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Notice

Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto by the National Association of Securities Dealers, Inc. Relating to the Elimination of Interval Delays in Nasdaq's SuperMontage System

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Start Preamble March 13, 2002.

Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) [1] and Rule 19b-4 thereunder,[2] notice is hereby given that on January 2, 2002, the National Association of Securities Dealers, Inc. (“NASD” or “Association”), through its subsidiary, the Nasdaq Stock Market, Inc. (“Nasdaq”), filed with the Securities Start Printed Page 12632and Exchange Commission (“SEC” or “Commission”) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by Nasdaq. On March 7, 2002, the Nasdaq filed Amendment No. 1 to the proposed rule change.[3] The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

Nasdaq proposes to amend NASD Rule 4710(b)(1)(D) to remove delays between executions across price levels in SuperMontage. Nasdaq will implement this rule change within 30 days after successful completion of SuperMontage user acceptance testing.

Proposed new language is italicized; proposed deletions are in [brackets].

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4710. Participant Obligations in NNMS

(a) No Change

(b)(1)(A) through (b)(1)(C) No Change

[(D) Interval Delay—After the NNMS system has executed all Displayed Quotes/Orders and Reserve Size interest at a price level, the following will occur:

(i) If the NNMS system cannot execute in full all shares of a Non-Directed Order against the Displayed Quotes/Orders and Reserve Size interest at the initial price level and at price two minimum trading increments away, the system will pause for 5 seconds before accessing the interest at the next price level in the system; provided, however, that once the Non-Directed Order can be filled in full within two price levels, there will be no interval delay between price levels and the system will execute the remainder of order in full; or

(ii) If the Non-Directed Orders is specially designated by the entering market participant as a “sweep order,” the system will execute against all Displayed Quotes/Orders and Reserve Size at the initial price level and the two price levels being displayed in the Nasdaq Order Display Facility without pausing between the displayed price levels. Thereafter, the system will pause 5 seconds before moving to the next price level, until the Non-Directed Order is executed in full.

(iii) The interval delay described in this subparagraph may be modified upon Commission approval and appropriate notification to NNMS Participants.]

[E] D All entries in NNMS shall be made in accordance with the requirements set forth in the NNMS Users Guide, as published from time to time by Nasdaq.

* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, Nasdaq included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. Nasdaq has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

1. Purpose

As part of its ongoing preparation for the launch of SuperMontage,[4] Nasdaq is engaging in a continuing review of the system's functionality and rules with a view to constant improvement. As a result of this review, and in consultation with industry professionals, Nasdaq has determined to eliminate system delays between executions at different price levels in SuperMontage.[5]

Currently, the rules of the SuperMontage system provide for immediate executions of Non-Directed Orders across the best inside price and next two best trading increments away from that inside price. If a Non-Directed Order cannot be executed in full against the combined displayed and reserve size amounts at those three increments, the system will pause 5 seconds before moving to price increments further away. If during this delay, additional share amounts appear in the system at any of the previous three price increments, the system will immediately execute against those shares.[6]

In response to concerns raised by market participants about the increased potential for the queuing of orders caused by system delays between executions, Nasdaq has determined to eliminate all interval delays in the SuperMontage system. In Nasdaq's view, removal of all interval delays will result in improved price discovery and a smoother functioning market. In addition, elimination of interval delays between executions will make the operation of this aspect of SuperMontage consistent with Nasdaq's current SuperSOES automatic execution functionality that likewise has no such delays.[7]

2. Statutory Basis

Nasdaq believes that the proposed rule change, as amended, is consistent with section 15A(b)(6) [8] of the Act, in that the proposed rule change is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principals of trade, to foster cooperation and coordination with person engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

Nasdaq does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. Start Printed Page 12633

C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others

No written comments were solicited or received with respect to the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action

Within 35 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will:

A. By order approve such proposed rule change, or

B. Institute proceedings to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change, as amended, is consistent with the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission's Public Reference Room. Copies of such filing will also be available for inspection and copying at the principal office of the NASD. All submissions should refer to File No. SR-NASD-2001-97 and should be submitted by April 9, 2002.

Start Signature

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[9]

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble

Footnotes

3.  See letter from Thomas P. Moran, Associate General Counsel, Nasdaq, to Katherine A. England, Assistant Director, Division of Market Regulation, Commission, dated March 6, 2002 (“Amendment No. 1”). In Amendment No. 1, Nasdaq made some technical corrections to the proposed rule text and to the proposed rule change. In addition, Nasdaq added a footnote to clarify that the 5-second interval delay will be retained for odd-lot executions against the same market maker. Nasdaq further deleted sentences referring to “sweep orders.” Nasdaq explained that the concept is no longer a part of Nasdaq's future Order Display and Collector Facility (“NNMS” or “SuperMontage”) because with the removal of interval delays, all SuperMontage orders will have the ability to immediately execute across multiple price levels without delay between those price intervals if the terms of the order and quote/orders it interacts with will allow it.

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4.  See Securities Exchange Act Release No. 43863 (January 19, 2001), 66 FR 8020 (January 26, 2001) (order approving SuperMontage).

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5.  Nasdaq will retain the 5 second interval delay between odd-lot executions against the same market maker contained in NASD Rule 4710(e)(2)(E). See Amendment No. 1, supra note 3.

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6.  SuperMontage also would have allowed sweep orders, which would have immediately executed an order against the three best prices in the system before pausing. Nasdaq explained that the concept is no longer a part of SuperMontage because with the removal of interval delays, all SuperMontage orders will have the ability to immediately execute across multiple price levels without delay between those price intervals if the terms of the order and quote/orders it interacts with will allow it. See Amendment No. 1, supra note 3.

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7.  See Securities Exchange Act Release No. 44504 (July 2, 2001), 66 FR 36022 (July 10, 2001).

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[FR Doc. 02-6510 Filed 3-18-02; 8:45 am]

BILLING CODE 8010-01-P