On January 3, 2002, the National Association of Securities Dealers, Inc. (“NASD” or “Association”), through its subsidiary, the Nasdaq Stock Market, Inc. (“Nasdaq”) filed with the Securities and Exchange Commission (“Commission”), pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), and Rule 19b-4 thereunder, a proposed rule change to amend NASD Rules 4710(b)(5) and 4619(c) to modify the procedures for refreshing exhausted market maker quotes in, and withdrawing market makers that fail to maintain proper clearing arrangements from, Nasdaq's future Order Display and Collector Facility (“NNMS” or “SuperMontage”).
Specifically, Nasdaq proposes to reduce from 3 minutes to 30 seconds the amount of time that a market maker can leave its bid or offer quotation at zero before SuperMontage begins its automatic quote refresh process. The process would only operate against the single bid or offer side of a quotation that has been reduced to zero through executions. If there are no available quotes from which to determine a refresh price, SuperMontage would refresh the exhausted side of a quote to a normal unit of trading at a price level that is one penny inferior to the lesser of either: (a) The last valid displayed inside bid/offer in the security before all Start Printed Page 44907such bids/offers were exhausted, or (b) the market maker's last displayed bid/offer. If the resulting bid/offer quote would create a locked or crossed market, NNMS would instead re-open the market maker's bid/offer quote at a price that is one penny inferior to the unexchanged contra side of the market. Finally, Nasdaq proposes to suspend from trading on SuperMontage market makers that fail to maintain a clearing relationship. Once the market maker regains a clearing relationship, the suspend status would be lifted, and the market maker would be free to participate again.
Nasdaq submitted Amendment No. 1 on March 5, 2002. The proposed rule change and Amendment No. 1 thereto were published for comment in the Federal Register on April 8, 2002. The Commission received no comments on the proposal. Nasdaq submitted Amendment No. 2 on June 13, 2002.
The Commission finds that the proposed rule change, as amended, is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities association  and, in particular, the requirements of section 15A of the Act  and the rules and regulations thereunder. The Commission finds specifically that the proposed rule change, as amended, is consistent with section 15A(b)(6) of the Act, which requires, among other things, that the rules of an association be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, and, in general, to protect investors and the public interest.
The Commission believes that the proposed rule change, as amended, should assist market makers in maintaining two-sided quotes and facilitate their continued participation in Nasdaq. By reducing the amount of time, from 3 minutes to 30 seconds, that a quote is in a closed state and by only closing out the side of the quote that has been zeroed out, the revised procedures should help ensure the presence of liquidity providers, while preserving priority for orders that may be represented by the unexhausted side of the quote. Further, Nasdaq, by establishing procedures for refreshing an exhausted quote where there are no available quotes, has addressed any potential instance in which trading interest is not being displayed. This should ensure that quotes may be refreshed in all instances. Finally, Nasdaq's proposal to suspend market makers who fail to maintain clearing relationships from participating in the SuperMontage should encourage market makers to maintain appropriate clearing relationships at all times.
The Commission finds good cause for accelerating approval of Amendment No. 2 to the proposed rule change prior to the thirtieth day after the date of publication in the Federal Register, pursuant to section 19(b)(2) of the Act. The Commission finds that Amendment No. 2 merely clarifies the proposed rule change by explaining that references to automatic adjustment of quotes at “inferior” prices refer to both bid and offer prices, with an inferior price adjustment on the bid side of the quote resulting in a higher offer price, and that references to a “clearing relationship” refer to a clearing relationship between a firm and a registered clearing agency or, alternatively, with a member of such an agency. Accordingly, the Commission believes that granting accelerated approval of Amendment No. 2 is appropriate and consistent with section 15A(b)(6)  and 19(b)(2) of the Act  in that it should prevent fraudulent and manipulative acts and practices, promote just and equitable principles of trade, foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, and, in general, protect investors and the public interest.
As stated previously in the order approving SuperMontage, the Commission wishes to again emphasize that it fully expects that the NASD will monitor the use of the system defaults by market makers to ensure that they do not become a surrogate for meaningful market making, and that the NASD will reevaluate the penalties against market makers for failure to properly maintain two-sided quotes if there is a decline in the overall quality of market making, particularly during market volatility.
It is therefore ordered, pursuant to section 19(b)(2) of the Act, that the proposed rule change, as amended (File No. SR-NASD-2002-01) be, and it hereby is, approved.Start Signature
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.
Jill M. Peterson,
3. See Letter from Thomas P. Moran, Associate General Counsel, Nasdaq, to Katherine A. England, Assistant Director, Division of Market Regulation (“Division”), Commission, dated March 4, 2002 (“Amendment No. 1”).Back to Citation
5. See Letter from Thomas P. Moran, Associate General Counsel, Nasdaq, to Marc F. McKayle, Special Counsel, Division, Commission, dated June 13, 2002 (“Amendment No. 2”). In Amendment No. 2, Nasdaq made two points of clarification: (1) References to automatic adjustment of quotes at “inferior” prices refer to both bid and offer prices, with an inferior price adjustment on the bid side of the quote resulting in a lower bid price, and an inferior price adjustment on the offer price resulting in a higher offer price, (2) references to a “clearing relationship” refer to a clearing relationship between a firm and a registered clearing agency or, alternatively, with a member of such an agency.Back to Citation
6. In approving this proposed rule change, the Commission notes that it has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).Back to Citation
[FR Doc. 02-16847 Filed 7-3-02; 8:45 am]
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