Federal Register: August 15, 2000 (Volume 65, Number 158)
DOCID: FR Doc 00-20686
SECURITIES AND EXCHANGE COMMISSION
Securities and Exchange Commission
DOCUMENT ID: [Release No. 34-43133; File No. SR-NASD-99-53]
NOTICE: NOTICES
ACTION: Self-regulatory organizations; proposed rule changes:
SUBJECT CATEGORY:
Self-Regulatory Organizations; Notice of Filing of Amendment Nos. 5, 6, and 7 to Proposed Rule Change by National Association of Securities Dealers, Inc. Relating to the Establishment of Nasdaq Order Display Facility and to Modifications of the Nasdaq Trading Platform
DOCUMENT SUMMARY:
August 10, 2000.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b4 thereunder,\2\ notice is hereby given that
the National Association of Securities Dealers, Inc. (``NASD''),
through its whollyowned subsidiary, the Nasdaq Stock Market, Inc.
(``Nasdaq''), filed with the Securities and Exchange Commission
(``Commission'') Amendment Nos. 5, 6, and 7 to the proposed rule change
as described in Items I, II, and III below, which Items have been
prepared by Nasdaq. On May 16, 2000, Nasdaq filed Amendment No. 5 to
the proposal.\3\ On July 6, 2000, Nasdaq filed Amendment No. 6 to the
proposal.\4\ On August 7, 2000, Nasdaq filed Amendment No. 7 to the
proposal.\5\ The proposed rule change and Amendment Nos. 1 and 2 were
published for comment in the Federal Register on December 6, 1999.\6\
On March 16, 2000, Nasdaq filed Amendment No. 3 to the proposal.\7\ On
March 30, 2000 Amendment No. 4 was published for comment in the Federal
Register.\8\ The Commission is publishing this notice to solicit
comments on Amendment Nos. 5, 6, and 7 to the proposed rule change from interested persons.\9\
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b4.
\3\ See letter from Richard G. Ketchum, President, NASD, to
Belinda Blaine, Associate Director, Division of Market Regulation
(``Division''), Commission (May 16, 2000) (``Amendment No. 5'').
\4\ See letter from Richard G. Ketchum, President, NASD, to
Belinda Blaine, Associate Director, Division of Market Regulation
(``Division''), Commission (July 6, 2000) (``Amendment No. 6'').
\5\ See letter from Richard G. Ketchum, President, NASD, to
Belinda Blaine, Associate Director, Division of Market Regulation
(``Division''), Commission (August 7, 2000) (``Amendment No. 7'').
\6\ See Securities Exchange Act Release No. 42166 (Nov. 22, 1999), 64 FR 69125.
\7\ See letter from Richard G. Ketchum, President, NASD, to
Belinda Blaine, Associate Director, Division of Market Regulation
(``Division''), Commission (March 15, 2000) (``Amendment No. 3'').
In Amendment No. 3, the NASD responded to comment letters and
submitted substantive, clarifying, and technical amendments to the proposal.
\8\ See Securities Exchange Act Release No. 42573 (March 23, 2000), 65 FR 16981.
\9\ This 19b4 filing, representing Amendment Nos. 5, 6, and 7
to SRNASD9953, reflect the substantive amendments to the filing,
and contains some technical changes and clarifying information to the proposal.
I. SelfRegulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
Nasdaq and the NASD propose the following amendments in response to
comment letters submitted to the Commission regarding the proposal as
originally noticed. The amended rule language is as follows: \10\
\10\ The amended rule language contained in this notice reflects the Commission's approval of SRNASD9911, regarding the
establishment of the Nasdaq National Market System (``NNMS''). See
Securities Exchange Act Release No. 42344 (January 14, 2000), 65 FR 3987 (January 25, 2000) (Order for File No. SRNASD9911
functionally integrating the Small Order Execution System (``SOES'')
and SelectNet system to become the foundation of the NNMS.) In
addition, the amended rule language replaces, in the entirety, the
rule language contained in the original filing, as well as Amendment Nos. 1, 2, 3 and 4.
Proposed additions are italicized and proposed deletions are placed in [brackets].
4720. SelectNet ServiceDeleted
* * * * *
4611. Registration as a Nasdaq Market Maker
(a)(e) No Change
(f) Unless otherwise specified by the Association, each Nasdaq
market maker that is registered as a market maker in a Nasdaq [National
Market security]listed security shall also at all times be registered
as a market maker in the Nasdaq National Market Execution System (NNMS)
with respect to that security and be subject to the NNMS Rules as set
forth in the Rule 4700 Series. [Participation in the Small Order
Execution System (SOES) shall be voluntary for any Nasdaq market maker
registered to make a market in a Nasdaq SmallCap security.] (g) No Change
* * * * *
4613. Character of Quotations
(a) TwoSided Quotations
(1) For each security in which a member is registered as a market
maker, the member shall be willing to buy and sell such security for
its own account on a continuous basis and shall enter and maintain a
twosided quotation[s] (``Principal Quote''), which is attributed to
the market maker by a special maker participant identifier (``MMID'')
and is displayed in the Nasdaq Quotation Montage [in The Nasdaq Stock Market]
[[Page 49843]]
at all times, subject to the procedures for excused withdrawal set forth in Rule 4619.
(A) A registered market maker in a Nasdaqlisted security [listed
in The Nasdaq Stock Market] must display a quotation size for at least
one normal unit of trading (or a larger multiple thereof) when it is
not displaying a limit order in compliance with SEC Rule 11Ac14,
provided, however, that a registered market maker may augment its
displayed quotation size to display limit orders priced at the market
maker's quotation. Unless otherwise designated, a ``normal unit of trading'' shall be 100 shares.
(b) Agency QuoteAmendments Pending Pursuant to SRNASD9909. (c)(e) No Change
IM4613. Autoquote PolicyNo Change
4618. Clearance and Settlement
(a)(b) No Changes
(c) All transactions through the facilities of the Nasdaq National
Market Execution System[, SOES, and SelectNet services] shall be
cleared and settled through a registered clearing agency using a continuous net settlement system.
* * * * *
4619. Withdrawal of Quotations and Passive Market Making
(a)(b) No Change
(c) Excused withdrawal status may be granted to a market maker that
fails to maintain a clearing arrangement with a registered clearing
agency or with a member of such an agency and is withdrawn from
participation in the Automated Confirmation Transaction service,
thereby terminating its registration as a market maker in Nasdaq
issues. Provided however, that if the Association finds that the market
maker's failure to maintain a clearing arrangement is voluntary, the
withdrawal of quotations will be considered voluntary and unexcused
pursuant to Rule 4620[, the Rules for the Small Order Execution System,
as set forth in the Rule 4750 Series,] and the Rule 4700 Series governing the Nasdaq['s] National Market Execution System.
(d) No Change
* * * * *
4620. Voluntary Termination of Registration
(a) A market maker may voluntarily terminate its registration in a
security by withdrawing its Principal [quotations] Quote from The
Nasdaq Stock Market. A market maker that voluntarily terminates its
registration in a security may not reregister as a market maker in
that security for twenty (20) business days. Withdrawal from
participation as a market maker in a Nasdaq [National Market]listed
security in the Nasdaq National Market Execution System shall
constitute termination of registration as a market maker in that
security for purposes of this Rule; provided, however, that a market
maker that fails to maintain a clearing arrangement with a registered
clearing agency or with a member of such an agency and is withdrawn
from participation in the Automated Confirmation Transaction System and
thereby terminates its registration as a market maker in Nasdaqlisted
[National Market and SmallCap] issues may register as a market maker at
any time after a clearing arrangement has been reestablished and the
market maker has complied with ACT participant requirements contained in Rule 6100.
* * * * *
4632. Transaction Reporting
(a)(d) No Change
(e) Transactions Not Required To Be Reported
The following types of transactions shall not be reported:
(1) Transactions executed through the Computer Assisted Execution
System (CAES), or the facilities of the Nasdaq National Market Execution System (``NNMS'')[, or the SelectNet service];
(2)(6) No Change.
(f) No Change.
4642. Transaction Reporting
(a)(d) No Change.
(e) Transactions Not Required To Be Reported.
The following types of transactions shall not be reported:
(1) Transactions executed through the Computer Assisted Execution
System (CAES)[; the Small Order Execution System (SOES) or the
SelectNet Service] or facilities of the facilities of the Nasdaq National Market Execution System (``NNMS'').
(2)(5) No Change.
(f) No Change.
* * * * *
4700. Nasdaq National Market Execution System (NNMS)
4701. DefinitionsUnless stated otherwise, the terms described below shall have the following meaning.
[(d)] (a) The term ``active NNMS securities'' shall mean those NNMS
eligible securities in which at least one NNMS Market Maker is currently active in NNMS.
[(i)] (b) The term ``Agency Quote'' shall mean the quotation that a
registered NNMS Market Maker is permitted to display pursuant to the requirements of NASD Rule 4613(b).
(c) The term ``Attributable Quote/Order'' shall have the following meaning:
(1) For NNMS Market Makers and NNMS ECNs, a bid or offer Quote/
Order that is designated for display (price and size) next to the
participant's MMID in the Nasdaq Quotation Montage once such Quote/
Order becomes the participant's best attributable bid or offer.
(2) For UTP Exchanges, the best bid and best offer quotation with
price and size that is transmitted to Nasdaq by the UTP Exchange, which
is displayed next to the UTP Exchange's MMID in the Nasdaq Quotation Montage.
[(h)] (d) The term ``Automated Confirmation Transaction'' service
or ``ACT'' shall mean the automated system owned and operated by The
Nasdaq Stock Market, Inc. which compares trade information entered by
ACT Participants and submits ``lockedin'' trades to clearing.
[(g)] (e) The term ``automatic refresh size'' shall mean the
default size to which an NNMS Market Maker's quote will be refreshed
pursuant to NASD Rule 4710(b)(2), if the market maker elects to utilize
the Quote Refresh Functionality and does not designate to Nasdaq an
alternative refresh size, which must be at least one normal unit of
trading. The [maximum order] automatic refresh size default [size] amount shall be 1,000 shares.
(f) The term ``Directed Order'' shall mean an order that is entered
into the system by an NNMS participant that is directed to a particular Quoting Market Participant.
(g) The term ``Displayed quote/Order'' shall mean both Attributable
and NonAttributable (as applicable) Quotes/Orders transmitted to Nasdaq by Quoting Market Participants.
(h) The term ``Firm Quote Rule'' shall mean SEC Rule 11Ac11.
(i) The term ``Liability Order'' shall mean an order that when
delivered to a Quoting Market Participant imposes an obligation to
respond to such order in a manner consistent with the Firm Quote Rule.
(j) The term ``limit order'' shall mean an order to buy or sell a stock at a specified price or better.
(k) The term ``market order'' shall mean an unpriced order to buy or sell a stock at the market's current best price.
(l) The term ``marketable limit order'' shall mean a limit order that, at the time
[[Page 49844]]
it is entered into the NNMS, if it is a limit order to buy, is priced
at the current inside offer or higher, or if it is a limit order to sell, is priced at the inside bid or lower.
(m) The term ``mixed lot'' shall mean an order that is for more than a normal unit of trading but not a multiple thereof.
(n) The term ``NonAttributable Quote/Order'' shall mean a bid or
offer Quote/Order that is entered by a Nasdaq Quoting Market
Participant and is designated for display (price and size) on an anonymous basis in the Nasdaq Order Display Facility.
(o) The term ``NonDirected Order'' shall mean an order that is
entered into the system by an NNMS participant and is not directed to any particular Quoting Market Participants.
(p) The term ``NonLiability Order'' shall mean an order that when
delivered to a Quoting Market Participant imposes no obligation to respond to such order under the Firm Quote Rule.
[(a)] (q) The term ``Nasdaq National Market Execution System,''
[or] ``NNMS,'' or ``system'' shall mean the automated system owned and
operated by The Nasdaq Stock Market, Inc. which enables NNMS
Participants to execute transactions in active NNMS authorized
securities; to have reports of the transactions automatically forwarded
to the National Market Trade Reporting System, if required, for
dissemination to the public and the industry, and to ``lock in'' these
trades by sending both sides to the applicable clearing corporation(s)
designated by the NNMS Participant(s) for clearance and settlement; and
to provide NNMS Participants with sufficient monitoring and updating
capability to participate in an automated execution environment.
[(c)] (r) The term ``NNMS eligible securities'' shall mean
designated Nasdaqlisted [National Market (NNMS)] equity securities.
(s) The term ``NNMS ECN'' shall mean a member of the Association
that meets all of the requirements of NASD Rule 4623, and that
participants in the NNMS with respect to one or more NNMS eligible securities.
(1) The term ``NNMS AutoEx ECN'' shall mean an NNMS ECN that
participates in the automaticexecution functionality of the NNMS
system, and accordingly executes NonDirected Orders via automatic
execution for the purchase or sale of an active NNMS security at the Nasdaq inside bid and/or offer price.
(2) The term ``NNMS OrderDelivery ECN'' shall mean an NNMS ECN
that participates in the orderdelivery functionality of the NNMS
system, accepts delivery of NonDirected Orders that are Liability
Orders, and provides an automated execution of NonDirected Orders (or
an automated rejection of such orders if the price is no longer
available) for the purchase or sale of an active NNMS security at the Nasdaq inside bid and/or offer price.
[(e)] (t) The term ``NNMS Market Maker'' shall mean a member of the
Association that is registered as a Nasdaq Market Maker and as a Market
Maker for purposes of participation in NNMS with respect to one or more
NNMS eligible securities, and is currently active in NNMS and obligated
to execute orders through the automaticexecution functionality of the
NNMS system for the purchase or sale of an active NNMS security at the Nasdaq inside bid and/or [ask] offer price.
[(b)] (u) The term ``NNMS Participant'' shall mean [either] an NNMS
Market Maker, NNMS ECN, UTP Exchange, or NNMS Order Entry Firm
registered as such with the Association for participation in NNMS.
[(f)] (v) The term ``NNMS Order Entry Firm'' shall mean a member of
the Association who is registered as an Order Entry Firm for purposes
of participation in NNMS which permits the firm to enter orders [of limited size] for execution against NNMS Market Makers.
(w) The term ``Nasdaq Quotation Montage'' shall mean the portion of
Nasdaq WorkStation presentation that displays for a particular stock
two columns (one for bid, one for offer), under which is listed in
price/time priority the MMIDs for each NNMS Market Maker, NNMS ECN, and
UTP Exchange registered in the stock and the corresponding quote (price and size) next to the related MMID.
(x) The term ``Nasdaq Quoting Market Participant'' shall include
only the following: (1) NNMS Market Makers; or (2) NNMS ECNs.
(y) The term ``oddlot order'' shall mean an order that is for less than a normal unit of trading.
(z) The term ``Quote/Order'' shall mean a single quotation or shall
mean an order or multiple orders at the same price submitted to Nasdaq
by a Nasdaq Quoting Market Participant that is displayed in the form of
a single quotation. Unless specifically referring to a UTP Exchange's
Agency Quote/Order (as set out in Rule 4710(f)(2)(b)), when this term
is used in connection with a UTP Exchange, it shall mean the best bid
and/or best offer quotation transmitted to Nasdaq by the UTP Exchange.
(aa) The term ``Quoting Market Participant'' shall include any of
the following: (1) NNMS Market Makers; (2) NNMS ECNs; and (3) UTP Exchange Specialists.
(bb) The term ``Reserve Size'' shall mean the systemprovided
functionality that permits a Nasdaq Quoting Market Participant to
display in its Displayed Quote/Order part of the full size of a
proprietary or agency order, with the remainder held in reserve on an
undisplayed basis to be displayed in whole or in part after the displayed part is executed.
(cc) The term ``Nasdaq Order Display Facility'' shall mean the
portion of Nasdaq Workstation presentation that displays without
attribution to particular Quoting Market Participant's MMID the three
best price levels in Nasdaq on both the bid and offer side of the
market and the aggregate size of Attributable and NonAttributable Quotes/Orders at each price level.
(dd) The term ``UTP Exchange'' shall mean any registered national
securities exchange that has unlisted trading privileges in Nasdaq
National Market securities pursuant to the Joint SelfRegulatory
Organization Plan Governing the Collection, Consolidation and
Dissemination Of Quotation and Transaction Information For Exchange
Listed Nasdaq/National Market System Securities Traded On Exchanges On An Unlisted Trading Privilege Basis (``Nasdaq UTP Plan'').
4705. NNMS Participant Registration
(a) Participation in NNMS as an NNMS Market Maker requires current
registration as such with the Association. Such registration shall be
conditioned upon the NNMS Market Maker's initial and continuing compliance with the following requirements:
(1) execution of an NNMS Participant application agreement with the Association;
(2) membership in, or access arrangement with, a clearing agency
registered with the Commission which maintains facilities through which NNMS compared trades may be settled;
(3) registration as a market maker in The Nasdaq Stock Market
pursuant to the Rule 4600 Series and compliance with all applicable
rules and operating procedures of the Association and the Commission;
(4) maintenance of the physical security of the equipment located
on the premises of the NNMS Market Maker to prevent the improper use or
access to Nasdaq systems, including unauthorized entry of information into NNMS; and
[[Page 49845]]
(5) acceptable and settlement of each NNMS trade that NNMS
identifies as having been effected by such NNMS Market Maker, or if
settlement is to be made through another clearing member, guarantee of
the acceptance and settlement of such identified NNMS trade by the
clearing member on the regularly scheduled settlement date.
(b) Pursuant to Rule 4611(f), participation as an NNMS Market Maker
is required for any Nasdaq market maker registered to make a market in an NNMS security.
(c) Participation in NNMS as an NNMS Order Entry Firm requires
current registration as such with the Association. Such registration
shall be conditioned upon the NNMS Order Entry Firm's initial and continuing compliance with the following requirements:
(1) execution of an NNMS Participant application agreement with the Association;
(2) membership in, or access arrangement with, a clearing agency
registered with the Commission which maintains facilities through which NNMS compared trades may be settled;
(3) compliance with all applicable rules and operating procedures
of the Association and the Securities and Exchange Commission;
(4) maintenance of the physical security of the equipment located
on the premises of the NNMS Order Entry Firm to prevent the improper
use or access to Nasdaq systems, including unauthorized entry of information into NNMS; and
(5) acceptance and settlement of each NNMS trade that NNMS
identifies as having been effected by such NNMS Order Entry Firm or if
settlement is to be made through another clearing member, guarantee of
the acceptance and settlement of such identified NNMS trade by the
clearing member on the regularly scheduled settlement date.
(d) Participation in NNMS as an NNMS requires current registration
as an NASD member and shall be conditioned upon the following:
(1) the execution of an NNMS Participant application agreement with the Association;
(2) compliance with all requirements in NASD Rule 4623 and all
other applicable rules and operating procedures of the Association and the Securities and Exchange Commission;
(3) membership in, or access arrangement with, a clearing agency
registered with the Commission which maintains facilities through which NNMS compared trades may be settled;
(4) maintenance of the physical security of the equipment located
on the premises of the NNMS ECN to prevent the improper use or access
to Nasdaq systems, including unauthorized entry of information into NNMS; and
(5) acceptance and settlement of each trade that is executed
through the facilities of the NNMS, or if settlement is to be made
through another clearing member, guarantee of the acceptance and
settlement of such identified NNMS trade by the clearing member on the regularly scheduled settlement date.
[(d)] (e) The registration required hereunder will apply solely to
the qualification of an NNMS Participant to participate in NNMS. Such
registration shall not be conditioned upon registration in any particular eligible or active NNMS securities.
[(e)] (f) Each NNMS Participant shall be under a continuing
obligation to inform the Association of noncompliance with any of the registration requirements set forth above.
(g) The Association and its subsidiaries shall not be liable for
any losses, damages, or other claims arising out of the NNMS or its
use. Any losses, damages, or other claims, related to a failure of the
NNMS to deliver, display, transmit, execute, compare, submit for
clearance and settlement, or otherwise process an order, Quote/Order,
message, or other data entered into, or created by, the NNMS shall be
absorbed by the member, or the member sponsoring the customer, that
entered the order, Quote/Order, message, or other data into the NNMS. 4706. Order Entry Parameters
(a) NonDirected OrdersAn NNMS Participant may enter a Non
Directed Order into the NNMS in order to access the best bid/best offer
as displayed in Nasdaq. A NonDirected Order must be a market or
marketable limit order, must be a round lot or a mixed lot, and must
indicate whether it is a short sale, shortsale exempt, or long sales.
If after entry but before delivery, a NonDirected Order becomes non
marketable, the system will hold the order for 90 seconds, after which
the order will be returned to the NNMS participant entering the order.
The system will not process a NonDirected Order to sell short if the
execution of such order would violate NASD Rule 3350. Limit orders may
be entered into the system prior to the market's open, but will be held
in queue, and if not marketable on the open, will be returned to the
participant entering the order. NonDirected Orders will be processed
as described in Rule 4710(b). The NNMS shall not accept NonDirected
Orders that are AllorNone or have a minimum size of execution.
(b) Directed OrdersA participant may enter a Directed Order into
the NNMS to access a specific Attributable/Order displayed in the
Nasdaq Quotation Montage, subject to the following conditions and requirements:
(1) Unless the Quoting Market Participant to which a Directed Order
is being sent has indicated that it wishes to receive Directed Orders
that are Liability Orders, a Directed Order must be a NonLiability
Order, and as such, at the time of order entry must be designated as:
(A) an ``AllorNone'' order (``AON'') that is at least one normal
unit of trading (e.g. 100 shares) in excess of the Attributable Quote/
Order of the Quoting Market Participant to which the order is directed; or
(B) a ``Minimum Acceptable Quantity'' order (``MAQ''), with a MAQ
value of at least one normal unit of trading in excess of Attributable
Quote/Order of the Quoting Market Participant to which the order is
directed. Nasdaq will append an indicator to the quote of a Quoting
Market Participants that has indicated to Nasdaq that it wishes to receive directed orders that are Liability Orders.
(2) A Directed Order may have a time in force of 1 to 99 minutes.
(c) Entry of Agency and Principal OrdersNNMS Participants are
permitted to enter into the NNMS both agency and principal orders for delivery and execution processing.
(d) Order SizeAny round or mixed lot order up to 999,999 shares
may be entered into the NNMS for normal execution processing. Oddlot
orders, and the oddlot portion of a mixed lot, are subject to a separate execution process, as described in Rule 4710(e).
(e) Open QuotesThe NNMS will only deliver an order or an
execution to a Quoting Market Participant if that participant has an open quote.
(f) OddLot OrdersThe system will accept oddlot orders for
processing through a separate facility. Oddlot orders must be Non
Directed Orders, and may be market, marketable limit or limit orders.
The system shall accept oddlot orders at a rate no faster than one
order per/second from any single participant. Oddlot orders, and the
oddlot portion of a mixed lot order, shall be processed as described in Rule 4710(e).
4707. Entry and Display of Quotes/Orders
(a) Entry of Quotes/OrdersNasdaq Quoting Market Participants may enter Quotes/Orders into the NNMS subject to
[[Page 49846]]
the following requirements and conditions:
(1) Nasdaq Quoting Market Participants shall be permitted to
transmit to the NNMS multiple principal and Agency Quotes/Orders at a
single as well as multiple price levels. Such Quote/Order at a single
as well as multiple price levels. Such Quote/Order shall indicate
whether it is an ``Attributable Quote/Order'' or ``NonAttributable
Quote/Order,'' and the amount of Reserve Size (if applicable).
(2) Upon entry of a Quote/Order into the system, the NNMS shall
timestamp it, which timestamp shall determine the ranking of the
Quote/Order for purposes of processing NonDirected Orders as described in Rule 4710(b).
(3) Consistent with Rule 4613, an NNMS Market Maker is obligated to
maintain a twosided Attributable Quote/Order (other that an Agency
Quote) at all times, for a least one normal unit of trading.
(4) Nasdaq Quoting Market Participants may continue to transmit to
the NNMS only their best bid and best offer Attributable Quotes/Orders,
Notwithstanding NASD Rule 4613 and subparagraph (a)(1) of this rule,
nothing in these rules shall require a Nasdaq Quoting Market
Participant to transmit to the NNMS multiple Quotes/Orders.
(b) Display of Quotes/Orders in NasdaqThe NNMS will display a
Nasdaq Quoting Market Participant's Quotes/Orders as follows:
(1) Attributable Quotes/OrdersThe price and size of a Nasdaq
Quoting Market Participant's best priced Attributable Quote/Order on
both the bid and offer side of the market will be displayed in the
Nasdaq Quotation Montage under the Nasdaq Quoting Market Participant's
MMID, and also will be displayed in the Nasdaq Order Display Facility
as part of the aggregate trading interest at a particular price when
the price of such Attributable Quote/Order falls within the best three
price levels in Nasdaq on either side of the market. Upon execution or
cancellation of the Nasdaq Quoting Market Participant's bestpriced
Attributable Quote/Order on a particular side of the market, the NNMS
will automatically display the participant's next best Attributable Quote/Order on that side of the market.
(2) NonAttributable Quotes/OrdersThe price and size of a Nasdaq
Quoting Market Participant's NonAttributable Quote/Order on both the
bid and offer side of the market will be displayed in the Nasdaq Order
Display Facility as part of the aggregate trading interest at a
particular price when the price of such NonAttributable Quote/Order
falls within the best three price levels in Nasdaq on either side of
the market. A NonAttributable Order will not be displayed in the
Nasdaq Quotation Montage under the Nasdaq Quoting Market Participant's
MMID. NonAttributable Quotes/Orders that are the best priced Non
Attributable bids or offers in the system will be displayed in the
Nasdaq Quotation Montage under an anonymous MMID, which shall represent
and reflect the aggregate size of all NonAttributable Quotes/Orders in
Nasdaq at that price level. Upon execution or cancellation of a Nasdaq
Quoting Market Participant's NonAttributable Quote/Order, the NNMS
will automatically display NonAttributable Quote/Order in the Nasdaq
Order Display Facility (consistent with the parameters described above)
if it falls within the best three price levels in Nasdaq on either side of the market.
(c) Reserve SizeReserve Size shall not be displayed in Nasdaq,
but shall be electronically accessible as described in Rule 4710(b).
(d) Summary ScanThe ``Summary Scan'' functionality, which is a
queryonly nondynamic functionality, displays without attribution to
Quoting Market Participants' MMIDs the aggregate size of Attributable
and NonAttributable Quotes/Orders for all levels (on both the bid and
offer side of the market) below the three price levels displayed in the Nasdaq Order Display Facility.
4710. Participant Obligations in NNMS
(a) Registration. Upon the effectiveness of registration as an NNMS
Market Maker, NNMS ECN, or NNMS Order Entry Firm, the NNMS Participant
may commence activity within NNMS for exposure to orders or entry of
orders, as applicable. The operating hours of NNMS may be established
as appropriate by the Association. The extent of participation in
Nasdaq by an NNMS Order Entry Firm shall be determined solely by the
firm in the exercise of its ability to enter orders into Nasdaq.
(b) [Market Makers] Obligations to and Processing of NonDirected Orders
(1) [An NNMS Market Maker] General ProvisionsA Quoting Market
Participant in an NNMS Security shall be subject to the following requirements for NonDirected Orders:
(A) For each NNMS security in which it is registered [as an NNMS
Market Maker, the market maker], a Quoting Market Participant must
accept and execute individual NonDirected orders against its quotation
including its Agency Quote (if applicable), in an amount equal to or
smaller than the combination of the Displayed [quotation] Quote/Order
and Reserve Size (if applicable) of such [quotation(s)] Quote/Order,
when the Quoting Market Participant is at the best bid/best offer in
Nasdaq. [For purposes of this rule, the term ``reserved size'' shall
mean that an NNMS Market Maker or a customer thereof wishes to display
publicly part of the full size of its order or interest with the
remainder held in reserve on an undisplayed basis to be displayed in
whole or in part as the displayed part is executed. To utilize the
reserve size function, a minimum of 1,000 shares must initially be
displayed in the market maker's quote (including the Agency Quote), and
the quotation must be refreshed to 1,000 shares consistent with
subparagraph (b)(2)(A) of this rule.] Quoting Market Participants shall participate in the NNMS as follows:
(i) NNMS Market Makers and NNMS AutoEx ECNs shall participate in
the automaticexecution functionality of the NNMS, and shall accept the
delivery of an execution up to the size of the participant's Displayed Quote/Order and Reserve Size.
(ii) NNMS OrderDelivery ECNs shall participate in the order
delivery functionality of the NNMS, and shall accept the delivery of an
order up to the size of the NNMS OrderDelivery ECN's Displayed Quote/
Order and Reserve Size. The NNMS OrderDelivery ECN shall be required
to execute such order in a manner consistent with the Firm Quote Rule.
(iii) UTP Exchanges shall participate in the NNMS as described in
subparagraph (f) of this rule and as otherwise described in the NNMS rules and the UTP Plan.
(B) Processing of NonDirected OrdersUpon entry of a NonDirected
Order into the system, the NNMS will ascertain who the next Quoting
Market Participant in queue to receive an order is and shall deliver an
execution to Quoting Market Participants that participate in the
automaticexecution functionality of the system, or shall deliver a
Liability Order to Quoting Market Participants that participate in the
orderdelivery functionality of the system; provided however, that the
system always shall deliver an order (in lieu of an execution) to the
Quoting Market Participant next in queue when the participant that
entered the NonDirected Order into the system is a UTP Exchange that
does not provide automatic execution against its Quotes/Orders for
Nasdaq Quoting Market Participants and NNMS Order Entry Firms. Non Directed Orders entered into
[[Page 49847]]
the NNMS system shall be delivered to or automatically executed against
Quoting Market Participants' Displayed [quotations] Orders/Quotes and
Reserve Size, including Agency Quotes (if applicable), in price[/] and
then time priority, subject to the following processing. For Quotes/
Orders [quotations] at the same price level, the NNMS system will
attempt to access interest in the system in the following priority and order:
(i) Displayed Quotes/Orders of NNMS Market Makers, NNMS ECNs that
do not charge a separate quoteaccess fee to nonsubscribers, and Non
Attributable agency Quotes/Orders of UTP Exchanges (as permitted by
subparagraph (f) of this rule), as well as Quotes/Orders from NNMS ECNs
that charges a separate quoteaccess fee to nonsubscribers where the
ECN entering such Quote/Order indicates that the price improvement
offered by the specific Quote/Order exceeds the separate quoteaccess
fee the ECN charges, in time priority between such participants' Quote/ Orders;
(ii) Displayed Quote/Order of NNMS ECNs that charge a separate
quoteaccess fee to nonsubscribers, in time priority between such participant's Quote/Orders;
(iii) Reserve Size of NNMS Market Makers and NNMS ECNs that do not
charge a separate quoteaccess fee to nonsubscribers, as well as
Reserve Size of Quote/Orders from NNMS ECNs that charges a separate
quoteaccess fee to nonsubscribers where the ECN entering such Quote/
Order has indicated that the price improvement offered by the specific
Quote/Order exceeds the separate quoteaccess fee the ECN charges, in time priority between such participants' Quote/Orders;
(iv) Reserve Size of NNMS ECNs that charge a separate quoteaccess
fee to nonsubscriber, in time priority between such participants' Quote/Orders; and
(v) Principal Quote/Orders of UTP Exchanges, in time priority
between such participants' Quote/Orders [yield priority to all
Displayed quotations over reserve size, so that the system will execute
against Displayed quotations in time priority and then against reserve size in time priority].
The following exceptions shall apply to the above execution
parameters. First, if a Nasdaq Quoting Market Participant enters a Non
Directed Order into the system, before sending such NonDirected Order
to the next Quoting Market Participants in queue, the NNMS will first
attempt to match off the order against the Nasdaq Quoting Market
Participant's own Quote/Order if the participant is at the best bid/
best offer in Nasdaq. Second, if Displayed Quote/Orders at a price
level are simultaneously exhausted and there is Reserve Size available
at that price, when Displayed Quote/Orders are refreshed from Reserve
Size the system will establish orderreceipt priority for these
refreshed Quote/Orders based on the size of a participant's Displayed
Quote/Order and then based on the original orderentry time for same sized refreshed Displayed Quote/Orders.
(C) Decrementation ProceduresThe size of [displayed quotation]
Quote/Order displayed in the Nasdaq Order Display Facility and/or the
Nasdaq Quotation Montage will be decremented upon the delivery of a
Liability Order or the delivery of an execution of a[n NNMS] Non
Directed [o]Order in an amount equal to [or greater than one normal
unit of trading] the systemdelivered order or execution; provided,
however, that [the execution of] if an NNMS order that is a mixed lot
(i.e., an order that is for more than a normal unit of trading but not
a multiple thereof), the system will only deliver a Liability Order or
an execution for the number of round lots contained in the mixed lot
order, and will only decrement [a displayed quotation's] the size of a
Displayed Quote/Order by the number of shares represented by the number
of round lots contained in the mixed lot order. The oddlot portion of
the mixed lot will be executed at the same price against the next NNMS
Market Maker in the odd lot rotation, as described in subparagraph (e) of this rule.
(i) If an NNMS AutoEx ECN has its bid or offer Attributable Quote/
Order and Reserve Size decremented to zero without transmition of
another Attributable Quote/Order to Nasdaq, the system will zero out
the side of the quote that is exhausted. If both the bid and offer are
decremented to zero without transmission of a revised Attributable
Quote/Order, the ECN will be placed into an excused withdrawal state
until the ECN transmits to Nasdaq a revised Attributable Quote/Order.
(ii) If an NNMS OrderDelivery ECN declines or partially fills a
NonDirected Order without immediately transmitting to Nasdaq a revised
Attributable Quote/Order that is at a price inferior to the previous
price, or if an NNMS OrderDelivery ECN fails to respond in any manner
within 5 seconds of order delivery, the system will cancel the
delivered order and send the order (or remaining portion thereof) back
into the system for immediate delivery to the next Quoting Market
Participant in queue. The system then will zero out the ECN's Quote/
Orders at that price level on that side of the market, and the ECN's
quote on that side of the market will remain at zero until the ECN
transmits to Nasdaq a revised Attributable Quote/Order. If both the bid
and offer are zeroed out, the ECN will be placed into an excused
withdrawal state until the ECN transmits to Nasdaq a revised Attributable Quote/Order.
(iii) If an NNMS ECN's Quote/Order has been zeroed out or if the
ECN has been placed into excused withdrawal as described in
subparagraphs (b)(1)(C) (i) and (ii) of this rule, the system will
continue to access the ECN's NonAttributable Quote/Orders that are in
the NNMS, as described in Rule 4707 and subparagraph (b) of this rule.
(D) Interval DelayAfter the NNMS system has executed all
Displayed Quote/Orders and Reserve Size interest at a price level [an
order against a market maker's displayed quote and reserve size (if
applicable), that market maker shall not be required to execute another
order at its bid or offer in the same security until a predetermined
time period has elapsed from the time the order was executed, as
measured by the time of execution in the Nasdaq system. This period of
time shall initially be established as 5 seconds, but may be modified
upon Commission approval and appropriate notification to NNMS participants.], the following will occur:
(i) If the NNMS system cannot execute in full all shares of a Non
Directed Order against the Displayed Quote/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 NonDirected Order can be filled in full within two price
levels, there will be no interval delay between price levels and the system will executed the remaindere of order in full; or
(ii) If the NonDirected Orders is specially designated by the
entering market participants as a ``sweep order,'' the system will
execute against all Displayed Quote/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 NonDirected 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.
[[Page 49848]]
(E) All entries in NNMS shall be made in accordance with the
requirements set forth in the NNMS User Guide, as published from time to time by Nasdaq.
(2) Refresh Functionality
(A) Reserve Size RefreshOnce a Nasdaq Quoting Market
Participant's [an NNMS Market Maker's displayed quotation] Displayed
Quote/Order size on either side of the market in the security has been
decremented to zero to NNMS [executions] processing Nasdaq will refresh
the [market maker's] displayed size out of Reserve Size to a sizelevel
designated by the Nasdaq Quoting Market Participant [NNMS Market
Maker], or in the absence of such sizelevel designation, to the
automatic refresh size. [If the market maker is using the reserve size
function for its proprietary quote or Agency Quote the NNMS Market
Maker must refresh to a minimum of 1,000 shares, consistent with
subparagraph (b)(1)(A) of this rule]. To utilize the Reserve Size
functionality, a minimum of 1,000 shares must initially be displayed in
the Nasdaq Quoting Market Participant's Displayed Quote/Order, and the
Displayed Quote/Order must be refreshed to at least 1,000 shares. This
functionality will not be available for use by UTP Exchanges.
(B) [auto q] Quote Refresh (``QR'')Once an NNMS Market Maker's
Displayed Quote/Order [quotation] size and Reserve Size on either side
of the market in the security has been decremented to zero due to NNMS
executions, the NNMS Market Maker may elect to have The Nasdaq Stock Market refresh the marker's quotation as follows:
(i) Nasdaq will refresh the market maker's quotation price on the
bid or offer side of the market, whichever is decremented to zero, by
a[n] price interval designated by the NNMS Market Maker; and
(ii) Nasdaq will refresh the market maker's displayed size to a
level designated by the NNMS Market Maker, or in the absence of such
size level designation, to the automatic refresh size. [A Market
Maker's Agency Quotation shall not be subject to the functionality described in the subparagraph.]
(iii) This functionality shall produce an Attributable Quote/Order.
In addition, if an NNMS Market Maker is utilizing the QR functionality
but has an Atributable Quote/Order in the system that is priced at or
better than the quote that would be created by the QR, the NNMS will
display the Attributable Quote/Order, not the QRproduced quote.
(iv) An NNMS Market Maker's Agency Quote shall not be subject to
the functionality described in this subparagraph, nor shall this
functionality be available to Quoting Market Participants other than NNMS Market Makers.
(3) Entry of Locking/Crossing Quotes/Orders [Except as otherwise
provided in subparagraph (b)(10) of this rule, at any time a locked or
crossed market, as defined in Rule 4613(e), exists for an NNMS
security, a market maker with a quotation for that security (including
an Agency Quote) that is causing the locked or crossed market may have
orders representing shares equal to the size of the bid or offer that
is locked or crossed executed by the NNMS system against the market
maker's quote (including an Agency Quote) at the quoted price if that
price is the best price. During locked or crossed markets, the NNMS
system will execute orders against those market makers that are locked
or crossed in predetermined time intervals. This period of time
initially shall be established as five (5) seconds, but may be modified
upon approval by the Commission and appropriate notification to NNMS
participants.] The system shall process locking/crossing Quotes/Orders as follows:
(A) Locked/Crossed Quotes/Orders During Market HoursIf during
market hours, a Quoting Market Participant enters into the NNMS a
Quote/Order that will lock/cross the market (as defined in NASD Rule
4613(e)), the system will not display the Quote/Order as a quote in
Nasdaq; instead the system will treat the Quote/Order as a marketable
limit order and enter it into the system as a NonDirected Order for
processing (consistent with subparagraph (b) of this rule) as follows:
(i) For lockedmarket situations, the order will be routed to the
Quoting Market Participant next in queue who would be locked, and the order will be executed at the lock price;
(ii) For crossedmarket situations, the order will be entered into
the system and routed to the next Quoting Market Participants in queue
who would be crossed, and the order will be executed at the price of the Displayed Quote/Order that would have been crossed.
Once the lock/cross is cleared, if the participant's order is not
completely filled, the system will reformat the order and display it in
Nasdaq (consistent with the parameters of the Quote/Order) as a Quote/
Order on behalf of the entering Quoting Market Participant.
(B) Locked/Crossed Quotes/Orders at the OpenIf the market is
locked or crossed at 9:30 a.m., Eastern Time, the NNMS will clear the
locked and/or crossed Quotes/Order by executing the oldest bid (offer)
against the oldest offer (bid) against which it is marketable at the
price of the oldest Quote/Order. Nasdaq then will begin processing Non
Directed Orders as described in subparagraph (b) of this rule.
[(4) For each NNM security in which a market maker is registered,
the market maker may enter orders into the NNMS for its proprietary
account as well as on an agency or riskless principal basis.]
[(5)] (4) An NNMS Market Maker may terminate its obligation by
keyboard withdrawal (or its equivalent) from NNMS at any time. However,
the market maker has the specific obligation to monitor its status in
NNMS to assure that a withdrawal has in fact occurred. Any transaction
occurring prior to the effectiveness of the withdrawal shall remain the responsibility of the market maker.
[(6)] (5) An NNMS Market Maker will be suspended from NNMS if its
bid or offer has been decremented to zero due to NNMS executions and
will be permitted a standard grace period, the duration of which will
be established and published by the Association, within which to take
action to restore a twosided quotation in the security for at least
one normal unit of trading. An NNMS Market Maker that fails to reenter
a twosided quotation within the allotted time will be deemed to have
withdrawn as a market maker (``Timed Out of the Box''). Except as
provided below in this subparagraph and in subparagraph (b)(7) of this
rule, an NNMS Market Maker that withdraws in an NNM security may not
reregister as a market maker in that security for twenty (20) business
days.] If an NNMS Market Maker's Attributable Quote/Order is reduced to
zero on one side of the market due to NNMS executions, the NNMS will
close the Market Maker's quote in the NNMS with respect to both sides
of its market, and the NNMS Market Maker will be permitted a standard
grace period of three minutes within which to take action to restore
its Attributable Quote/Order, if the market maker has not authorized
use of the QR functionality or does not otherwise have an Attributable
Quote/Order on both sides of the market in the system. An NNMS Market
Maker that fails to transmit an Attributable Quote/Order in a security
within the allotted time will have its quotation restored by the system
at the lowest bid price and the highest offer price in that security.
Except as provided in subparagraph (b)(6) of this rule, and NNMS Market
Maker that withdraws from a security may not reregister in the system as a market maker in that security for twenty
[[Page 49849]]
(20) business days. The requirements of this subparagraph shall not apply to a market maker's Agency Quote.
[(A) Nothwithstanding the above, a market maker can be reinstated if:
(i) the market maker makes a request for reinstatement to Nasdaq
Market Operations as soon as practicable under the circumstances, but
within at least one hour of having been Timed Out of the Box, and
immediately thereafter provides written notification of the reinstatement request;
(ii) it was a Primary Market Maker at the time it was Timed Out of the Box;
(iii) the market maker's firm would not exceed the following reinstatement limitations:
a. for firms that simultaneously made markets in less than 250 stocks during the previous calendar year, the firm can receive no more than four (4) reinstatements per year;
b. for firms that simultaneously made markets in 250 or more but less than 500 stocks during the previous calendar year, the firm can receive no more than six (6) reinstatements per year;
c. for firms that simultaneously made markets in 500 or more stocks
during the previous calendar year, the firm can receive no more than twelve (12) reinstatements per year; and
(iv) the designated Nasdaq officer makes a determination that the
withdrawal was not an attempt by the market maker to avoid its
obligation to make a continuous twosided market. In making this
determination, the designated Nasdaq officer will consider, among other things:
a. whether the market conditions in the issue included unusual volatility or other unusual activity, and/or the market conditions in other issues in which the market maker made a market at the time the firm was Timed Out of the Box;
b. the frequency with which the firm has been Timed Out of the Box in the past;
c. procedures the firm has adopted to avoid being inadvertently Timed Out of the Box; and
d. the length of time before the market maker sought reinstatement.
(B) If a market maker has exhausted the reinstatement limitations
in subparagraph (b)(6)(A)(iii) above, the designated Nasdaq officer may
grant a reinstatement request if he or she finds that such
reinstatement is necessary for the protection of investors or the
maintenance of fair and orderly markets and determines that the
withdrawal was not an attempt by the market maker to avoid its
obligation to make a continuous twosided market in instances where:
(i) a member firm experiences a documented problem or failure
impacting the operation or utilization of any automated system operated
by or on behalf of the firm (chronic system failures within the control
of the member will not constitute a problem or failure impacting a
firm's automated system) or involving an automated system operated by Nasdaq:
(ii) the market maker is a manager or comanager of a secondary
offering from the time the secondary offering is announced until ten days after the offering is complete; or
(iii) absent the reinstatement, the number of market makers in a
particular issue is equal to two (2) or less or has otherwise declined
by 50% or more from the number that existed at the end of the prior
calendar quarter, except that if a market maker has a regular pattern
of being frequently Timed Out of the Box, it may not be reinstated notwithstanding the number of market makers in the issue.]
[(7)] (6) Notwithstanding the provisions of subparagraph [(6)] (5) above:
(A) an NNMS Market Maker that obtains an excused withdrawal
pursuant to Rule 4619 prior to withdrawing from NNMS may reenter NNMS according to the conditions of its withdrawal; and
(B) a NNMS Market Maker that fails to maintain a clearing
arrangement with a registered clearing agency or with a member of such
an agency, and is thereby withdrawn from participation in ACT and NNMS
for NNMS securities, may reenter NNMS after a clearing arrangement has
been reestablished and the market maker has compiled with ACT
participant requirements. Provided however, that if the Association
finds that the ACT market maker's failure to maintain a clearing
arrangement is voluntary, the withdrawal of quotations will be considered voluntary and unexcused.
[(8)] (7) The Market Operations Review Committee shall have
jurisdiction over proceedings brought by market makers seeking review
of their removal from NNMS pursuant to subparagraph[s] (b) (5) [(6) or (b)(7)] of this rule.
[(9)] (8) In the event that a malfunction in the [NNMS Market
Maker's] Quoting Market Participant's equipment occurs, rendering [on
line] communications with NNMS inoperable, the [NNMS Market Maker]
Quoting Market Participant is obligated to immediately contact Nasdaq
Market Operations by telephone to request withdrawal from NNMS and a
closedquote status, and if the Quoting Market Participants is an NNMS
Market Maker an excused withdrawal from Nasdaq[. Such request must be
made] pursuant to Rule 4619. If withdrawal is granted, Nasdaq Market
Operations personnel will enter the withdrawal notification into NNMS
from a supervisory terminal and shall close the quote. Such manual
intervention, however, will take a certain period of time for
completion and, unless otherwise permitted by the Association pursuant
to its authority under Rule 11890, the [NNMS Market Maker] Quoting
Market Participants will continue to be obligated for any transaction
executed prior to the effectiveness of [his] the withdrawal and closed quote status.
[(10) In the event that there are no NNMS Market Makers at the best
bid (offer) disseminated by Nasdaq, market orders to sell (buy) entered
into NNMS will be held in queue until executable, or until 90 seconds
has elapsed, after which such orders will be rejected and returned to their respective order entry firms.]
(c) Directed Order ProcessingA participant may enter a directed
order into the NNMS to access a specific Quote/Order in the Nasdaq
Quotation Montage and to begin the negotiation process with a
particular Quoting Market Participant. The system will deliver an order
to the Quoting Market Participant designated as the recipient of the
order. Upon delivery, the Quoting Market Participants shall owe no
liability under the Firm Quote Rule to that order and the system will
not decrement the receiving Quoting Market Participant's Quote/Order,
unless the Quoting Market Participant to which a Directed Order is
being sent has indicated that it wishes to receive Directed Orders that are Liability Orders (as described in Rule 4706(b)).
[(c)] (d) NNMS Order Entry Firms
All entries in NNMS shall be made in accordance with the procedures
and requirements set forth in the NNMS User Guide. Orders may be
entered in NNMS by the NNMS Order Entry Firm through either its Nasdaq
terminal or computer interface. The system will transmit to the firm on
the terminal screen and printer, if requested, or through the computer
interface, as applicable, an execution report generated immediately following the execution.
[(d) Order Entry Parameters
(1) NNMS will only accept market and marketable limit orders for
execution and will not accept market or marketable limit orders
designated as AllorNone (``AON'') orders; provided, however, that NNMS will not accept
[[Page 49850]]
any limit orders, marketable or unmarketable, prior to 9:30 a.m.,
Eastern Time. For purposes of this subparagraph, an AON order is an
order for an amount of securities equal to the size of the order and no less.
(2) Additionally, the NNMS will only accept orders that are
unpreferenced, thereby resulting in execution in rotation against NNMS Market Makers, and will not accept preferenced orders.
(3) NNMS will not accept orders that exceed 9,900 shares, and no
participant in the NNMS system shall enter an order into the system that exceeds 9,900.]
[(e) Electronic Communication Networks
An Electronic Communications Networks, as defined in SEC Rule
11Ac11(a)(8), may participate in the NNMS System if it complies with
NASD Rule 4623 and executes with the Association a Nasdaq Workstation Subscriber Agreement, as amended, for ECNs.]
(e) OddLot Processing
(1) Participation in OddLot ProcessAll NNMS Market Makers may
participate in the OddLot Process for each security in which the market makers is registered.
(2) Execution Process
(A) Oddlot orders will be executed against an NNMS Market Maker
only if it has an oddlot exposure limit in an amount that would fill
the oddlot order. A NNMS Market Maker may, on a securitybysecurity
basis, set an oddlot exposure limit from 0 to 999,999 shares.
(B) An oddlot order shall be executed automatically against the
next available NNMS Market Maker when the oddlot order becomes
executable (i.e., when the best price in Nasdaq moves to the price of
the oddlot limit order). Such oddlot orders will execute at the best
price available in the market, in rotation against NNMS Market Makers
who have an exposure limit that would fill the oddlot order.
(C) For odd lots that are part of a mixed lot, once the roundlot
portion is executed, the oddlot portion will be executed at the round
lot price against the next NNMS Market Maker in rotation (as described
in subparagraph (e)(2)(b) of this rule) even if the roundlot price is no longer the best price in Nasdaq.
(D) Oddlot executions will decrement the oddlot exposure limit of
an NNMS Market Maker but will not decrement the size of NNMS Market Maker's Displayed Quote/Order.
(E) After the NNMS system has executed an odd lot against an NNMS
Market Maker, the system will not deliver another oddlot order against
the same market maker until a predetermined time period has elapsed
from the time the last execution was delivered, as measured by the time
of execution in the Nasdaq system. This period of time shall initially
be established as 5 seconds, but may be increased upon Commission
approval and appropriate notification to NNMS Participants or may be
decreased to an amount less than five seconds by the NNMS Market Maker. (f) UTP Exchanges
As a general matter, Nasdaq shall endeavor to provide fair and
equivalent access to the Nasdaq market for UTP Exchanges, as a UTP
Exchange provides to its market for Nasdaq Quoting Market Participants
and NNMS Order Entry Firms. Unless specified otherwise in these rules
or in the Nasdaq UTP Plan, UTP Exchanges may participate in the NNMS as follows:
(1) Order EntryUTP Exchanges shall be permitted to enter Directed
and NonDirected orders into the system subject to the conditions and
requirements of Rules 4706. Directed and NonDirected orders entered by
UTP Exchanges shall be processed (unless otherwise specified) as described subparagraphs (b) and (c) of this rule.
(2) Display of UTP Exchange Quotes/Orders in Nasdaq
(A) UTP Exchange Principal Orders/QuotesUTP Exchanges shall be
permitted to transmit to the NNMS a single bid Quote/Order and a single
offer Quote/Order. Upon transmission of the Quote/Order to Nasdaq, the
system shall time stamp the Quote/Order, which time stamp shall
determine the ranking of the Quote/Order for purposes of processing
NonDirected Orders. The NNMS shall display the best bid and best offer
Quote/Order transmitted to Nasdaq by a UTP Exchange in the Nasdaq
Quotation Montage under the MMID for the UTP Exchange, and shall also
display such Quote/Order in the Nasdaq Order Display Facility as part
of the aggregate trading interest when the UTP Exchange's best bid/best
offer Quote/Order falls within the best three price levels in Nasdaq on either side of the market.
(B) UTP Exchange Agency Quotes/Orders
(i) A UTP Exchange may transmit to the NNMS Quotes/Orders at a
single as well as multiple price levels that meet the following
requirements: are for the benefit of the account of a natural person
executing securities transactions with or through or receiving
investment banking services from a broker/dealer; are not for the
benefit of a broker and/or dealer; and are designated as Non Attributable Quotes/Orders (``UTP Agency Order/Quote'').
(ii) Upon transmission of a UTP Agency Quote/Order to Nasdaq, the
system shall time stamp the order, which time stamp shall determine the
ranking of these Quote/Order for purposes of processing NonDirected
orders, as described in subparagraph (b) of this rule. A UTP Agency
Quote/Order shall not be displayed in the Nasdaq Quotation Montage
under the MMID for the UTP Exchange. Rather, UTP Agency Quotes/Orders
shall be reflected in the Nasdaq Order Display Facility and Nasdaq
Quotation Montage in the same manner in which NonAttributable Quotes/
Orders from Nasdaq Quoting Market Participants are reflected in Nasdaq, as described in Rule 4707(b)(2).
(3) NonDirected Order Processing
(a) UTP Exchanges that agree to provide automatic execution against
their Quotes/Orders for Nasdaq Quoting Market Participants and NNMS
Order Entry Firms, shall accept an execution of an order up to the size
of the UTP Exchange's displayed Quote/Order, and shall have Non
Directed Orders they enter into the system processed as described in subparagraph (b) of this rule.
(b) UTP Exchanges that do not provide automatic execution against
their Quotes/Orders for Nasdaq Quoting Market Participants and NNMS
Order Entry firms, shall accept the delivery of an order up to the size
of the UTP Exchange's Displayed Quote/Order, and shall have Non
Directed Orders they enter into the system processed as described in
subparagraph (b) of this rule. If such a UTP Exchange declines or
partially fills a NonDirected Order without immediately transmitting
to Nasdaq a revised Quote/Order that is at a price inferior to the
previous price, or if such a UTP Exchange fails to respond in any
manner within 5 seconds of order delivery, the NNMS will send the order
(or remaining portion thereof) back into the system for delivery to the
next Quoting Market Participant in queue. The system will then move the
side of such UTP Exchange's Quote/Order to which the declined or
partiallyfilled order was delivered, to the lowest bid or highest offer price in Nasdaq, at a size of 100 shares.
(4) Directed order ProcessingUTP Exchanges shall participate in the
[[Page 49851]]
Directed Order processing as described in subparagraph (c) of this rule.
(5) DecrementationUTP Exchanges shall be subject to the
decrementation procedures described in subparagraph (b)(1)(C) of this rule.
47114714No Change
4718. Termination of System Service
The Association or its subsidiaries may, upon notice, terminate
system service to a participant in the event that a participant fails
to abide by any of the rules or operating procedures of the System or
any other relevant rule or requirement, or fails to pay promptly for services rendered.
* * * * *
4750. Smallcap Small Order Execution System (SOES)
47514757Deleted
II. SelfRegulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the NASD and Nasdaq included
statements concerning the purpose of, and basis for, the proposed rule
change and discussed any comments its received on the proposed rule
change. The text of these statements may be examined at the places
specified in Item IV below. The NASD and Nasdaq have prepared
summaries, set forth in Sections (A, (B), and (C) below, of the most significant aspects of such statements.
(A) SelfRegulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
1. Purpose
In the original filing, the NASD and Nasdaq proposed enhancing the Nasdaq quotation montage and Nasdaq's main trading platformthe Nasdaq National Market (System (``NNMS''). In particular, Nasdaq proposed to (1) Add a new display to the Nasdaq Workstation II (``NWII'') called the Nasdaq Order Display Facility (``NODF''), which would show the best bid/best offer in Nasdaq and two price levels away, accompanied by the aggregate size at each price level of the ``displayed'' trading interest of market makers, electronic communications networks (``ECN''), and UTP Exchanges; (2) make substantial enhancements to the NNMS, which would improve the efficiency of the current trading platform; (3) allow market makers and ECNs to designate order for ``display'' in Nasdaq on either an attributable (i.e., not anonymous) or nonattributable (i.e., anonymous) basis; (4) establish the Order Collector Facility (``OCF'') as part of the NNMS, which would allow Nasdaq market makers and ECNs to give the Nasdaq system multiple quotes/orders at a single as well as multiple price levels, which would be displayed in the Nasdaq Quotation Montage and the NODF, consiste
SUMMARY:
National Association of Securities Dealers, Inc.,
DOCUMENT BODY 2:
August 10, 2000.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b4 thereunder,\2\ notice is hereby given that
the National Association of Securities Dealers, Inc. (``NASD''),
through its whollyowned subsidiary, the Nasdaq Stock Market, Inc.
(``Nasdaq''), filed with the Securities and Exchange Commission
(``Commission'') Amendment Nos. 5, 6, and 7 to the proposed rule change
as described in Items I, II, and III below, which Items have been
prepared by Nasdaq. On May 16, 2000, Nasdaq filed Amendment No. 5 to
the proposal.\3\ On July 6, 2000, Nasdaq filed Amendment No. 6 to the
proposal.\4\ On August 7, 2000, Nasdaq filed Amendment No. 7 to the
proposal.\5\ The proposed rule change and Amendment Nos. 1 and 2 were
published for comment in the Federal Register on December 6, 1999.\6\
On March 16, 2000, Nasdaq filed Amendment No. 3 to the proposal.\7\ On
March 30, 2000 Amendment No. 4 was published for comment in the Federal
Register.\8\ The Commission is publishing this notice to solicit
comments on Amendment Nos. 5, 6, and 7 to the proposed rule change from interested persons.\9\
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b4.
\3\ See letter from Richard G. Ketchum, President, NASD, to
Belinda Blaine, Associate Director, Division of Market Regulation
(``Division''), Commission (May 16, 2000) (``Amendment No. 5'').
\4\ See letter from Richard G. Ketchum, President, NASD, to
Belinda Blaine, Associate Director, Division of Market Regulation
(``Division''), Commission (July 6, 2000) (``Amendment No. 6'').
\5\ See letter from Richard G. Ketchum, President, NASD, to
Belinda Blaine, Associate Director, Division of Market Regulation
(``Division''), Commission (August 7, 2000) (``Amendment No. 7'').
\6\ See Securities Exchange Act Release No. 42166 (Nov. 22, 1999), 64 FR 69125.
\7\ See letter from Richard G. Ketchum, President, NASD, to
Belinda Blaine, Associate Director, Division of Market Regulation
(``Division''), Commission (March 15, 2000) (``Amendment No. 3'').
In Amendment No. 3, the NASD responded to comment letters and
submitted substantive, clarifying, and technical amendments to the proposal.
\8\ See Securities Exchange Act Release No. 42573 (March 23, 2000), 65 FR 16981.
\9\ This 19b4 filing, representing Amendment Nos. 5, 6, and 7
to SRNASD9953, reflect the substantive amendments to the filing,
and contains some technical changes and clarifying information to the proposal.
I. SelfRegulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
Nasdaq and the NASD propose the following amendments in response to
comment letters submitted to the Commission regarding the proposal as
originally noticed. The amended rule language is as follows: \10\
\10\ The amended rule language contained in this notice reflects the Commission's approval of SRNASD9911, regarding the
establishment of the Nasdaq National Market System (``NNMS''). See
Securities Exchange Act Release No. 42344 (January 14, 2000), 65 FR 3987 (January 25, 2000) (Order for File No. SRNASD9911
functionally integrating the Small Order Execution System (``SOES'')
and SelectNet system to become the foundation of the NNMS.) In
addition, the amended rule language replaces, in the entirety, the
rule language contained in the original filing, as well as Amendment Nos. 1, 2, 3 and 4.
Proposed additions are italicized and proposed deletions are placed in [brackets].
4720. SelectNet ServiceDeleted
* * * * *
4611. Registration as a Nasdaq Market Maker
(a)(e) No Change
(f) Unless otherwise specified by the Association, each Nasdaq
market maker that is registered as a market maker in a Nasdaq [National
Market security]listed security shall also at all times be registered
as a market maker in the Nasdaq National Market Execution System (NNMS)
with respect to that security and be subject to the NNMS Rules as set
forth in the Rule 4700 Series. [Participation in the Small Order
Execution System (SOES) shall be voluntary for any Nasdaq market maker
registered to make a market in a Nasdaq SmallCap security.] (g) No Change
* * * * *
4613. Character of Quotations
(a) TwoSided Quotations
(1) For each security in which a member is registered as a market
maker, the member shall be willing to buy and sell such security for
its own account on a continuous basis and shall enter and maintain a
twosided quotation[s] (``Principal Quote''), which is attributed to
the market maker by a special maker participant identifier (``MMID'')
and is displayed in the Nasdaq Quotation Montage [in The Nasdaq Stock Market]
[[Page 49843]]
at all times, subject to the procedures for excused withdrawal set forth in Rule 4619.
(A) A registered market maker in a Nasdaqlisted security [listed
in The Nasdaq Stock Market] must display a quotation size for at least
one normal unit of trading (or a larger multiple thereof) when it is
not displaying a limit order in compliance with SEC Rule 11Ac14,
provided, however, that a registered market maker may augment its
displayed quotation size to display limit orders priced at the market
maker's quotation. Unless otherwise designated, a ``normal unit of trading'' shall be 100 shares.
(b) Agency QuoteAmendments Pending Pursuant to SRNASD9909. (c)(e) No Change
IM4613. Autoquote PolicyNo Change
4618. Clearance and Settlement
(a)(b) No Changes
(c) All transactions through the facilities of the Nasdaq National
Market Execution System[, SOES, and SelectNet services] shall be
cleared and settled through a registered clearing agency using a continuous net settlement system.
* * * * *
4619. Withdrawal of Quotations and Passive Market Making
(a)(b) No Change
(c) Excused withdrawal status may be granted to a market maker that
fails to maintain a clearing arrangement with a registered clearing
agency or with a member of such an agency and is withdrawn from
participation in the Automated Confirmation Transaction service,
thereby terminating its registration as a market maker in Nasdaq
issues. Provided however, that if the Association finds that the market
maker's failure to maintain a clearing arrangement is voluntary, the
withdrawal of quotations will be considered voluntary and unexcused
pursuant to Rule 4620[, the Rules for the Small Order Execution System,
as set forth in the Rule 4750 Series,] and the Rule 4700 Series governing the Nasdaq['s] National Market Execution System.
(d) No Change
* * * * *
4620. Voluntary Termination of Registration
(a) A market maker may voluntarily terminate its registration in a
security by withdrawing its Principal [quotations] Quote from The
Nasdaq Stock Market. A market maker that voluntarily terminates its
registration in a security may not reregister as a market maker in
that security for twenty (20) business days. Withdrawal from
participation as a market maker in a Nasdaq [National Market]listed
security in the Nasdaq National Market Execution System shall
constitute termination of registration as a market maker in that
security for purposes of this Rule; provided, however, that a market
maker that fails to maintain a clearing arrangement with a registered
clearing agency or with a member of such an agency and is withdrawn
from participation in the Automated Confirmation Transaction System and
thereby terminates its registration as a market maker in Nasdaqlisted
[National Market and SmallCap] issues may register as a market maker at
any time after a clearing arrangement has been reestablished and the
market maker has complied with ACT participant requirements contained in Rule 6100.
* * * * *
4632. Transaction Reporting
(a)(d) No Change
(e) Transactions Not Required To Be Reported
The following types of transactions shall not be reported:
(1) Transactions executed through the Computer Assisted Execution
System (CAES), or the facilities of the Nasdaq National Market Execution System (``NNMS'')[, or the SelectNet service];
(2)(6) No Change.
(f) No Change.
4642. Transaction Reporting
(a)(d) No Change.
(e) Transactions Not Required To Be Reported.
The following types of transactions shall not be reported:
(1) Transactions executed through the Computer Assisted Execution
System (CAES)[; the Small Order Execution System (SOES) or the
SelectNet Service] or facilities of the facilities of the Nasdaq National Market Execution System (``NNMS'').
(2)(5) No Change.
(f) No Change.
* * * * *
4700. Nasdaq National Market Execution System (NNMS)
4701. DefinitionsUnless stated otherwise, the terms described below shall have the following meaning.
[(d)] (a) The term ``active NNMS securities'' shall mean those NNMS
eligible securities in which at least one NNMS Market Maker is currently active in NNMS.
[(i)] (b) The term ``Agency Quote'' shall mean the quotation that a
registered NNMS Market Maker is permitted to display pursuant to the requirements of NASD Rule 4613(b).
(c) The term ``Attributable Quote/Order'' shall have the following meaning:
(1) For NNMS Market Makers and NNMS ECNs, a bid or offer Quote/
Order that is designated for display (price and size) next to the
participant's MMID in the Nasdaq Quotation Montage once such Quote/
Order becomes the participant's best attributable bid or offer.
(2) For UTP Exchanges, the best bid and best offer quotation with
price and size that is transmitted to Nasdaq by the UTP Exchange, which
is displayed next to the UTP Exchange's MMID in the Nasdaq Quotation Montage.
[(h)] (d) The term ``Automated Confirmation Transaction'' service
or ``ACT'' shall mean the automated system owned and operated by The
Nasdaq Stock Market, Inc. which compares trade information entered by
ACT Participants and submits ``lockedin'' trades to clearing.
[(g)] (e) The term ``automatic refresh size'' shall mean the
default size to which an NNMS Market Maker's quote will be refreshed
pursuant to NASD Rule 4710(b)(2), if the market maker elects to utilize
the Quote Refresh Functionality and does not designate to Nasdaq an
alternative refresh size, which must be at least one normal unit of
trading. The [maximum order] automatic refresh size default [size] amount shall be 1,000 shares.
(f) The term ``Directed Order'' shall mean an order that is entered
into the system by an NNMS participant that is directed to a particular Quoting Market Participant.
(g) The term ``Displayed quote/Order'' shall mean both Attributable
and NonAttributable (as applicable) Quotes/Orders transmitted to Nasdaq by Quoting Market Participants.
(h) The term ``Firm Quote Rule'' shall mean SEC Rule 11Ac11.
(i) The term ``Liability Order'' shall mean an order that when
delivered to a Quoting Market Participant imposes an obligation to
respond to such order in a manner consistent with the Firm Quote Rule.
(j) The term ``limit order'' shall mean an order to buy or sell a stock at a specified price or better.
(k) The term ``market order'' shall mean an unpriced order to buy or sell a stock at the market's current best price.
(l) The term ``marketable limit order'' shall mean a limit order that, at the time
[[Page 49844]]
it is entered into the NNMS, if it is a limit order to buy, is priced
at the current inside offer or higher, or if it is a limit order to sell, is priced at the inside bid or lower.
(m) The term ``mixed lot'' shall mean an order that is for more than a normal unit of trading but not a multiple thereof.
(n) The term ``NonAttributable Quote/Order'' shall mean a bid or
offer Quote/Order that is entered by a Nasdaq Quoting Market
Participant and is designated for display (price and size) on an anonymous basis in the Nasdaq Order Display Facility.
(o) The term ``NonDirected Order'' shall mean an order that is
entered into the system by an NNMS participant and is not directed to any particular Quoting Market Participants.
(p) The term ``NonLiability Order'' shall mean an order that when
delivered to a Quoting Market Participant imposes no obligation to respond to such order under the Firm Quote Rule.
[(a)] (q) The term ``Nasdaq National Market Execution System,''
[or] ``NNMS,'' or ``system'' shall mean the automated system owned and
operated by The Nasdaq Stock Market, Inc. which enables NNMS
Participants to execute transactions in active NNMS authorized
securities; to have reports of the transactions automatically forwarded
to the National Market Trade Reporting System, if required, for
dissemination to the public and the industry, and to ``lock in'' these
trades by sending both sides to the applicable clearing corporation(s)
designated by the NNMS Participant(s) for clearance and settlement; and
to provide NNMS Participants with sufficient monitoring and updating
capability to participate in an automated execution environment.
[(c)] (r) The term ``NNMS eligible securities'' shall mean
designated Nasdaqlisted [National Market (NNMS)] equity securities.
(s) The term ``NNMS ECN'' shall mean a member of the Association
that meets all of the requirements of NASD Rule 4623, and that
participants in the NNMS with respect to one or more NNMS eligible securities.
(1) The term ``NNMS AutoEx ECN'' shall mean an NNMS ECN that
participates in the automaticexecution functionality of the NNMS
system, and accordingly executes NonDirected Orders via automatic
execution for the purchase or sale of an active NNMS security at the Nasdaq inside bid and/or offer price.
(2) The term ``NNMS OrderDelivery ECN'' shall mean an NNMS ECN
that participates in the orderdelivery functionality of the NNMS
system, accepts delivery of NonDirected Orders that are Liability
Orders, and provides an automated execution of NonDirected Orders (or
an automated rejection of such orders if the price is no longer
available) for the purchase or sale of an active NNMS security at the Nasdaq inside bid and/or offer price.
[(e)] (t) The term ``NNMS Market Maker'' shall mean a member of the
Association that is registered as a Nasdaq Market Maker and as a Market
Maker for purposes of participation in NNMS with respect to one or more
NNMS eligible securities, and is currently active in NNMS and obligated
to execute orders through the automaticexecution functionality of the
NNMS system for the purchase or sale of an active NNMS security at the Nasdaq inside bid and/or [ask] offer price.
[(b)] (u) The term ``NNMS Participant'' shall mean [either] an NNMS
Market Maker, NNMS ECN, UTP Exchange, or NNMS Order Entry Firm
registered as such with the Association for participation in NNMS.
[(f)] (v) The term ``NNMS Order Entry Firm'' shall mean a member of
the Association who is registered as an Order Entry Firm for purposes
of participation in NNMS which permits the firm to enter orders [of limited size] for execution against NNMS Market Makers.
(w) The term ``Nasdaq Quotation Montage'' shall mean the portion of
Nasdaq WorkStation presentation that displays for a particular stock
two columns (one for bid, one for offer), under which is listed in
price/time priority the MMIDs for each NNMS Market Maker, NNMS ECN, and
UTP Exchange registered in the stock and the corresponding quote (price and size) next to the related MMID.
(x) The term ``Nasdaq Quoting Market Participant'' shall include
only the following: (1) NNMS Market Makers; or (2) NNMS ECNs.
(y) The term ``oddlot order'' shall mean an order that is for less than a normal unit of trading.
(z) The term ``Quote/Order'' shall mean a single quotation or shall
mean an order or multiple orders at the same price submitted to Nasdaq
by a Nasdaq Quoting Market Participant that is displayed in the form of
a single quotation. Unless specifically referring to a UTP Exchange's
Agency Quote/Order (as set out in Rule 4710(f)(2)(b)), when this term
is used in connection with a UTP Exchange, it shall mean the best bid
and/or best offer quotation transmitted to Nasdaq by the UTP Exchange.
(aa) The term ``Quoting Market Participant'' shall include any of
the following: (1) NNMS Market Makers; (2) NNMS ECNs; and (3) UTP Exchange Specialists.
(bb) The term ``Reserve Size'' shall mean the systemprovided
functionality that permits a Nasdaq Quoting Market Participant to
display in its Displayed Quote/Order part of the full size of a
proprietary or agency order, with the remainder held in reserve on an
undisplayed basis to be displayed in whole or in part after the displayed part is executed.
(cc) The term ``Nasdaq Order Display Facility'' shall mean the
portion of Nasdaq Workstation presentation that displays without
attribution to particular Quoting Market Participant's MMID the three
best price levels in Nasdaq on both the bid and offer side of the
market and the aggregate size of Attributable and NonAttributable Quotes/Orders at each price level.
(dd) The term ``UTP Exchange'' shall mean any registered national
securities exchange that has unlisted trading privileges in Nasdaq
National Market securities pursuant to the Joint SelfRegulatory
Organization Plan Governing the Collection, Consolidation and
Dissemination Of Quotation and Transaction Information For Exchange
Listed Nasdaq/National Market System Securities Traded On Exchanges On An Unlisted Trading Privilege Basis (``Nasdaq UTP Plan'').
4705. NNMS Participant Registration
(a) Participation in NNMS as an NNMS Market Maker requires current
registration as such with the Association. Such registration shall be
conditioned upon the NNMS Market Maker's initial and continuing compliance with the following requirements:
(1) execution of an NNMS Participant application agreement with the Association;
(2) membership in, or access arrangement with, a clearing agency
registered with the Commission which maintains facilities through which NNMS compared trades may be settled;
(3) registration as a market maker in The Nasdaq Stock Market
pursuant to the Rule 4600 Series and compliance with all applicable
rules and operating procedures of the Association and the Commission;
(4) maintenance of the physical security of the equipment located
on the premises of the NNMS Market Maker to prevent the improper use or
access to Nasdaq systems, including unauthorized entry of information into NNMS; and
[[Page 49845]]
(5) acceptable and settlement of each NNMS trade that NNMS
identifies as having been effected by such NNMS Market Maker, or if
settlement is to be made through another clearing member, guarantee of
the acceptance and settlement of such identified NNMS trade by the
clearing member on the regularly scheduled settlement date.
(b) Pursuant to Rule 4611(f), participation as an NNMS Market Maker
is required for any Nasdaq market maker registered to make a market in an NNMS security.
(c) Participation in NNMS as an NNMS Order Entry Firm requires
current registration as such with the Association. Such registration
shall be conditioned upon the NNMS Order Entry Firm's initial and continuing compliance with the following requirements:
(1) execution of an NNMS Participant application agreement with the Association;
(2) membership in, or access arrangement with, a clearing agency
registered with the Commission which maintains facilities through which NNMS compared trades may be settled;
(3) compliance with all applicable rules and operating procedures
of the Association and the Securities and Exchange Commission;
(4) maintenance of the physical security of the equipment located
on the premises of the NNMS Order Entry Firm to prevent the improper
use or access to Nasdaq systems, including unauthorized entry of information into NNMS; and
(5) acceptance and settlement of each NNMS trade that NNMS
identifies as having been effected by such NNMS Order Entry Firm or if
settlement is to be made through another clearing member, guarantee of
the acceptance and settlement of such identified NNMS trade by the
clearing member on the regularly scheduled settlement date.
(d) Participation in NNMS as an NNMS requires current registration
as an NASD member and shall be conditioned upon the following:
(1) the execution of an NNMS Participant application agreement with the Association;
(2) compliance with all requirements in NASD Rule 4623 and all
other applicable rules and operating procedures of the Association and the Securities and Exchange Commission;
(3) membership in, or access arrangement with, a clearing agency
registered with the Commission which maintains facilities through which NNMS compared trades may be settled;
(4) maintenance of the physical security of the equipment located
on the premises of the NNMS ECN to prevent the improper use or access
to Nasdaq systems, including unauthorized entry of information into NNMS; and
(5) acceptance and settlement of each trade that is executed
through the facilities of the NNMS, or if settlement is to be made
through another clearing member, guarantee of the acceptance and
settlement of such identified NNMS trade by the clearing member on the regularly scheduled settlement date.
[(d)] (e) The registration required hereunder will apply solely to
the qualification of an NNMS Participant to participate in NNMS. Such
registration shall not be conditioned upon registration in any particular eligible or active NNMS securities.
[(e)] (f) Each NNMS Participant shall be under a continuing
obligation to inform the Association of noncompliance with any of the registration requirements set forth above.
(g) The Association and its subsidiaries shall not be liable for
any losses, damages, or other claims arising out of the NNMS or its
use. Any losses, damages, or other claims, related to a failure of the
NNMS to deliver, display, transmit, execute, compare, submit for
clearance and settlement, or otherwise process an order, Quote/Order,
message, or other data entered into, or created by, the NNMS shall be
absorbed by the member, or the member sponsoring the customer, that
entered the order, Quote/Order, message, or other data into the NNMS. 4706. Order Entry Parameters
(a) NonDirected OrdersAn NNMS Participant may enter a Non
Directed Order into the NNMS in order to access the best bid/best offer
as displayed in Nasdaq. A NonDirected Order must be a market or
marketable limit order, must be a round lot or a mixed lot, and must
indicate whether it is a short sale, shortsale exempt, or long sales.
If after entry but before delivery, a NonDirected Order becomes non
marketable, the system will hold the order for 90 seconds, after which
the order will be returned to the NNMS participant entering the order.
The system will not process a NonDirected Order to sell short if the
execution of such order would violate NASD Rule 3350. Limit orders may
be entered into the system prior to the market's open, but will be held
in queue, and if not marketable on the open, will be returned to the
participant entering the order. NonDirected Orders will be processed
as described in Rule 4710(b). The NNMS shall not accept NonDirected
Orders that are AllorNone or have a minimum size of execution.
(b) Directed OrdersA participant may enter a Directed Order into
the NNMS to access a specific Attributable/Order displayed in the
Nasdaq Quotation Montage, subject to the following conditions and requirements:
(1) Unless the Quoting Market Participant to which a Directed Order
is being sent has indicated that it wishes to receive Directed Orders
that are Liability Orders, a Directed Order must be a NonLiability
Order, and as such, at the time of order entry must be designated as:
(A) an ``AllorNone'' order (``AON'') that is at least one normal
unit of trading (e.g. 100 shares) in excess of the Attributable Quote/
Order of the Quoting Market Participant to which the order is directed; or
(B) a ``Minimum Acceptable Quantity'' order (``MAQ''), with a MAQ
value of at least one normal unit of trading in excess of Attributable
Quote/Order of the Quoting Market Participant to which the order is
directed. Nasdaq will append an indicator to the quote of a Quoting
Market Participants that has indicated to Nasdaq that it wishes to receive directed orders that are Liability Orders.
(2) A Directed Order may have a time in force of 1 to 99 minutes.
(c) Entry of Agency and Principal OrdersNNMS Participants are
permitted to enter into the NNMS both agency and principal orders for delivery and execution processing.
(d) Order SizeAny round or mixed lot order up to 999,999 shares
may be entered into the NNMS for normal execution processing. Oddlot
orders, and the oddlot portion of a mixed lot, are subject to a separate execution process, as described in Rule 4710(e).
(e) Open QuotesThe NNMS will only deliver an order or an
execution to a Quoting Market Participant if that participant has an open quote.
(f) OddLot OrdersThe system will accept oddlot orders for
processing through a separate facility. Oddlot orders must be Non
Directed Orders, and may be market, marketable limit or limit orders.
The system shall accept oddlot orders at a rate no faster than one
order per/second from any single participant. Oddlot orders, and the
oddlot portion of a mixed lot order, shall be processed as described in Rule 4710(e).
4707. Entry and Display of Quotes/Orders
(a) Entry of Quotes/OrdersNasdaq Quoting Market Participants may enter Quotes/Orders into the NNMS subject to
[[Page 49846]]
the following requirements and conditions:
(1) Nasdaq Quoting Market Participants shall be permitted to
transmit to the NNMS multiple principal and Agency Quotes/Orders at a
single as well as multiple price levels. Such Quote/Order at a single
as well as multiple price levels. Such Quote/Order shall indicate
whether it is an ``Attributable Quote/Order'' or ``NonAttributable
Quote/Order,'' and the amount of Reserve Size (if applicable).
(2) Upon entry of a Quote/Order into the system, the NNMS shall
timestamp it, which timestamp shall determine the ranking of the
Quote/Order for purposes of processing NonDirected Orders as described in Rule 4710(b).
(3) Consistent with Rule 4613, an NNMS Market Maker is obligated to
maintain a twosided Attributable Quote/Order (other that an Agency
Quote) at all times, for a least one normal unit of trading.
(4) Nasdaq Quoting Market Participants may continue to transmit to
the NNMS only their best bid and best offer Attributable Quotes/Orders,
Notwithstanding NASD Rule 4613 and subparagraph (a)(1) of this rule,
nothing in these rules shall require a Nasdaq Quoting Market
Participant to transmit to the NNMS multiple Quotes/Orders.
(b) Display of Quotes/Orders in NasdaqThe NNMS will display a
Nasdaq Quoting Market Participant's Quotes/Orders as follows:
(1) Attributable Quotes/OrdersThe price and size of a Nasdaq
Quoting Market Participant's best priced Attributable Quote/Order on
both the bid and offer side of the market will be displayed in the
Nasdaq Quotation Montage under the Nasdaq Quoting Market Participant's
MMID, and also will be displayed in the Nasdaq Order Display Facility
as part of the aggregate trading interest at a particular price when
the price of such Attributable Quote/Order falls within the best three
price levels in Nasdaq on either side of the market. Upon execution or
cancellation of the Nasdaq Quoting Market Participant's bestpriced
Attributable Quote/Order on a particular side of the market, the NNMS
will automatically display the participant's next best Attributable Quote/Order on that side of the market.
(2) NonAttributable Quotes/OrdersThe price and size of a Nasdaq
Quoting Market Participant's NonAttributable Quote/Order on both the
bid and offer side of the market will be displayed in the Nasdaq Order
Display Facility as part of the aggregate trading interest at a
particular price when the price of such NonAttributable Quote/Order
falls within the best three price levels in Nasdaq on either side of
the market. A NonAttributable Order will not be displayed in the
Nasdaq Quotation Montage under the Nasdaq Quoting Market Participant's
MMID. NonAttributable Quotes/Orders that are the best priced Non
Attributable bids or offers in the system will be displayed in the
Nasdaq Quotation Montage under an anonymous MMID, which shall represent
and reflect the aggregate size of all NonAttributable Quotes/Orders in
Nasdaq at that price level. Upon execution or cancellation of a Nasdaq
Quoting Market Participant's NonAttributable Quote/Order, the NNMS
will automatically display NonAttributable Quote/Order in the Nasdaq
Order Display Facility (consistent with the parameters described above)
if it falls within the best three price levels in Nasdaq on either side of the market.
(c) Reserve SizeReserve Size shall not be displayed in Nasdaq,
but shall be electronically accessible as described in Rule 4710(b).
(d) Summary ScanThe ``Summary Scan'' functionality, which is a
queryonly nondynamic functionality, displays without attribution to
Quoting Market Participants' MMIDs the aggregate size of Attributable
and NonAttributable Quotes/Orders for all levels (on both the bid and
offer side of the market) below the three price levels displayed in the Nasdaq Order Display Facility.
4710. Participant Obligations in NNMS
(a) Registration. Upon the effectiveness of registration as an NNMS
Market Maker, NNMS ECN, or NNMS Order Entry Firm, the NNMS Participant
may commence activity within NNMS for exposure to orders or entry of
orders, as applicable. The operating hours of NNMS may be established
as appropriate by the Association. The extent of participation in
Nasdaq by an NNMS Order Entry Firm shall be determined solely by the
firm in the exercise of its ability to enter orders into Nasdaq.
(b) [Market Makers] Obligations to and Processing of NonDirected Orders
(1) [An NNMS Market Maker] General ProvisionsA Quoting Market
Participant in an NNMS Security shall be subject to the following requirements for NonDirected Orders:
(A) For each NNMS security in which it is registered [as an NNMS
Market Maker, the market maker], a Quoting Market Participant must
accept and execute individual NonDirected orders against its quotation
including its Agency Quote (if applicable), in an amount equal to or
smaller than the combination of the Displayed [quotation] Quote/Order
and Reserve Size (if applicable) of such [quotation(s)] Quote/Order,
when the Quoting Market Participant is at the best bid/best offer in
Nasdaq. [For purposes of this rule, the term ``reserved size'' shall
mean that an NNMS Market Maker or a customer thereof wishes to display
publicly part of the full size of its order or interest with the
remainder held in reserve on an undisplayed basis to be displayed in
whole or in part as the displayed part is executed. To utilize the
reserve size function, a minimum of 1,000 shares must initially be
displayed in the market maker's quote (including the Agency Quote), and
the quotation must be refreshed to 1,000 shares consistent with
subparagraph (b)(2)(A) of this rule.] Quoting Market Participants shall participate in the NNMS as follows:
(i) NNMS Market Makers and NNMS AutoEx ECNs shall participate in
the automaticexecution functionality of the NNMS, and shall accept the
delivery of an execution up to the size of the participant's Displayed Quote/Order and Reserve Size.
(ii) NNMS OrderDelivery ECNs shall participate in the order
delivery functionality of the NNMS, and shall accept the delivery of an
order up to the size of the NNMS OrderDelivery ECN's Displayed Quote/
Order and Reserve Size. The NNMS OrderDelivery ECN shall be required
to execute such order in a manner consistent with the Firm Quote Rule.
(iii) UTP Exchanges shall participate in the NNMS as described in
subparagraph (f) of this rule and as otherwise described in the NNMS rules and the UTP Plan.
(B) Processing of NonDirected OrdersUpon entry of a NonDirected
Order into the system, the NNMS will ascertain who the next Quoting
Market Participant in queue to receive an order is and shall deliver an
execution to Quoting Market Participants that participate in the
automaticexecution functionality of the system, or shall deliver a
Liability Order to Quoting Market Participants that participate in the
orderdelivery functionality of the system; provided however, that the
system always shall deliver an order (in lieu of an execution) to the
Quoting Market Participant next in queue when the participant that
entered the NonDirected Order into the system is a UTP Exchange that
does not provide automatic execution against its Quotes/Orders for
Nasdaq Quoting Market Participants and NNMS Order Entry Firms. Non Directed Orders entered into
[[Page 49847]]
the NNMS system shall be delivered to or automatically executed against
Quoting Market Participants' Displayed [quotations] Orders/Quotes and
Reserve Size, including Agency Quotes (if applicable), in price[/] and
then time priority, subject to the following processing. For Quotes/
Orders [quotations] at the same price level, the NNMS system will
attempt to access interest in the system in the following priority and order:
(i) Displayed Quotes/Orders of NNMS Market Makers, NNMS ECNs that
do not charge a separate quoteaccess fee to nonsubscribers, and Non
Attributable agency Quotes/Orders of UTP Exchanges (as permitted by
subparagraph (f) of this rule), as well as Quotes/Orders from NNMS ECNs
that charges a separate quoteaccess fee to nonsubscribers where the
ECN entering such Quote/Order indicates that the price improvement
offered by the specific Quote/Order exceeds the separate quoteaccess
fee the ECN charges, in time priority between such participants' Quote/ Orders;
(ii) Displayed Quote/Order of NNMS ECNs that charge a separate
quoteaccess fee to nonsubscribers, in time priority between such participant's Quote/Orders;
(iii) Reserve Size of NNMS Market Makers and NNMS ECNs that do not
charge a separate quoteaccess fee to nonsubscribers, as well as
Reserve Size of Quote/Orders from NNMS ECNs that charges a separate
quoteaccess fee to nonsubscribers where the ECN entering such Quote/
Order has indicated that the price improvement offered by the specific
Quote/Order exceeds the separate quoteaccess fee the ECN charges, in time priority between such participants' Quote/Orders;
(iv) Reserve Size of NNMS ECNs that charge a separate quoteaccess
fee to nonsubscriber, in time priority between such participants' Quote/Orders; and
(v) Principal Quote/Orders of UTP Exchanges, in time priority
between such participants' Quote/Orders [yield priority to all
Displayed quotations over reserve size, so that the system will execute
against Displayed quotations in time priority and then against reserve size in time priority].
The following exceptions shall apply to the above execution
parameters. First, if a Nasdaq Quoting Market Participant enters a Non
Directed Order into the system, before sending such NonDirected Order
to the next Quoting Market Participants in queue, the NNMS will first
attempt to match off the order against the Nasdaq Quoting Market
Participant's own Quote/Order if the participant is at the best bid/
best offer in Nasdaq. Second, if Displayed Quote/Orders at a price
level are simultaneously exhausted and there is Reserve Size available
at that price, when Displayed Quote/Orders are refreshed from Reserve
Size the system will establish orderreceipt priority for these
refreshed Quote/Orders based on the size of a participant's Displayed
Quote/Order and then based on the original orderentry time for same sized refreshed Displayed Quote/Orders.
(C) Decrementation ProceduresThe size of [displayed quotation]
Quote/Order displayed in the Nasdaq Order Display Facility and/or the
Nasdaq Quotation Montage will be decremented upon the delivery of a
Liability Order or the delivery of an execution of a[n NNMS] Non
Directed [o]Order in an amount equal to [or greater than one normal
unit of trading] the systemdelivered order or execution; provided,
however, that [the execution of] if an NNMS order that is a mixed lot
(i.e., an order that is for more than a normal unit of trading but not
a multiple thereof), the system will only deliver a Liability Order or
an execution for the number of round lots contained in the mixed lot
order, and will only decrement [a displayed quotation's] the size of a
Displayed Quote/Order by the number of shares represented by the number
of round lots contained in the mixed lot order. The oddlot portion of
the mixed lot will be executed at the same price against the next NNMS
Market Maker in the odd lot rotation, as described in subparagraph (e) of this rule.
(i) If an NNMS AutoEx ECN has its bid or offer Attributable Quote/
Order and Reserve Size decremented to zero without transmition of
another Attributable Quote/Order to Nasdaq, the system will zero out
the side of the quote that is exhausted. If both the bid and offer are
decremented to zero without transmission of a revised Attributable
Quote/Order, the ECN will be placed into an excused withdrawal state
until the ECN transmits to Nasdaq a revised Attributable Quote/Order.
(ii) If an NNMS OrderDelivery ECN declines or partially fills a
NonDirected Order without immediately transmitting to Nasdaq a revised
Attributable Quote/Order that is at a price inferior to the previous
price, or if an NNMS OrderDelivery ECN fails to respond in any manner
within 5 seconds of order delivery, the system will cancel the
delivered order and send the order (or remaining portion thereof) back
into the system for immediate delivery to the next Quoting Market
Participant in queue. The system then will zero out the ECN's Quote/
Orders at that price level on that side of the market, and the ECN's
quote on that side of the market will remain at zero until the ECN
transmits to Nasdaq a revised Attributable Quote/Order. If both the bid
and offer are zeroed out, the ECN will be placed into an excused
withdrawal state until the ECN transmits to Nasdaq a revised Attributable Quote/Order.
(iii) If an NNMS ECN's Quote/Order has been zeroed out or if the
ECN has been placed into excused withdrawal as described in
subparagraphs (b)(1)(C) (i) and (ii) of this rule, the system will
continue to access the ECN's NonAttributable Quote/Orders that are in
the NNMS, as described in Rule 4707 and subparagraph (b) of this rule.
(D) Interval DelayAfter the NNMS system has executed all
Displayed Quote/Orders and Reserve Size interest at a price level [an
order against a market maker's displayed quote and reserve size (if
applicable), that market maker shall not be required to execute another
order at its bid or offer in the same security until a predetermined
time period has elapsed from the time the order was executed, as
measured by the time of execution in the Nasdaq system. This period of
time shall initially be established as 5 seconds, but may be modified
upon Commission approval and appropriate notification to NNMS participants.], the following will occur:
(i) If the NNMS system cannot execute in full all shares of a Non
Directed Order against the Displayed Quote/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 NonDirected Order can be filled in full within two price
levels, there will be no interval delay between price levels and the system will executed the remaindere of order in full; or
(ii) If the NonDirected Orders is specially designated by the
entering market participants as a ``sweep order,'' the system will
execute against all Displayed Quote/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 NonDirected 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.
[[Page 49848]]
(E) All entries in NNMS shall be made in accordance with the
requirements set forth in the NNMS User Guide, as published from time to time by Nasdaq.
(2) Refresh Functionality
(A) Reserve Size RefreshOnce a Nasdaq Quoting Market
Participant's [an NNMS Market Maker's displayed quotation] Displayed
Quote/Order size on either side of the market in the security has been
decremented to zero to NNMS [executions] processing Nasdaq will refresh
the [market maker's] displayed size out of Reserve Size to a sizelevel
designated by the Nasdaq Quoting Market Participant [NNMS Market
Maker], or in the absence of such sizelevel designation, to the
automatic refresh size. [If the market maker is using the reserve size
function for its proprietary quote or Agency Quote the NNMS Market
Maker must refresh to a minimum of 1,000 shares, consistent with
subparagraph (b)(1)(A) of this rule]. To utilize the Reserve Size
functionality, a minimum of 1,000 shares must initially be displayed in
the Nasdaq Quoting Market Participant's Displayed Quote/Order, and the
Displayed Quote/Order must be refreshed to at least 1,000 shares. This
functionality will not be available for use by UTP Exchanges.
(B) [auto q] Quote Refresh (``QR'')Once an NNMS Market Maker's
Displayed Quote/Order [quotation] size and Reserve Size on either side
of the market in the security has been decremented to zero due to NNMS
executions, the NNMS Market Maker may elect to have The Nasdaq Stock Market refresh the marker's quotation as follows:
(i) Nasdaq will refresh the market maker's quotation price on the
bid or offer side of the market, whichever is decremented to zero, by
a[n] price interval designated by the NNMS Market Maker; and
(ii) Nasdaq will refresh the market maker's displayed size to a
level designated by the NNMS Market Maker, or in the absence of such
size level designation, to the automatic refresh size. [A Market
Maker's Agency Quotation shall not be subject to the functionality described in the subparagraph.]
(iii) This functionality shall produce an Attributable Quote/Order.
In addition, if an NNMS Market Maker is utilizing the QR functionality
but has an Atributable Quote/Order in the system that is priced at or
better than the quote that would be created by the QR, the NNMS will
display the Attributable Quote/Order, not the QRproduced quote.
(iv) An NNMS Market Maker's Agency Quote shall not be subject to
the functionality described in this subparagraph, nor shall this
functionality be available to Quoting Market Participants other than NNMS Market Makers.
(3) Entry of Locking/Crossing Quotes/Orders [Except as otherwise
provided in subparagraph (b)(10) of this rule, at any time a locked or
crossed market, as defined in Rule 4613(e), exists for an NNMS
security, a market maker with a quotation for that security (including
an Agency Quote) that is causing the locked or crossed market may have
orders representing shares equal to the size of the bid or offer that
is locked or crossed executed by the NNMS system against the market
maker's quote (including an Agency Quote) at the quoted price if that
price is the best price. During locked or crossed markets, the NNMS
system will execute orders against those market makers that are locked
or crossed in predetermined time intervals. This period of time
initially shall be established as five (5) seconds, but may be modified
upon approval by the Commission and appropriate notification to NNMS
participants.] The system shall process locking/crossing Quotes/Orders as follows:
(A) Locked/Crossed Quotes/Orders During Market HoursIf during
market hours, a Quoting Market Participant enters into the NNMS a
Quote/Order that will lock/cross the market (as defined in NASD Rule
4613(e)), the system will not display the Quote/Order as a quote in
Nasdaq; instead the system will treat the Quote/Order as a marketable
limit order and enter it into the system as a NonDirected Order for
processing (consistent with subparagraph (b) of this rule) as follows:
(i) For lockedmarket situations, the order will be routed to the
Quoting Market Participant next in queue who would be locked, and the order will be executed at the lock price;
(ii) For crossedmarket situations, the order will be entered into
the system and routed to the next Quoting Market Participants in queue
who would be crossed, and the order will be executed at the price of the Displayed Quote/Order that would have been crossed.
Once the lock/cross is cleared, if the participant's order is not
completely filled, the system will reformat the order and display it in
Nasdaq (consistent with the parameters of the Quote/Order) as a Quote/
Order on behalf of the entering Quoting Market Participant.
(B) Locked/Crossed Quotes/Orders at the OpenIf the market is
locked or crossed at 9:30 a.m., Eastern Time, the NNMS will clear the
locked and/or crossed Quotes/Order by executing the oldest bid (offer)
against the oldest offer (bid) against which it is marketable at the
price of the oldest Quote/Order. Nasdaq then will begin processing Non
Directed Orders as described in subparagraph (b) of this rule.
[(4) For each NNM security in which a market maker is registered,
the market maker may enter orders into the NNMS for its proprietary
account as well as on an agency or riskless principal basis.]
[(5)] (4) An NNMS Market Maker may terminate its obligation by
keyboard withdrawal (or its equivalent) from NNMS at any time. However,
the market maker has the specific obligation to monitor its status in
NNMS to assure that a withdrawal has in fact occurred. Any transaction
occurring prior to the effectiveness of the withdrawal shall remain the responsibility of the market maker.
[(6)] (5) An NNMS Market Maker will be suspended from NNMS if its
bid or offer has been decremented to zero due to NNMS executions and
will be permitted a standard grace period, the duration of which will
be established and published by the Association, within which to take
action to restore a twosided quotation in the security for at least
one normal unit of trading. An NNMS Market Maker that fails to reenter
a twosided quotation within the allotted time will be deemed to have
withdrawn as a market maker (``Timed Out of the Box''). Except as
provided below in this subparagraph and in subparagraph (b)(7) of this
rule, an NNMS Market Maker that withdraws in an NNM security may not
reregister as a market maker in that security for twenty (20) business
days.] If an NNMS Market Maker's Attributable Quote/Order is reduced to
zero on one side of the market due to NNMS executions, the NNMS will
close the Market Maker's quote in the NNMS with respect to both sides
of its market, and the NNMS Market Maker will be permitted a standard
grace period of three minutes within which to take action to restore
its Attributable Quote/Order, if the market maker has not authorized
use of the QR functionality or does not otherwise have an Attributable
Quote/Order on both sides of the market in the system. An NNMS Market
Maker that fails to transmit an Attributable Quote/Order in a security
within the allotted time will have its quotation restored by the system
at the lowest bid price and the highest offer price in that security.
Except as provided in subparagraph (b)(6) of this rule, and NNMS Market
Maker that withdraws from a security may not reregister in the system as a market maker in that security for twenty
[[Page 49849]]
(20) business days. The requirements of this subparagraph shall not apply to a market maker's Agency Quote.
[(A) Nothwithstanding the above, a market maker can be reinstated if:
(i) the market maker makes a request for reinstatement to Nasdaq
Market Operations as soon as practicable under the circumstances, but
within at least one hour of having been Timed Out of the Box, and
immediately thereafter provides written notification of the reinstatement request;
(ii) it was a Primary Market Maker at the time it was Timed Out of the Box;
(iii) the market maker's firm would not exceed the following reinstatement limitations:
a. for firms that simultaneously made markets in less than 250 stocks during the previous calendar year, the firm can receive no more than four (4) reinstatements per year;
b. for firms that simultaneously made markets in 250 or more but less than 500 stocks during the previous calendar year, the firm can receive no more than six (6) reinstatements per year;
c. for firms that simultaneously made markets in 500 or more stocks
during the previous calendar year, the firm can receive no more than twelve (12) reinstatements per year; and
(iv) the designated Nasdaq officer makes a determination that the
withdrawal was not an attempt by the market maker to avoid its
obligation to make a continuous twosided market. In making this
determination, the designated Nasdaq officer will consider, among other things:
a. whether the market conditions in the issue included unusual volatility or other unusual activity, and/or the market conditions in other issues in which the market maker made a market at the time the firm was Timed Out of the Box;
b. the frequency with which the firm has been Timed Out of the Box in the past;
c. procedures the firm has adopted to avoid being inadvertently Timed Out of the Box; and
d. the length of time before the market maker sought reinstatement.
(B) If a market maker has exhausted the reinstatement limitations
in subparagraph (b)(6)(A)(iii) above, the designated Nasdaq officer may
grant a reinstatement request if he or she finds that such
reinstatement is necessary for the protection of investors or the
maintenance of fair and orderly markets and determines that the
withdrawal was not an attempt by the market maker to avoid its
obligation to make a continuous twosided market in instances where:
(i) a member firm experiences a documented problem or failure
impacting the operation or utilization of any automated system operated
by or on behalf of the firm (chronic system failures within the control
of the member will not constitute a problem or failure impacting a
firm's automated system) or involving an automated system operated by Nasdaq:
(ii) the market maker is a manager or comanager of a secondary
offering from the time the secondary offering is announced until ten days after the offering is complete; or
(iii) absent the reinstatement, the number of market makers in a
particular issue is equal to two (2) or less or has otherwise declined
by 50% or more from the number that existed at the end of the prior
calendar quarter, except that if a market maker has a regular pattern
of being frequently Timed Out of the Box, it may not be reinstated notwithstanding the number of market makers in the issue.]
[(7)] (6) Notwithstanding the provisions of subparagraph [(6)] (5) above:
(A) an NNMS Market Maker that obtains an excused withdrawal
pursuant to Rule 4619 prior to withdrawing from NNMS may reenter NNMS according to the conditions of its withdrawal; and
(B) a NNMS Market Maker that fails to maintain a clearing
arrangement with a registered clearing agency or with a member of such
an agency, and is thereby withdrawn from participation in ACT and NNMS
for NNMS securities, may reenter NNMS after a clearing arrangement has
been reestablished and the market maker has compiled with ACT
participant requirements. Provided however, that if the Association
finds that the ACT market maker's failure to maintain a clearing
arrangement is voluntary, the withdrawal of quotations will be considered voluntary and unexcused.
[(8)] (7) The Market Operations Review Committee shall have
jurisdiction over proceedings brought by market makers seeking review
of their removal from NNMS pursuant to subparagraph[s] (b) (5) [(6) or (b)(7)] of this rule.
[(9)] (8) In the event that a malfunction in the [NNMS Market
Maker's] Quoting Market Participant's equipment occurs, rendering [on
line] communications with NNMS inoperable, the [NNMS Market Maker]
Quoting Market Participant is obligated to immediately contact Nasdaq
Market Operations by telephone to request withdrawal from NNMS and a
closedquote status, and if the Quoting Market Participants is an NNMS
Market Maker an excused withdrawal from Nasdaq[. Such request must be
made] pursuant to Rule 4619. If withdrawal is granted, Nasdaq Market
Operations personnel will enter the withdrawal notification into NNMS
from a supervisory terminal and shall close the quote. Such manual
intervention, however, will take a certain period of time for
completion and, unless otherwise permitted by the Association pursuant
to its authority under Rule 11890, the [NNMS Market Maker] Quoting
Market Participants will continue to be obligated for any transaction
executed prior to the effectiveness of [his] the withdrawal and closed quote status.
[(10) In the event that there are no NNMS Market Makers at the best
bid (offer) disseminated by Nasdaq, market orders to sell (buy) entered
into NNMS will be held in queue until executable, or until 90 seconds
has elapsed, after which such orders will be rejected and returned to their respective order entry firms.]
(c) Directed Order ProcessingA participant may enter a directed
order into the NNMS to access a specific Quote/Order in the Nasdaq
Quotation Montage and to begin the negotiation process with a
particular Quoting Market Participant. The system will deliver an order
to the Quoting Market Participant designated as the recipient of the
order. Upon delivery, the Quoting Market Participants shall owe no
liability under the Firm Quote Rule to that order and the system will
not decrement the receiving Quoting Market Participant's Quote/Order,
unless the Quoting Market Participant to which a Directed Order is
being sent has indicated that it wishes to receive Directed Orders that are Liability Orders (as described in Rule 4706(b)).
[(c)] (d) NNMS Order Entry Firms
All entries in NNMS shall be made in accordance with the procedures
and requirements set forth in the NNMS User Guide. Orders may be
entered in NNMS by the NNMS Order Entry Firm through either its Nasdaq
terminal or computer interface. The system will transmit to the firm on
the terminal screen and printer, if requested, or through the computer
interface, as applicable, an execution report generated immediately following the execution.
[(d) Order Entry Parameters
(1) NNMS will only accept market and marketable limit orders for
execution and will not accept market or marketable limit orders
designated as AllorNone (``AON'') orders; provided, however, that NNMS will not accept
[[Page 49850]]
any limit orders, marketable or unmarketable, prior to 9:30 a.m.,
Eastern Time. For purposes of this subparagraph, an AON order is an
order for an amount of securities equal to the size of the order and no less.
(2) Additionally, the NNMS will only accept orders that are
unpreferenced, thereby resulting in execution in rotation against NNMS Market Makers, and will not accept preferenced orders.
(3) NNMS will not accept orders that exceed 9,900 shares, and no
participant in the NNMS system shall enter an order into the system that exceeds 9,900.]
[(e) Electronic Communication Networks
An Electronic Communications Networks, as defined in SEC Rule
11Ac11(a)(8), may participate in the NNMS System if it complies with
NASD Rule 4623 and executes with the Association a Nasdaq Workstation Subscriber Agreement, as amended, for ECNs.]
(e) OddLot Processing
(1) Participation in OddLot ProcessAll NNMS Market Makers may
participate in the OddLot Process for each security in which the market makers is registered.
(2) Execution Process
(A) Oddlot orders will be executed against an NNMS Market Maker
only if it has an oddlot exposure limit in an amount that would fill
the oddlot order. A NNMS Market Maker may, on a securitybysecurity
basis, set an oddlot exposure limit from 0 to 999,999 shares.
(B) An oddlot order shall be executed automatically against the
next available NNMS Market Maker when the oddlot order becomes
executable (i.e., when the best price in Nasdaq moves to the price of
the oddlot limit order). Such oddlot orders will execute at the best
price available in the market, in rotation against NNMS Market Makers
who have an exposure limit that would fill the oddlot order.
(C) For odd lots that are part of a mixed lot, once the roundlot
portion is executed, the oddlot portion will be executed at the round
lot price against the next NNMS Market Maker in rotation (as described
in subparagraph (e)(2)(b) of this rule) even if the roundlot price is no longer the best price in Nasdaq.
(D) Oddlot executions will decrement the oddlot exposure limit of
an NNMS Market Maker but will not decrement the size of NNMS Market Maker's Displayed Quote/Order.
(E) After the NNMS system has executed an odd lot against an NNMS
Market Maker, the system will not deliver another oddlot order against
the same market maker until a predetermined time period has elapsed
from the time the last execution was delivered, as measured by the time
of execution in the Nasdaq system. This period of time shall initially
be established as 5 seconds, but may be increased upon Commission
approval and appropriate notification to NNMS Participants or may be
decreased to an amount less than five seconds by the NNMS Market Maker. (f) UTP Exchanges
As a general matter, Nasdaq shall endeavor to provide fair and
equivalent access to the Nasdaq market for UTP Exchanges, as a UTP
Exchange provides to its market for Nasdaq Quoting Market Participants
and NNMS Order Entry Firms. Unless specified otherwise in these rules
or in the Nasdaq UTP Plan, UTP Exchanges may participate in the NNMS as follows:
(1) Order EntryUTP Exchanges shall be permitted to enter Directed
and NonDirected orders into the system subject to the conditions and
requirements of Rules 4706. Directed and NonDirected orders entered by
UTP Exchanges shall be processed (unless otherwise specified) as described subparagraphs (b) and (c) of this rule.
(2) Display of UTP Exchange Quotes/Orders in Nasdaq
(A) UTP Exchange Principal Orders/QuotesUTP Exchanges shall be
permitted to transmit to the NNMS a single bid Quote/Order and a single
offer Quote/Order. Upon transmission of the Quote/Order to Nasdaq, the
system shall time stamp the Quote/Order, which time stamp shall
determine the ranking of the Quote/Order for purposes of processing
NonDirected Orders. The NNMS shall display the best bid and best offer
Quote/Order transmitted to Nasdaq by a UTP Exchange in the Nasdaq
Quotation Montage under the MMID for the UTP Exchange, and shall also
display such Quote/Order in the Nasdaq Order Display Facility as part
of the aggregate trading interest when the UTP Exchange's best bid/best
offer Quote/Order falls within the best three price levels in Nasdaq on either side of the market.
(B) UTP Exchange Agency Quotes/Orders
(i) A UTP Exchange may transmit to the NNMS Quotes/Orders at a
single as well as multiple price levels that meet the following
requirements: are for the benefit of the account of a natural person
executing securities transactions with or through or receiving
investment banking services from a broker/dealer; are not for the
benefit of a broker and/or dealer; and are designated as Non Attributable Quotes/Orders (``UTP Agency Order/Quote'').
(ii) Upon transmission of a UTP Agency Quote/Order to Nasdaq, the
system shall time stamp the order, which time stamp shall determine the
ranking of these Quote/Order for purposes of processing NonDirected
orders, as described in subparagraph (b) of this rule. A UTP Agency
Quote/Order shall not be displayed in the Nasdaq Quotation Montage
under the MMID for the UTP Exchange. Rather, UTP Agency Quotes/Orders
shall be reflected in the Nasdaq Order Display Facility and Nasdaq
Quotation Montage in the same manner in which NonAttributable Quotes/
Orders from Nasdaq Quoting Market Participants are reflected in Nasdaq, as described in Rule 4707(b)(2).
(3) NonDirected Order Processing
(a) UTP Exchanges that agree to provide automatic execution against
their Quotes/Orders for Nasdaq Quoting Market Participants and NNMS
Order Entry Firms, shall accept an execution of an order up to the size
of the UTP Exchange's displayed Quote/Order, and shall have Non
Directed Orders they enter into the system processed as described in subparagraph (b) of this rule.
(b) UTP Exchanges that do not provide automatic execution against
their Quotes/Orders for Nasdaq Quoting Market Participants and NNMS
Order Entry firms, shall accept the delivery of an order up to the size
of the UTP Exchange's Displayed Quote/Order, and shall have Non
Directed Orders they enter into the system processed as described in
subparagraph (b) of this rule. If such a UTP Exchange declines or
partially fills a NonDirected Order without immediately transmitting
to Nasdaq a revised Quote/Order that is at a price inferior to the
previous price, or if such a UTP Exchange fails to respond in any
manner within 5 seconds of order delivery, the NNMS will send the order
(or remaining portion thereof) back into the system for delivery to the
next Quoting Market Participant in queue. The system will then move the
side of such UTP Exchange's Quote/Order to which the declined or
partiallyfilled order was delivered, to the lowest bid or highest offer price in Nasdaq, at a size of 100 shares.
(4) Directed order ProcessingUTP Exchanges shall participate in the
[[Page 49851]]
Directed Order processing as described in subparagraph (c) of this rule.
(5) DecrementationUTP Exchanges shall be subject to the
decrementation procedures described in subparagraph (b)(1)(C) of this rule.
47114714No Change
4718. Termination of System Service
The Association or its subsidiaries may, upon notice, terminate
system service to a participant in the event that a participant fails
to abide by any of the rules or operating procedures of the System or
any other relevant rule or requirement, or fails to pay promptly for services rendered.
* * * * *
4750. Smallcap Small Order Execution System (SOES)
47514757Deleted
II. SelfRegulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the NASD and Nasdaq included
statements concerning the purpose of, and basis for, the proposed rule
change and discussed any comments its received on the proposed rule
change. The text of these statements may be examined at the places
specified in Item IV below. The NASD and Nasdaq have prepared
summaries, set forth in Sections (A, (B), and (C) below, of the most significant aspects of such statements.
(A) SelfRegulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
1. Purpose
In the original filing, the NASD and Nasdaq proposed enhancing the Nasdaq quotation montage and Nasdaq's main trading platformthe Nasdaq National Market (System (``NNMS''). In particular, Nasdaq proposed to (1) Add a new display to the Nasdaq Workstation II (``NWII'') called the Nasdaq Order Display Facility (``NODF''), which would show the best bid/best offer in Nasdaq and two price levels away, accompanied by the aggregate size at each price level of the ``displayed'' trading interest of market makers, electronic communications networks (``ECN''), and UTP Exchanges; (2) make substantial enhancements to the NNMS, which would improve the efficiency of the current trading platform; (3) allow market makers and ECNs to designate order for ``display'' in Nasdaq on either an attributable (i.e., not anonymous) or nonattributable (i.e., anonymous) basis; (4) establish the Order Collector Facility (``OCF'') as part of the NNMS, which would allow Nasdaq market makers and ECNs to give the Nasdaq system multiple quotes/orders at a single as well as multiple price levels, which would be displayed in the Nasdaq Quotation Montage and the NODF, consiste