[Federal Register Volume 62, Number 15 (Thursday, January 23, 1997)]
[Notices]
[Pages 3548-3549]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-1559]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38175; File No. SR-NASD-96-55]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Order Granting Accelerated Approval and Notice of Filing
and Order Granting Accelerated Approval of Amendment No. 1 of Proposed
Rule Change Relating to Primary Market Maker Standards
January 15, 1997.
I. Introduction
On December 23, 1996, the National Association of Securities
Dealers, Inc. (``NASD'' or ``Association'') filed with the Securities
and Exchange Commission (``Commission'' or ``SEC'') pursuant to Section
19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ and Rule
19b-4 thereunder \2\ a proposed rule change to waive the Nasdaq Primary
Market Maker standards for the remainder of the current pilot period of
the Nasdaq Short Sale Rule.\3\ The proposed rule change was published
for comment in Securities Exchange Act Release No. 38091 (December 27,
1996), 62 FR 778 (January 6, 1997) (``Notice of Proposed Rule
Change'').\4\ On January 10, 1997, the NASD submitted Amendment No. 1
to waive the Nasdaq Primary Market Maker standards on a phase-in
schedule.\5\ This order approves the proposed rule change, including
Amendment No. 1, on an accelerated basis.
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\1\ 15 U.S.C. 78s (b)(1).
\2\ 17 CFR 240.19b-4.
\3\ On November 1, 1996, the Commission extended the pilot
period of the NASD Short Sale Rule, Rule 3350, through October 1,
1997. Securities Exchange Act Release No. 37917 (November 1, 1996)
61 FR 57934 (November 8, 1996).
\4\ The Nasdaq Board has unanimously approved the filing of the
proposed rule change regarding the suspension of Primary Market
Maker standards. See Letter to Holly Smith, Associate Director,
Division of Market Regulation, SEC, from Eugene A. Lopez, the Nasdaq
Stock Market, Inc., dated January 9, 1997.
\5\ See Letter to Holly Smith, Associate Director, Division of
Market Regulation, SEC, from Robert E. Aber, The Nasdaq Stock
Market, Inc., dated January 14, 1997.
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II. Description of the Proposal
The NASD has proposed to suspend the use of the Primary Nasdaq
Market Maker (``PMM'') qualification criteria found in Rule 4612 (a)
and (b) of the Nasdaq market maker Requirements of the NASD Rules.
Under existing Rule 4612, a registered Nasdaq market maker may be
deemed to be a PMM in a National Market Security if the market maker
meets two of three criteria: (1) The market maker maintains the best
bid or best offer as shown on Nasdaq no less than 35% of the time; (2)
a market maker maintains a spread no greater than 102% of the average
dealer spread; and (3) no more than 50% of a market maker's quotation
changes occur without a trade execution. In addition, if a registered
market maker meets only one of the above criteria, it may nevertheless
qualify as a PMM if the market maker accounts for volume at least 1\1/
2\ times its proportionate share of overall volume in the stock. The
review period for meeting any of these criteria is one calendar month.
The PMM qualification criteria is reviewed by Nasdaq to determine which
Nasdaq market makers will receive the PMM designation. The PMM
designation allows a Nasdaq market maker to avail itself of the short
sale exemption under NASD Rule 3350(c)(1). The NASD has proposed, on a
phase-in basis, to suspend the PMM qualification criteria for Nasdaq
National Market (``NNM'') securities and, accordingly, deem all
registered market makers in such securities a PMM.
III. Discussion
In August 1996, the Commission adopted a new rule and amendments to
an existing rule that are scheduled to go into effect on January 20,
1997.\6\ Upon commencement of the Order Execution Rules, over-the-
counter (``OTC'') market makers will be representing certain customer
limit orders in their quotations and frequently executing customer
limit orders in a manner very different from today. Moreover, under an
amendment to the Quote Rule, electronic communications networks
(``ECNs'') will be entering quotations and executions in the Nasdaq
Stock Market in a manner which heretofore was reserved for registered
market makers.\7\ The Commission has acknowledged that the Order
Execution Rules represent a major change in the way OTC market makers
display and execute orders in the Nasdaq Stock Market.
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\6\ See Securities Exchange Act Release No. 37619A (September 6,
1996), 61 FR 48290 (September 12, 1996) adopting Rule 11Ac1-4
(``Limit Order Display Rule'') and amendments to Rule 11Ac1-1
(``Quote Rule'') (collectively the ``Order Execution Rules''). See
also Securities Exchange Act Release Nos. 38110 (January 2, 1997),
62 FR 1279 (January 9, 1997) (revising the effective date of the
Order Execution Rules to January 13, 1997); and 38139 (January 8,
1997) (revising the effective date of the Order Execution Rules
until January 20, 1997).
\7\ Rule 11Ac1-1(c)(5) requires a market maker to display in its
quote any better priced order the market maker places into an
electronic communications network (``ECN Amendment'').
Alternatively, the ECN Amendment provides an exception to the market
maker's display obligation that depends upon the ECN itself
displaying its best-priced orders, entered therein by a market maker
or specialist, and allowing brokers and dealers to access such
orders (``ECN Display Amendment'').
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While the Order Execution Rules are anticipated to contribute to
more vigorous quotation competition, the additional quotations will
alter the data used in determining the PMM designation. A quote
reflecting a customer limit order will be indistinguishable from a
proprietary quote of a market maker. Inclusion of customer limit orders
in a market maker's quote can narrow the market maker's spread, as well
as the number of quotation changes the market maker effects. The
display of ECN prices into the Nasdaq montage, which also will
[[Page 3549]]
include customer limit orders, will further influence the data that
Nasdaq calculates in determining a market maker's status as a PMM.
As a result, the quote conditions on which the PMM standards are
based will change significantly and will no longer reliably reflect the
quality of the market provided by the market maker, making the current
PMM standards unpredictable for market makers. Without such PMM
designation, a Nasdaq market maker is not permitted to effect a short
sale in a NNM Security at or below the current best bid when the
current best bid displayed by Nasdaq is below the preceding best bid in
the security.\8\
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\8\ See NASD Rule 3350.
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The inability of a market maker to predict and obtain the PMM
designation, and therefore sell short as part of its bona fide market
making activity, may cause the withdrawal of some market makers thereby
reducing liquidity and continuity in the market. Moreover, the
Commission believes that a market maker could be deterred from
accepting customer limit orders by the risk of losing its PMM
designation, which consequently could impede the effectiveness of the
Limit Order Display Rule. The Commission further believes that the
continued use of the PMM qualification criteria, when the data used is
not an accurate assessment of the maket marker's own independent
quotation, would be inequitable and cause an unintended burden on
competition. The Commission concludes that the suspension of the
current NASD PMM qualification criteria on a temporary basis is
consistent with the Act, and for the smooth implementation of the Order
Execution Rules.
The Order Execution Rules contain phase-in periods to ensure an
orderly transition and to permit market participants an opportunity to
obtain experience over a manageable set of securities.\9\ Consequently,
the suspension of PMM qualification criteria will also operate on a
phase-in schedule that parallels the phase-in period of the ECN
Amendment. On the first business day of the month following each phase-
in period of the ECN amendment, the PMM qualification criteria will be
suspended and all registered Nasdaq market makers in such securities
will be designated a PMM. For example, on February 3, 1997 all Nasdaq
registered market makers in the first fifty securities being phased-in
under the ECN Amendment, effective January 20, 1997, will be a
designated PMM.\10\ The Commission expects the NASD to develop new
standards as soon as practicable after the Order Execution Rules become
effective. As a result, the Commission is approving the rule change on
a pilot basis through July 1, 1997.
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\9\ See Securities Exchange Act Release Nos. 37619A (September
6, 1996), 61 FR 48290 (September 12, 1996), 38110 (January 2, 1997);
62 FR 1279 (January 9, 1997); and 38139 (January 8, 1997) (outlining
the phase-in dates for the Limit Order Display Rule and the ECN
Amendment).
\10\ See Letter from S. William Broka, Senior Vice President,
Trading & Market Service, The Nasdaq Stock Market, Inc., dated
December 23, 1996.
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IV. Solicitation of Comments on Amendment No. 1
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 1 to the proposed rule change.
Persons making written submissions should file six copies thereof with
the Secretary, Securities and Exchange Commission, 450 Fifth Street,
NW., Washington, DC 20549. Copies of the submissions, all subsequent
amendments, all written statements with respect to Amendment No. 1 that
are filed with the Commission, and all written communications relating
to Amendment No. 1 between the Commission and any persons, other than
those that may be withheld from the public in accordance with
provisions of 5 U.S.C. 552, will be available for inspection and
copying in the Commission's Public Reference Room. Copies of such
filing will also be available for inspection and copying at the
principal office of the NASD. All submissions should refer to File No.
SR-NASD-96-55 and should be submitted [insert date 21 days from date of
publication].
V. Conclusion
For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with the Act and the rules and regulations
thereunder applicable to the NASD, and in particular Sections
15A(b)(6), 15A(b)(9), and 15A(b)(11). In addition, the Commission finds
that the rule change is consistent with the Congressional objectives
for the equity markets, set out in Section 11A, of achieving more
efficient and effective market operations, fair competition among
brokers and dealers, and the economically efficient execution of
investor orders in the best market. The Commission further believes
that maintaining the existing PMM qualification criteria beyond January
20, 1997 will likely frustrate the operation of the Order Execution
Rules. Accordingly, the Commission finds good cause for approving the
proposed rule change and Amendment No. 1 to suspend the PMM
qualification criteria prior to the thirtieth day after date of
publication of notice of filing thereof in the Federal Register.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\11\ that the proposed rule change (NASD-96-55) be and hereby is
approved, with the first phase-in effective February 1, 1997, until
July 1, 1997.
\11\ 15 U.S.C. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\12\
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\12\ 17 CFR 300.30-3(a)(12) (1996).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-1559 Filed 1-22-97; 8:45 am]
BILLING CODE 8010-01-M
