[Federal Register Volume 65, Number 5 (Friday, January 7, 2000)]
[Notices]
[Pages 1202-1204]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-393]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-42268; File No. S7-24-89]
Joint Industry Plan; Solicitation of Comments and Order Approving
Request To Extend Temporary Effectiveness of Reporting Plan for Nasdaq/
National Market Securities Traded on an Exchange on an Unlisted or
Listed Basis, Submitted by the National Association of Securities
Dealers, Inc., the Boston Stock Exchange, Inc., the Chicago Stock
Exchange, Inc. and the Philadelphia Stock Exchange, Inc.
December 23, 1999.
I. Introduction
On November 29, 1999, the National Association of Securities
Dealers, Inc. (``NASD''), on behalf of itself and the Boston Stock
Exchange, Inc. (``BSE''), the Chicago Stock Exchange, Inc. (``CHX''),
and the Philadelphia Stock Exchange, Inc. (``Phlx'') submitted to the
Securities and Exchange Commission (``Commission'' or ``SEC'') a
proposal to extend the operation of a joint transaction reporting plan
(``Plan'')\1\ for Nasdaq/National Market (``Nasdaq/NM'') (previously
referred to as Nasdaq/NMS) securities traded on an exchange on an
unlisted or listed basis.\2\ The proposal would extend the
effectiveness of the Plan, as amended by Revised Amendment No. 9, as
defined in footnote 3, through June 30, 2000.\3\ The
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Commission also is extending certain exemptive relief as described
below. The November 1999 Extension Request also requests that the
Commission approve the Plan, as amended, on a permanent basis on or
before June 30, 2000. During the extension of the Plan, the Commission
will consider whether to approve the proposed Plan, as amended, on a
permanent basis.
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\1\ See Letter from Robert E. Aber, Vice President and General
Counsel, Nasdaq, to Jonathan G. Katz, Secretary, Commission, dated
November 29, 1999 (``November 1999 Extension Request''). The
November 1999 Extension Request also requests that the Commission
continue to provide exemptive relief, previously granted in
connection with the Plan on a temporary basis, from Rules 11Ac1-2
and 11Aa3-1 under the Securities Exchange Act of 1934, as amended
(``Act''). 15 U.S.C. 78a et seq. The signatories to the Plan are the
Participants for purposes of this release, however, the BSE joined
the Plan as a ``limited participant'' and reports quotation
information and transaction reports only in Nasdaq/NM securities
listed on the BSE. Originally, the American Stock Exchange, Inc.
(``Amex'') was a Participant but withdrew its participation from the
Plan in August 1994.
\2\ Section 12 of the Act generally requires an exchange to
trade only those securities that the exchange lists, except that
Section 12(f) of the Act permits unlisted trading privileges
(``UTP'') under certain circumstances. For example, Section 12(f),
among other things, permits exchanges to trade certain securities
that are traded over-the-counter (``OTC/UTP''), but only pursuant to
a Commission order or rule. The present order fulfills this Section
12(f) requirement. For a more complete discussion of the Section
12(f) requirement, see November 1995 Extension Order, infra note 7.
\3\ On March 18, 1996, the Commission solicited comment on a
revenue sharing agreement among the Participants. See March 1996
Extension Order, infra note 7. Thereafter the Participants submitted
certain technical revisions to the revenue sharing agreement
(``Revised Amendment No. 9''). See Letter from Robert E. Aber, Vice
President and General Counsel, Nasdaq, to Jonathan G. Katz,
Secretary, Commission, dated September 13, 1996. See also September
1996 Extension Order, infra note 7.
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II. Background
The Plan governs the collection, consolidation and dissemination of
quotation and transaction information for Nasdaq/NM securities listed
on an exchange or traded on an exchange pursuant to a grant of UTP.\4\
The Commission approved trading pursuant to the Plan on a one-year
pilot basis, with the pilot period to commence when transaction
reporting pursuant to the Plan commenced. The Commission originally
approved the Plan on June 26, 1990.\5\ Accordingly, the pilot period
commenced on July 12, 1993 and was scheduled to expire on July 12,
1994.\6\ The Plan has since been in operation on an extended pilot
basis.\7\
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\4\ See Section 12(f)(2) of the Act.
\5\ See Securities Exchange Act Release No. 28146 (June 26,
1990), 55 FR 27917 (July 6, 1990) (``1990 Plan Approval Order'').
\6\ See letter from David T. Rusoff, Foley & Lardner, to Betsy
Prout, Division of Market Regulation (``Division''), SEC, dated May
9, 1994.
\7\ See Securities Exchange Act Release No. 34371 (July 13,
1994), 59 FR 37103 (July 20, 1994); Securities Exchange Act Release
No. 35221 (January 11, 1995), 60 FR 3886 (January 19, 1995);
Securities Exchange Act Release No. 36102 (August 14, 1995), 60 FR
43626 (August 22, 1995) (``August 1995 Approval Order''); Securities
Exchange Act Release No. 36226 (September 13, 1995), 60 FR 49029
(September 21, 1995); Securities Exchange Act Release No. 36368
(October 13, 1995), 60 FR 54091 (October 19, 1995); Securities
Exchange Act Release No. 36481 (November 13, 1995), 60 FR 58119
(November 24, 1995) (``November 1995 Extension Order''); Securities
Exchange Act Release No. 36589 (December 13, 1995), 60 FR 65696
(December 20, 1995); Securities Exchange Act Release No. 36650
(December 28, 1995), 61 FR 358 (January 4, 1996); Securities
Exchange Act Release No. 36934 (March 6, 1996), 61 FR 10408 (March
13, 1996); Securities Exchange Act Release No. 36985 (March 18,
1996), 61 FR 12122 (March 25, 1996) (``March 1996 Extension
Order''); Securities Exchange Act Release No. 37689 (September 16,
1996), 61 FR 50058 (September 24, 1996) (``September 1996 Extension
Order''); Securities Exchange Act Release No. 37772 (October 1,
1996), 61 FR 52980 (October 9, 1996); Securities Exchange Act
Release No. 38457 (March 31, 1996), 62 FR 16880 (April 8, 1997);
Securities Exchange Act Release No. 38794 (June 30, 1997) 62 FR
36586 (July 8, 1997); Securities Exchange Act Release No. 39505
(December 31, 1997) 63 FR 1515 (January 9, 1998); Securities
Exchange Act Release No. 40151 (July 1, 1998) 63 FR 36979 (July 8,
1998) (``July 1998 Extension Order''); Securities Exchange Act
Release No. 40896 (December 31, 1998) 64 FR 1834 (January 12, 1999)
(``December 1998 Extension Order''); and Securities Exchange Act
Release No. 41392 (May 12, 1999), 64 FR 27839 (May 21, 1999) (``May
1999 Approval Order'').
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III. Description of the Plan
The Plan provides for the collection from Plan Participants and the
consolidation and dissemination to vendors, subscribers and others of
quotation and transaction information in ``eligible securities.'' \8\
The Plan contains various provisions concerning its operation,
including: Implementation of the Plan; Manner of Collecting,
Processing, Sequencing, Making Available and Disseminating Last Sale
Information; Reporting Requirements (including hours of operation);
Standards and Methods of Ensuring Promptness, Accuracy and Completeness
of Transaction Reports; Terms and Conditions of Access; Description of
Operation of Facility Contemplated by the Plan; Method and Frequency of
Processor Evaluation; Written Understandings of Agreements Relating to
Interpretation of, or Participation in, the Plan; Calculation of the
Best Bid and Offer (``BBO''); Dispute Resolution; and Method of
Determination and Imposition, and Amount of Fees and Charges.\9\
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\8\ The Plan defines ``eligible security'' as any Nasdaq/NM
security as to which unlisted trading privileges have been granted
to a national securities exchange pursuant to Section 12(f) of the
Act or that is listed on a national securities exchange. On May 12,
1999, the Commission expanded the number of eligible Nasdaq/NM
securities that may be traded by the CHX pursuant to the Plan from
500 to 1000. See May 1999 Approval Order, supra note 7.
\9\ The full text of the Plan, as well as a ``Concept Paper''
describing the requirements of the Plan, are contained in the
original filing which is available for inspection and copying in the
Commission's public reference room.
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IV. Exemptive Relief
In conjunction with the Plan, on a temporary basis, the Commission
granted an exemption to vendors from Rule 11Ac1-2 under the Act
regarding the calculation of the BBO \10\ and granted the BSE an
exemption from the provision of Rule 11Aa3-1 under the Act that
requires transaction reporting plans to include market identifiers for
transaction reports and last sale data. As discussed further below in
the Summary of Comments, the Participants ask in the November 1999
Extension Request that the Commission grant an extension of the
exemptive relief described above to vendors until the BBO calculation
issue is fully resolved. Additionally, in the November 1999 Extension
Request, the Participants also request that the Commission grant an
extension of the exemptive relief described above to the BSE for as
long as the BSE is a Limited Participant under the Plan.
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\10\ Rule 11Ac1-2 under the Act requires that the best bid or
best offer be computed on a price/size/time algorithm in certain
circumstances. Specifically, Rule 11Ac1-2 under the Act provides
that ``in the event two or more reporting market centers make
available identical bids or offer for a reported security, the best
bid or offer . . . shall be computed by ranking all such identical
bids or offers . . . first by size . . . then by time.'' The
exemption permits vendors to display the BBO for Nasdaq securities
subject to the Plan on a price/time/size basis.
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V. Summary of Comments
In the December 1998 Extension Order, the Commission requested
comment on the following issues: Whether the BBO calculation for
securities traded pursuant to the Plan should be based on a price/time/
size methodology or a price/size/time methodology; whether there is a
need for a trade through rule; and the impact of the CHX's intended use
of BRASS, as defined below.
With respect to the BBO calculation issue, the Nasdaq Board
approved a recommendation to modify the methodology for calculating the
BBO on Nasdaq to prioritize quotes based on a price/size/time algorithm
instead of the current price/time/size algorithm, provided that Nasdaq
market makers are subject to a minimum quote size requirement of 100
shares for at least 1,000 Nasdaq securities.\11\ In furtherance of this
goal, on October 29, 1997, the Commission approved an NASD proposal to
extend and expand the ``Actual Size Rule'' \12\ to a total of 150
securities from 100 securities.\13\ More recently, the Commission
approved an NASD proposal to permanently allow market makers to quote
their actual size by reducing the minimum quotation size requirement
for all Nasdaq securities to one normal unit of trading.\14\
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\11\ The NASD Board approved a recommendation that the price/
size/time algorithm be utilized when a meaningful portion of Nasdaq
securities are subject to a minimum quote size requirement of 100
shares. In addition, the Nasdaq and NASD Boards agreed that if
Nasdaq develops the technological capability to afford market makers
simultaneous electronic access to all market maker quotes at the
same price level, the methodology used to determine the quoted size
of the Nasdaq market will be re-examined to accommodate reflection
of the fully accessible size displayed on Nasdaq.
\12\ See Securities Exchange Act Release No. 39285 (October 29,
1997), 62 FR 59932 (November 5, 1997).
\13\ See Securities Exchange Act Release No. 38513 (April 15,
1997), 62 FR 19369 (April 21, 1997). Under the Actual Size Rule,
market makers in certain Nasdaq securities are subject to a minimum
quotation size requirement of 100 shares instead of the applicable
small order execution system (``SOES'') tier size for that security.
\14\ See Securities Exchange Act Release No. 40211 (July 15,
1998), 63 FR 39322 (July 22, 1998).
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In addition, the NASD submitted a proposed rule change to establish
an
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integrated order delivery and execution system for directed orders and
non-directed orders.\15\ The NASD also submitted a proposed rule change
to modify the NASD's SOES and SelectNet systems and create a new
system, Nasdaq National Market Execution System.\16\ Either of the
proposed new systems, if approved, would alter SOES and SelectNet and
would have an impact on the Plan (e.g., the manner in which Plan
participants interact with orders and quotes displayed in Nasdaq). With
respect to the need for a trade through rule, the NASD maintains that
it would be more appropriate to address this issue once the issue of
electronic access to Nasdaq market makers' quotes has been resolved.
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\15\ See Securities Exchange Act Release No. 39718 (March 4,
1998) 63 FR 12124 (March 12, 1998). (``IODES Proposal'') Directed
orders are those that an order-entry firm chooses to send to a
specific Nasdaq market maker, electronic communications network
(``ECN'') or UTP exchange for delivery and execution. Non-directed
orders are those that are not sent to particular Nasdaq market maker
or ECN. In other words, when the broker-dealer entering the order
does not specify the particular Nasdaq market maker, ECN or UTP
exchange it wants to access, the order will be sent to the next
available executing participant quoting at the national BBO.
\16\ Securities Exchange Act Release No. 41296 (April 15, 1999),
64 FR 19844 (April 22, 1999).
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In December 1997, the CHX advised the Commissions staff that it
intended to replace its then existing MAX-OTC system with the BRASS
system developed by Automated Securities Clearance, Limited
(``ASC'').\17\ In December 1998, the CHX stated its intention to
implement the BRASS system by September 30, 1999.\18\ While awaiting
delivery of the necessary BRASS system modifications from ASC, the CHX
continue to upgrade its MAX-OTC system. Earlier this year, after ASC
failed to deliver the necessary modifications, the CHX decided to make
the improved MAX-OTC system its means of accessing securities instead
of the BRASS system.\19\
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\17\ See December 1997 Extension Request and Letter from George
T. Simon, Foley & Lardner to Howard L. Kramer, Senior Associate
Director, Division, SEC, dated December 12, 1997.
\18\ See December 1998 Extension Order, supra note 7.
\19\ See Letter from Paul B. O'Kelly, Executive Vice President,
Market Regulation and Legal, CHX, to Mignon McLemore, Attorney,
Division, SEC, dated December 20, 1999.
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VI. Discussion
The Commission finds that an extension of temporary approval of the
operation of the Plan, as amended, through June 30, 2000, is
appropriate and in furtherance of Section 11A of the Act.\20\ The
Commission believes that the extension will provide the Participants
with additional time to seek Commission approval of pending proposals
concerning the BBO calculation \21\ and to begin to make reasonable
proposals concerning a trade through rule to facilitate the trading of
OTC securities pursuant to UTP. With respect to a trade through rule,
the Commission notes that it has recently proposed to expand the ITS
linkage to all securities. This, in turn, would expand the coverage of
the ITS trade through rule.\22\ While the Commission continues to
solicit comment on these matters, the Commission believes that these
matters should be addressed directly by the Participants on or before
June 30, 2000 so that the Commission may have ample time to determine
whether to approve the Plan on a permanent basis by June 30, 2000.
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\20\ In approving this extension, the Commission has considered
the extension's impact on efficiency, competition, and capital
formations. 15 U.S.C. 78(c)(f).
\21\ See e.g., Actual Size Rule Release, supra note 13 and IODES
Proposal, supra note 14.
\22\ Securities Exchange Act Release No. 42212 (December 9,
1999), 64 FR 70297 (December 16, 1999).
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The Commission also finds that it is appropriate to extend the
exemptive relief from Rule 11Ac1-2 under the Act until the earlier of
June 30, 1999, or until such time as the calculation methodology of the
BBO is based on a price/size/time algorithm pursuant to a mutual
agreement among the Participants approved by the Commission. The
Commission further finds that it is appropriate to extend the exemptive
relief from rule 11Aa3-1 under the Act, that requires transaction
reporting plans to include market identifiers for transaction reports
and last sale data, to the BSE through June 30, 1999. The Commission
believes that the extensions of the exemptive relief provided to
vendors and the BSE, respectively, are consistent with the Act, the
Rules thereunder, and specifically with the objectives set forth in
Sections 12(f) and 11A of the Act and in Rules 11Aa3-1 and 11Aa3-2
thereunder.
IV. Solicitation of Comment
Interested persons are invited to submit written data, views and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-
0609. Copies of the submission, all subsequent amendments, all written
statements with respect to the proposal that are filed with the
Commission, and all written communications relating to the proposal
between the Commission and any person, other than those that may be
withheld from the public in accordance with the provisions of 5 U.S.C.
552, will be available for inspection and copying at the Commission's
Public Reference Room. All submissions should refer to File No. S7-24-
89 and should be submitted by January 28, 2000.
V. Conclusion
It is therefore ordered, pursuant to Sections 12(f) and 11A of the
Act and paragraph (c)(2) of rule 11Aa3-2 thereunder, that the
Participants' request to extend the effectiveness of the Joint
Transaction Reporting Plan, as amended, for Nasdaq/National Market
securities traded on an exchange on an unlisted or listed basis through
June 30, 2000, and certain exemptive relief through June 30, 2000, is
approved.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(29).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-393 Filed 1-6-00; 8:45 am]
BILLING CODE 8010-01-M
