02-30370. Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Granting Approval to a Proposed Rule Change and Amendment No. 1 Thereto To Establish an Execution Price Governor in SuperMontage

November 22, 2002.

On October 9, 2002, the National Association of Securities Dealers, Inc. (“NASD”), through its subsidiary, the Nasdaq Stock Market, Inc. (“Nasdaq”), filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),^[1] and Rule 19b-4 thereunder,^[2] a proposed rule change to establish in SuperMontage a permanent execution price governor to prevent inadvertent executions significantly away from the inside market. The NASD amended its proposals on October 10, 2002.^[3] The proposed rule change, as amended, was published for comment in the Federal Register on October 21, 2002.^[4] The Commission received no comments on the proposed rule change, as amended.

The Commission finds that the proposed rule change, as amended, is consistent with the requirements of Section 15A of the Act ^[5] and the rules and regulations thereunder.^[6] Specifically, the Commission finds that the proposed rule change, as amended, is consistent with Section 15(A)(b)(6),^[7] which provides that the rules of the association be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principals of trade, to foster cooperation and coordination with person engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. The Commission believes that the establishment of a SuperMontage execution price governor may prevent inadvertent executions significantly away from the inside market. The Commission also agrees with Nasdaq that this approach may act to balance the goals of rapid execution and price discovery while protecting market participants and the public investors they represent from excessive volatility and market confusion that can result from grossly mispriced/sized quotes/orders in an automated and linked trading environment. The Commission also notes that Nasdaq separately filed and received accelerated approval of a proposal, pursuant to Section 19(b)(2) of the Act,^[8] to establish the execution price governor on a 60-day pilot basis, which is scheduled to expire on December 13, 2002.^[9] Since the implementation of the pilot program, Nasdaq has indicated that it has encountered no problems with the establishment of the execution price governor.^[10]

For the foregoing reasons, the Commission finds that the proposed rule change, as amended, is consistent with the requirements of the Act and rules and regulations thereunder.

It is therefore ordered, pursuant to Section 19(b)(2) of the Act,^[11] that the proposed rule change and Amendment No. 1 (SR-NASD-2002-142) are approved.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.^[12]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  17 CFR 240.19b-4.

3.  See letter from Thomas P. Moran, Associate General Counsel, Nasdaq, to Katherine A. England, Assistant Director, Division of Market Regulation (“Division”), Commission, dated October 10, 2002 (“Amendment No. 1”).

4.  See Securities Exchange Act Release No. 46650 (October 11, 2002), 67 FR 64683.

5.  15 U.S.C. 78 o-3.

6.  In approving this proposed rule change, the Commission notes that it has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

7.  15 U.S.C. 78 o-3(b)(6).

8.  15 U.S.C. 78s(b)(2).

9.  See Securities Exchange Act Release No. 46652 (October 11, 2002), 67 FR 64681 (October 21, 2002).

10.  Telephone conversation between Thomas P. Moran, Associate General Counsel, Nasdaq, and Cyndi Nguyen, Attorney, Division, Commission, on November 21, 2002.

11.  15 U.S.C. 78s(b)(2).

12.  17 CFR 200.30-3(a)(12).