[Federal Register Volume 62, Number 76 (Monday, April 21, 1997)]
[Notices]
[Pages 19373-19377]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-10222]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38512; File No. SR-NASD-97-25]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the National
Association of Securities Dealers, Inc. Relating to an Extension of the
Pilot for the NASD's Rule Permitting Market Makers To Display Their
Actual Quotation Size
April 15, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on
April 11, 1997, the National Association of Securities Dealers, Inc.
(``NASD'' or ``Association'') filed with the Securities and Exchange
Commission (``Commission'' or ``SEC'') the proposed rule change as
described in Items I, II, and III below, which Items have been prepared
by the NASD. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons. For the
reasons discussed below, the Commission is granting accelerated
approval of the extension.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The NASD proposes to extend the effectiveness of NASD Rule
4613(a)(1)(C) until July 18, 1997.\1\ NASD Rule 4613(a)(1)(C) provides
that market makers in the first fifty Nasdaq securities subject to the
Commission's Limit Order Display Rule are allowed to quote their actual
quote size (``Actual Size Rule''). The text of the proposed rule change
is as follows. (Additions are italicized; deletions are bracketed.)
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\1\ The NASD has concurrently requested that the pilot for the
Actual Size Rule be expanded to apply to 100 additional Nasdaq
securities and extended until December 19, 1997. See Securities
Exchange Act Release No. 38513 (April 15, 1997).
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* * * * *
NASD Rule 4613 Character of Quotations
(a) Two-Sided Quotations
(1) No change.
(A)-(B) No change.
(C) As part of a pilot program implemented by The Nasdaq Stock
Market, during the period January 20, 1997 through at least [April]
July 18, 1997, a registered market maker in a security listed on The
Nasdaq Stock Market that became subject to mandatory compliance with
SEC Rule 11Ac1-4 on January 20, 1997 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 11Ac1-4,
provided, however, that a registered market maker may augment its
displayed quotation size to display limit orders priced at the market
marker's quotation.
(2) Except as provided in subparagraph (a)(1)(C) above, [E]each
member registered as a Nasdaq market maker in Nasdaq National Market
equity securities shall display size in its quotations of 1,000, 500,
or 200 shares and the following guidelines shall apply to determine the
applicable size requirement:
(A)-(C) No change.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the NASD included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item III below. The NASD has prepared summaries, set forth in Sections
A, B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Introduction and Background
On August 29, 1996, the Commission promulgated a new rule, the
Limit Order Display Rule \2\ and adopted amendments to the Quote Rule
\3\ which together are designed to enhance the quality of published
quotations for securities and promote competition and pricing
efficiency in U.S. securities markets (these rules are collectively
referred to
[[Page 19374]]
hereinafter as the ``Order Execution Rules'').\4\ With respect to
securities included on Nasdaq (``Nasdaq securities''), the Order
Execution Rules are being implemented according to a phased-in
implementation schedule. Fifty Nasdaq securities became subject to the
rules on January 20, 1997 (``first fifty''); fifty more securities
became subject to the rules on February 10, 1997 (``second fifty'');
and an additional fifty securities became subject to the rules on
February 24, 1997. The remaining Nasdaq securities will become subject
to the rules according to time tables established by the Commission.\5\
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\2\ 17 CFR 240.11Ac1-4.
\3\ 17 CFR 240.11Ac1-1.
\4\ See Securities Exchange Act Release No. 37619A (September
56, 1997), 61 FR 48290 (September 12, 1996) (``Order Execution Rules
Adopting Release'')
\5\ See, e.g., Securities Exchange Act Release No. 38490 (April
9, 1997).
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In particular, the SEC's Limit Order Display Rule requires the
display of customer limit orders, that: (1) are priced better than a
market maker's quote; \6\ or (2) add to the size associated with a
market marker's quote when the market maker is at the best price in the
market.\7\ By virtue of the Limit Order Display Rule, investors now
have the ability to directly advertise their trading interest to the
marketplace, thereby allowing them to complete with market maker
quotations and affect the size of bid-ask spreads.\8\ The Order
Execution Rules also included amendments to the SEC's Quote Rule, the
most significant of which requires market makers to display in their
quote any better priced orders that the market maker places into an
electronic communications network (``ECN'') such as SelectNet or
Instinet (``ECN Rule''). Alternatively, instead of updating its quote
to reflect better priced orders entered into an ECN, a market maker may
comply with the display requirements of the ECN rule through the ECN
itself, provided the ECN: (1) ensures that the best priced orders
entered by market makers into the ECN are included in the public
quotation; and (2) provides brokers and dealers access to orders
entered by market makers into the ECN, so that brokers and dealers who
do not subscribe to the ECN can trade with those orders (``ECN Display
Alternative'').
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\6\ For example, if a market maker's quote in stock ABCD is 10-
10\1/4\ (1000 x 1000) and the market maker receives a customer
limit order to buy 200 shares at 10\1/8\, the market maker must
update its quote to 10\1/8\-10\1/4\ (200 x 1000).
\7\ For example, if a market maker receives a customer limit
order to buy 200 shares of ABCD at 10 when its quote in ABCD is 10-
10\1/4\ (1000 x 1000) and the NBBO for ABCD is 10-10\1/8\, the
market maker must update is quote to 10-10\1/4\ (1200 x 1000).
\8\ There are eight exceptions to the immediate display
requirement of the Limit Order Display Rule: (1) customer limit
orders executed upon receipt; (2) limit orders placed by customers
who request that they not be displayed; (3) limit orders for odd-
lots; (4) limit orders of block size (10,000 shares or $200,000);
(5) limit orders routed to a Nasdaq or exchange system for display;
(6) limit orders routed to a qualified electronic communications
network for display; (7) limit orders routed to another member for
display; and (8) limit orders that are all-or-none orders. See Rule
11Ac1-4(c).
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In order to facilitate implementation of the SEC's Order Execution
Rules and reflect the order-driven nature of the Nasdaq market that was
to be brought about by the implementation of these rules, the
Commission approved, on January 10, 1997, a variety of amendments to
NASD Rules pertaining to Nasdaq's Small Order Execution System
(``SOES'') and the SelectNet Service (``SelectNet'').\9\ In particular,
one of the NASD Rule changes approved by the Commission provides on a
temporary basis that Nasdaq market makers in the first fifty securities
subject to the Commission's Limit Order Display rule are required to
display a minimum quotation size of one normal unit of trading when
quoting solely for their own proprietary account (i.e., the Actual Size
Rule).\10\ For Nasdaq securities outside of the first fifty, the
minimum quotation size requirements remained the same.\11\
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\9\ See Securities Exchange Act Release No. 38156 (January 10,
1997), 62 FR 2415 (January 16, 1997) ( order partially approving SR-
NASD-96-43 and approving the Actual Size Rule on a pilot basis)
(``Actual Size Rule Approval Order'').
\10\ Thus, the Actual Size Rule does not effect a market maker's
obligation to display the full size of a customer limit order. If a
market maker is required to display a customer limit order for 200
or more shares, it must display a quote size of at least 200 shares
absent an exception from the Limit Order Display Rule.
\11\ In particular, NASD Rule 4613(3)(2) requires each market
maker in a Nasdaq issue other than those in the first fifty to enter
and maintain two-sided quotations with a minimum size equal or
greater than the applicable SOES tier size for the security (e.g.,
1000, 500 or 200 shares for Nasdaq National Market issues and 500 or
100 shares for Nasdaq SmallCap Market issues) (``Mandatory Quote
Size Requirement'').
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The NASD submitted the proposal for the Actual Size Rule because it
believed, and continues to believe, that the new order-driven nature of
Nasdaq brought about by the Limit Order Display Rule obviates the
regulatory justification for minimum quote size requirements because
investors now have the capability to display their own orders on
Nasdaq. The NASD originally imposed the Mandatory Quote Size
Requirements to ensure an acceptable level of market liquidity and
depth in an environmental where Nasdaq market makers were the only
market participants who could impact quotation prices. Now that the
Limit Order Display Rule permits investors to directly impact quoted
prices, however, the NASD believes it is appropriate to treat Nasdaq
market makers in a manner equivalent to exchange specialists and not
subject them to minimum quote size requirements when they are not
representing customer orders. In sum, with the successful
implementation of the SEC's Order Executive Rules, the NASD believes
that Mandatory Quote Size Requirements impose unnecessary regulatory
burdens on market makers.
At the same time, the NASD does not believe that implementation of
the Actual Size Rule in an environment where limit orders are displayed
has or will compromise the quality of the Nasdaq market. First, the
display of customer limit orders enhances the depth, liquidity, and
stability of the market and contributes to narrower quoted spreads,
thereby mitigating the effects of the loss of displayed trading
interest, if any, by market makers, Second, removing artificial quote
size requirements may lead to narrower market maker spreads, thereby
reducing investors' transaction costs. Third, permitting market makers
to quote in size commensurate with their own freely-determined trading
interest will enhance the pricing efficiency of the Nasdaq market and
the independence and competitiveness of dealers quotations. Fourth,
removing quotation size requirements will facilitate greater quote size
changes, thereby increasing the information content of market maker
quotes by facilitating different quote sizes from dealers who have a
substantial interest in the stock at a particular time and those who do
not.
Indeed, in its order approving the Actual Size Rule, the Commission
noted that it ``preliminarily believes that the proposal will not
adversely affect market quality and liquidity'' \12\ and that it
``believes there are substantial reasons * * * to expect that reducing
market makers' proprietary quotation size requirements in light of the
shift to a more order-driven market would be beneficial to investors.''
\13\ In addition, the Commission stated that, ``based on its experience
with the markets and discussions with market participants, [it]
believes that decreasing the required quote size will not result in a
reduction in liquidity that will hurt investors.'' \14\
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\12\ See Actual Size Approval Order, supra note 8, 62 FR at
2425.
\13\ Id. 62 FR at 243.
\14\ Id. 62 FR at 2424.
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Nevertheless, in light of concerns raised by commentators opposed
to the Actual Size Rule regarding the potential adverse impacts of the
rule on market
[[Page 19375]]
liquidity and volatility, the Commission originally determined to
approve the rule on a three-month pilot basis to afford the Commission
and the NASD an opportunity to gain practical experience with the rule
and evaluate its effects. The factors identified by the Commission to
be considered in this evaluation include, among others, the impact of
reduced quotation sizes on liquity, volatility and question
spreads.\15\
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\15\ See 62 FR 2415 at 2425.
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As detailed below, the NASD has concluded that implementation of
the SEC's Order Execution Rules has significantly improved the quality
of the Nasdaq market by creating a market structure where customer
limit provide liquidity and effectively compete with market maker
quotations. In this type of environment, the NASD believes the
regulatory necessity for the Mandatory Quote Size Requirements no
longer exists. Accordingly, the NASD is proposing to extend the pilot
of the Actual Size Rule until July 18, 1997.
2. Economic Analysis of the Actual Size Rule \16\
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\16\ See 62 FR 2415 at 2425.
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Research conducted by the NASD's Economic Research Department
indicates three general findings concerning implementation of the SEC's
Order Execution Rules and the Actual Size Rule: (1) The SEC's Order
Execution Rules have dramatically improved the quality of the Nasdaq
market, particularly with respect to the size of quoted spreads; (2)
among those securities subject to the SEC's Order Execution Rules,
there is no appreciable difference in market quality between those
securities subject to the Actual Size Rule and those securities subject
to Mandatory Quote Size Requirements; \17\ and (3) implementation of
the Actual Size Rule has not resulted in any significant diminution of
the ability of investors to receive automated executions through SOES,
SelectNet, or proprietary systems operated by broker-dealers.
Accordingly, as the case with 100-share minimum quotation size
requirements applicable to exchange specialists in order-driven
markets, the NASD believes the Actual Size Rule has not harmed
investors or the quality of the Nasdaq market.
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\17\ The first fifty securities include Nasdaq's top ten issues
by dollar volume plus 40 issues chosen from Nasdaq's top 500 issues:
8 ranked between 11 and 1000; 8 ranked between 101 and 200; 8 ranked
between 201 and 300; 8 ranked between 301 and 400; 8 ranked between
401 and 500. The second fifty securities include the ten Nasdaq
stocks ranked between 11 and 20 by dollar volume plus 40 stocks
chosen from Nasdaq's top 500 stocks in the same manner explained
above. The ten largest Nasdaq stocks in the first fifty have no
comparable peer group among Nasdaq stocks and the next ten largest
Nasdaq stocks (i.e., Nasdaq stocks ranked 11-20 in size) included in
the second fifty are also not comparable to the ``bottom 40'' within
the first fifty stocks and the ``second forty'' stocks are those
stocks that are the ``bottom 40'' within the second fifty stocks.
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While some market participants may maintain that the Actual Size
Rule should be abandoned because it has not had a demonstrably positive
market impact, the NASD believes that the Rule should be retained
because it eliminates an unnecessary regulatory requirement and,
moreover, it has not had any adverse market impacts. In particular,
with respect to the first fifty securities, the NASD believes that
competitive forces in the marketplace, be they the result of displaying
customer limit orders or market maker competition for order flow, have
driven the Nasdaq market to perform the same as of the artifical 1,000
share minimum quotation size requirement was in place.\18\ As a result,
given that the market performs the same with or without the Actual Size
Rule, the NASD believes it is far preferable for the protection of
investors and the efficiency of the capital formation process to
promote a regulatory environment for Nasdaq that achieves its results
through aggressive competition rather than artificial regulatory fiat.
In sum. in light of the performance of the first fifty securities, the
NASD believes there is no regulatory basis to justify the retention of
artificial quotation size requirements for Nasdaq market makers.
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\18\ Some market participants may assert that the lack of
difference in performance between the first forty securities and the
second forty is attributable to the operation of several features of
SOES. Specifically, these market participants may claim that the
SOES Auto-Refresh Feature, which refreshes a market quote to the
applicable SOES tier size once its quote has been completely
decremented, along with the ``No Decrementation'' and ``Supplemental
Size'' feature of SOES, artificially increase the number of 1000-
share quotes in the first fifty securities. The ``No
Decrementation'' feature of SOES allows a market maker to provide
that its quote shall not be decremented after the execution of SOES
orders. To use this feature, a market maker's quote size must be
equal to the applicable SOES tier size. The ``Supplemental Size''
feature of SOES allows a market maker to establish a ``supplemental
size'' that is used to automatically replenish a market maker's
quote once it has been completely decremented. When a market maker's
quote is replenished from the supplemental size, it is replenished
to 1000 shares. In order to use this feature, a market maker must
initially enter a quote size equal to or greater than the applicable
SOES tier size. The NASD notes that market maker use of each of
these system features is completely voluntary and they are available
for all Nasdaq securities. Accordingly, the NASD believes it would
be inaccurate to assert that these SOES features have obfuscated the
impact of the Actual Size Rule.
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a. Implementation of the SEC's Order Execution Rules Has Resulted
in Significant Benefits to Investors and Enhanced the Quality of the
Nasdaq Market.
The NASD's analysis of the markets for the first 150 Nasdaq
securities subject to the SEC's Order Execution Rules shows that: \19\
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\19\ Statistics concerning the first 150 Nasdaq securities
subject to the Order Execution Rules reflect a comparison of the
markets for these securities for the 20 trading days before January
20, 1997 and the 24 trading days after February 24, 1997.
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Quoted spreads have narrowed 32.3%; \20\ effective spreads
have narrowed 24.6%; and actual dollar spreads have narrowed 31.8% \21\
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\20\ A quoted spread is the difference between the inside bid
and ask. The individual dollar spreads used to calculate the average
for a given stock are weighted by the amount of time each spread was
in effect for the day, i.e., the spread's duration.
\21\ An effective spread is measured by taking the absolute
difference between a transaction price and the bid-ask midpoint,
multiplied by two. Each effective spread is weighted by the share
volume of the associated transaction. An actual spread is measured
by taking the transaction price minus the bid-ask midpoint for
market maker sells, and the bid-ask midpoint minus the transaction
price for market maker buys. The figure is multiplied by two to
compare the quoted spread, and the average is volume-weighted.
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Average dealer spreads have narrowed 3.8%.
The amount of time the inside spread was equal to an \1/8\
increased 104.9%, meaning that quoted spreads in these securities were
equal to their narrowest quote increment 47.8% of the time. In
addition, inside spreads were equal to or less than a \1/4\ 77.1% of
the time.
The average number of market makers per stock increased
5.6%, or 1.1 market makers per stock.
The maximum quoted depth of any single market maker at the
inside bid or offer increased 37.2%.
There has been a noticeable increase in the number of
quotation updates greater than 1,000 shares. In particular, whereas
before implementation of the Actual Size Rule market makers virtually
never displayed sizes greater than 1,000 shares, since the rule has
been in effect, 6.3% of all market maker quote updates have been for
greater than 1,000 shares.
b. The Market Behavior of the ``First Forty'' Securities is Very
Similar to the Market Behavior of the ``Second Forty'' Securities.
While the data set forth above indicates that implementation of the
SEC's Order Execution Rules have been associated with dramatically
narrower spreads and improvements in other indicia of market quality,
the NASD believes that the similar performance of the second forty
securities to the first forty securities indicates that the Actual
[[Page 19376]]
Size Rule did not impair the markets for these securities. In
particular, a comparison of the first forty securities and the second
forty securities reveals that: \22\
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\22\ The comparison of the first forty securities and the second
forty securities is based on an analysis of the 31 trading days
after February 10, 1997.
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Dollar quoted spreads decreased 33.8% for the first forty
securities and 33.7% for the second forty.
Effective spreads decreased 26.6% for the first forty
securities and 27.4% for the second forty.
Actual dollar spreads decreased 30.5% for the first forty
securities and 33% for the second forty.
Dealer dollar spreads decreased 7.4% for the first forty
securities and 4.9% for the second forty.
The average number of market makers for the first forty
securities increased 4.1% and the average for the second forty
increased 2.7%.
10% of the quote updates by market makers in the first
forty securities were for 100 shares, as compared to 5.7% for the
second forty.
66.5% of the quote updates by market makers in the first
forty securities were for 1,000 shares, as compared to 77.5% for the
second forty.
6.0% of the quote updates by market makers in the first
forty securities were for greater than 1,000 shares, as compared to
6.2% for the second forty.
By one measure of market liquidity, the amount of
transaction volume required to move the bid-ask midpoint (``BAM''),\23\
liquidity for both groups of securities appears to have diminished at
narrower price movements, but less so for larger price movements.\24\
Specifically, the amount of stock needed to move the BAM \1/16\ to an
\1/8\ decreased 26.5% for the first forty securities and 21.3% for the
second forty. In addition, the amount of stock needed to move the BAM
an \1/8\ to a \1/4\ decreased 11.7% for the first forty and 4.9% for
the second forty. It is interesting to note, however, that the
performance of the two groups begins to diverge for larger BAM
movements. Specifically, the amount of stock needed to move the BAM \3/
8\ to a \1/2\ increased .2% for the first forty, but decreased 4.5% for
the second forty. Similarly, the amount of stock needed to move the BAM
greater than a \1/2\ increased 6.1% for the first forty, but decreased
1.1% for the second forty.
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\23\ Under this analysis, volume is summed for each day until
the BAM has moved away from the starting BAM (the ``base'') by a
specific amount. Once this occurs, the base BAM is reassigned and
volume is summed again until the bid-ask midpoint has moved again by
the specified amount. For example, consider the calculation of
``Volume Per $.125 to $.25 Movement in the BAM.'' If the bid-ask
midpoint is 20 for ABCD security at the beginning of the day, the
algorithm will sum volume until the bid-ask midpoint has moved to at
least $20.125 but less than $20.25, or at most $19.75 but at least
$19.875. If such a movement should occur, the algorithm will note
the total volume and use it as one observation in final
calculations. Volume is defined as net volume transacted by market
makers in a principle capacity with a non-market maker or another
market maker acting as agent. All transactions in which two market
makers trade as agent or two non-market makers trade are excluded
from the calculations. If market makers (in aggregate) are net
sellers (buyers) before an increase (decrease) in the BAM, then this
occurrence is included in the above analysis. If, however, market
makers are net sellers (buyers) before a decrease (increase) in the
BAM, then this ``counter-intuitive'' occurrence is excluded from
this analysis. ``Counter-intuitive'' cases accounted for about 35%
of the total events analyzed.
\24\ Because customer limit orders can now affect the inside
market under the Display Rule, the NASD believes it would be
expected that liquidity would decrease with respect to smaller price
movements.
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By two measures, volatility in the first forty securities
has declined since implementation of the Actual Size Rule. However, by
two other measures volatility increased.\25\ Specifically, for the
first forty securities, the percentage change in the range of trade
prices decreased 6.6% \26\ and the percentage change in the standard
deviation of trade prices declined .78%.\27\ On the other hand, the
percentage change in the range of the BAM increased 3.44% \28\ and the
percentage change in the standard deviation of the BAM increased
1.7%.\29\ In comparison, for the second forty securities, the
percentage change in the range of trade prices increased 8.5%; the
percentage change in the standard deviation of trade prices increased
18.68%; the percentage change in the range of the BAM increased 24.52%;
and the percentage change in the standard deviation of the BAM
increased 25.82%. While it may appear that volatility did not increase
in the first forty to the same extent that it did for the second forty,
once differences in volume between the two groups are controlled or
``normalized,'' these apparent differences in volatility decline
significantly.
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\25\ In this connection, it is also important to note that
volatility for stocks included in the top 1,000 Nasdaq stocks that
were not subject to the Order Handling Rules increased as well.
Specifically, the standard deviation of the BAM increased 12.8% for
this group of stocks.
\26\ Range of the trade price measures the range of price
movement over a day as a percentage of the day's highest price. The
calculation takes the difference between the day's highest
transaction price and the day's lowest transaction price, divided by
the highest transaction price.
\27\ Standard deviation of price measures the ``bounce'' in
trade price over the course of a day. Technically, it is the
standard deviation of the logarithm of prices observed during a
given day. The use of logarithms results in a measure that
represents the volatility of price relative to the level of price.
\28\ Range of the Bid-Ask Midpoint is calculated by taking the
difference between the day's high value of the bid-ask midpoint
minus the low value, divided by the high value.
\29\ Standard deviation of the Bid-Ask Midpoint measures the
``bounce'' in the bid-ask midpoint over the course of a day. It uses
the same calculation as the standard deviation of price,
substituting the bid-ask midpoint for trade price.
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c. Implementation of the Actual Size Rule Has Not Resulted in Any
Diminution in the Ability of Investors To Receive Automated Executions
Through SOES, SelectNet, or Other Proprietary Systems Operated by
Broker Dealers.
The NASD believes that the following statistics indicate that
implementation of the Actual Size Rule has not diminished the ability
of small investors to receive automated executions through SOES up to
the size of their SOES orders.\30\
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\30\ The statistics concerning SOES accessibility are based on
the 20 trading days following February 10, 1997.
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For the top ten Nasdaq stocks, 99% of SOES volume and 99%
of SOES trades were executed at one price. Thus, for all but 1% of SOES
orders, investors received SOES executions at the price and size they
desired. Similarly, for the first forty securities, 98% of SOES volume
and 98% of SOES trades received an execution at one price.
For the top ten Nasdaq stocks, the aggregate depth of all
market makers at the inside was less than 1,000 shares 2.7% of the
time. Similarly, for the first forty securities, the aggregate depth of
all market makers at the inside was less than 1,000 shares 7.85% of the
time.
For the top ten stocks, the aggregate depth of all market
makers at the inside was less than 500 shares 1.6% of the time.
Similarly, for the first forty securities, the aggregate depth of all
market makers at the inside was less than 500 shares 4.3% of the time.
Moreover, SOES volume and SelectNet volume in the first fifty
securities indicates that the Actual Size Rule has had no impact on the
ability of investors to receive executions through SOES or SelectNet.
In fact, as detailed below, volume in both these systems has increased
since implementation of the Actual Size Rule.\31\
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\31\ The statistics concerning SOES volume and SelectNet volume
are based on the 31 trading days following February 10, 1997.
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The average daily share volume through SOES increased 1.08
million shares a day, or 8.8%.
The average daily dollar volume through SOES increased
$44.53 million a day, or 4.6%.
The average daily share volume through SelectNet increased
5.29 million shares a day, or 176.8%.
[[Page 19377]]
The average daily dollar volume through SelectNet
increased $303.18 million a day, or 140.3%.
Finally, the NASD notes that several NASD members operate their own
automated trading systems that guarantee execution of customer orders
up to the applicable SOES tier size or greater. The NASD estimates that
these systems accommodate a significantly large number of the customer
accounts participating in the Nasdaq market. Based on an informal
survey of several of these firms, the NASD is aware of no instances
where a firm has significantly changed the execution guarantees
provided through its automated execution system.
3. Statutory Basis
For the reasons noted above, the NASD believes the proposed rule
change is consistent with Sections 11A(a)(1)(C), 15A(b)(6), 15A(b)(9),
and 15A(b)(11) of the Exchange Act. Section 11A(a)(1)(C) provides that
it is in the public interest to, among other things, assure the
economically efficient execution of securities transactions and the
availability to brokers, dealers, and investors of information with
respect to quotations for and transactions in securities. Section
15A(b)(6) requires that the rules of a national securities association
be designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, 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.
Section 15A(b)(9) requires that rules of an Association not impose any
burden on competition not necessary or appropriate in furtherance of
the purposes of the Exchange Act. Section 15A(b)(11) requires the NASD
to, among other things, formulate rules designed to produce fair and
informative quotations.
B. Self-Regulatory Organization's Statement on Burden on Competition
The NASD believes that the proposed rule change will not result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Exchange Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Comments were neither solicited nor received.
III. Solicitation of Comments
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.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change 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 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 the file number in the caption
above and should be submitted by May 12, 1997.
IV. Commission's Findings and Order Granting Accelerated Approval of
the Proposed Rule Change
The Commission finds that the NASD's proposal is consistent with
the Act and the rules and regulations thereunder applicable to a
national securities association. Specifically, the Commission finds
that the proposed rule change is consistent with Section 15A(b)(9) in
that it permits Nasdaq market makers to quote in 100 share increments
for an additional three months in a manner equivalent to exchange
specialists. This has not resulted in significant reductions in Nasdaq
market quality to date. In addition, consistent with Section
15A(b)(11), the Actual Size Rule is designed to produce accurate and
informative quotations that disclose the true trading interest of the
market maker.
The Commission approved the Actual Size Rule on a three-month pilot
basis so that the effects of the rule could be assessed. The Commission
continues to believe that a reduction in the quotation size requirement
reduces the risks that market makers must take, and should encourage
them to maintain competitive prices even in the changing market
conditions resulting from the Order Execution Rules. Although the
economic analysis from the NASD has not indicated any notable
detrimental effects, the Commission believes that the proposed rule
change will benefit the markets by providing more experience with the
rule before a decision is made regarding permanent approval.
Accordingly, the Commission believes that the pilot should be extended
beyond the April 18, 1997 expiration date. The Commission, therefore,
finds good cause for approving the proposed rule change prior to the
thirtieth day after the date of publication of notice of filing thereof
in the Federal Register.
The Commission requests that the NASD continue to evaluate the
effects of the reduction in the minimum quotation size for those Nasdaq
stocks included in the pilot.
Specifically, the NASD should continue its analysis of: (1) The
number of market makers in each of the 50 securities, and any change in
the number over time; (2) the average aggregate dealer and inside
spread by stock over time; (3) the average spread for each market maker
by stock; (4) the average depth by market maker (including limit
orders), and any change in the depth over time; (5) the fraction of
volume executed by a market maker who is at the inside quote per stock;
and (6) a measure of volume required to move the price of each security
one increment (to determine the overall liquidity and volatility in the
market for each stock).
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\32\ that the proposed rule change, SR-NASD-97-25, be and
hereby is approved.
\32\ 15 U.S.C. Sec. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\33\
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\33\ 17 CFR 200.30-3(a)(12) (1989).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-10222 Filed 4-18-97; 8:45 am]
BILLING CODE 8010-01-M
