[Federal Register Volume 62, Number 67 (Tuesday, April 8, 1997)]
[Notices]
[Pages 16880-16883]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-8873]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38457; 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., and the Boston, Chicago and Philadelphia Stock Exchanges
March 31, 1997.
On March 27, 1997, the National Association of Securities Dealers,
Inc., on behalf of itself and the Boston, Chicago, and Philadelphia
Stock Exchanges (collectively, ``Participants'') \1\ submitted to the
Commission a request \2\ to extend the
[[Page 16881]]
operation of a joint transaction reporting plan (``Plan'') for Nasdaq/
National Market (``Nasdaq/NM'') securities traded on an exchange on an
unlisted or listed basis.\3\ The proposal would extend the
effectiveness of the Plan, as amended by revised Amendment No. 9,\4\
through June 30, 1997. The Commission also is extending certain
exemptive relief as discussed below. The 1997 Extension Request also
requests that the Commission approve the Plan, as amended, on a
permanent basis on or before June 30, 1997.\5\ The Commission is
approving the proposed amendment to the Plan insofar as the proposal
requests an extension of the effectiveness of the Plan. During the
three-month extension of the Plan, the Commission will determine
whether to approve the proposed Plan, as amended, on a permanent basis.
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\1\ The signatories to the Plan, i.e., the National Association
of Securities Dealers, Inc. (``NASD''), and the Chicago Stock
Exchange, Inc. (``Chx'') (previously, the Midwest Stock Exchange,
Inc.), Philadelphia Stock Exchange, Inc. (``Phlx''), and the Boston
Stock Exchange, Inc. (``BSE''), are the ``Participants.'' The BSE,
however, joined the Plan as a ``Limited Participant,'' and reports
quotation information and transaction reports only in Nasdaq/NM
(previously referred to as ``Nasdaq/NMS'') securities listed on the
BSE. Originally, the American Stock Exchange, Inc. (``Amex''), was a
Participant to the Plan, and withdrew from participation in the Plan
in August 1994.
\2\ See letter from Robert E. Aber, Vice President and General
Counsel, Nasdaq, to Jonathan G. Katz, Secretary, Commission, dated
March 27, 1997 (``1997 Extension Request''). The 1997 Extension
Request also requests the Commission to 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 (``Act''). Id.
\3\ 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 this Section
12(f) requirement, see November 1995 Extension Order, infra note 9,
at n. 2.
\4\ On March 18, 1996, the Commission solicited comment on a
revenue sharing agreement among the Participants. See March 18, 1996
Extension Order, infra note 9. 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 Katz,
Secretary, SEC, dated September 13, 1996. See also September 16,
1996 Extension Order, Infra note 9 (notice and order recognizing
receipt of revised Amendment No. 9).
\5\ The CHX and PHLX also request that, commensurate with
permanent approval of the Plan, the number of Nasdaq/NM securities
eligible for trading pursuant to the Plan be expanded to include all
Nasdaq/NM securities. See 1997 Extension request, supra note 2. The
NASD states that, while it recognizes the benefits from such an
expansion in terms of the promotion of competition and protection of
investors, it believes a wholesale expansion of Nasdaq/UTP-eligible
securities to include all Nasdaq/NM securities is inseparable from
an expansion of Nasdaq's Intermarket Trading System (``ITS'')/
Computer Assisted Execution Service (``CAES'') linkage to include
all exchange-listed securities. Id.
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I. Background
The Commission originally approved the Plan on June 26, 1990.\6\
The Plan governs the collection, consolidation and dissemination of
quotation and transaction information for Nasdaq/NM securities listed
on an exchange or trade on an exchange pursuant to a grant of UTP.\7\
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. Accordingly, the pilot period
commenced on July 12, 1993, and was scheduled to expire on July 12,
1994.\8\ The Plan has since been in operation on a pilot basis.\9\
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\6\ See Securities Exchange Act Release No. 28146 (June 26,
1990), 55 FR 27917 (``1990 Plan Approval Order'').
\7\ See Section 12(f)(2) of the Act, supra note 3.
\8\ See letter from David T. Rusoff, Foley & Lardner, to Betsy
Prout, SEC, dated May 9, 1994.
\9\ See Securities Exchange Act Release No. 34371 (July 13,
1994), 59 FR 37103 (``1994 Extension Order''), Securities Exchange
Act Release No. 35221, (January 11, 1995), 60 FR 3886 (``January
1995 Extension Order''), Securities Exchange Act Release No. 36102
(August 14, 1995), 60 FR 43626 (``August 1995 Extension Order''),
Securities Exchange Act Release No. 36226 (September 13, 1995), 60
FR 49029 (``September 1995 Extension Order''), Securities Exchange
Act Release No. 36368 (October 13, 1995), 60 FR 54091 (``October
1995 Extension Order''), Securities Exchange Act Release No. 36481
(November 13, 1995), 60 FR 58119 (``November 1995 Extension
Order''), Securities Exchange Act Release No. 36589 (December 13,
1995), 60 FR 65696 (``December 13, 1995 Extension Order''),
Securities Exchange Act Release No. 36650 (December 28, 1995), 60 FR
358 (``December 28, 1995 Extension Order''), Securities Exchange Act
Release No. 36934 (March 6, 1996), 61 FR 10408 (``March 6, 1996
Extension Order''), Securities Exchange Act Release No. 36985 (March
18, 1996), 61 FR 12122 (``March 18, 1996 Extension Order''),
Securities Exchange Act Release No. 37689 (September 16, 1996), 61
FR 50058 (``September 16, 1996 Extension Order''), and Securities
Exchange Act Release No. 37772 (October 1, 1996), 61 FR 52980
(``October 1, 1996 Extension Order'').
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II. Description of the Plan
The Joint Industry 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.'' \10\ The Plan contains various provisions
concerning the operation of the Plan, which include: 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 BBO; Dispute Resolution;
Method of Determination and Imposition, and Amount of, Fees and
Charges.\11\
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\10\ The Plan defines ``eligible security'' as any Nasdaq/NM
security (i) as to which unlisted trading privileges have been
granted to a national securities exchange pursuant to Section 12(f)
of the Act, or (ii) which is listed on a national securities
exchange.
\11\ 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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III. Exemptive Relief
In conjunction with the Plan, on a temporary basis scheduled to
expire on March 30, 1997, the Commission granted an exemption to
vendors from Rule 11Ac1-2 under the Act regarding the calculation of
the Best Bid and Offer (``BBO''), 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. In the 1997 Extension Request, the Participants
request that the Commission grant an extension of the exemptive relief
described above to vendors until such time as the calculation
methodology for the BBO is based on a price/size/time algorithm. In the
1997 Extension Request, the Participants also request that the
Commission grant an extension of the exemptive relief described above
to the BSE for so long as the BSE is a Limited Participant under the
Plan.
IV. Summary of Comments
In the January 1995, August 1995, September 1995, October 1995,
November 1995, December 13, 1995, December 28, 1995, March 6, 1996,
March 18, 1996, September 16, 1996, and October 1, 1996 Extension
Orders, the Commission solicited, among other things, comment on: (1)
Whether the BBO calculation for the relevant securities should be based
on price and time only (as currently is the case) or if the calculation
should include size of the quoted bid or offer; \12\ and (2) whether
there is a need for an intermarket linkage for order routing and
execution and an accompanying trade-through rule. In response, the
Commission has received three comment letters regarding the issues
noted at (1) and (2) above.\13\
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\12\ The Commission recognizes that, currently, although the
size of orders is considered in the calculation of the BBO, it is
only in those limited instances in which two or more orders have
identical prices and are entered simultaneously. Telephone
conversation between Tom Gira, NASD, and George A. Villasana,
Attorney, SEC, on March 27, 1997. The Commission is particularly
interested in comments as to whether size should take priority over
time for purposes of calculating the BBO.
\13\ See letter from Jack A. Dempsey, Senior Vice President,
Dempsey & Company, to Jonathan Katz, Secretary, SEC, dated February
21, 1995 (``Dempsey Letter''); letter from William A. Lupien,
Chairman, Mitchum, Jones & Templeton, Inc. (``MJT''), to Secretary,
SEC, dated February 21, 1995 (``MJT Letter''); and letter from
Robert E. Moore, Managing Director, Smith Barney Inc., to Jonathan
Katz, Secretary, SEC, dated August 18, 1995 (``Smith Barney
Letter'').
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[[Page 16882]]
The Commission has received two comments in support of a BBO
calculation based on a price/size/time algorithm.\14\ These commenters
explain that, without giving size precedence over time in the BBO
calculation, the BBO does not provide an accurate representation of the
depth of the market.\15\
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\14\ See MJT Letter and Dempsey Letter, supra note 13.
\15\ In the Dempsey Letter, Dempsey states that when the BBO in
a particular security is 12-12\1/4\ (500 x 1000), and a market
maker, broker, or investor expresses an interest to buy 2500 shares
at $12.00 per share, that bid will not be displayed in the quote,
such that the BBO will continue to be 12-12\1/4\ (500 x 1000).
Dempsey states that this is not a true picture of the current
market. Dempsey states that the BBO calculation should include the
size of the quoted bid and offer, and that size should have
precedence over time.
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The Commission has received one comment in support of the current
BBO calculation based on a price/time/size algorithm.\16\ In the Smith
Barney Letter, Smith Barney explains that giving size precedence over
time in the BBO calculation provides Nasdaq market makers and exchanges
making a UTP market with the incentive to incrementally increase size
rather than improve prices.\17\ Smith Barney states that the
application of a price/size/time methodology for the calculation of BBO
would encourage market makers only to increase the size of their
quotation as it would enable them to attract order flow. Smith Barney
states that this is because the price/size/time methodology allows the
market maker quoting the greatest size at the best price to be
identified as providing the BBO on vendor screens and to move to the
front of the line to receive unpreferenced SOES and Computer Assisted
Execution Service orders. Smith Barney states that the application of a
price/time/size methodology encourages market makers to improve their
prices, and not order size, in order to attract order flow. Smith
Barney states that this is because the price/time/size methodology
allows the market maker who quoted the best price first in time to be
identified as providing the BBO. Smith Barney believes that the price/
time/size methodology benefits customers as it encourages market makers
to improve prices.
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\16\ See Smith Barney Letter, supra note 13.
\17\ The Commission notes, however, that this letter was written
prior to the effectiveness and phased-in implementation of the
Commission's Order Execution Rules which, among other things,
require market makers and specialists to display their customer
limit orders, and prior to the Commission's related partial approval
of the NASD's proposed rule changes to provide for the
implementation of the Order Execution Rules. See Securities Exchange
Act Release Nos. 37619A, (September 6, 1996, 61 FR 48290 (adopting
Order Exec. Rules) and 38156 (January 10, 1997), 62 FR 2415
(partially approving File No. SR-NASD-96-43). Therefore, when the
Smith Barney letter was submitted to the Commission, market makers
generally displayed the minimum size required by NASD rules, such as
1000 shares or 500 shares. Currently, however, for certain stocks
that have been phased-in under the Order Execution Rules and that
are subject to the NASD's Rules, market makers may quote for as
little as 100 shares.
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The Commission has received two comments in support of an
intermarket linkage for order routing and execution, and an
accompanying trade-through rule.\18\ Dempsey states that an intermarket
linkage and trade-through rule would increase market efficiency,
transparency, and liquidity. Smith Barney states that an intermarket
linkage would assure fair competition and best execution of customer
orders.
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\18\ See Dempsey Letter and Smith Barney Letter, supra note 13.
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Also in response to the Commission's request for comment on the
aforementioned issues, the Board of Directors of The Nasdaq Stock
Market, Inc. (``Nasdaq'') approved two recommendations at its meeting
on March 25, 1997 as set forth below.\19\ 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.\20\ With respect to the intermarket linkage issue, the
Nasdaq Board approved a recommendation to provide specialists on an
exchange trading Nasdaq securities on an UTP basis access to Nasdaq's
Small Order Execution System (``SOES''), or its successor system, to
the same extent that registered Nasdaq market makers have access to
SOES, provided that (1) Nasdaq market makers are afforded virtually
identical access to the automated execution system operated by such UTP
exchange, and (2) the order execution algorithms of the exchange's
automated execution system are virtually identical to SOES's or its
successor system.\21\
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\19\ See 1997 Extension Request, supra note 2.
\20\ Id. In the event that Nasdaq develops the technological
capability to afford market makers simultaneous electronic access to
all market maker quotes at the same price level, the Nasdaq Board
believes that the methodology used to determine the quoted size of
the Nasdaq market must be reconsidered to accommodate reflection of
the fully accessible size displayed and Nasdaq. Id.
\21\ Id.
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The Commission continues to solicit comment on (1) 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; (2)
whether there is a need for an intermarket linkage for order routing an
execution; and (3) whether there is a need for a trade-through
rule.\22\
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\22\ The Commission requests that all comments be submitted no
later than May 30, 1997 so that the Commission may have adequate
time to consider all comments prior to June 30, 1997, the date on
which the Commission will determine whether to approve the Plan on a
permanent basis.
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V. 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.
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 at the
Commission's Public Reference Room. All submissions should refer to
File No. S7-24-89 and should be submitted by April 29, 1997.
VI. Discussion
The Commission finds that an extension of temporary approval of the
operation of the Plan, as amended, through June 30, 1997, is
appropriate and in furtherance of Section 11A of the Act as it will
provide the Participants with additional time and make reasonable
proposals concerning the BBO calculation and whether there is a need
for an intermarket linkage for order routing and execution and an
accompanying trade through rule. 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
May 30, 1997 so that the Commission may have ample time to determine
whether to approve the Plan on a permanent basis by June 30, 1997.
The Commission further finds that it is appropriate to extend the
exemptive relief from Rule 11Ac1-2 under the Act until the earlier of
June 30, 1997 or until
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such time as the calculation methodology for the BBO is based on a
price/size/time algorithm pursuant to the 1997 Extension Request or
other 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,
1997. 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.
VII. Conclusion
It is therefore ordered, pursuant to Sections 12(f) and 11A of the
Act and (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, 1997, and
certain exemptive relief until such time as the calculation method for
the BBO is based on a price/size/time algorithm, is approved.
For the Commission, by the Division of Market Regulation, pursuant
to delegated authority, 17 CFR 200.30-3(a)(29).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-8873 Filed 4-7-97; 8:45 am]
BILLING CODE 8010-01-M
