[Federal Register Volume 61, Number 69 (Tuesday, April 9, 1996)]
[Notices]
[Pages 15855-15856]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-8710]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37062; File No. SR-NASD-96-11]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the National Association of Securities Dealers, Inc. Relating
to Amendments to the Primary Market Maker Standards
April 2, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on March
27, 1996, 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.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The NASD is proposing to amend the Primary Market Maker (``PMM'')
Standards rule by deleting a provision of the rule that allows a market
maker to become a PMM in an issue by registering in the stock and
refraining from quoting the issue for five days.1 Below is the
text of the proposed rule change. Proposed deletions are in brackets.
\1\ NASD Manual, Rules of Fair Practice, Art. III, Sec. 49 (CCH)
para. 2200I.
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Article III
Rules of Fair Practice
* * * * *
Primary Nasdaq Market Maker Standards
Sec. 49.
* * * * *
(g) In registration situations:
(1) To register and immediately become a Primary Nasdaq Market
Maker in a Nasdaq National Market security, a member must be a
Primary Nasdaq Market Maker in 80% of the securities in which it has
registered. If the market maker is not a Primary Nasdaq Market Maker
in 80% of its stocks, it may qualify as a Primary Nasdaq Market
Maker in that stock if[:
(i) the market maker registers in the stock but does not enter
quotes for five days; or
(ii)] the market maker registers in the stock as a regular
Nasdaq market maker and satisfies the qualification criteria for the
next review period.
* * * * *
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 IV 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
On June 29, 1994, the SEC approved the NASD's short-sale rule
applicable to short sales in Nasdaq National Market (``NNM'')
securities.\2\ The rule, which has been approved by the Commission on a
pilot basis through August 3, 1996,\3\ prohibits member firms from
effecting short sales \4\ at or below the current inside bid as
disseminated by the Nasdaq system whenever that bid is lower than the
previous inside bid.\5\
\2\ See Securities Exchange Act Release No. 34277 (June 29,
1994), 59 FR 34885 (July 7, 1994) (approving, inter alia, Article
III, Section 48 to the NASD Rules of Fair Practice).
\3\ See Securities Exchange Act Release No. 36532 (Nov. 30,
1995), 60 FR 62519 (Dec. 6, 1995).
\4\ A short sale is a sale of a security which the seller does
not own or any sale which is consummated by the delivery of a
security borrowed by, or for the account of, the seller. To
determine whether a sale is a short sale members must adhere to the
definition of a ``short sale'' contained in SEC Rule 3b-3, which
rule is incorporated into Nasdaq's short sale rule by Article III,
Section 48(l)(1) of the NASD Rules of Fair Practice.
\5\ Nasdaq calculates the inside bid and the best bid from all
market makers in the security (including bids on behalf of exchanges
trading Nasdaq securities on an unlisted trading privileges basis),
and disseminates symbols to denote whether the current inside bid is
an ``up bid'' or a ``down bid.'' Specifically, an ``up bid'' is
denoted by a green ``up'' arrow symbol and a ``down bid'' is denoted
by a red ``down'' arrow. Accordingly, absent an exemption from the
rule, a member can not effect a short sale at or below the inside
bid in a security in its proprietary account or an account of a
customer if there is a red arrow next to the security's symbol on
the screen. In order to effect a ``legal'' short sale on a down bid,
the short sale must be executed at a price at least a \1/16\th of a
point above the current inside bid. Conversely, if the security's
symbol has a green ``up'' arrow next to it, members can effect short
sales in the security without any restrictions. The rule is in
effect during normal domestic market hours (9:30 a.m. to 4:00 p.m.,
Eastern Time).
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In order to ensure that market maker activities that provide
liquidity and continuity to the market are not adversely constrained
when the short sale rule is invoked, the rule provides an exemption to
``qualified'' Nasdaq market makers.\6\ Even if a market maker is able
to avail itself of the qualified market maker exemption, it can utilize
the exemption from the short sale rule only for transactions that are
made in connection with bona fide market making activity. If a market
maker does not satisfy the requirements for a qualified market maker,
it can remain a market maker in the Nasdaq system; however, it can not
take advantage of the exemption from the rule.
\6\ Article III, Section 48(c)(1).
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From February 1, 1996 to August 3, 1996, a ``qualified'' Nasdaq
market maker is defined to be a market maker that satisfies the
criteria for a PMM found in Section 49 of the NASD Rules of Fair
Practice.\7\ To qualify as a PMM, market makers must satisfy at least
two of the following four criteria: (1) the market maker must be at the
best bid or best offer as shown on the Nasdaq system no less than 35
percent of the time; (2) the market maker must maintain a spread no
greater than 102 percent of the average dealer spread; (3) no more than
50 percent of the market maker's quotation updates may occur without
being accompanied by a trade execution of at least one unit of trading;
or (4) the market maker executes 1\1/2\ times its ``proportionate''
volume in the stock.\8\ If a market maker is a PMM, a ``P'' indicator
is displayed next to its market maker identification to denote that it
is a PMM.
\7\ Before the PMM standards went into effect, a ``qualified
market maker'' was defined to be a market maker that had entered
quotations in the relevant security on an uninterrupted basis for
the preceding 20 business days, the so-called ``20-day test.''
\8\ For example, if there are 10 market makers in a stock, each
dealer's proportionate share volume would be 10 percent; therefore,
1\1/2\ times proportionate share volume would mean 15 percent of
overall volume.
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The review period for satisfaction of the PMM performance standards
is one calendar month. If a PMM has not satisfied the threshold
standards after a particular review period, the PMM designation will be
removed commencing on the next business day
[[Page 15856]]
following notice of failure to comply with the standards. Market makers
may requalify for designation as a Primary Market Maker by satisfying
the threshold standards for the next review period.
If a market maker is a PMM in 80 percent or more of the securities
in which it has registered, it may immediately become a PMM (i.e., a
qualified market maker) in an NNM security by registering and entering
quotations in that issue. If the market maker is not a PMM in at least
80 percent of its stocks, it may qualify as a PMM in that stock if the
market maker registers in the stock but does not enter quotes for five
days (the ``five-day quotation delay rule'') or the market maker
registers in the stock as a regular Nasdaq market maker and satisfies
the qualification criteria for the next review period. The PMM rule
also has provisions applicable to initial public offerings, secondary
offerings, and merger and acquisition situations.\9\
\9\ See Section 49(g)(2) and (3) of the NASD Rules of Fair
Practice.
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As discussed above, the ``five-day quotation delay'' rule permits a
market maker to become a PMM by registering in a stock and refraining
from entering quotes in the issue for five days. If the market maker
commences quoting the issue on the sixth day, it is a PMM in that stock
until the next PMM review. Thereafter, to retain the PMM designation,
the market maker must meet the PMM standards for the next review
period. This provision of the PMM standards was originally put into the
rule to ensure that market makers were not registering in a stock to
take advantage of momentary short-selling opportunities.
The NASD is concerned, however, that the ``five-day quotation delay
rule'' could be utilized in a manner that undermines the PMM exemption
and diminishes the effectiveness of the NASD's short-sale rule.
Specifically, the NASD is concerned that the rule could be used to
circumvent the application of the PMM standards \10\ and/or inflate the
percentage of stocks in which they are a PMM above the 80 percent
level, thereby entitling them to be a PMM for all initial public
offerings and issues that they register in during the next month.
Accordingly, in light of these unintended consequences of the rule, the
NASD is proposing to delete the provision from the PMM Rule. In sum,
because the ``five-day quotation delay rule'' allows a market maker to
become a PMM for reasons wholly unrelated to the quality with which it
makes a market, the NASD believes the provision should be deleted
because it is consistent with all other qualitative means by which a
market maker can become a PMM.
\10\ Specifically, it is conceivable that market making
affiliates of the same firm could ``swap'' lists of stocks in which
they make a market and alternatively receive PMM designation without
ever meeting the quanitative PMM standards.
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The NASD believes the proposed rule change is consistent with
Section 15A(b)(6) of the Act. 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. Specifically, by amending
the PMM Rule to provide that market makers will only be exempt from the
NASD's short-sale rule if they have met certain performance standards,
the NASD believes its proposal will help to ensure that the market
maker exemption is not subject to abuse, thereby promoting the
effectiveness of the NASD's short-sale rule.
(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 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. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such data if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
A. by order approve such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. 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 SR-NASD-96-11 and should be
submitted by April 30, 1996.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\11\
\11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-8710 Filed 4-8-96; 8:45 am]
BILLING CODE 8010-01-M
