95-12698. Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Approving Proposed Rule Change to Provide Non- member Viewing Access to SelectNet and that the Transmission of Broadcast Orders Through SelectNet be ...  

  • [Federal Register Volume 60, Number 100 (Wednesday, May 24, 1995)]
    [Notices]
    [Pages 27579-27581]
    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
    [FR Doc No: 95-12698]
    
    
    
    -----------------------------------------------------------------------
    
    SECURITIES AND EXCHANGE COMMISSION
    [Release No. 34-35732; File No. SR-NASD-94-9]
    
    
    Self-Regulatory Organizations; National Association of Securities 
    Dealers, Inc.; Order Approving Proposed Rule Change to Provide Non-
    member Viewing Access to SelectNet and that the Transmission of 
    Broadcast Orders Through SelectNet be Solely on an Anonymous Basis
    
    May 18, 1995.
    
    I. Introduction
    
        On January 30, 1995, the National Association of Securities 
    Dealers, Inc. (``NASD'' or ``Association'') filed with the Securities 
    and Exchange Commission (``SEC'' or ``Commission'') a proposed rule 
    change pursuant to Section 19(b)(1) of the Securities Exchange Act of 
    1934 (``Act'') \1\ and Rule 19b-4 thereunder.\2\ The NASD seeks to 
    amend SelectNet in two ways: (a) to provide real-time access to non-
    members to view all ``broadcast'' orders in SelectNet; and (b) to 
    provide that the transmission of broadcast orders through SelectNet be 
    solely on an anonymous basis.
    
        \1\ 15 U.S.C. 78s(b)(1) (1988).
        \2\ 17 CFR 240.19b-4 (1994).
    ---------------------------------------------------------------------------
    
        Notice of the proposed rule change appeared in the Federal Register 
    on April 28, 1994 \3\ and March 7, 1995.\4\ The Commission received 
    letters from four commenters in response to the NASD's proposal. For 
    the reasons discussed below, the Commission is approving the proposed 
    rule change.
    
        \3\ Securities Exchange Act Release No. 33938 (Apr. 20, 1994), 
    59 FR 22033 (Apr. 28, 1994) (notice of original proposal and 
    Amendment No. 1).
        \4\ Securities Exchange Act Release No. 35428 (Feb. 28, 1995), 
    60 FR 12583 (Mar. 7, 1995) (notice of Amendment No. 2).
    ---------------------------------------------------------------------------
    
    II. Background
    
        Originally referred to as the Order Confirmation Transaction 
    Service (``OCT'') and approved by the Commission in January 1988,\5\ 
    the NASD developed SelectNet in response to the difficulties 
    experienced in the Nasdaq market during the market break of October 
    1987. SelectNet is an electronic screen-based order routing system 
    allowing market makers and order-entry firms (collectively referred to 
    as ``participants'') to negotiate securities transactions in Nasdaq 
    securities through computer communications rather than relying on the 
    telephone.
    
        \5\ Securities Exchange Act Release No. 25263 (Jan. 11, 1988), 
    53 FR 1430 (Jan. 19, 1988) (order approving SelectNet, previously 
    referred to as the Order Confirmation Transaction Service, on a 
    temporary, accelerated basis). See also, Securities Exchange Act 
    Release No. 25523 (Mar. 28, 1988), 53 FR 10965 (Apr. 4, 1988) (order 
    extending temporary approval of SelectNet); Securities Exchange Act 
    Release No. 25690 (May 11, 1988), 53 FR 17523 (May 17, 1988) (order 
    granting permanent approval of SelectNet).
    ---------------------------------------------------------------------------
    
        To enter an order in SelectNet, a participant enters the normal 
    trade information: security symbol, side (buy or sell), transaction 
    size, and price. Participants may enter orders priced at, above or 
    below the inside bid or ask and, thus, SelectNet offers the opportunity 
    to negotiate for a price superior to the current inside quote. In 
    addition, participants may provide that an order or counter-offer will 
    be in effect for anywhere from 3 to 99 minutes, specify a day order, or 
    indicate whether price or size are negotiable or whether a specific 
    minimum quantity is acceptable. Participants may accept, counter, or 
    decline a SelectNet order. In the event that a participant elects to 
    counter an offer, the service allows negotiations to be conducted 
    between the participants by exchanging counter-offers until an 
    agreement is reached. Once agreement is reached, the execution is 
    ``locked-in'' and reported to the tape.
        Through SelectNet, participants may either direct an order to a 
    particular market maker in the security, broadcast to all market makers 
    in the security, or broadcast to all participants watching a particular 
    security (a feature known as ``all call''). The participants then may 
    negotiate the terms of the order through counter-offers entered into 
    the system. SelectNet's default setting provides anonymity for 
    broadcast orders. However, a participant currently entering a broadcast 
    order may elect to identify itself. After an anonymous broadcast order 
    is executed, each participant to the transaction learns the identity of 
    the other. In contrast, directed orders always display to the receiving 
    participant the identity of the participant entering the order.
    
    III. Description of the Rule Change
    
        The NASD seeks to modify SelectNet in two ways. First, it proposes 
    to permit non-member viewing access to orders broadcast through 
    SelectNet. Second, the NASD proposes to require that broadcast orders 
    be entered on an anonymous basis only.
    A. Non-member Viewing Access to Broadcast Orders
    
        Under the NASD's proposal, non-members will be permitted to view on 
    a real-time basis all orders broadcast through SelectNet. Specifically, 
    non-members will be able to view all unexecuted broadcast SelectNet 
    orders, including the security name, the side of the order (buy or 
    sell), the quantity available, the order price, the original size of 
    the order, the outstanding portion, and the duration of the order (from 
    3 to 99 minutes or all day). The NASD will provide this information via 
    the Level 2 Nasdaq Workstation service, to which non-members may 
    subscribe. In addition, the NASD will provide a data feed of the 
    broadcast SelectNet information to data vendors who in turn may provide 
    the information to non-members. Under either alternative, dissemination 
    of SelectNet information will be provided on a real-time basis.
        Non-members, however, will not be permitted to interact through 
    SelectNet with the order or be provided access to orders directed from 
    one participant to another. Moreover, because the NASD's proposal will 
    restrict all broadcast orders to an anonymous basis, neither members 
    nor non-members will be able to determine the identity of the 
    participant entering a broadcast order.
    
    B. All Broadcast Orders will be on an Anonymous Basis
    
        As currently configured, SelectNet allows a participant 
    broadcasting an order to elect either to identify itself or to send the 
    order anonymously. Under this proposal, however, participants will be 
    limited to entering broadcast orders on an anonymous basis.\6\ If two 
    firms begin negotiating the terms of a broadcast order, however, the 
    participant that entered the order may choose to identify itself to the 
    contra side.
    
        \6\ In contrast, directed orders will continue to identify the 
    participant transmitting an order to another participant.
    ---------------------------------------------------------------------------
    
    IV. Comments
    
        As noted above, the Commission received letters from four 
    commenters in response to the proposal. Three of the commenters 
    addressed the proposal to provide non-member viewing access, with one 
    of these commenters supporting the proposal and the other two opposing 
    it; the fourth commenter [[Page 27580]] expressed opposition to the 
    proposal to require anonymity for broadcast orders. The NASD responded 
    to these comments in Amendment No. 2 \7\ and by a letter dated April 8, 
    1995.\8\
    
        \7\ Securities Exchange Act Release No. 35428 (Feb. 28, 1995), 
    60 FR 12583 (Mar. 7, 1995) (notice of Amendment No. 2).
        \8\ Letter from Richard Ketchum, Executive Vice President & 
    Chief Operating Officer, NASD, to Jonathan G. Katz, Secretary, SEC 
    (Apr. 28, 1995).
    ---------------------------------------------------------------------------
    
        Commenters responding to the NASD's original proposal criticized it 
    because it would have limited non-member viewing access to Nasdaq 
    WorkStation Level 2 subscribers.\9\ These commenters argued that the 
    NASD should provide this access through a vendor data feed. In 
    response, the NASD amended its filing to provide to vendors a separate 
    data feed of broadcast orders.\10\
    
        \9\ Letters from James E. Buck, Senior Vice President and 
    Secretary, NYSE (June 2, 1994), Daniel Parker Odell, Assistant 
    Secretary, NYSE (Mar. 28, 1995), and Craig S. Tyle, Vice President & 
    Senior Counsel, Investment Company Institute (May 19, 1994), to 
    Jonathan G. Katz, Secretary, SEC.
        \10\ Securities Exchange Act Release No. 35428 (Feb. 28, 1995), 
    60 FR 12583 (Mar. 7, 1995) (notice of Amendment No. 2). In response 
    to this amendment, the Investment Company Institute submitted a 
    second comment letter, expressing its support for the proposal. 
    Letter from Craig S. Tyle, Vice President & Senior Counsel, 
    Investment Company Institute, to Jonathan G. Katz, Secretary, SEC 
    (Mar. 28, 1995).
    ---------------------------------------------------------------------------
    
        The NYSE and American Stock Exchange (``Amex'') generally opposed 
    the proposal because of their concerns about the broader policy issues 
    surrounding SelectNet. Specifically, the NYSE and Amex argue that 
    ``orders'' entered in SelectNet are actually quotations for purposes of 
    the Quote Rule\11\ and, therefore, the NASD should include them for 
    dissemination in the calculation of the best bid and offer.\12\ In 
    response, the NASD argues that SelectNet orders lack the 
    characteristics that trigger an obligation to include an order in the 
    calculation of the best bid or offer in a Nasdaq security. 
    Specifically, the NASD contends that unlike quotes, SelectNet orders 
    are generally limited in duration\13\ and subject to price and size 
    negotiation. The NASD concludes that classifying SelectNet orders as 
    ``indications of interest'' would be more appropriate than treating 
    them as bids or offers.\14\ Moreover, the NASD argues that reassessing 
    whether market maker orders broadcast through SelectNet should be 
    reflected in the market maker's quote would necessarily include a 
    similar assessment concerning market maker orders entered in Instinet.
    
        \11\ 17 CFR 240.11Ac1-1.
        \12\ The NYSE also notes in its comment letters that the 
    SelectNet rules are contained in the SelectNet User Guide, but are 
    not included in the NASD Manual. See SelectNet User Guide (Nov. 
    1990). The NASD has committed to submit to the Commission a package 
    of SelectNet rules by the end of 1995. Letter from Richard Ketchum, 
    Executive Vice President & Chief Operating Officer, NASD, to 
    Jonathan G. Katz, Secretary, SEC (Apr. 28, 1995).
        \13\ The NASD represents that SelectNet orders are usually 
    either executed immediately or expire after three minutes. Thus, the 
    NASD further argues, SelectNet orders fall within the exception that 
    allows the NASD to exclude from the best bid or offer calculation an 
    order which is executed immediately. 17 CFR 240.11Ac1-1(b)(1)(ii).
        \14\ Under rules promulgated pursuant to the Act, ``indications 
    of interest'' are not considered bids or offers. 17 CFR 240.11Ac1-
    1(a)(8).
    ---------------------------------------------------------------------------
    
        One commenter opposed the NASD's proposal to modify the operation 
    of SelectNet to provide that all broadcast orders be entered 
    anonymously.\15\ This commenter argued that it identifies itself 
    regularly with the hope that market makers will contact it to negotiate 
    the order further. This commenter noted that it often wishes to be 
    associated with certain buy or sell interest and that, paradoxically, 
    the NASD's proposal to provide more information to non-members will 
    result in less information to members.
    
        \15\ Letter from John C. Helmer, President, Caldwell Securities 
    Incorporated, to Jonathan G. Katz, Secretary, SEC (Mar. 15, 1994).
        In response, the NASD reiterated the two concerns set forth in its 
    original filing as the basis for the proposal. First, the NASD believes 
    that orders entered on an anonymous basis will act to maintain the 
    incentives for dealers to continue to make markets that provide needed 
    liquidity. The depth and liquidity of the Nasdaq market is dependent 
    upon the presence of market makers who, among other duties, are 
    required to maintain firm, continuous, two-sided quotations and 
    participate in automated execution systems.\16\ The NASD is concerned 
    about allowing order-entry firms to advertise buy and sell interest 
    without having to satisfy these obligations. Specifically, the NASD 
    believes that it would be inappropriate to allow a firm to pose as a 
    dealer by posting identified positions in SelectNet without registering 
    as a market maker. To allow this, the NASD argues, would reduce the 
    incentive for firms to undertake market making responsibilities and 
    consequently adversely affect market liquidity.
    
        \16\ 17 CFR 240.11Ac1-1 and NASD Manual, Schedules to the By-
    Laws, Schedule D, Sec. 2(a) and (b), (CCH) para. 1819.
    ---------------------------------------------------------------------------
    
        Second, the NASD is concerned that allowing a participant to 
    identify itself provides the opportunity for the participant to 
    condition or influence the market in one direction or another. For 
    example, in the situation where a particular participant is considered 
    a lead market maker or a major institutional block positioner in a 
    security, if it were interested in buying shares in the stock, it might 
    broadcast a sell order in SelectNet and identify itself. The influence 
    associated with the participant's name might trigger a decrease in the 
    bid in reaction to the sell interest. This reaction would allow the 
    participant to purchase the security at a lower price than would 
    otherwise have been the case, simply because it was advertising its 
    name, or conditioning the market.\17\
    
        \17\ Indeed, the Commission and the NASD also have expressed 
    concern that other types of market conditioning may violate just and 
    equitable principles of trade. See, e.g., NASD Manual, Rules of Fair 
    Practice, Art. III, Sec. 6, (CCH) para. 2156 (no member shall offer 
    to buy or sell a security unless the member is prepared at the time 
    to honor the offer).
    ---------------------------------------------------------------------------
    
        Finally, the NASD noted that once two firms begin negotiating an 
    order, the firm entering the order may choose to identify itself to the 
    contra side. Thus, two participants negotiating an order that find the 
    need to continue negotiations over the telephone rather than through 
    SelectNet may arrange to do so.
    
    V. Discussion
    
        The Commission believes that the rule change is consistent with the 
    requirements of Sections 11A and 15A of the Act and the rules and 
    regulations thereunder applicable to the NASD and, therefore, has 
    determined to approve the proposal.
        Section 11A sets forth the Congressional goal of achieving more 
    efficient and effective market operations and the economically 
    efficient execution of transactions through new data processing and 
    communications techniques.\18\ Section 11A also expresses the 
    Congressional finding that the public interest, the protection of 
    investors and the maintenance of fair and orderly markets are enhanced 
    by assuring: (a) fair competition among brokers and dealers, and (b) 
    the availability to brokers, dealers, and investors of information with 
    respect to quotations for and transactions in securities.\19\ Section 
    15A requires that the rules of the NASD, among other things, 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 [[Page 27581]] open market, and, in general, to 
    protect investors and the public interest.\20\
    
        \18\ 15 U.S.C. Sec. 78k-1(a)(1)(B).
        \19\ Id. 78k-1(a)(C)(ii) and (iii).
        \20\ Id. 78o-3(b)(6).
    ---------------------------------------------------------------------------
    
    A. Non-member Viewing Access
    
        In its Market 2000 report,\21\ the Commission's Division of Market 
    Regulation (``Division'') expressed concern that the limited 
    transparency of SelectNet orders often conceals from the broader market 
    the best trading interest in a security and, in turn, impedes 
    competition and price discovery.\22\ The Division, therefore, 
    recommended that the NASD consider ways to enhance SelectNet 
    transparency.\23\ The Commission believes that this proposal is a 
    positive response to the Division's recommendation in Market 2000.
    
        \21\ Market 2000: An Examination of Current Equity Market 
    Developments, Division of Market Regulation, United States 
    Securities and Exchange Commission (Jan. 1994).
        \22\ Id. at IV-7.
        \23\ Id. at 19 and IV-7.
    ---------------------------------------------------------------------------
    
        The NASD's proposal to provide non-members viewing access to orders 
    broadcast through SelectNet will help achieve more efficient and 
    effective market operations by increasing transparency of market 
    information. Increased transparency, in turn, will facilitate more 
    efficient price discovery and enhance price competition among all 
    market participants. This change to SelectNet will allow non-members to 
    obtain with relative ease and low cost important pricing information 
    about Nasdaq securities. Moreover, investors will be better able to 
    assess the overall supply and demand for a particular Nasdaq security 
    and, thus, effect transactions in a more cost-effective manner. They 
    will now be able to view, although not participate directly in, an 
    important system for trading Nasdaq securities.\24\
    
        \24\ The NASD has represented that SelectNet usage has grown 
    from a daily average of 3,000 transactions and 6 million shares in 
    the first half of 1991 to over 10,550 transactions and more than 
    12.6 million shares in the first quarter of 1995.
    ---------------------------------------------------------------------------
    
        In response to the NASD's proposal, the NYSE and Amex raised broad 
    policy concerns about the operation of SelectNet in the context of the 
    Quote Rule. The NYSE and Amex argued that orders broadcast through 
    SelectNet constitute quotations for purposes of the Quote Rule and, 
    therefore, should be reflected in market maker quotations.
        The Commission believes that this issue reaches beyond the 
    broadcast of SelectNet orders to non-members. For example, it raises 
    question about whether the widespread dissemination of orders through 
    broker-dealer trading systems, such as Instinet, constitute quotations 
    for purposes of the Quote Rule. Thus, the Commission believes that this 
    issue is beyond the scope of this proposal and that the policy issue 
    raised by the NYSE and Amex deserve continued examination. Moreover, 
    the Commission believes that this proposal is a meaningful advance in 
    the effort to enhance transparency in the Nasdaq market and, therefore, 
    should not await further debate of this issue.
    
    B. The Anonymous Display of All Broadcast Orders
    
        As noted above, the NASD will not identify the origin of SelectNet 
    orders when pricing information is made available through Nasdaq or 
    vendor facilities. One commenter opposed this feature for the reasons 
    described above.
        The Commission currently believes the NASD's proposal incorporating 
    anonymity in the display of orders broadcast through SelectNet is 
    consistent with the goals of the Act. The Commission believes requiring 
    anonymity will promote just and equitable principles of trade by 
    removing a mechanism for a participant to induce market movement simply 
    by associating its name with a particular order.
        In addition, the Commission finds that the rule change does not 
    impose any burden on competition not necessary or appropriate in 
    furtherance of the purposes of the Act. While the imposition of the 
    anonymity requirement may alter certain existing trading practices, the 
    Commission believes that the proposal furthers the purposes of the Act 
    by enhancing SelectNet transparency for non-members. The Commission 
    believes that expanded dissemination of SelectNet information will 
    better inform public investors regarding the prices at which investors 
    and dealers are willing to transact business in a particular security.
    
    VI. Conclusion
    
        For the reasons stated above, the Commission finds that the 
    proposed rule change is consistent with the requirements of the Act.
        It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
    that the proposed rule change SR-NASD-94-9 be, and hereby is, approved.
    
        For the Commission, by the Division of Market Regulation, 
    pursuant to delegated authority.\25\
    
        \25\ 17 CFR 200.30-3(a)(12).
    ---------------------------------------------------------------------------
    
    Margaret H. McFarland,
    Deputy Secretary.
    [FR Doc. 95-12698 Filed 5-23-95; 8:45 am]
    BILLING CODE 8010-01-M
    
    

Document Information

Published:
05/24/1995
Department:
Securities and Exchange Commission
Entry Type:
Notice
Document Number:
95-12698
Pages:
27579-27581 (3 pages)
Docket Numbers:
Release No. 34-35732, File No. SR-NASD-94-9
PDF File:
95-12698.pdf