[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]
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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).
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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).
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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).
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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.
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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).
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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).
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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).
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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.
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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).
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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).
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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.
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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.
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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).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-12698 Filed 5-23-95; 8:45 am]
BILLING CODE 8010-01-M
