02-14431. Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Granting Approval to a Proposed Rule Change Relating to the Minimum Life of Directed Orders in Nasdaq's SuperMontage System and the Minimum Life of ...

May 31, 2002.

On April 18, 2002, the National Association of Securities Dealers, Inc. (“NASD” or “Association”), through its subsidiary, the Nasdaq Stock Market, Inc. (“Nasdaq”), filed with the Securities and Exchange Commission (“Commission”), pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),^[1] and Rule 19b-4 thereunder,^[2] a proposed rule change to: (1) Establish a minimum life of five seconds for Directed Orders in Nasdaq's future Order Display and Collector Facility (“NNMS” or “SuperMontage”), and (2) reduce from ten seconds to five seconds the minimum time period before an order entered into Nasdaq's SelectNet system may be cancelled by the entering party. The proposed rule change was published for comment in the Federal Register on May 1, 2002.^[3]

The Commission received one comment regarding the proposal.^[4] According to this one commenter, the reduction from ten seconds to five seconds of the minimum life of SelectNet orders was both justified and beneficial, and would reduce opportunity costs as well as increase market efficiency. The commenter also believes that, “[b]ased on the current performance of the SelectNet system, the risk of rejected executions with a 5 second delay is almost zero. [Further, c]urrent SelectNet performance levels justify further cutting the delay down to as little as one second.”

The Commission finds that the proposed rule change is consistent with the requirements of section 15A of the Act ^[5] and the rules and regulations thereunder. Specifically, the Commission finds that the proposed rule change is consistent with Section 15(A)(b)(6),^[6] which provides that the rules of the association be designed to promote just and equitable principals of trade, to foster cooperation and coordination with person 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. Nasdaq represents that the average time for a SelectNet order to be delivered to a recipient is 0.5 seconds, and that this standard will be maintained with Directed Orders in SuperMontage.^[7] The Commission finds that the proposal to establish a minimum life of five seconds for Directed Orders in SuperMontage is consistent with section 15A(b)(6) of the Act ^[8] because it should provide market participants with a reasonable opportunity to respond to incoming orders before they are cancelled, while limiting the exposure of order senders to potential inferior execution in a volatile market. In addition, the Commission finds that establishing a five-second minimum life period for both Directed Orders in SuperMontage and for SelectNet orders should help to provide clarity and uniformity of minimum order life parameters across both systems during the phase-in period.^[9] Nasdaq expects to implement both rule changes on July 1, 2002.

For the foregoing reasons, the Commission finds that the proposed rule change is consistent with the requirements of the Act and rules and regulations thereunder.

It is therefore ordered, pursuant to section 19(b)(2) of the Act,^[10] that the proposed rule change (SR-NASD-2002-55) is approved.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.^[11]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  17 CFR 240.19b-4.

3.  See Securities Exchange Act Release No. 45813 (April 24, 2002), 67 FR 21792.

4.  See e-mail comment from Joshua Levine to [e-mail], Commission, dated May 15, 2002.

5.  15 U.S.C. 78 o-3.

6.  15 U.S.C. 78 o-3(b)(6).

7.  Telephone conversation between Thomas Moran, Associate General Counsel, Nasdaq, and Sapna C. Patel, Attorney, Division of Market Regulation, Commission, on May 31, 2002.

8.  15 U.S.C. 78 o-3(b)(6).

9.  Nasdaq intends to introduce SuperMontage through a phased roll-out process where limited numbers of securities will transition to trading in the new SuperMontage environment under new rules, while the remainder will continue to trade in Nasdaq's current environment. Nasdaq represents that, during this transition, both SuperMontage and SelectNet will continue to operate, and a single uniform minimum order cancellation time parameter will be needed to govern both systems.

10.  15 U.S.C. 78s(b)(2).

11.  17 CFR 200.30-3(a)(12).