[Federal Register Volume 64, Number 135 (Thursday, July 15, 1999)]
[Notices]
[Pages 38226-38227]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-18111]
[[Page 38226]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41606; File No. SR-NASD-98-08]
Self-Regulatory Organizations; Order Granting Approval of
Proposed Rule Change and Amendment No. 1 Thereto, and Notice of Filing
and Order Granting Accelerated Approval to Amendment No. 2 to the
Proposed Rule Change, by the National Association of Securities
Dealers, Inc. Relating to Trade Reporting Rules
July 8, 1999.
I. Introduction
On February 2, 1998, the National Association of Securities
Dealers, Inc. (``NASD'' or ``Association'') through its wholly owned
subsidiary, the Nasdaq Stock Market, Inc. (``Nasdaq'') 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\
Nasdaq filed Amendment No. 1 to the proposed rule change on May 19,
1998. \3\ On June 5, 1998, the proposed rule change, including
Amendment No. 1, was published for comment in the Federal Register. \4\
The Commission received one comment letter in response to the
solicitation of comments. \5\ On March 1, 1999, Nasdaq filed Amendment
No. 2 to the proposed rule change. \6\ For the reasons discussed below,
the Commission is granting partial approval of the proposed rule change
and Amendment No. 1 (as requested in Amendment No. 2), and accelerated
approval of Amendment No. 2 to the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Letter from Robert E. Aber, Senior Vice President and
General Counsel, The Nasdaq Stock Market, Inc., to Katherine A.
England, Assistant Director, Division of Market Regulation
(``Division''), SEC, May 13, 1998(``Amendment No. 1'').
\4\ Securities Exchange Act Release No. 40047 (May 29, 1998), 63
FR 30791.
\5\ The original filing proposed that every electronic
communications network (``ECN'') be required to report all trades
executed within the ECN on behalf of its subscribers. The Commission
received one comment letter, which addressed the original filing's
proposed ECN reporting requirements. See letter from Charles R.
Hood, Senior Vice President and General Counsel, Instinet, to
Jonathan Katz, Secretary, SEC, dated June 25, 1998.
\6\ Letter from Robert Aber, Senior Vice President and General
Counsel, Nasdaq, to Katherine England, Assistant Director, Division,
SEC, March 1, 1999 ``(Amendment No. 2''). Amendment No. 2 requests
that the Commission grant a partial approval of the original filing.
Specifically, Amendment No. 2 requests approval of all the proposed
changes in the original filing with the exception of the proposed
ECN trade reporting requirements. Amendment No. 2 states that the
NASD intends to submit a separate response to the Commission
regarding the Instinet comment letter received on the proposed ECN
trade reporting requirements.
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II. Description of the Proposal
Nasdaq proposes to amend various trade reporting rules of the
Association. Specifically the proposal would: (1) Implement a new trade
report modifier to identify trades effected at a prior reference price;
(2) eliminate the 10,000 share limitation on individual trades that may
be ``bunched'' for trade reporting purposes; and (3) address riskless
principal trades involving exchange-listed securities traded in the
Third Market.\7\
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\7\ The text of the proposed rule change is in the form of an
amendment to Rule 6420(d)(3)(B).
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A. New Modifier for Trades Based on Prior Reference Price
Recently, there have been situations where NASD members execute
certain transactions that, although reported timely, actually relate to
an obligation to trade that arose at an earlier point in the day or
that refer to a prior reference price. These situations may include
obligations to trade arising from a preferenced SelectNet order that
was not executed timely, orders that are owed the opening or closing
price (``market on open'' or ``market on close'') but that are not
executed within 90 seconds of the open or close, respectively, and
orders that may have been lost or misplaced. In effect, these trades
are late executions, not late reports of executions. Nasdaq, therefore,
proposes to implement a trade report modifier for firms to append to
certain trade reports to more accurately identify transactions that are
at a price which is based on a prior reference point in time. \8\ The
modifier would apply to trade reports in Nasdaq securities (both Nasdaq
National Market and SmallCap) as well as non-Nasdaq OTC Equity
Securities (e.g., OTC Bulletin Board and Pink Sheets). The modifier
would not, however, apply to exchange-listed securities traded in the
Third Market.\9\
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\8\ The text of the proposed rule change to implement the new
modifier is contained in NASD Rules 4632(a)(9), 4642(a)(9),
4652(a)(8), and 6620(a)(6).
\9\ The NASD intends that the modifier would not apply to
``stopped'' stock situations. Moreover, by using the modifier, a
member would not be absolved of its obligation to provide best
execution, in terms of both price and timely execution. The modifier
would not be required if the report was made within 90 seconds of
the prior reference time.
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B. Eliminating the 10,000 Share Limitation on Aggregating Trades in
Nasdaq Securities That May Be Bunched for Trade Reporting
Nasdaq proposes to eliminate the 10,000 share limitation on the
maximum number of shares in an individual trade that can be aggregated
for purposes of reporting a ``bunched'' trade in Nasdaq securities, but
only in the context of IPOs.
Rules governing the reporting of transactions in Nasdaq securities
(both National Market and SmallCap) currently permit the aggregation of
transactions into a ``bunched'' trade report in a variety of
situations. Most notably, there is a provision whereby a firm may
aggregate transactions at the same price that would be impractical to
report individually, provided that no individual order of 10,000 shares
or more may be aggregated.\10\ These reports have a ``.B'' modifier
appended by the reporting firm and disseminated to the Nasdaq tape and
vendors.
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\10\ This rule was originally adopted in 1982 with a limitation
of 5,000 shares. See Securities Exchange Act Release No. 18602
(March 26, 1982), 47 FR 14642 (April 5, 1982) (notice of filing and
order granting accelerated approval of File No. SR-NASD-82-4). The
rule was subsequently increased to 10,000 shares in 1984, but has
remained at that level ever since. See Securities Exchange Act
Release No. 21202 (August 3, 1984), 49 FR 31971 (August 9, 1984)
(order approving File No. SR-NASD-84-12).
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C. Trade Reporting Rules for Riskless Principal Trades in the Third
Market
Nasdaq proposes to amend the trade reporting rules for exchange
listed securities traded in the Third Market to ensure that all
riskless principal trades, including those effected by market makers,
are reported only once.\11\
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\11\ In addition to the amendment to Rule 6420, Nasdaq proposes
the corresponding interpretations:
(1) Nasdaq notes that a riskless principal trade generally is
one that involves a conditional order rather than one immediately
executable by the firm as principal. This condition may involve a
customer order, the execution of which is dependent upon finding the
other side, or a transaction dependent upon the execution of a part
of the order placed with another firm or market; and
(2) Nasdaq notes that, in certain situations, a ``marker'' order
may be a riskless principal trade. Marker orders, usually of nominal
size, are used to trigger obligations to other orders the firm may
be holding. Under the interpretation of a riskless principal trade,
a marker order appears to merit riskless principal treatment for the
size of the marker order. Nasdaq, however, believes that, given the
purpose for which marker orders are used, the order need not be
broken into two separate components to distinguish between a risk
and riskless portion, provided, however, that the marker order is no
larger than 10% of the size of an execution or group of executions
that it would trigger. Nasdaq believes that the nominal size of the
marker order does not, to any material extent, change the overall
risk profile of the order.
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Nasdaq believes that the exception applicable to non-market makers
(which
[[Page 38227]]
treats riskless principal trades as one trade for reporting purposes)
should be extended to market makers in exchange-listed stocks. For
example, if a market maker in an exchange-listed security does not
assume a risk position on an Intermarket Trading System (``ITS'')
commitment sent to another market, the market maker should not be
reprinting it in its own market when it receives confirmation of an
execution on the commitment. The fact that the firm is a market maker
is irrelevant. Nasdaq also believes that this analysis should apply to
transactions that result from orders sent to the floor even when sent
outside of the ITS linkage (e.g., through a floor broker or other
automated execution system of the exchange).
III. Discussion
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
applicable to the NASD and, in particular, with the requirements of
Section 15A(b)(6) of the Act.\12\ Section 15A(b)(6) requires that the
rules of a registered 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. Most specifically, the
Commission finds that this rule change will result in more accurate and
reliable, information regarding last sale transaction reports
consistent with the requirements of Section 15A(b)(6).
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\12\ 15 U.S.C. 78o-3(b)(6).
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The Commission finds that requiring a separate identifier to
accurately reflect ``out of sequence'' trades would provide better
information to market participants and the public as to what these
trades actually represent. The new modifier would inform the market
that the price of the trade is based on an earlier reference point and
may bear no relationship to the current market price. In addition, the
Commission finds that the removal of the 10,000 share limitation for
bunching on the first day of secondary market trading following an IPO
will facilitate more efficient and timely reporting of large numbers of
trades in the IP aftermarket.
The Commission agrees with the NASD that, for reporting purposes,
it is appropriate to treat riskless principal trades as one trade. The
Commission finds that discontinuing the distinction between market
makers and non-market makers in the context of exchange-listed
securities, and thus extending the riskless principal exception to
market makers, will provide more accurate trade reporting.\13\ The
Commission believes that because this proposal would ensure that only
one trade report results for transactions that are clearly one trade,
transaction reports will be more accurate.
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\13\ The Commission recently approved a proposed rule change to
allow an NASD member acting as a market maker to report riskless
principal transactions in Nasdaq securities as one transaction. See
Securities Exchange Act Release No. 41208 (March 24, 1999), 64 FR
15386 (March 31, 1999).
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The Commission notes that Rule 10b-10 under the Act \14\ requires a
broker-dealer acting as market maker in a riskless principal
transaction in an exchange-listed security to confirm to its customer
the reported trade price, the price to the customer in the transaction,
and the difference, if any, between the reported trade price and the
price to the customer. Under Rule 10b-10, the broker-dealer is required
to report, as the reported trade price, the price at which the security
was reported to the tape when the member purchased the security for, or
sold the security to, its customer. This requirement remains in effect
regardless of the fact that there is no corresponding requirement in
the NASD rules to report that second leg of a riskless principal
transaction to the tape. For example, when a market maker receives an
execution report from an exchange in a listed security, through ITS or
otherwise, and completes a riskless principal transaction by filling a
customer order, the market maker must conform to its customer the price
of the transaction that was reported to the CTA by the exchange and any
mark-up or mark-down charged by the market maker. A failure by a
broker-dealer to confirm to its customer the price of the security that
was reported to the tape would constitute a violation of Rule 10b-10.
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\14\ 17 CFR 240.10b-10.
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The Commission finds good cause for approving Amendment No. 2 to
the proposed rule change prior to the thirtieth day after the date of
publication of notice of filing of this amendment in the Federal
Register. Amendment No. 2 asks only that the Commission approve all of
the proposed changes in the original filing and Amendment No.1, with
the exception of the proposed ECN trade reporting requirements.
Furthermore, Amendment No. 2 states that the NASD will submit a
separate response to the Commission regarding the Instinet comment
letter addressing the proposed ECN trade reporting requirements. The
Commission does not believe that Amendment No. 2 raises any new
regulatory issues. The original proposal and Amendment No. 1 were
published for the full 21-day comment period, and the Commission
received no comments on the proposal other than the Instinet letter
addressing ECN trade reporting requirements. Accordingly, the
Commission finds good cause, consistent with sections 15A(b)(6) \15\
and 19(b) \16\ of the Act, to approve Amendment No. 2 to the proposal
on an accelerated basis.
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\15\ 15 U.S.C. 78o-3(b)(6).
\16\ 15 U.S.C. 78(b).
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IV. Conclusion
For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with the Act and the rules and regulations
thereunder applicable to the NASD, and, in particular, section
15A(b)(6). In addition, in granting a partial approval of this rule
change, the Commission notes that it has also considered the proposed
rule's impact on efficiency, competition, and capital formation.\17\
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\17\ 15 U.S.C. 78c(f).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\18\ that the proposed rule change (SR-NASD-98-08) be, and hereby
is, approved with the exception of the proposed amendment to Rule 4623
``Electronic Communication Networks.''
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\18\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-18111 Filed 7-14-99; 8:45 am]
BILLING CODE 8010-01-M
