03-18901. Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change by the National Association of Securities Dealers, Inc. to Temporarily Increase the Non-Directed Order Maximum Response Time for Order-...

July 17, 2003.

Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) ^[1] and Rule 19b-4 thereunder,^[2] notice is hereby given that on July 10, 2003, the National Association of Securities Dealers, Inc. (“NASD”), through its subsidiary, The Nasdaq Stock Market, Inc. (“Nasdaq”), filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I, II and III below, which Items have been prepared by Nasdaq. Nasdaq has designated the proposed rule change as constituting a “non-controversial” rule change under section 19(b)(3)(A)(iii) of the Act,^[3] and paragraph (f)(6) of Rule 19b-4 under the Act,^[4] which renders the proposal effective upon receipt of this filing by the Commission.^[5] 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

Nasdaq proposes to increase, from 7 seconds to 30 seconds, the maximum time allowed for Nasdaq's National Market Execution System (“NNMS”) Order-Delivery Electronic Communications Networks (“ECNs”) to respond to non-directed orders sent to them by Nasdaq's SuperMontage system (“SuperMontage”). Below is the text of the proposed rule change. Proposed new language is underlined; proposed deletions are in brackets.

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4710. Participant Obligations in NNMS

(a) No Change.

(b) Non-Directed Orders

(1) No Change.

(A) through (B) No Change.

(C) Decrementation Procedures—The size of a Quote/Order displayed in the Nasdaq Order Display Facility and/or the Nasdaq Quotation Montage will be decremented upon the delivery of a Liability Order or the delivery of an execution of a Non-Directed Order or Preferenced Order in an amount equal to the system-delivered order or execution.

(i) No Change.

(ii) If an NNMS Order-Delivery ECN declines or partially fills a Non-Directed Order without immediately transmitting to Nasdaq a revised Attributable Quote/Order that is at a price inferior to the previous price, or if an NNMS Order-Delivery ECN fails to respond in any manner within 30 [7] seconds of order delivery, the system will cancel the delivered order and send the order (or remaining portion thereof) back into the system for immediate delivery to the next Quoting Market Participant in queue. The system then will zero out the ECN's Quote/Orders at that price level on that side of the market, and the ECN's quote on that side of the market will remain at zero until the ECN transmits to Nasdaq a revised Attributable Quote/Order. If both the bid and offer are zeroed out, the ECN will be placed into an excused withdrawal state until the ECN transmits to Nasdaq a revised Attributable Quote/Order.

(iii) through (iv) No Change.

(D) No Change.

(1) through (8) No Change.

(c) through (e) No Change.

* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, Nasdaq 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. Nasdaq 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

1. Purpose

On June 24, 2003, the Commission approved a proposed rule change in which Nasdaq reduced, from 30 seconds to 7 seconds, the maximum time allowed for NNMS Order-Delivery ECNs to respond to non-directed orders sent to them by SuperMontage (“the original proposal”).^[6] Under the original proposal, if an Order-Delivery ECN had failed to respond within 7 seconds, the delivered non-directed order would be canceled by SuperMontage and forwarded to the next NNMS Quoting Market Participant in queue for execution, and the ECN's quote at the price level on the side of the market to which the order was delivered would be reduced to zero.^[7]

Since the approval of the original proposal, and prior to its implementation, Nasdaq has become aware of internal system processing queues that, in certain circumstances, do not allow adequate time for ECNs to receive and respond to SuperMontage non-directed orders using a 7-second standard. As a result, Nasdaq has determined to temporarily delay implementation of the 7-second maximum response time and revert back to previous 30-second maximum response time. Nasdaq represents that it is currently introducing system enhancements that are expected to eliminate the queuing problem and will submit a proposed rule change to the Commission seeking to implement a reduced ECN non-directed order response time parameter as soon as practicable.

2. Statutory Basis

Nasdaq believes that the proposed rule change is consistent with the provisions of section 15A of the Act ^[8] in general, and with section 15A(b)(6) of the Act ^[9] in particular, in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, 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.

B. Self-Regulatory Organization's Statement on Burden on Competition

Nasdaq does not believe that the proposed rule change will 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

Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action

Because the proposed rule change: (i) Does not significantly affect the protection of investors or the public interest; (ii) does not impose any significant burden on competition; and (iii) does not become operative for 30 days (or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest) after the date of the filing, the proposed rule change has become effective pursuant to section 19(b)(3)(A) of the Act ^[10] and Rule 19b-4(f)(6) thereunder.^[11] At any time within 60 days of the filing of such proposed rule change, the Commission may summarily abrogate such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act.

The Commission has decided, consistent with the protection of investors and the public interest, to waive the five-day pre-filing notice and 30-day operative date to allow Nasdaq to immediately provide for a 30-second maximum time period for Order-Delivery ECNs to respond to non-directed orders sent to them by SuperMontage.^[12] The Commission believes that this should allow ECNs to continue to participate in SuperMontage without their quotes being zeroed out as a result of system queues.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 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 Nasdaq. All submissions should refer to file number SR-NASD-2003-108, and should be submitted by August 14, 2003.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.¹³

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  17 CFR 240.19b-4.

3.  15 U.S.C. 78s(b)(3)(A)(iii).

4.  17 CFR 240.19b-4(f)(6).

5.  The NASD has requested that the Commission waive both the five-day pre-filing notification requirement and the 30-day operative delay, as specified in Rule 19b-4(f)(6)(iii). 17 CFR 240.19b-4(f)(6)(iii).

6.  See Securities Exchange Act Release No. 48078, 68 FR 39171 (July 1, 2003) (SR-NASD-2003-72).

7.  Nasdaq represents that the ECN's quote on that side of the market will remain at zero until the ECN transmits to Nasdaq a revised Attributable Quote/Order. If both the bid and offer are zeroed out, the ECN will be placed into an excused withdrawal state until the ECN transmits to Nasdaq a revised Attributable Quote/Order.

8.  15 U.S.C. 78 o-3.

9.  15 U.S.C. 78 o-3(6).

10.  15 U.S.C. 78s(b)(3)(A).

11.  17 CFR 240.19b-4(f)(6).

12.  For purposes only of accelerating the operative date of this proposal, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

13.  17 CFR 200.30-3(a)(12).