[Federal Register Volume 63, Number 130 (Wednesday, July 8, 1998)]
[Notices]
[Pages 36979-36981]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-18053]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40151; File No. S7-24-89]
Joint Industry Plan; Solicitation of Comments and Order Approving
Request to Extend Temporary Effectiveness of Reporting Plan for Nasdaq/
National Market Securities Traded on an Exchange on an Unlisted or
Listed Basis, Submitted by the National Association of Securities
Dealers, Inc., the Boston Stock Exchange, Inc., the Chicago Stock
Exchange, Inc., and the Philadelphia Stock Exchange, Inc.
July 1, 1998.
I. Introduction
On June 30, 1998, the National Association of Securities Dealers,
Inc. (``NASD''), on behalf of itself and the Boston Stock Exchange,
Inc. (``BSE''), the Chicago Stock Exchange, Inc. (``CHX''), and the
Philadelphia Stock Exchange, Inc. (``Phlx'') submitted to the
Securities and Exchange Commission (``Commission'' or ``SEC'') a
proposal to extend the operation of a joint transaction reporting plan
(``Plan'') \1\ for Nasdaq/National Market (``Nasdaq/NM'') (previously
referred to as Nasdaq/NMS) securities traded on an exchange on an
unlisted or listed basis.\2\ The proposal would extend the
effectiveness of the Plan, as amended by Revised Amendment No. 9, as
defined in footnote 3, through December 31, 1998.\3\ The Commission
also is extending certain exemptive relief as described below. The June
1998 Extension Request also requests that the Commission approve the
Plan, as amended, on a permanent basis on or before December 31, 1998.
During the six-month extension of the Plan, the Commission will
consider whether to approve the proposed Plan, as amended, on a
permanent basis.
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\1\ See Letter from Robert E. Aber, Vice President and General
Counsel, Nasdaq, to Jonathan G. Katz, Secretary, Commission, dated
June 30, 1998 (``June 1998 Extension Request''). The June 1998
Extension Request also requests the Commission continue to provide
exemptive relief, previously granted in connection with the Plan on
a temporary basis, from Rules 11Ac1-2 and 11Aa3-1 under the
Securities Exchange Act of 1934, as amended (``Act''). 15 U.S.C. 78a
et seq. The signatories to the Plan are the Participants for
purposes of this release, however, the BSE joined the Plan as a
``limited participant'' and reports quotation information and
transaction reports only in Nasdaq/NM securities listed on the BSE.
Originally, the American Stock Exchange, Inc. (``Amex'') was a
Participant but withdrew its participation from the Plan in August
1994.
\2\ Section 12 of the Act generally requires an exchange to
trade only those securities that the exchange lists, except that
Section 12(f) of the Act permits unlisted trading privileges
(``UTP'') under certain circumstances. For example, Section 12(f),
among other things, permits exchanges to trade certain securities
that are traded over-the-counter (``OTC/UTP''), but only pursuant to
a Commission order or rule. The present order fulfills this Section
12(f) requirement. For a more complete discussion of the Section
12(f) requirement, see November 1995 Extension Order, infra note 8.
\3\ On March 18, 1996, the Commission solicited comment on a
revenue sharing agreement among the Participants. See March 1996
Extension Order, infra note 8. Thereafter the Participants submitted
certain technical revisions to the revenue sharing agreement
(`'Revised Amendment No. 9''). See Letter from Robert E. Aber, Vice
President and General Counsel, Nasdaq, to Jonathan G. Katz,
Secretary, Commission, dated September 13, 1996. See also September
1996 Extension Order, infra note 8.
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II. Background
The Plan governs the collection, consolidation and dissemination of
quotation and transaction information for Nasdaq/NM securities listed
on an exchange or traded on an exchange pursuant to a grant of UTP.\4\
The Commission approved trading pursuant to the Plan on a one-year
pilot basis, with the pilot period to commence when transaction
reporting pursuant to the Plan commenced. The Commission originally
approved the Plan on June 26, 1990.\5\ Accordingly, the pilot period
commenced on July 12, 1993 and was scheduled to expire on July 12,
1994.\6\ The Plan has since been in operation on an extended pilot
basis.\7\
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\4\ See Section 12(f)(2) of the Act.
\5\ See Securities Exchange Act Release No. 28146 (June 26,
1990), 55 FR 27917 (July 6, 1990) (``1990 Plan Approval Order'').
\6\ See letter from David T. Rusoff, Foley & Lardner, to Betsy
Prout, Division of Market Regulation (``Division''), SEC, dated May
9, 1994.
\7\ See Securities Exchange Act Release No. 34371 (July 13,
1994), 59 FR 37103 (July 20, 1994); Securities Exchange Act Release
No. 35221 (January 11, 1995), 60 FR 3886 (January 19, 1995);
Securities Exchange Act Release No. 36102 (August 14, 1995), 60 FR
43626 (August 22, 1995); Securities Exchange Act Release No. 36226
(September 13, 1995), 60 FR 49029 (September 21, 1995); Securities
Exchange Act Release No. 36368 (October 13, 1995), 60 FR 54091
(October 19, 1995); Securities Exchange Act Release No. 36481
(November 13, 1995), 60 FR 58119 (November 24, 1995) (``November
1995 Extension Order''); Securities Exchange Act Release No. 36589
(December 13, 1995), 60 FR 65696 (December 20); Securities Exchange
Act Release No. 36650 (December 28, 1995), 61 FR 358 (January 4,
1996); Securities Exchange Act Release No. 36934 (March 6, 1996), 61
FR 10408 (March 13, 1996); Securities Exchange Act Release No. 36985
(March 18, 1996), 61 FR 12122 (March 25, 1996) (``March 1996
Extension Order''); Securities Exchange Act Release No. 37689
(September 16, 1996), 61 FR 50058 (September 24, 1996) (``September
1996 Extension Order''); Securities Exchange Act Release No. 37772
(October 1, 1996), 61 FR 52980 (October 9, 1996); Securities
Exchange Act Release No. 38457 (March 31, 1997), 62 FR 16880 (April
8, 1997); Securities Exchange Act Release No. 38794 (June 30, 1997)
62 FR 36586 (July 8, 1997) (``June 1997 Extension Order''); and
Securities Exchange Act Release No. 39505 (December 31, 1997) 63 FR
1515 (``December 1997 Extension Order'').
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III. Description of the Plan
The Plan provides for the collection from Plan Participants and the
consolidation and dissemination to vendors, subscribers and others of
quotation and transaction information in ``eligible securities.'' \8\
The Plan contains various provisions concerning its operation,
including: Implementation of the Plan; Manner of Collecting,
Processing, Sequencing, Making Available and Disseminating Last Sale
Information; Reporting Requirements (including hours of operation);
Standards and Methods of Ensuring Promptness, Accuracy and Completeness
of Transaction Reports; Terms and Conditions Access; Description of
Operation of Facility Contemplated by the Plan; Method and Frequency of
Processor Evaluation; Written Understandings of Agreements Relating to
Interpretation of, or Participation in, the Plan; Calculation of the
Best Bid and Offer (``BBO''); Dispute Resolution; and Method of
Determination and Imposition, and Amount of Fees and Charges.\9\
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\8\ The Plan defines ``eligible security'' as any Nasdaq/NM
security as to which unlisted trading privileges have been granted
to a national securities exchange pursuant to Section 12(f) of the
Act or that is listed on a national securities exchange.
\9\ The full text of the Plan, as well as a ``Concept Paper''
describing the requirements of the Plan, are contained in the
original filing which is available for inspection and copying in the
Commission's public reference room.
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IV. Exemptive Relief
In conjunction with the Plan, on a temporary basis scheduled to
expire on June 30, 1998, the Commission granted an exemption to vendors
from Rule 11Ac1-2 under the Act regarding the calculation of the BBO
\10\ and granted the BSE an exemption from the provision of Rule 11Aa3-
1 under the Act that requires transaction reporting plans to include
market identifiers for transaction reports and last sale data. As
discussed further below in the Summary of Comments, the Participants
ask in the June 1998 Extension Request that the Commission grant an
extension of the exemptive relief described above to vendors until the
BBO calculation issue is resolved. Additionally, in the June 1998
Extension Request, the Participants also request that the Commission
grant an extension of the exemptive relief described above to the BSE
for as long as the BSE is a Limited Participant under the Plan.
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\10\ Rule 11Ac1-2 under the Act requires that the best bid or
best offer be computed on a price/size/time algorithm in certain
circumstances. Specifically, Rule 11Ac1-2 under the Act provides
that ``in the event two or more reporting market centers make
available identical bids or offers for a reported security, the best
bid or offer . . . shall be computed by ranking all such identical
bids or offers . . . first by size . . . then by time.'' The
exemption permits vendors to display the BBO for Nasdaq securities
subject to the Plan on a price/time/size basis.
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V. Summary of Comments
In the December 1997 Extension Order, the Commission requested
comment on the following issues: Whether the BBO calculation for
securities traded pursuant to the Plan should be based on a price/time/
size methodology or a price/size/time methodology; whether there is a
need for a trade through rule, and the impact of the CHX's intended use
of BRASS, as defined below.
With respect to the BBO calculation issue, the Nasdaq Board
approved a recommendation to modify the methodology for calculating the
BBO on Nasdaq in order to prioritize quotes based on a price/size/time
algorithm instead of the current price/time/size algorithm, provided
that Nasdaq market makers are subject to a minimum quote size
requirement of 100 shares for at least 1,000 Nasdaq securities. In
furtherance of this goal, on October 29, 1997, the Commission approved
a NASD proposal to extend and expand the ``Actual Size Rule'' \11\ to a
total of 150 securities from 100 securities.\12\ More recently, the
NASD proposed to expand the Actual Size Rule to cover all Nasdaq
securities and to implement this rule on a permanent basis.\13\ In
addition, the NASD submitted a proposed rule change to establish an
integrated order delivery and execution system for directed orders and
non-directed orders.\14\ The proposed new system, if approved would
replace the NASD's SOES and SelectNet systems and would have an impact
on the Plan (e.g., the manner in which Plan participants interact with
orders and quotes displayed in Nasdaq).\15\ As a result, the NASD and
the Plan participants request an extension of the Plan until December
31, 1998 to afford the Plan participants time to resolve the BBO
issue.\16\
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\11\ See Securities Exchange Act Release No. 39285 (October 29,
1997), 62 FR 59932 (November 5, 1997).
\12\ See Securities Exchange Act Release No. 38513 (April 15,
1997), 62 FR 19369 (April 21, 1997). Under the Actual Size Rule,
market makers in certain Nasdaq securities are subject to a minimum
quotation size requirement of 100 shares instead of the applicable
small order execution system (``SOES'') tier size for that security.
\13\ See Securities Exchange Act Release No. 39760 (March 16,
1998), 63 FR 13894 (March 23, 1998).
\14\See Securities Exchange Act Release No. 39718 (March 4,
1998), 63 FR 12124 (March 12, 1998). (``IODES Proposal'') Directed
orders are those that an order-entry firm chooses to send to a
specific Nasdaq market maker, electronic communications network
(``ECN'') or UTP exchange for delivery and execution. Non-directed
orders are those that are not sent to a particular Nasdaq market
maker or ECN. In other words, when the broker-dealer entering the
order does not specify the particular Nasdaq market maker, ECN or
UTP exchange it wants to access, the order will be sent to the next
available executing participant quoting at the national BBO.
\15\ Portions of the proposed new system are contingent on the
approval of the request to implement the Actual Size Rule for all
Nasdaq securities. The proposal does, however, contain alternative
approaches if the Actual Size Rule is not approved for all Nasdaq
securities. See IODES Proposal, supra note 14.
\16\ The BSE submitted comments to the SEC concerning the
proposed new order delivery and execution system's impact on the
Plan, preservation of the BSE's rights concerning issues still not
agreed upon or specifically covered by the Plan (specifically the
need for a trade-through rule). See Comment letter No. 1511, SR-
NASD-98-17 from Karen A. Aluise, Vice President, BSE to Jonathan G.
Katz, Secretary, SEC dated May 14, 1998. In addition, the CHX
submitted comments to the SEC concerning the IODES proposal and
encouraged the Commission to grant permanent approval of the Plan.
See Comment letter No. 1160, SR-NASD-98-17 from Patricia L. Levy,
Senior Vice President and General Counsel, CHX to Jonathan G. Katz,
Secretary, SEC dated May 13, 1998.
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With respect to the need for a trade through rule, the NASD
continues to maintain in the June 1998 Extension Request that it would
be more appropriate to address this issue once the issue of electronic
access to Nasdaq market makers' quotes has been resolved.
With regard to the CHX's use of BRASS, by the end of 1998 the CHX
intends to replace its existing trade support system for accessing
securities subject to the Plan and begin using BRASS, developed by
Automated Securities Clearance, Limited (``ASC''). BRASS is a trade
support and order routing system which offers subscribers, generally
broker-dealers, software and hardware to enable them to perform various
functions. ASC grants its subscribers a license to operate the BRASS
software through a customized computer terminal purchased from ASC or
by running the BRASS software on their own terminals. The CHX has
represented that ASC has specifically customized BRASS to meet the
special
[[Page 36981]]
needs of the CHX. Among other things, Nasdaq market makers that already
subscribe to BRASS will be able to route OTC/UTP orders to specialists
on the CHX floor through a SelectNet linkage with BRASS workstations on
the CHX floor. Conversely, CHX specialists will be able to route orders
into SelectNet through their BRASS workstations.\17\ The Commission
notes that ASC will be subject to the Commission's inspection and
examination procedures with regards to the specific customized BRASS
system that ASC will provide to the CHX because ASC will be operating a
facility of an exchange.
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\17\See December 1997 Extension Request and Letter from George
T. Simon, Foley & Lardner to Howard L. Kramer, Senior Associate
Director, Division, SEC, dated December 12, 1997 (``CHX Letter'').
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The Commission continues to solicit comment regarding the BBO
calculation, the trade through rule and the CHX's use of the BRASS
system as well as issues presented by changes occurring in the market
place.
VI. Discussion
The Commission finds that an extension of temporary approval of the
operation of the Plan, as amended, through December 31, 1998, is
appropriate and in furtherance of Section 11A of the Act. The
Commission believes that such extension will provide the Participants
with additional time to seek Commission approval of pending proposals
concerning the BBO calculation \18\ and to begin to make reasonable
proposals concerning a trade through rule to facilitate the trading of
OTC securities pursuant to UTP. In addition, the Commission believes
that the extension will afford the CHX adequate time to test the BRASS
system, address any operating issues concerning its use and implement
it. While the Commission continues to solicit comment on these matters,
the Commission believes that these matters should be addressed directly
by the Participants on or before September 30, 1998 so that the
Commission may have ample time to determine whether to approve the Plan
on a permanent basis by December 31, 1998.
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\18\ See e.g., Actual Size Rule Release, supra note 13 and IODES
Proposal, supra note 14.
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The Commission also finds that it is appropriate to extend the
exemptive relief from Rule 11Ac1-2 under the Act until the earlier of
December 31, 1998 or until such time as the calculation methodology for
the BBO is based on a price/size/time algorithm pursuant to a mutual
agreement among the Participants approved by the Commission. The
Commission further finds that it is appropriate to extend the exemptive
relief from Rule 11Aa3-1 under the Act, that requires transaction
reporting plans to include market identifiers for transaction reports
and last sale data, to the BSE through December 31, 1998. The
Commission believes that the extensions of the exemptive relief
provided to vendors and the BSE, respectively, are consistent with the
Act, the Rules thereunder, and specifically with the objectives set
forth in Sections 12(f) and 11A of the Act and in Rules 11Aa3-1 and
11Aa3-2 thereunder.
VII. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the extension, including whether the extension is
consistent with the Act. Persons making written submissions should file
six copies thereof with the Secretary, Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of
the submission, all subsequent amendments, all written statements with
respect to the proposed plan amendment that are filed with the
Commission and all written communications relating to the proposed plan
amendment 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 at the
Commission's Public Reference Room. All submissions should refer to
File No. S7-24-89 and should be submitted by [insert date 21 days from
date of publication].
VIII. Conclusion
It is therefore ordered, pursuant to Sections 12(f) and 11A and the
Act and paragraph (c)(2) of Rule 11Aa3-2 thereunder, that the
Participants' request to extend the effectiveness of the Joint
Transaction Reporting Plan, as amended, for Nasdaq/National Market
securities traded on an exchange on an unlisted or listed basis through
December 31, 1998, and certain exemptive relief until December 31,
1998, is approved.
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)(29).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-18053 Filed 7-7-98; 8:45 am]
BILLING CODE 8010-01-M
