[Federal Register Volume 61, Number 152 (Tuesday, August 6, 1996)]
[Notices]
[Pages 40869-40870]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19902]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37502; File No. SR-NASD-96-22]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Order Granting Accelerated Temporary Approval of
Proposed Rule Change To Extend Certain SOES Rules Through January 31,
1997
July 30, 1996.
I. Introduction
On June 10, 1996, 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 proposes to extend
through January 31, 1997 certain changes to The Nasdaq Stock Market,
Inc.'s (``Nasdaq'') Small Order Execution System (``SOES'') that were
originally implemented in January 1994 for a one-year pilot period
(``January 1994 Amended SOES Rules'').\3\ These rules subsequently were
modified in January 1995 (``January 1995 Amended SOES Rules''),\4\
further modified in March 1995 (``March 1995 Amended SOES Rules''),\5\
extended in September 1995 (``September 1995 Amended SOES Rules''),\6\
and further extended in January 1996 (``January 1996 Amended SOES
Rules'').\7\ The January 1996 Amended SOES Rules are scheduled to
expire on July 31, 1996, and the NASD seeks to extend these rules until
January 31, 1997. Without further Commission action, the SOES rules
would revert to those in effect prior to January 1994.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 33377 (Dec. 23, 1993),
58 FR 69419 (Dec. 30, 1993) (approving the Amended SOES Rules on a
one-year pilot basis effective January 7, 1994). See also Securities
Exchange Act Release No. 33424 (Jan. 5, 1994) (order denying stay
and granting interim stay through January 25, 1994) and Securities
Exchange Act Release No. 33635 (Feb. 17, 1994) (order denying
renewed application for stay).
The changes contained in the January 1994 Amended SOES Rules
were as follows:
(1) A reduction in the maximum size order eligible for SOES
execution from 1,000 shares to 500 shares;
(2) A reduction in the minimum exposure limit for
``unpreferenced'' SOES orders from five times the maximum order size
to two times the maximum order size, and the elimination of exposure
limits for ``preferenced'' orders (``SOES Minimum Exposure Limit
Rule'');
(3) An automated function for updating market maker quotations
when the market maker's exposure limit has been exhausted (market
makers using this update function may establish an exposure limit
equal to the maximum order size for that security) (``SOES Automated
Quotation Update Feature''); and
(4) The prohibition of short sale transactions through SOES.
\4\ Securities Exchange Act Release No. 35275 (Jan. 25, 1995) 60
FR 6327 (Feb. 1, 1995).
The January 1995 Amended SOES Rules excluded the feature of the
January 1994 Amended SOES Rules relating to the prohibition of short
sale transactions through SOES.
\5\ Securities Exchange Act Release No. 35535 (Mar. 27, 1995),
60 FR 16690 (Mar. 31, 1995).
The March 1995 Amended SOES Rules excluded the following two
features of the January 1994 Amended SOES Rules:
(1) A reduction in the maximum size order eligible for SOES
execution from 1,000 shares to 500 shares; and
(2) The prohibition of short sales transactions through SOES.
(This prohibition also was excluded from the January 1995 Amended
SOES Rules.) See supra, note 4.
\6\ Securities Exchange Act Release No. 36311 (September 29,
1995), 60 FR 52438 (October 6, 1995). The September 1995 Amended
SOES Rules were identical to the March 1995 Amended SOES Rules, and
extended the effectiveness of such rules until January 31, 1996.
\7\ Securities Exchange Act Release No. 36795 (January 31,
1996), 61 FR 4504 (February 6, 1996). The January 1996 Amended SOES
Rules were identical to the September 1995 and March 1995 Amended
SOES Rules, and extended the effectiveness of such rules until July
31, 1996.
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Notice of the proposed rule change appeared in the Federal Register
on July 5, 1996.\8\ No comments were received in response to the
Commission release. For the reasons discussed below, this order
approves the proposed rule change until January 31, 1997.
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\8\ Securities Exchange Act Release No. 37377 (June 27, 1996),
61 FR 35284 (July 5, 1996).
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II. Description of the Current and Prior Proposals
The NASD proposed to extend until January 31, 1997 the January 1996
Amended SOES Rules. Specifically, the NASD proposes to extend until
January 31, 1997 the SOES Minimum Exposure Limit Rule and the SOES
Automated Quotation Update Feature.
III. Discussion
The Commission must approve a proposed NASD rule change if it finds
that the proposal is consistent with the requirements of the Act and
the rules and regulations thereunder that govern the NASD.\9\ In
evaluating a given proposal, the Commission examines the record before
it and relevant factors and information.\10\ The Commission believes
[[Page 40870]]
that approval of the proposal through January 31, 1997 meets the above
standards. Specifically, the Commission believes that the current
minimum exposure limit and automated quotation update feature are
appropriate while the Commission considers NAqcess, the NASD's latest
proposal for handling small orders from retail customers.\11\
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\9\ 15 U.S.C. Sec. 78s(b). The Commission's statutory role is
limited to evaluating the rules as proposed against the statutory
standards. See S. Rep. No. 75, 94th Cong., 1st. Sess. 13 (1975).
\10\ In the Securities Acts Amendments of 1975, Congress
directed the Commission to use its authority under the Act,
including its authority to approve SRO rule changes, to foster the
establishment of a national market system and promote the goals of
economically efficient securities transactions, fair competition,
and best execution. Congress granted the Commission ``broad,
discretionary powers'' and ``maximum flexibility'' to develop a
national market system and to carry out these objectives.
Furthermore, Congress gave the Commission ``the power to classify
markets, firms, and securities in any manner it deems necessary or
appropriate in the public interest or for the protection of
investors and to facilitate the development of subsystems within the
national market system.'' S. Rep. No. 75, 94th Cong., 1st Sess. 7
(1975).
\11\ See Securities Exchange Act Release Nos. 36548 (December 1,
1995), 60 FR 63092 (December 8, 1995); and 37302 (June 11, 1996) 61
FR 3154 (June 20, 1996). The comment period for the NAqcess
proposal, as amended, closed on July 26, 1996, and to date the
Commission has received approximately 600 comments on the proposal.
The Commission's evaluation of the NAqcess proposal may affect its
evaluation of any future submissions relating to SOES.
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The Commission believes that a sufficient basis exists for
approving the NASD's proposal to continue the current operation of
SOES.\12\ The system provided and continues to provide retail
investors, through automation, an enhanced opportunity to obtain
execution of orders in size up to 1,000 shares and, accordingly, has
improved access to the Nasdaq market.
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\12\ In reaching this conclusion, the Commission does not rely
on the data or economic analysis submitted by the NASD. See
Securities Exchange Act Release Nos. 35275 (Jan. 25, 1995), 60 FR
6327 (Feb. 1, 1995); 35535 (March 27, 1995), 60 FR 16690 (March 31,
1995); 36311 (September 29, 1995), 60 FR 52438 (October 6, 1995);
and 36795 (January 31, 1996) 61 FR 4504 (February 6, 1996).
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In addition, as a result of the March 1995 Amended SOES Rules, the
SOES minimum exposure limit was increased from 1,000 shares to 2,000
shares. Moreover, the March 1995 Amended SOES Rules continued the
methodology for calculating a market maker's outstanding exposure limit
that excluded orders executed pursuant to a preferencing arrangement.
Under the SOES Rules prior to the January 1994 Amended SOES Rules, both
preferenced and unpreferenced orders were considered when calculating a
market maker's remaining exposure limit. Thus, in relative terms, the
2,000 share exposure limit potentially provides greater liquidity under
certain conditions \13\ compared to the pre-January 1994 Amended SOES
Rules' 5,000 share minimum exposure limit.
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\13\ That is, depending upon the mix of preferenced and
unpreferenced orders.
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The Commission continues to believe that the current operation of
SOES has eliminated economically significant restrictions imposed on
order entry firms by the January 1994 Amended SOES Rules. The
Commission believes that while the proposal does not restore the pre-
January 1994 Amended SOES Rules' minimum exposure limit, it provides
customers fair access to the Nasdaq market and reasonable assurance of
timely executions. In this regard, the maximum order size is consistent
with the Firm Quote Rule \14\ and the size requirement prescribed under
the NASD rules governing the character of market maker quotations.\15\
Moreover, a market maker's minimum exposure limit for unpreferenced
orders is double its minimum size requirement prescribed under these
rules.
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\14\ 17 CFR 240.11Ac1-1(c).
\15\ NASD Manual, Schedules to the By-Laws, Schedule D, Part V,
Sec. 2(a), (CCH) para. 1819.
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The Commission also believes that extending the automated update
function is consistent with the Act and, in particular, the Firm Quote
Rule.\16\ The update function provides market makers the opportunity to
update their quotations automatically after executions through SOES;
under the Commission's Firm Quote Rule, market makers are entitled to
update their quotations following an execution and prior to accepting a
second order at their published quotes.\17\
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\16\ The SOES automated update function is also consistent with
the NASD's autoquote policy which generally prohibits autoquote
systems, but allows automatic updating of quotations ``when the
update is in response to an execution in the security by that
firm.'' NASD Manual, Schedules to the By-Laws, Schedule D, Part V,
Sec. 2 (CCH) para. 1819.
\17\ The Firm Quote Rule requires market makers to execute
orders at prices at least as favorable as their quoted prices. 17
CFR 11Ac1-1(c)(2). The Rule also allows market makers a reasonable
period of time to update their quotations following an execution;
allows market makers to reject an order if they have communicated a
quotation update to their exchange or association; and provides for
a size limitation on liability at a given quote. 17 CFR 240.11Ac1-
1(c)(3)(ii). See also, Securities Exchange Act Release No. 14415
(Jan. 26, 1978), 43 FR 4342 (Feb. 1, 1978).
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IV. Conclusion
As indicated above, the Commission has determined to approve the
extension of the SOES Minimum Exposure Limit Rule and the SOES
Automated Quotation Update Feature through January 31, 1997. In light
of the balance of factors described above, the Commission believes
extension of the reduction in the minimum exposure limit, the
limitation of the exposure limit to unpreferenced orders, and the
provision for an automatic quotation update feature are consistent with
the Act.
The Commission, in the exercise of the authority delegated to it by
Congress, and in light of its experience regulating securities markets
and market participants, has determined that approval of these changes
to the SOES Rules until January 31, 1997 is consistent with maintaining
investor protection and fair and orderly markets, and that these goals,
on balance, outweigh possible anti-competitive effects on order entry
firms and their customers.
Accordingly, the Commission finds that the rule change is
consistent with the Act and the rules and regulations thereunder
applicable to the NASD and, in particular, Sections 15A(b)(6),
15A(b)(9), and 15A(b)(11).
The Commission finds good cause for approving the proposed rule
change prior to the 30th day after the date of publication of notice of
filing thereof in the Federal Register. In addition to the reasons
discussed in this order, the Commission believes that accelerated
approval of the NASD's proposal is appropriate given the fact that the
proposal is an extension of the amended SOES Rules that have been in
effect since March 1995; that the information presently before the
Commission leads to the conclusion that the current minimum exposure
limit and automated quotation update function are appropriate features
for SOES while the Commission considers the NASD's NAqcess proposal;
and that without Commission action on or before July 31, 1996, the SOES
rules would revert to those in effect prior to January 1994, resulting
in a temporary lapse in continuity.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the instant rule change SR-NASD-96-22 be, and hereby is, approved,
effective August 1, 1996 through January 31, 1997.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-19902 Filed 8-5-96; 8:45 am]
BILLING CODE 8010-01-M
