[Federal Register Volume 64, Number 189 (Thursday, September 30, 1999)]
[Notices]
[Pages 52817-52819]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-25383]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41907; File No. SR-NASD-99-32]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the National
Association of Securities Dealers, Inc. Relating to Firm Quotation
Requirements
September 23, 1999.
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 June 17, 1999, the National Association of Securities Dealers, Inc.
(``NASD''), through its wholly owned subsidiary, the Nasdaq Stock
Market, Inc. (``Nasdaq'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I and II below, which Items have been prepared by Nasdaq. On
August 25, 1999, Nasdaq filed Amendment No. 1 to the proposal with the
Commission.\3\ The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons and to
grant accelerated approval 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, Nasdaq, to Richard Strasser, Assistant Director,
Division of Market Regulation, Commission, dated August 24, 1999
(``Amendment No. 1''). Amendment No. 1 was received by the
Commission on August 25, 1999, the substance of which is
incorporated into this notice.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
Nasdaq is proposing to amend NASD Rule 6750 to provide any Nasdaq
officer at the executive vice president level or above with limited
discretionary authority to reduce the minimum quotation size for
securities quoted at a price exceeding $200 in the OTC Bulletin Board
(``OTCBB''). Below is the text of the proposed rule change. Proposed
new language is in italics.
* * *
6750. Minimum Quotation Size Requirements For OTC Equity Securities
(a) Every member firm that functions as a market maker in OTC
Equity Securities by entering firm quotations into the OTC Bulletin
Board Service (OTCBB) (or any other inter-dealer quotation system that
permits quotation updates on a real-time basis) must honor those
quotations for the minimum size defined in the table below. In this
regard, it is the market maker's responsibility to determine the
minimum size requirement applicable to its firm bid and/or offer in
each of its registered securities (excluding OTC Equity Securities for
which the OTCBB will not accept firm quotations). Depending on the
price level of the bid or offer, a different minimum size can apply to
each side of the market being quoted by the member firm in a given
security.
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Minimum
Price (bid or offer) quote size
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0 to .50*................................................... 5,000
.51 to 1.00................................................. 2,500
1.01 to 10.00............................................... 500
10.01 to 100.00............................................. 200
100.01 to 200.00............................................ 100
200.01 plus................................................. 50
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A Nasdaq officer at the Executive Vice President level or above, within
its discretion, may modify the minimum quotation size for those
securities with a price exceeding $200.
(b) no change.
* The OTCBB can accept bids/offers expressed in fractions as small as 1/
256 or in decimals up to six places. In applying the price test for
minimum quotation size, any increment beyond an upper limit in the
right hand column will trigger application of the minimum quote size
for the next tier. For example, a bid (or offer) of $.505 must be firm
for a size of 2,500 shares.
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 III 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
Nasdaq is proposing to provide any officer at the executive vice
president level or above \4\ with limited discretionary authority to
modify the minimum quotation size for securities quoted on the OTCBB
that exceed a price of $200. Nasdaq believes that this authority is
necessary to correct a previously unforeseen problem with the schedule
contained in NASD Rule 6750, which presently mandates that securities
priced over $200 be traded in units of 50 shares or more. For certain
highly priced and/or thinly-traded securities, this rule has had an
undesired and detrimental effect on transparency and liquidity.
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\4\ See Amendment No. 1.
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NASD Rule 6750 was approved by the Commission in 1993 \5\ as the
NASD and market makers were first beginning to gain significant
experience in dealing with the OTCBB. Prior to implementation of the
rule, all quotations on the OTCBB were required to be firm for 100
shares. This approach soon proved unworkable for lower priced
securities because a quote for 100 shares could represent an
insignificant aggregate dollar value commitment to the market.
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\5\ Exchange Act Release No. 32570 (July 1, 1993); 58 FR 36725
(July 8, 1993).
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To remedy this situation, the NASD implemented Rule 6750 which
specified minimum quotation sizes for securities priced at $200 and
below on a
[[Page 52818]]
``graduated'' or ``tiered'' basis.\6\ For securities quoted at 50 cents
or below, the market maker quoting such security is required to honor
that quotation for a minimum of 5,000 shares. This approach was carried
through to $200 with decreasing levels of 2,500, 500, 200, and 100
shares. For all quotations exceeding $200, the minimum quote size was
determined to be 50 shares.
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\6\ This requirement applies only to market makers entering
priced quotations. Market makers are permitted to enter unpriced
indications of interest into the OTCBB which are not held to the
minimum quotation size standard.
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The ensuing six years since implementation of this rule have
witnessed unanticipated changes to the OTCBB. Among those changes has
been the quotation of certain securities for thousands of dollars per
share, and, in a few isolated instances, securities quoted in excess of
$100,000. Obviously, the presence of these highly priced securities was
not considered when NASD Rule 6750 was originally proposed with the
smallest minimum quotation size of 50 shares. This has resulted in a
situation in which market makers have been unwilling to enter priced
quotations for such highly priced and thinly traded securities for fear
of potentially significant liability to their proprietary accounts.
In order to alleviate the potential exposure of quoting 50 shares
of these highly priced securities, market makers have ceased entering
quotations and instead post only indications of interest for these
securities into the OTCBB. While posting an indication of interest is
permitted in the OTCBB, the purpose of the OTCBB or any inter-dealer
quotation medium is to permit multiple market participants to quickly
and efficiently obtain the best bid or offer in a security and execute
the transaction without unnecessary delay. Additionally, posting firm
quotations on the OTCBB has the effect of increasing competition among
market makers and fostering enhanced price discovery, ultimately
benefiting the investing public.
Recognizing these goals and the present problems caused by the lack
of flexibility within NASD Rule 6750, Nasdaq is proposing to allow any
officer at the executive vice president level or above the flexibility
to reduce the minimum display size for certain highly priced securities
in the top tier (securities quoted in excess of $200) of the OTCBB
schedule. Any modifications would be done within the spirit of NASD
Rule 6750 and would be based primarily on the impact that the price of
the security has upon liquidity, which would include consideration of
the number of shares publicly available. Such quotation size
modifications may change from time to time as conditions warrant.
However, any modifications to the minimum quotation size will be
clearly displayed on the Nasdaq Workstation II screen for the
appropriate security to avoid any confusion among market makers or
other market participants.
2. Statutory Basis
Nasdaq believes that the proposed rule change is consistent with
the provisions of Section 15A(b)(6) \7\ and Section 15A(b)(11) \8\ of
the Act. Nasdaq believes that the proposed rule specifically promotes
the objectives of Sections 15A(b)(6) and 15A(b)(11), respectively, by
facilitating transactions free of impediments to a free and open market
while producing fair and informative quotations. The rule will
encourage market makers to display firm quotations in OTCBB securities
thereby providing increased transparency, competition, and price
discovery.
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\7\ 15 U.S.C. 78o-3(b)(6).
\8\ 15 U.S.C. 78o-3(b)(11).
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B. Self-Regulatory Organization's Statement on Burden on Competition
Nasdaq does not believe that the proposed rule change will impose
any inappropriate burden on competition.
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. Solicitation of Comments
Interested persons are invited to submit written data, views, and
argument concerning the foregoing, including whether the proposal is
consistent with the Act. Persons making written submission should file
six copies thereof with the Secretary, Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 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 at the
Commission's Public Reference Room. Copies so such filing will also be
available for inspection and copying at the principal office of the
NASD. All submissions should refer to File No. SR-NASD-99-32 and should
be submitted by October 21, 1999.
IV. Commission's Findings and Order Granting Accelerated Approval
of Proposed Rule Change
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities association.\9\
Specifically, the Commission believes that the proposal is consistent
with Sections 15A(b)(6) and (b)(11) of the Act.\10\ Section 15A(b)(6)
requires, in part, that the rules of a national securities association
be designed 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 system,
and, in general, to protect investors and the public interest.\11\
Section 15A(b)(11) requires, among other things, that the rules of a
national securities association include provisions governing the form
and content of quotations, and that such rules must be designed to
produce fair and informative quotations, to prevent fictitious or
misleading quotations, and to promote orderly procedures for
collecting, distributing, and publishing quotations.\12\
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\9\ In approving this proposed rule change, the Commission
considered the proposal's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
\10\ 15 U.S.C. 78o-3(b)(6) and (b)(11).
\11\ 15 U.S.C. 78o-3(b)(6).
\12\ 15 U.S.C. 78o-3(b)(11)
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The proposal provides Nasdaq with the flexibility to reduce the
minimum quote size of highly priced and thinly traded OTCBB securities
when appropriate. Nasdaq asserts and the Commission agrees that market
makers may be reluctant to quote 50 shares of a highly priced and
thinly traded security and, as a result, may instead post indications
of interest that are not firm. Therefore, the Commission supports
granting any Nasdaq officer at the executive vice president level or
above limited discretionary authority to reduce the minimum quote size
for highly priced and thinly traded OTCBB securities as a means to
enhance quote activity. The Commission finds that the increased
opportunity for priced quotations in highly priced OTCBB securities
that may result from this rule
[[Page 52819]]
change will help improve liquidity and transparency for these
securities. Moreover, with this rule change, market participants may be
able to more quickly ascertain the best bid or offer in highly priced
OTCBB securities. The Commission also believes that reducing the
minimum quotation size for highly priced and thinly traded securities
might attract market makers to such securities, thereby enhancing
competition, which should result in more efficient pricing of these
securities. As a result, the Commission finds that the proposed rule
change is consistent with Section 15A(b)(6) of the Act because it will
benefit investors and facilitate transactions in securities.
The Commission also finds that the proposal is consistent with
Section 15A(b)(11) because it is intended to result in additional
priced quotations for highly priced OTCBB securities. This should help
produce fair and informative quotations for these highly priced OTCBB
securities.
The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after the date of publication of
notice thereof in the Federal Register. Accelerated approval will
permit Nasdaq to quickly redress an unforeseen consequence of NASD
6750, as originally adopted, which made quoting certain OTCBB
securities prohibitive. Accordingly, the Commission believes that good
cause exists, consistent with Section 15A(b)(6) and Section 19(b)(2) of
the Act, to grant accelerated approval to the proposed rule change.\13\
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\13\ 15 U.S.C. 78o-3(b)(6) and 78s(b)(2).
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\14\ that the proposed rule change (SR-NASD-99-32) is approved.
\14\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-25383 Filed 9-29-99; 8:45 am]
BILLING CODE 8010-10-M
