02-22218. Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Approving Proposed Rule Change Relating to the Establishment of Day and Good-Till-Cancelled Order Designations for Non-Directed Orders in the Nasdaq ...

August 23, 2002.

I. Introduction

On July 1, 2002, the National Association of Securities Dealers, Inc. (“NASD” or “Association”), through its subsidiary, the Nasdaq Stock Market, Inc. (“Nasdaq”), filed with the Securities and Exchange Commission (“SEC” or “Commission”), pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),^[1] and Rule 19b-4 thereunder,^[2] a proposed rule change to establish “Good-till-Cancelled” (“GTC”) and “Day” designations for Non-Directed Orders and clarify the processing of such orders when held in Nasdaq's future Order Display and Collector Facility (“SuperMontage”). The proposed rule change was published for comment in the Federal Register on July 5, 2002.^[3] The Commission did not receive any comment letters regarding the proposal. This order approves the proposed rule change.

II. Description of the Proposed Rule Change

Nasdaq proposes to establish Day and GTC order designations for Non-Directed Orders in SuperMontage. Under the proposal, a Day order would be held in SuperMontage for potential display and/or execution (unless cancelled by the entering party) until the 4:00 p.m. Eastern Standard Time (“EST”) Nasdaq market close. At the market close, the order, if not fully executed, would be removed from the system and returned to the entering party. A GTC order would be held in the SuperMontage for potential display and/or execution (unless cancelled by the entering party) for up to one year. At the market close of the one-year anniversary date, the order, if not fully executed, would be removed from the Nasdaq system and returned to the entering party. If this anniversary date fell on a date when the Nasdaq market was closed, the GTC order would be purged after the close of the next business day.

Market makers, Electronic Communication Networks (“ECNs”), and Unlisted Trading Privileges Exchanges (collectively “Quoting Market Participants”) could designate a non-directed limit order as Day, GTC, or Immediate or Cancel (“IOC”). If a Quoting Market Participant entered a non-directed limit order without a designation, such an order would be designated as IOC, the system's default designation.^[4]

Under the proposal, whenever a Non-Directed Order designated as Day or GTC is entered into the system, it would receive a time stamp to be used in determining the order's price/time priority consistent with the current SuperMontage rules.^[5] Day and GTC orders would be executed pursuant to the execution algorithm selected (price/time (default), price/time taking into account access fees, and price/size/time) by the entering market participant.^[6] Day orders could be entered into SuperMontage during the Pre-Market Session through Normal Market Hours. GTC orders could be entered into SuperMontage during the Pre-Market Session through the After Hours Session. Day and GTC orders would be eligible for execution during the Nasdaq Unlocking/Uncrossing Session (beginning at 9:29:30 a.m. EST) throughout the Normal Market Hours (ending at 4:00 p.m. EST). At the close of Normal Market Hours, unexecuted Day orders would expire and be returned to the entering participant. GTC orders that are not executed or cancelled would continue residing in the system at the close of Normal Market Hours, however, such orders would not be eligible for execution through the Non-Directed Order process during the Nasdaq After-Hours Session. Thus, after the 4:00 p.m. EST market close, GTC orders residing in the system would not be eligible for execution through the Non-Directed Order process until the following business day at 9:29:30 a.m. EST.

To clarify that the SuperMontage will accept, retain, display, and execute orders at multiple price levels, Nasdaq also proposed to remove the term “marketable” from the text of Rule 4706(a)(1)(B).

III. Discussion

After careful review, 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.^[7] In particular, the Commission finds that the proposed rule change is consistent with Section 15A.^[8] Specifically, the Commission finds that the proposed rule change is consistent with section 15A(b)(6) of the Act because it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principals 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.^[9]

The Commission finds that Nasdaq's proposal to allow Quoting Market Participants to enter GTC and Day orders, in addition to IOC orders, is consistent with the Act. In particular, the addition of GTC and Day orders will provide SuperMontage participants with more options beyond IOC orders for entering orders into the system. The Commission believes that the flexibility added by the proposal will give Quoting Market Participants more options in the designation of order types, which in turn should allow the trading interest and strategies of customers to be better reflected in SuperMontage. The Commission also notes that other market centers, including the New York Stock Exchange (“NYSE”) and the Pacific Stock Exchange Equities (“PCXE”) allow the use order of Day or GTC order types.^[10]

IV. Conclusion

For the foregoing reasons, the Commission finds that the proposal is consistent with the requirements of the Act and the rules and regulations thereunder.

It is therefore ordered, pursuant to section 19(b)(2) of the Act,^[11] that the proposed rule change (SR-NASD-2002-92) is approved.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.^[12]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  17 CFR 240.19b-4.

3.  See Securities Exchange Act Release No. 46155 (July 1, 2002), 67 FR 44914.

4.  An IOC order if not immediately executed is canceled from the system and returned to the order entry participant.

5.  As contemplated, SuperMontage will have four distinct time periods over the course of the trading day: (1) The Pre-Market Session (7:30 a.m. to 9:29:29 a.m. EST), (2) the Pre-Open Unlocking/Uncrossing Process (9:29:30 a.m. to 9:29:59 a.m. EST), (3) Normal Market Hours (9:30 a.m. to 4:00 p.m. EST), and (4) the After-Hours Session (4:00 p.m. to 6:30 p.m. EST). See Securities Exchange Act Release No. 46410, (August 23, 2002) (approving amendments to SuperMontage Pre-Market Session including the Pre-Open Unlocking/Uncrossing Process) and File No. NASD-2002-114 (extending the Nasdaq After-Hours Pilot to SuperMontage).

6.  If a Non-Directed Order is entered by a Market Maker or ECN, SuperMontage will, before sending it to a Quoting Market Participant, first attempt to match the order off against the entering party's own quote/order, if that quote/order is at the best price in Nasdaq. See Rule 4710(b)(1)(B)(iv)(a). Parties entering Non-Directed Orders also have an option to preference such orders to a particular market participant. See Rule 4710(b)(1)(B)(iv)(b).

7.  In approving this proposal, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

8.  15 U.S.C. 78 o-3.

9.  15 U.S.C. 78 o-3(b)(6).

10.  See NYSE Rule 13 and PCXE Rule 7.31(c).

11.  15 U.S.C. 78s(b)(2).

12.  17 CFR 200.30-3(a)(12).