02-22574. Order With Respect to the Implementation of NASDAQ'S SuperMontage Facility

On January 19, 2001, the Commission conditionally approved a proposed rule change submitted by the National Association of Securities Dealers, Inc. (the “NASD”), on behalf of The Nasdaq Stock Market (“Nasdaq”), that would establish a new order display and collection facility for Nasdaq-listed securities (“SuperMontage”).^[1] To address the concerns expressed by several market participants that certain Commission rules would effectively make their participation in the SuperMontage mandatory,^[2] the Commission conditioned its approval of the SuperMontage on the implementation of an alternative display facility (“ADF”) by the NASD.

Specifically, the Commission conditioned its approval of the SuperMontage on the following, which must be implemented prior to or at the same time as the SuperMontage:

(1) That the NASD will offer a quote and trade reporting alternative that satisfies the Order Handling Rules, Regulation ATS, and other regulatory requirements for ATSs, ECNs, and market makers;

(2) That NASD quotes disseminated through the exclusive securities information processor (“SIP”) for Nasdaq-listed securities will identify the ATS, ECN, or market maker source of the quote;^[3] and

(3) That participation in SuperMontage will be entirely voluntary, because NASD quotes will be included in the Nasdaq quotation management system while Nasdaq is the exclusive SIP, but only for display purposes, and the NASD will provide access to its quotes on a market-neutral basis.^[4]

On July 24, 2002, the Division of Market Regulation approved, pursuant to delegated authority, operation of the ADF as a pilot program for nine months.^[5] The ADF pilot program permits registered market makers and registered ECNs to display their best-priced quotes or customer limit orders in Nasdaq-listed securities through the NASD. ADF market participants are required to provide other ADF market participants with direct electronic access to their quote, and to provide all other members of the NASD or a national securities exchange with the option to obtain direct electronic access or indirect electronic access through private linkages. The ADF also serves as a trade reporting and trade comparison facility. The ADF will therefore allow market participants to satisfy their order display and execution access obligations under the Order Handling Rules and Regulation ATS. The NASD staff has indicated that several ECNs have expressed an interest in fulfilling their quote display obligations through the ADF and are in varying stages of adapting their systems to participate in the ADF.^[6]

In addition, on July 1, 2002, Nasdaq launched a new technology platform (the “Internal SIP”) on which Nasdaq will perform its duties as the exclusive SIP for the Nasdaq UTP Plan until a new securities information processor is chosen.^[7] Quotation information provided by ADF market participants will be available through two Internal SIP feeds. The Internal SIP will disseminate the consolidated best bid and offer of the ADF, along with the best bid and offer of each UTP Exchange and Nasdaq market participant, through the UTP Quotation Data Feed. In addition, the Internal SIP will disseminate the individual quotations of each broker or dealer quoting in the NASD ADF via the OTC Montage Data Feed (OMDF).

Based on these developments, the Commission believes that participation in SuperMontage will be voluntary, because market makers, exchange specialists, ECNs and ATSs will have alternative venues in which to display their quotes, including the ADF.

Certain market participants have indicated that they are firmly committed to using the ADF as their order collection and display facility but require further time to adapt and test their systems to participate through the ADF. To prevent any unfairness, the Commission believes that SuperMontage should begin operation on October 11, 2002, assuming that within five business days from the entry of this Order, one or more market participants certifies, under oath, that such entity at the time of the oath intends to use ADF as its primary order collection and display facility for a significant portion of its business in Nasdaq securities, and provides a list of the Nasdaq securities for which it currently intends to post quotes on the ADF. In the absence of any such certification, SuperMontage shall become effective immediately after the fifth business day of the entry of this order. Accordingly, subject to the certification process, the Commission finds that the implementation of the ADF satisfies the conditions stated in the SuperMontage Approval Order. As referenced in Amendment No. 5 to the SuperMontage proposal, and consistent with subsequent conversations with the Commission staff, we understand that the NASD will roll out SuperMontage over a six-week period.

The Commission continues to review Nasdaq's pending application to register as a national securities exchange. The entry of this Order does not address or resolve the issues presented in that application, does not make any findings with respect thereto, and does not suggest what, if any, future actions the Commission may take with regard to that application.

By the Commission.

Dated: August 29, 2002.

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  Exchange Act Release No. 43863 (January 19, 2001), 66 FR 8020 (January 26, 2001) (File No. SR-NASD-99-53) (the “SuperMontage Approval Order”).

2.  Rules 11Ac1-1(c)(5) and 11Ac1-4 under the Securities Exchange Act of 1934 (the “Exchange Act”) permit a market maker or specialist to place a better-priced proprietary or customer limit order with an electronic communications network (“ECN”) anonymously without updating its public quote to reflect the better-priced order, as long as the ECN displays the order in the public market through a self-regulatory organization (“SRO”) and provides equivalent access to such order. 17 CFR 240.11Ac1-1(c) and 240.11Ac1-4 (the “Order Handling Rules”). Regulation ATS requires alternative trading systems (“ATSs”), including ECNs, that trade 5% or more of the average daily trading volume in an exchange-or Nasdaq-listed security to display and provide execution access to their quotes through an SRO. 17 CFR 242.301(b).

3.  The Commission stated in the SuperMontage Approval Order that it would require Nasdaq and the exchanges trading Nasdaq securities on an unlisted trading privileges (“UTP”) basis to renegotiate existing intermarket plans to provide for a new exclusive SIP or multiple non-exclusive SIPs for Nasdaq securities. The Commission further stated that if the revised plan provided for a new exclusive SIP, the operator of the new processor should not be a Plan participant except under certain conditions. SuperMontage Approval Order, 66 FR at 8052-55.

4.  Id., 66 FR at 8053-54.

5.  Exchange Act Release No. 46249 (July 24, 2002), 67 FR 49822 (July 31, 2002). The NASD filed a proposal to establish an ADF on December 7, 2001. Exchange Act Release No. 45156 (December 14, 2001), 67 FR 388 (January 3, 2002). The NASD subsequently filed an amendment to the proposal on May 24, 2002, to respond to issues raised by commenters. Exchange Act Release No. 45991 (May 28, 2002), 67 FR 39476 (June 7, 2002).

6.  Market Participants are not required to use either the ADF or SuperMontage to quote or report trades. For instance, beginning the week of August 5, 2002, the Cincinnati Stock Exchange has provided Island ECN (“Island”) with the ability to represent orders in certain Nasdaq securities in the national best bid or offer. As a result, Island has indicated that it may choose not to represent customer limit orders in SuperMontage. See Notice to Island Subscribers dated August 5, 2002, available at http://island.com/​prodserv/​developers/​resources/​emailarchive/​20020805.asp.

7.  See Letter from Edward S. Knight, Executive Vice President and General Counsel, Nasdaq, to Robert L.D. Colby, Deputy Director, Division of Market Regulation, Commission (June 28, 2002).