Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of Proposed Rule Change by the National Association of Securities Dealers, Inc. Relating to Head Trader Alert 1999-60 Regarding the Nasdaq Application of the OptiMark System

[Federal Register Volume 64, Number 248 (Tuesday, December 28, 1999)]
[Notices]
[Pages 72710-72712]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-33546]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42242; File No. SR-NASD-99-68]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc. Relating to Head Trader Alert 1999-60 
Regarding the Nasdaq Application of the OptiMark System

December 16, 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 November 5, 1999, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association''), through its wholly-owned subsidiary 
The Nasdaq Stock Market, Inc. (``Nasdaq'') filed with the Securities 
and Exchange Commission (``SEC'' or ``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by Nasdaq. Nasdaq submitted Amendment No. 1 on November 
23, 1999.\3\ The Commission is publishing this notice to solicit 
comments on the proposed rule change, as amended, from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, Nasdaq explained the ``N'' modifier that 
may be attached to a SelectNet order that is the result of an 
OptiMark match, and clarified the use of the C999 modifier by market 
participants outside of the OptiMark system. Letter from Peter R. 
Geraghty, Assistant General Counsel, Nasdaq, to Richard Strasser, 
Assistant Director, Division of Market Regulation (``Division''), 
Commission, dated November 22, 1999.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Nasdaq is filing an interpretation of NASD Rule 4991(h) that was 
issued in Head Trader Alert Number 1999-60. The interpretation affects 
the Nasdaq Application of the OptiMark System (the ``Nasdaq 
Application''). The text of the proposed rule change is available at 
the Association and at the Commission.

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 IV below. Nasdaq has prepared summaries, set forth in Sections A, 
B,

[[Page 72711]]

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
    The SEC recently approved a proposed rule change filed by the NASD 
to implement the Nasdaq Application.\4\ The Nasdaq Application permits 
NASD members and their customers to enter large orders in Nasdaq stocks 
into an anonymous matching system that has been designed, developed, 
and patented by OptiMark Technologies, Inc. (``OptiMark Match'') and 
has been integrated into Nasdaq's facilities in Trumbull, Connecticut. 
The NASD believes that the anonymity offered by this facility limits 
the market impact of trading in large size and provides NASD members 
with a new, additional tool to trade Nasdaq securities more 
effectively.
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    \4\ Securities Exchange Act Release No. 41967 (September 30, 
1999), 64 FR 54704 (October 7, 1999).
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    The Nasdaq Application allows NASD members (and if sponsored by 
NASD members, customers of such members) to enter trading interests, 
called profiles, into Nasdaq-operated systems where those profiles are 
collected and matched periodically by the OptiMark Match. As currently 
approved, these matches occur no more frequently than every five 
minutes. In addition to matching profiles entered directly into the 
system, the Nasdaq Application incorporates bids and offers in the 
Nasdaq Quote Montage, creates profiles for such quotes, and includes 
the profiles in the next match. The OptiMark Match then attempts to 
match contra interests at the best prices and sizes according to the 
rules of the match process. If the system finds that a Nasdaq Quota 
Montage profile matched with another profile, the system sends a 
message to the market participant via the Nasdaq SelectNet system, 
seeking to trade at the market participant's quoted price or better and 
at round lot sizes, up to the amount quoted by that market participant.
    Nasdaq believes that the rules approved by the SEC in October 1999 
\5\ clearly implied that Nasdaq subscribers that respond to SelectNet 
messages sent as a result of OptiMark entered profiles matching with 
quoted interest displayed in the Nasdaq Quote Montage profiles must 
respond in round lot sizes only. Specifically, Nasdaq intended that 
Rule 4991(h) require such a response in that Rule 4991(h) stated that 
orders in the Nasdaq Application ``shall be in round lots equal to or 
greater than 1,000 shares, except for * * * Quote Montage Profiles * * 
* that may be in any round lot size. * * *''
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    \5\Id.
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    Therefore, Nasdaq issued a Head Trader Alert to firms explaining 
that the rules related to the OptiMark system specifically intended to 
require that responses to SelectNet messages sent as a result of an 
OptiMark Match with a Nasdaq Quote Montage profile must be made in 
round lot sizes, and that the C999 modifier is intended to signal the 
receiving market participant that it must respond in round lots only. 
The Head Trader Alert also noted that Rule 3380(b) should not be 
interpreted as permitting an ECN to reject a SelectNet message from an 
OptiMark match with the C999 modifier. Nasdaq notes that the 
requirement that an ECN or other market participant deal only in round 
lots when responding to a SelectNet message sent as a result of an 
OptiMark match is implied only by the rules governing the Nasdaq 
Application of the OptiMark System. Other market participants sending 
SelectNet messages to ECNs are not permitted to use the C999 modifier 
in such circumstances.
    In addition, the Head Trader Alert explained another modifier that 
is attached to SelectNet orders sent as a result of OptiMark matches. 
This modifier is the letter ``N'' which is intended to convey to the 
recipient of the order that the order is non-negotiable. However the 
Not Negotiable modifier ``N'' on a SelectNet order following the price 
allows the recipient of the order to price improve the order and 
execute it at a price better than that found in the price field. The 
``N'' modifier does not allow the recipient to enter a counter offer at 
an inferior price against the order. For example, a firm receiving an 
order to sell at 10 with the Not Negotiable indicator may not send a 
counter offer on the order at 9\7/8\, but they may price improve the 
order at 10\1/16\.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
Section 15A\6\ of the Act in general and furthers the objectives of 
Section 15A(b)(6) \7\ in particular because it is designed to promote 
just and equitable principles of trade, to facilitate transactions in 
securities, to remove impediments to and perfect the mechanisms of a 
free and open market and a national market system, and to protect 
investors and the public interest.\8\
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    \6\ 15 U.S.C. 78o-3.
    \7\ 15 U.S.C. 78o-3(b)(c).
    \8\ In reviewing this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
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    Nasdaq believes that the proposed rule change is consistent with 
provisions of Section 11A \9\ of the Act in general and furthers the 
objectives of Section 11A(a)(1)(C) \10\ in particular because it is in 
the public interest and appropriate for the protection of investors and 
the maintenance of fair and orderly markets to assure economically 
efficient execution of securities transactions, fair competition among 
brokers and dealers, availability to brokers, dealers and investors of 
information with respect to quotations and transactions in securities, 
and practicability of brokers executing investors' orders in the best 
market.
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    \9\ 15 U.S.C. 78k-1.
    \10\ 15 U.S.C. 78k-1(a)(1)(C).
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    Nasdaq believes that the proposal is consistent with Section 
15A(b)(6) \11\ and Section 11A(a)(1)(C) \12\ of the Act because it will 
inform firms about two modifiers that may be attached to SelectNet 
messages sent as a result of an Optimark match related to round lot 
only messages and price improvement, and will clarify a firm's 
obligations in responding to SelectNet orders generated by an OptiMark 
match.
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    \11\ 15 U.S.C. 78o-3(b)(6).
    \12\ 15 U.S.C. 78k-1(a)(1)(C).
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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

    Nasdaq has neither solicited nor received written comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    The foregoing rule change constitutes a stated policy, practice or 
interpretation with respect to the meaning, administration, or 
enforcement of an existing rule of the Exchange and therefore, has 
become effective pursuant to Section 19(b)(3)(A)(i) of the Act \13\ and 
subparagraph (f)(l) of Rule 19b-4 thereunder.\14\
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    \13\ 15 U.S.C. 78s(b)(3)(A)(i).
    \14\ 17 CFR 240.19b-4(f)(1).
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    At any time within 60 days of the filing of the proposed rule 
change, the

[[Page 72712]]

Commission may summarily abrogate such rule change if it appears to the 
Commission that such action is necessary or appropriate in the public 
interest, for the protection of investors, or otherwise in furtherance 
of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change 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-
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 in the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
NASD. All submissions should refer to SR-NASD-99-68 and should be 
submitted by January 18, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-33546 Filed 12-27-99; 8:45 am]
BILLING CODE 8010-01-M