[Federal Register Volume 67, Number 2 (Thursday, January 3, 2002)]
[Notices]
[Pages 388-455]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-31481]
[[Page 387]]
-----------------------------------------------------------------------
Part II
Securities and Exchange Commission
-----------------------------------------------------------------------
Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change
by the National Association of Securities Dealers, Inc. Relating to
Nasdaq's Proposed Separation From the NASD and the Establishment of the
NASD Alternative Display Facility; Notice
Federal Register / Vol. 67, No. 2 / Thursday, January 3, 2002 /
Notices
[[Page 388]]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-45156; File No. SR-NASD-2001-90]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the National Association of Securities Dealers, Inc. Relating
to Nasdaq's Proposed Separation From the NASD and the Establishment of
the NASD Alternative Display Facility
December 14, 2001.
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 December 7, 2001, the National Association of Securities Dealers,
Inc. (``NASD'' or ``Association'') 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 the NASD. The NASD amended the proposed rule change on
December 14, 2001.\3\ The Commission is publishing this notice to
solicit comments on the proposed rule change, as amended, from
interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Letter from Alden S. Adkins, Senior Vice President, NASD
Market Operations Administration, to Katherine A. England, Assistant
Director, Division of Market Regulation, Commission, dated December
14, 2001 (``Amendment No. 1''). First, Amendment No. 1 revises
proposed Rule 4200(a)(12) to (i) clarify that the market where the
security is listed, rather than the NASD, determines whether a
normal unit of trading should be an amount other than 100 shares and
(ii) delete an inadvertent reference to Nasdaq. Second, Amendment
No. 1 deletes the phrase ``that enters into a contractual
relationship with an NASD Market Participant'' from the definition
of ``customer broker/dealer'' in proposed Rule 4300(d)(1) and adds
the word ``not'' to the definition of ``Indirect electronic access''
before the word ``affiliates'' in the first sentence of proposed
Rule 4300(d)(3). Finally, Amendment No. 1 waives the 35-day period
for Commission action until such time as the waiver is withdrawn by
the NASD.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The NASD is proposing to amend its rules to reflect Nasdaq's
separation from the NASD upon its approval as a national securities
exchange and to establish rules that would govern trading otherwise
than on an exchange, including rules governing the NASD Alternative
Display Facility (``ADF''). Below is the text of the proposed rule
change. Proposed new language is in italics; proposed deletions are in
brackets.
* * * * *
0100. General Provisions
0120. Definitions.
(a) No Change.
(b) ``Association'
The term ``Association'' means, collectively, the NASD, NASD
Regulation, [Nasdaq,] and NASD Dispute Resolution.
(c) through (q) No Change.
0130. Delegation, Authority and Access
(a) The National Association of Securities Dealers, Inc., delegates
to its subsidiaries (NASD Regulation, Inc. and NASD Dispute Resolution,
Inc. [The Nasdaq Stock Market, Inc.], hereinafter ``Subsidiaries'') the
authority to act on behalf of the Association as set forth in a Plan of
Allocation and Delegation adopted by the Board of Governors and
approved by the Commission pursuant to its authority under the Act.
(b) No Change.
* * * * *
1000. MEMBERSHIP, REGISTRATION AND QUALIFICATION REQUIREMENTS
* * * * *
1022. Categories of Principal Registration
(a) through (d) No Change.
(e) Limited Principal--Direct Participation Programs
(1) No Change.
(2) For purposes of the Rule 1000 Series, ``direct participation
programs'' shall mean programs [which] that provide for flow-through
tax consequences regardless of the structure of the legal entity or
vehicle for distribution including, but not limited to, oil and gas
programs, cattle programs, condominium securities, Subchapter S
corporate offerings and all other programs of a similar nature,
regardless of the industry represented by the program, or any
combination thereof. Excluded from this definition are real estate
investment trusts, tax qualified pension and profit sharing plans
pursuant to Sections 401 and 403(a) of the Internal Revenue Code (Code)
and individual retirement plans under Section 408 of the Code, tax
sheltered annuities pursuant to the provisions of Section 403(b) of the
Code and any company including separate accounts registered pursuant to
the Investment Company Act of 1940. Also excluded from this definition
is any program [for which quotations are displayed on Nasdaq or which]
that is listed on a registered national securities exchange or any
program for which an application for [quotation on Nasdaq or] listing
on a registered national securities exchange has been made.
(3) No Change.
(f) through (g) No Change.
* * * * *
2000. BUSINESS CONDUCT
2100. GENERAL STANDARDS
2110. Standards of Commercial Honor and Principles of Trade
A member, in the conduct of [his] its business, shall observe high
standards of commercial honor and just and equitable principles of
trade.
IM-2110-1. ``Free-Riding and Withholding'
(a) No Change.
(b) Violations of Rule 2110
Except as provided herein, it shall be inconsistent with high
standards of commercial honor and just and equitable principles of
trade and a violation of Rule 2110 for a member, or a person associated
with a member, to fail to make a bona fide public distribution at the
public offering price of securities of a public offering which trade at
a premium in the secondary market whenever such secondary market begins
regardless of whether such securities are acquired by the member as an
underwriter, a selling group member or from a member participating in
the distribution as an underwriter or selling group or otherwise.
Therefore, it shall be a violation of Rule 2110 for a member, or a
person associated with a member, to:
(1) through (8) No Change.
(9) Sell any of the securities to any person, or to a member of the
immediate family of such person who is supported directly or indirectly
to a material extent by such person, who owns or has contributed
capital to a broker/dealer, other than solely a limited business
broker/dealer as defined in paragraph (c) of this interpretation, or
the account in which any such person has a beneficial interest,
provided, however, that:
(A) The prohibition shall not apply to any person who directly or
indirectly owns any class of equity securities of, or who has made a
contribution of capital to, a member, and whose ownership or capital
interest is passive and is less than 10% of the equity or capital of a
member, as long as:
(i) Such person purchases hot issues from a person other than the
member in which it has such passive ownership and such person is not in
a position by virtue of its passive ownership interest to direct the
allocation of hot issues, or
[[Page 389]]
(ii) such member's shares or shares of a parent of such member are
publicly traded on a[n] registered national securities exchange [or
Nasdaq].
(B) and (C) No Change.
(c) through (m) No Change.
* * * * *
IM-2110-2. Trading Ahead of Customer Limit Order
(a) General Application
To continue to ensure investor protection and enhance market
quality, the Association's Board of Governors is issuing an
interpretation to the Rules of the Association dealing with member
firms' treatment of their customer limit orders in Nasdaq-listed
securities. This interpretation, which is applicable from 9:30 a.m. to
6:30 p.m. Eastern Time, will require members acting as market makers to
handle their customer limit orders with all due care so that market
makers do not ``trade ahead'' of those limit orders. Thus, members
acting as market makers that handle customer limit orders, whether
received from their own customers or from another member, are
prohibited from trading at prices equal or superior to that of the
limit order without executing the limit order.[, provided that, prior
to September 1, 1995, this prohibition shall not apply to customer
limit orders that a member firm receives from another member firm and
that are greater than 1,000 shares. Such orders shall be protected from
executions at prices that are superior but not equal to that of the
limit order. In the interests of investor protection, the Association
is eliminating the so-called disclosure ``safe harbor'' previously
established for members that fully disclosed to their customers the
practice of trading ahead of a customer limit order by a market-making
firm.]\1\
---------------------------------------------------------------------------
\1\ FN1 For purposes of the pilot program expanding the
operation of certain Nasdaq transaction and quotation reporting
systems and facilities in SR-NASD-99-57 during the period from 4
p.m. to 6:30 p.m. Eastern Time, members may generally limit the life
of a customer limit order to the period of 9:30 a.m. to 4 p.m.
Eastern Time. If a customer does not formally assent (``opt-in'') to
processing of their limit order(s) during the extended hours period
commencing after the normal close of the Nasdaq market, limit order
protection will not apply to that customer's order(s).
---------------------------------------------------------------------------
[Rule 2110 of the Association's Rules states that:]
[A member, in the conduct of [his] its business, shall observe high
standards of commercial honor and just and equitable principles of
trade.]
[Rule 2320, the Best Execution Rule, states that:]
[In any transaction for or with a customer, a member and persons
associated with a member shall use reasonable diligence to ascertain
the best inter-dealer market for the subject security and buy or sell
in such a market so that the resultant price to the customer is as
favorable as possible to the customer under prevailing market
conditions.]
Interpretation
The following interpretation of Rule 2110 has been approved by the
Board:
A member firm that accepts and holds an unexecuted limit order from
its customer (whether its own customer or a customer of another member)
in a Nasdaq-listed security and that continues to trade the subject
security for its own market-making account at prices that would satisfy
the customer's limit order, without executing that limit order, shall
be deemed to have acted in a manner inconsistent with just and
equitable principles of trade, in violation of Rule 2110, provided
that, [until September 1, 1995, customer limit orders in excess of
1,000 shares received from another member firm shall be protected from
the market maker's executions at prices that are superior but not equal
to that of the limit order, and provided further, that] a member firm
may negotiate specific terms and conditions applicable to the
acceptance of limit orders only with respect to limit orders that are:
(a) For customer accounts that meet the definition of an
``institutional account'' as that term is defined in Rule 3110(c)(4);
or (b) 10,000 shares or more, unless such orders are less than $100,000
in value. Nothing in this interpretation, however, requires members to
accept limit orders from any customer.
[By rescinding the safe harbor position and adopting this
interpretation,] [t]The Association wishes to emphasize that members
may not trade ahead of their customer limit orders in their market-
making capacity even if the member had in the past fully disclosed the
practice to its customers prior to accepting limit orders. The
Association believes that, pursuant to Rule 2110, members accepting and
holding unexecuted customer limit orders owe certain duties to their
customers and the customers of other member firms that may not be
overcome or cured with disclosure of trading practices that include
trading ahead of the customer's order. The terms and conditions under
which institutional account or appropriately sized customer limit
orders are accepted must be made clear to customers at the time the
order is accepted by the firm so that trading ahead in the firm's
market making capacity does not occur. For purposes of this
interpretation, a member that controls or is controlled by another
member shall be considered a single entity so that if a customer's
limit order is accepted by one affiliate and forwarded to another
affiliate for execution, the firms are considered a single entity and
the market making unit may not trade ahead of that customer's limit
order.
The Association also wishes to emphasize that all members accepting
customer limit orders owe those customers duties of ``best execution''
regardless of whether the orders are executed through the member's
market making capacity or sent to another member for execution. [As set
out above, the Best Execution Rule] Rule 2320 requires members to use
reasonable diligence to ascertain the best inter-dealer market for the
security and buy or sell in such a market so that the price to the
customer is as favorable as possible under prevailing market
conditions. The Association emphasizes that order entry firms should
continue to routinely monitor the handling of their customers' limit
orders regarding the quality of the execution received.
(b) No Change.
* * * * *
IM-2110-3. Front Running Policy
It shall be considered conduct inconsistent with just and equitable
principles of trade for a member or person associated with a member,
for an account in which such member or person associated with a member
has an interest, for an account with respect to which such member or
person associated with a member exercises investment discretion, or for
certain customer accounts, to cause to be executed:
(a) No Change.
(b) an order to buy or sell an underlying security when such member
or person associated with a member causing such order to be executed
has material, non-public market information concerning an imminent
block transaction in an option overlying that security, or when a
customer has been provided such material, non-public market information
by the member or any person associated with a member; prior to the time
information concerning the block transaction has been made publicly
available.
The violative practice noted above may include transactions [which]
that are executed based upon knowledge of less than all of the terms of
the block transaction, so long as there is knowledge that all of the
material terms of the transaction have been or will be agreed upon
imminently.
[[Page 390]]
The general prohibitions stated above shall not apply to
transactions executed by member participants in automatic execution
systems in those instances where participants must accept automatic
executions.
These prohibitions also do not include situations in which a member
or person associated with a member receives a customer's order of block
size relating to both an option and the underlying security. In such
cases, the member and person associated with a member may position the
other side of one or both components of the order. However, in these
instances, the member and person associated with a member would not be
able to cover any resulting proprietary position(s) by entering an
offsetting order until information concerning the block transaction
involved has been made publicly available.
The application of this front running policy is limited to
transactions that are required to be reported on the last sale
reporting systems administered by Nasdaq, Consolidated Tape Association
(CTA), or Option Price Reporting Authority (OPRA). Information as to a
block transaction shall be considered to be publicly available when it
has been disseminated via the tape or high speed communications line of
one of those systems or of a third-party news wire service.
A transaction involving 10,000 shares or more of an underlying
security or options covering such number of shares is generally deemed
to be a block transaction, although a transaction of less than 10,000
shares could be considered a block transaction in appropriate cases. A
block transaction that has been agreed upon does not lose its identity
as such by arranging for partial executions of the full transaction in
portions [which] that themselves are not of block size if the execution
of the full transaction may have a material impact on the market. In
this situation, the requirement that information concerning the block
transaction be made publicly available will not be satisfied until the
entire block transaction has been completed and publicly reported.
IM-2110-4. Trading Ahead of Research Reports
The Board of Governors, under its statutory obligation to protect
investors and enhance market quality, is issuing an interpretation to
the Rules regarding a member firm's trading activities that occur in
anticipation of a firm's issuance of a research report regarding a
security. The Board of Governors is concerned with activities of member
firms that purposefully establish or adjust the firm's inventory
position in [Nasdaq-listed securities,] an exchange-listed security
traded otherwise than on an exchange [in the OTC market,] or a
derivative security based primarily on a specific [Nasdaq or] exchange-
listed security in anticipation of the issuance of a research report in
that same security. For example, a firm's research department may
prepare a research report recommending the purchase of a particular
Nasdaq-listed security. Prior to the publication and dissemination of
the report, however, the trading department of the member firm might
purposefully accumulate a position in that security to meet anticipated
customer demand for that security. After the firm had established its
position, the firm would issue the report, and thereafter fill customer
orders from the member firm's inventory positions.
The Association believes that such activity is conduct [which] that
is inconsistent with just and equitable principles of trade, and not in
the best interests of the investors. Thus, this interpretation
prohibits a member from purposefully establishing, creating or changing
the firm's inventory position in [a Nasdaq-listed security,] an
exchange-listed security traded otherwise than on an exchange [in the
third market] or a derivative security related to the underlying equity
security, in anticipation of the issuance of a research report
regarding such security by the member firm.
[Rule 2110 states that:
A member in the conduct of its business, shall observe high
standards of commercial honor and just and equitable principles of
trade.]
In accordance with Article VII, Section 1(a)(ii) of the NASD By-
Laws, the Association's Board of Governors has approved the following
interpretation of Rule 2110:
Trading activity purposefully establishing, increasing, decreasing,
or liquidating a position in [a Nasdaq security,] an exchange-listed
security traded otherwise than on an exchange [in the over-the-counter
market] or a derivative security based primarily upon a specific
[Nasdaq or] exchange-listed security, in anticipation of the issuance
of a research report in that security is inconsistent with just and
equitable principles of trade and is a violation of Rule 2110.
For purposes of this interpretation, a ``purposeful'' change in the
firm's inventory position means any trading activities undertaken with
the intent of altering a firm's position in a security in anticipation
of accommodating investor interest once the research report has been
published. Hence, the interpretation does not apply to changes in an
inventory position related to unsolicited order flow from a firm's
retail or broker/dealer client base or to research done solely for in-
house trading and not in any way used for external publication.
Under this interpretation, the Board recommends, but does not
require, that member firms develop and implement policies and
procedures to establish effective internal control systems and
procedures that would isolate specific information within research and
other relevant departments of the firm so as to prevent the trading
department from utilizing the advance knowledge of the issuance of a
research report. Firms that choose not to develop ``Chinese Wall''
procedures bear the burden of demonstrating that the basis for changes
in inventory positions in advance of research reports was not
purposeful.
* * * * *
IM-2110-5. Anti-Intimidation/Coordination
The Board of Governors is issuing this interpretation to codify a
longstanding policy. It is conduct inconsistent with just and equitable
principles of trade for any member or person associated with a member
to coordinate the prices (including quotations), trades, or trade
reports of such member with any other member or person associated with
a member; to direct or request another member to alter a price
(including a quotation); or to engage, directly or indirectly, in any
conduct that threatens, harasses, coerces, intimidates, or otherwise
attempts improperly to influence another member or person associated
with a member. This includes, but is not limited to, any attempt to
influence another member or person associated with a member to adjust
or maintain a price or quotation, whether displayed on any [automated
system] facility operated by the NASD [The Nasdaq Stock Market, Inc.
(Nasdaq),] or otherwise, or refusals to trade or other conduct that
retaliates against or discourages the competitive activities of another
market maker or market participant. Nothing in this interpretation
respecting coordination of quotes, trades, or trade reports shall be
deemed to limit, constrain, or otherwise inhibit the freedom of a
member or person associated with a member to:
(1) Set unilaterally its own bid [and] or ask in any [Nasdaq]
security, the prices at which it is willing to buy or sell any [Nasdaq]
security, and the quantity of shares of any [Nasdaq] security that it
is willing to buy or sell;
[[Page 391]]
(2) set unilaterally its own dealer spread, quote increment, or
quantity of shares for its quotations (or set any relationship between
or among its dealer spread, inside spread, or the size of any quote
increment) in any [Nasdaq] security;
(3) communicate its own bid or ask, or the prices at or the
quantity of shares in which it is willing to buy or sell any [Nasdaq]
security to any person, for the purpose of exploring the possibility of
a purchase or sale of that security, and to negotiate for or agree to
such purchase or sale;
(4) communicate its own bid or ask, or the price at or the quantity
of shares in which it is willing to buy or sell any [Nasdaq] security,
to any person for the purpose of retaining such person as an agent or
subagent for the member or for a customer of the member (or for the
purpose of seeking to be retained as an agent or subagent), and to
negotiate for or agree to such purchase or sale;
(5) through (7) No Change.
* * * * *
2200. Communications with Customers and the Public
2210. Communications with the Public
(a) and (b) No Change.
(c) Filing Requirements and Review Procedures
(1) through (6) No Change.
(7) The following types of material are excluded from the foregoing
filing requirements and (except for research reports under paragraph
(G)) spot-check procedures:
(A) No Change.
(B) Advertisements or sales literature [which] that do no more than
identify the [Nasdaq] symbol of the member and/or of a security in
which the member is a [Nasdaq] registered market maker;
(C) through (G) No Change.
(8) and (9) No Change.
* * * * *
2300. TRANSACTIONS WITH CUSTOMERS
2310. No Change.
* * * * *
IM-2310-1. Possible Application of SEC Rules 15g-1 through 15g-9
Members should be aware that, effective January 1, 1990, any
transaction [which] that involves a [non-Nasdaq,] non-exchange-listed
equity security trading for less than five dollars per share may be
subject to the provisions of SEC Rules 15g-1 through 15g-9, and those
Rules should be reviewed to determine if an executed customer
suitability agreement is required.
Accounts opened, and recommendations made, prior to January 1, 1991
remain subject to former Article III, Sections 2 and 21(c) of the Rules
of Fair Practice as previously in effect, as set forth in Notice to
Members 90-52 (August 1990).
* * * * *
IM-2310-2. Fair Dealing with Customers
(a) through (d) No Change.
(e) Fair Dealing with Customers with Regard to Derivative Products
or New Financial Products.
The Board emphasizes members' obligations for fair dealing with
customers when making recommendations or accepting orders for new
financial products. As new products are introduced from time to time,
it is important that members make every effort to familiarize
themselves with each customer's financial situation, trading
experience, and ability to meet the risks involved with such products
and to make every effort to make customers aware of the pertinent
information regarding the products. Members must follow specific
guidelines, set forth below, for qualifying the accounts to trade the
products and for supervising the accounts thereafter.
(1) Index Warrants
Members are obliged to comply with the Rules, regulations and
procedures applicable to index warrants and foreign currency warrants
contained in the Rule 2840 Series.
(2) Hybrid Securities and Selected Equity-Linked Debt Securities
(``SEEDS'') Designated as Nasdaq National Market Securities [Pursuant
to the Rule 4400 Series]
With respect to Hybrid Securities and Selected Equity-Linked Debt
Securities (``SEEDS'') that have been designated as Nasdaq National
Market Securities, [M]members are obligated to comply with any Rules,
regulations, or procedures applicable to such securities [pursuant to
the Rule 4420 Series], including those of Nasdaq, as well as any other
applicable Rule, regulation, or procedure of the Association. Prior to
the commencement of trading of a particular SEEDS, Nasdaq or the
Association will distribute a circular providing guidance regarding
member firm compliance responsibilities (including suitability
recommendations and account approval) when handling transactions in
SEEDS.
* * * * *
2320. Best Execution and Interpositioning
(a) through (f) No Change.
(g) (1) Unless two or more priced quotations for a [non-Nasdaq]
non-exchange-listed security (as defined in the Rule [6700] 6600
Series) are displayed in an inter-dealer quotation system that permits
quotation updates on a real-time basis, in any transaction for or with
a customer pertaining to the execution of an order in a [non-Nasdaq]
non-exchange-listed security, a member or person associated with a
member[,] shall contact and obtain quotations from three dealers (or
all dealers if three or less) to determine the best inter-dealer market
for the subject security.
(2) Members that display priced quotations on a real-time basis for
a [non-Nasdaq] non-exchange-listed security in two or more quotation
mediums that permit quotation updates on a real-time basis must display
the same priced quotations for the security in each medium.
(3) through (5) No Change.
* * * * *
2340. Customer Account Statements
(a) through (b) No Change.
(c) Definitions.
For purposes of this Rule, the following terms will have the stated
meanings:
(1) through (2) No Change.
(3) direct participation program or direct participation program
security refers to the publicly issued equity securities of a direct
participation program as defined in Rule 2810 (including limited
liability companies), but does not include securities on deposit in a
registered securities depository and settled regular way, securities
listed on a national securities exchange [or The Nasdaq Stock Market],
or any program registered as a commodity pool with the Commodities
Futures Trading Commission.
(4) ``real estate investment trust'' or ``real estate investment
trust security'' refers to the publicly issued equity securities of a
real estate investment trust as defined in Section 856 of the Internal
Revenue Code, but does not include securities on deposit in a
registered securities depository and settled regular way or securities
listed on a national securities exchange [or The Nasdaq Stock Market].
(5) No Change.
(d) No Change.
* * * * *
2520. Margin Requirements
(a)-(e) No Change.
[[Page 392]]
(f) Other Provisions
(1) Determination of Value for Margin Purposes
Active securities dealt in on a national securities exchange [or
OTC Marginable securities listed on Nasdaq] shall, for margin purposes,
be valued at current market prices provided that, whether or not dealt
in on an exchange [or listed on Nasdaq], only those options contracts
on a stock or stock index, or a stock index warrant, having an
expiration that exceeds nine months and that are listed or guaranteed
by the carrying broker-dealer, may be deemed to have market value for
the purposes of Rule 2520. Other securities shall be valued
conservatively in view of current market prices and the amount [which]
that might be realized upon liquidation. Substantial additional margin
must be required in all cases where the securities carried in ``long''
or ``short'' positions are subject to unusually rapid or violent
changes in value, or do not have an active market [on Nasdaq or] on a
national securities exchange, or where the amount carried is such that
the position(s) cannot be liquidated promptly.
(2)-(9) No Change.
(10) Margin For Index/Currency Warrants
(A) This subparagraph (10) sets forth the minimum amount of margin
[which] that must be deposited and maintained in margin accounts of
customers having positions in index warrants, currency index warrants
or currency warrants dealt in on [Nasdaq or] a national securities
exchange. The Association may at any time impose higher margin
requirements in respect of such positions when it deems such higher
margin requirements to be advisable. The initial deposit of margin
required under this Rule must be made within five full business days
after the date on which a transaction giving rise to a margin
requirement is effected. The margin requirements set forth in this
subparagraph (J) are applicable only to index warrants, currency index
warrants and currency warrants listed for trading on Nasdaq or a
national securities exchange on or after September 28, 1995.
(B) Definitions
The following definitions shall apply to transactions in index
warrants, currency index warrants, and currency warrants.
(i) through (ii) No Change.
(iii) The term ``current market value'' of an index warrant,
currency index warrant or currency warrant shall mean the total cost or
net proceeds of the transaction on the day the warrant was purchased or
sold and at any other time shall mean the most recent closing price of
that issue of warrants on [Nasdaq, in the case of a Nasdaq-listed index
warrants, or] the exchange on which it is listed on any day with
respect to which a determination of current market value is made.
(iv) through (xiv) No Change.
(C) through (D) No Change.
* * * * *
2522. Definitions Related to Options, Currency Warrants, Currency
Index Warrants and Stock Index Warrants Transactions
(a) The following definitions shall apply to the margin
requirements for options, currency warrants, currency index warrants
and stock index warrants transactions:
(1) through (46) No Change.
(47) Options Trading
The term ``options trading'' means trading in any option issued by
The Options Clearing Corporation, whether or not of a type, class or
series [which] that has been approved for trading [on Nasdaq or] on a
national securities exchange.
(48) through (49) No Change.
(50) Primary Market
The term ``primary market'' means (A) in respect of an underlying
security that is principally traded on a national securities exchange,
the principal exchange market in which the underlying security is
traded and (B) in respect of an underlying security that is principally
traded in the over-the-counter market, the market reflected by any
widely recognized quotation dissemination system or service [(Nasdaq in
the case of a Nasdaq stock)].
(51) through (77) No Change.
* * * * *
2700. SECURITIES DISTRIBUTIONS
* * * * *
2720. Distribution of Securities of Members and Affiliates--
Conflicts of Interest
(a) No Change.
(b) Definitions
For purposes of this Rule, the following words shall have the
stated meanings:
(1) through (2) No Change.
(3) Bona fide independent market--a market in a security [which]
that:
(A) through (D) No Change.
(4) Bona fide independent market maker--a market maker [which]
that:
(A) is registered with the NASD [as a Nasdaq] or a national
securities exchange as a market maker in the security to be distributed
pursuant to this Rule;
(B) through (C) No Change.
(5) through (18) No Change.
(c) through (p) No Change.
* * * * *
2800. SPECIAL PRODUCTS
2810. Direct Participation Programs
(a) No Change.
(b) Requirements
(1) No Change.
(2) Suitability
(A) through (C) No Change.
(D) Subparagraphs (A) and (B), and, only in situations where the
member is not affiliated with the direct participation program,
subparagraph (C) shall not apply to:
(i) A secondary public offering of or a secondary market
transaction in a unit, depositary receipt, or other interest in a
direct participation program [for which quotations are displayed on
Nasdaq or which] that is listed on a registered national securities
exchange; or
(ii) an initial public offering of a unit, depositary receipt or
other interest in a direct participation program for which an
application for [inclusion on Nasdaq or] listing on a registered
national securities exchange has been approved by [Nasdaq or] such
exchange and the applicant makes a good faith representation that it
believes such [inclusion on Nasdaq or] listing on an exchange will
occur within a reasonable period of time following the formation of the
program.
(3) through (5) No Change.
(6) Participation in Rollups
(A) through (B) No Change.
(C) No member or person associated with a member shall participate
in any capacity in a limited partnership rollup transaction if the
transaction is unfair or unreasonable.
(i) A limited partnership rollup transaction will be presumed not
to be unfair or unreasonable if the limited partnership rollup
transaction provides for the right of dissenting limited partners:
a. to receive compensation for their limited partnership units
based on an appraisal of the limited partnership assets performed by an
independent appraiser unaffiliated with the sponsor or general partner
of the program [which] that values the assets as if sold in an orderly
manner in a reasonable period of time, plus or minus other balance
sheet items, and less the cost of
[[Page 393]]
sale or refinancing and in a manner consistent with the appropriate
industry practice. Compensation to dissenting limited partners of
limited partnership rollup transactions may be cash, secured debt
instruments, unsecured debt instruments, or freely[-] tradeable
securities; provided, however, that:
1. through 3. No Change.
4. freely[-] tradeable securities [utilized] used as compensation
to dissenting limited partners must be previously listed on a
registered national securities exchange [or previously traded on
Nasdaq] prior to the limited partnership rollup transaction, and the
number of securities to be received in return for limited partnership
interests must be determined in relation to the average last sale price
of the freely[-] tradeable securities in the 20-day period following
the date of the meeting at which the vote on the limited partnership
rollup transaction occurs. If the issuer of the freely[-] tradeable
securities is affiliated with the sponsor or general partner, newly
issued securities to be [utilized] used as compensation to dissenting
limited partners shall not represent more than 20 percent of the issued
and outstanding shares of that class of securities after giving effect
to the issuance. For purposes of the preceding sentence, a sponsor or
general partner is ``affiliated'' with the issuer of the freely[-]
tradeable securities if the sponsor or general partner receives any
material compensation from the issuer or its affiliates in conjunction
with the limited partnership rollup transaction or the purchase of the
general partner's interest; provided, however, that nothing herein
shall restrict the ability of a sponsor or general partner to receive
any payment for its equity interests and compensation as otherwise
provided by this subparagraph.
b. and c. No Change.
(ii) No Change.
(c) No Change.
* * * * *
2840. Trading in Index Warrants, Currency Index Warrants, and
Currency Warrants
2841. General
(a) Applicability--This Rule 2840 Series shall be applicable[: (1)
To the conduct of accounts, the execution of transactions, and the
handling of orders in index warrants listed on The Nasdaq Stock Market
(``Nasdaq''); and (2)] to the extent appropriate unless otherwise
stated herein, to the conduct of accounts, the execution of
transactions, and the handling of orders in exchange-listed stock index
warrants, currency index warrants, and currency warrants by members who
are not members of the exchange on which the warrant is listed or
traded.
(b) and (c) No Change.
* * * * *
2850. Position Limits
[(a)] Except with the prior written approval of the Association
pursuant to the Rule 9600 Series for good cause shown in each instance,
no member shall effect for any account in which such member has an
interest, or for the account of any partner, officer, director or
employee thereof, or for the account of any customer, a purchase or
sale transaction in an index warrant listed [on Nasdaq or] on a
national securities exchange if the member has reason to believe that
as a result of such transaction the member, or partner, officer,
director or employee thereof, or customer would, acting alone or in
concert with others, directly or indirectly, hold or control an
aggregate position in an index warrant issue on the same side of the
market, combining such index warrant position with positions in index
warrants overlying the same index on the same side of the market, in
excess of the position limits established by the Association[, in the
case of Nasdaq-listed index warrants,] or the exchange on which the
index warrant is listed.
[(b) In determining compliance with this Rule, the position limits
for Nasdaq-listed index warrants are as follows:]
[(1) Fifteen million warrants with respect to warrants on the same
stock index (other than the Standard & Poor's MidCap 400 Index) with an
original issue price of ten dollars or less.]
[(2) Seven million five hundred thousand warrants, with respect to
warrants on the Standard & Poor's MidCap 400 Index with an original
issue price of ten dollars or less.]
[(3) For stock index warrants with an original issue price greater
than ten dollars, positions in these warrants must be converted to the
equivalent-of warrants on the same index priced initially at ten
dollars by dividing the original issue price of the index warrants
priced above ten dollars by ten and multiplying this number by the size
of such index warrant position. After recalculating a warrant position
pursuant to this subparagraph, such recalculated warrant position shall
be aggregated with other warrant positions on the same underlying index
on the same side of the market and subjected to the applicable position
limit set forth in subparagraph (1) or (2) above. For example, if an
investor held 100,000 Nasdaq 100 Index warrants offered originally at
$20 per warrant, the size of this position for the purpose of
calculating position limits would be 200,000, or 100,000 times 20/10.]
2851. Exercise Limits
(a) Except with the prior written approval of the Association
pursuant to the Rule 9600 Series for good cause shown, in each
instance, no member or person associated with a member shall exercise,
for any account in which such member or person associated with such
member has an interest, or for the account of any partner, officer,
director or employee thereof, or for the account of any customer, a
long position in any index warrant if as a result thereof such member
or partner, officer, director or employee thereof or customer, acting
alone or in concert with others, directly or indirectly,[:]
[(1) Has or will have exercised within any five (5) consecutive
business days a number of index warrants overlying the same index in
excess of the limits for index warrant positions contained in Rule
2850; or
(2)] Has or will have exceeded the applicable exercise limit fixed
from time to time by an exchange for an index warrant [not dealt in on
Nasdaq].
(b) The Association, pursuant to the Rule 9600 Series for good
cause shown, may institute other limitations concerning the exercise of
index warrants from time to time by action of the Association.
Reasonable notice shall be given of each new limitation fixed by the
Association. These exercise limitations are separate and distinct from
any other exercise limitations imposed by the issuers of index
warrants.
[2852. Reporting Requirements] Reserved
[(a) Each member shall file with the Association a report with
respect to each account in which the member has an interest, each
account of a partner, officer, director or employee of such member, and
each customer account of the member, which has established an aggregate
position of 100,000 index warrants on the same side of the market in an
index warrant issue listed on Nasdaq, combining such index warrant
position with positions in index warrants overlying the same index on
the same side of the market traded on Nasdaq or a national securities
exchange.]
[(b) Such report shall identify the person or persons having an
interest in such account and shall identify separately the total number
of each type of index warrant that comprises the reportable position in
such account. The
[[Page 394]]
report shall be in such form as may be prescribed by the Association
and shall be filed no later than the close of business on the next
business day following the day on which the transaction or transactions
necessitating the filing of such report occurred. Whenever a report
shall be required to be filed with respect to an account pursuant to
this Rule, the member filing such report shall file with the
Association such additional periodic reports with respect to such
account as the Association may from time to time prescribe.]
* * * * *
2854. [Trading Halts or Suspensions] Reserved
[(a) The trading in an index warrant on Nasdaq shall be halted
whenever the Senior Vice President for Market Regulation, or its
designee, shall conclude that such action is appropriate in the
interests of a fair and orderly market and to protect investors. Among
the factors that may be considered are the following:]
[(1) Trading has been halted or suspended in underlying stocks
whose weighted value represents 20% or more of the index value;]
[(2) the current calculation of the index derived from the current
market prices of the stocks is not available;]
[(3) other unusual conditions or circumstances detrimental to the
maintenance of a fair and orderly market are present.]
[(b) Trading in index warrants that has been the subject of a
trading halt or suspension may resume if the Senior Vice President for
Market Regulation, or its designee, determines that the conditions
which led to the halt or suspension are no longer present or that the
interests of a fair and orderly market are served by a resumption of
trading. In either event, the reopening may not occur until the
Association has determined that trading in underlying stocks whose
weighted value represents more than 50% of the index is occurring.]
* * * * *
2860. Options
(a) No Change.
(b) Requirements
(1) General
(A) Applicability--This Rule shall be applicable (i) [to the
trading of options contracts issued by The Options Clearing Corporation
and displayed on The Nasdaq Stock Market and to the terms and
conditions of such contracts; (ii)] to the extent appropriate unless
otherwise stated herein, to the conduct of accounts, the execution of
transactions, and the handling of orders in exchange-listed options by
members [who] that are not members of an exchange on which the option
executed is listed; [(iii)] (ii) to the extent appropriate unless
otherwise stated herein, to the conduct of accounts, the execution of
transactions, and the handling of orders in conventional options; and
[(iv)] (iii) other matters related to options trading.
Unless otherwise indicated herein, subparagraphs (3) through (12)
shall apply only to [options displayed on Nasdaq and] standardized and
conventional options on common stock and subparagraphs (13) through
(24) shall apply to transactions in all options as defined in paragraph
(a), including common stock. The position and exercise limits for FLEX
Equity Options for members [who] that are not also members of the
exchange on which FLEX Equity Options trade shall be the same as the
position and exercise limits as applicable to members of the exchange
on which such FLEX Equity Options are traded.
(B) through (C) No Change.
(2) Definitions
The following terms shall, unless the context otherwise requires,
have the stated meanings:
(A) through (F) No Change.
(G) Call--The term ``call'' means an option contract under which
the holder of the option has the right, in accordance with the terms of
the option, to purchase the number of units of the underlying security
or to receive a dollar equivalent of the underlying index covered by
the option contract. In the case of a ``call'' issued by The Options
Clearing Corporation on common stock [or on an option displayed on The
Nasdaq Stock Market], it shall mean an option contract under which the
holder of the option has the right, in accordance with the terms of the
option, to purchase from The Options Clearing Corporation the number of
units of the underlying security or receive a dollar equivalent of the
underlying index covered by the option contract.
(H) through (DD) No Change. [(EE) Nasdaq Market Index Option--The
term ``Nasdaq market index option'' means an option contract issued by
The Options Clearing Corporation and displayed on Nasdaq based upon an
underlying index which has been deemed by the Commission to be a market
index.]
[(FF) Nasdaq Option Transaction--The term ``Nasdaq option
transaction'' means a transaction effected by a member of the
Association for the purchase or sale of an option contract which is
displayed on The Nasdaq Stock Market or for the closing out of a long
or short position in such option contract.]
(GG) through (II) are renumbered as (EE) through (GG).
[(JJ)] (HH) Options Contract--The term ``options contract'' means
any option as defined in paragraph (a). For purposes of subparagraphs
(3) through (12), an option to purchase or sell common stock shall be
deemed to cover 100 shares of such stock at the time the contract
granting such option is written. [A Nasdaq index option shall be deemed
to cover a dollar equivalent to the numerical value of the underlying
index multiplied by the applicable index multiplier.] If a stock option
is granted covering some other number of shares, then for purposes of
subparagraphs (3) through (12), it shall be deemed to constitute as
many option contracts as that other number of shares divided by 100
(e.g., an option to buy or sell five hundred shares of common stock
shall be considered as five option contracts). A stock option contract
[which] that, when written, grants the right to purchase or sell 100
shares of common stock shall continue to be considered as one contract
throughout its life, notwithstanding that, pursuant to its terms, the
number of shares [which] that it covers may be adjusted to reflect
stock dividends, stock splits, reverse splits, or other similar actions
by the issuer of such stock.
(KK) through (NN) are renumbered as (II) through (LL).
[(OO)] (MM) Put--The term ``put'' means an option contract under
which the holder of the option has the right, in accordance with the
terms of the option, to sell the number of units of the underlying
security or deliver a dollar equivalent of the underlying index covered
by the option contract. In the case of a ``put'' issued by The Options
Clearing Corporation on common stock [or on an option displayed on The
Nasdaq Stock Market], it shall mean an option contract under which the
holder of the option has the right, in accordance with terms of the
option, to sell to The Options Clearing Corporation the number of units
of the underlying security covered by the option contract or to tender
the dollar equivalent of the underlying index.
[(PP) Registered Nasdaq Index Options Market Maker--The term
``registered Nasdaq index options market maker'' means a member who
meets the qualifications for such, as set forth in subparagraph (3), is
willing and
[[Page 395]]
able to serve as such in connection with Nasdaq index option contracts
and who is authorized by the Association to do so.]
(QQ) through (VV) are renumbered as (NN) through (SS).
[(WW)] (TT) The Options Clearing Corporation--The term ``The
Options Clearing Corporation'' means The Options Clearing Corporation,
the issuer of exchange-listed options [and options displayed on The
Nasdaq Stock Market].
(XX) through (YY) are renumbered as (UU) through (VV).
[(ZZ) Underlying Index--The term ``underlying index'' means an
index upon which a Nasdaq index option contract is based.]
(AAA) through (BBB) are renumbered as (YY) through (ZZ).
(3) Position Limits
(A) Stock Options--Except in highly unusual circumstances, and with
the prior written approval of the Association pursuant to the Rule 9600
Series for good cause shown in each instance, no member shall effect
for any account in which such member has an interest, or for the
account of any partner, officer, director or employee thereof, or for
the account of any customer, non-member broker, or non-member dealer,
an opening transaction through [Nasdaq,] the over-the-counter market or
on any exchange in a stock option contract of any class of stock
options if the member has reason to believe that as a result of such
transaction the member or partner, officer, director or employee
thereof, or customer, non-member broker, or non-member dealer, would,
acting alone or in concert with others, directly or indirectly, hold or
control or be obligated in respect of an aggregate equity options
position in excess of:
(i) No Change.
(ii) 22,500 options contracts of the put class and the call class
on the same side of the market covering the same underlying security,
provid[ing]ed that the 22,500 contract position limit shall only be
available for option contracts on securities [which] that underlie
[Nasdaq or] exchange-traded options qualifying under applicable rules
for a position limit of 22,500 option contracts; or
(iii) 31,500 option contracts of the put class and the call class
on the same side of the market covering the same underlying security
provid[ing]ed that the 31,500 contract position limit shall only be
available for option contracts on securities [which] that underlie
[Nasdaq or] exchange-traded options qualifying under applicable rules
for a position limit of 31,500 option contracts; or
(iv) 60,000 options contracts of the put and the call class on the
same side of the market covering the same underlying security,
provid[ing]ed that the 60,000 contract position limit shall only be
available for option contracts on securities [which] that underlie
[Nasdaq or] exchange-traded options qualifying under applicable rules
for a position limit of 60,000 option contracts; or
(v) 75,000 options contracts of the put and the call class on the
same side of the market covering the same underlying security,
provid[ing]ed that the 75,000 contract position limit shall only be
available for option contracts on securities [which] that underlie
[Nasdaq or] exchange-traded options qualifying under applicable rules
for a position limit of 75,000 option contracts; or
(vi) through (ix) No Change.
(B) Index Options
[(i)] Except in highly unusual circumstances, and with the prior
written approval of the Association pursuant to the Rule 9600 Series
for good cause shown in each instance, no member shall effect for any
account in which such member has an interest, or for the account of any
partner, officer, director or employee thereof, or for the account of
any customer, an opening transaction in an option contract of any class
of index options [displayed on Nasdaq or] dealt in on an exchange if
the member has reason to believe that as a result of such transaction
the member or partner, officer, director or employee thereof, or
customer, would, acting alone or in concert with others, directly or
indirectly, hold or control or be obligated in respect of an aggregate
position in excess of position limits established by [the Association,
in the case of Nasdaq index options, or] the exchange on which the
option trades.
[(ii) In determining compliance with this subparagraph (3), option
contracts on a market index displayed in Nasdaq shall be subject to a
contract limitation fixed by the Association, which shall not be larger
than the equivalent of a $300 million position. For this purpose, a
position shall be determined by the product of the closing index value
times the index multiplier times the number of contracts on the same
side of the market.]
(C) through (D) No Change.
(4) through (6) No Change.
(7) Limit on Uncovered Short Positions
Whenever the Association shall determine in light of current
conditions in the markets for options, or in the markets for underlying
securities, that there are outstanding a number of uncovered short
positions in option contracts of a given class in excess of the limits
established by the Association for purposes of this subparagraph or
that a percentage of outstanding short positions in option contracts of
a given class are uncovered, in excess of the limits established by the
Association for purposes of this subparagraph, the Association, upon
its determination that such action is in the public interest and
necessary for the protection of investors and the maintenance of a fair
and orderly market in the option contracts or underlying securities,
may prohibit any further opening writing transactions in option
contracts of that class unless the resulting short position will be
covered, and it may prohibit the uncovering of any existing covered
short position in option contracts of one or more series of options of
that class. [The Association may exempt transactions in Nasdaq options
by registered Nasdaq options market makers from restrictions imposed
under this subparagraph and it shall rescind such restrictions upon its
determination that they are no longer appropriate.]
(8) through (11) No Change.
(12) Confirmations
Every member shall promptly furnish to each customer a written
confirmation of each transaction in option contracts for such
customer's account. Each such confirmation shall show the type of
option, the underlying security or index, the expiration month, the
exercise price, the number of option contracts, the premium, the
commission, the trade and settlement dates, whether the transaction was
a purchase or a sale (writing) transaction, whether the transaction was
an opening or a closing transaction, whether the transaction was
effected on a principal or agency basis and, for other than options
issued by The Options Clearing Corporation, the date of expiration. The
confirmation shall by appropriate symbols distinguish between exchange
listed [and Nasdaq option transactions] and other transactions in
option contracts.
(13) through (22) No Change.
(23) Tendering Procedures for Exercise of Options
(A) Exercise of Options Contracts
(i) Subject to the restrictions established pursuant to paragraph
(b)(4) hereof and such other restrictions [which] that may be imposed
by the Association, The Options Clearing Corporation or an options
exchange pursuant to appropriate rules, an outstanding option contract
issued by The Options Clearing Corporation may be exercised during the
time period specified in the rules of The Options
[[Page 396]]
Clearing Corporation. An exercise notice may be tendered to The Options
Clearing Corporation only by the clearing member in whose account the
option contract is carried. Exercise instructions of their customers
relating to exchange listed [or Nasdaq] option contracts shall not be
accepted by members after 5:30 p.m. (Eastern Time) on the business day
immediately prior to the expiration date of any option contract.
Exercise instructions in respect of such option contracts carried in
any proprietary account of a member shall similarly not be accepted by
any other member with [whom] which such member maintains an account
after 5:30 p.m. (Eastern Time) on the business day immediately prior to
the expiration date of any option contract.
(ii) through (iii) No Change.
(B) through (D) No Change.
[(E) Exercise of Nasdaq Index Option Contracts
(i) With respect to Nasdaq index option contracts, clearing members
are required to follow the procedures of The Options Clearing
Corporation for tendering exercise notices, and member organizations
also are required to comply with the following procedures:]
[a. A memorandum to exercise any Nasdaq index option contract
issued or to be issued in a customer or market maker account at The
Options Clearing Corporation must be received or prepared by the member
organization no later than 4:10 p.m. (Eastern Time) and must be time-
stamped at the time it is received or prepared. Member organizations
must accept exercise instructions until 4:10 p.m. (Eastern Time) each
business day.]
[b. A memorandum to exercise any Nasdaq index option contract
issued or to be issued in a firm account at The Options Clearing
Corporation must be prepared by the member organization no later than
4:10 p.m. (Eastern Time) and must be time-stamped at the time it is
prepared.]
[c. Any member or member organization that intends to submit an
exercise notice for 25 or more contracts in the same series of Nasdaq
index options on the same business day on behalf of an individual
customer, registered Nasdaq options market maker or firm account must
notify the Association of such exercises in a manner prescribed by the
Association no later than 4:10 p.m. (Eastern Time) on that day. For
purposes of this subparagraph (E), exercises for all accounts
controlled by the same individual must be aggregated.]
[(ii) The provisions of subparagraphs (i) a. and b. above are not
applicable in respect to any series of Nasdaq index options on the last
day of trading prior to the expiration date of such series.]
(24) No Change.
* * * * *
2870. [Nasdaq Index Options] Reserved
[2871. Definitions]
[(a) Aggregate Current Index Value--The term ``aggregate current
index value'' means the value required to be delivered to the holder of
a call or by the holder of a put (against payment of the aggregate
exercise price) upon the valid exercise of an index option. Such value
is equal to the index multiplier times the current index value on the
trading day on which an exercise notice is properly tendered to The
Options Clearing Corporation, or, if the day on which such notice is so
tendered is not a trading day, then on the most recent trading day.]
[(b) Aggregate Index Option Exercise Price--The term ``aggregate
index option exercise price'' in respect of an index option means the
exercise price of such option times the index multiplier.]
[(c) Best Bid and Asked--The term ``best bid'' means the best or
highest price of all the open, active bids. The term ``best asked''
means the best or lowest (but greater than zero) price of all the open
active offers.]
[(d) Cabinet Transaction--The term ``cabinet transaction'' means a
transaction in a Nasdaq index option executed at a price of $1.00 per
contract for the purpose of opening or closing a position in an index
option having a nominal market value.]
[(e) Call--The term ``call'' means an option contract under which
the holder of the options has the right, in accordance with the terms
of the option, to buy a number of units of the underlying security or
to receive a dollar equivalent of the underlying index covered by the
option contract.]
[(f) Class of Options--The term ``class of options'' means all
option contracts of the same type of option covering the same
underlying security or index.]
[(g) Clearing Member--The term ``clearing member'' means a member
of the Association which has been admitted to membership in The Options
Clearing Corporation pursuant to the provisions of the rules of The
Options Clearing Corporation.]
[(h) Closing Purchase Transaction--The term ``closing purchase
transaction'' means an option transaction in which the purchaser's
intention is to reduce or eliminate a short position in the series of
options involved in such transaction.]
[(i) Closing Sale Transaction--The term ``closing sale
transaction'' means an option transaction in which the seller's
intention is to reduce or eliminate a long position in the series of
options involved in such transaction.]
[(j) Combination Order--The term ``combination order'' means an
order to buy a number of call option contracts and the same number of
put option contracts with respect to the same underlying security or
index or put and call option contracts representing the same number of
shares or units of trading at option, which contracts do not have both
the same exercise price and expiration date; or an order to sell a
number of call option contracts and the same number of put option
contracts with respect to the same underlying security or index, or put
and call option contracts representing the same number of shares, or
units of trading at option, which contracts do not have both the same
exercise price and expiration date (e.g., an order to buy two XYZ April
50 calls and to buy two XYZ July 40 puts is a combination order). In
the case of adjusted option contracts, a combination order need not
consist of the same number of put and call contracts if such contracts
represent the same number of shares or units of trading at option.]
[(k) Covered--The term ``covered'' in respect of a short position
in a call option contract means that the writer's obligation is secured
by a ``specific deposit'' or an ``escrow deposit,'' meeting the
conditions of Rules 610(e) or 610(h), respectively, of the rules of The
Options Clearing Corporation, or the writer holds in the same account
as the short position, on a unit-for-unit basis, a long position either
in the underlying security or in an option contract of the same class
of options where the exercise price of the option contract in such long
position is equal to or less than the exercise price of the option
contract in such short position. The term ``covered'' in respect of a
short position in a put option contract means that the writer holds in
the same account as the short position, on a unit-for-unit basis, a
long position in an option contract of the same class of options having
an exercise price equal to or greater than the exercise price of the
option contract in such short position.]
[(l) Current Index Value--The term ``current index value'' means
the level of a particular index (derived from the current market prices
and capitalization of the underlying securities in the index group) at
the close of trading on any trading day, or any multiple or fraction
thereof specified by the Association as such value is reported by the
reporting authority.]
[[Page 397]]
[(m) Expiration Cycle--The term ``expiration cycle'' means all
option contracts covering the same underlying security or index having
the same expiration month, or the time period during which such options
are authorized for trading.]
[(n) Expiration Date--The term ``expiration date'' of a Nasdaq
option contract issued by The Options Clearing Corporation means the
day and time fixed by the rules of The Options Clearing Corporation for
the expiration of all option contracts having the same expiration month
as such option contract.]
[(o) Expiration Month--The term ``expiration month'' in respect of
an option contract means the month and year in which such option
contract expires.]
[(p) Index Dollar Equivalent--The term ``index dollar equivalent''
is the dollar amount which results when the index value is multiplied
by the appropriate index multiplier.]
[(q) Index Group--The term ``index group'' means a group of
securities, whose inclusion and relative representation in the group is
determined by the inclusion and relative representation of their
current market values in a widely disseminated securities index
specified by the Association.]
[(r) Index Multiplier--The term ``index multiplier'' as used in
reference to an index option contract means the dollar amount (as
specified by the Association) by which the current index value is
multiplied to arrive at the index dollar equivalent. Such term replaces
the term ``unit of trading'' used in reference to other kinds of
options.]
[(s) Index Option Exercise Price--The term ``index option exercise
price'' in respect of an index option means the specified index value
which, when multiplied by the index multiplier, will yield the
aggregate exercise price at which the aggregate current index value may
be purchased (in the case of a call) or sold (in the case of a put)
upon the exercise of such option.]
[(t) Index Option Premium--The term ``index option premium'' means
the price of each such option (expressed in points), as agreed upon by
the purchaser and seller in such transaction, times the index
multiplier and the number of options subject to the transaction.]
[(u) Index Underlying Security--The term index underlying security
means any of the securities included in an index group underlying a
class of Nasdaq index options.]
[(v) Internalized Trade Transaction--The term ``Internalized Trade
Transaction'' or ``ITT'' means an OCT entered into The Nasdaq Stock
Market by a participant containing the terms of a transaction executed
by the participant as principal where the participant is also the order
entry firm.]
[(w) Long Position--The term ``long position'' means the number of
outstanding option contracts of a given series of options held by a
person (purchaser).]
[(x) Nasdaq Index Option Contract--The term ``Nasdaq index option
contract'' means an option contract which is authorized for quotation
display on The Nasdaq Stock Market.]
[(y) Nasdaq Index Options Order Entry Firm--The term ``order entry
firm'' shall mean a member of the Association who is registered as an
order entry firm for purposes of participation in the Nasdaq Index
Options Service which permits the firm to enter options orders via
Order Confirmation Transactions (OCT) or Internalized Trade Transaction
(ITT).]
[(z) Nasdaq Index Options Participant--The term ``participant''
shall mean either a Nasdaq index options market maker or Nasdaq index
options order entry firm registered as such with the Association for
participation in the Nasdaq Index Options Service.]
[(aa) Nasdaq Index Options Service--The term ``Nasdaq Index Option
Service'' or ``Service'' means the Service owned and operated by The
Nasdaq Stock Market, Inc. which enables participants to report
transaction in Nasdaq index options, to have reports of all Nasdaq
index options transactions automatically forwarded to the Options Price
Reporting Authority (OPRA) for dissemination to the public and the
industry, and to ``lock-in'' these trades by sending both sides to The
Options Clearing Corporation for clearance and settlement; and to
provide participants with sufficient monitoring and updating
capabilities to participate in such trading environment.]
[(bb) Nasdaq Market Index Option--The term ``Nasdaq market index
option'' means an option contract issued by The Options Clearing
Corporation and displayed on The Nasdaq Stock Market based upon an
underlying index which has been deemed by the Commission to be a market
index.]
[(cc) Opening Purchase Transaction--The term ``opening purchase
transaction'' means an option transaction in which the buyer's
intention is to create or increase a long position in the series of
options involved in such transaction.]
[(dd) Opening Writing Transaction--The term ``opening writing
transaction'' means an option transaction in which the seller's
(writer's) intention is to create or increase a short position in the
series of options involved in such transaction.]
[(ee) Options Clearing Corporation--The term ``Options Clearing
Corporation'' (OCC) means The Options Clearing Corporation, the issuer
of options displayed on The Nasdaq Stock Market.]
[(ff) Order Confirmation Transaction--The term ``Order Confirmation
Transaction'' or ``OCT'' means a message entered into The Nasdaq Stock
Market by an order entry firm which is directed to a market maker not
simultaneously acting as both a market maker and an order entry firm,
which message contains the information specified by the Association as
necessary for trade reporting purposes and for submission of trade
detail to The Options Clearing Corporation.]
[(gg) Outstanding--The term ``outstanding'' in respect of an option
contract means an option contract which has neither been the subject of
a closing sale transaction nor has been exercised nor has reached its
expiration date.]
[(hh) Put--The term ``put'' means an option contract under which
the holder of the option has the right, in accordance with the terms of
the option, to sell the number of units of the underlying security or
deliver a dollar equivalent of the underlying index covered by the
option contract.]
[(ii) Registered Nasdaq Index Options Market Maker--The term
``registered Nasdaq index options market maker'' means a member who
meets the qualifications for such as set forth in Rule 2873, is willing
and able to serve as such in connection with Nasdaq index option
contracts and who is authorized by the Association to do so.]
[(jj) Rules of The Options Clearing Corporation--The term ``rules
of The Options Clearing Corporation'' means the by-laws and the rules
of The Option Clearing Corporation, and all written interpretations
thereof as may be in effect from time to time.]
[(kk) Series of Options--The term ``series of options'' means all
option contracts of the same class of options having the same exercise
price and expiration date and which cover the same number of units of
the underlying security or index.]
[(ll) Short Position--The term ``short position'' means the number
of outstanding option contracts of a given series of options with
respect to which a person is obligated as a writer (seller).]
[(mm) Spread Order--The term ``spread order'' means an order to buy
a stated number of option contracts and
[[Page 398]]
to sell the same number of option contracts, or contracts representing
the same number of shares or units of trading at option in a different
series of the same class of options.]
[(nn) Straddle Order--The term ``straddle order'' means an order to
buy a number of call option contracts and the same number of put option
contracts with respect to the same underlying security or index, or put
and call option contracts representing the same number of shares or
units of trading at option, and having the same exercise price and
expiration date; or an order to sell a number of call option contracts
and the same number of put option contracts with respect to the same
underlying security or index, or put and call option contracts
representing the same number of shares or units of trading at option
and having the same exercise price and expiration date, (e.g., an order
to buy two XYZ July 50 calls and to buy two XYZ July 50 puts is a
straddle order). In the case of adjusted option contracts, a straddle
order need not consist of the same number of put and call contracts if
such contracts both represent the same number of shares, or units of
trading at option.]
[(oo) Type of Options--The term ``type of options'' means the
classification of an option contract as either a put or a call.]
[(pp) Uncovered--The term ``uncovered'' in respect of a short
position in an option contract means the short position is not
covered.]
[(qq) Underlying Index--The term ``underlying index'' means an
index upon which a Nasdaq index option contract is based.]
[(rr) Unit of Trading--The term ``unit of trading'' means the
number of units of the underlying security designated by The Options
Clearing Corporation as the subject of a single option contract. In the
absence of any other designation, the unit of trading for a common
stock is 100 shares.]
[2872. Nasdaq Index Option Services Available]
[(a) Level 2 Nasdaq Index Options Service]
[(1) Nature of Service
This service will provide the subscriber with access to the
quotations of all of the registered Nasdaq index options market makers
entering quotes on each of the Nasdaq index options, in addition to the
last reported sale for each Nasdaq index option, the most recent index
computation for the underlying index, daily high and low, daily volume,
time of last sale and inside quotations.]
[(2) Availability
This service is available only to persons approved and authorized
by the Association for retrieval of Nasdaq index options quotation and
last sale data.]
[(b) Level 3 Nasdaq Index Options Service]
[(1) Nature of Service
This service will enable a registered Nasdaq index options market
maker to enter quotations in The Nasdaq Stock Market only on the Nasdaq
index options as to which the Association has authorized it to enter
quotes pursuant to the procedures set forth in Rule 2873. A subscriber
to Level 3 Nasdaq Index Options Service shall also receive Level 2
Nasdaq Index Options Service.]
[(2) Availability
Level 3 Nasdaq Index Options Service is available to any member
which, upon application, is approved and authorized by the Association
to participate in The Nasdaq Stock Market as a registered Nasdaq index
options market maker.]
[2873. Registration, Qualification and Other General Requirements
Applicable to All Nasdaq Index Options Market Makers]
[(a) Registration of Nasdaq Index Options Market Makers--Prior to
acting as a market maker in Nasdaq index options, a member must make
application to the Association on a form prescribed by the Association
and become registered as such with it. In connection with such
application, a member must submit to the Association such financial and
other information as required by the Association to determine if such
member meets the qualifications of a registered Nasdaq index options
market maker specified herein. Such other information will include
those classes and series of Nasdaq options in which such member desires
to be registered as an index options market maker.]
[(b) Participation in the Nasdaq Index Options Service shall be
mandatory for all Nasdaq index options market makers. Accordingly, a
Nasdaq index options market maker's registration as such shall be
conditioned upon the member's initial and continuing compliance with
the following requirements:]
[(1) execution of a Nasdaq Index Options Service participant
application agreement with the Association;]
[(2) maintenance of the physical security of the equipment located
on the premises of the Nasdaq index options market maker to prevent the
unauthorized entry of information into the Nasdaq Index Options
Service;]
[(3) acceptance and settlement of each NASD index option trade that
the Service identifies as having been effected by such Nasdaq index
options market maker, or if settlement is to be made through another
clearing member, guarantee of the acceptance and settlement of such
identified trade by the clearing member on the regularly scheduled
settlement date;]
[(4) membership in The Options Clearing Corporation, or a clearing
arrangement with such member; and]
[(5) compliance with all applicable rules and operating procedures
of the Association and the Commission.]
[(c) Nasdaq index options market makers shall be under a continuing
obligation to inform the Association of non-compliance with any of the
registration requirements set forth above.]
[(d) Obligation to Honor Trades--If a Nasdaq index options market
maker, or clearing member acting on his behalf, is reported by the
Service to clearing at the close of any trading day, or shown by the
activity reports generated by the Service as constituting a side of a
trade, such market maker, or clearing member acting on his behalf,
shall honor such trade on the scheduled settlement date.]
[(e) Compliance with Rules and Registration Requirements--Failure
by Nasdaq index options market makers to comply with any of the Rules
or registration requirements applicable to the Service identified
herein shall subject such participants to censure, fine, suspension or
revocation of its registration as Nasdaq index options market maker
and/or order entry firm or any other fitting penalty under the Rules of
the Association.]
[(f) Market Maker Financial Requirements--A registered Nasdaq index
options market maker shall continuously maintain net capital of at
least $50,000 computed in accordance with the provisions of SEC Rule
15c3-1(c)(2) under the Act, plus $5,000 per options series up to a
maximum requirement of $150,000.]
[(g) Normal Business Hours--A registered Nasdaq index options
market maker shall keep the Association advised as to the normal
business hours during which it shall enter quotations. All firms should
be open and active between the hours of 9:30 a.m. and 4:10 p.m.
(Eastern Time). Nasdaq shall publish a ``close symbol'' for a
registered Nasdaq index options market maker on Level 2 and Level 3
terminals at the close of such firm's normal business hours.]
[[Page 399]]
[(h) Initiation of Service--Upon initial application, the
registration of a Nasdaq index options market maker in a Nasdaq index
options series shall be effective at the start of business on the
second business day following receipt of his registration application
by the Association; provided, however, said registration is accepted by
the Association. If said initial registration is received for a Nasdaq
index options series which has not previously been authorized by the
Association, the registered Nasdaq index options market maker's
registration shall be effective at the start of business on the first
day that the Nasdaq options series is authorized for quotation by the
Association; provided, however, said registration is accepted by the
Association. A Nasdaq index options market maker shall commence market
making and participation in the Service by initially contacting the
Nasdaq Market Operations Center to obtain authorization for the trading
of a particular Nasdaq index options series and identifying those
terminals on which the Service information is to be displayed and
thereafter by an appropriate keyboard entry which obligates him to
execute transactions for at least one contract at the market maker's
displayed quotations so long as the market maker remains active. All
entries shall be made in accordance with the requirements set forth in
the User Guide.]
[(i) Withdrawal Procedure for Nasdaq Index Options Market Makers]
[(1) With the approval of the Association, a registered Nasdaq
index options market maker may suspend its quotations in a Nasdaq index
options series for a specified period of time upon a showing that it is
seriously impaired in its ability to enter quotations, or, in the case
of a contemplated financing in the underlying security, the presence of
statutory prohibitions or restrictions, or such other reason acceptable
to the Association.]
[(2) In the event of a malfunction in the Nasdaq index options
market maker's equipment rendering on-line communications with the
Service inoperable, the Nasdaq index options market maker is obligated
to immediately contact the Nasdaq Market Operations Center by telephone
to request withdrawal from the Service. Nasdaq operational personnel
will in turn enter the withdrawal notification from a supervisory
terminal. Such manual intervention, however, will take a certain period
of time for completion and any transaction occurring prior to the
effectiveness of the withdrawal shall remain the responsibility of the
withdrawing market maker.]
[(3) A registered Nasdaq index options market maker who suspends
its quotations in a Nasdaq index options series pursuant to
subparagraphs (1) and (2) above may not re-enter quotations in such
series during the same trading day without the prior approval of the
Association.]
[(j) Voluntary Termination--A registered Nasdaq index options
market maker may voluntarily terminate its registration as to any
Nasdaq options series by withdrawing its quotations from the Service
without prior approval of the Association, subject to the conditions
set forth in Rules 2875 and 2876. Such Nasdaq index options market
maker may, by making application to the Association under the
procedures and requirements set forth in this Rule, re-register as a
Nasdaq index options market maker in a Nasdaq options series in which
his registration is terminated.]
[(k) A Nasdaq index options market maker withdrawing option
quotations from the Nasdaq Index Options Service for any reason has a
specific obligation to monitor his status to assure that a withdrawal
has in fact occurred. Any transaction occurring prior to the
effectiveness of the withdrawal shall remain the responsibility of the
withdrawing market maker.]
[(l) Suspension and Termination of a Registered Nasdaq Index
Options Market Maker's Authority to Enter Quotations by Action of the
Association--The Association may, pursuant to provisions specified in
the Code of Procedure as set forth in the Rule 9000 Series, suspend,
condition or terminate a registered index options market maker's
authority to enter quotations on one or more series of Nasdaq index
options for violations of applicable Rules of the Association.]
[(m) Termination of Service on the Failure to Promptly Pay Fines
and Assessments]
[(1) The Association, upon notice, may terminate service on any
level of Nasdaq Index Options Service for failure of a subscriber to
maintain the standards of availability specified in this Rule for such
service or to pay the Service operator for services rendered.]
[(2) Any member which is a respondent in a complaint pursuant to
any Rule of the Association is required promptly to pay any fine or
costs imposed to the Treasurer of the Association. In the event that
the respondent fails to do so, the Association may, after ten business
days notice in writing to such respondent, suspend his authority to
enter options quotations into or receive options quotations from Level
2 and 3 of the Nasdaq Index Options Services.]
[2874. Character of Index Options Quotations Entered Into the
Nasdaq Index Options Service by All Nasdaq Index Options Market
Makers]
[(a) All bids or offers for Nasdaq index options shall be for at
least one option contract or the minimum unit of trading.]
[(b) All bids and offers for Nasdaq index options shall be
expressed in terms of the applicable index multiplier (e.g., a bid of
five for a Nasdaq index option having an index multiplier of $100 shall
represent a bid to pay a premium of $500 for an option contract).]
[(c) All bids or offers for a Nasdaq index option contract for
which The Options Clearing Corporation has established an adjusted unit
of trading in accordance with paragraphs (c) and (d) of Section 11 of
Article VI of the OCC's By-Laws shall be expressed in terms of dollars
per the appropriate fractional part of the total securities and/or
other property constituting such adjusted unit of trading.]
[(d) A registered Nasdaq index options market maker who receives a
buy or sell order must execute a trade for at least one contract at his
quotation as they appear on the Nasdaq CRT screen at the time of
receipt of any such buy or sell order. Each quotation entered by a
registered Nasdaq index options market maker must be reasonably related
to the prevailing market.]
[(e) A registered Nasdaq index options market maker will be
permitted to enter a one-sided quotation (0-1/16) with respect to those
options which have no present market value.]
[(f) Crossed Markets--A registered Nasdaq index options market
maker shall not be permitted, except under extraordinary circumstances,
to enter quotations into the Nasdaq Index Options Service if (1) the
bid quotation entered is greater than the ask quotation of another
registered market maker in the same options series or (2) the asked
quotation is less than the bid quotation of another registered market
maker in the same options series.]
[(g) Quote Spread Parameters--A registered Nasdaq index options
market maker shall not be permitted, except under extraordinary
circumstances, to enter index option quotations into the Nasdaq Index
Options Service if the spread between the market maker's bid and ask
exceeds the following parameters:]
[[Page 400]]
[(1) \1/4\ of $1, if the member's bid price is $.50 or less;]
[(2) \1/2\ of $1, if the bid price is more than $.50 but does not
exceed $10;]
[(3) \3/4\ of $1, if the bid price is more than $10 but does not
exceed $20; or]
[(4) $1, if the bid price is more than $20;]
[Providing, however, that the allowable quote spread differentials for
the longest term options series open for trading in each option class
shall be twice the amounts stated in subparagraphs (1) through (4)
above.]
[(h) Except under extraordinary circumstances, a registered Nasdaq
index options market maker shall not be permitted to enter on an intra-
day basis a bid quotation more than $1 lower and/or an offering more
than $1 higher than the last reported transaction for the particular
index option contract. However, this standard shall not ordinarily
apply if the price per share (or other unit of trading of the
underlying index value has changed since the last preceding transaction
for the particular option contract, in which event a market maker may
then bid no lower than or offer no more than $1 plus the aggregate
change in the price per unit of trading) of the underlying index value
since the time of the last preceding transaction for the particular
index option contract. Nothing in this paragraph shall alter the
maximum bid-ask differential established by paragraph (g) above.]
[(i) Whenever, in the judgment of the Association, the interest of
maintaining a fair and orderly market so requires, the Association may
waive the requirements of paragraph (h) above on a case by case basis.]
[(j) When unusual trading conditions exist, and the interest of
maintaining a fair and orderly market, the Association may waive the
requirements of paragraph (g) above in those option series 10 or more
points in the money to allow market makers to make bid/ask
differentials as wide as the quotation in the primary market as
determined by the inside quotation displayed on Nasdaq. Such waiver
shall not automatically carry over from one day to the next.]
[2875. Commitment Rules Applicable to Options Market Makers in
Nasdaq Index Options]
[(a) Commitment Rule for Index Options Market Makers. A market
maker in a Nasdaq index option, unless excused from entering quotations
pursuant to Rule 2873(i) shall, during normal options business hours,
continuously quote all options series in such index option through the
expiration of the longest term index options authorized for trading at
the time the member commences such market making. Failure to abide by
this commitment shall cause the index options market maker to be
subject to the sanctions contained in Rule 2876.]
[(b) The following examples illustrate the commitment rule for
index option market makers established by this Rule.]
[(1) Member A is authorized as a Nasdaq index options market maker
prior to the expiration of January Nasdaq-100 Index Options.
Member A is thus obligated to continuously quote all series of Nasdaq-
100 put and call options authorized for trading in the January,
February and March expirations through the expiration of the March
options.]
[(2) Member B is authorized as a market maker in Nasdaq-100
Index Options at the time these options are authorized for
the Nasdaq Options Program, but prior to the commencement of trading in
these index options. The first authorized expiration cycle in Nasdaq-
100 Index options will consist of options expiring in April, May and
June with trading to commence in March. Member B would be obligated to
continuously quote all authorized Nasdaq-100 Index option series from
the commencement of trading in such options in March through the
expiration of June Nasdaq-100 Index options.]
[2876. Sanctions Applicable to Nasdaq Index Options Market Makers]
[(a) A registered Nasdaq market maker in index options whose
quotation for any option series in which the member is a market maker
is withdrawn without the approval of the Association shall, at or
before the daily close of the Nasdaq Index Options Service, have its
registration terminated in all Nasdaq index options series covering the
same underlying index as that for which option quotations were
suspended by the member, subject, however, to the re-registration
procedures set forth in paragraph (b) below.]
[(b) A Nasdaq index options market maker in index options whose
registration in options classes is terminated pursuant to paragraph (a)
above may, by making application to the Association under the
procedures and requirements set forth in Rule 2873, re-register as a
Nasdaq index options market maker in any Nasdaq index options series in
the options classes in which his registration was terminated pursuant
to paragraph (a) above providing, however, that the Association shall
not grant effectiveness to such registration until the near-term
options and those in the following expiration cycle have expired.]
[(c) The following example illustrates the sanction for index
options market makers established by paragraph (a) above.]
[(1) Market Maker A, without approval of the Association, withdraws
quotations from the Nasdaq Index Options Service for a series of
Nasdaq-100 Index options causing the member's registration in
all Nasdaq-100 Index options series to be terminated pursuant to
paragraph (a) above.]
[(2) At the time Market Maker A's registration is terminated,
January, February and March Nasdaq-100 Index options are
trading. Pursuant to paragraph (b), any application by member A to
again register as a market maker in Nasdaq-100 Index options would not
be granted effectiveness by the Association until the expiration of the
February Nasdaq-100 Index options.]
[(d) A registered market maker in Nasdaq index options who
withdraws index options quotations from the Nasdaq Index Options
Service in any options series without prior authorization during the 15
business days preceding the expiration of the near-term options on the
same underlying index may be deemed to be in violation of Rule 2110.]
[2877. Requirements Applicable to Nasdaq Index Options Order Entry
Firms]
[(a) Participation in the Nasdaq Index Options Service as an order
entry firm requires current registration as such with the Association.
Such registration shall be conditioned upon the order entry firm's
initial and continuing compliance with the following requirements:]
[(1) Execution of a Nasdaq Index Options Service participant
application agreement with the Association;]
[(2) membership in, or a clearing arrangement with, a member of The
Options Clearing Corporation;]
[(3) compliance with all applicable rules and operating procedures
of the Association and the Commission;]
[(4) maintenance of the physical security of the equipment located
on the premises of the Nasdaq index options order entry firm to prevent
the unauthorized entry of information into the Nasdaq Index Options
Service; and]
[(5) acceptance and settlement of each trade that the Service
identifies as having been effected by such Nasdaq index options order
entry firm or, if settlement is to be made through another clearing
member, guarantee of the acceptance and settlement of such
[[Page 401]]
identified trade by the clearing member on the regularly scheduled
settlement date.]
[(b) The registration required hereunder will apply solely to the
qualification of a participant to participate in the Nasdaq Index
Options Service. Such registration shall not be conditioned upon
registration in any particular eligible or active Nasdaq index options
contracts.]
[(c) Each participant shall be under a continuing obligation to
inform the Association of non-compliance with any of the registration
requirements set forth above.]
[(d) Upon the effectiveness of registration as a Nasdaq index
options order entry firm, the participant may commence activity for
entry of orders, as applicable. The operating hours of the Nasdaq Index
Options Service are currently 9:30 a.m. to 4:10 p.m. (Eastern Time),
but may be modified by the Association. The extent of participation in
Nasdaq by a Nasdaq index options order entry firm shall be determined
solely by the firm in the exercise of its ability to enter orders into
Nasdaq.]
[(e) Market orders shall not be permitted in the Nasdaq Index
Options Service. All orders entered into the Service other than
accommodation transactions shall be priced and all orders shall be
directed to a specified Nasdaq index options market maker. Nasdaq index
options order entry firms will be immediately notified on the terminal
screen and printer, if requested, of the execution or rejection of an
order entered into via OCT.]
[(f) If a Nasdaq index options order entry firm or clearing member
acting on his behalf, is reported by the Service to clearing at the
close of any trading day, or shown by the activity reports generated by
the Service as constituting a side of a Nasdaq index option trade, such
order entry firm or clearing member acting on his behalf, shall honor
such trade on the scheduled settlement date.]
[(g) Failure by a Nasdaq index options order entry firm to comply
with any of the Rules or registration requirements applicable to the
Service identified herein shall subject such participant to censure,
fine, suspension or revocation of its registration as a Nasdaq index
options order entry and/or market maker firm or any other fitting
sanction under the Rules of the Association.]
[2878. Transaction Reporting and Other Reporting Requirements]
[(a) All Nasdaq index options participants, upon becoming so
registered and qualified, shall have access to, and be required to
utilize, the Order Confirmation Transaction (OCT) and Internalized
Trade Transaction (ITT) trade reporting systems established by the
Association for Nasdaq index options transactions. Such trade reporting
systems are designed to ``lock-in'' all Nasdaq index options
transactions. Thus these systems serve trade comparison and clearing
functions as well as trade reporting functions, and require the
participation of both the order entry and the market making firms in
the reporting process. Because these procedures, which are detailed in
the User Guide, vary from those applying to transaction reporting in
other Nasdaq securities, it is imperative that all Nasdaq index options
participants become familiar with and comply with the provisions of
this Rule. Failure on the part of a Nasdaq index options participant to
comply with Nasdaq index options reporting provisions may subject
participants to censure, fine, suspension or revocation of registration
as a Nasdaq index options market maker and/or order entry firm or any
other fitting sanction under the Rules of the Association.]
[(b) Order Confirmation Transaction (OCT)--Nasdaq index options
order entry firms shall enter an OCT into the Service promptly upon the
execution of their order. Upon the acceptance by a market maker of an
OCT, the Service shall automatically forward a trade report to the
Options Price Reporting Authority (OPRA). Nasdaq index options market
makers shall accept an OCT via terminal entry within two minutes as
specified by the Association, or the OCT shall be ``timed-out,'' in
which case the Service will notify the order entry firm of the market
maker's non-acceptance of the order. The order entry firm will also be
notified if the market maker affirmatively rejects the order via
terminal entry. If the market maker wishes to subsequently confirm an
OCT which has been timed-out or rejected, a new OCT must be entered
into the Service by the order entry firm with a late trade indicator.
Once accepted, an OCT may only be canceled or corrected by mutual
consent of the market maker and order entry firm.]
[(c) Unsolicited Orders--Nasdaq index options market makers are not
obligated to accept an OCT which is unsolicited but, if they choose to
do so, must accept the order within two minutes of its receipt as
specified by the Association. Upon the acceptance of an unsolicited OCT
order by a Nasdaq index options market maker, the system will
automatically forward a trade report to OPRA. Once accepted by the
market maker, the OCT may only be canceled or corrected with the mutual
consent of the market maker and the order entry firm.]
[(d) Internalized Trade Transaction (ITT)--Nasdaq Index Options
Service participants shall, where appropriate, enter an ITT message
into the Service within two minutes of the execution of an internalized
trade. Upon the entry of an ITT message, the Service shall
automatically forward a trade report to OPRA. An ITT may be
subsequently canceled or corrected by the member.]
[(e) A Nasdaq index options order entry firm shall transmit OCT and
ITT for transactions in Nasdaq index options other than cabinet
transactions at the price recorded on the trade ticket exclusive of
commission, taxes or other charges.]
[(f) Nasdaq index options participants may effect cabinet
transactions in any class of options contracts authorized for trading
via the Service at a price of $1.00 per contract, providing such price
is reasonably related to the prevailing market for the option. In
reporting cabinet transactions, participants shall designate these
transactions as such with the appropriate indicator on OCT or ITT
entered into the Service. Cabinet transactions will not be disseminated
to OPRA but will be reported to OCC for clearance.]
[(g) Weekly and/or Monthly Reports--A member shall report weekly
and/or monthly to the Association such data on Nasdaq index options
quoted in the Service as the Board of Governors shall require. Such
report shall be on a form prescribed by the Association.]
[(h) Trade Tickets--All trade tickets on transactions in Nasdaq
index options and authorized underlying securities must indicate the
time the order was received and the time the order was executed or
canceled.]
[2879. Authorization of Nasdaq Index Option Market Making]
[(a) The Association shall not authorize index option market making
in any options series unless, at the time such market making activity
is to commence, there are a minimum of five registered Nasdaq index
options market makers in the index option.]
[(b) Once market making has commenced in any class of Nasdaq index
options, the Association shall withdraw approval of further market
making activity with respect to any succeeding options series to be
opened in that Nasdaq index option if there are fewer than three
registered market makers in the index option.]
[(c) Whenever the Association shall withdraw its approval for index
option market making activity in a particular
[[Page 402]]
Nasdaq index options series pursuant to paragraph (b) above, it shall
not reinstate such market making until the provisions of paragraph (a)
above have been satisfied.]
* * * * *
[2880. Nasdaq Index Option Contracts Authorized for Trading]
[The Association may from time to time approve for display on
Nasdaq put option contracts and call option contracts in respect of
underlying indexes which have been selected by the Association and
approved for trading. All such option contracts shall be designated as
to the type of option, the underlying index, the expiration month and
the exercise price. Only quotations in respect to option contracts in a
class or series of options approved by the Association and currently
open for display on the Service may be quoted by a registered Nasdaq
index options market maker on the Nasdaq Index Options Service.]
[2881. Series of Nasdaq Index Options for Trading]
[(a) Nasdaq Index Options--After a particular class of index
options has been approved for display on the Service and quotation
thereon by registered Nasdaq index options market makers, the
Association shall from time to time open for trading series of options
therein. Prior to the opening of trading in any series of options the
Association shall fix the expiration month and exercise price of
options contracts included in each such series.]
[(1) Expiration Months--At the commencement of trading in a
particular class of Nasdaq index options, series of options having
three different expiration months will normally be opened. Such
expirations shall occur in consecutive months. The first such
expiration will occur in the month following the month in which such
options are introduced, the second expiration will occur in the month
following the first, and the third expiration will occur in the month
following the second. Additional series of index options of the same
class may be opened for trading at or about the time a prior series
expires and the expiration month of each such series will normally be
approximately three months following the opening of such series.]
[(2) Exercise Prices--The procedures for fixing the exercise or
strike price of each series of index options opened for trading shall
be as follows:]
[(A) Strike prices shall be fixed at an index value which is an
integer.]
[(B) Regardless of the value of an index, the interval between
strike prices will be $5.00.]
[(C) New series of index option contracts may be added up to the
fifth business day prior to expiration.]
[(D) When new series of index option contracts within a new
expiration cycle are opened for trading, two strike prices above and
two strike prices below the current index value may be added.]
[(E) When the value of the index underlying a class of index
options reaches a strike price, the Association may add one or more
additional strike prices such that there are at least two strike prices
above and two strike prices below the strike price which has been
reached.]
[(F) In unusual market conditions, the Association may add
additional series of index option contracts up to three strike prices
above and three strike prices below the current index price.]
[(b) Specification Adjustments--The unit of trading and the
exercise price initially established for index option contracts of a
particular series are subject to adjustment in accordance with the
rules of The Options Clearing Corporation. When such adjustment(s) have
been determined, announcement thereof shall be made by the Association
and, effective as of the time specified in such announcement, the
adjusted unit of trading and the adjusted exercise price shall be
applicable with respect to all subsequent transactions in such series.]
[(c) Contract Adjustments--Index option contracts shall be subject
to adjustments in accordance with the rules of The Options Clearing
Corporation.]
[(d) Puts and Calls--When calls are first opened for trading on an
underlying index stock group, the Association may open a series of puts
corresponding to each series of calls open or to be opened for trading
on the same underlying index stock group.]
[2882. Unit of Trading]
[The unit of trading in each series of options displayed on the
Service shall be the unit of trading established by The Options
Clearing Corporation pursuant to the rules of The Options Clearing
Corporation.]
[2883. Suspension of Authorization of Nasdaq Index Option
Contracts]
[(a) The Association shall have the authority to suspend trading in
Nasdaq index option contracts by either one or more market maker or all
market makers where it deems it necessary and appropriate:]
[(1) to prevent fraudulent and manipulative acts and practices;]
[(2) to promote just and equitable principles of trade; or]
[(3) to prevent excessive speculation and promote the likelihood of
a competitive and orderly market.]
[(b) The Association shall suspend trading in Nasdaq index options
contracts by all market makers:]
[(1) If the underlying index is not being computed or disseminated;
or]
[(2) if trading is halted or suspended in underlying stocks that
collectively contribute (A) 20 percent of the current index group value
(in the case of index stock groups comprised of more than 50 stocks);
and (B) 10 percent of the current index group value (in the case of
index stock groups comprised of 50 or fewer stocks).]
[2884. Trade Comparison Procedures for Nasdaq Index Options]
[(a) Scope and Applicability--All transactions in Nasdaq index
options shall be reported to the Association pursuant to reporting
procedures established by the Association. The Association shall report
all compared transactions to The Options Clearing Corporation for
clearance and settlement. All compared transactions in Nasdaq options
which are cleared and settled through the facilities of The Options
Clearing Corporation shall be subject to the rules of The Options
Clearing Corporation.]
[(b) Responsibility of Clearing Members--Every member which is a
member of The Options Clearing Corporation (a ``clearing member'')
shall be responsible for the clearance and settlement of every Nasdaq
index option transaction to which it is a party and for each Nasdaq
index option transaction of a member for which it acts as correspondent
and/or clearing agent pursuant to agreement. Unless specifically
authorized by The Options Clearing Corporation, no member shall be
permitted to have more than one such agreement with a clearing member
in effect at any time.]
[(c) Reporting of Clearing Information]
[(1) Filing of Trade Information--Each Nasdaq index option
participant shall individually report each transaction in a Nasdaq
index option, for which it has a responsibility to report, each
business day to the Association via OCT or ITT in the manner specified
by the Association.]
[(2) (A) The Association will provide each Nasdaq index options
participant with the opportunity to review on trade date OCT and ITT
transactions to which the participant is a party.]
[[Page 403]]
[(B) All OCT orders which are accepted by the contra party and all
ITT which have not been canceled shall be considered to be compared
trades, i.e., trades where the trade information agrees as to the
identity of the other party to the transaction, the type of option
contract, the underlying index, the exercise price, the expiration
month, the number of options contracts, the amount of the premium, the
designation of the parties as purchaser and writer, respectively, and
the trade date, if other than the date of submission.]
[(3) Verification of Nasdaq Index Options Transactions--Each
participant shall promptly review each OCT or ITT execution report
received and report corrected trade information to the Association as
soon as possible, but in any event, not later than the hour which shall
be from time to time prescribed by the Association. It shall be the
sole responsibility of participants to review the accuracy of all
reports promptly upon receipt, and the Association shall not assume any
responsibility for reviewing such reports for accuracy or for making
any corrections not reported by a participant.]
[(4) Reporting of Compared Trades to The Options Clearing
Corporation--On each business day, at or prior to such time as may be
prescribed by The Options Clearing Corporation, the Association shall
furnish The Options Clearing Corporation a report of each clearing
member's compared trades as reported to the Association on that day.
Only those trades which have been confirmed by both parties shall be
furnished by the Association to The Options Clearing Corporation, and
the Association shall assume no responsibility with respect to any
unaccepted order nor for any delays or errors in the reporting of
trades.]
[2885. Clearance and Settlement Procedures for Nasdaq Index
Options]
[(a) Failure to Pay Premium]
[(1) Whenever The Options Clearing Corporation shall reject a
Nasdaq index option transaction because of the failure of a clearing
member acting on behalf of the purchaser to pay the premium due thereon
as required by the rules of The Options Clearing Corporation, the
member acting as or on behalf of the seller (writer) shall have the
right either to cancel the transaction by giving notices thereof to the
defaulting clearing member or to enter into either a new opening
writing transaction or closing sale transaction, as the case may be, in
respect of the same Nasdaq index option contract that was the subject
of the rejected Nasdaq index option transaction, charging any loss
resulting therefrom (including any commissions paid or payable in
connection with such new transaction) to the defaulting clearing
member. Such action shall be taken on the day the Nasdaq index option
transaction was rejected by The Options Clearing Corporation, unless
the Association shall extend such time.]
[(2) In the event the rejected transaction involves a Nasdaq index
option contract of a series in which trading has been terminated or
suspended before a new Nasdaq index option transaction can be effected
to establish the amount of loss, the member acting as or on behalf of
the seller shall have a claim against the defaulting clearing member
for the amount of the premium due thereon.]
[(b) Index Option Contracts of Suspended Members--When announcement
is made of the suspension from membership in the Association of a
member, other than a clearing member of The Options Clearing
Corporation (a ``non-clearing member''), pursuant to the By-Laws of the
Association, all open short positions in option contracts of such
member and all open positions that are secured in full by a specific
deposit or evidenced by an escrow receipt in accordance with the rules
of The Options Clearing Corporation, shall be closed out without
unnecessary delay by all members carrying such positions for the
account of the suspended non-clearing member; provided, however, that
upon any such suspension, the Association may, in its discretion and
where it determines that such is necessary for the protection of
investors, suspend the mandatory close-out provisions hereof and may,
in its discretion and where it determines that such is necessary for
the protection of investors, reinstate such provisions at such time as
it may determine. No temporary suspension of the mandatory close-out
provisions hereof shall relieve any suspended non-clearing member of
its obligations or of any damages incurred by members carrying
positions for the account of such suspended non-clearing member. Should
an open short position or an open position resulting from an exercise
of an option contract not be closed when required by this Rule, the
price for the purpose of determining claims shall be fixed by the price
current at the time when such position should have been closed under
this Rule. When a member of The Options Clearing Corporation is
suspended pursuant to the provisions of the By-Laws, the positions of
such clearing member shall be closed out in accordance with the rules
of The Options Clearing Corporation.]
* * * * *
3100. BOOKS AND RECORDS, AND FINANCIAL CONDITION
3110. Books and Records
(a) No Change.
(b) Marking of Customer Order Tickets
(1) No Change.
(2) A person associated with a member shall indicate on the
memorandum for each transaction in a [non-Nasdaq] non-exchange-listed
security, as that term is defined in the Rule [6700] 6600 Series, the
name of each dealer contacted and the quotations received to determine
the best inter-dealer market; however, the requirements of this
subparagraph shall not apply if two or more priced quotations for the
security are displayed in an inter-dealer quotation system, as defined
in Rule 2320(g), that permits quotation updates on a real-time basis
for which NASD Regulation has access to historical quotation
information.
(c) No Change.
* * * * *
IM-3110. Customer Account Information
(a) Members should be aware that, effective January 1, 1990, any
transaction [which] that involves a [non-Nasdaq,] non-exchange-listed
equity security trading for less than five dollars per share may be
subject to the provisions of SEC Rules 15g-1 through 15g-9, and those
rules should be reviewed to determine if an executed customer
suitability agreement is required.
(b) through (h) No Change.
* * * * *
[3350] 5100. Short Sale Rule
(a) No member shall effect a short sale in a Nasdaq National Market
Security (as that term is defined in Rule 4200) otherwise than on an
exchange for the account of a customer or for its own account in a
Nasdaq National Market security at or below the current national best
(inside) bid when the current national best (inside) bid [as displayed
by The Nasdaq Stock Market] is below the preceding national best
(inside) bid in the security.
(b) No change.
(c) The provisions of paragraph (a) shall not apply to:
(1) Sales by a [qualified] registered market maker registered in
the security with NASD [on Nasdaq] in connection with bona fide market
making activity. For purposes of this paragraph,
[[Page 404]]
transactions unrelated to normal market making activity, such as index
arbitrage and risk arbitrage that are independent from a member's
market making functions, will not be considered bona fide market-making
activity.
(2) through (8) No Change.
(d) through (e) No Change.
(f) A member that is not currently registered as NASD [Nasdaq]
market maker in a security and that has acquired a security while
acting in the capacity of a block positioner shall be deemed to own
such security for the purposes of this Rule notwithstanding that such
member may not have a net long position in such security if and to the
extent that such member's short position in such security is the
subject of one or more offsetting positions created in the course of
bona fide arbitrage, risk arbitrage, or bona fide hedge activities.
(g) through (h) No Change
(i) (1) A member shall be permitted, consistent with its quotation
obligations, to execute a short sale for the account of a warrant
market maker that would otherwise be in contravention of this Rule, if:
(A) The warrant market maker is a registered [Nasdaq] NASD market
maker for the warrant; and
(B) No Change.
(j) No Change.
(k) Definitions
(1) through (2) No Change.
[(3)(A) Until February 1, 1996, the term ``qualified market maker''
shall mean a registered Nasdaq market maker that has maintained,
without interruption, quotations in the subject security for the
preceding 20 business days. Notwithstanding the 20-day period specified
in this subparagraph, after an offering in a stock has been publicly
announced, a registration statement has been filed, or a merger or
acquisition involving two issues has been announced, no market maker
may register in the stock as a qualified market maker unless it meets
the requirements set forth below:]
[(i) For secondary offerings, the offering has become effective and
the market maker has been registered in and maintained quotations
without interruption in the subject security for 40 calendar days;]
[(ii) For initial public offerings, the market maker may register
in the offering and immediately become a qualified market maker;
provided however, that if the market maker withdraws on an unexcused
basis from the security within the first 20 days of the offering, it
shall not be designated as a qualified market maker on any subsequent
initial public offerings for the next 10 business days;]
[(iii) After a merger or acquisition involving an exchange of stock
has been publicly announced and not yet consummated or terminated, a
market maker may immediately register in either or both of the two
affected securities as a qualified market maker pursuant to the same-
day registration procedures in Rule 4611; provided, however, that if
the market maker withdraws on an unexcused basis from any stock in
which it has registered pursuant to this paragraph within 20 days of so
registering, it shall not be designated as a qualified market maker
pursuant to this subparagraph (3) for any subsequent merger or
acquisition announced within three months subsequent to such unexcused
withdrawal.]
[(B) For purposes of this subparagraph (3), a market maker will be
deemed to have maintained quotations without interruption if the market
maker is registered in the security and has continued publication of
quotations in the security through Nasdaq on a continuous basis;
provided however, that if a market maker is granted an excused
withdrawal pursuant to the requirements of Rule 4619, the 20 business
day standard will be considered uninterrupted and will be calculated
without regard to the period of the excused withdrawal. Beginning
February 1, 1996, the term ``qualified market maker'' shall mean a
registered Nasdaq market maker that meets the criteria for a Primary
Nasdaq Market Maker as set forth in Rule 4612.]
[(l) This Rule shall be in effect until March 1, 2002.]
* * * * *
IM-[3350]5100. Short Sale Rule
(a) (1) In developing a Short Sale Rule for Nasdaq National Market
securities effected otherwise than on an exchange, the Association has
adopted an exemption to the Rule for certain market making activity.
This exemption [was deemed] is an essential component of the Rule
because bona fide market making activity is necessary and appropriate
to maintain continuous, liquid markets in Nasdaq National Market
securities. Rule 3350(c)(1) states that short selling prohibitions
shall not apply to sales by [qualified] registered [Nasdaq] NASD market
makers in connection with bona fide market making activity and
specifies that transactions unrelated to normal market making activity,
such as index arbitrage and risk arbitrage that are independent from a
member's market making functions, will not be considered as bona fide
market making. Thus two standards are to be applied: one must be a
['qualified'' Nasdaq] registered NASD market maker and one must engage
in ``bona fide'' market making activity to take advantage of this
exemption. With this interpretation, the Association wishes to clarify
for members some of the factors that will be taken into consideration
when reviewing market making activity that may not be deemed to be bona
fide market making activity and therefore would not be exempted from
the Rule's application.
(2) through (3) No change.
(b) (1) Rule [3350] 5100 requires that no member shall effect a
short sale otherwise than on an exchange for the account of a customer
or for its own account in a Nasdaq National Market security at or below
the current national best (inside) bid when the current national best
(inside) bid [as displayed by The Nasdaq Stock Market] is below the
preceding best (inside) bid in the security. The Association has
determined that in order to effect a ``legal'' short sale when the
current best bid is lower than the preceding best bid the short sale
must be executed at a price of at least \1/16\th point above the
current national inside bid when the current inside spread is \1/16\th
point or greater. The last sale report for such a trade would,
therefore, be above the national inside bid by at least \1/16\th of a
point. If the current spread is less than \1/16\th of a point, however,
the short sale must be executed at a price equal to or greater than the
current inside offer price.
(2) Moreover, the Association believes that requiring short sales
to be a minimum increment of \1/16\th point above the national best bid
when the current spread is \1/16\th or greater and equal to or greater
than the offer when the current spread is less than \1/16\th ensures
that transactions are not effected at prices inconsistent with the
underlying purpose of the Rule. It would be inconsistent with Rule
[3350] 5100 for a member or customer to cause the inside spread for an
issue to narrow when the current best bid is lower than the preceding
best bid (e.g., lowering its offer to create an inside spread less than
\1/16\th) for the purpose of facilitating the execution of a short sale
at a price less than \1/16\th above the inside bid.
(3) For Nasdaq National Market securities trading in decimals
pursuant to the Decimals Implementation Plan for Equity and Options
Markets, the Association has determined that in order to effect a
``legal'' short sale in such securities when the current bid is lower
than the preceding bid the short sale must be executed at least $0.01
[[Page 405]]
above the current inside bid. The last sale report for such a trade
would, therefore, be above the inside bid by at least $0.01.
(c) (1) No Change.
(2) For example, in instances where the current best bid is below
the preceding best bid, if a market maker alone at the inside best bid
were to lower its bid and then raise it to create an ``up bid'' for the
purpose of facilitating a short sale, the Association would consider
such activity to be a manipulative act and a violation of the
Association's Short Sale Rule. The Association also would consider it a
manipulative act and a violation of the Rule if a market maker with a
long stock position were to raise its bid above the inside bid and then
lower it to create a ``down bid'' for the purpose of precluding market
participants from selling short. In addition, if a market maker agrees
to an arrangement proposed by a member or a customer whereby the market
maker raises its bid [in The Nasdaq Stock Market] in order to effect a
short sale for the other party and is protected against any loss on the
trade or on any other executions effected at its new bid price, the
market maker would be deemed to be in violation of Rule [3350] 5100.
Similarly, a market maker would be deemed in violation of the Rule if
it entered into an arrangement with a member or a customer whereby it
used its exemption from the rule to sell short at the bid at
successively lower prices, accumulating a short position, and
subsequently offsetting those sales through a transaction at a
prearranged price, for the purpose of avoiding compliance with the
Rule, and with the understanding that the market maker would be
guaranteed by the member or customer against losses on the trades.
(3) No Change.
* * * * *
The 4000 Series is replaced in its entirety by the following
proposed rule language.
4000. NASD Alternative Display Facility
4100. General
The NASD Alternative Display Facility is the facility to be
operated by the NASD for members that effect trades in Nasdaq and CQS/
CTA (``ADF-eligible'') securities otherwise than on an exchange. The
NASD Alternative Display Facility will collect and disseminate
quotations, compare trades, and collect and disseminate trade reports.
4110. Use of NASD Alternative Display Facility Data Systems
NASD may at any time authorize the use of NASD's Alternative
Display Facility data systems on a test basis for whatever studies it
considers necessary and appropriate.
4200. DEFINITIONS
(a) Unless the context requires otherwise, the terms used in the
Rule 4000 through 6000 Series shall have the meanings below. Terms not
specifically defined below shall have the meaning in NASD's By-Laws and
Rules and SEC Rule 11Aa3-1.
(1) ``Act'' means the Securities Exchange Act of 1934.
(2) ``ADF-eligible security'' means a Nasdaq or CQS/CTA security.
(3) ``CQS/CTA security'' means a security that is eligible for
inclusion in the CQ/CTA Plan as from time to time amended in accordance
with the provisions of the Plan and with the approval of the SEC.
(4) ``Nasdaq'' means the registered national securities exchange
and its facilities operated by The Nasdaq Stock Market, Inc.
(5) ``Nasdaq market maker'' shall have the meaning as defined in
the Nasdaq rules.
(6) ``Nasdaq National Market'' or ``NNM'' is a distinct tier of the
Nasdaq Stock Market comprised of securities that meet the requirements
of and are authorized as a Nasdaq National Market Security.
(7) ``Nasdaq National Market security'' or ``NNM security'' shall
have the meaning as defined in the Nasdaq rules.
(8) ``Nasdaq security'' means a security that is listed on the
Nasdaq Stock Exchange.
(9) ``Nasdaq SmallCap Market'' or ``SCM'' is a distinct tier of The
Nasdaq Stock Market compromised of securities that meet the
requirements of and are authorized as a Nasdaq SmallCap Security.
(10) ``Nasdaq SmallCap Market security'' shall have the meaning as
defined in the Nasdaq rules.
(11) ``Non-Registered Member'' means a member of NASD that is not a
Registered Market Maker or a Registered ECN.
(12) ``Normal unit of trading'' means 100 shares of a security
unless, with respect to a particular security, the market where the
security is listed determines that a normal unit of trading shall
constitute other than 100 shares. If a normal unit of trading is other
than 100 shares, a special identifier shall be appended to the issuer's
symbol.
(13) ``Otherwise than on an exchange'' means a trade effected by an
NASD member otherwise than on or through a national securities
exchange. The determination of what constitutes a trade ``on or
through'' a particular national securities exchange shall be determined
by that exchange in accordance with all applicable statutes, rules and
regulations, and with any necessary SEC approval.
(14) ``Registered ECN'' means a member of NASD that is an
electronic communications network (``ECN'') that elects to display
orders in the NASD Alternative Display Facility. A member is a
Registered ECN in only those designated securities for which it is
registered with NASD. A member shall cease being a Registered ECN in a
designated security when it has withdrawn or voluntarily terminated its
quotations in that security or when its quotations have been suspended
or terminated by action of NASD.
(15) ``Registered Market Maker'' means a member of NASD that is
registered as an NASD market maker in a particular designated security
and, with respect to that security, holds itself out (by entering
quotations in the NASD Alternative Display Facility) as being willing
to buy and sell such security for its own account on a regular and
continuous basis. A member is a Registered Market Maker in only those
designated securities for which it is registered as an NASD market
maker. A member shall cease being a Registered Market Maker in a
designated security when it has withdrawn or voluntarily terminated its
quotations in that security or when its quotations have been suspended
or terminated by action of NASD.
(16) ``SEC Rule 100,'' ``SEC Rule 101,'' ``SEC Rule 103,'' and
``SEC Rule 104'' mean the rules adopted by the Commission under
Regulation M, and any amendments thereto.
(17) ``Stabilizing bid'' means the terms ``stabilizing'' or to
``stabilize'' as defined in SEC Rule 100.
(18) ``Underwriting Activity Report'' is a report provided by the
Corporate Financing Department of NASD Regulation, Inc. in connection
with a distribution of securities subject to SEC Rule 101 pursuant to
NASD Rule 2710(b)(11) and includes forms that are submitted by members
to comply with their notification obligations under Rules 4614, 4619,
and 4623.
(b) For purposes of Rules 4619, and 4623, the following terms shall
have the meanings as defined in SEC Rule 100: ``affiliated purchaser,''
``distribution,'' ``distribution participant,'' ``independent bid,''
``net purchases,''
[[Page 406]]
``passive market maker,'' ``penalty bid,'' ``reference security,''
``restricted period,'' ``subject security,'' and ``syndicate covering
transaction.''
Selected NASD Notices to Members: 94-70, 95-64, 95-82.
4300. Quote and Order Access Requirements
(a) To ensure that NASD Market Participants comply with their quote
and order access obligations as defined below, for each security in
which they elect to display a bid and offer (for Registered Market
Makers), or a bid or offer (for Registered ECNs), in the Alternative
Display Facility, NASD Market Participants must:
(1) Provide other NASD Market Participants direct electronic
access, as defined below; and
(2) Provide NASD member broker-dealers that are not NASD Market
Participants direct electronic access or allow for indirect electronic
access, as defined below. Indirect electronic access must be readily
available to broker-dealers seeking access, otherwise the NASD Market
Participant must provide direct electronic access. In any event, an
NASD Market Participant is prohibited from (A) in any way directly or
indirectly influencing or prescribing the prices that their customer
broker-dealer may choose to impose for providing indirect access; and
(B) precluding or discouraging indirect electronic access, including
through the imposition of discriminatory pricing or quality of service
with regard to a broker-dealer that is providing indirect electronic
access.
(b) Subject to the terms and conditions contained herein, all NASD
Market Participants that display quotations in the NASD Alternative
Display Facility must record each item of information described in
paragraphs (b)(1) and (2) of this Rule for all orders they receive via
direct or indirect electronic access, and report this information to
the NASD as specified below.
(1) NASD Market Participants must record the following information
for every order they receive via direct or indirect electronic access
during the trading day:
(A) Unique Order Identifier
(B) Order Entry Firm (OEID)
(C) Order Side (Buy/Sell)
(D) Order Quantity
(E) Issue Identifier
(F) Order Price
(G) Order Price Modifier (i.e. .N)
(H) Time In Force (i.e. 3 minutes, day, etc.)
(I) Order Date
(J) Order Time (including seconds)
(K) Minimal Acceptable Quantity (i.e. C1, M1, AON, etc.)
(L) Market Making Firm (MMID)
The information described in paragraphs (A) through (L) must be
reported to the NASD within 10 seconds of receipt of the order.
(2) In addition to the information previously provided pursuant to
paragraph (b)(1), NASD Market Participants must record the following
information, as applicable, for every order that has been acted upon or
responded to:
(A) Unique Order Identifier (as provided in paragraph (b)(1)(A))
(B) Order Response (i.e. E=Execute, D=Decline, X=Cancel, T=timed out,
P=partial, etc.)
(C) Order Response Time (including seconds)
(D) Partial Quantity
(E) Counter Price
(F) Total Execution Quantity
(G) Execution Price
The information described in paragraphs (A) through (G) must be
reported to the NASD within 10 seconds of any response to or action
taken regarding an order.
(3) Maintaining and Preserving Records
(A) In addition to submitting the information described herein to
the NASD, each member shall maintain and preserve records of the
information required to be recorded under this Rule for the period of
time and accessibility specified in SEC Rule 17a-4(b).
(B) The records required to be maintained and preserved under this
Rule may be immediately produced or reproduced on ``micrographic
media'' as defined in SEC Rule 17a-4(f)(1)(i) or by means of
``electronic storage media'' as defined in SEC Rule 17a-4(f)(1)(ii)
that meet the conditions set forth in SEC Rule 17a-4(f) and may be
maintained and preserved for the required time in that form.
(4) Orders Not Required To Be Recorded
The recording and reporting requirements contained in paragraphs
(a) and (b) of this Rule shall not apply to orders received via ITS or
any system operated by a national securities exchange or national
securities association.
(5) Method of Transmitting Data
Members shall transmit this information in such form as prescribed
by the Association.
(6) Reporting Agent Agreements
(A) ``Reporting Agent'' shall mean a third party that enters into
any agreement with a member pursuant to which such third party agrees
to fulfill such member's obligations under this Rule.
(B) Any member may enter into an agreement with a Reporting Agent
pursuant to which the Reporting Agent agrees to fulfill the obligations
of such member under this Rule. Any such agreement shall be evidenced
in writing, which shall specify the respective functions and
responsibilities of each party to the agreement that are required to
effect full compliance with the requirements of this Rule.
(C) All written documents evidencing an agreement described in
paragraph (6)(B) shall be maintained by each party to the agreement.
(D) Each member remains responsible for compliance with the
requirements of this Rule, notwithstanding the existence of an
agreement described in this paragraph.
(7) Withdrawal of Quotations
If an NASD Market Participant knows or has reason to believe that
it or its Reporting Agent is not complying with the requirements of
this Rule, the member must withdraw its quotations from the NASD
Alternative Display Facility until such time that the member is
satisfied that its order information is being properly recorded and
reported.
(c) NASD Market Participants are required to specify as part of
their NASD Alternative Display Facility Workstation Subscriber
Agreement the method and terms by which they will comply with the
requirements of this Rule. NASD Regulation staff will not approve a
Market Participant's Subscriber Agreement unless the method and terms
provided by the Market Participant are in compliance with this Rule.
(d) Definitions
(1) Customer broker-dealer is any broker-dealer that has, or seeks
to have, an ongoing relationship with a Market Participant, including
an ECN subscriber, for the purposes of executing securities
transactions.
(2) Direct electronic access means the ability to deliver an order
for execution directly against an individual NASD Market Participant's
best bid and offer subject to quote and order access obligations, as
defined herein, without the need for voice communication, with the
equivalent speed, reliability, availability, and cost, as are made
available to the NASD Market Participant's own customer broker-dealers
or other active customers or subscribers.
(3) Indirect electronic access means the ability to route an order
through
[[Page 407]]
customer broker-dealers of an NASD Market Participant that are not
affiliates of the NASD Market Participant, for execution against the
NASD Market Participant's best bid and offer subject to quote and order
access obligations, without the need for voice communication, with
equivalent speed, reliability, availability, and cost, as are made
available to the Market Participant's customer broker-dealer providing
the indirect access or other active customers or subscribers. The NASD
Market Participant's customer broker-dealers providing indirect
electronic access shall remain responsible for all orders routed
through them as though the orders were the firms' own orders.
(4) NASD Market Participant means (a) an NASD Registered Market
Maker,(b) an ATS, (c) or an NASD Registered ECN.
(5) Best bid and offer for purposes of this Rule includes the best-
priced buy and sell orders of an NASD Registered ECN.
(6) Quote and Order Access Obligations include the requirements
under this Rule and the firm quote obligations under Rule 11Ac1-1 under
the Act, the standards under Rule 11Ac1-1(c)(5)(ii)(A)(2) under the
Act, Sections 301(b)(3) through (5) of Regulation ATS and other order
access-related regulatory requirements for ATSs, ECNs and market
makers. Obligations under this Rule include providing the ability to
send or receive Trade-or-Move messages, identifiable as such, as
required by Rule 4613(d) and providing access to any reserved size
orders as required by Rule 4623(c).
* * * * *
4600. TRADING IN NASDAQ SECURITIES
4610. Registration and Other Requirements
4611. Registration as a Market Maker
(a) Quotations and quotation sizes in Nasdaq securities may be
entered into the NASD Alternative Display Facility only by a Registered
Market Maker or other entity approved by NASD to function in a market-
making capacity.
(b) An NASD member seeking registration as a market maker shall
file an application with NASD. The application shall certify the
member's good standing with NASD and shall demonstrate compliance with
the net capital and other financial responsibility provisions of the
Act. It shall be sufficient to obtain registration as a market maker
for a member to demonstrate proof that it is a registered Nasdaq market
maker in good standing. A member's registration as a market maker shall
become effective upon receipt by the member of notice of approval of
registration from NASD.
(c) A market maker may become registered in an issue by entering a
registration request via an NASD terminal or other NASD approved
electronic interface with NASD's systems or by contacting NASD
Alternative Display Facility Operations. If the requirements of
paragraph (b) above are satisfied, registration shall become effective
on the day the registration request is entered. It shall be sufficient
to obtain registration in an issue for a member to demonstrate proof
that it is currently registered in that issue as a Nasdaq market maker
and is in good standing.
(d) A market maker's registration in an issue shall be terminated
if the market maker fails to enter quotations in the issue within five
(5) business days after the market maker's registration in the issue
becomes effective.
Selected NASD Notices to Members: 93-24, 94-68, 94-83.
4612. Reserved
4613. Character of Quotations
(a) Two-Sided Quotations
(1) For each Nasdaq security for which a member is a Registered
Market Maker, the member shall be willing to buy and sell such security
for its own account on a continuous basis and shall enter and maintain
two-sided quotations through the NASD Alternative Display Facility,
subject to the procedures for excused withdrawal set forth in Rule
4619.
(A) A Registered Market Maker in a security listed on Nasdaq must
display a quotation size for at least one normal unit of trading (or a
larger multiple thereof) when it is not displaying a limit order in
compliance with SEC Rule 11Ac1-4, provided, however, that a Registered
Market Maker may augment its displayed quotation size to display limit
orders priced at the market maker's quotation.
(B) Minimum Price Variation for Decimal-based Quotations
The minimum quotation increment for securities authorized for
decimal pricing as part of the SEC-approved Decimals Implementation
Plan for the Equities and Options Markets shall be $0.01. Quotations
failing to meet this standard shall be rejected.
(b) Firm Quotations
(1) A Registered Market Maker that receives an offer to buy or sell
from another NASD member shall execute a transaction for at least a
normal unit of trading at its displayed quotations as disseminated
through the NASD Alternative Display Facility at the time of receipt of
any such offer. If a Registered Market Maker displays a quotation for a
size greater than a normal unit of trading, it shall, upon receipt of
an offer to buy or sell from another NASD member, execute a transaction
at least at the size displayed.
(2) If a Registered Market Maker, upon receipt of an offer to buy
or sell from another NASD member in any amount that is at least one
normal unit of trading greater than its published quotation size as
disseminated through the NASD Alternative Display Facility at the time
of receipt of any such offer, executes a transaction in an amount of
shares less than the size of the offer, then such Registered Market
Maker shall, immediately after such execution, display a revised
quotation at a price that is inferior to its previous published
quotation. The failure of a Registered Market Maker to execute the
offer in an amount greater than its published quotation size shall not
constitute a violation of subparagraph (b)(1) of this rule.
(c) Quotations Reasonably Related to the Market
A Registered Market Maker shall enter and maintain quotations that
are reasonably related to the prevailing market. In the event it
appears that a Registered Market Maker's quotations are no longer
reasonably related to the prevailing market, NASD may require the
market maker to re-enter its quotations. If a Registered Market Maker
whose quotations are no longer reasonably related to the prevailing
market fails to re-enter its quotations, NASD may suspend the market
maker's quotations in one or all securities.
(1) In the event that a Registered Market Maker's ability to enter
or update quotations is impaired, the Registered Market Maker shall
immediately contact NASD Alternative Display Facility Operations to
request the withdrawal of its quotations.
(2) In the event that a Registered Market Maker's ability to enter
or update quotations is impaired and the Registered Market Maker elects
to continue to participate through the NASD Alternative Display
Facility, the Registered Market shall execute an offer to buy or sell
received from another NASD member at its quotations as disseminated
through the NASD Alternative Display Facility.
[[Page 408]]
(d) Locked and Crossed Markets
(1) A Registered Market Maker shall not, except under extraordinary
circumstances, enter or maintain quotations through the NASD
Alternative Display Facility during normal business hours if:
(A) the bid quotation entered is equal to (``lock'') or greater
than (``cross'') the asked quotation of another market maker entering
quotations in the same security; or
(B) the asked quotation is equal to (``lock'') or less than
(``cross'') the bid quotation of another market maker entering
quotations in the same security.
(2) Obligations Regarding Locked/Crossed Market Conditions Prior to
Market Opening
(A) Locked/Crossed Market Prior to 9:20 a.m.--For locks/crosses
that occur prior to 9:20 a.m. Eastern Time, a Registered Market Maker
that is a party to a lock/cross because the Registered Market Maker
either has entered a bid (ask) quotation that locks/crosses another
market maker's quotation(s) or has had its quotation(s) locked/crossed
by another market maker (``party to a lock/cross'') may, beginning at
9:20 a.m. Eastern Time, send a message, making use of direct electronic
access in accordance with Rule 4300, of any size, that is at the
receiving market maker's quoted price (``Trade-or-Move Message''). Any
Registered Market Maker that receives a Trade-or-Move Message at or
after 9:20 a.m. Eastern Time, and that is a party to a lock/cross, must
within 30 seconds of receiving such message either: fill the incoming
Trade-or-Move Message for the full size of the message; or move its bid
down (offer up) by a quotation increment that unlocks/uncrosses the
market.
(B) Locked/Crossed Market Between 9:20 and 9:29:59 a.m.--If a
Registered Market Maker locks or crosses the market between 9:20 and
9:29:59 a.m. Eastern Time, the Registered Market Maker must immediately
send, making use of direct electronic access in accordance with Rule
4300, to the market maker whose quotes it is locking or crossing a
Trade-or-Move message that is at the receiving market maker's quoted
price and that is for at least 5,000 shares (in instances where there
are multiple market makers to a lock/cross, the locking/crossing market
maker must send a message to each party to the lock/cross and the
aggregate size of all such messages must be at least 5,000 shares);
provided, however, that if a market participant is representing an
agency order, the market participant shall be required to send a Trade-
or-Move Message(s) in an amount equal to the agency order, even if that
order is less than 5,000 shares. A Registered Market Maker that
receives a Trade-or-Move Message during this period and that is a party
to a lock/cross, must within 30 seconds of receiving such message
either: fill the incoming Trade-or-Move Message for the full size of
the message; or move its bid down (offer up) by a quotation increment
that unlocks/uncrosses the market.
(C) A Registered Market Maker that sends a Trade-or-Move Message
pursuant to of this rule must append to the message a symbol indicating
that it is a Trade-or-Move Message.
(D) For the purposes of this rule ``agency order'' shall mean an
order(s) that is for the benefit of the account of a natural person
executing securities transactions with or through or receiving
investment banking services from a broker/dealer, or for the benefit of
an ``institutional account'' as defined in NASD Rule 3110. An agency
order shall not include an order(s) that is for the benefit of a market
maker in the security at issue, but shall include an order(s) that is
for the benefit of a broker/dealer that is not a market maker in the
security at issue.
(3) A Registered Market Maker, prior to entering a quotation that
locks or crosses another quotation, must make reasonable efforts to
avoid such locked or crossed market by executing transactions with all
market makers whose quotations would be locked or crossed. Reasonable
efforts shall include making use of direct electronic access in
accordance with Rule 4300. Pursuant to the provisions of paragraph (b)
of this Rule, a Registered Market Maker whose quotations are causing a
locked or crossed market is required to execute transactions at its
quotations as displayed through the NASD Alternative Display Facility
at the time of receipt of any order.
(4) For purposes of this Rule 4613(d), the term ``Registered Market
Maker'' shall include:
(A) any NASD member that enters into an ECN, as that term is
defined in SEC Rule 11Ac1-1(a)(8), a order that is displayed through
the NASD Alternative Display Facility;
(B) any NASD member that operates the ECN when the order being
displayed has been entered by a person or entity that is not an NASD
member;
(C) any NASD member that enters into an ATS, as that term is
defined in SEC Regulation ATS, a priced order that is displayed through
the NASD Alternative Display Facility; and
(D) any NASD member that operates the ATS when the priced order
being displayed has been entered by a person or entity that is not an
NASD member.
(e) Other Quotation Obligations
(1) Members that display priced quotations on a real-time basis for
Nasdaq securities in two or more market centers that permit quotation
updates on a real-time basis must display the same priced quotations
for the security in each market center.
(2) A member that is registered as a market maker in a Nasdaq
security shall be obligated to have available in close proximity to the
NASD Alternative Display Facility terminal at which it makes a market
in a Nasdaq security a quotation service that disseminates the bid
price and offer price then being furnished by or on behalf of national
securities exchanges and other market makers trading and quoting that
Nasdaq security.
Selected NASD Notices to Members: 91-37, 93-2, 93-43, 99-61.
IM-4613. Autoquote Policy
(a) General Prohibition--NASD bans the automated update of
quotations by market makers through the NASD Alternative Display
Facility. Except as provided below, this policy prohibits systems known
as ``autoquote'' systems from effecting automated quote updates or
tracking of inside quotations through the NASD Alternative Display
Facility. This ban is necessary to offset the negative impact on the
capacity and operation of the NASD Alternative Display Facility caused
by certain autoquote techniques that track changes to the inside
quotation and automatically react by generating another quote to keep
the market maker's quote away from the best market.
(b) Exceptions to the General Prohibition--Automated updating of
quotations is permitted when: (1) the update is in response to an
execution in the security by that firm (such as execution of an order
that partially fills a market maker's quotation size), and is in
compliance with Rule 4613(b)(2); (2) it requires a physical entry (such
as a manual entry to the market maker's internal system which then
automatically forwards the update to Nasdaq); or (3) the update is to
reflect the receipt, execution, or cancellation of a customer limit
order. elected NASD Notices to Members: 99-61.
4614. Reserved
4615. Reserved
4616. Reserved
4617. Normal Business Hours
A Registered Market Maker shall be open for business as of 9:30
a.m.
[[Page 409]]
Eastern Time and shall close no earlier than 4:00 p.m. Eastern Time. An
NASD Registered Market Maker may remain open for business on a
voluntary basis for any period of time between 4:00 p.m. Eastern time
and 6:30 p.m. Eastern Time. Registered Market Makers whose quotes are
open after 4:00 p.m. Eastern Time shall be obligated to comply, while
their quotes are open, with all NASD Rules that are not by their
express terms, or by an official interpretation of NASD, inapplicable
to any part of the 4:00 p.m. to 6:30 p.m. Eastern Time period.
4618. Reserved
4619. Withdrawal of Quotations and Passive Market Making
(a) A Registered Market Maker that wishes to withdraw quotations in
a security or have its quotations identified as the quotations of a
passive market maker shall contact NASD Alternative Display Facility
Operations to obtain excused withdrawal status prior to withdrawing its
quotations or identification as a passive market maker. Withdrawals of
quotations or identifications of quotations as those of a passive
market maker shall be granted by NASD Alternative Display Facility
Operations only upon satisfying one of the conditions specified in this
Rule.
(b) Excused withdrawal status based on circumstances beyond the
market maker's control may be granted for up to five (5) business days,
unless extended by NASD Alternative Display Facility Operations.
Excused withdrawal status based on demonstrated legal or regulatory
requirements, supported by appropriate documentation and accompanied by
a representation that the condition necessitating the withdrawal of
quotations is not permanent in nature, may, upon notification, be
granted for not more than sixty (60) days (unless such request is
required to be made pursuant to paragraph (d) below). Excused
withdrawal status based on religious holidays may be granted only if
notice is received by NASD one business day in advance and is approved
by NASD. Excused withdrawal status based on vacation may be granted
only if:
(1) The request for withdrawal is received by NASD one business day
in advance, and is approved by NASD;
(2) the request includes a list of the securities for which
withdrawal is requested; and
(c) Excused withdrawal status may be granted to a Registered Market
Maker that has withdrawn from an issue prior to the public announcement
of a merger or acquisition and wishes to re-register in the issue
pursuant to the same-day registration procedures contained in Rule
4611, above, provided the Registered Market Maker has remained
registered in one of the affected issues. The withdrawal of quotations
because of pending news, a sudden influx of orders or price changes, or
to effect transactions with competitors shall not constitute acceptable
reasons for granting excused withdrawal status; or
(d) Excused withdrawal status may be granted to a member that
experiences a documented problem or failure impacting the operation or
utilization of any automated system operated by or on behalf of the
firm (chronic system failures within the control of the member will not
constitute a problem or failure impacting a firm's automated system).
(e) Excused withdrawal status may be granted to a Registered Market
Maker that fails to maintain a clearing arrangement with a registered
clearing agency or with a member of such an agency, thereby terminating
its registration as a Registered Market Maker; provided however, that
if NASD finds that the Registered Market Maker's failure to maintain a
clearing arrangement is voluntary, the withdrawal of quotations will be
considered voluntary and unexcused pursuant to Rule 4620.
(f) Excused withdrawal status or passive market maker status may be
granted to a Registered Market Maker that is a distribution participant
(or, in the case of excused withdrawal status, an affiliated purchaser)
in order to comply with SEC Rules 101, 103, or 104 under the Act on the
following conditions:
(1) A member acting as a manager (or in a similar capacity) of a
distribution of a security that is a subject security or reference
security under Rule 101 and any member that is a distribution
participant or an affiliated purchaser in such a distribution that does
not have a manager shall provide written notice to NASD Alternative
Display Facility Operations and the Market Regulation Department of
NASD Regulation, Inc. no later than the business day prior to the first
entire trading session of the one-day or five-day restricted period
under SEC Rule 101, unless later notification is necessary under the
specific circumstances.
(A) The notice required by subparagraph (f)(1) of this Rule shall
be provided by submitting a completed Underwriting Activity Report that
includes a request on behalf of each market maker that is a
distribution participant or an affiliated purchaser to withdraw the
market maker's quotations, or that includes a request on behalf of each
market maker that is a distribution participant (or an affiliated
purchaser of a distribution participant) that its quotations be
identified as those of a passive market maker and includes the
contemplated date and time of the commencement of the restricted
period.
(B) The managing underwriter shall advise each Registered Market
Maker that it has been identified as a distribution participant or an
affiliated purchaser to NASD Alternative Display Facility Operations
and that its quotations will be automatically withdrawn or identified
as passive market maker quotations, unless a market maker that is a
distribution participant (or an affiliated purchaser of a distribution
participant) notifies NASD Alternative Display Facility Operations as
required by subparagraph (f)(2), below.
(2) A Registered Market Maker that has been identified to NASD
Alternative Display Facility Operations as a distribution participant
(or an affiliated purchaser of a distribution participant) shall
promptly notify NASD Alternative Display Facility Operations and the
manager of its intention not to participate in the prospective
distribution or not to act as a passive market maker in order to avoid
having its quotations withdrawn or identified as the quotations of a
passive market maker.
(3) If a Registered Market Maker that is a distribution participant
withdraws its quotations in a Nasdaq security in order to comply with
the net purchases limitation of SEC Rule 103 or with any other
provision of SEC Rules 101, 103, or 104 and promptly notifies NASD
Alternative Display Facility Operations of its action, the withdrawal
shall be deemed an excused withdrawal. Nothing in this subparagraph
shall prohibit NASD from taking such action as is necessary under the
circumstances against a member and its associated persons for failure
to contact NASD Alternative Display Facility Operations to obtain an
excused withdrawal as required by subparagraphs (a) of this Rule.
(4) The quotations of a passive market maker shall be identified on
NASD Alternative Display Facility Data Systems as those of a passive
market maker.
(5) A member acting as a manager (or in a similar capacity) of a
distribution subject to subparagraph (f)(1) of this Rule shall submit a
request to NASD Alternative Display Facility Operations and the Market
Regulation Department of NASD Regulation, Inc. to rescind the excused
withdrawal status or passive market making status of distribution
[[Page 410]]
participants and affiliated purchasers, which request shall include the
date and time of the pricing of the offering, the offering price, and
the time the offering terminated, and, if not in writing, shall be
confirmed in writing no later than the close of business the day the
offering terminates. The request referenced in this subparagraph may be
submitted on the Underwriting Activity Report.
(g) The NASD Alternative Display Facility Operations Review
Committee shall have jurisdiction over proceedings brought by market
makers seeking review of a denial of an excused withdrawal pursuant to
this Rule, or the conditions imposed on their reentry. Selected NASD
Notices to Members: 88-69, 89-15, 93-29, 93-41.
4620. Voluntary Termination of Registration
A Registered Market Maker may voluntarily terminate its
registration in a security by (1) withdrawing its quotations from the
NASD Alternative Display Facility and not re-entering its quotations
for five (5) minutes or (2) failing to re-enter quotations within
thirty (30) minutes of the end of a trading halt. A Registered Market
Maker that voluntarily terminates its registration in a security may
not re-register as a market maker in that security for twenty (20)
business days, absent an excused withdrawal specified in Rule 4619.
Withdrawal from participation as a Registered Market Maker in the NASD
Alternative Display Facility shall constitute termination of
registration as a market maker in that security for purposes of this
Rule; provided, however, that a Registered Market Maker that fails to
maintain a clearing arrangement with a registered clearing agency or
with a member of such an agency and thereby terminates its registration
as a market maker in Nasdaq securities may register as a market maker
at any time after a clearing arrangement has been reestablished.
4621. Suspension and Termination of Quotations by NASD Action
NASD may, pursuant to the procedures set forth in the Rule 9000
Series, suspend, condition, limit, prohibit or terminate a Registered
Market Maker's authority to enter quotations in one or more authorized
securities for violations of applicable requirements or prohibitions.
4622. Termination of NASD Alternative Display Facility Data System
Service
NASD may, upon notice, terminate NASD Alternative Display Facility
Data System service in the event that a Registered Market Maker fails
to qualify under specified standards of eligibility or fails to pay
promptly for services rendered by NASD. Selected NASD Notices to
Members: 88-43.
4623. Alternative Trading Systems
(a) NASD may provide a means to permit alternative trading systems
(``ATSs''), as such term is defined in Regulation ATS, and electronic
communications networks (``ECNs''), as such term is defined in SEC Rule
11Ac1-1(a)(8), to comply with the display requirements of SEC Rule
301(b)(3) and the terms of the ECN display alternative provided for in
SEC Rule 11Ac1-1(c)(5)(ii)(A) and (B) (``ECN display alternatives'').
NASD will not facilitate compliance with access requirements, which are
the responsibility of Market Participants under Rule 4300.
(b) An ATS or ECN that seeks to use the NASD-provided means to
comply with SEC Rule 301(b)(3), the ECN display alternatives shall:
(1) Demonstrate to NASD that it is in compliance with Regulation
ATS or that it qualifies as an ECN meeting the definition in the SEC
Rule;
(2) be registered as an NASD member;
(3) enter into and comply with the terms of an NASD Alternative
Display Facility Workstation Subscriber Agreement, as amended for ATSs
and ECNs;
(4) agree to provide for NASD's dissemination in the quotation data
made available to quotation vendors the prices and sizes of NASD
Registered Market Maker orders (and orders from other subscribers of
the ATS or ECN, if the ATS or ECN so chooses or is required by SEC Rule
301(b)(3) to display a subscriber's order in the NASD Alternative
Display Facility), at the highest buy price and the lowest sell price
for each Nasdaq security entered in and widely disseminated by the ATS
or ECN; and prior to entering such prices and sizes, register with NASD
Alternative Display Facility Operations as an ATS or ECN; and
(5) comply with Rule 4300.
(c) When an NASD member attempts to access electronically an ATS or
ECN-displayed order by sending an order that is larger than the ATS's
or ECN's Nasdaq-displayed size and the ATS or ECN is displaying the
order on a reserved size basis, the NASD member that operates the ATS
or ECN shall execute such delivered order:
(1) Up to the size of the delivered order, if the ATS or ECN order
(including the reserved size and displayed portions) is the same size
or larger than the NASD-delivered order; or
(2) up to the size of the ATS or ECN order (including the reserved
size and displayed portions), if the delivered order is the same size
or larger than the ATS or ECN order (including the reserved size and
displayed portions).
No ATS or ECN operating through the NASD Alternative Display
Facility pursuant to this Rule is permitted to provide a reserved-size
function unless the size of the order displayed through the NASD
Alternative Display Facility is 100 shares or greater. For purposes of
this Rule, the term ``reserved size'' shall mean that a customer
entering an order into an ATS or ECN has authorized the ATS or ECN to
display publicly part of the full size of the customer's order with the
remainder held in reserve on an undisplayed basis to be displayed in
whole or in part as the displayed part is executed.
4624. Reserved
4625. Regulatory Cooperation
(a) The NASD may enter into agreements with other self-regulatory
organizations, markets, associations and other entities that provide
for the exchange of information and other forms of mutual assistance
for regulatory purposes.
(b) No member or associated person shall refuse a request to appear
and testify before, or provide documents or other information to,
another self-regulatory organization, market, association or other
entity with which NASD has entered into an agreement pursuant to
paragraph (a) of this Rule, provided that the request is made in
connection with an investigation or proceeding covered by the agreement
with NASD. The requirements of this paragraph (b) shall apply
irrespective of whether the NASD has initiated its own investigation or
proceeding.
(c) Whenever a member or associated person responds to a request
pursuant to this Rule, the member or associated person shall have all
the same rights and obligations that would be accorded if the request
had been made pursuant to Rule 8210.
[[Page 411]]
4630. Reporting Transactions in Securities Listed on Nasdaq
4631. Reserved
4632. Reserved
4633. Transactions Reported by Members
(a) General
(1) This Rule governs the reporting of trades through the NASD's
Trade Reporting and Comparison Service (``TRACS'') in Nasdaq securities
effected otherwise than on an exchange.
(2) All times referenced in this Rule are Eastern time.
(3) For Purposes of this Rule, the term ``Reporting NASD Member''
or ``Reporting Member'' shall mean an NASD member with the trade
reporting obligation as set forth in Rule 4633(d).
(4) For purposes of this Rule, the term ``Non-Reporting NASD
Member'' or ``Non-Reporting Member'' shall mean the contra side of a
trade reported by a Reporting Member.
(5) For purposes of this Rule, the term ``normal market hours''
means from 9:30 a.m. to 4:00 p.m.
(6) Times in trade reports shall be expressed in hours, minutes,
and seconds according to the 24 hour clock (e.g., a trade executed at
1:30:45 p.m. Eastern Time shall be reported as executed at 13:30:45).
All times referenced in this Rule are Eastern Time.
(7) Participation in the trade reporting function of TRACS is
mandatory for all members that have trade reporting obligations under
this Rule. Participation in the trade reporting function of TRACS is
conditioned upon (a) execution of, and continuing compliance with, a
TRACS trade reporting Participant Application Agreement and (b)
maintenance of the physical security of the equipment on the premises
of the member to prevent unauthorized entry of information into the
trade reporting function of TRACS.
(b) Normal Market Hours
Reporting NASD Members shall transmit last sale reports in Nasdaq
securities effected otherwise than on an exchange to TRACS within 90
seconds after execution. Transactions not reported within 90 seconds
after execution shall be designated as late and such trade reports must
include the time of execution.
(c) Outside Normal Market Hours
Transactions in Nasdaq securities effected otherwise than on an
exchange outside normal market hours shall be reported by members to
TRACS as set out below.
(1) For transactions effected otherwise than on an exchange between
the hours of 8:00 a.m. and 9:30 a.m. and 4:00 p.m. and 6:30 p.m.,
(A) A Reporting NASD Member shall transmit last sale reports to
TRACS within 90 seconds after execution. Such last sale reports shall
be designated as ``.T'' trades to denote their execution outside normal
market hours. Transactions not reported within 90 seconds must include
the time of execution on the trade report.
(2) For transactions effected otherwise than on an exchange between
the hours of midnight and 8:00 a.m.,
(A) A Reporting NASD Member shall transmit last sale reports to
TRACS between 8:00 a.m. and 9:30 a.m. on trade date. Such last sale
reports shall be designated as ``.T'' trades, to denote their execution
outside normal market hours, and must include the time of execution.
(3) For securities transactions effected otherwise than on an
exchange between the hours of 6:30 p.m. and 12:00 p.m.
(A) A Reporting NASD Member shall transmit last sale reports to
TRACS on the next business day (T+1) between 8:00 a.m. and 6:30 p.m.
Such last sale reports shall be designated ``as/of'' trades, to denote
their execution on a prior day, and must include the time of execution.
(d) Determining Which Party Reports a Transaction
(1) For transactions between two Registered Market Makers or
Registered ECNs, the Registered Market Maker or ECN representing the
sell side shall report the transaction.
(2) For transactions between a Registered Market Maker or
Registered ECN and a Non-Registered Member, the Registered Market Maker
or ECN shall report the transaction.
(3) For transactions between two Non-Registered Members, the Non-
Registered Member representing the sell side shall report the
transaction.
(4) For transactions between a member and a customer, the member
shall report the transaction.
(5) For transactions between a member and a broker-dealer that is
not a member of NASD, the member shall report the transaction.
(6) For all transactions between an NASD member and an NASD member
that is also a member of Nasdaq or another national securities
exchange, where the reporting party has a choice of reporting venues
and chooses not to report to Nasdaq or another national securities
exchange, the reporting party described in (1) through (5) above shall
report the transaction to the NASD.
(e) Information To Be Reported--Two Party Trade Reports
(1) A two party trade report is a last sale report that denotes a
trade between one Reporting NASD member and one Non-Reporting Member.
The Reporting NASD Member is denoted as the (``MMID'') side of the
trade report and the Non-Reporting Member is denoted as the (``OEID'')
side of the report.
(2) Each Two Party Last Sale Report Submitted by a Reporting NASD
Member Should Contain:
(A) Security identification symbol (SECID);
(B) Number of shares or bonds;
(C) Price of the transaction as required by paragraph (h) below;
(D) A designated symbol denoting whether the transaction, from the
Reporting NASD Member's perspective, is a buy, sell, sell short, sell
short exempt, or cross;
(E) If known, a designated symbol denoting whether the transaction,
from the perspective of the Non-Reporting Member, is a buy, sell, sell
short, or sell short exempt;
(F) A designated symbol denoting whether the transaction, from the
perspective of the Reporting Member, is a principal, riskless
principal, or agent;
(G) If known, a designated symbol denoting whether the transaction,
from the perspective of the Non-Reporting Member, is a principal,
riskless principal, or agent;
(H) For any transaction in an order for which a member has
recording and reporting obligations under NASD Rules 6954 and 6955, the
trade report must include:
(i) An order identifier, meeting such parameters as may be
prescribed by the NASD, assigned to the order that uniquely identifies
the order for the date it was received (see Rule 6954(b)(1));
(ii) The time of execution. This information must be reported
regardless of the period of time between execution of the trade and the
NASD report.
(I) Execution time for any transaction not reported within 90
seconds of execution;
(J) The market participant identifier of the Reporting Member and
the Non-Reporting Member;
(K) Reporting Member clearing broker;
(L) Reporting Member Executing Broker in case of a ``give up;''
(M) Non-Reporting Member Executing Broker;
(N) Non-Reporting Member introducing broker in case of a ``give
up;''
(O) Non-Reporting Member clearing broker;
[[Page 412]]
(P) A designated symbol denoting whether the trade report should be
published;
(Q) A designated symbol denoting whether the trade report should be
compared in TRACS;
(R) If the contra side to the trade report is a customer of the
Reporting Member, the Reporting Member shall denote that the trade is
an internalized trade with the designated symbol;
(S) If the contra side to the trade report is a Non-NASD member,
the Reporting Member shall indicate with the designated symbol that the
contra side is a non-member.
(T) For two party trade reports submitted pursuant to an Automated
Give Up (``AGU'') arrangement or a Qualified Service Representative
(``QSR'') Agreement, disclosure of the information set forth in
subparagraphs (e) (2) (E) and (G) is mandatory.
(f) Information To Be Reported--Three Party Trade Reports
(1) A three party trade report is a single last sale trade report
that denotes one Reporting Member and two contra parties. The Reporting
Member is denoted as the MMID side of the trade report and the two non-
reporting sides are denoted as the OEID side of the trade report. In a
three party report, the Reporting Member is the buyer to one OEID and
the seller to the other OEID. Registered ECNs shall only submit three
party trade reports. Riskless principal trades may be submitted by
reporting members as three party trade reports.
(2) Each Three Party Trade Report Submitted by a Reporting Member
shall contain the following information:
Transaction Information
(A) Security Identification Symbol (SECID);
(B) Number of shares or bonds;
(C) Price of the transaction as required by paragraph (h) below;
(D) Execution time for any transaction not reported within 90
seconds of execution;
(E) The market participant identifier of the Reporting Member and
the two Non-Reporting Members;
(F) A designated symbol denoting whether the trade should be
published;
(G) For any transaction in an order for which a member has
recording and reporting obligations under NASD Rules 6954 and 6955, the
trade report must include:
(i) An order identifier, meeting such parameters as may be
prescribed by the NASD, assigned to the order that uniquely identifies
the order for the date it was received (see Rule 6954(b)(1)). This
order number must associate both the buy side and sell side OATS
Execution Reports to the TRACS report;
(ii) The time of execution. This information must be reported
regardless of the period of time between execution of the trade and the
NASD report.
MMID Side
(H) All three party trade reports from ECNs must be marked as
agency cross transactions;
(I) All three party trade reports from Non-ECNs must be denoted as
riskless principal trade reports and shall include a designated symbol
denoting whether the trade between the non-ECN and the buy-side OEID is
a sell, sell short, or sell short exempt transaction;
(J) Reporting Member clearing broker;
(K) Reporting Member Executing Broker in the case of a ``give up'';
Buy Side OEID
(L) Buy Side OEID executing broker;
(M) Buy Side OEID introducing broker in case of a ``give up'';
(N) Buy Side OEID clearing broker;
(O) If known, a designated symbol denoting whether the trade, from
the Buy Side OEID's perspective, is as principal, riskless principal,
or agent;
(P) If the Buy Side OEID is a customer of the Reporting Member, the
Reporting Member shall denote that the trade is an internalized trade
with the designated symbol;
(Q) If the Buy Side OEID is a non-NASD member, the Reporting Member
shall indicate with the designated symbol that the buy side OEID is a
non-member;
(R) A designated symbol denoting whether the trade between the MMID
and the Buy Side OEID shall be compared in TRACS;
Sell Side OEID
(S) Sell Side OEID executing broker;
(T) Sell Side OEID introducing broker in case of a ``give up'';
(U) Sell Side OEID clearing broker;
(V) If known, a designated symbol denoting whether the trade, from
the Sell Side OEID's perspective, is as principal, riskless principal,
or agent;
(W) If known, a symbol denoting whether the trade, from the Sell
Side OEID's perspective, is a sell, sell short, or sell short exempt
transaction;
(X) If the Sell Side OEID is a customer of the Reporting Member,
the Reporting Member shall denote that the trade is an internalized
trade with the designated symbol;
(Y) If the Sell Side OEID is a non-NASD Member, the Reporting
Member shall indicate with the designated symbol that the buy side OEID
is a non-member;
(Z) A designated symbol denoting whether the trade between the MMID
and the Sell Side OEID shall be compared in TRACS;
(AA) If the transactions between the Buy Side OEID and the
Reporting Member is reported pursuant to an AGU arrangement or a QSR
agreement, disclosure of the information set forth in subparagraph (f)
(2) (O) is mandatory; and
(BB) If the transaction between the Sell Side OEID and the
Reporting Member is reported pursuant to an AGU arrangement or a QSR
agreement, disclosure of the information set forth in subparagraphs (f)
(2) (V) and (W) is mandatory.
(g) Trade Report Modifiers
(1) Reporting Members shall append the following trade report
modifiers to a last sale report if applicable:
(A) .SLD, if the trade is executed during normal market hours and
it is reported later than 90 seconds after execution;
(B) .PRP, if the trade reflects a price different from the current
market when the execution is based on a prior reference point in time
during normal market hours, which time shall be denoted in the trade
report;
(C) .B, if the trade is executed during market hours and is an
aggregation of transaction reports meeting the conditions set forth in
paragraph (h) below;
(D) .SB, if the trade is executed during market hours and is a .B
trade that is reported later than 90 seconds after execution;
(E) .SNN, if the trade is a Seller's Option Trade, .NN denotes the
number of days for delivery;
(F) .C, if the trade is a Cash Trade;
(G) .ND, if the trade is a Next Day Trade;
(H) .W, if the trade occurs at a price based on an average
weighting or another special pricing formula;
(I) .T, if the trade is executed outside of normal market hours;
(J) .O, if the trade is priced beyond certain price validation
parameters as established by the NASD; and
(K) Any other trade report modifier approved for use by the
Securities and Exchange Commission.
(2) It will be a violation of this Rule for a Reporting Member to
fail to append a required trade modifier or to append a modifier that
is not required.
(3) A Reporting Member shall not append a .O modifier to a trade
report unless the trade price is beyond certain price validation
parameters as established by the NASD.
(4) The Association seeks to emphasize the obligations of members
[[Page 413]]
to report securities transactions within 90 seconds after execution.
All reportable transactions not reported within 90 seconds after
execution shall be reported as late, and the Association routinely
monitors members' compliance with the 90 second requirement. If the
Association finds a pattern or practice of unexcused late reporting,
that is, repeated reports of executions after 90 seconds without
reasonable justification or exceptional circumstances, the member may
be found to be in violation of Rule 2110. Exceptional circumstances
will be determined on a case by case basis and may include instances of
system failure by a member or service bureau, or unusual market
conditions, such as extreme volatility in a security, or in the market
as a whole. Timely reporting of all transactions is necessary and
appropriate for the fair and orderly operation of the Association's
marketplace, and the Association will view noncompliance as a rule
violation.
(h) Procedures for Reporting Price and Volume
(1) Members that are required to report transactions pursuant to
paragraph (d) above shall transmit last sale reports in the following
manner:
(A) For agency transactions, report the number of shares (or bonds)
and the price excluding the commission charged.
Example:
SELL as agent 100 shares at 40 less a commission of $12.50;
REPORT 100 shares at 40.
(B) For dual agency transactions, report the number of shares (or
bonds) only once, and report the price excluding the commission
charged.
Example:
SELL as agent 100 shares at 40 less a commission of $12.50;
BUY as agent 100 shares at 40 plus a commission of $12.50;
REPORT 100 shares at 40.
(C) (i) For principal transactions, except as provided below,
report each purchase and sale transaction separately and report the
number of shares (or bonds) and the price. For principal transactions
that are executed at a price that includes a mark-up, mark-down or
service charge, the price reported shall exclude the mark-up, mark-down
or service charge. Such reported price shall be reasonably related to
the prevailing market, taking into consideration all relevant
circumstances including, but not limited to, market conditions with
respect to the security, the number of shares (or bonds) involved in
the transaction, the published bids and offers with size at the time of
the execution (including the reporting firm's own quotation), the cost
of execution and the expenses involved in clearing the transaction.
Example:
BUY as principal 100 shares from another member at 40 (no mark-down
included);
REPORT 100 shares at 40.
Example:
BUY as principal 100 shares from a customer at 39.85 which includes
a .15 mark-down from prevailing market at 40;
REPORT 100 shares at 40.
Example:
SELL as principal 100 shares to a customer at 40.15, which includes
a .15 mark-up from the prevailing market of 40;
REPORT 100 shares at 40.
Example:
BUY as principal 10,000 shares from a customer at 39.75, which
includes a .25 mark-down or service charge from the prevailing market
of 40;
REPORT 10,000 shares at 40.
(ii) Exception: A ``riskless'' principal transaction in which a
member after having received an order to buy a security, purchases the
security as principal at the same price to satisfy the order to buy or,
after having received an order to sell, sells the security as principal
at the same price to satisfy the order to sell, shall be reported as
one three party transaction, excluding the mark-up or mark-down,
commission-equivalent, or other fee. Alternatively, a member may report
a riskless principal transaction by submitting the following report(s)
to the NASD:
a. The member with the obligation to report the transaction
pursuant to paragraph (d) above must submit a last sale report for the
initial leg of the transaction.
b. Regardless of whether a member has a reporting obligation
pursuant to paragraph (d) above, the firm must submit, for the
offsetting, ``riskless'' portion of the transaction, either:
1. a clearing-only report with a capacity indicator of ``riskless
principal,'' if a clearing report is necessary to clear the
transaction; or
2. a non-tape, non-clearing report with a capacity indicator of
``riskless principal,'' if a clearing report is not necessary to clear
the transaction.
Example:
SELL as a principal 100 shares to another member at 40 to fill an
existing order;
BUY as principal 100 shares from a customer at 40 minus a mark-down
of $12.50;
REPORT 100 shares at 40 by submitting to the NASD either a single
trade report marked with a ``riskless principal'' capacity indicator or
by submitting the following reports:
3. where required by this Rule, a tape report marked with a
``principal'' capacity indicator; and
4. either a non-tape, non-clearing report or a clearing-only report
marked with a ``riskless principal'' capacity indicator.
(D) For transactions that are executed at a price different from
the current market when the execution is based on a prior reference
point in time, members shall append to the transaction report a trade
report modifier designated by NASD and shall include in the transaction
report the prior reference time.
Example:
At 9:45 a.m., a member discovers that a customer's order to BUY 100
shares at the opening price has not been executed. The member executes
the customer's order at 9:45 a.m. at the opening price (40). Current
market is 41.
REPORT 100 shares at 40 and append the .PRP modifier with the time
9:30.
(i) Aggregation of Transaction Reports
(1) Under the following conditions, individual executions of orders
in a security at the same price may be aggregated, for transaction
reporting purposes, into a single transaction report. Individual
transactions in convertible debt securities cannot be aggregated
pursuant to this paragraph.
(A) Orders received prior to the opening of the reporting member's
market in the security and simultaneously executed at the opening.
Also, orders received during a trading or quotation halt in the
security and executed simultaneously when trading or quotations resume.
In no event shall a member delay its opening or resumption of
quotations for the purpose of aggregating transactions.
Example:
A firm receives, prior to its market opening, several market orders
to sell which total 10,000 shares. All such orders are simultaneously
executed at the opening at a reported price of 40.
REPORT 10,000 shares at 40.
(B) Simultaneous executions by the member of customer transactions
at the same price, e.g., a number of limit orders being executed at the
same time when a limit price has been reached.
Example:
A firm has several customer limit orders to sell which total 10,000
shares at a limit price of 40. That price is reached and all such
orders are executed simultaneously.
REPORT 10,000 shares at 40.
(C) Orders relayed to the trading department of the reporting
member for
[[Page 414]]
simultaneous execution at the same price.
Example:
A firm purchases a block of 50,000 shares from an institution at a
reported price of 40.
REPORT 50,000 at 40.
Subsequently, one of the firm's branch offices transmits to the
firm's trading department for execution customer buy orders in the
security totaling 12,500 shares at a reported price of 40.
REPORT 12,500 at 40.
Subsequently, another branch office transmits to the firm's trading
department for execution customer buy orders totaling 15,000 shares in
the security at a reported price of 40.
REPORT 15,000 at 40.
Example:
Due to a major change in market conditions, a firm's trading
department receives from a branch office for execution customer market
orders to sell totaling 10,000 shares. All are executed at a reported
price of 40.
REPORT 10,000 at 40.
(D) Orders received or initiated by the reporting member that are
impractical to report individually and are executed at the same price
within 60 seconds of execution of the initial transaction; provided
however, that no individual order of 10,000 shares or more may be
aggregated in a transaction report and that the aggregated transaction
report shall be made within 90 seconds of the initial execution
reported therein. Furthermore, it is not permissible for a member to
withhold reporting a trade in anticipation of aggregating the
transaction with other transactions. The limitation on aggregating
individual orders of 10,000 shares or more for a particular security
shall not apply on the first day of secondary market trading of an IPO
for that security.
Examples:
A reporting member receives and executes the following orders at
the following times and desires to aggregate reports to the maximum
extent permitted under this Rule.
First Example
11:01:00 500 shares at 40
11:01:05 500 shares at 40
11:01:10 9,000 shares at 40
11:01:15 500 shares at 40
REPORT 10,500 shares at 40 within ninety seconds of 11:01.
Second Example
11:01:00 100 shares at 40
11:01:10 11,000 shares at 40
11:01:30 300 shares at 40
REPORT 400 shares within ninety seconds of 11:01 and 11,000 shares
within ninety seconds of 11:01:10 (individual transactions of 10,000
shares or more must be reported separately).
Third Example
11:01:00 100 shares at 40
11:01:15 500 shares at 40
11:01:30 200 shares at 40
11:02:30 400 shares at 40
REPORT 800 shares at 40 within ninety seconds of 11:01 and 400
shares at 40 within ninety seconds of 11:02:30 (the last trade is not
within sixty seconds of the first and must, therefore, be reported
separately).
(2) The reporting member shall identify aggregated transaction
reports and order tickets of aggregated trades in a manner directed by
Nasdaq.
(j) Reporting Transactions on Form T
All Reporting NASD Members required (or that elect) to report
transactions to the NASD shall report, as soon as practicable to NASD
Regulation's Market Regulation Department on Form T, last sale reports
of transactions in designated securities for which electronic
submission into the NASD is not possible (e.g., the ticker symbol for
the security is no longer available, a market participant identifier is
no longer active, or the NASD will not accept the date of execution
because the NASD Alternative Display Facility was closed on that date).
Transactions that can be reported into the NASD, whether on trade date
or on a subsequent date on an ``as of'' basis (T+N), shall not be
reported on Form T.
(k) Trade Tickets
All trade tickets for transactions in Nasdaq securities shall be
time-stamped at the time of execution.
(l) Special Trade Indicator
A Reporting Member shall append the designated symbol for special
trades, step out trades, reversals, and as-of trades.
(m) Clearing Indicators
A Reporting Member shall use a designated symbol to denote whether
the trade is to be: (i) compared in TRACS; (ii) not compared in TRACS;
(iii) compared in TRACS pursuant to an Automatic Give Up Agreement
(``AGU''); or (iv) not compared in TRACS, but locked in pursuant to a
Qualified Service Representation Agreement (``QSR'').
(n) Transactions Not To Be Reported To NASD
The following types of transactions effected by NASD members
otherwise than on an exchange shall not be reported to TRACS for
publication:
(1) Odd-lot transactions;
(2) transactions that are part of a primary distribution by an
issuer or of a registered secondary distribution (other than ``shelf
distributions'') or of an unregistered secondary distribution;
(3) transactions made in reliance on Section 4(2) of the Securities
Act of 1933;
(4) transactions where the buyer and seller have agreed to trade at
a price substantially unrelated to the current market for the security
(e.g., to enable the seller to make a gift);
(5) purchases or sales of securities effected upon the exercise of
an option pursuant to the terms thereof or the exercise of any other
right to acquire securities at a pre-established consideration
unrelated to the current market.
(o) Dissemination of Transaction Reports in Convertible Debt Securities
For surveillance purposes, NASD will collect and process trade
reports for all transactions in convertible debt securities listed on
Nasdaq and effected through the NASD Alternative Display Facility. On a
real-time basis, NASD will disseminate to members and the public
through NASD, and through securities information processors,
transactions in convertible debt securities reported to it equaling 99
bonds or less. Selected NASD Notices to Members: 83-1, 87-85, 93-9, 93-
25, 93-83, 94-71, 98-82, 99-65, 99-66.
* * * * *
5000. [OTHER NASDAQ AND NASD MARKETS] TRADING OTHERWISE THAN ON AN
EXCHANGE
[5100. NASDAQ INTERNATIONAL SERVICE RULES]
[5101. Applicability]
[(a) These Rules shall be known as the ``International Rules'' and
govern operation of the Nasdaq International Service (``Nasdaq
International'' or ``Service''), as well as the obligations, access to
and use of the Service by the following parties: broker/dealers
admitted to membership in the Association (collectively, ``Association
members''); associated persons of such Association members; and any
non-member broker/dealer having the status of an approved affiliate.
Unless otherwise indicated, the requirements of the International Rules
are in addition to those contained in the By-Laws and other Rules of
the Association.]
[(b) Rules 5106, 5108, 5109, and 5112 of the International Rules
establish requirements that apply exclusively to
[[Page 415]]
participation in the Service during the European Session. As such,
these provisions of the International Rules supersede the Rule 2870,
4640, 6300 and 6600 Series: and Rules 6410, 6420 and 6450. Non-
compliance with any applicable requirement will subject the Association
member and/or its associated person(s) to regulatory action under the
Association's Code of Procedure, the Rule 9000 Series.]
[(c) Unless otherwise indicated within a particular provision of
the International Rules, all procedures, requirements, and prohibitions
shall apply with equal force to Association members, their associated
persons, and approved affiliates that participate in the Service.]
[5102. Definitions]
[Unless the context otherwise requires, or unless defined in the
International Rules, the terms used herein shall retain their present
meanings as defined in the By-Laws and other Rules of the Association.]
[(a) ``Approved affiliate'' means a broker/dealer that meets all of
the following requirements:]
[(1) it is not admitted to membership in the Association or any
registered national securities exchange;]
[(2) it is authorized to conduct securities business in the United
Kingdom in accord with all applicable provisions of the Financial
Services Act of 1986;]
[(3) it controls, is controlled by, or is under common control with
an Association member (hereinafter referred to as a ``control
relationship''); and]
[(4) it has been approved by the Association to participate as a
Service market maker, in an agency capacity, on behalf of the
Association member with whom it has a control relationship.]
[(b) ``Domestic Session'' refers to the market session operated by
the Association between the hours of 9:30 a.m. and 4:00 p.m. Eastern
Time on each U.S. business day.]
[(c) ``European-only market maker'' means a broker/dealer that is
registered with the Association to make markets in one or more
qualified securities in the SERVICE, but is not registered in the same
security(ies) for purposes of making a market during the Domestic
Session.]
[(d) European Session refers to the market session supported by the
Service during the hours specified in Rule 5103.]
[(e) ``International market maker'' means a broker/dealer that is
registered with the Association to make markets in one or more
qualified securities in the SERVICE and is also registered with the
Association to make markets in the same security(ies) during the
Domestic Session.]
[(f) The terms ``Nasdaq International'' and ``Service refer to an
extension of the basic automation capabilities that support Association
members' market making in the Nasdaq National Market (NNM), and
exchange-listed securities to the business hours fixed by Rule 5103.]
[(g) ``Non-NNM security'' means every qualified security in the
subset defined by Rule 5104(b).]
[(h) Qualified security'' means any security that satisfies the
requirements contained in Rule 5104.]
[(i) ``Service market maker'' includes any Association member that
is registered as a European-only or International market maker in one
or more qualified securities, and any approved affiliate registered as
a European-only market maker in one or more qualified securities.]
[5103. Normal Business Hours]
[The Nasdaq International market session (hereinafter referred to
as the ``European Session'') will run from 3:30 a.m. to 9:00 a.m.
Eastern Time on each business day in the U.S.; pre-opening procedures
will commence at 2:30 a.m. Eastern Time. Appropriate adjustments will
be made in the event that the U.S. and the U.K. move to (or from)
daylight-saving time on different dates. All times referenced in the
International Rules relate to the Eastern Time zone of the U.S.]
[5104. Qualified Securities]
[The Association deems the following classes of securities
qualified for inclusion in Nasdaq International:]
[(a) any Nasdaq security that is designated an NNM security;]
[(b) any non-Canadian, foreign security or ADR that is included in
Nasdaq but not designated an NNM security; and]
[(c) any equity security that is listed on a registered national
securities exchange.]
[Inclusion of a qualified security in Nasdaq International requires
a market making commitment by one or more broker/dealers that
participate as Service market makers.]
[5105. Access]
[(a) Access to the market making capabilities provided by Nasdaq
International is restricted to broker/dealers that are either
Association members or approved affiliates and that have all equipment
and communication lines specified by the Association for receipt of
Nasdaq Workstation Service. Additionally, Association members that
participate as Service market makers, either directly or through the
agency of an approved affiliate, must satisfy the same financial and
operational requirements applicable to market makers in Nasdaq
securities and/or exchange-listed securities traded off-board during
the Domestic Session.]
[(b) Association members that utilize Nasdaq Workstation units to
receive Level 2 Nasdaq Service during the Domestic Session can also
receive real-time quotation information entered by Service market
makers. Similar access terms will be provided to non-member, Level 2
subscribers utilizing Nasdaq Workstation units.]
[5106. Requirements Applicable to Market Makers]
[(a) Service Market Maker]
[Association members and approved affiliates can function as
Service market makers by registering with the Association in one or
more qualified securities. Two classifications of market makers are
authorized: (1) European-only and (2) International. Association
members can register in either capacity in any qualified security;
approved affiliates are limited to European-only registration. At the
time of registration, a Service market maker must select one of the
following time periods to define its daily market making commitment, on
a security-by-security basis: 3:30 a.m. to 9:00 a.m.; 5:30 a.m. to 9:00
a.m., and 7:30 a.m. to 9:00 a.m. Every Service market maker must
fulfill the market making obligations specified below in each of its
registered securities while participating in the European Session.
Based on experience gained with Service market makers' use of the
multiple openings, the Association may determine to alter the specified
times by up to one hour or to eliminate an opening altogether.]
[(b) Market Maker Obligations]
[The following requirements and procedures govern a broker/dealer's
participation in Nasdaq International as a Service market maker.]
[(1) Registration]
[(A) Quotations and quotation size may be entered into the Service
only by a Service market maker.]
[(B) To function as a Service market maker, an Association member
must initially obtain registration as a European-only or International
market maker by filing an application with the Association. The
application shall certify the Association member's good standing with
the Association,
[[Page 416]]
demonstrate compliance with the net capital and other financial
responsibility provisions of the Act and the rules thereunder, and
specify the qualified security(ies) in which the member is seeking to
register as a European-only or International market maker. Initial
registration as a Service market maker shall become effective upon the
member's receipt of the Association's notice approving such
registration.]
[(C) For an approved affiliate to function as a Service market
maker, it must initially obtain registration as a European-only market
maker by filing an application with the Association. Such application
must be co-signed by a registered principal of the Association member
for whom the approved affiliate will act as agent. The application
shall certify the following: the Association member's good standing
with the Association; the approved affiliate's authorization to conduct
securities business in the United Kingdom in accord with all applicable
provisions of the Financial Services Act of 1986; and the Association
member's ability to comply and its assumption of compliance with the
net capital and other financial responsibility requirements of the Act
and the rules thereunder in respect of the approved affiliate's market
making in the Service as agent for the Association member. The
application shall also specify the qualified security(ies) in which the
approved affiliate is seeking to register as a European-only market
maker. Initial registration as a Service market maker shall become
effective upon the approved affiliate's receipt of the Association's
notice approving such registration.]
[(D) A Service market maker may become registered in a newly
qualified security by telephoning Market Operations. If registration is
requested within five (5) business days after the issue becomes
qualified, registration shall take effect at the time the request is
entered.]
[(E) A Service market maker may register in additional qualified
securities by entering a registration request via its Nasdaq
Workstation unit authorized for receipt of the Service. If registration
is requested respecting a security that has been a qualified security
for more than five (5) days, and the requirements of either
subparagraph (B) or (C) above are satisfied, registration shall take
effect on the day after the registration request is entered.]
[(F) Registration in a qualified security shall be terminated by
the Association if the Service market maker fails to enter quotations
in that security within five (5) business days after its registration
in that security first became effective.]
[(2) Normal Business Hours]
[Service market makers must be open for business, on each U.S.
business day, during the time periods established by their registration
in one or more qualified securities. By virtue of the multiple openings
feature, a Service market maker would have the flexibility, for
example, to register and quote markets in some securities during the
5:30 a.m. to 9:00 a.m. segment and others during the 7:30 a.m. to 9:00
a.m. segment. This flexibility is equally available to Association
members and approved affiliates that participate as Service market
makers. Appropriate adjustments will be made in the event that the U.S.
and U.K. move to (or from) daylight savings time on different dates.]
[(3) Character of Quotations]
[(A) For each security in which an Association member has
registered as a Service market maker, it shall be willing to buy and
sell such security for its own account on a continuous basis and shall
enter and maintain two-sided quotations in the Service during the hours
specified above in subparagraph (2), above, subject to the procedures
for excused withdrawal set forth in subparagraph (4) below. An approved
affiliate registered as a Service market maker shall assume identical
obligations in each of its registered securities. Purchases and sales
effected to fulfill those obligations shall be deemed to be made for
the account of the Association member on whose behalf the approved
affiliate acts as agent.]
[(B) A Service market maker that receives an offer to buy or sell
from another Association member or approved affiliate shall execute a
transaction for at least a normal unit of trading at its displayed
quotations as disseminated through the Service at the time of receipt
of any such offer. If a Service market maker displays a quotation for a
size greater than a normal unit of trading, it shall, upon receipt of
an offer to buy or sell from another Association member or approved
affiliate, execute a transaction at least at the size displayed.]
[(C) A Service market maker shall enter and maintain quotations
that are reasonably related to the prevailing market. If it appears
that such market maker's quotations are no longer reasonably related to
the prevailing market, the Association may require the firm to re-enter
its quotations. However, if that Service market maker fails to re-enter
its quotations, the Association may suspend the market maker's
quotations in one or all of the qualified securities in which it is
registered.]
[(D) If a Service market maker's ability to enter or update
quotations is impaired, the market maker shall immediately contact
Market Operations to request the withdrawal of its quotations.] [(E) If
a Service market maker's ability to enter or update quotations is
impaired and it elects to remain in the Service, the market maker shall
execute an offer to buy or sell received from another Association
member or approved affiliate at its quotations as disseminated through
the Service.]
[(F) A Service market maker should refrain from entering quotations
into the Service that exceed the guidelines for maximum allowable
spreads set forth below:]
Spread Guidelines
------------------------------------------------------------------------
Maximum
Average spread allowable
spread
------------------------------------------------------------------------
\1/8\ or less.............................................. \1/4\
\1/4\...................................................... \1/2\
\3/8\...................................................... \3/4\
\1/2\...................................................... 1
\5/8\...................................................... 1
\3/4\...................................................... 1\1/2\
\7/8\...................................................... 1\1/2\
1.......................................................... 1\1/2\
1\1/8\..................................................... 1\5/8\
1\1/4\..................................................... 1\3/4\
1\3/8\..................................................... 1\7/8\
1\1/2\..................................................... 2
1\5/8\..................................................... 2
1\3/4\..................................................... 3
1\7/8\..................................................... 3
2.......................................................... 3
2\1/8\..................................................... 3
2\1/4\..................................................... 3
2\3/8\..................................................... 3
2\1/2\..................................................... 3
2\5/8\..................................................... 4
2\3/4\..................................................... 4
2\7/8\..................................................... 4
------------------------------------------------------------------------
[For an average spread of 3 or more, the maximum allowable spread
is 125 percent of the average spread rounded to the next highest whole
number.]
[The Association regards these spread parameters as guidelines
rather than absolute requirements. Nonetheless, the Association will
continuously monitor the quotation spreads of every Service market
maker and consider taking regulatory action upon finding a pattern of
excessive spreads disseminated during European Sessions. A pattern of
excessive spreads will be deemed to exist where a Service market maker
exceeds the applicable guideline on five
[[Page 417]]
or more occasions in the same qualified security during a calendar
month or exceeds the applicable guideline respecting at least 10% of
its quotation updates entered into the Service during a calendar
month.]
[(G) A Service market maker shall not, except under extraordinary
circumstances, enter or maintain quotations in the Service during the
European Session if: the bid quotation entered is equal to or greater
than the asked quotation of another Service market maker displaying
quotations in the same qualified security; or the asked quotation is
equal to or less than the bid quotation of another Service market maker
displaying quotations in the same qualified security.]
[(H) A Service market maker shall, prior to entering a quotation
that locks or crosses another quotation, make reasonable efforts to
avoid such locked or crossed market by executing transactions with all
Service market makers whose quotations would be locked or crossed. A
Service market maker whose quotations are causing a locked or crossed
market is required to execute transactions at its quotations as
displayed through the Service at the time of receipt of any order.]
[(4) Withdrawal of Quotations]
[(A) A Service market maker that wishes to withdraw its quotations
in a qualified security shall contact Market Operations to obtain
excused withdrawal status prior to effecting withdrawal. Excused
withdrawals shall be granted by Market Operations only upon the
demonstration of the existence of one of the circumstances set forth in
subparagraphs (B) and (C) below.]
[(B) Excused withdrawal status based on physical circumstances
beyond the Service market maker's control may be granted for up to five
(5) business days, unless extended by Market Operations. Excused
withdrawal status based on demonstrated legal or regulatory
requirements, supported by appropriate documentation and accompanied by
a representation that the condition necessitating the withdrawal of
quotations is not permanent in nature, may, upon written request, be
granted for not more than sixty (60) days. Excused withdrawal status
based on religious holidays or national holidays in the U.K. may be
granted only if the request is received by the Association five (5)
business days in advance and is approved by the Association. Excused
withdrawal status based on vacation may be granted only if: the request
for withdrawal is received by the Association twenty (20) business days
in advance, and is approved by the Association; the request includes a
list of the securities for which withdrawal is requested; and the
request is made by a Service market maker with three (3) or fewer
Nasdaq Workstation units authorized for market making in the Service.
The following shall not constitute acceptable reasons for granting
excused withdrawal status: pending news, a sudden influx of orders or
price changes, or the desire to effect transactions with competitors.]
[(C) Excused withdrawal status may be granted to a Service market
maker that fails to maintain a clearing arrangement with a registered
clearing agency or with another party that is a member of such an
agency and is therefore withdrawn from participation in the
Association's Automated Confirmation Transaction Service. However, if
the Association finds that the Service market maker's failure to
maintain a clearing arrangement is voluntary, the withdrawal of
quotations will be deemed a voluntary termination pursuant to
subparagraph (5) below.]
[(5) Voluntary Termination of Registration]
[A Service market maker may voluntarily terminate its registration
in a qualified security by withdrawing its quotations in that security
from the Service. A market maker that voluntarily terminates its
registration in a qualified security may re-register to quote that
security in the Service in accord with procedures contained in
paragraph (b)(1)(E) above. Nonetheless, if an International market
maker voluntarily terminates both the domestic and European components
of its registration in a qualified security that is included in Nasdaq
(qualified Nasdaq security), this Association member cannot re-register
to quote that qualified Nasdaq security during the Domestic Session
until twenty (20) business days have elapsed. This waiting period would
not apply where an International market maker in a qualified Nasdaq
security had terminated the European component of its registration but
maintained the domestic component.]
[(6) Stabilizing Bids]
[(A) A Service market maker may enter a stabilizing bid in the
Service for a qualified Nasdaq security, which bid will be identified
with the appropriate identifier on the quotation display. Only one
market maker in an issue may enter a stabilizing bid. A stabilizing bid
will not be displayed unless one market maker in addition to the market
maker entering the stabilizing bid is registered in the issue and
enters quotations during the European Session.]
[(B) A stabilizing bid, a pre-effective stabilizing bid, or a
penalty bid may be entered into the Service. A stabilizing bid must be
available for all freely tradeable outstanding securities of the same
class being offered.]
[(C) Notice to the Association]
[(i) A Service market maker that wishes to enter a stabilizing bid
shall so notify Market Operations in writing prior to the first day on
which the stabilizing bid is to appear in the Service. The notice shall
include: the name of the qualified Nasdaq security and its Nasdaq
symbol; the date on which the security's registration will become
effective, if it is already quoted in the Service; whether the
stabilizing bid will be a penalty bid or a penalty-free bid; and a copy
of the preliminary prospectus or shelf registration statement, unless
the Association determines otherwise.]
[(ii) In the case of a pre-effective stabilizing bid, the notice
shall include: the name of the qualified Nasdaq security and its Nasdaq
symbol; the contemplated effective date of the offering; whether it is
contemplated that the pre-effective stabilizing bid will be converted
to a stabilizing bid and, if so, whether the stabilizing bid will be a
penalty bid or a penalty-free bid; and a copy of the preliminary
prospectus, unless the Association determines otherwise.]
[(iii) A service market maker that has provided the written notice
prescribed above shall also contact Market Operations for authorization
on the day the market maker wishes to enter the stabilizing bid into
the Service.]
[(D) A Service market maker shall not enter a stabilizing bid at
the same time that it is quoting any other bid or offer in the
qualified Nasdaq security.]
[(E) A Service market maker entering a stabilizing bid shall report
all purchases made on the stabilizing bid and enter ``zero volume'' for
sales during the period in which the stabilizing bid is in effect.]
[5107. Automated Submission of Trading Data]
[Reserved for Future Use. Redesignated as 8212 by SR-NASD-97-81 eff.
Jan. 16, 1998.]
[5108. Reports]
[Every Association member and approved affiliate that functions as
a Service market maker shall submit the following reports to the
Association at the frequency specified:]
[[Page 418]]
[(a) A Service market maker shall report each business day any data
relating to qualified securities quoted in the Service as the
Association shall require.]
[(b) A Service market maker shall report monthly such data on
qualified securities that are quoted in the Service as the Association
shall require.]
[(c) A Service market maker shall make such other reports as the
Association may prescribe from time to time.]
[5109. Clearance and Settlement of International Transactions]
[(a) Association members and approved affiliates that effect
international transactions must clear and settle all such transactions
through a clearing agency registered with the Commission that uses a
continuous net settlement system. This requirement may be satisfied
through direct participation in a suitable clearing agency or through a
clearing arrangement with another party.]
[(b) For purposes of this Rule, the term ``international
transaction'' means every transaction having the following three
characteristics: (1) the transaction involves a qualified security
quoted in the Service by at least one registered market maker; (2) the
transaction is consummated during the hours of the European Session
between two Association members, two approved affiliates, or an
Association member and an approved affiliate; and (3) the transaction
involves at least one Association member (acting in a principal or
agency capacity) that is registered as a European-only or International
market maker in any qualified security, or alternatively, at least one
approved affiliate (acting in a principal or agency capacity) that is
registered as a European-only market maker in any qualified security.]
[(c) Participation in the Automated Confirmation Transaction
Service is mandatory for self-clearing Association members
participating in the Service directly or through an approved
affiliate.]
[5110. Suspension and Termination of Quotations by Association
Action]
[The Association may, pursuant to the procedures set forth in the
Association Code of Procedure, the Rule 9000 Series, suspend,
condition, limit, prohibit or terminate a Service market maker's
authority to enter quotations in one or more qualified securities for
violations of the applicable requirements or prohibitions contained in
the By-Laws or Rules of the Association.]
[5111. Termination of Access]
[The Association may, upon notice, terminate access to Nasdaq
International in the event that a Service market maker fails to qualify
under specified standards of eligibility for Association membership or
participation in the Service, or fails to pay promptly for services
rendered by the Association or its subsidiaries.]
[5112. Transaction Reporting Requirements]
[During the European Session, broker/dealers registered as
International or European-only market makers shall observe the
following requirements for reporting transaction information to the
Association on qualified securities quoted in Nasdaq International:]
[(a) Definitions]
[(1) ``International Participant'' includes any Association member
registered as an International or European-only market maker in at
least one qualified security, and any approved affiliate registered as
a European-only market maker in at least one qualified security.]
[(2) ``Reportable transaction'' means any round-lot or mixed-lot
transaction in a Service security effected during the European Session
with an International Participant being on one or both sides. The
following are not deemed to be reportable transactions:]
[(A) transactions which are part of a primary distribution by an
issuer or of a registered secondary distribution (other than shelf
registrations) or of an unregistered secondary distribution; ]
[(B) transactions executed on and reported to a securities exchange
domiciled outside the U.S.; ]
[(C) transactions made in reliance on Section 4(2) of the
Securities Act of 1933; ]
[(D) transactions where the buyer and seller have agreed to trade
at a price substantially unrelated to the current market for a Service
security, e.g., to enable the seller to make a gift; and ]
[(E) purchases or sales of Service securities effected upon the
exercise of an option pursuant to the terms thereof or the exercise of
any other right to acquire securities at a preestablished consideration
unrelated to the current market.]
[(3) ``Service security'' means any qualified security that is
quoted in Nasdaq International by at least one registered market
maker.]
[(4) ``Trade report'' refers to the entry of the following elements
of information for each reportable trans security symbol, price
(exclusive of commission, mark-up, or mark-down), volume, and a symbol
indicating whether the transaction is a buy, sell or cross.]
[(b) Timely Trade Reports]
[International Participants shall enter trade reports on all
reportable transactions within three minutes of execution via a Nasdaq
Workstation unit authorized for receipt of Nasdaq International or
through a CTCI. Trade reports not submitted within three minutes of
execution shall be designated as late by addition of the ``SLD''
indicator. A pattern or practice of late reporting without exceptional
circumstances may be considered conduct inconsistent with high
standards of commercial honor and just and equitable principles of
trade, in violation of Rule 2110 of the Association's Rules.]
[(c) Obligation To Submit Trade Reports on Reportable Transactions]
[(1) In transactions between two International Participants that
are both Service market makers in the affected Service security, only
the party representing the sell side shall report.]
[(2) In transactions between two International Participants where
only one is a Service market maker in the affected Service security,
the latter party shall report.]
[(3) In transactions between two International Participants where
neither is a Service market maker in the affected Service security,
only the party representing the sell side shall report.]
[(4) In transactions between an International Participant and a
non-member (other than an approved affiliate), the International
Participant shall report. Where an International Participant acts as a
dual agent in a reportable transaction, it shall be reported only once
by the International Participant.]
[(5) In transactions between an International Participant and
another Association member that is not an International Participant,
only the International Participant shall report.]
[(d) Aggregation of Trade Reports]
[(1) The following procedures and requirements apply exclusively to
an International Participant registered as a Service market maker in a
particular Service security.]
[(2) Under the following conditions, individual trade reports in a
Service security at the same price may be aggregated into a single
trade report by a Service market maker in that security:]
[(A) orders received prior to opening of the European Session and
[[Page 419]]
simultaneously executed at the opening;]
[(B) orders received during a trading halt and executed
simultaneously when trading resumes;]
[(C) orders relayed to the trading department of the Service market
maker for simultaneous execution at the same price;]
[(D) simultaneous executions by the Service market maker of
customer transactions at the same price, e.g., multiple limit orders
being executed at the same time when a limit price has been reached;
or]
[(E) orders received or initiated by the Service market maker that
are impractical to report individually and are executed at the same
price within two minutes of execution of the initial transaction;
provided, however, that no individual order of 10,000 shares or more
may be aggregated in a trade report and that the aggregated trade
report shall be made within three minutes of the initial execution
reported therein.]
[(3) In no instance shall a Service market maker delay entry of its
opening quotations or resumption of trading in a Service security for
the purpose of aggregating trade reports. Further, a Service market
maker is prohibited from withholding a trade report in anticipation of
aggregating the transaction with others.]
[(4) A Service market maker shall identify aggregated trade reports
and the underlying order tickets in a manner prescribed by the
Association.]
[(e) Time Stamping of Transactions]
[All trade tickets for reportable transactions shall be time-
stamped at the time of execution. Association members and approved
affiliates that utilize screen-based systems for executing transactions
shall satisfy this requirement by ensuring that such a system assigns
an appropriate execution time to each reportable transaction.]
[(f) Weekly Reports]
[International Participants shall submit trade reports weekly
respecting Service securities in the following circumstances:]
[(1) European-only market makers. Transactions in Service
securities executed outside hours of the European Session;]
[(2) International market makers. Transactions in Service
securities executed outside the hours of both the European Session and
the Domestic Session;]
[(3) European-only and International Market Makers. Transactions in
Service securities that were effected during the European Session and
were omitted inadvertently from reported volume during the preceding
week's European Sessions.]
[5113. Audit Trail Requirements]
[All existing requirements for submitting audit trail information
to the Association, either directly or through a registered clearing
agency, shall extend to Association members'/approved affiliates'
participation in Nasdaq International. The applicable requirements were
published in NASD Notices to Members 84-55 (October 15, 1984), 85-24
(April 12, 1985), and 85-72 (October 30, 1985), which notices are
hereby incorporated by reference.]
* * * * *
5200. Trading Halts
(a) Authority To Initiate Halts in Trading Otherwise Than on an
Exchange
NASD, pursuant to the procedures set forth in paragraph(b):
(1) shall halt trading otherwise than on an exchange an ADF-
eligible security whenever any market eligible to trade that security
imposes a trading halt, or suspends the listing, in order to:
(A) Permit dissemination of material news;
(B) obtain information from the issuer relating to material news;
(C) obtain information relating to the issuer's ability to meet
listing qualification requirements; or
(D) obtain any other information that is necessary to protect
investors and the public interest.
(2) shall halt trading otherwise than on an exchange in an American
Depository Receipt (``ADR'') listed on a national securities exchange,
when the security underlying the ADR is listed on or registered with a
national or foreign securities exchange or market, and the national or
foreign securities exchange or market, or regulatory authority
overseeing such exchange or market, halts trading in such security for
regulatory reasons.
(3) shall halt all trading through the NASD Alternative Display
Facility (a) whenever the NASD Alternative Display Facility is unable
to transmit real-time quotation or trade reporting information to the
applicable Securities Information Processor, or (b) whenever a market-
wide trading halt is in effect under circuit breaker rules of a primary
exchange.
(4) may, in its discretion, halt all trading otherwise than on an
exchange in a security listed on a national securities exchange when
(i) a national securities exchange imposes a trading halt in that
security because of an order imbalance or influx (``operational trading
halt''), or (ii) when the security is a derivative or component of a
security listed on a national securities exchange and a national
securities exchange imposes an operational trading halt in that
security. In the event that the NASD, in its discretion, chooses not to
halt trading otherwise than on an exchange in a security when the
conditions of this paragraph exist, NASD members may continue to
conduct trading in such security during the period of any such halt and
shall continue to report all last sale prices reflecting transactions
in such security.
Members shall promptly notify NASD whenever they have knowledge of
any matter related to a security or the issuer thereof that has not
been adequately disclosed to the public or where they have knowledge of
a regulatory problem relating to such security.
(b) Commencement and Termination of a Trading Halt
(1) In the event NASD determines that a basis exists under Rule
5200(a) to initiate a trading halt, the commencement of the trading
halt will be effective simultaneously with appropriate notice via an
administrative message.
(2) Trading in a halted security shall resume upon notice via an
administrative message that a trading halt is no longer in effect.
(c) Authority To Initiate Trading and Quotation Halts in Non-Exchange-
Listed Foreign Securities
In circumstances in which it is necessary to protect investors and
the public interest, NASD Regulation may direct members, pursuant to
the procedures set forth in paragraph (d), to halt trading and
quotations in a quotation medium other than an exchange or the NASD
Alternative Display Facility of an American Depository Receipt (``OTC
ADR'') or a security (``OTC Security'') that is traded in the OTC
market and that is not otherwise listed on a national securities
exchange or included in the OTC Bulletin Board Service (``OTCBB'') when
the OTC Security or the security underlying the OTC ADR is listed on or
registered with a foreign securities exchange or market, and the
foreign securities exchange, market, or regulatory authority overseeing
such issuer, exchange or market halts trading in such security for
regulatory reasons (``Foreign Regulatory Halt''); provided, however,
that NASD Regulation will not impose a trading and quotation halt if
the Foreign Regulatory Halt was imposed solely for the dissemination of
[[Page 420]]
material news, a regulatory filing deficiency, or operational reasons.
(d) Procedure for Initiating a Trading and Quotation Halt
(1) For a halt initiated under subparagraph (c) of this rule, NASD
Regulation will promptly evaluate information received from a foreign
securities exchange or market on which the OTC Security or the security
underlying the OTC ADR is listed or registered or from a foreign
regulatory authority overseeing such issuer, exchange, or market about
a Foreign Regulatory Halt and determine whether a trading and quotation
halt in the OTC Security is appropriate.
(2) Should NASD Regulation determine that a basis exists under this
Rule for initiating a trading and quotation halt, NASD Regulation shall
disseminate appropriate public notice that a trading and quotation halt
is in effect and the commencement of the trading halt will be effective
simultaneously with appropriate public notice.
(3) Trading and quotations in the OTC market may resume when NASD
Regulation determines that the basis for the halt no longer exists or
when five business days have elapsed from the date NASD Regulation
initiated the trading and quotation halt in the security, whichever
occurs first. NASD Regulation shall disseminate appropriate public
notice that a trading and quotation halt is no longer in effect.
Selected NASD Notices to Members: 88-46, 94-98.
5300. Transactions Related to Initial Public Offerings
No member or person associated with a member shall execute or cause
to be executed, directly or indirectly, an over-the-counter transaction
in a security subject to an initial public offering until such security
has first opened for trading on the national securities exchange
listing the security, as indicated by the dissemination of an opening
transaction in the security by the listing exchange via the
Consolidated Tape or, for Nasdaq, the Nasdaq Tape.
[5200] 6500. INTERMARKET TRADING SYSTEM[/COMPUTER ASSISTED
EXECUTION SYSTEM]
[5210] 6510. Definitions
(a) The term ``ITS Participant Exchange'' shall mean a participant
in the ITS Plan that is a national securities exchange.
(b) The term ``ITS Plan'' shall mean the plan agreed upon by the
ITS participants, as from time to time amended in accordance with the
provisions therein, and approved by the Commission pursuant to Section
11A(a)(3)(B) of the Act and SEC Rule 11Aa3-2 thereunder.
(c) The term ``ITS Security'' shall mean any security [which] that
may be traded through the System by an ITS/ADF[CAES] Market Maker.
(d) The term ``ITS System'' shall mean the communications network
and related equipment that links electronically the ITS Participant
Exchanges and ITS/ADF[CAES] Market Makers as described in the Plan.
(e) The term ``ITS/ADF[CAES] Market'' Maker shall mean a member of
the Association that is registered as a market maker with the
Association for the purposes of participation in ITS [through CAES]
with respect to one or more specified ITS securities in which [he] it
is then actively registered. Registration as an ITS/ADF[CAES] Market
Maker is [mandatory] optional for all registered CQS market makers in
securities eligible for inclusion in the ITS/ADF[CAES] linkage.
(f) The term ``Participant Market'' shall mean the securities
trading floor of each participating ITS Exchange and the markets of
ITS/ADF[CAES] Market Makers in ITS securities.
(g) The term ``Pre-Opening Application'' shall mean the application
of the System which permits a specialist or ITS/ADF[CAES] Market Maker
who wishes to open [his] its market in an ITS Security to obtain pre-
opening interests from other specialists and ITS/ADF[CAES] Market
Makers.
(h) The term ``Previous Day's Consolidated Closing Price'' shall
mean the last price at which a transaction in a security was reported
by the consolidated last sale reporting system on the last previous day
on which transactions were reported by such system; provided, however,
that the ``previous day's consolidated closing price'' for all Network
A or Network B eligible [S]securities shall be the last price at which
a transaction in the stock was reported by the New York Stock Exchange,
Inc. (NYSE) or the American Stock Exchange, Inc. (Amex), if, because of
unusual market conditions, the NYSE or the Amex price is designated as
such pursuant to the ITS plan.
(i) A ``Third Participating Market Center Trade-Through,'' as that
term is used in this Rule, occurs whenever an ITS/ADF[CAES] Market
Maker initiates the purchase of an ITS Security by sending a commitment
to trade through the System and such commitment results in an execution
at a price [which] that is higher than the price at which the security
is being offered (or initiates the sale of such a security by sending a
commitment to trade through the System and such commitment results in
an execution at a price which is lower than the price at which the
security is being bid for) at the time of the purchase (or sale) in
another ITS participating market center as reflected by the offer (bid)
then being displayed by [ITS/ CAES] Market Makers from such other
market center. The member described in the foregoing sentence is
referred to in this Rule as the ``member who initiated a third
participating market center trade-through.'' [Amended eff. Nov. 24,
1989; Aug. 5, 1991; amended by SR-NASD-93-10 eff. Oct. 31, 1994;
amended by SR-NASD-97-09 eff. May 30, 1997.] Selected Notices to
Members: 94-81.
[5220] 6520. ITS/ADF[CAES] Registration
In order to participate in ITS, a market maker must be registered
with the Association as an ITS/ADF[CAES] Market Maker in each security
in which a market will be made in ITS. Such registration shall be
conditioned upon the ITS/ADF[CAES] Market Maker's continuing compliance
with the following requirements:
(a) Registration as a CQS market maker pursuant to Rule 6320 and
compliance with the Rule 6300 Series;
(b) execution of an ITS/ADF[CAES] Market Maker application
agreement with the Association at least two days prior to the requested
date of registration;
(c) compliance with SEC Rule 15c3-1;
(d) compliance with the ITS Plan, SEC Rule 11Ac1-1 and all
applicable Rules of the Association;
(e) the maintenance of continuous two-sided quotations in the
absence of the grant of an excused withdrawal or a functional excused
withdrawal by the Association. Any registered ITS Market Maker
(excluding ECNs) that participates in a pre-opening application process
and does not enter and maintain continuous two-sided quotations in the
security on that same trading day may not re-register to participate in
ITS in such security for twenty (20) business days unless NASD
Alternative Display Facility Operations grants an excused withdraw;
(f) maintenance of the physical security of the equipment used to
interface with the ITS System located on the premises of the ITS/
ADF[CAES] Market Makers to prevent the unauthorized entry of
communications into the ITS System; and
(g) acceptance and settlement of each ITS System trade that the ITS
System
[[Page 421]]
identifies as effected by such ITS/ADF[CAES] Market Maker, or if
settlement is to be made through another clearing member, guarantee of
the acceptance of settlement of such identified ITS System trade by the
clearing member on the regularly scheduled settlement date.
[5221] 6521. Suspension or Revocation of ITS/ADF[CAES] Registration
Failure by an ITS/ADF[CAES] Market Maker to comply with the ITS
Plan or any of the rules identified herein shall subject such ITS/
ADF[CAES] Market Maker to censure, fine, suspension or revocation of
its registration as an ITS/ADF[CAES] Market Maker, or any other fitting
penalty.
[5230] 6530. ITS Operations
(a) All transactions effected through ITS shall be on a ``regular
way'' basis. Each transaction effected through ITS shall be cleared and
settled through a clearing agency registered with the Commission
[which] that maintains facilities through which ITS transactions may be
compared and settled.
(b) Any ``commitment to trade,'' which is transmitted by an ITS/
ADF[CAES] Market Maker to another ITS participating market center
through ITS, shall be firm and irrevocable for the period of thirty
(30) seconds, [either] one minute or two minutes (specified in
accordance with subparagraph (7) below) following transmission by the
sender. All such commitments to trade shall, at a minimum:
(1) Include the number or symbol which identifies the ITS/ADF[CAES]
Market Maker;
(2) direct the commitment to a particular participant market;
(3) specify the security which is the subject of the commitment;
(4) designate the commitment as either a commitment to buy or a
commitment to sell;
(5) specify the amount of the security to be bought or sold, which
amount shall be for one unit of trading or any multiple thereof;
(6) specify:
(A) A price equal to the offer or bid price then being furnished by
the destination Participant Market, which price shall represent the
price at or below which the security is to be bought or the price at or
above which the security is to be sold, respectively;
(B) a price at the execution price in the case of a commitment to
trade sent in compliance with the block trade rule; or
(C) that the commitment is a commitment to trade ``at the market;''
(7) specify [either] thirty (30) seconds, one minute or two minutes
as the time period during which the commitment shall be irrevocable,
but if the time period is not specified in the commitment, a two minute
period shall be assumed. It should be noted that the period of time
represented by these designations may be changed in the future by
action of the ITS Operating Committee, whose decision as to the
applicable period shall be binding upon ITS/ADF[CAES] Market Makers;
(8) designate the commitment ``short'' or ``short exempt'' whenever
it is a commitment to sell which, if it should result in an execution
in the receiving market, would result in a short sale to which the
provisions of SEC Rule 10a-1(a) under the Act would apply.
(c) If a commitment to trade is directed to an ITS/ADF[CAES] Market
Maker, and the execution of such commitment exhausts the size of the
quotation being displayed by the ITS/ADF[CAES] Market Maker, then such
ITS/ADF[CAES] Market Maker shall be placed in a functional excused
withdrawal state pending the input of a new two-sided quotation with
size into the Association's [Consolidated Quotation Service] ADF. The
new two-sided quotation required of the ITS/ADF[CAES] Market Maker will
be entered as promptly as possible into the Association's [Consolidated
Quotation Service] ADF.
(d) Transactions in ITS securities executed [in CAES] by ITS/
ADF[CAES] Market Makers or received through the ITS System and executed
by an ITS/ADF[CAES] Market Maker are reported to the CTA Plan Processor
[by the CAES System] at the price specified in the commitment or if
executed at a better price, the execution price.
[5240] 6540. Pre-Opening Application--Opening by ITS/ADF[CAES]
Market Maker
The pre-opening application enables an ITS/ADF[CAES] Market Maker
or ITS Participant Exchange in any participant market who wishes to
open [his] its market in an ITS Security to obtain through the ITS
System [or CAES], any pre-opening interest of an ITS Participant
Exchange or other ITS/ADF[CAES] Market Makers registered in that
security and/or market makers in other participant markets.
(a) Notification Requirement--Applicable Price Change, Initial
Notification
(1) Whenever an ITS/ADF[CAES] Market Maker, in an opening
transaction in any ITS/ADF[/CAES] Security, anticipates that the
opening transaction will be at a price that represents a change from
the security's previous day's consolidated closing price of more than
the ``applicable price change'' (as defined below), [he] its shall
notify the other Participant markets of the situation by sending a
``pre-opening notification'' through the System. Thereafter, the ITS/
ADF[CAES] Market Maker shall not open the security in [his] its market
until not less than three minutes after [his] its transmission of the
pre-opening notification. The ``applicable price changes'' are:
------------------------------------------------------------------------
Applicable
Security Consolidated closing price change
price (more than)
------------------------------------------------------------------------
Network A...................... Under $15.............. \1/8\ point.
$15 or over............ \1/4\
point.\1\
Network B...................... Under $5............... \1/8\ point.
$5 or over............. \1/4\
point.\2\
For transactions involving
securities trading in decimal-
based increments, the
``applicable price changes''
are:
Network A.................. Under $15.............. $0.10
$15 or over............ $0.25 \3\
Network B.................. Under $5............... $0.10
$5 or over............. $0.25 \4\
(2) a pre-opening notification shall:
(A) be designated as a pre-opening notification (POA);
[[Page 422]]
(B) identify the ITS/ADF[CAES] Market Maker and the security
involved; and
(C) indicate the ``applicable price range'' by being formatted as a
standardized pre-opening administrative message as follows:
POA MMID/XYZ
(3) The price range shall not exceed the ``applicable price range''
shown below:
------------------------------------------------------------------------
Applicable price
Security Consolidated change (more
closing price than)
------------------------------------------------------------------------
Network A........................ Under $50.......... \1/2\ point.
$50 or over........ 1 point.\5\
Network B........................ Under $10.......... \1/2\ point.
$10 or over........ 1 point.\6\
For transactions involving securities trading in decimal-based
increments, the price range shall not exceed the ``applicable price
range'' shown below:
------------------------------------------------------------------------
Security Consolidated price Price range
------------------------------------------------------------------------
Network A........................ Under $50.......... $0.50
$50 or over........ $1.00 \7\
Network B........................ Under $20.......... $0.50
$10 or over........ $1.00 \8\
\1\ If the previous day's consolidated closing price of a Network A
Eligible Security exceeded $100 dollars and the security does not
underlie an individual stock option contract listed and currently
trading on a national securities exchange the ``applicable price
change'' is one dollar.
\2\ If the previous day's consolidated closing price of a Network B
Eligible Security exceeded $75 and the security is not a Portfolio
Deposit Receipt, Index Funds Share, or Trust Issued Receipt, or does
not underlie an individual stock option contract listed and currently
trading on a national securities exchange the ``applicable price
change'' is one dollar.
\3\ If the previous day's consolidated closing price of a Network A
Eligible Security exceeded $100 dollars and the security does not
underlie an individual stock option contract listed and currently
trading on a national securities exchange the ``applicable price
change'' is one dollar.
\4\ If the previous day's consolidated closing price of a Network B
Eligible Security exceeded $75 and the security is not a Portfolio
Deposit Receipt, Index Funds Share, or Trust Issued Receipt, or does
not underlie an individual stock option contract listed and currently
trading on a national securities exchange the ``applicable price
change'' is one dollar.
\5\ If the previous day's consolidated closing price of an ITS security
exceeded $100 dollars and the Security does not underlie an individual
stock option contract listed and currently trading on a national
securities exchange the ``applicable price change'' is two dollars.
\6\ If the previous day's consolidated closing price of a Network B
Eligible Security exceeded $75 and the security is not a Portfolio
Deposit Receipt, Index Fund[s] Share, or Trust Issued Receipt, or does
not underlie an individual stock option contract listed and currently
trading on a national securities exchange the ``applicable price
change'' is two dollars.
\7\ If the previous day's consolidated closing price of an ITS security
exceeded $100 dollars and the Security does not underlie an individual
stock option contract listed and currently trading on a national
securities exchange the ``applicable price change'' is two dollars.
\8\ If the previous day's consolidated closing price of a Network B
Eligible Security exceeded $75 and the security is not a Portfolio
Deposit Receipt, Index Fund[s] Share, or Trust Issued Receipt, or does
not underlie an individual stock option contract listed and currently
trading on a national securities exchange the ``applicable price
change'' is two dollars.
The price range also shall not straddle the previous day's
consolidated closing price, although it may include it as an endpoint
(e.g., a \1/8\-\5/8\ price range would be permissible if the previous
day's consolidated closing price were \1/8\ or \5/8\, but not if the
closing price were \1/4\, \3/8\ or \1/8\).
For transactions involving securities trading in decimal-based
increments, the price range also shall not straddle the previous day's
consolidated closing price, although it may include it as an endpoint
(e.g., a 40.15--40.65 price range would be permissible if the previous
day's consolidated closing price were 40.15--40.65, but not if the
closing price were within the price range 40.16--40.64).
(b) Subsequent Notifications
If, after sending a pre-opening notification, the situation in an
ITS/ADF[CAES] Market Maker's market changes [he] it may have to issue a
subsequent pre-opening notification. The three situations requiring
subsequent notifications are described below. Subsequent pre-opening
notifications shall be standardized pre-opening administrative
messages. After sending a subsequent notification, the ITS/ADF[CAES]
Market Maker shall wait either (1) one minute or (2) until the balance
of the original three-minute waiting period expires, whichever is
longer, before opening [his] its market (i.e., if more than one minute
of the initial waiting period has not yet expired at the time the
subsequent notification is sent, the ITS/ADF[CAES] Market Maker must
wait for the rest of the period to pass before opening [his] its
market).
(1) Increase or Decrease in Applicable Price Range
Where, prior to the ITS/ADF[CAES] Market Maker's opening of [his]
its market in the security, [his] its anticipated opening price shifts
so that it (A) is outside of the price range specified in [his] its
pre-opening notification but (B) still represents a change from the
previous day's consolidated closing price of more than the applicable
price change, [he] it shall issue a replacement pre-opening
notification (an ``additional'' notification) through the system before
opening [his] its market in the security. An additional notification
contains the same kind of information as is required in an original
pre-opening notification.
(2) Shift to Within Applicable Price Change Parameter
(A) The ITS/ADF[CAES] Market Maker shall, by issuing a
``cancellation'' notification through the system, notify the
Participant market(s) of the receiving market maker(s) prior to opening
the security if the price at which [he] it anticipates opening [his]
its market shifts so that it (i) is outside of the price range
specified in [his] its pre-opening notification but (ii) does not
represent a change from the
[[Page 423]]
previous day's consolidated closing price of more than the applicable
price change.
(B) Notwithstanding the preceding sentence, in situations where the
price range in an initial or additional notification includes price
variations equal to or less than the applicable price change
parameters, the ``cancellation'' notification signifies that the
anticipated opening price (i) may or may not be outside of the price
range specified in the pre-opening notification and (ii) does not
represent a change from the previous day's consolidated closing price
of more than the applicable price change.
Example: CTA close at 30. Pre-Opening Notification sent with any
one of the following price ranges: 30-30\1/2\; 30\1/8\-30\5/8\; or
30\1/4\-30\3/4\. It is then determined that the stock will open at
29\3/4\ or 29\7/8\. Under paragraph (b)(2)(A), the specialist ``shall''
send cancellation notification. If it is subsequently determined that
stock will open at 30, 30\1/8\, or 30\1/4\, the specialist need not
reindicate stock pursuant to paragraph (b)(2)(B).
Example for Decimal-Based Securities: CTA close at 30. Pre-Opening
Notification sent with a price range at or within the following range:
30.10-30.60. It is then determined that the stock will open at a price
within the range of 29.75 to 29.99. Under paragraph (b)(2)(A), the
specialist ``shall'' send cancellation notification. If it is
subsequently determined that stock will open at a price within the
range of 30-30.25, the specialist need not reindicate stock pursuant to
paragraph (b)(2)(B).
(3) Participation as Principal Precluded (``Second Look'')
If a responding market maker who has shown in [his] its pre-opening
response interest as a principal at a price better than the anticipated
opening price would be precluded from participation as principal in the
opening transaction (e.g., [his] its responding principal interest is
to sell at a price \1/8\ or more below the opening price established by
paired agency orders), the ITS/ADF[CAES] Market Maker[s] shall send a
``second look'' notification through the System, notifying such
responding market maker of the price and size at which [he] it could
participate as principal (i.e., in the parenthetical example above, the
total amount of the security that [he] it would have to sell at the \1/
8\-better price to permit the opening transaction to occur at that
price).
For securities trading in decimal-based increments, if a responding
market maker who has shown in [his] its pre-opening response interest
as a principal at a price better than the anticipated opening price
would be precluded from participation as principal in the opening
transaction (e.g. [his] its responding principal interest is to sell at
a price .01 or more below the opening price established by paired
agency orders), the ITS/ADF[CAES] Market Maker[s] shall send a ``second
look'' notification through the System, notifying such responding
market maker of the .01 price and size at which [he] it could
participate as principal (i.e., in the parenthetical example above, the
total amount of the security that [he] it would have to sell at the .01
better price to permit the opening transaction to occur at that price).
(c) Tape Indications
If the CTA Plan or the Association's rules require[s] or permits
that an ``indication of interest'' (i.e., an anticipated opening price
range) in a security be furnished to the consolidated last sale
reporting system prior to the opening of trading or the reopening of
trading following a halt or suspension in trading in one or more ITS
Securities, then the furnishing of an indication of interest in such
situations shall, without any other additional action required of the
ITS/ADF[CAES] Market Maker, (1) initiate the pre-opening process, and
(2) if applicable, substitute for and satisfy the requirements of
paragraphs (a), (b)(1), and (b)(2) (while the furnishing of an
indication of interest to the consolidated last sale reporting system
satisfies the notification requirements of this rule, an ITS/ADF[CAES]
Market Maker should also transmit the indication through the System in
the format of a standardized pre-opening administrative message). In
any such situation, the ITS/ADF[/CAES] Market Maker shall not open or
reopen the security until not less than three minutes after [his] its
transmission of the opening or reopening indication of interest. For
the purpose of paragraphs (b)(3), (d), (f), and (g) through (i), ``pre-
opening notification'' includes an indication of interest furnished to
the consolidated last sale reporting system.
(d) Pre-Opening Responses--Decision on Opening Transaction
Subject to paragraph (e), [I]if an ITS/ADF[CAES] Market Maker [who]
that has issued a pre-opening notification receives ``pre-opening
responses'' through the system containing ``obligations to trade'' from
market makers in other Participant markets (``responding market
makers''), [he] it shall combine those obligations with orders [he] it
already holds in the security and, on the basis of this aggregated
information, decide upon the opening transaction in the security. If
the ITS/ADF[CAES] Market Maker has received more than one pre-opening
response from a Participant market, [he] it shall include in such
combination only those obligations to trade from such Participant
market as are specified in the most recent response, whether or not the
most recent response expressly cancels the preceding response(s). An
original or revised response received after the ITS/ADF[CAES] Market
Maker has effected [his] its opening transaction shall be to no effect.
(e) Pre-Opening Responses From Open Markets
(1) An ITS/ADF[CAES] Market Maker must accept only those pre-
opening responses sent to the Association by market makers in other
[p]Participant markets prior to the opening of their markets for
trading in the security. Following a halt or suspension in trading
declared by the Association in an ITS Security, an ITS/ADF[CAES] Market
Maker must accept only those pre-opening responses sent by market
makers to the Association from other [p]Participant markets that halted
trading in the security contemporaneously with the Association and that
had not resumed trading in the security at the time the pre-opening
response was sent.
(2) In the event that one or more market makers from [p]Participant
markets that have already opened trading in a security or, with respect
to a halt or suspension in trading, either did not halt trading in the
security contemporaneously with the Association, or has already resumed
trading in the security, respond to a pre-opening notification in that
security, the ITS/ADF[CAES] Market Maker need not, but may in [his] its
discretion, accept such responses for the purpose of inclusion in the
opening or reopening transaction. In the event that a Participant
market opens or, with respect to a halt or suspension in trading,
resumes trading in a security subsequent to a market maker in the
Participant market sending a pre-opening response but prior to the
opening or reopening transaction in ITS/ADF[CAES], the market maker who
sent the pre-opening response to the Association must confirm the pre-
opening response by sending an administrative message through the
[s]System stating that the response remains valid. If the market maker
fails to so confirm the pre-opening response, the ITS/ADF[CAES] Market
Maker need
[[Page 424]]
not, but may in [his] its discretion, accept the original response for
the purpose of inclusion in the opening or reopening transaction.
(f) Allocation of Imbalances
Whenever pre-opening responses from one or more responding market
makers include obligations to take or supply as principal more than 50
percent of the opening imbalance, the ITS/ADF[CAES] Market Maker may
take or supply as principal 50 percent of the imbalance at the opening
price, rounded up or down as may be necessary to avoid the allocation
of odd lots. In any such case, where the pre-opening response is from
more than one responding market maker, the ITS/ADF[CAES] Market Maker
shall allocate the remaining imbalance (which may be greater than 50
percent if the ITS/ADF[CAES] Market Maker elects to take or supply less
than 50 percent of the imbalance) among them in proportion to the
amount each obligated [himself] itself to take or supply as principal
at the opening price in [his] its pre-opening response, rounded up or
down as may be necessary to avoid the allocation of odd lots. For the
purpose of this paragraph, multiple responding market makers in the
same ITS Security in the same Participant market shall be deemed to be
a single responding market maker.
(g) Treatment of Obligations To Trade
In receiving a pre-opening response, an ITS/ADF[CAES] Market Maker
shall accord to any obligation to trade as agent included in the
response the same treatment as [he] it would to an order entrusted to
[him]it as agent at the same time such obligation was received.
(h) Responses Increasing the Imbalances
An ITS/ADF[CAES] Market Maker shall not reject a pre-opening
response that has the effect of further increasing the existing
imbalance for that reason alone.
(i) Reports of Participation
Promptly following the opening in any security as to which an ITS/
ADF[CAES] Market Maker issued a pre-opening notification, the ITS/ADF[/
CAES] Market Maker shall report to each Participant responsible for a
market in which one or more responding market makers are located (1)
the amount of the security purchased and/or sold, if any, by the
responding market maker(s) in the opening transaction and the price
thereof, or (2) if the responding market maker(s)'s response included
agency or principal interest at the opening price that did not
participate in the opening transaction, the fact that such interest did
not so participate.
[Amended eff. Aug. 5, 1991; Mar. 31, 1993; amended by SR-NASD-97-09
eff. May 30, 1997; amended by SR-NASD-00-46 eff. Aug. 28, 2000.]
* * * * *
[5250] 6550. Pre-Opening Application--Openings on Other Participant
Markets
(a) Pre-Opening Responses
Whenever an ITS/ADF[CAES] Market Maker [who] that has received a
pre-opening notification from another ITS/ADF[CAES] Market Maker or ITS
Participant Exchange as provided in the ITS Plan in any ITS Security as
to which [he] it is registered as an ITS/ADF[CAES] Market Maker wishes
to participate in the opening of that security in the Participant
market from which the pre-opening notification was issued, [he] it may
do so by sending obligations to trade through the System to such
Participant market in a pre-opening response. A pre-opening response
shall be designated as a pre-opening response (POR), identify the
security, and show the ITS/ADF[CAES] Market Maker's buy and/or sell[,]
interest, (if any), both as principal for [his] its own account (``P'')
and as agent for orders left with [him]it (``A''), at each price level
within the price-range indicated in the pre-opening notification (e.g.,
40\3/8\), reflected on a netted share basis.
For securities trading in decimal-based increments, whenever an
ITS/ADF[CAES] Market Maker [who] that has received a pre-opening
notification from another ITS/ADF[CAES] Market Maker or ITS Participant
Exchange as provided in the ITS Plan in any ITS Security as to which
[he] it is registered as an ITS/ADF[CAES] Market Maker wishes to
participate in the opening of that security in the Participant market
from which the pre-opening notification was issued, [he] it may do so
by sending obligations to trade through the System to such Participant
market in a pre-opening response. A pre-opening response shall be
designated as a pre-opening response (POR), identify the security, and
show the ITS/ADF[CAES] Market Maker's buy and/or sell[,] interest, (if
any), both as principal for [his] its own account (``P'') and as agent
for orders left with [him] it (``A''), at each price level within the
price-range indicated in the pre-opening notification (e.g., 40.40 ),
reflected on a netted share basis.
The pre-opening response shall be formatted as follows:
POR (MMID) BUY [SELL] A-P 40\3/8\
For securities trading in decimal-based increments the pre-opening
response shall be:
POR (MMID) BUY (SELL) A-P 40.40
The response may also show market orders separately.
(b) Revised Responses
An ITS/ADF[CAES] Market Maker may cancel or modify [his] its pre-
opening response by sending through the System a revised response that
cancels the obligations to trade contained in [his] its original
response and, if a modification is desired, that substitutes new
obligations to trade stating the ITS/ADF[CAES] Market Maker's aggregate
interest (i.e., [his] its interest reflected in the original response
plus any additional interest and/or minus any withdrawn interest) at
each price level. Each succeeding response, even if it fails to
expressly cancel its predecessor response, shall supersede the
predecessor response in its entirety. Any revised response shall be to
no effect if received in the Participant market from which the pre-
opening notification was issued after the security has opened in such
Participant market.
(c) Pre-Opening Notification From Other Markets
No ITS/ADF[CAES] Market Maker, whether acting as principal or
agent, shall send an obligation to trade, commitment to trade or order
in any security through the System to any other [p]Participant
market[,] prior to the opening of trading in such security on such
other market (or prior to the resumption of trading in such security on
such other market following the initiation of a halt or suspension in
trading in the security) until a pre-opening notification as to such
security has been issued from such other market or a quotation has been
disseminated from such other market pursuant to SEC Rule 11Ac1-1. No
ITS/ADF[CAES] Market Maker that has opened for trading or, with respect
to a halt or suspension of trading initiated by another Participant
[M]market, did not halt trading in the security reasonably
contemporaneously with the Participant [M]market or resumed trading
during such trading halt or suspension, shall respond to a pre-opening
notification.
(d) Sole Means of Pre-Opening Routing
Once a pre-opening notification as to any security is received by
the ITS/ADF[CAES] Market Maker through the
[[Page 425]]
System, the ITS/ADF[CAES] Market Maker[s] in such security shall submit
obligations to trade that security as principal for [his] its own
account to the market from which the pre-opening notification was
issued only through the Pre-Opening Application and shall not send
orders to trade that security for [his] its own account to such market
for participation at the opening in that market by any other means.
However, this restriction shall not apply to any order sent to such
market by the ITS/ADF[CAES] Market Maker prior to the issuance of the
pre-opening notification.
(e) Duration of Obligations To Trade
Responses to pre-opening notifications shall be voluntary, but each
obligation to trade that an ITS/ADF[CAES] Market Maker includes in any
pre-opening response, or in any modification of a pre-opening response,
shall remain binding on [him] it, until the security has opened in the
market from which the pre-opening notification was issued or until a
cancellation or modification of such obligation has been received in
such market, and until a subsequent cancellation or modification
thereof has been received in such market.
(f) Request for Participation Report
The ITS Plan anticipates that an ITS/ADF[CAES] Market Maker [who]
that has sent one or more obligations to trade in response to a pre-
opening notification will request a report through the System as to
[his] its participation if [he] it does not receive a report as
required promptly following the opening. If, on or following trade
date, [he] it does request a report through the System as to [his] its
participation before 4:00 p.m. Eastern Time, and [he] it does not
receive a response by 9:30 a.m. Eastern Time on the next trading day,
[he] it need not accept a later report. If [he] it fails to so request
a report, [he] it must accept a report until 4:00 p.m. Eastern Time on
the third trading day following the trade date (i.e., on T+3). The
Association does not intend this paragraph to relieve [him] U the ITS/
ASD Market Maker of the obligation, when [he] it does not receive a
report, to request a report as soon as [he] it reasonably should expect
to have received it.
[Amended eff. Nov. 24, 1989; May 15, 1991; Aug. 5, 1991; amended by
SR-NASD-97-09 eff. May 30, 1997; amended by SR-NASD-00-46 eff. Aug. 28,
2000.]
[5260]6560. System Trade and Quotations
[5261]6561. [Obligation To Honor System Trades] Obligation Before
Issuing External ITS Commitments
[If an ITS/CAES Market Maker or clearing member acting on his
behalf is reported on the clearing tape (as adjusted) at the close of
any trading day, or shown by the activity reports developed by CAES as
constituting a side of a System trade, such ITS/CAES Market Maker or
clearing member shall honor such trade on the scheduled settlement
date.]
Before formatting any order, bid or offer into an ITS commitment to
trade and issuing such a commitment to another ITS participant market,
a member registered as an ITS Market Maker in an ITS Security shall
first exhaust all interest at or better than such order, bid or offer
which is resident in the ADF, and then expose for thirty seconds any
remaining balance to all ADF Participants, whether or not registered in
the ITS Security involved.
[5262]6562. Trade-Throughs
(a) A member registered as an ITS/ADF[CAES] Market Maker in an ITS/
ADF[CAES] [s]Security, shall avoid purchasing or selling such security,
whether as principal or agent, at a price [which] that is lower than
the bid or higher than the offer displayed from an ITS Participant
Exchange or ITS/ADF[CAES] Market Maker (``trade-through''), unless the
following conditions apply:
(1) The size of the bid or offer that is traded-through is for 100
shares;
(2) the ITS/ADF[CAES] Market Maker is unable to avoid the trade-
through because of [the] a systems/equipment failure or malfunction;
(3) the transaction which constituted the trade-through is not a
``regular way'' contract;
(4) the bid or offer that is traded[-] through is being displayed
from a [M]market [C]center whose members are relieved of their
obligations under SEC Rule 11Ac1-1([C]c)(2) with respect to such bid or
offer;
(5) the bid or offer that is traded[-] through has caused a locked
or crossed market in the ITS Security;
(6) the commitment received by an ITS/ADF[CAES] Market Maker which
caused the trade-through was originated by an ITS Participant Exchange;
(7) The transaction involves (A) purchases and sales effected by
ITS/ADF[CAES] Market Makers participating in an opening (or reopening)
transaction or (B) any ``Block Transaction'' as defined in the ITS/
ADF[CAES] Rules; or
(8) In the case of a third participating market center trade-
through, either:
(A) the ITS/ADF[CAES] Market Maker who initiated the trade-through
(i) had sent a commitment to trade promptly following the trade-through
that satisfies the bid or offer traded[-] through, and (ii) preceded
the commitment with an administrative message stating that the
commitment was in satisfaction of a third participating market center
trade-through; or
(B) a complaint with respect to the trade-through was not received
by the Association through the System from the aggrieved party promptly
following the trade-through, and, in any event, within ten (10) minutes
from the time the aggrieved party sent a complaint through the System
to the ITS [p]Participating [m]Market [c]Center that received the
commitment to trade that caused the trade-through, which first
complaint must have been received within five (5) minutes from the time
the report of the transaction that constituted the trade-through was
disseminated over the high speed line of the consolidated last sale
reporting system.
(b) (1) If a trade-through occurs and a complaint is promptly
received by the Association either through the ITS System from the
appropriate ITS Participant Exchange whose member is the aggrieved
party or from an ITS/ADF[CAES] Market Maker, then:
(A) If ITS/ADF[CAES] Market Makers are on both sides of a principal
trade, the price of the transaction which constituted the trade-through
shall be corrected, by agreement of the parties, to a price at which a
trade-through would not have occurred and the price correction shall be
reported through the consolidated last sale reporting system; otherwise
(i) the initiating ITS/ADF[CAES] Market Maker shall satisfy, or cause
to be satisfied, the bid or offer traded-through in its entirety at the
price of such bid or offer or at the price that caused the trade-
through (as determined in accordance with subparagraph (E) below, or,
if the initiating ITS/ADF[CAES] Market Maker elects not to do so, (ii)
the transaction shall be voided.
(B) If an ITS/ADF[CAES] Market Maker executed the transaction and
the contra-side was not an ITS/ADF[CAES] Market Maker (i) the ITS/
ADF[CAES] Market Maker registered in the security shall satisfy, or
cause to be satisfied, the bid or offer traded-through in its entirety
at the price of such bid or offer, or, if the ITS/ADF[CAES] Market
Maker elects not to do so, (ii) the price of the transaction [which]
that constituted the trade-through shall be corrected by the
[[Page 426]]
ITS/ADF[CAES] Market Maker to a price at which a trade-through would
not have occurred and the price correction shall be reported through
the consolidated last sale reporting system.
(C) If ITS/ADF[CAES] Market Makers are on both sides of a trade and
one or both are acting as agent, the price of the transaction which
constituted the trade-through shall be corrected, by agreement of the
parties, to a price at which a trade-through would not have occurred
and the price correction shall be reported through the consolidated
last sale reporting system; otherwise, the ITS/ADF[CAES] Market Maker
that initiated the transaction shall satisfy, or cause to be satisfied,
the bid or offer traded-through in its entirety at the price of such
bid or offer.
(D) Whenever the provisions of subparagraphs (B) and (C) above
apply, the customer's order or a portion thereof [which] that was
executed in the transaction [which] that constituted the trade-through
(whether such order or a portion thereof was executed by the member who
initiated the trade-through or by the member on the contra-side of the
transaction, or both) shall receive the price [which] that caused the
trade-through, or the price at which the bid or offer traded-through
was satisfied, if it was satisfied pursuant to subparagraph (B) above,
or the adjusted price, if there was an adjustment pursuant to
subparagraph (B) above, whichever price is most beneficial to the order
or a portion thereof. Money differences resulting from the application
of this paragraph shall be the liability of the member who initiated
the trade-through.
(E) The price at which the bid or offer traded-through shall be
satisfied shall be the price of such bid or offer except if (i) the
transaction that constituted the trade-through was of ``block size''
but did not constitute a ``block trade'' (as those terms are defined in
the Block Trade Rule) and (ii) the ITS/ADF[CAES] Market Maker who
initiated the trade-through did not make every reasonable effort to
satisfy, or cause to be satisfied, through the System the bid or offer
traded-through at its price and in its entirety within two (2) minutes
from the time the report of the transaction that constituted the trade-
through was disseminated over the high speed line of the consolidated
last sale reporting system. In the case of such exception, the price at
which the bid or offer traded-through shall be satisfied shall be the
price that caused the trade-through.
(2) Such complaint shall be considered promptly received when no
more than five minutes expire from the time the report of the
transaction was disseminated over the high speed line of the
consolidated last sale reporting system, unless the transaction is
between an ITS/ADF[CAES] Market Maker and another ITS/ADF[CAES] Market
Maker or ITS Participant Exchange. In the latter case, the complaint
must be received within ten minutes from the time the aggrieved party
sent a complaint through the System to the ITS/ADF[CAES] Market Maker
or ITS Participant Exchange that received the commitment to trade that
caused the trade-through, which first complaint must have been received
within five minutes from the time the report of the transaction was
disseminated over the high speed line of the consolidated last sale
reporting system.
(c) (1) The Association shall notify the ITS/ADF[CAES] Market Maker
of any trade-through complaint received from an ITS Participant
Exchange or ITS/ADF[CAES] Market Maker. Upon receipt of such
notification, the ITS/ADF[CAES] Market Maker shall promptly respond to
the complaining ITS Participant Exchange or ITS/ADF[CAES] Market Maker.
Such response shall set forth either: (A) the conditions specified in
paragraph (a) above, or (B) the corrective action to be taken under
paragraph (b) above. If there is more than one ITS/ADF[CAES] Market
Maker that is registered in the ITS Security and participating in the
transaction, then the ITS/ADF[CAES] Market Maker that initiated the
transaction will receive notification of the trade-through complaint.
(2) If it is ultimately determined that an ITS/ADF[CAES] Market
Maker has engaged in a trade-through but has not taken corrective
action required by paragraph (b) above, then the ITS/ADF[CAES] Market
Maker shall be liable for the lesser of (A) the actual loss proximately
caused by the trade-through and suffered by the aggrieved party, or (B)
the loss proximately caused by the trade-through which would have been
suffered by the aggrieved party had [he] it purchased or sold the
security subject to the trade-through in order to mitigate [his] its
loss and had such purchase or sale been effected at the ``loss basis
price.'' For purposes of this subparagraph the ``loss basis price''
shall be the price of the next transaction, as reported by the high
speed line of the consolidated last sale reporting system in the
security in question, after one hour has elapsed from the time the
complaint is received (or, if the complaint is so received within the
last hour in which transactions are reported on the high speed line of
the consolidated last sale reporting system on any day, then the price
of the opening transaction in such security reported on such high speed
line on the next day on which the security is traded).
(3) Any ITS/ADF[CAES] Market Maker that becomes the subject of a
trade-through by another ITS Participant Exchange or ITS/ADF[CAES]
Market Maker may take whatever steps [are] necessary to mitigate any
potential loss resulting from the trade-through of his bid or offer.
Such action shall be promptly communicated to the offending ITS
Participant market.
(4) The provisions of this trade-through rule shall not apply in
respect to any Participant Exchange [which] that does not have in
effect a similar rule imposing similar obligations and
responsibilities.
(5) If a complaint of a purported trade-through is received by the
Association and the complained-of transaction resulted from an ITS/
ADF[CAES] Market Maker's execution of a commitment to trade received
from another ITS/ADF[CAES] Market Maker or ITS Participant Exchange,
the ITS/ADF[CAES] Market Maker should, if circumstances permit, make
reasonable efforts to notify the complaining party, as promptly as
practicable following receipt of the complaint, (A) that the
transaction was not initiated by the ITS/ADF[CAES] Market Maker and (B)
[of] the identity of the ITS/ADF[CAES] Market Maker or ITS Participant
Exchange that originated the commitment. Neither compliance nor non-
compliance with the preceding sentence shall be the basis for any
liability of the ITS/ADF[CAES] Market Maker for any loss associated
with the complained-of transaction.
[5263]6563. Locked or Crossed Markets
(a) A member registered as an ITS/ADF[CAES] Market Maker in an ITS/
ADF[CAES] Security that makes a bid (offer) for such security at a
price [which] that equals the offering (bid) price at that time from an
ITS Participant Exchange or ITS/ADF[CAES] Market Maker has created what
is referred to in this [r]Rule as a ``locked market.''
(b) A member registered as an ITS/ADF[CAES] Market Maker in an ITS/
ADF[CAES] Security that makes a bid (offer) for such security at a
price [which] that exceeds (is less than) the offering (bid) price at
that time from an ITS Participant Exchange or ITS/ADF[CAES] Market
Maker has created what is referred to in this [r]Rule as a ``crossed
market.''
(c) An ITS/ADF[CAES] Market Maker [who] that makes a bid or offer
and in
[[Page 427]]
so doing creates a locked or crossed market with another ITS
Participant or ITS/ADF[CAES] Market Maker shall promptly send to such
other ITS Participant Exchange or ITS/ADF[CAES] Market Maker a
commitment to trade seeking either the bid or offer [which] that was
locked or crossed, unless excused by operation of paragraph (d) below.
Such commitment shall be for either the number of shares [he] it has
bid for (offered) or the number of shares offered (bid for) on the ITS
Participant Exchange or by the ITS/ADF[CAES] Market Maker, whichever is
less.
(d) The provisions of paragraph (c) above shall not apply when:
(1) The bid or offer in the ITS Participating [m]Market [c]Center
is for 100 shares;
(2) the issuance of the commitment to trade referred to above would
be prohibited by SEC Rule 10a-1 under the Act;
(3) the ITS/ADF[CAES] Market Maker [who] that causes a locked or
crossed market is unable to comply with the provisions of paragraph (c)
above because of a systems/equipment failure or malfunction;
(4) the bid or offer that causes the locked or crossed market is
not for a ``regular way'' contract;
(5) the locked or crossed market occurs at a time when, with
respect to the ITS Security [which] that is the subject of the locked
or crossed market, members of the ITS [p]Participating [m]Market
[c]Center to which the commitment to trade would be sent pursuant to
paragraph (c) above are relieved of their obligations under SEC Rule
11Ac1-1(c)(2);
(6) the transaction involves (A) purchases and sales effected by
ITS/[CAES]ADF Market Maker[']s participating in an opening or
(reopening) transaction or (B) any ``Block Transaction'' as defined in
the ITS[/CAES] Rules.
[5264] 6564. Block Transactions
(a) An ITS/ADF[CAES] Market Maker [who] that executes a ``block
transaction'' in an ITS[/CAES] [s]Security in which [he] it is
registered as an ITS/ADF[CAES] Market Maker at an execution price
outside the best quotation for the security displayed by any ITS
[p]Participant market or other ITS/ADF[CAES] Market Maker, shall, upon
executing the block trade, send to each other [p]Participant market and
each ITS/ADF[CAES] Market Maker displaying a bid or offer (as the case
may be) superior to the execution price, a commitment to trade, at the
execution price, to satisfy the number of shares displayed in that
[p]Participant market's bid or offer.
(b) For purposes of this Rule, a block transaction shall be a trade
that:
(1) Involves 10,000 or more shares of a common stock traded through
ITS (an ``ITS Security'') or a quantity of any such security having a
market value of $200,000 or more (``block size'');
(2) is effected at a price outside the bid or offer displayed from
another ITS [p]Participating [m]Market [c]Center; and
(3) involves either:
(A) a cross of block size (where the member represents all of one
side of the transaction and all or a portion of the other side); or
(B) any other transaction of block size (i.e., in which the ITS/
ADF[CAES] Market Maker represents an order of block size on one side of
the transaction only) that is not the result of an execution at the
current bid or offer of the ITS/ADF[CAES] Market Maker.
Contemporaneous transactions at the same price filling an order or
orders then or theretofore represented by the ITS/ADF[CAES] Market
Maker (including transactions resulting from commitments to trade sent
by the ITS/ADF[CAES] Market Maker pursuant to paragraph (a) above)
shall be deemed to constitute a single transaction for the purpose of
this definition.
(c) A ``current bid or offer'' of the ITS/ADF[CAES] Market Maker,
as that term is used in paragraph (b)(3)(B) above, means the price of
the current quotation displayed by the ITS/ADF[CAES] Market Maker
established independently of the order to buy or sell.
(d) A ``bid or offer'' displayed from another ITS [p]Participating
[m]Market [c]Center (or any derivative phrase), as that term is used in
this Rule, means the current quotations from another ITS
[p]Participating [m]Market [c]Center displayed to the ITS/ADF[CAES]
Market Maker as required by the ITS Plan, and does not include ``away-
from-the-market'' limit orders or other interests that may be
represented in such other ITS [p]Participating [m]Market [c]Center.
(e) Inapplicability. Paragraph (a) above shall not apply under the
following conditions:
(1) The size of the better priced bid or offer displayed by another
ITS [p]Participating [m]Market [c]Center was for 100 shares;
(2) the ITS/ADF[CAES] Market Maker representing the block-size
order(s) made every reasonable effort to satisfy through ITS a better-
priced bid or offer displayed by another ITS [p]Participating [m]Market
[c]Center but was unable to because of a systems/equipment failure or
malfunction;
(3) the block trade was not a ``regular way'' contract;
(4) the bid or offer that is traded through is being displayed from
a [m]Market [c]Center whose members are relieved of their obligations
under SEC Rule 11Ac1-1(c)(2) with respect to such bid or offer;
(5) the bid or offer that is traded through has caused a locked or
crossed market in the ITS Security;
(6) the better priced bid or offer was being displayed from an ITS
[p]Participating [m]Market [c]Center whose members were relieved of
their obligations with respect to such bid or offer under SEC Rule 11Ac
1-1(c)(2) pursuant to the ``unusual market'' exception to SEC Rule
11Ac1-1(b)(3); or
(7) the better priced bid or offer had caused a ``locked or crossed
market[,]'' in the ITS Security that was the subject of the block
trade.
[5265. Authority To Cancel or Adjust Transactions]
[(a) In circumstances in which the Association deems it necessary
to maintain a fair and orderly market and to protect investors and the
public interest, the Association may, pursuant to the procedures set
forth in Rule 11890 of the Uniform Practice Code, declare any
transaction arising out of the use or operation of the ITS[/CAES]
System, null and void on the grounds that one or more of the terms of
the transaction are clearly erroneous; and the Association may
reallocate stock between ITS[/CAES] Market Makers to correct an
erroneous transaction.]
[(b) For purposes of this Rule, the terms of the transaction are
clearly erroneous when there is an obvious error in any term, such as
price, number of shares or other unit of trading, identification of the
security, or if a specific commitment to trade has been executed with
the wrong ITS/CAES Market Maker.]
[5300]6700. THE PORTAL MARKET
[5310]6710. Definitions
For purposes of the PORTAL Market Rules, unless the
context requires otherwise:
(a) ``Association'' means the National Association of Securities
Dealers, Inc. (Association) or its wholly owned subsidiary, NASD
Regulation, Inc. [The Nasdaq Stock Market, Inc.,] as determined by the
Association.
(a) through (aa) No Change.
[[Page 428]]
[5320]6720. Requirements Applicable to PORTAL Securities
[5321]6721. Application for Designation
(a) Application for designation as a PORTAL security shall be in
the form required by the Association and shall be filed by a PORTAL
participant. Applications may be made with or without the concurrence
of the issuer. The application shall demonstrate to the satisfaction of
the Association that the security meets or exceeds the qualification
requirements set forth in Rule 5322.
(b) Designation of a security as a PORTAL security shall be
declared effective within a reasonable time after determination of
qualification. The effective date of designation as a PORTAL security
shall be determined by the Association giving due regard to the
requirements of the PORTAL Market.
[5322]6722. Qualification Requirements for PORTAL Securities
(a) To qualify for initial designation and continued designation in
the PORTAL Market, a security shall:
(1) be:
(A) a restricted security, as defined in SEC Rule 144(a)(3) under
the Securities Act; or
(B) a security that upon issuance and continually thereafter only
can be sold pursuant to Regulation S under the Securities Act, SEC Rule
144A, or SEC Rule 144 under the Securities Act, or in a transaction
exempt from the registration requirements of the Securities Act
pursuant to Section 4 thereof and not involving any public offering;
provided, however, that if the security is a depositary receipt,
the underlying security shall also be a security that meets the
criteria set forth in subparagraphs (A) or (B) hereof;
(2) be eligible to be sold pursuant to SEC Rule 144A under the
Securities Act;
(3) be in negotiable form and not subject to any restriction,
condition or requirement that would impose an unreasonable burden on
any PORTAL participant;
(4) be assigned a CUSIP or CINS security identification number that
is different from any identification number assigned to any
unrestricted securities of the same class [which] that do not satisfy
paragraph (a)(1)(B); or, if issued in physical certificate form to
investors, have a legend placed on each certificate stating that the
securities have not been registered under the Securities Act and cannot
be resold without registration under the Securities Act or an exemption
therefrom; and
(5) satisfy such additional criteria or requirements as the
Association may prescribe.
(b) Notwithstanding the provisions of paragraph (a)(1)(B) of this
Rule, if a PORTAL security is sold pursuant to the provisions of Rule
144, including Rule 144(k), it will thereby cease being a PORTAL
security and it must be assigned a CUSIP or CINS security
identification number that is different from the identification number
assigned to a PORTAL security of the same class.
[5323]6723. Suspension or Termination of a PORTAL Security
Designation
(a) The Association may, in its discretion, suspend or terminate
designation as a PORTAL security if it determines that:
(1) The security is not in compliance with the requirements of the
PORTAL Rules;
(2) a holder or prospective purchaser that requested issuer
information pursuant to SEC Rule 144A(d)(4) did not receive the
information;
(3) any application or other document relative to such securities
submitted to the Association contained an untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein not misleading; or
(4) failure to withdraw designation of such securities would for
any reason be detrimental to the interests and welfare of PORTAL
participants or the Association.
(b) The Association will promptly notify PORTAL participants of the
suspension or termination of a security's designation as a PORTAL
security. Such notification may be made through the facilities of the
PORTAL Market. Suspension or termination shall become effective in
accordance with the terms of notice by the Association. The Association
also will promptly notify The Depository Trust Company of the
suspension or termination.
(c) Notwithstanding the suspension or termination of designation of
a security as a PORTAL security, such security shall remain subject to
all rules of the Association applicable to the PORTAL Market until the
security is sold in accordance with the terms of notice by the
Association of the suspension or termination.
[5324]6724. PORTAL Entry Fees
When a PORTAL participant submits an application for designation of
any class of securities as a PORTAL security, it shall pay to the
Association a filing fee of $2,000.00 for an application covering a
security or group of identifiable securities issuable as part of a
single private placement covered by the same offering documents, plus
$200.00 per assigned security symbol that is in addition to the first
symbol assigned.
[5330]6730. Requirements Applicable to Members of the Association
[5331]6731. Limitations on Transactions in PORTAL Securities
(a) No member shall sell a PORTAL security unless:
(1) The sale is to:
(A) an investor or member that the member reasonably believes is a
``qualified institutional buyer'' in a transaction exempt from
registration under the Securities Act by reason of compliance with Rule
144A;
(B) an investor or member in a transaction that is exempt from
registration under the Securities Act by reason of compliance with an
applicable exemption under the Securities Act other than Rule 144A; or
(C) a member acting as an agent in a transaction that the member
acting as agent determines is in compliance with subparagraphs (A) or
(B) hereof, and the selling member determines is exempt from
registration under the Securities Act by reason of compliance with SEC
Rule 144A or an applicable exemption under the Securities Act other
than SEC Rule 144A; and
(2) the member maintains in its files information demonstrating
that the transaction is in compliance with Rule 144A or with any other
applicable exemption from registration under the Securities Act.
[5332]6732. Reporting Debt and Equity Transactions in PORTAL
Securities
(a) A transaction in a PORTAL security in which a PORTAL dealer or
PORTAL broker participates shall be reported to the PORTAL Market
system in a PORTAL transaction report complying with Rule [5334] 6734
by:
(1) The seller, if each party in the transaction is either a PORTAL
dealer or a PORTAL broker;
(2) the PORTAL dealer or PORTAL broker participating in the
transaction, if only one party in the transaction is a PORTAL dealer or
PORTAL broker; provided, however, that with respect to transactions
that are part of the initial offering by or on behalf of the issuer or
an affiliate thereof, a PORTAL dealer or PORTAL broker may comply with
its obligation to submit a PORTAL transaction report by submitting,
instead, a PORTAL surveillance report [which] that reports such
transaction to
[[Page 429]]
the Market Regulation Department of the Association as set forth in
Rule [5336] 6736.
(b) A transaction in a PORTAL security in which a member
participates, but in which no PORTAL dealer or PORTAL broker
participates, shall be reported to the Market Regulation Department of
the Association in a PORTAL non-participant report complying with Rule
[5335] 6735 by:
(1) The seller, if each party in the transaction is a member; or
(2) The member, if only one party in the transaction is a member.
(c) The member responsible for submitting a PORTAL transaction
report shall also submit to the Market Regulation Department of the
Association a PORTAL surveillance report as set forth in Rule [5336]
6736.
(d) The reporting requirements of this Rule shall apply to any
transaction in a PORTAL security, including transactions in reliance on
SEC Rule 144 and sales to or purchases from a non-U.S. securities
market.
[Rule [5332] 6732 will not be effective until a date is announced by
the NASD.]
[5333]6733. PORTAL Settlement
(a) Transactions in the PORTAL Market where the PORTAL dealer or
PORTAL broker that enters the PORTAL transaction report in the PORTAL
Market system designates settlement in the PORTAL clearance and
depository systems will settle five (5) business days after the date of
the execution of the transaction, except as otherwise agreed between
the PORTAL participants, in any currency accepted by the PORTAL
depository organization.
(b) PORTAL securities and funds will be transferred on the books of
the PORTAL depository system upon receipt from the PORTAL clearing
system of the necessary settlement instructions designating settlement
in the PORTAL clearance and depository systems from the PORTAL
transaction report entered in the PORTAL Market system by the
appropriate PORTAL dealer or PORTAL broker and subject to the purchaser
meeting the requirements of the relevant PORTAL depository organization
concerning deposit and availability of funds in accordance with the
depository organization's procedures.
(c) PORTAL dealers and PORTAL brokers that settle a PORTAL
transaction outside the PORTAL clearance and depository systems assume
responsibility for the prompt settlement of the transaction in
accordance with the protocols of the settlement method used and the
transaction will not be compared in the PORTAL Market.
[5334]6734. PORTAL Transaction Reports
(a) Each PORTAL transaction report shall include: whether the
report should be forwarded to the PORTAL depository and clearance
systems for the clearance and settlement of the transaction; if the
PORTAL depository and clearance system is to be used, the identity of
the account where the transaction is to be settled; if the PORTAL
depository and clearance system is not to be used and the contra-party
is an Association member, the identity of the Association member that
is the contra-party; whether the transaction is on an agency or
principal basis; whether the transaction is a purchase or sale; whether
a sale is a ``short'' sale; the quantity of the security; the price of
the security expressed in the currency in which the security was quoted
in the PORTAL Market; and such additional information as the
Association may require.
(b) PORTAL transaction reports shall be entered within 15 minutes
after execution of the transaction during hours that the PORTAL Market
system accepts PORTAL transaction reports. The PORTAL Market system
shall accept PORTAL transaction reports from 8:30 a.m. Eastern Time to
6:30 p.m. Eastern Time. If a transaction is executed during hours that
the PORTAL Market system does not accept PORTAL transaction reports,
the PORTAL transaction report shall be entered between 8:30 a.m.
Eastern Time and 9:30 a.m. Eastern Time when the PORTAL Market system
is next open, with the trade date [of] the date of execution of the
transaction. The Association, in its discretion, will establish hours
for and additional time limitations on the entry of PORTAL transaction
reports.
(c) Modification, correction or cancellation of a PORTAL
transaction report must be entered in the PORTAL Market system.
(d) The Association will not disseminate PORTAL transaction reports
that are entered in the PORTAL Market system between 8:30 a.m. Eastern
Time and 9:30 a.m. Eastern Time, and between 4:00 p.m. Eastern Time and
6:30 p.m. Eastern Time. The Association shall, however, display daily
aggregate volume of transactions effected pursuant to SEC Rule 144A,
including the volume of transactions that are entered in the PORTAL
Market system between 8:30 a.m. Eastern Time and 6:30 p.m. Eastern
Time.
[Rule [5334] 6734 will not be effective until a date is announced by
the NASD.]
[5335]6735. PORTAL Non-Participant Report
(a) Each PORTAL non-participant report shall include: whether the
transaction is on an agency or principal basis, whether the transaction
is a purchase or sale; whether a sale is a ``short'' sale; the quantity
of the security; the price of the security expressed in the currency in
which the security was quoted in the PORTAL Market; a representation as
to whether the buyer was a ``qualified institutional buyer'' under Rule
144A, a ``non-qualified institutional buyer'' institution, or an
individual investor; and such additional information as the Association
may require.
(b) PORTAL non-participant reports shall be submitted to the Market
Regulation Department of the Association no later than the fifth day of
the month following the month in which the transaction was effected.
(c) Modification, correction, or cancellation of a PORTAL non-
participant report must be submitted in the manner specified by the
Association.
[Rule [5335] 6735 will not be effective until a date is announced by
the NASD.]
Selected Notices to Members: 95-34.
[5336] 6736. PORTAL Surveillance Report
(a) Each PORTAL dealer or PORTAL broker shall submit to the Market
Regulation Department of the Association, no later than the fifth day
of each month, a PORTAL surveillance report [which] that reports every
transaction effected during the preceding month (including transactions
that are part of the initial offering by or on behalf of the issuer or
an affiliate thereof) for which the PORTAL dealer or PORTAL broker was
required to submit a PORTAL transaction report under Rule [5332] 6732,
including transactions that are part of the initial offering by or on
behalf of the issuer or an affiliate thereof; provided, however, that a
member shall not be required to submit a PORTAL surveillance report
with respect to any transaction for which the member was not required
to submit a PORTAL transaction report.
(b) The PORTAL surveillance report shall be submitted in the manner
specified by the Association and shall include for each transaction
reported: a representation as to whether the buyer was a ``qualified
institutional buyer'' under Rule 144A, a ``non-qualified
[[Page 430]]
institutional buyer'' institution, or an individual investor; the
information required under Rule [5334] 6734; and such additional
information as the Association may require.
(c) Modification, correction, or cancellation of a PORTAL
surveillance report must be submitted in the manner specified by the
Association.
[Rule [5336] 6736 will not be effective until a date is announced
by the NASD.]
[5337]6737. Comparison of PORTAL Transaction Reports Entered in the
PORTAL Market System
Each PORTAL dealer and PORTAL broker that executes a purchase
transaction in a PORTAL security with another PORTAL dealer or PORTAL
broker shall, within 30 minutes after execution of a transaction for
which a report is entered into the PORTAL Market system that designates
settlement in the PORTAL clearance and depository system:
(a) Accept a PORTAL transaction report entered by the seller by
entering in the PORTAL Market system a matching PORTAL comparison
report with the same terms as the seller's PORTAL transaction report;
(b) reject a PORTAL transaction report entered by the seller by
entering a PORTAL comparison report in the PORTAL Market system with
different terms than those included in the seller's PORTAL transaction
report; or
(c) enter an affirmation or rejection in the PORTAL Market system
with respect to the PORTAL transaction report entered by the seller.
[5338]6738. Registration Requirements for PORTAL Dealers
(a) A member of the Association that registers as a PORTAL dealer
shall also be registered as a PORTAL qualified investor.
(b) To register as a PORTAL dealer, a member shall:
(1) Execute a participation agreement;
(2) demonstrate to the satisfaction of the Association that it is
eligible to purchase securities under the financial criteria of SEC
Rule 144A as it applies to a dealer registered under Section 15 of the
Exchange Act by submission of the member's most recent Audited
Financial Statements filed with the SEC pursuant to SEC Rule 17a-5(d)
under the Exchange Act, with the supporting schedules required pursuant
to subparagraph (3) thereof, and any other information that the
Association, in its discretion, may require to be submitted to the
Association;
(3) be a member of the Association and qualified to do business as
a general securities firm; and
(4) agree to comply with the requirements of the PORTAL Rules,
including the filing of such documents and the payment of such fees as
may be required by the Association.
[5339]6739. Registration Requirements for PORTAL Brokers
To register as a PORTAL broker a member shall comply with Rule
[5338] 6738(b)(1), (b)(3), and (b)(4).
[5340]6740. Continuing Requirements for PORTAL Dealers and PORTAL
Brokers
(a) For a PORTAL dealer to continue to be eligible to participate
as a PORTAL dealer in the PORTAL Market, the PORTAL dealer shall
demonstrate to the satisfaction of the Association that it continues to
be eligible to purchase securities under the financial criteria of SEC
Rule 144A as it applies to a dealer registered under Section 15 of the
Exchange Act by submitting to the Association, concurrent with the
dealer's SEC filing, the dealer's Audited Financial Statements filed
with the SEC pursuant to SEC Rule 17a-5(d) under the Exchange Act, with
the supporting schedules required pursuant to subparagraph (3) thereof,
and any other information that the Association, in its discretion, may
require to be submitted to the Association.
(b) The Association may suspend or terminate the registration of a
PORTAL dealer or PORTAL broker if:
(1) It fails to comply with any requirement of the PORTAL Rules
with respect to any PORTAL security;
(2) any application or other document submitted by or on behalf of
it contained an untrue statement of a material fact or omitted to state
a material fact necessary to make the statements therein not
misleading; or
(3) it fails to file any documents or to pay any fee as may be
required by the Association.
(c) Nothing in paragraph (b) shall prohibit the Association from
taking such other action as it deems necessary under the circumstances
against a PORTAL dealer or a PORTAL broker for violations of the
requirements of the PORTAL Rules, any other rule or regulation of the
Association, or any rule or regulation of the SEC.
[5350]6750. Requirements Applicable to PORTAL Qualified Investors
[5351]6751. Registration Requirements for PORTAL Qualified
Investors
(a) No investor other than a dealer registered under Section 15 of
the Exchange Act shall subscribe to PORTAL Market information directly
through the PORTAL Market system or indirectly through a third-party
distributor unless:
(1) The investor executes a subscriber agreement;
(2) a PORTAL dealer represents to the Association that it
reasonably believes that the investor is a ``qualified institutional
buyer'' under SEC Rule 144A; or
(3) the investor demonstrates to the satisfaction of the
Association that it is a ``qualified institutional buyer'' under SEC
Rule 144A; or
(4) the Association reasonably believes that the investor is a
``qualified buyer'' under SEC Rule 144A.
(b) The Association may classify PORTAL qualified investors in such
manner as it deems advisable for the purpose of conforming with SEC
Rule 144A.
(c) A PORTAL dealer that submits a representation to the
Association pursuant to paragraph (a)(2) shall maintain in its files
the basis for its representation that it reasonably believes that the
investor satisfies the ``qualified institutional buyer'' requirements
of SEC Rule 144A.
(d) No member of the Association may register as a PORTAL qualified
investor unless the member is also registered as a PORTAL dealer.
[5352]6752. Continuing Requirements for PORTAL Qualified Investors
(a) For an investor other than a dealer registered under Section 15
of the Exchange Act, to continue to be eligible to subscribe to PORTAL
Market information:
(1) A PORTAL dealer shall represent annually to the Association
that it reasonably believes that the investor is a ``qualified
institutional buyer'' under SEC Rule 144A; or
(2) the investor shall demonstrate to the satisfaction of the
Association or the Association shall form a reasonable belief that the
investor is a ``qualified institutional buyer'' under SEC Rule 144A.
(b) A PORTAL dealer that submits a representation to the
Association pursuant to paragraph (a)(1) shall maintain in its files
the basis for its representation that it reasonably believes that an
investor satisfied the ``qualified institutional buyer'' requirements
of SEC Rule 144A.
[5353]6753. Suspension or Termination of the Registration of a
PORTAL Qualified Investor
(a) The Association shall suspend or terminate the registration of
a PORTAL qualified investor if:
(1) Any application or document submitted by or on behalf of the
[[Page 431]]
PORTAL qualified investor contained an untrue statement of material
fact or omitted to state a material fact necessary to make the
statements therein not misleading; or
(2) the investor fails to comply with any requirements of the
PORTAL Rules, or to file any documents or to pay any fee as may be
required by the Association.
(b) Nothing in paragraph (a) shall prohibit the Association from
taking such action as it deems necessary under the circumstances
against a PORTAL qualified investor that is also a member of the
Association for violations of the requirements of the PORTAL Rules, any
other rule or regulation of the Association, or any rule or regulation
of the SEC.
[5360]6760. Denial, Suspension or Termination Procedures
A determination by the Association to deny, suspend or terminate
the designation of a PORTAL security or registration of a PORTAL
participant may be reviewed upon application by the aggrieved person
pursuant to the provisions of the Rule [4800] 9700 Series.
[5370]6770. PORTAL Market Transactions
[5371]6771. Normal PORTAL Market Hours of Operation
The PORTAL Market shall be open for business from 9:30 a.m. Eastern
Time to 4:00 p.m. Eastern Time, or as otherwise determined by the
Association.
[5372]6772. PORTAL Quotations
The PORTAL Market will accept prices and quotations from PORTAL
dealers and PORTAL brokers that are one- or two-sided, firm or
indicative.
[5373]6773. PORTAL Contracts
The existence and terms of each PORTAL contract shall be
conclusively established by a compared PORTAL transaction report
pertaining to the underlying transaction in a PORTAL security.
Notwithstanding the foregoing, the parties to any PORTAL contract may
modify or correct the terms of any transaction in a PORTAL security in
a manner consistent with the rules of the PORTAL Market.
[5374]6774. PORTAL Fees
PORTAL participants shall pay to the Association a fee for PORTAL
transactions or such other fees as determined by the Association,
including those set forth in Rule [5324] 6724. The Board of Governors
shall have the power to impose, alter, or amend such fees from time to
time pursuant to Article VI, Section 1 of the By-Laws.
[5375]6775. ``When, As and If Issued'' Trading
PORTAL securities that are of a new issue of securities, primary or
secondary, may trade ``when, as and if issued'' in the PORTAL Market
subsequent to effectiveness of the designation of the securities as
PORTAL securities, provided; however, that the lead manager shall:
(a) Establish a settlement date for the securities based on their
anticipated availability; and
(b) in the event of any subsequent delay in the established
settlement date, shall enter in the PORTAL Market a corrected PORTAL
transaction report designating a substitute date for settlement and
cancel the existing PORTAL transaction report.
[5376]6576. ``Short'' Sales
(a) ``Short'' sale transactions in PORTAL securities may be entered
in the PORTAL Market. ``Short'' sale transactions shall be identified
as such in the PORTAL transaction report.
(b) The settlement date for ``short'' sales in PORTAL securities
shall be negotiated by the parties.
(c) The provisions of Rule [3370] 5100 and IM-5100 that relate to
``short'' sale transactions are applicable to transactions in PORTAL
securities.
(d) The Association may adopt such restrictions on ``short'' sales,
and the borrowing and return of securities, as it may deem necessary to
prevent violation of the registration requirements of the Securities
Act in connection with the transactions in the PORTAL Market.
[5377]6577. Stabilizing Bids
(a) A PORTAL dealer may enter a stabilizing bid in the PORTAL
Market subject to compliance with SEC Rules 10b-6 and 10b-7 under the
Exchange Act, which bid shall be identified in the PORTAL Market. When
a stabilizing bid is entered, it shall be available for all outstanding
securities in the PORTAL Market of the same class being offered.
(b) A PORTAL dealer shall notify the Association in writing prior
to the first day in which the stabilizing bid is to appear in the
PORTAL Market. The notice shall include:
(1) The name of the security and its PORTAL symbol;
(2) the date on which the distribution of the security will
commence; and
(3) a copy of any offering document related to the distribution.
The PORTAL dealer shall contact the Association for authorization
on the day that the dealer wishes to enter the stabilizing bid.
(c) A PORTAL dealer shall not enter a stabilizing bid at the same
time it is quoting any other bid or offer in the issue.
[5378]6578. Partial Delivery
A PORTAL qualified investor is required to accept a partial
delivery on any PORTAL contract due, provided the portion remaining
undelivered is not an amount that includes an odd-lot [which] that was
not part of the original transaction.
[5379]6779. Close-out Procedures--``Buying-In''
A PORTAL contract [which] that has not been completed by the seller
according to its terms may be closed by the buyer not sooner than the
third business day following the date delivery was due, in accordance
with the following procedure:
(a) Notice of ``Buy-In''
(1) Written notice of ``buy-in'' shall be delivered to the seller
at the seller's office not later than 12 noon, the seller's local time,
two business days preceding the execution of the proposed ``buy-in.''
(2) For purposes of this provision, written notice shall include an
electronic notice through a medium that provides for an immediate
return receipt capability. Such electronic media shall include but not
be limited to facsimile transmission and a computerized network
facility.
(b) Information Contained in the ``Buy-In'' Notice
(1) Every notice of ``buy-in'' shall state the date of the PORTAL
contract to be closed, the quantity and contract price of the PORTAL
securities covered by said contract, the settlement date of said PORTAL
contract and any other information deemed necessary to properly
identify the PORTAL contract to be closed. Such notice shall state
further that unless delivery is effected at or before a certain
specified time, which may not be prior to 2:30 p.m. Eastern Time, the
PORTAL security may be ``bought-in'' on the date specified for the
account of the seller.
(2) Notice may be redelivered immediately to another PORTAL dealer
or PORTAL broker from whom the securities involved are due in the form
of a re-transmitted notice (re-transmit). Re-transmitted notice of buy-
in must be delivered to subsequent PORTAL dealers or PORTAL brokers not
later than one business day preceding the time and date of execution of
the proposed buy-in.
[[Page 432]]
(c) Seller's Failure to Deliver After Receipt of Notice
On failure of the seller to effect delivery in accordance with the
``buy-in'' notice, or to obtain a stay as hereinafter provided, the
buyer may close the PORTAL contract by purchasing all or part of the
PORTAL securities necessary to satisfy the amount requested in the
``buy-in'' notice. Securities delivered subsequent to the receipt of
the ``buy-in'' notice should be considered as delivered pursuant to the
``buy-in'' notice. Delivery of the requisite amount of securities as
stated in the ``buy-in'' notice or execution will also operate to
close-out all PORTAL contracts covered under re-transmitted notices of
buy-in issued pursuant to the original notice of buy-in. A ``buy-in''
may be executed by a PORTAL dealer from its long position and/or from
customers' accounts maintained with such PORTAL dealer. In all cases,
PORTAL dealers must be prepared to defend the price at which the ``buy-
in'' is executed relative to the current market at the time of the
``buy-in''.
(d) ``Buy-In'' Not Completed
In the event that a ``buy-in'' is not completed pursuant to the
provisions of paragraph (b) hereof on the day specified in the notice
of ``buy-in,'' or as such date may be extended pursuant to the
provisions of paragraph (f) hereof, said notice shall expire at the
close of business on the day specified in the notice of buy-in.
(e) Partial Delivery by Seller
Prior to the closing of a PORTAL contract on which a ``buy-in''
notice has been given, the buyer shall accept any portion of the PORTAL
securities called for by the PORTAL contract, provided the portion
remaining undelivered at the time the buyer proposes to execute the
``buy-in'' is not an amount which includes an odd-lot [which] that was
not part of the original transaction.
(f) Securities in Transit
If prior to the closing of a PORTAL contract on which a ``buy-in''
notice has been given, the buyer receives from the seller written or
comparable electronic notice stating that the securities are: (1) In
transfer; (2) in transit; (3) are being shipped that day; or (4) are
due from a depository and giving the certificate numbers, except for
those securities due from the depository, then the buyer must extend
the execution date of the ``buy-in'' for a period of seven (7) calendar
days from the date delivery was due under the ``buy-in.''
(g) Notice of Executed ``Buy-In''
The party executing the ``buy-in'' shall immediately upon
execution, but not later than the close of business, local time where
the seller maintains its office, notify the PORTAL dealer or PORTAL
broker for whose account the securities were bought as to the quantity
purchased and the price paid. Such notification should be in written or
electronic form having immediate receipt capabilities. If this written
media is not available, the telephone shall be used for the purpose of
same day notification, and written or similar electronic notification
having next day receipt capabilities must also be sent out
simultaneously. In either case, formal confirmation of purchase along
with a billing or payment (depending upon which is applicable) should
be forwarded as promptly as possible after the execution of the buy-in.
Notification of the execution of a ``buy-in'' shall be given to
succeeding broker/dealers to whom a re-transmitted notice was issued
pursuant to paragraph (b) using the same procedures stated herein. If a
re-transmitted ``buy-in'' is executed, it will operate to close-out all
contracts covered under the re-transmitted notices.
(h) ``Close-Out'' under Association or Exchange Rulings
(1) When a national securities exchange makes a ruling that all
open contracts with a particular member, who is also a PORTAL dealer or
PORTAL broker, should be closed-out immediately (or any similar
ruling), PORTAL dealers and PORTAL brokers may close-out contracts as
directed by the exchange.
(2) When the Association issues notification that all open
contracts with the PORTAL dealer or PORTAL broker in question should be
closed-out immediately, PORTAL dealers or PORTAL brokers may close-out
contracts as directed by the Association.
(3) Within the meaning of this section, to close-out immediately
shall mean that (A) ``buy-ins'' may be executed without prior notice of
intent to ``buy-in'' and (B) ``sell-outs'' may be executed without
making prior delivery of the securities called for.
(4) All close-outs executed pursuant to the provisions of this
subparagraph shall be executed for the account and liability of the
PORTAL dealer or PORTAL broker in question. Notification of all close-
outs shall immediately be sent to such PORTAL dealer or PORTAL broker.
(i) Failure to Deliver and Liability Notice Procedures
(1) If a contract is for warrants, rights, convertible securities
or other securities [which] that (A) have been called for redemption;
(B) are due to expire by their terms; (C) are the subject of a tender
or exchange offer; or (D) are subject to other expiring events such as
the record date for the underlying security and the last day on which
the securities must be delivered or surrendered (the ``expiration
date'') is the settlement date of the contract or any later day, the
receiving member may deliver a Liability Notice to the delivering
member as an alternative to the close-out procedures set forth in
paragraphs (a) through (g) of this Rule. Such Notice must be issued
using written or comparable electronic media having immediate receipt
capabilities no later than one business day prior to the latest time
and date of the offer or other event in order to obtain the protection
provided by this provision.
(2) If the delivering PORTAL dealer or PORTAL broker fails to
deliver the securities on the expiration date, the delivering PORTAL
dealer or PORTAL broker shall be liable for any damages [which] that
may accrue thereby. A Liability Notice delivered in accordance with
this provision shall serve as notification by the receiving member of
the existence of a claim for damages. All claims for such damages shall
be made promptly.
(3) If the above procedures are not utilized, contracts may be
``bought-in'' without prior notice, after normal delivery hours
established in the community where the buyer maintains its office, on
the expiration date. Such buy-in execution shall be for the account and
risk of the defaulting PORTAL dealer or PORTAL broker.
(j) Information on Notices
Notices of ``buy-in'' and ``re-transmitted buy-in'' shall include
all information contained in the sample forms prescribed by the
Association.
(k) ``Buy-In'' Desk Required
PORTAL dealers or PORTAL brokers shall have a ``buy-in'' section or
desk adequately staffed to process and research all ``buy-ins'' during
normal business hours.
(l) ``Buy-In'' of Accrued Securities
Securities in the form of stock, rights or warrants [which] that
accrue to a purchaser shall be deemed due and deliverable to the
purchaser on the payable date. Any such securities remaining
undelivered at that time shall
[[Page 433]]
be subject to the ``buy-in'' procedures as provided in this Rule.
[5380]6780. Close-Out Procedures--``Selling-Out''
A contract [which] that has not been completed by the buyer
according to its terms may be closed by the seller in accordance with
the following procedures:
(a) Conditions Permitting ``Sell-Out''
Upon failure of the buyer to accept delivery in accordance with the
terms of the contract, and lacking a properly executed Reclamation
Form, the seller may, without notice, ``sell-out'' in the PORTAL Market
and for the account and liability of the party in default all or any
part of the securities due or deliverable under the contract.
(b) Notice of ``Sell-Out''
The party executing a ``sell-out'' as prescribed above shall, as
promptly as possible on the day of execution, by written or comparable
electronic notice, notify the PORTAL dealer or PORTAL broker for whose
account and risk such securities were sold of the quantity sold and the
price received, and shall promptly mail or deliver formal confirmation
of such sale.
[5390]6790. Miscellaneous
[5391]6791. Arbitration
The facilities of [the Association's Arbitration Department] NASD
Dispute Resolution, Inc., and the procedures of the Code of Arbitration
Procedure shall be available to PORTAL participants to resolve disputes
arising from PORTAL transactions and transfers or activities related
thereto.
[5392]6792. Rules of the Association
(a) The following Rules of the Association and Interpretative
Material thereunder are specifically applicable to transactions and
business activities relating to the PORTAL Market:
(1) Rules 0113, 0114, 0115, 2110, 2120, 2230, 2240, 2250, 2260,
2270, 2310, 2410, 2420, 2430, 2440, 2510, 2760, 2770, 2780, 3010, 3120,
3310, 3320, 3330, 3370, and 8210;
(2) the Rule 8100 and 8300 Series; and
(3) IM-2310-2, IM-2420-1, IM-2440, IM-3310, and IM-3320.
(b) The following Rules of the Association and Interpretative
Material thereunder are specifically applicable to transactions and
business activities relating to the PORTAL Market, with the exceptions
specified below:
(1) Rule 2320, except for paragraph (g), which requires that a
member obtain quotations from three dealers to determine the best
inter-dealer market for the subject security;
(2) Rule 2330, except for paragraph (d); and
(3) Rule 3110, except paragraph (b)(2).
(c) The following Rules of the Association are applicable to
members and persons associated with members regardless of the member's
participation in transactions in the PORTAL Market:
(1) Rules 0111, 0112, 0120, and 0121.
(2) Rules 2210, 3020, 3030, 3040, 3050, 3060, 3130, 3140, and 3340.
(d) The following Rules of the Association and Interpretative
Material thereunder are not applicable to transactions and business
activities relating to the PORTAL Market:
(1) Rules 1130, 2450, 2520, 2710, 2730, 2740, 2750, 2810, 2820,
2830, 2860, 3210, and 3360; and
(2) IM-2110-1.
* * * * *
5400. Clearance and Settlement
(a) A market maker shall clear and settle transactions effected
otherwise than on an exchange in ADF-eligible securities that are
eligible for net settlement through the facilities of a registered
clearing agency that uses a continuous net settlement system. This
requirement may be satisfied by direct participation, use of direct
clearing services, or by entry into a correspondent clearing
arrangement with another member that clears trades through such an
agency.
(b) Notwithstanding paragraph (a), transactions in listed
securities may be settled ``ex-clearing'' provided that both parties to
the transaction agree.
Selected NASD Notices to Members: 94-73.
* * * * *
6000. NASD SYSTEMS AND PROGRAMS
The 6100 Series is replaced in its entirety by the following
proposed rule language:
6100. TRACS TRADE COMPARISON SERVICE
6110. Definitions
(a) The term ``Browse'' shall mean the function of TRACS that
permits a Participant to review (or query) for trades in the system
identifying the Participant as a party to the transaction, subject to
the specific uses contained in the TRACS Users Guide.
(b) The term ``Clearing Broker/Dealer'' or ``Clearing Broker''
shall mean the member firm that has been identified in the TRACS system
as principal for clearing and settling a trade, whether for its own
account or for a correspondent firm.
(c) The term ``Correspondent Executing Broker/Dealer'' or
``Correspondent Executing Broker'' shall mean the member firm that has
been identified in the TRACS system as having a correspondent
relationship with a clearing firm whereby it executes trades and the
clearing function is the responsibility of the clearing firm.
(d) The term ``Introducing Broker/Dealer'' or ``introducing
broker'' shall mean the member firm that has been identified in the
TRACS system as a party to the transaction, but does not execute or
clear trades.
(e) The term ``Participant'' shall mean any member of NASD in good
standing that uses the TRACS system as an NASD Registered Market Maker
or CQS Market Maker according to the requirements of Rule 4611 or Rule
6320, an ECN registered in accordance with Rule 4623, an Order Entry
Firm, or a clearing broker/dealer, correspondent executing broker/
dealer, or introducing broker/dealer.
(f) The terms ``Participant,'' ``TRACS Order Entry Firm,''
``correspondent executing broker/dealer,'' ``correspondent executing
broker,'' ``introducing broker/dealer,'' ``introducing broker,''
``clearing broker/dealer,'' and ``clearing broker'' shall also include,
where appropriate, the Non-Member Clearing Organizations listed in Rule
6120(a)(5) below and their qualifying members.
(g) The term ``Parties to the Transaction'' shall mean the
executing brokers, introducing brokers and clearing brokers, if any.
(h) The term ``Reportable TRACS Transaction'' shall mean those
transactions in a TRACS eligible security that are required to be
submitted to NASD pursuant to the Rule 4630, 6400, and 6620 Series. The
term shall also include transactions in TRACS eligible securities that
are for less than one round lot, and those transactions that are to be
compared and locked-in for settlement.
(i) The term ``Reporting Party'' shall mean the TRACS Participant
that is required to input the trade information, according to the
requirements in NASD Rule 4633.
(j) The term ``Trade Reporting and Comparison Service'' or
``TRACS'' shall mean the automated system owned and operated by NASD
that reports trades and compares trade information entered by TRACS
participants and submits ``locked-in'' trades to Depository Trust
Clearing Corporation (DTCC) for clearance and settlement; transmits
reports of the transactions automatically to the Securities Information
Processor, if required, for dissemination to the
[[Page 434]]
public and the industry; and provides participants with monitoring
capabilities to facilitate participation in a ``locked-in'' trading
environment.
(k) The term ``TRACS ECN'' shall mean a member of NASD that is an
electronic communications network (``ECN'') that elects to display
orders in the NASD Alternative Display Facility pursuant to Rule 4623
and is a member of a registered clearing agency for clearing or
comparison purposes or has a clearing arrangement with such a member.
This term shall also include an NASD member that is an alternative
trading system (``ATS'') that displays orders in the NASD Alternative
Display Facility pursuant to Rule 4623 and is a member of a registered
clearing agency for clearing or comparison purposes or has a clearing
arrangement with such a member.
(l) The term ``TRACS Eligible Security'' shall mean all Nasdaq
securities, all Consolidated Quotation Service (CQS) securities traded
pursuant to unlisted trading privileges, all non-exchange-listed
securities as defined in the Rule 6600 series, and all Direct
Participation Programs as defined in the Rule 6900 series.
(m) The term ``TRACS Market Maker'' shall mean a member of NASD
that is registered as an NASD or CQS Market Maker and is a member of a
registered clearing agency for clearing or comparison purposes or has a
clearing arrangement with such a member.
(n) The term ``TRACS Order Entry Firm'' shall mean a member of NASD
that is a firm that executes orders but does not act as a market maker
in the instant transaction and is a member of a registered clearing
agency for clearing or comparison purposes or has a clearing
arrangement with such a member.
6120. Participation in TRACS Trade Comparison Feature by
Participants in the NASD Alternative Display Facility
The following Rules 6120 through 6190 apply to members that effect
transactions in ADF-eligible securities otherwise than on an exchange.
(a) Mandatory Participation for Clearing Agency Members
(1) Participation in TRACS trade comparison feature is mandatory
for any NASD member that effects transactions in ADF-eligible
securities otherwise than on an exchange that are not locked-in and
sent directly to Deposit Trust Clearing Corporation (``DTCC'') by that
member. All members, whether or not they must participate in the TRACS
trade comparison feature, must comply with the trade reporting
requirements described in Rule 4633.
(2) Participation in the TRACS trade comparison feature as a Market
Maker shall be conditioned upon the TRACS Market Maker's initial and
continuing compliance with the following requirements:
(A) Execution of, and continuing compliance with, a TRACS trade
comparison Participant Application Agreement;
(B) membership in, or maintenance of, an effective clearing
arrangement with a member of a clearing agency registered pursuant to
the Act;
(C) registration as an NASD Market Maker or ECN for Nasdaq or CQS
securities pursuant to Rule 4611 or Rule 6320, if applicable, and
compliance with all applicable rules and operating procedures of NASD
and the Commission;
(D) maintenance of the physical security of the equipment located
on the premises of the TRACS Market Maker to prevent unauthorized entry
of information into the TRACS trade comparison feature; and
(E) acceptance and settlement of each trade that the TRACS trade
comparison feature identifies as having been effected by such TRACS
Market Maker, or if settlement is to be made through a clearing member,
guarantee or the acceptance and settlement of each TRACS identified
trade by the clearing member on the regularly scheduled settlement
date.
(3) Participation in the TRACS trade comparison feature as an Order
Entry Firm shall be conditioned upon the Order Entry Firm's initial and
continuing compliance with the following requirements:
(A) Execution of, and continuing compliance with, a TRACS trade
comparison Participant Application Agreement;
(B) membership in, or maintenance of, an effective clearing
arrangement with a member of a clearing agency registered pursuant to
the Act;
(C) compliance with all applicable rules and operating procedures
of NASD and the Commission;
(D) maintenance of the physical security of the equipment located
on the premises of the TRACS Order Entry Firm to prevent the
unauthorized entry of information into the TRACS trade comparison
feature; and
(E) acceptance and settlement of each trade that the TRACS trade
comparison feature identifies as having been effected by such TRACS
Order Entry Firm, or if settlement is to be made through a clearing
member, guarantee of the acceptance and settlement of each TRACS
identified trade by the clearing member on the regularly scheduled
settlement date.
(4) Participation in the TRACS trade comparison feature as a
Clearing Broker shall be conditioned upon the Clearing Broker's initial
and continuing compliance with the following requirements:
(A) Execution of, and continuing compliance with, a TRACS trade
comparison Participant Application Agreement;
(B) membership in a clearing agency registered pursuant to the Act;
(C) compliance with all applicable rules and operating procedures
of NASD and the Commission;
(D) maintenance of the physical security of the equipment located
on the premises of the TRACS Clearing Broker to prevent the
unauthorized entry of information into the TRACS trade comparison
feature; and
(E) acceptance and settlement of each trade that the TRACS trade
comparison feature identifies as having been effected by itself or any
of its correspondents on the regularly scheduled settlement date.
(5) Participation in the TRACS trade comparison feature as an ECN
shall be conditioned upon the ECN's initial and continuing compliance
with the following requirements:
(A) execution of, and continuing compliance with, a TRACS trade
comparison Participant Application Agreement;
(B) membership in, or maintenance of an effective clearing
arrangement with a member of, a clearing agency registered pursuant to
the Act;
(C) compliance with all applicable rules and operating procedures
of NASD and the Commission;
(D) maintenance of the physical security of the equipment located
on the premises of the ECN to prevent the unauthorized entry of
information into the TRACS trade comparison feature; and
(E) acceptance and settlement of each trade that the TRACS trade
comparison feature identifies as having been effected by such TRACS
ECN, or if settlement is to be made through a clearing member,
guarantee of the acceptance and settlement of each TRACS identified
trade by the clearing member on the regularly scheduled settlement
date.
(6) Each TRACS trade comparison Participant shall be obligated to
inform NASD of non-compliance with any of the participation
requirements set forth above.
[[Page 435]]
(b) Participant Obligations in TRACS
(1) Access to TRACS
Upon execution and receipt by NASD of the TRACS trade comparison
Participant Application Agreement, a TRACS trade comparison Participant
may commence input and validation of trade information in TRACS
eligible securities. TRACS trade comparison Participants may access the
service via NASD terminals or Workstations or through computer
interface during the hours of operation specified in the TRACS Users
Guide. Prior to such input, all TRACS comparison Participants,
including those that have trade report information submitted to NASD by
any third party, must obtain from NASD a unique identifying Market
Participant Symbol (``MMID'' or ``MPID''), and use that identifier for
trade reporting and audit trail purposes.
(2) Market Maker Obligations
(A) TRACS Market Makers shall commence participation in the TRACS
trade comparison feature by initially contacting the TRACS Operation
Center to verify authorization for submitting trade data to the TRACS
system for TRACS eligible securities.
(B) A TRACS Market Maker that is a self-clearing firm shall be
obligated to accept and clear each trade that the TRACS trade
comparison feature identifies as having been effected by that Market
Maker.
(C) A TRACS Market Maker that is an introducing broker or a
correspondent executing broker shall identify its clearing broker when
it becomes an TRACS trade comparison participant and notify the TRACS
Operation Center if its clearing broker is to be changed; this will
necessitate execution of a revised TRACS trade comparison Participant
Application Agreement.
(D) If at any time a TRACS Market Maker fails to maintain a
clearing arrangement, it shall be removed from the TRACS trade
comparison feature, and be precluded from participation as a Market
Maker in Nasdaq and CQS securities pursuant to the requirements of 6300
Series until such time as a clearing arrangement is reestablished and
notice of such arrangement, with an amended TRACS trade comparison
Participant Application Agreement, is filed with NASD. If, however, the
NASD finds that the TRACS Market Maker's failure to maintain a clearing
arrangement is voluntary, the withdrawal of quotations will be
considered voluntary and unexcused pursuant to Rule 4619.
(3) Order Entry Firm Obligations
(A) TRACS Order Entry Firms shall commence participation in the
TRACS trade comparison feature by initially contacting the TRACS
Operation Center to verify authorization for submitting trade data to
the TRACS system for TRACS eligible securities.
(B) A TRACS Order Entry Firm that is a self-clearing firm shall be
obligated to accept and clear each trade that the TRACS trade
comparison feature identifies as having been effected by the Order
Entry Firm.
(C) A TRACS Order Entry Firm that is an introducing broker or a
correspondent executing broker shall identify its clearing broker when
it becomes a TRACS trade comparison Participant and notify the TRACS
Operations Center if its clearing broker is to be changed; this change
will necessitate execution of a revised TRACS trade comparison
Participant Application Agreement.
(D) If at any time a TRACS Order Entry Firm fails to maintain a
clearing arrangement, it shall be removed from the TRACS trade
comparison feature until such time as a clearing arrangement is
reestablished, and notice of such arrangement, with an amended TRACS
trade comparison Participant Application Agreement, is filed with NASD.
(4) Clearing Broker Obligation
TRACS clearing brokers shall be obligated to accept and clear as a
party to the transaction each trade that the system identifies as
having been effected by itself or any of its correspondent executing
brokers. Clearing brokers may cease to act as principal for a
correspondent executing broker at any time provided that notification
has been given to, received and acknowledged by the TRACS Operations
Center and affirmative action has been completed by the Center to
remove the clearing broker from the TRACS trade comparison feature for
that correspondent executing broker. The clearing broker's obligation
to accept and clear trades for its correspondents shall not cease prior
to the completion of all of the steps detailed in this subparagraph
(4).
(5) ECN Obligations
(A) TRACS ECNs shall commence participation in the TRACS trade
comparison feature by initially contacting the TRACS Operations Center
to verify authorization for submitting trade data to the TRACS trade
comparison feature for TRACS eligible securities.
(B) A TRACS ECN that is a self-clearing firm shall be obligated to
accept and clear each trade that the TRACS trade comparison feature
identifies as having been effected by the ECN.
(C) A TRACS ECN that is an introducing broker or a correspondent
executing broker shall identify its clearing broker when it becomes a
TRACS trade comparison Participant and notify the TRACS Operations
Center if its clearing broker is to be changed; this change will
necessitate execution of a revised TRACS trade comparison Participant
Application Agreement.
(D) If at any time a TRACS ECN fails to maintain a clearing
arrangement, it shall be removed from the TRACS trade comparison
feature until such time as a clearing arrangement is reestablished, and
notice of such arrangement, with an amended TRACS trade comparison
Participant Application Agreement, is filed with NASD.
Selected NASD Notices to Members: Notice to Members 98-82.
6130. Trade Report Input
(a) Reportable TRACS Transactions
A member choosing to submit a trade to the NASD for comparison
shall report the trade to TRACS. TRACS will also process trades that
are submitted on an automatic locked-in basis for transmission to NSCC.
All trades that are reportable transactions pursuant to NASD Rule 4633
will be transmitted to the applicable securities information processor;
however, only those trades that are subject to regular way settlement
and are not already locked-in trades will be compared and locked-in
through TRACS. Trades that are reported as other than regular way
settlement (i.e., Cash, Next-Day, Seller's Option) will not be compared
in TRACS or reported to DTCC. All transactions in Direct Participation
Program securities shall be reported to TRACS pursuant to the Rule 6900
Series as set forth therein.
(b) When and How Trade Reports Are Submitted to TRACS
(1) TRACS trade comparison Participants who are Reporting Members
that choose to submit a trade for comparison shall transmit to TRACS
the information required by Rule 4633 (e) or (f), as applicable, within
90 seconds of execution.
(2) A TRACS trade comparison Participant who is a Non-Reporting
Member to a transaction shall, within twenty (20) minutes after
execution accept (or decline, if applicable) a transaction submitted by
the Reporting
[[Page 436]]
Member for comparison through TRACS. A Non-Reporting Member has an
obligation to ensure that the information that it transmits or accepts
in TRACS is timely, accurate and complete. Therefore, if a Non-
Reporting Member accepts a transaction in TRACS transmitted by the
Reporting Member for comparison through TRACS, then the Non-Reporting
Member shall be deemed to have adopted all of the data elements
required by Rule 4633(e) or (f), as applicable, concerning the Non-
Reporting Member's side of the transaction, absent any subsequent
modification of the trade through TRACS.
(3) Trades not required to be reported for public dissemination may
still be compared and locked-in through TRACS.
(4) Reporting NASD Members may conduct the following functions in
TRACS pursuant to TRACS specifications established by the NASD: (i)
MMID Trade Entry; (ii) Trade Cancellation; and (iii) Trade Break.
(5) Non-Reporting NASD Members may conduct the following functions
in TRACS pursuant to TRACS specifications established by the NASD: (i)
Trade Accept; (ii) Trade Decline; and (iii) Trade Break.
(6) If a TRACS Report from a Reporting Member did not include a
necessary OATS order number for OATS/TRACS matching from the Non-
Reporting Member's perspective, the Non-Reporting Member shall submit a
non-published TRACS Report to compare the trades.
(7) A party entering a trade report into the TRACS trade comparison
feature shall use a designated symbol to denote whether the party is
submitting the trade report as the Reporting Member or the Non-
Reporting Member.
6140. TRACS Processing
Locked-in trades may be determined through the TRACS trade
comparison feature through one of the following methods:
(a) Trade Acceptance
The reporting party enters its version of the trade into the system
and the contra party reviews the trade report and accepts or declines
the trade. An acceptance results in a locked-in trade; a declined trade
report is purged from the TRACS system at the end of trade date
processing;
(b) Aggregate Volume Match
A batch type comparison will be run at the end of trade date and
will aggregate volume of previously entered uncompared trade reports
(if all other matching fields agree) in order to effect matching;
(c) T+N Trade Processing
T+N entries may be submitted until 5:15 p.m. each business day. At
the end of daily matching, all declined trade entries will be purged
from the TRACS system. TRACS will not purge any open trade (i.e.
unmatched or unaccepted) at the end of its entry day, but will carry-
over such trades to the next business day for continued comparison and
reconciliation. TRACS will automatically lock in and submit to NSCC as
such any carried-over T to T+21 (calendar day) trade if it remains open
as of 2:30 p.m. on the next business day. TRACS will not automatically
lock in T+22 (calendar day) or older open ``as-of'' trades that were
carried-over from the previous business day; these trades will be
purged by TRACS at the end of the carry-over day if such trades remain
open. Members may re-submit these T+22 or older ``as-of'' trades into
TRACS on the next business day for continued comparison and
reconciliation for up to one calendar year.
Selected NASD Notices to Members 94-73.
6150. Reserved
6160. Obligation to Honor Trades
If a TRACS trade comparison Participant is reported by TRACS as a
party to a trade that has been treated as locked-in and sent to DTCC,
notwithstanding any other agreement to the contrary, that party shall
be obligated to act as a principal to the trade and shall honor such
trade on the scheduled settlement date.
6170. Audit Trail Requirements
The data elements specified in Rule 6130(b) are critical to NASD's
compilation of a transaction audit trail for regulatory purposes. As
such, all member firms using the TRACS Service have an ongoing
obligation to input Rule 6130(b) information accurately and completely.
6180. Reserved
6190. Termination of TRACS Service
NASD may, upon notice, terminate TRACS service as to a Participant
in the event that a TRACS Participant fails to abide by any of the
rules or operating procedures of the TRACS service or NASD, or fails to
honor contractual agreements entered into with NASD or its
subsidiaries, or fails to pay promptly for services rendered by the
TRACS Service.
* * * * *
6200. To be replaced in its entirety by SR-NASD-99-65, which
currently is expected to be effective on February 1, 2002.
* * * * *
The 6300 through 6500 Series are replaced in their entirety by the
following proposed rule language.
6300. CONSOLIDATED QUOTATIONS SERVICE (CQS)
6310. General
The Rule 6300 through 6500 Series govern trading by members in CQS/
CTA securities otherwise than on an exchange.
6320. Registration as a CQS Market Maker
(a) Quotations and quotation sizes in reported securities may be
entered into the Consolidated Quotations Service (CQS) through the NASD
Alternative Display Facility only by an NASD member registered with it
as a CQS market maker.
(b) An NASD member, including an operator of an ECN/ATS seeking
registration as a CQS market maker, shall file an application with
NASD. The application shall certify the member's good standing with
NASD and shall demonstrate compliance with the net capital and other
financial responsibility provisions of the Act. A member's registration
as a CQS market maker shall become effective upon receipt by the member
of notice of approval of registration by NASD. It shall be sufficient
to obtain registration as a CQS market maker with NASD for a member to
demonstrate proof that it is a registered CQS market maker with Nasdaq
in good standing.
(c) A CQS market maker registered in a reported security may become
registered in additional reported securities by entering a registration
request via an NASD Alternative Display Facility terminal. Registration
shall become effective at the time the registration request is entered.
(d) An NASD member that becomes registered as a CQS market maker in
an issue shall enter quotations in the issue on the effective date of
the issue's authorization. If quotations are not entered on the
effective date of authorization and the CQS market maker remains
inactive in the issue for five (5) business days, the CQS market
maker's registration in the issue will be terminated.
(e) Any CQS market makers registered in reported securities that
are eligible
[[Page 437]]
for inclusion in the Intermarket Trading System (ITS) may be registered
as market makers in ITS and, if they so choose, shall be subject to the
Rule 6500 Series.
6330. Obligations of CQS Market Makers
(a) Pursuant to SEC Rule 11Ac1-1, a CQS market maker's quotations
in reported securities are required to be firm for the size displayed
or, if no size is displayed, for a normal unit of trading. If a market
maker displays quotations in a reported security in both a national
securities exchange and NASD's CQS System, the market maker shall
maintain identical quotations in each system.
(b) A CQS market maker's quotation must be at least one normal unit
of trading.
(c) A CQS market maker shall be obligated to have available in
close proximity to the NASD Alternative Display Facility terminal at
which it makes a market in a CQS security a quotation service that
disseminates the bid price and offer price then being furnished by or
on behalf of other national securities exchanges and CQS market makers
trading and quoting that CQS security.
(d) Computer-Generated Quotations
(1) General Prohibition--Except as provided below, this Rule
prohibits the automatic updating or tracking of inside quotations in
CQS by computer-generated quote systems. This ban is necessary to
offset the negative impact on the capacity and operation of NASD
systems regarding certain systems that track changes to the inside
quotation and automatically react by generating another quote to keep
the market maker's quote away from the best market, without any
cognizable human intervention.
(2) Exceptions to the General Prohibition--Automated updating of
quotations is permitted when:
(A) The update is in response to an execution in the security by
that firm (such as execution of an order that partially fills a market
maker's quotation size);
(B) it requires a physical, cognizable entry (such as a manual
entry to the market maker's internal system which then automatically
forwards the update to the NASD system);
(C) the update is to reflect the receipt, execution, or
cancellation of a customer limit order;
(D) it is used to expose a customer's market or marketable limit
order for price improvement opportunities; or
(E) it is used to equal or improve either or both sides of the
national best bid or offer (``NBBO''), or add size to the NBBO.
(e) Minimum Price Variation for Decimal-Based Quotations
(1) The minimum quotation increment for securities authorized for
decimal pricing as part of the SEC-approved Decimals Implementation
Plan for the Equities and Options Markets shall be $0.01.
(f) Members that display priced quotations on a real-time basis for
CQS securities in two or more market centers that permit quotation
updates on a real-time basis must display the same priced quotations
for the security in each market center.
Cross Reference--IM-4613, Autoquote Policy
6340. Normal Business Hours
A CQS market maker shall be open for business as of 9:30 a.m.
Eastern Time and shall close no earlier than 4:00 p.m. Eastern Time. An
NASD market maker may remain open for business on a voluntary basis for
any period of time between 4:00 p.m. Eastern time and 6:30 p.m. Eastern
Time. A CQS market maker whose quotes are open after 4:00 p.m. Eastern
Time shall be obligated to comply, while their quotes are open, with
all NASD Rules that are not by their express terms, or by an official
interpretation of NASD, inapplicable to any part of the 4:00 p.m. to
6:30 p.m. Eastern Time period.
6350. Withdrawal of Quotations
(a) Any registered CQS market maker (excluding ECNs) that initiates
a pre-opening application and does not enter and maintain continuous
two-sided quotations in the security on the same trading day may not
re-register to enter quotations in such security for twenty (20)
business days unless NASD Alternative Display Facility Operations
grants an excused withdrawal.
(b) A CQS market maker that wishes to withdraw quotations in a
reported security shall contact NASD Alternative Display Facility
Operations to obtain excused withdrawal status prior to withdrawing its
quotations. Excused withdrawal status based on illness, vacations or
physical circumstances beyond the CQS market maker's control may be
granted for up to five (5) business days, unless extended by NASD
Alternative Display Facility Operations. Excused withdrawal status
based on investment activity or advice of legal counsel, accompanied by
a representation that the condition necessitating the withdrawal of
quotations is not permanent in nature, may, upon written request, be
granted for not more than sixty (60) days. The withdrawal of quotations
because of pending news, a sudden influx of orders or price changes, or
to effect transactions with competitors shall not normally constitute
acceptable reasons for granting excused withdrawal status, unless NASD
has initiated a trading halt for ITS Market Makers in the security,
pursuant to Rule 5200.
6360. Voluntary Termination of Registration
A CQS market maker may voluntarily terminate its registration in a
reported security by withdrawing its quotations from the NASD
Alternative Display Facility. A CQS market maker that voluntarily
terminates its registration in a reported security may not, however,
re-register as a CQS market maker in that security for two (2) business
days.
6370. Suspension and Termination of Quotations by NASD Action
NASD may, pursuant to the procedures set forth in NASD's Code of
Procedure as set forth in the Rule 9000 Series, suspend, condition,
limit, prohibit or terminate a CQS market maker's authority to enter
quotations in one or more reported securities for violations of the
applicable requirements or prohibitions of the Rule 4000, 5000 and 6300
Series. Selected NASD Notices to Members: 94-81.
6400. REPORTING TRANSACTIONS IN CTA-ELIGIBLE SECURITIES
The provisions of this Rule 6400 Series shall apply to all
transactions effected by members otherwise than on an exchange in
securities listed on an exchange (other than Nasdaq) that are required
to be reported to the Consolidated Tape (``eligible securities''), as
provided in the Plan filed by NASD pursuant to SEC Rule 11Aa3-1 under
the Act (``Plan''). Rule 6420 shall not apply to transactions executed
through the Intermarket Trading System by market makers registered as
CQS market makers.
Selected NASD Notices to Members: 94-81.
6410. Definitions
(a) Unless the context requires otherwise, terms used herein shall
have the meaning below. Terms not specifically defined below shall have
the meaning in the By-Laws and NASD Rules, SEC Rule 11Aa3-1 and the
Plan.
[[Page 438]]
(b) ``Consolidated Tape'' means the consolidated transaction
reporting system for the dissemination of last sale reports in eligible
securities required to be reported pursuant to the Plan.
(c) ``Eligible securities'' means all common stocks, preferred
stocks, long-term warrants, and rights entitling the holder to acquire
an eligible security, listed or admitted to unlisted trading privileges
on the American Stock Exchange or the New York Stock Exchange, and
securities listed on regional stock exchanges, which substantially meet
the original listing requirements of the New York Stock Exchange or the
American Stock Exchange. A list of eligible securities listed on
regional stock exchanges is contained in Rule 6450. An updated list of
eligible securities will be provided to members from time to time.
(d) ``Initial Public Offering''--a security is subject to an
``initial public offering'' if: (1) the offering of the security is
registered under the Securities Act of 1933; and (2) the issuer of the
security, immediately prior to filing the registration statement with
respect to such offering, was not subject to the reporting requirements
of Section 13 or 15(d) of the Act.
(e) ``Non-Registered Member'' shall have the meaning as defined in
NASD Rule 4200.
(f) ``Transaction effected through the NASD Alternative Display
Facility'' shall have the meaning as defined in Rule 4100.
(g) ``Registered Member'' means a member of NASD that is registered
as a CQS market maker, pursuant to Rule 6320, in a particular eligible
security. A member is a Registered Member in only those eligible
securities for which it has registered as a CQS market maker. A member
shall cease being a Registered Member in an eligible security when it
has withdrawn or voluntarily terminated its quotations in that security
or when its quotations have been suspended or terminated by action of
NASD.
(h) ``Registered ECN'' means a member of NASD that is an electronic
communications network (``ECN'') that has chosen to register with NASD
and meets the terms of registration set forth in the NASD-provided
agreement. A member is a Registered ECN in only those eligible
securities for which it is registered with NASD. A member shall cease
being a Registered ECN in an eligible security when it has withdrawn or
voluntarily terminated its quotations in that security or when its
quotations have been suspended or terminated by action of NASD. The
term ``Registered ECN'' shall also include NASD members that are
alternative trading systems (``ATS''), subject to SEC Regulation ATS,
that comply with the requirements of this paragraph.
6420. Transaction Reporting
(a) General
(1) This Rule governs the reporting of trades in eligible
securities through the NASD's Trade Reporting and Comparison Service
(``TRACS'').
(2) All times referenced in this Rule are Eastern time.
(3) For Purposes of this Rule, the term ``Reporting NASD Member''
or ``Reporting Member'' shall mean an NASD member with the trade
reporting obligation as set forth in Rule 6420(c).
(4) For purposes of this Rule, the term ``Non-Reporting NASD
Member'' or ``Non-Reporting Member'' shall mean the contra side of a
trade reported by a Reporting Member.
(5) For purposes of this Rule, the term ``normal market hours''
means from 9:30 a.m. to 4:00 p.m. All times referenced in this Rule are
Eastern Time.
(b) When and How Transactions are Reported
(1) Reporting NASD Members shall transmit to TRACS, within 90
seconds after execution, last sale reports of transactions in eligible
securities effected by members otherwise than on an exchange during the
trading hours of the Consolidated Tape. Transactions not reported
within 90 seconds after execution shall be designated as late and such
trade reports must include the time of execution. Reporting NASD
Members shall also transmit to TRACS, within 90 seconds after
execution, last sale reports of transactions in eligible securities
effected by members otherwise than on an exchange between 4:00 p.m. and
6:30 p.m.; trades executed and reported after 4:00 p.m. shall be
designated as ``.T'' trades to denote their execution outside normal
market hours. Transactions not reported within 90 seconds after
execution must include the time of execution on the trade report.
(2) (A) Reporting NASD Members shall report transactions in
eligible securities effected otherwise than on an exchange outside the
hours of 9:30 a.m. and 6:30 p.m. Eastern Time as follows:
(i) By transmitting the individual trade reports to TRACS on the
next business day (T+1) between 8:00 a.m. and 6:30 p.m. Eastern Time;
(ii) by designating the entries ``as/of'' trades to denote their
execution on a prior day; and
(iii) by including the time of execution.
(c) Which Party Reports Transaction
(1) Transactions executed on an exchange are reported by the
exchange and shall not be reported by members.
(2) For transactions between two Registered Members or Registered
ECNs, the Registered Market Maker or ECN representing the sell side
shall report the transaction.
(3) For transactions between a Registered Member or Registered ECN
and a Non-Registered Member, the Registered Member or Registered ECN
shall report the transaction.
(4) For transactions between two Non-Registered Members, the Non-
Registered Member representing the sell side shall report the
transaction.
(5) For transactions between a member and a customer, the member
shall report the transaction.
(6) For transactions between a member and a broker-dealer that is
not a member of NASD, the member shall report the transaction.
(7) For all transactions between an NASD member and an NASD member
that is also a member of Nasdaq or another national securities
exchange, where the reporting party has a choice of reporting venues
and chooses not to report to Nasdaq or another national securities
exchange, the reporting party described in (1) through (6) above shall
report the transaction to the NASD.
(d) Information To Be Reported--Two Party Trade Reports
(1) A two party trade report is a last sale report that denotes a
trade between one Reporting NASD member and one Non-Reporting Member.
The Reporting NASD Member is denoted as the (``MMID'') side of the
trade report and the Non-Reporting Member is denoted as the (``OEID'')
side of the report.
(2) Each Two Party Last Sale Report Submitted by a Reporting NASD
Member Should Contain:
(A) Security identification symbol (SECID);
(B) Number of shares or bonds;
(C) Price of the transaction as required by paragraph (g) below;
(D) A designated symbol denoting whether the transaction, from the
Reporting NASD Member's perspective, is a buy, sell, sell short, sell
short exempt, or cross;
(E) If known, a designated symbol denoting whether the transaction,
from the perspective of the Non-Reporting Member, is a buy, sell, sell
short, or sell short exempt;
(F) A designated symbol denoting whether the transaction, from the
perspective of the Reporting Member, is as principal, riskless
principal, or agent;
[[Page 439]]
(G) If known, a designated symbol denoting whether the transaction,
from the perspective of the Non-Reporting Member, is as principal,
riskless principal, or agent;
(H) Execution time for any transaction not reported within 90
seconds of execution;
(I) The market participant identifier of the Reporting Member and
the Non-Reporting Member;
(J) Reporting Member clearing broker;
(K) Reporting Member Executing Broker in case of a ``give up;'
(L) Non-Reporting Member Executing Broker;
(M) Non-Reporting Member introducing broker in case of a ``give
up;'
(N) Non-Reporting Member clearing broker;
(O) A designated symbol denoting whether the trade report should be
published;
(P) A designated symbol denoting whether the trade report should be
compared in TRACS;
(Q) If the contra side to the trade report is a customer of the
Reporting Member, the Reporting Member shall denote that the trade is
an internalized trade with the designated symbol;
(R) If the contra side to the trade report is a Non-NASD member,
the Reporting Member shall indicate with the designated symbol that the
contra side is a non-member.
(S) For two party trade reports submitted pursuant to an Automated
Give Up (``AGU'') arrangement or a Qualified Service Representative
(``QSR'') Agreement, subparagraphs (d) (2) (E) and (G) are mandatory.
(e) Information To Be Reported--Three Party Trade Reports
(1) A three party trade report is a single last sale trade report
that denotes one Reporting Member and two contra parties. The Reporting
Member is denoted as the MMID side of the trade report and the two non-
reporting sides are denoted as the OEID side of the trade report. In a
three party report, the Reporting Member is the buyer to one OEID and
the seller to the other OEID. Registered ECNs shall only submit three
party trade reports. Risklnnnqess principal trades may be submitted as
three party trade reports.
(2) Each Three Party Trade Report Submitted by a Reporting Member
shall contain the following information:
Transaction Information
(A) Security Identification Symbol (SECID);
(B) Number of shares or bonds;
(C) Price of the transaction as required by paragraph (g) below;
(D) Execution time for any transaction not reported within 90
seconds of execution;
(E) The market participant identifies of the Reporting Member and
the two Non-Reporting Members;
(F) A designated symbol denoting whether the trade should be
published;
MMID Side
(G) All three party trade reports from ECNs must be marked as
agency cross transactions;
(H) All three party trade reports from Non-ECNs must be denoted as
riskless principal trade reports and shall include a designated symbol
denoting whether the trade between the non-ECN and the buy-side OEID is
a sell, sell short, or sell short exempt transaction;
(I) Reporting Member clearing broker;
(J) Reporting Member Executing Broker in the case of a ``give up,''
if applicable;
Buy Side OEID
(K) Buy Side OEID executing broker;
(L) Buy Side OEID introducing broker in case of a ``give up'';
(M) Buy Side OEID clearing broker;
(N) If known, a designated symbol denoting whether the trade, from
the Buy Side OEID's perspective, is as principal, riskless principal,
or agent;
(O) If the Buy Side OEID is a customer of the Reporting Member, the
Reporting Member shall denote that the trade is an internalized trade
with the designated symbol;
(P) If the Buy Side OEID is a non-NASD member, the Reporting Member
shall indicate with the designated symbol that the buy side OEID is a
non-member;
(Q) A designated symbol denoting whether the trade between the MMID
and the Buy Side OEID shall be compared in TRACS;
Sell Side OEID
(R) Sell Side OEID executing broker;
(S) Sell Side OEID introducing broker in case of a ``give up'';
(T) Sell Side OEID clearing broker;
(U) If known, a designated symbol denoting whether the trade, from
the Sell Side OEID's perspective, is as principal, riskless principal,
or agent;
(V) If known, a symbol denoting whether the trade, from the Sell
Side OEID's perspective, is a sell, sell short, or sell short exempt
transaction;
(W) If the Sell Side OEID is a customer of the Reporting Member,
the Reporting Member shall denote that the trade is an internalized
trade with the designated symbol;
(X) If the Sell Side OEID is a non-NASD Member, the Reporting
Member shall indicate with the designated symbol that the buy side OEID
is a non-member; and
(Y) A designated symbol denoting whether the trade between the MMID
and the Sell Side OEID shall be compared in TRACS.
(Z) If the transactions between the Buy Side OEID and the Reporting
Member is reported pursuant to an AGU arrangement or a QSR agreement,
subparagraphs (e) (2) (N) is mandatory.
(AA) If the transaction between the Sell Side OEID and the
Reporting Member is reported pursuant to an AGU arrangement or a QSR
agreement, subparagraphs (e) (2) (U) and (V) are mandatory.
(f) Trade Report Modifiers
(1) Reporting Members shall append the following trade report
modifiers to a last sale report if applicable:
(A) .SLD, if the trade is executed during normal market hours and
it is reported later than 90 seconds after execution;
(B) .SNN, if the trade is a Seller's Option Trade, .NN denotes the
number of days for delivery;
(C) .C, if the trade is a Cash Trade;
(D) .ND, if the trade is a Next Day Trade;
(E) .W, if the trade occurs at a price based on an average
weighting or another special pricing formula;
(F) .T, if the trade is executed outside of normal market hours;
(G) .O, if the trade is price beyond certain price validation
parameters as established by the NASD; and
(H) Any other trade report modifier approved for use by the
Securities and Exchange Commission.
(2) It will be a violation of this Rule for a Reporting Member to
fail to append a required trade modifier or to append a modifier that
is not required.
(3) A Reporting Member shall not append a .O modifier to a trade
report unless the trade price is beyond certain price validation
parameters as established by the NASD.
(4) The Association seeks to emphasize the obligations of members
to report securities transactions within 90 seconds after execution.
All reportable transactions not reported within 90 seconds after
execution shall be reported as late, and the Association routinely
monitors members' compliance with the 90 second requirement. If the
Association finds a pattern or practice of unexcused late reporting,
that is, repeated reports of executions after 90 seconds without
reasonable justification or exceptional circumstances, the member may
be found to be in violation of Rule 2110.
[[Page 440]]
Exceptional circumstances will be determined on a case by case basis
and may include instances of system failure by a member or service
bureau, or unusual market conditions, such as extreme volatility in a
security, or in the market as a whole. Timely reporting of all
transactions is necessary and appropriate for the fair and orderly
operation of the Association's marketplace, and the Association will
view noncompliance as a rule violation.
(g) Procedures for Reporting Price and Volume
Members that are required to report pursuant to paragraph (b) above
shall transmit last sale reports for all purchases and sales in
eligible securities in the following manner:
(1) For agency transactions, report the number of shares and the
price excluding the commission charged.
Example:
SELL as agent 100 shares at 40 less a commission of $12.50; REPORT
100 shares at 40.
(2) For dual agency transactions, report the number of shares only
once, and report the price excluding the commission charged.
Example:
SELL as agent 100 shares at 40 less a commission of $12.50; BUY as
agent 100 shares at 40 plus a commission of $12.50; REPORT 100 shares
at 40.
(3) (A) For principal transactions, except as provided below,
report each purchase and sale transaction separately and report the
number of shares and the price. For principal transactions that are
executed at a price that includes a mark-up, mark-down or service
charge, the price reported shall exclude the mark-up, mark-down or
service charge.
Example:
BUY as principal 100 shares from another member at 40 (no mark-down
included).
REPORT 100 shares at 40.
Example:
BUY as principal 100 shares from a customer at 39\3/4\, which
includes a \1/8\ mark-down from prevailing market of 39\7/8\; REPORT
100 shares at 39\7/8\.
Example
BUY as principal 100 shares from a customer at 39.75, which
includes a $0.10 mark-down from prevailing market at $39.85; REPORT 100
shares at 39.85.
Example:
SELL as principal 100 shares to a customer at 40\1/8\, which
includes a \1/8\ mark-up from the prevailing market of 40; REPORT 100
shares at 40.
Example:
SELL as principal 100 shares to a customer at 40.10, which includes
a .10 mark-up from the prevailing market of 40;
REPORT 100 shares at 40.
(B) Exception: A ``riskless'' principal transaction in which a
member, after having received from a customer an order to buy,
purchases the security as principal from another member or customer to
satisfy the order to buy or, after having received from a customer an
order to sell, sells the security as principal to another member or
customer to satisfy the order to sell, shall be reported as one three
party transaction in the same manner as an agency transaction,
excluding the mark-up or mark-down, commission-equivalent, or other
fee. Alternatively, a member may report a riskless principal
transaction by submitting the following report(s) to the NASD:
(i) The member with the obligation to report the transaction
pursuant to paragraph (b) above must submit a last sale report for the
initial leg of the transaction.
(ii) Regardless of whether a member has a reporting obligation
pursuant to paragraph (b) above, the firm must submit, for the
offsetting, ``riskless'' portion of the transaction, either:
a. a clearing-only report with a capacity indicator of ``riskless
principal,'' if a clearing report is necessary to clear the
transaction; or
b. a non-tape, non-clearing report with a capacity indicator of
``riskless principal,'' if a clearing report is not necessary to clear
the transaction.
A riskless principal transaction in which a member purchases or
sells the security on an exchange to satisfy a customer's order will be
reported by the exchange and the member shall not report.
Example:
BUY as principal 100 shares from another member at 40 to fill an
existing order;
SELL as principal 100 shares to a customer at 40 plus mark-up of
$12.50;
REPORT 100 shares at 40 by submitting to the NASD either a single
trade report marked with a ``riskless principal'' capacity indicator or
by submitting the following reports:
(1) Where required by this Rule, a tape report marked with a
``principal'' capacity indicator; and
(2) either a non-tape, non-clearing report or a clearing-only
report marked with a ``riskless principal'' capacity indicator.
Example:
BUY as principal 100 shares on an exchange at 40 to fill an
existing order; SELL as principal 100 shares to a customer at 40 plus a
mark-up of $12.50.
DO NOT REPORT (will be reported by exchange).
(h) Reporting Transactions on Form T
All Reporting NASD Members required (or that elect) to report
transactions in eligible securities to the NASD shall report, as soon
as practicable to NASD Regulation's Market Regulation Department on
Form T, last sale reports of transactions in designated securities for
which electronic submission into the NASD is not possible (e.g., the
ticker symbol for the security is no longer available, a market
participant identifier is no longer active, or the NASD will not accept
the date of execution because the NASD Alternative Display Facility was
closed on that date). Transactions that can be reported into the NASD,
whether on trade date or on a subsequent date on an ``as of'' basis
(T+N), shall not be reported on Form T.
(i) Trade Tickets
All trade tickets for transactions in eligible securities shall be
time-stamped at the time of execution.
(j) Special Trade Indicator
A Reporting Member shall append the designated symbol for special
trades, step out trades, reversals, and as-of trades.
(k) Clearing Indicators
A Reporting Member shall use a designated symbol to denote whether
the trade is to be: (i) Compared in TRACS; (ii) not compared in TRACS;
(iii) compared in TRACS pursuant to an Automatic Give Up Agreement
(``AGU''); or (iv) not compared in TRACS, but locked in pursuant to a
Qualified Service Representation Agreement (``QSR'').
(l) Transactions Not Required To Be Reported
The following types of transactions shall not be reported for
inclusion on the Consolidated Tape:
(1) Transactions executed on an exchange;
(2) odd-lot transactions;
(3) transactions that are part of a primary distribution by an
issuer or of a registered secondary distribution (other than shelf
distributions) or of an unregistered secondary distribution effected
off the floor of an exchange;
(4) transactions made in reliance on Section 4(2) of the Securities
Act of 1933;
(5) transactions where the buyer and seller have agreed to trade at
a price substantially unrelated to the current market for the security,
e.g., to enable the seller to make a gift;
[[Page 441]]
(6) the acquisition of securities by a member as principal in
anticipation of making an immediate exchange distribution or exchange
offering on an exchange;
(7) purchases of securities off the floor of an exchange pursuant
to a tender offer, and
(8) purchases or sales of securities effected upon the exercise of
an option pursuant to the terms thereof or the exercise of any other
right to acquire securities at a pre-established consideration
unrelated to the current market.
Selected Notices to Members: 94-71; 99-66.
6430. Reserved
6440. Trading Practices
(a) No member shall execute or cause to be executed or participate
in an account for which there are executed purchases of any eligible
security at successively higher prices, or sales of any such security
at successively lower prices, for the purpose of creating or inducing a
false, misleading or artificial appearance of activity in such security
or for the purpose of unduly or improperly influencing the market price
for such security or for the purpose of establishing a price that does
not reflect the true state of the market in such security.
(b) No member shall, for the purpose of creating or inducing a
false or misleading appearance of activity in an eligible security or
creating or inducing a false or misleading appearance with respect to
the market in such security:
(1) Execute any transaction in such security which involves no
change in the beneficial ownership thereof; or
(2) enter any order or orders for the purchase of such security
with the knowledge that an order or orders of substantially the same
size, and at substantially the same price, for the sale of any such
security, has been or will be entered by or for the same or different
parties; or
(3) enter any order or orders for the sale of any such security
with the knowledge that an order or orders of substantially the same
size, and at substantially the same price, for the purchase of such
security, has been or will be entered by or for the same or different
parties.
(c) No member shall execute purchases or sales of any eligible
security for any account in which such member is directly or indirectly
interested, which purchases or sales are excessive in view of the
member's financial resources or in view of the market for such
security.
(d) No member shall participate or have any interest, directly or
indirectly, in the profits of a manipulative operation or knowingly
manage or finance a manipulative operation.
(1) Any pool, syndicate or joint account organized or used
intentionally for the purpose of unfairly influencing the market price
of an eligible security shall be deemed to be a manipulative operation.
(2) The solicitation of subscriptions to or the acceptance of
discretionary orders from any such pool, syndicate or joint account
shall be deemed to be managing a manipulative operation.
(3) The carrying on margin of a position in such securities or the
advancing of credit through loans to any such pool, syndicate or joint
account shall be deemed to be financing a manipulative operation.
(e) No member shall make any statement or circulate and disseminate
any information concerning any eligible security that such member knows
or has reasonable grounds for believing is false or misleading or would
improperly influence the market price of such security.
(f) (1) No member shall:
(A) Personally buy or initiate the purchase of an eligible security
for its own account or for any account in which it or any person
associated with it is directly or indirectly interested, while such
member holds or has knowledge that any person associated with it holds
an unexecuted market order to buy such security in the unit of trading
for a customer; or
(B) sell or initiate the sale of any such security for any such
account, while it personally holds or has knowledge that any person
associated with it holds an unexecuted market order to sell such
security in the unit of trading for a customer.
(2) No member shall:
(A) Buy or initiate the purchase of any eligible security for any
such account, at or below the price at which it personally holds or has
knowledge that any person associated with it holds an unexecuted
limited price order to buy such security in the unit of trading for a
customer; or
(B) sell or initiate the sale of any eligible security for any such
account at or above the price at which it personally holds or has
knowledge that any person associated with it holds an unexecuted
limited price order to sell such security in the unit of trading for a
customer.
(3) The provisions of this paragraph shall not apply:
(A) To any purchase or sale of any eligible security in an amount
less than the unit of trading made by a member to offset odd-lot orders
for customers,
(B) to any purchase or sale of any eligible security upon terms for
delivery other than those specified in such unexecuted market or
limited price order,
(C) to any unexecuted order that is subject to a condition that has
not been satisfied.
(g) No member or person associated with a member shall, directly or
indirectly, hold any interest or participation in any joint account for
buying or selling an eligible security, unless such joint account is
promptly reported to NASD. The report should contain the following
information for each account:
(1) Name of the account, with names of all participants and their
respective interests in profits and losses;
(2) a statement regarding the purpose of the account;
(3) name of the member carrying and clearing the account; and
(4) a copy of any written agreement or instrument relating to the
account.
(h) No member shall offer that a transaction or transactions to buy
or sell an eligible security will influence the closing transaction on
the Consolidated Tape.
(i)(1) A member may, but is not obligated to, accept a stop order
in an eligible security.
(A) A buy stop order is an order to buy that becomes a market order
when a transaction takes place at or above the stop price.
(B) A sell stop order is an order to sell that becomes a market
order when a transaction takes place at or below the stop price.
(2) A member may, but is not obligated to, accept stop limit orders
in eligible securities. When a transaction occurs at the stop price,
the stop limit order to buy or sell becomes a limit order at the limit
price.
(j) No member or person associated with a member shall execute or
cause to be executed, directly or indirectly, an over-the-counter
transaction in a security subject to an initial public offering until
such security has first opened for trading on the national securities
exchange listing the security, as indicated by the dissemination of an
opening transaction in the security by the listing exchange via the
Consolidated Tape.
6450. Eligible Securities
Transactions required to be reported on the Consolidated Tape
(eligible securities) include all common stocks, preferred stocks,
long-term warrants, and rights entitling the holder to acquire an
eligible security, listed on the American Stock Exchange and/or the
[[Page 442]]
New York Stock Exchange and the following securities listed on regional
stock exchanges.
------------------------------------------------------------------------
Symbol Security
------------------------------------------------------------------------
ALK$...................................... Alaska Airlines $2.77 Pfd.
ADN....................................... Alden Electronic
AFI$D..................................... Amer. Financial Corp. Pfd.D
AFI$E..................................... Amer. Financial Corp. Pfd.E
AFI$F..................................... Amer. Financial Corp. Pfd.F
AFI$G..................................... Amer. Financial Corp. Pfd.G
AFI$H..................................... Amer. Financial Corp. Pfd.H
BPP....................................... Ballys Park Place
BSI....................................... Bastian Inds., Inc.
BSI$...................................... Bastian Inds., Inc. $1.00
Pfd
BBM....................................... Berkeley Bio Medical
CSW....................................... Canada Southern Petroleum
CNO....................................... Casco Northern Corp.
CJI....................................... Central Jersey Industries
CTE....................................... Columbia Chase Corp.
DCT....................................... DC Trading Development Corp.
EDG....................................... Enterprise Devel. Group,
Inc.
GEO....................................... Geothermal Resources
GLR....................................... Grolier Inc.
HWK....................................... Hardwicke Companies, Inc.
MOD....................................... Modine Manufacturing Company
OKC....................................... OKC Limited Partnership
OGS....................................... O's Gold Seed Company
PRI....................................... Pacific Resources
PJH....................................... Piper Jaffray, Inc.
PRB....................................... Provident Bancorp, Inc.
REL.Z..................................... Reliance Group 87 Wts.
SOU$A..................................... Southern Cal Gas 6% A Pfd.
SOU$Q..................................... Southern Cal Gas 6% Pfd.
SYN$B..................................... Syntex Corp. Pfd.B
TEP$...................................... Tucson Elec. Power Pfd.
UTC....................................... United Canso Oil and Gas
WH........................................ White Motor Corporation
------------------------------------------------------------------------
Selected Notices to Members: 85-27, 87-12, 93-9, 93-25.
* * * * *
6600. REPORTING TRANSACTIONS IN [OVER-THE-COUNTER EQUITY] NON-
EXCHANGE-LISTED SECURITIES
This Rule 6600 Series sets forth the trade reporting requirements
applicable to members' transactions in equity securities effected
otherwise than on an exchange for which real-time trade reporting is
not otherwise required (hereinafter referred to as ``non-exchange-
listed securities [OTC Equity Securities]''). Members shall [utilize]
use the Automated Confirmation Transaction (ACT) for trade reporting in
non-exchange-listed securities [OTC Equity Securities].
Those members effecting transactions otherwise than on an exchange
in non-exchange-listed securities shall have in place contractual
agreements with Nasdaq to use ACT for trade reporting. Members who use
ACT to compare trades must comply with the applicable Nasdaq trade
comparison rules. Members should refer to the Nasdaq rules for the
specific rules that govern trade comparison through ACT.
6610. Definitions
(a) Terms used in this Rule shall have the same meaning as those
defined in the Association's By-Laws and Rules unless otherwise
specified herein.
(b) ``Automated Confirmation Transaction Service'' or ACT is the
Nasdaq service that, among other things, accommodates reporting and
dissemination of last sale reports in non-exchange-listed securities
[OTC Equity Securities]. Regarding those non-exchange-listed securities
[OTC Equity Securities] that are not eligible for clearance and
settlement through the facilities of the National Securities Clearing
Corporation, the ACT comparison function will not be available.
However, ACT will support the entry and dissemination of last sale data
on such securities.
(c) ``Non-Market Maker'' means a member of the Association that is
not an OTC Market Maker with respect to a particular non-exchange-
listed security [OTC Equity Security].
(d) ``Non-exchange-listed security'' [``OTC Equity Security'']
means any equity security that is not traded on any national securities
exchange. [not classified as a ``designated security,'' for purposes of
the Rule 4630 and 4640 Series. This term also includes certain
exchange-listed securities that do not otherwise qualify for real-time
trade reporting because they are not ``eligible securities'' as defined
in Rule 6410(d).] The term ``non-exchange-listed securities'' [``OTC
Equity Security''] shall not include ``restricted securities,'' as
defined by SEC Rule 144(a)(3) under the Securities Act of 1933, nor any
securities designated in the PORTAL Market, the Rule [5300] 6700
Series.
(e) ``OTC Market Maker'' means a member of the Association that
holds itself out as a market maker by entering proprietary quotations
or indications of interest for a particular non-exchange-listed
security [OTC Equity Security] in any inter-dealer quotation system,
including any system that the Commission has qualified pursuant to
Section 17B of the Act. A member is an OTC Market Maker only in those
non-exchange-listed securities [OTC Equity Securities] in which it
displays market making interest via an inter-dealer quotation system.
6620. Transaction Reporting
(a) When and How Transactions are Reported
(1) OTC Market Makers shall, within 90 seconds after execution,
transmit through ACT last sale reports of transactions in non-exchange-
listed securities [OTC Equity Securities] executed during normal market
hours. Transactions not reported within 90 seconds after execution
shall be designated as late.
(2) Non-Market Makers shall, within 90 seconds after execution,
transmit through ACT or the Nasdaq ACT service desk (if qualified
pursuant to Rule 7010(i)), or if ACT is unavailable due to system or
transmission failure, by telephone to the Nasdaq Market Operations
Department, last sale reports of transactions in non-exchange-listed
securities [OTC Equity Securities] executed during normal market hours.
Transactions not reported within 90 seconds after execution shall be
designated as late.
(3) Transaction Reporting Outside Normal Market Hours
(A) Last sale reports of transactions in Non-exchange-listed
securities [OTC Equity Securities] executed between 8:00 a.m. and 9:30
a.m. Eastern Time shall be transmitted through ACT within 90 seconds
after execution and shall be designated as ``.T'' trades to denote
their execution outside normal market hours. Last sale reports of
transactions in non-exchange-listed securities [OTC Equity Securities]
executed between the hours of 4:00 p.m. and 5:15 p.m. Eastern Time
shall also be transmitted through the NASD [ACT] within 90 seconds
after execution; trades executed and reported after 4:00 p.m. Eastern
Time shall be designated as ``.T'' to denote their execution outside
normal market hours. Transactions not reported within 90 seconds must
include the time of execution on the trade report.
(B) Last sale reports of transactions in non-exchange-listed
securities [OTC Equity Securities] executed outside the hours of 8:00
a.m. and 5:15 p.m. Eastern Time shall be reported as follows:
(i) Last sale reports of transactions in American Depository
Receipts (ADRs), Canadian issues, or domestic non-exchange-listed
securities [OTC Equity Securities] that are executed between midnight
and 8:00 a.m. Eastern Time shall be transmitted through ACT between
8:00 a.m. and 9:30 a.m. Eastern Time on trade date, be designated as
``.T'' trades to denote their execution outside normal market hours,
and be accompanied by the time of execution. The party responsible for
reporting on trade date, the trade details to be reported, and the
applicable procedures shall be governed, respectively, by paragraphs
(b), (c), and (d) below;
(ii) Last sale reports of transactions in ADRs, Canadian issues, or
domestic non-exchange-listed securities [OTC Equity Securities] that
are executed between 5:15 p.m. and midnight Eastern
[[Page 443]]
Time shall be transmitted through ACT on the next business day (T+1)
between 8:00 a.m. and 5:15 p.m. Eastern Time, be designated ``as/of''
trades to denote their execution on a prior day, and be accompanied by
the time of execution. The party responsible for reporting on T+1, the
trade details to be reported, and the applicable procedures shall be
governed, respectively, by paragraphs (b), (c), and (d) below; and
(iii) Last sale reports of transactions in foreign securities
(excluding ADRs and Canadian issues) shall be transmitted through ACT
on T+1 regardless of time of execution. Such reports shall be made
between 8:00 a.m. and 1:30 p.m. Eastern Time in the same manner as
described in subparagraph (3)(B)(ii) above.
(4) All members shall report as soon as practicable to the Market
[Surveillance] Regulation Department on Form T, last sale reports of
transactions in non-exchange-listed securities [OTC Equity Securities]
for which electronic submission into ACT is not possible (e.g., the
ticker symbol for the security is no longer available or a market
participant identifier is no longer active). Transactions that can be
reported into ACT, whether on trade date or on a subsequent date on an
``as of'' basis (T+N), shall not be reported on Form T.
(5) A pattern or practice of late reporting without exceptional
circumstances may be considered conduct inconsistent with high
standards of commercial honor and just and equitable principles of
trade, in violation of Rule 2110.
(6) All members shall append a trade report modifier as designated
by the Association to transaction reports that reflect a price
different from the current market when the execution is based on a
prior reference point in time, which shall be accompanied by the prior
reference time.
(b) Which Party Reports Transaction
(1) In a transaction[s] between two OTC Market Makers, only the
member representing the sell side shall report the transaction.
(2) In a transaction[s] between an OTC Market Maker and a Non-
Market Maker, only the OTC Market Maker shall report the transaction.
(3) In a transaction[s] between two Non-Market Makers, only the
member representing the sell side shall report the transaction.
(4) In a transaction[s] between a member and a customer, the member
shall report the transaction.
(c) Information To Be Reported
Each last sale report shall contain the following information:
(1) Symbol of the non-exchange-listed security [OTC Equity
Security];
(2) Number of shares;
(3) Price of the transaction as required by paragraph (d) below;
and
(4) A symbol indicating whether the transaction is a buy, sell, or
cross.
(d) Procedures for Reporting Price and Volume
Members that are required to report pursuant to paragraph (b) above
shall transmit last sale reports for all purchases and sales in non-
exchange-listed securities [OTC Equity Securities] in the following
manner:
(1) For agency transactions, report the number of shares and the
price excluding the commission charged.
(2) For dual agency transactions, report the number of shares only
once, and report the price excluding the commission charged.
(3) (A) For principal transactions, except as provided in
subparagraph (B) hereof, report each purchase and sale transaction
separately and report the number of shares and the price. For principal
transactions that are executed at a price [which] that includes a mark-
up, mark-down or service charge, the price reported shall exclude the
mark-up, mark-down or service charge. Such reported price shall be
reasonably related to the prevailing market, taking into consideration
all relevant circumstances including, but not limited to, market
conditions with respect to the non-exchange-listed securities [OTC
Equity Security], the number of shares involved in the transaction, the
published bids and offers with size displayed in any inter-dealer
quotation system at the time of the execution (including the reporting
firm's own quotation), the cost of execution and the expenses involved
in clearing the transaction.
(B) Exception: A ``riskless'' principal transaction in which a
member, after having received an order to buy a security, purchases the
security as principal at the same price to satisfy the order to buy or,
after receiving an order to sell, sells the security as principal at
the same price to satisfy the order to sell, shall be reported as one
transaction in the same manner as an agency transaction, excluding the
mark-up or mark-down, commission-equivalent, or other fee.
(e) Transactions Not Required To Be Reported
The following types of transactions shall not be reported:
(1) Transactions [which] that are part of a primary distribution by
an issuer or a registered secondary distribution (other than ``shelf
distributions'') or of an unregistered secondary distribution;
(2) Transactions made in reliance on Section 4(2) of the Securities
Act of 1933;
(3) Transactions where the buyer and seller have agreed to trade at
a price substantially unrelated to the current market for the security;
(4) Purchases or sales of securities effected upon the exercise of
an option pursuant to the terms thereof or the exercise of any other
right to acquire securities at a pre-established consideration
unrelated to the current market.
* * * * *
[6700. REPORTING TRANSACTIONS IN NON-NASDAQ SECURITIES]
[6710. Definitions]
[For the purposes of this Rule 6700 Series, unless the context
requires otherwise:]
[(a) ``Issuer,'' in the case of quotations for American Depository
Receipts (ADRs), shall mean the issuer of the deposited shares
represented by such ADRs.]
[(b) ``Non-Nasdaq Reporting System'' means the electronic price and
volume reporting system operated by the Association for non-Nasdaq
securities.]
[(c) ``Non-Nasdaq security'' means any equity security that is
neither included in The Nasdaq Stock Market nor traded on any national
securities exchange. For purposes of Rules 6720 and 6730 of this
Series, the term ``non-Nasdaq security'' shall also mean any Nasdaq
security, if transactions in that security are effected by market
makers that are not registered Nasdaq market makers pursuant to Rule
4611, and any security listed on an exchange, if transactions are
required to be reported pursuant to the Rule 6400 Series.]
[(d) ``Priced entry'' shall mean a quotation consisting of a bid,
offer, or both at a specified price.]
[(e) ``Quotation'' shall mean any bid or offer at a specified price
with respect to a non-Nasdaq security, or any indication of interest by
a broker or dealer in receiving bids or offers from others for such a
security, or any indication by a broker or dealer that it wishes to
advertise its general interest in buying or selling a particular non-
Nasdaq security.]
[(f) ``Quotation medium'' means any inter-dealer quotation system
(except for the PORTAL Market) or any publication or electronic
communications network or other device that is used by brokers
[[Page 444]]
or dealers to make known to others their interest in transactions in
any non-Nasdaq security, including offers to buy or sell at a stated
price or otherwise, or invitations of offers to buy or sell.]
[6720. Price and Volume Reporting]
[(a) Each member shall report through the Non-Nasdaq Reporting
System the following information on all principal transactions in non-
Nasdaq securities:]
[(1) The highest price at which it sold and the lowest price at
which it purchased each non-Nasdaq security;]
[(2) the total volume of purchases and sales executed by it in each
non-Nasdaq security; and]
[(3) whether the trades establishing the highest price at which the
member sold and the lowest price at which the member purchased the
security represented an execution with a customer or with another
broker/dealer. The price to be reported for principal sales and
purchases from customers shall be inclusive of mark-up or mark-down.]
[(b) Members shall report the price and volume information required
by paragraph (a) of this Rule through the Non-Nasdaq Reporting System
between the hours of 4 p.m. and 6:30 p.m. Eastern Time on the trade
date or between 7:30 a.m. and 9 a.m. Eastern Time on the next business
day, or at such other time as determined by the Association.]
[(c) The reporting requirements contained in paragraphs (a) and (b)
of this Rule shall not apply to any non-Nasdaq security for which
members are required to report individual transactions pursuant to the
Rule 6600 Series.]
[6730. Automated Submission of Trade Data]
[RESERVED FOR FUTURE USE. REDESIGNATED AS 8213 BY SR-NASD-97-81
EFF. JAN. 16, 1998.]
6630[6740]. Submission of Rule 15c2-11 Information on [Non-Nasdaq]
Non-Exchange-Listed Securities
(a) Except as provided in SEC Rule 15c2-11(f)(1), (2), (3) and (5)
under the Act, no member shall initiate or resume the quotation of a
non-exchange-listed [Nasdaq] security in any quotation medium unless
the member has demonstrated compliance with this Rule and the
applicable requirements for information maintenance under Rule 15c2-11.
A member shall demonstrate compliance by making a filing with, and in
the form required by, the Association, which filing must be received at
least three business days before the member's quotation is published or
displayed in the quotation medium.
(b) The information to be filed shall contain one copy of all
information required to be maintained under SEC Rule 15c2-11(a)(1),
(2), (3)(iii), (4)(ii), or (5), including any information that may be
required by future amendments thereto. In addition, this filing shall
identify the issuer, the issuer's predecessor in the event of a merger
or reorganization within the previous 12 months, the type of non-
exchange-listed [Nasdaq] security to be quoted (e.g., ADR, warrant,
unit, or common stock), the quotation medium to be used, the member's
initial or resumed quotation, and the particular subsection of Rule
15c2-11 with which the member is demonstrating compliance.
Additionally, if a member is initiating or resuming quotation of a non-
exchange-listed [Nasdaq] security with a priced entry, the member's
filing must specify the basis upon which that priced entry was
determined and the factors considered in making that determination.
(c) If a member's initial or resumed quotation does not include a
priced entry, a member shall supplement its prior filing under this
Rule, in the form required by the Association, before inserting a
priced entry for the affected non-exchange-listed [Nasdaq] security in
a quotation medium. The supplemental filing shall specify the basis
upon which the proposed priced entry was determined and the factors
considered in making that determination. The supplemental filing must
be received by the Association at least three business days before the
member's priced entry first appears in a quotation medium.
(d) No Change.
6640. Limit Order Protection
(a) Members shall be prohibited from ``trading ahead'' of customer
limit orders that a member accepts in non-exchange-listed securities
quoted on a quotation medium. Members handling customer limit orders,
whether received from their own customers or from another member, are
prohibited from trading at prices equal or superior to that of the
customer limit order without executing the limit order. Members are
under no obligation to accept limit orders from any customer.
(b) Members may avoid the obligation specified in paragraph (a)
through the provision of price improvement. If a customer limit order
is priced at or inside the current inside spread, however, the price
improvement must be for a minimum of the lesser of $0.01 or one-half
(\1/2\) of the current inside spread. For purposes of this rule, the
inside spread shall be defined as the difference between the best
reasonably available bid and offer in the subject security.
(c) Notwithstanding subparagraph (a) of this rule, a member may
negotiate specific terms and conditions applicable to the acceptance of
limit orders only with respect to such orders that are:
(1) For customer accounts that meet the definition of an
``institutional account'' as that term is defined in Rule 3110(c)(4);
or
(2) for 10,000 shares or more, and greater than $200,000 in value.
(d) Contemporaneous trades.
A member that trades through a held limit order must execute such
limit order contemporaneously, or as soon as practicable, but in no
case later than five minutes after the member has traded at a price
more favorable than the customer's price.
(e) Application.
(1) This rule shall apply only to non-exchange-listed securities
specifically identified as such on the NASD website.
(2) This rule shall apply from 9:30 a.m. to 4:00 p.m. Eastern Time.
(3) This rule shall be in effect until February 8, 2002.
[67]6650. Minimum Quotation Size Requirements For [OTC] Non-
Exchange-Listed Equity Securities
[(a)] Every member firm that functions as a market maker in [OTC]
Non-Exchange-Listed 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.
------------------------------------------------------------------------
Minimum
Price (bid or offer) quote size
------------------------------------------------------------------------
0-.50*..................................................... 5,000
.51-1.00................................................... 2,500
1.01-10.00................................................. 500
10.01-100.00............................................... 200
100.01-200.00.............................................. 100
200.01-+................................................... 50
------------------------------------------------------------------------
[[Page 445]]
An [Nasdaq] NASD 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) For purposes of this Rule, the term ``OTC Equity Security''
means any equity security not classified as a ``designated security''
for purposes of the Rule 4630 and 4640 Series, or as an ``eligible
security,'' for purposes of the Rule 6400 Series. The term does not
include ``restricted securities,'' as defined by SEC Rule 144(a)(3)
under the Securities Act of 1933, nor any securities designated in the
PORTAL Market.SM]
* * * * *
6900. REPORTING TRANSACTIONS IN DIRECT PARTICIPATION PROGRAMS
All secondary market transactions by members in Direct
Participation Program securities other than transactions executed on a
registered national securities exchange [or through Nasdaq] shall be
reported to the Association in accordance with the procedures set forth
below. All trade tickets shall be time-stamped at the time of
execution.
* * * * *
6920. Transaction Reporting
(a) through (d) No Changes.
(e) Transactions Not Required To Be Reported
The following transactions are not required to be reported under
the foregoing procedures:
(1) through (2) No Changes.
(3) Transactions executed on a registered national securities
exchange [or through Nasdaq].
* * * * *
7000. CHARGES FOR SERVICES AND EQUIPMENT--TO BE DETERMINED
* * * * *
8200. INVESTIGATIONS
8210. No Change.
[8212. Automated Submission of Trading Data for the Nasdaq
International Service Requested by the Association] Reserved
[(a) Every Association member and approved affiliate that
participates in the Nasdaq International Service as defined in the Rule
5100 Series (``Nasdaq International'') as a Service market maker or an
order-entry firm shall submit to the Association the trade data
specified below in automated format as may be prescribed by the
Association from time to time. This information shall be supplied with
respect to any transaction or transactions that are the subject of a
request for information made by the Association. In this rule the terms
``participating firm'' and ``firm'' include both Association members
and approved affiliates that utilize the Service.]
[(b) If the transaction was a proprietary transaction effected or
caused to be effected by the participating firm for any account in
which such firm, or person associated with the firm, is directly or
indirectly interested, the participating firm shall submit or cause to
be submitted the following information:]
[(1) Clearing house number, or alpha symbol as used by the
participating firm submitting the data;]
[(2) Clearing house number(s), or alpha symbol(s) as may be used
from time to time, of the participating firm on the opposite side of
the transaction;]
[(3) Identifying symbol assigned to the security;]
[(4) Date transaction was executed;]
[(5) Number of shares, ADRs, units, warrants or rights for each
specific transaction and whether each transaction was a purchase, sale
or short sale;]
[(6) Transaction price;]
[(7) Account number; and]
[(8) Market center where transaction was executed.]
[(c) If the transaction was effected or caused to be effected by
the participating firm for any customer account, such firm shall submit
or cause to be submitted the following information:]
[(1) The data described in subparagraphs (b)(1) through (8);]
[(2) Customer name, address(es), branch office number, registered
representative number, whether order was solicited or unsolicited, date
account opened and employer name, and the tax identification number(s);
and]
[(3) If the transaction was effected for another Association member
or participating firm, whether the other party was acting as principal
or agent on the transaction or transactions that are the subject of the
Association's request.]
[(d) In addition to the above trade data, a participating firm
shall submit such other information in such automated format as may
from time to time be required by the Association.]
[(e) Pursuant to the Rule 9600 Series, the Association may exempt a
person from the requirement that the data prescribed in paragraphs (b)
through (d) above be submitted to the Association in an automated
format for good cause shown.]
8213. Automated Submission of Trading Data for Non-Exchange-Listed
[Nasdaq] Securities Requested by the Association
Each member shall submit trade data specified in Rule 8211 in
automated format as may be prescribed by the Association from time to
time with respect to any transaction or transactions involving non-
exchange-listed [Nasdaq] securities as defined in the Rule [6700]6600
Series that are the subject of a request for information made by the
Association. Pursuant to the Rule 9600 Series, the Association may
exempt a member from the requirement that the data prescribed in
paragraphs (b) through (d) of Rule 8211 be submitted to the Association
in an automated format for good cause shown.
* * * * *
9000. CODE OF PROCEDURE
9100. APPLICATION AND PURPOSE
9110. Application
(a) through (b) No Change.
(c) Incorporation of Defined Terms and Cross References
Unless otherwise provided, terms used in the Rule 9000 Series shall
have the meaning as defined in Rule 0120 and Rule 9120. References
within the Rule 9000 Series to Association offices or departments refer
to offices so designated by the NASD[,] or NASD Regulation [or Nasdaq].
* * * * *
9120. Definitions
(a) through (r) No Change.
(s) ``Market Regulation Committee''
The term ``Market Regulation Committee'' means the committee of
NASD Regulation designated to consider the federal securities laws and
the rules and regulations adopted thereunder and various Rules of the
Association and policies relating to:
(1) through (3) No Change.
(4) trading practices, including rules prohibiting manipulation and
insider trading, and those Rules designated as Trading Rules (Rule 3300
Series), [the Nasdaq Stock Market Rules] the NASD Alternative Display
Facility Rules (Rule 4000 Series), other [Nasdaq and] NASD [Market]
Reporting Facility Rules (Rule 5000 Series), NASD Systems and Programs
Rules (Rule 6000 Series), and Charges for Services and Equipment Rules
(Rule 7000 Series).
(t) through (cc) No Change.
* * * * *
[[Page 446]]
9160. Recusal or Disqualification
No person shall participate as an Adjudicator in a matter governed
by the Code as to which he or she has a conflict of interest or bias,
or circumstances otherwise exist where his or her fairness might
reasonably be questioned. In any such case the person shall recuse
himself or herself, or shall be disqualified as follows:
(a) through (c) No Change.
(d) Rule 9514 Hearing Panel
The NASD Regulation Board [or Nasdaq Board] shall have authority to
order the disqualification of a member of a Hearing Panel appointed by
such Board under Rule 9514(b);
(e) through (g) No Change.
* * * * *
9230. Appointment of Hearing Panel, Extended Hearing Panel
9231. Appointment by the Chief Hearing Officer of Hearing Panel or
Extended Hearing Panel
(a) No Change.
(b) Hearing Panel
The Hearing Panel shall be composed of a Hearing Officer and two
Panelists, except as provided in Rule 9234 (a), (c), (d), or (e). The
Hearing Officer shall serve as the chair of the Hearing Panel. Each
Panelist shall be associated with a member of the Association or
retired therefrom.
(1) Except as provided in (2), the Chief Hearing Officer shall
select as a Panelist a person who:
(A) through (C) No Change.
(D) previously served as a Director[, a director of the Nasdaq
Board of Directors,] or a Governor, but does not serve currently in any
of these positions.
(2) No Change.
(c) through (d) No Change.
* * * * *
9500. OTHER PROCEEDINGS
9510. Summary and Non-Summary Proceedings
9511. No Change
9512. Initiation of Summary Proceeding
(a) Authorization
(1) No Change.
(2) The NASD Board may authorize the President of NASD Regulation
[or the President of Nasdaq] to issue on a case-by-case basis a written
notice that summarily limits or prohibits any person with respect to
access to services offered by the Association if paragraph (a)(1)
applies to such person or, in the case of a person who is not a member,
if the NASD Board determines that such person does not meet the
qualification requirements or other prerequisites for such access and
such person cannot be permitted to continue to have such access with
safety to investors, creditors, members, or the Association.
(b) through (c) No Change.
* * * * *
9514. Hearing and Decision
(a) No Change.
(b) Designation of Party for the Association and Appointment of Hearing
Panel
If a member, associated person, or other person subject to a notice
under Rule 2210, 2220, 9512, or 9513 files a written request for a
hearing, an appropriate department or office of the Association shall
be designated as a Party in the proceeding, and a Hearing Panel shall
be appointed.
[(1)] If the President of NASD Regulation or NASD Regulation staff
issued the notice initiating the proceeding under Rule 2210, 2220,
9512(a), or 9513(a), the President of NASD Regulation shall designate
an appropriate NASD Regulation department or office as a Party. For
proceedings initiated under Rule 9513(a) concerning failure to comply
with an arbitration award or a settlement agreement related to an NASD
arbitration or mediation, the Chief Hearing Officer shall appoint a
Hearing Panel composed of a Hearing Officer. For any other proceedings
initiated under Rule 2210, 2220, 9512(a), or 9513(a) by the President
of NASD Regulation or NASD Regulation staff, the NASD Regulation Board
shall appoint a Hearing Panel composed of two or more members; one
member shall be a Director of NASD Regulation, and the remaining member
or members shall be current or former Directors of NASD Regulation or
Governors. The President of NASD Regulation may not serve on a Hearing
Panel.
[(2) If the President of Nasdaq or Nasdaq staff issued the notice
under Rule 9512(a) or 9513(a), the President of Nasdaq shall designate
an appropriate Nasdaq department or office as a Party, and the Nasdaq
Board shall appoint a Hearing Panel. The Hearing Panel shall be
composed of two or more members. One member shall be a director of
Nasdaq, and the remaining member or members shall be current or former
directors of Nasdaq or Governors. The President of Nasdaq may not serve
on the Hearing Panel.]
(c) through (e) No Change.
(f) Hearing Panel Consideration
(1) through (4) No Change.
(5) Custodian of the Record
If the President of NASD Regulation or NASD Regulation staff
initiated the proceeding under Rule 2210, 2220, 9512, or 9513, the
Office of the General Counsel of NASD Regulation shall be the custodian
of the record, except that the Office of Hearing Officers shall be the
custodian of record for proceedings initiated under Rule 9513(a)
concerning failure to comply with an arbitration award or a settlement
agreement related to an NASD arbitration or mediation. [If the
President of Nasdaq or Nasdaq staff initiated the proceeding under Rule
9512 or 9513, the Office of the General Counsel of Nasdaq shall be the
custodian of the record.]
(6) No Change.
(g) No Change.
* * * * *
9700. PROCEDURES ON GRIEVANCES CONCERNING THE AUTOMATED SYSTEMS
9710. Purpose
The purpose of this Rule 9700 Series is to provide, where
justified, redress for persons aggrieved by the operations of any
automated quotation, execution, or communication system owned or
operated by the Association, or any subsidiary thereof, and approved by
the Commission, not otherwise provided for by the Code of Procedure as
set forth in the Rule 9000 Series, the Uniform Practice Code as set
forth in the Rule 11000 Series.[, or the Procedures for Review of
Nasdaq Listing Determinations as set forth in the Rule 4800 Series.]
9720. Form of Application
All applications shall be in writing, and shall specify in
reasonable detail the nature of and basis for the redress requested. If
the application consists of several allegations, each allegation shall
be stated separately. All applications must be signed and shall be
directed to the NASD [Nasdaq].
* * * * *
9730. Request for Hearing
Upon request, the applicant shall be granted a hearing after
reasonable notice. In the absence of such request for a hearing,
[Nasdaq] the NASD may, in its discretion, have any application set down
for hearing or consider the matter on the basis of the application and
supporting documents.
* * * * *
9760. Reserved [Review by the Nasdaq Listing and Hearing Review
Council]
[The decision shall be subject to review by the Nasdaq Listing and
[[Page 447]]
Hearing Review Council on its own motion within 45 calendar days after
issuance of the written decision. Any such decision shall also be
subject to review upon application of any person aggrieved thereby,
filed within 15 calendar days after issuance. The institution of a
review, whether on application or on the initiative of the Nasdaq
Listing and Hearing Review Council, shall not operate as a stay of the
decision.]
* * * * *
9770. Reserved [Findings of the Nasdaq Listing and Hearing Review
Council on Review]
[Upon consideration of the record, and after such further hearings
as it shall order, the Nasdaq Listing and Hearing Review Council shall
affirm, modify, reverse, dismiss, or remand the decision. The Nasdaq
Listing and Hearing Review Council shall set forth specific grounds
upon which its determination is based.]
* * * * *
9780. Reserved [Discretionary Review by the Board]
[Determinations of the Nasdaq Listing and Hearing Review Council
may be reviewed by the NASD Board of Governors solely upon the request
of one or more Governors not later than the NASD Board meeting next
following the Nasdaq Listing and Hearing Review Council's decision but
which is 15 calendar days or more following the decision of the Nasdaq
Listing and Hearing Review Council. Notwithstanding the preceding
sentence, the NASD Board may determine it is advisable to call for
review any decision of the Nasdaq Listing and Hearing Review Council
within the 15 calendar day period following the decision of the Nasdaq
Listing and Hearing Review Council. Such review, which may be
undertaken solely at the discretion of the Board, shall be in
accordance with resolutions of the Board governing the review of Nasdaq
Listing and Hearing Review Council determinations. The Board shall
affirm, modify or reverse the determinations of the Nasdaq Listing and
Hearing Review Council or remand the matter to the Nasdaq Listing and
Hearing Review Council with appropriate instructions. The institution
of discretionary review by the Board shall not operate as a stay of the
decision.]
* * * * *
11300. DELIVERY OF SECURITIES
11310. Book-Entry Settlement
(a) through (c) No Change.
(d) (1) No Change.
(2) A determination under r[R]ules [4310(c)(23) or under the
corresponding rule] of a national securities exchange that a security
depository has included a CUSIP number identifying a security in its
file of eligible issues does not render the security ``depository
eligible'' under this Rule until:
(A) in the case of any new issue distributed by an underwriting
syndicate on or after the date a securities depository system for
monitoring repurchases of distributed shares by the underwriting
syndicate is available, the date of the commencement of trading in such
security on [The Nasdaq Stock Market] the exchange; or
(B) in the case of any new issue distributed by an underwriting
syndicate prior to the date a securities depository system for
monitoring repurchases of distributed shares by the underwriting
syndicate is available where the managing underwriter elects not to
deposit the securities on the date of the commencement of trading in
such security on [The Nasdaq Stock Market] the exchange, such later
date designated by the managing underwriter in a notification submitted
to the securities depository; but in no event more than three (3)
months after the commencement of trading in such security on [The
Nasdaq Stock Market] the exchange.
(e) through (g) No Change.
* * * * *
11500. DELIVERY OF SECURITIES WITH RESTRICTIONS
11580. Transfer of Limited Partnership Securities
(a) Each member [who] that participates in the transfer of limited
partnership securities, as defined in Rule 2810, shall use standard
transfer forms in the same form as set forth in IM-11580. This Rule
shall not apply to limited partnership securities [which] that are
traded on [The Nasdaq Stock Market or] a registered national securities
exchange, or are on deposit in a registered securities depository and
settle regular way.
* * * * *
11800. CLOSE-OUT PROCEDURES
11810. No Change
IM-11810. Sample Buy-In Forms
(a) through (b) No Change.
(c) Seller's Failure to Deliver After Receipt of Notice
(1) (A) No Change.
(B) For transactions in [Nasdaq] exchange-listed [S]securities
where the buyer is a customer (other than another member), upon failure
of a clearing corporation to effect delivery in accordance with a buy-
in notice, the contract must be closed by purchasing for ``cash'' in
the best available market, or at the option of the buyer for guaranteed
delivery, for the account and liability of the party in default all or
any part of the securities necessary to complete the contract.
(2) No Change.
(d) through (m) No Change.
* * * * *
[11890. Clearly Erroneous Transactions]
[(a) Authority to Review Transactions]
[(1) For the purposes of this Rule, the terms of a transaction are
clearly erroneous when there is an obvious error in any term, such as
price, number of shares or other unit of trading, or identification of
the security.]
[(2) Officers of The Nasdaq Stock Market, Inc. (``Nasdaq'')
designated by the President of Nasdaq shall, pursuant to the procedures
set forth in paragraph (b) below, have the authority to review any
transaction arising out of the use or operation of any automated
quotation, execution, or communication system owned or operated by
Nasdaq and approved by the Commission, excluding transactions arising
from use of the Nasdaq Application of OptiMark. A Nasdaq officer shall
review transactions with a view toward maintaining a fair and orderly
market and the protection of investors and the public interest. Based
upon this review, the officer shall decline to act upon a disputed
transaction if the officer believes that the transaction under dispute
is not clearly erroneous, or, if the officer determines the transaction
in dispute is clearly erroneous, he or she shall declare that the
transaction is null and void or modify one or more terms of the
transaction. When adjusting the terms of a transaction, the Nasdaq
officer shall seek to adjust the price and/or size of the transaction
to achieve an equitable rectification of the error that would place the
parties to a transaction in the same position, or as close as possible
to the same position, that they would have been in had the error not
occurred. Nasdaq shall promptly provide oral notification of a
determination to the parties involved in a disputed transaction and
thereafter issue a
[[Page 448]]
written confirmation of the determination.]
[(b) Procedures for Reviewing Transactions]
[(1) Any member or person associated with a member that seeks to
have a transaction reviewed pursuant to paragraph (a) hereof, shall
submit a written complaint, via facsimile or otherwise, to Nasdaq
Market Operations in accordance with the following time parameters:]
[(A) For transactions occurring at or after 9:30 a.m., Eastern
Time, but prior to 10:00 a.m., Eastern Time, complaints must be
submitted by 10:30 a.m., Eastern Time; and]
[(B) for transactions occurring prior to 9:30 a.m., Eastern Time
and at or after 10:00 a.m., Eastern Time, complaints must be submitted
within thirty minutes.]
[(2) Once a complaint has been received in accord with subparagraph
(b)(1) above:]
[(A) The complainant shall have up to thirty (30) minutes, or such
longer period as specified by Nasdaq staff, to submit any supporting
written information concerning the complaint necessary for a
determination under paragraph (a)(2), via facsimile or otherwise;]
[(B) the counterparty to the trade shall be verbally notified of
the complaint by Nasdaq staff and shall have up to thirty (30) minutes,
or such longer period as specified by Nasdaq staff, to submit any
supporting written information concerning the complaint necessary for a
determination under paragraph (a)(2), via facsimile or otherwise; and]
[(C) either party to a disputed trade may request the written
information provided by the other party pursuant to this subparagraph.]
[(3) Notwithstanding paragraph (b)(2) above, once a party to a
disputed trade communicates that it does not intend to submit any
further information concerning a complaint, the party may not
thereafter provide additional information unless requested to do so by
Nasdaq staff. If both parties to a disputed trade indicate that they
have no further information to provide concerning the complaint before
their respective thirty-minute information submission period has
elapsed, then the matter may be immediately presented to a Nasdaq
officer for a determination pursuant to paragraph (a)(2) above.]
[(4) Each member and/or person associated with a member involved in
the transaction shall provide Nasdaq with any information that it
requests in order to resolve the matter on a timely basis
notwithstanding the time parameters set forth in paragraph (b)(2)
above.]
[(5) Once a party has applied to Nasdaq for review, the transaction
shall be reviewed and a determination rendered, unless both parties to
the transaction agree to withdraw the application for review prior to
the time a decision is rendered pursuant to paragraph (a)(2).]
[(c) Procedures for Reviewing Transactions Executed During System
Disruptions or Malfunctions]
[In the event of a disruption or malfunction in the use or
operation of any automated quotation, execution, or communication
system owned or operated by Nasdaq and approved by the Commission,
Nasdaq acting through an officer designated by the President of Nasdaq
pursuant to paragraph (a)(2), may, on its own motion pursuant to the
standards set forth in paragraph (a), declare transactions arising out
of the use or operation of such systems during the period of such
disruption or malfunction null and void or modify the terms of these
transactions; provided that, in the absence of extraordinary
circumstances, a Nasdaq officer must take action pursuant to this
paragraph within thirty (30) minutes of detection of the erroneous
transaction(s), but in no event later than 6:00 p.m., Eastern Time, on
the next trading day following the date of the trade at issue. When
Nasdaq takes action pursuant to this subparagraph, the member firms
involved in the transaction shall be notified as soon as is practicable
and shall have a right to appeal such action in accordance with
paragraph (d)(1) below.]
[(d) Review by the Market Operations Review Committee (``MORC'')]
[(1) A member or person associated with a member may appeal a
determination made under paragraphs (a)(2) or (c) to the MORC provided
such appeal is made in writing, via facsimile or otherwise, within
thirty (30) minutes after the member or person associated with a member
receives verbal notification of such determination, except that if
Nasdaq notifies the parties of action taken pursuant to paragraph (c)
after 4:00 p.m., either party has until 9:30 a.m. the next trading day
to appeal. Once a written appeal has been received, the counterparty to
the trade will be notified of the appeal and both parties shall be able
to submit any additional supporting written information, via facsimile
or otherwise, up until the time the appeal is considered by the
Committee. Either party to a disputed trade may request the written
information provided by the other party during the appeal process. An
appeal to the Committee shall not operate as a stay of the
determination made pursuant to paragraph (a)(2) or (c) above. Once a
party has appealed a determination to the Committee, the determination
shall be reviewed and a decision rendered, unless both parties to the
transaction agree to withdraw the appeal prior to the time a decision
is rendered by the Committee. Upon consideration of the record, and
after such hearings as it may in its discretion order, the Committee,
pursuant to the standards set forth in paragraph (a), shall affirm,
modify, reverse, or remand the determination made under paragraph
(a)(2) or (c) above.]
[(2) The decision of the Committee shall be final and binding upon
any member or person associated with a member and shall constitute
final Association action on the matter in issue. Any adverse
determination by a Nasdaq officer pursuant to paragraph (a)(2) or (c)
or any adverse decision by the Committee pursuant to paragraph (d)(1)
shall be rendered without prejudice as to the rights of the parties to
the transaction to submit their dispute to arbitration.]
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the NASD included statements
concerning the purpose of, and statutory 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. The NASD 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
Background
The purpose of the proposed rule change is twofold: (1) to amend
the Association's rules to reflect the anticipated approval of Nasdaq
as a national securities exchange \4\ and its resultant separation from
NASD; and (2) to establish the rules that would govern trading
otherwise than on an exchange, including the implementation and
[[Page 449]]
operation of the ADF. The ADF is a quotation collection, trade
comparison, and trade reporting facility being developed by NASD in
accordance with the Commission's SuperMontage Approval Order \5\ and in
conjunction with Nasdaq's anticipated registration as a national
securities exchange.
---------------------------------------------------------------------------
\4\ Securities Exchange Act Release No. 44396 (June 7, 2001), 66
FR 31952 (June 13, 2001).
\5\ Securities Exchange Act Release No. 43863 (Jan. 19, 2001),
66 FR 8020 (Jan. 26, 2001).
---------------------------------------------------------------------------
Proposed Rule Change Relating to the Separation of Nasdaq
The NASD is in the process of spinning off its Nasdaq subsidiary as
an independent, for-profit company. As the result of a second private
placement of Nasdaq shares completed on January 18, 2001, the NASD's
ownership interest in Nasdaq was reduced to a minority interest. Before
Nasdaq can fully separate from the NASD, it must become registered as a
national securities exchange with the SEC. Nasdaq has filed a Form 1
with the SEC requesting such registration. Notice and a request for
comments on Nasdaq's completed application for exchange registration
was published for comment in the Federal Register on June 13, 2001,\6\
and the comment period expired on August 29, 2001.
---------------------------------------------------------------------------
\6\ Securities Exchange Act Release No. 44396 (June 7, 2001), 66
FR 31952 (June 13, 2001) (File No. 10-131).
---------------------------------------------------------------------------
Upon Nasdaq's registration as a national securities exchange, the
NASD will no longer control the voting rights in the common stock of
Nasdaq. At that point, Nasdaq and the NASD will be unaffiliated
corporate entities, and therefore each will need separate rules
applicable to their respective members. To effectuate that change, the
NASD must modify existing NASD rules, effective upon Nasdaq's
registration as an exchange, to reflect this separation of Nasdaq from
the NASD. These changes include deleting Nasdaq-specific rules, such as
listing and qualification requirements; replacing references to
``Nasdaq'' with ``NASD'' or ``exchange,'' as applicable; and renaming
and renumbering certain rules. The proposed rule change also includes
corrections of minor grammatical or typographical errors and other
miscellaneous non-substantive changes.
Deleted Rules: The Association proposes to delete the following
rules in their entirety because they either relate exclusively to
participation in, and operation of, the Nasdaq Stock Market or would no
longer be applicable upon the establishment of the ADF: 2852, 2854,
2870 through 2885; 5100 through 5113; 6700 through 6740; 8212 and
11890.
IM-2110-2 and Rule 6640 Trading Ahead of Customer Orders: The
proposed rule change would eliminate an exemption in IM-2110-2 for
certain customer limit orders received prior to September 1, 1995. The
passage of time has rendered this exemptive language obsolete and
therefore it no longer bears on the existing application of the
interpretation. This change is consistent with Nasdaq's rule filing in
connection with its exchange registration application, which contains
an identical proposed rule change.
Existing Rule 6541 extends the principles of IM-2110-2 to certain
OTC Bulletin Board stocks as part of a pilot program that will continue
at least until February 8, 2002. Rule 6541 is renumbered in the rule
proposal as new Rule 6640, and the language is changed to include
``non-exchange-listed'' securities, rather than ``Bulletin Board''
securities. Initially, Rule 6640 would cover the same Bulletin Board
stocks that are part of the ongoing pilot program. The language change
is made in anticipation of the Bulletin Board becoming part of the
Nasdaq-listed stock market,\7\ and its listed securities becoming
subject to IM-2110-2. At that time, the NASD may extend the scope of
Rule 6640 to include additional non-exchange-listed securities. The
language change in the rule proposal would allow NASD that flexibility
without having to amend the rule.
---------------------------------------------------------------------------
\7\ See SR-NASD-2001-82, which is currently being reviewed by
the Commission.
---------------------------------------------------------------------------
IM-2310-2 SEEDS Transactions: As a result of Nasdaq's anticipated
separation from the NASD, the proposed rule change deletes Rule 4420,
which primarily involves quantitative listing criteria for Nasdaq
National Market securities. However, existing Rule 4420(g)(5) describes
an obligation on the part of the Association to distribute a circular
to member firms that provides guidance when handling Hybrid Securities
and Selected Equity-linked Debt Securities (``SEEDS'') transactions.
Since that provision applies to the NASD and is regulatory in nature,
it has been retained and moved to IM-2310-2. The proposed rule change
also would allow either Nasdaq or the NASD to distribute the compliance
circular.
Rule 2840 Trading in Index Warrants: The proposed rule change
would delete language in Rule 2840 related to index warrants listed on
the Nasdaq Stock Market. The existing rule was promulgated because
Nasdaq expected eventually to list such index warrants. However, as
evidenced by Nasdaq's proposed rule filing in connection with its
application for exchange registration, Nasdaq no longer intends to list
index warrants. The remainder of Rule 2840 remains unchanged, as it has
continued applicability to NASD members that are not also members of an
exchange on which they trade index warrants.
Rules 2850 through 2885 Position Limits and Options Trading: To
reflect Nasdaq's separation from the NASD, the proposed rule change
deletes from Rules 2850 through 2885 all language related to position
limits and transactions in index warrants and options traded on Nasdaq.
However, the rule change retains all provisions related to options
trading in the over-the-counter market.
Rule 6600 Transactions in Non-Exchange-Listed Securities: The
proposed rule change would combine the existing Rule 6600 and 6700
Series into a single Rule 6600 Series that governs transactions in non-
exchange-listed equity securities. The proposed combination is intended
to eliminate redundancies in the existing rules, while maintaining all
of the regulatory requirements for trading and reporting transactions
in such securities.
Proposed Rule 6620 also would require those NASD members that
effect trades otherwise than on an exchange in non-exchange-listed
securities to enter into contractual agreements to use Nasdaq's ACT
system for trade comparison and trade reporting. The NASD has
determined that this contractual agreement with Nasdaq would be the
most practical, efficient and fair means to provide access to the ACT
system for members that effect such trades.
First, most NASD members are already connected to ACT, since ACT is
used currently to report these transactions. Second, this approach
would relieve the NASD of significant additional cost to process and
administer these services, and Nasdaq already has these operations in
place. Third, the subject securities do not trade on Nasdaq; therefore,
no competitive issues would be raised. Finally, the NASD would maintain
regulatory responsibility to monitor and enforce compliance with the
ACT rules by its members that effect transactions in non-exchange-
listed securities. Nasdaq would function only as a vendor and systems
operator.
The proposed rule change also would amend the minimum quotation
size requirements required by Rule 6750 to reflect the fact that upon
Nasdaq exchange registration, the NASD would no longer operate the OTC
Bulletin Board Service. Therefore, references to the OTC Bulletin Board
would be deleted from the rule.
[[Page 450]]
Proposed Rule Change Relating to Trading Otherwise Than on an Exchange
The proposed rule change generally would clarify that NASD rules
that relate to trading practices (e.g., quotations, trade reporting,
short selling, trading halts) apply only to transactions otherwise than
on an exchange. To achieve this, the proposal would add a definition of
the term ``otherwise than on an exchange'' in Rule 4200 and also
specify in particular rules where the rule applies only to trading
otherwise than on an exchange.\8\ The term ``otherwise than on an
exchange'' is defined in the proposal to mean a trade effected by an
NASD member otherwise than on or through a national securities
exchange. The determination of what constitutes a trade ``on or
through'' a national securities exchange would be left to the
respective exchanges and applicable statutes, rules and regulations, as
approved by the SEC.
---------------------------------------------------------------------------
\8\ See e.g., the new Rule 5000 Series, which sets forth rules
that apply generally to trading otherwise than on an exchange (short
selling and trading halts) and Rule 4633, which governs specifically
transactions effected otherwise than on an exchange in Nasdaq
securities.
---------------------------------------------------------------------------
The rule proposal, for the most part, maintains the same
organization as the existing NASD rules. For example, rules related to
trading Nasdaq securities otherwise than on an exchange are found in
the Rule 4600 Series. Rules related to trading in Consolidated
Quotation Service (``CQS'') securities otherwise than on an exchange
similarly remain in the Rule 6300 Series. While the rules governing CQS
securities are similar to those governing Nasdaq securities (e.g., the
trade reporting rules) the proposal maintains the historically separate
rule structure that has been considered helpful by many market
participants.
The NASD is considering combining the similar rules, where
possible, and placing them in a section that would encompass all rules
related to trading otherwise than on an exchange. The current rule
proposal begins such a process by establishing a new Rule 5000 Series,
Trading Otherwise Than On An Exchange, that would contain some rules
that apply both to Nasdaq and CQS securities, such as the short sale
rule, trading halts, transactions involving initial public offerings,
and clearance and settlement. Rules that previously resided in the Rule
5000 Series, and have not otherwise been deleted, have been moved.
Under the proposal, rules related to the Intermarket Trading System
(``ITS'') (Rule 5200 Series) would be moved to the Rule 6500 Series.
Rules related to The Portal Market (Rule 5300 Series) would be moved to
the Rule 6700 Series.
The NASD Alternative Display Facility: The NASD would build a quote
collection, trade comparison and trade reporting facility that meets
specific performance and security standards and provides users with the
necessary functionality to make it a viable alternative display
facility to Nasdaq.
The facility would provide market participants--market makers, ECNs
and order entry firms--the ability to collect and view quotations, and
to report transactions to the appropriate Securities Information
Processor (``SIP'')\9\ for consolidation and dissemination of data to
vendors and ADF market participants. The facility also would provide
for trade comparison through the Trade Comparison and Reporting Service
(``TRACS''), the details of which are described below. The facility
further would provide for real-time data delivery to NASD Regulation
for regulatory purposes, including enforcement of firm quote and
related rules.
---------------------------------------------------------------------------
\9\ Nasdaq initially will be the designated SIP for all
transactions in Nasdaq securities, while the Securities Industry
Automation Corporation will continue to function as the SIP for
transactions in listed securities.
---------------------------------------------------------------------------
The ADF is expected to launch by the end of the first quarter of
calendar year 2002, provided that Nasdaq has been approved as a
national securities exchange. The NASD or a vendor (other than Nasdaq)
would maintain and operate the facility. The NASD would establish the
rules that govern the ADF, and NASD Regulation will enforce the rules
and provide market surveillance.
The proposed rule change also includes a number of changes that
more specifically reflect the implementation and operation of the ADF.
Most significantly, the proposed rule change would replace in their
entirety the existing Rule 4000 Series and Rules 6100, 6300, 6400 and
6500 with a new set of rules to govern the ADF. For the most part, the
proposed ADF rules closely track existing Nasdaq rules or rules
proposed by Nasdaq in its exchange registration and existing rules that
govern the CQS.\10\ The ADF would provide trade comparison and trade
reporting services that would be similar to Nasdaq's ACT system.
However, the proposed ADF rules have been refined to reflect the more
limited functionality of the ADF, most particularly the absence of an
automatic execution or order routing system. Instead, the proposed rule
change would require ADF market participants to provide direct or
indirect access to their quotations, as described in more detail below.
---------------------------------------------------------------------------
\10\ Should Nasdaq amend its exchange registration with respect
to matters such as trade reporting, short selling, or quotation
obligations, we anticipate making similar amendments to the proposed
NASD rules.
---------------------------------------------------------------------------
As required by existing Nasdaq rules, ADF participants would be
required to register as market makers or ECNs for each security in
which they make a market or display orders. Market makers would receive
approval for registration upon demonstration that they are members in
good standing and comply with the net capital and other financial
responsibility requirements of the Act. To ease the administrative
burden on NASD members, the NASD rules initially would allow
registration as a market maker in the ADF upon proof that a firm is a
registered Nasdaq market maker. Eventually, members seeking to become
an NASD registered market maker would have to comply either with Rule
1017(a)(5) (which requires an application for approval for a material
change in business operations) or Rule 1010 (application for initial
membership in the NASD).
Additionally, the proposed rule change tracks Nasdaq requirements
that market makers maintain continuous two-sided, firm quotations and
prescribes market maker obligations when a bid or offer locks or
crosses the market. However, as described in more detail below, the
rule proposal does not provide for stabilizing or penalty bids, as
existing Nasdaq rules do. The proposal generally adopts Nasdaq's
anticipated approach to trade reporting: the seller reports both
intramarket and intermarket trades between market makers, the market
maker reports trades between it and a customer, and an NASD member
reports trades between it and a non-member.\11\ ECNs would report all
trades effected within the ECN (i.e., when a market maker sells through
an ECN). As described below, the ADF also would support a ``three party
trade report'' for ECNs.
---------------------------------------------------------------------------
\11\ Securities Exchange Act Release No. 44396 (June 7, 2001),
66 FR 31952 (June 13, 2001) (File No. 10-131). But see note 10,
supra.
---------------------------------------------------------------------------
Order Access Rule: The ADF rules differ from existing Nasdaq rules
most significantly with respect to participants' ability to reach
quotes displayed in the ADF. The NASD would not provide ADF market
participants an order routing capability, other than
[[Page 451]]
ITS.\12\ In order to provide a means to enforce compliance with firm
quote obligations, locked and crossed quotation obligations,\13\ and to
provide other market participants within the ADF and in other markets
the ability to provide best execution, in the absence of an NASD-
provided router, the proposed rule change contains new Rule 4300. This
rule would require market participants to provide direct electronic
access to other market participants and direct or indirect electronic
access to all other NASD members seeking access. Proposed Rule 4300
defines ``direct electronic access'' as the ability to deliver an order
for execution directly against an individual NASD market participant's
best bid and offer without the need for voice communication, and with
the equivalent speed, reliability, availability and cost as are made
available to the NASD market participant's own customer broker/dealers
or other active customers or subscribers. The proposal would not,
however, preclude market participants from charging more for the access
required by the rule--sometimes called ``hit or take'' access--than for
full service access, so long as hit or take access is not charged
discriminatorily, i.e., charged differently for one group of users
(e.g., subscribers) than for others (e.g., non-subscribers). While
``hit or take'' is more limited functionally than full book access, it
also is a liquidity taking function and some markets--including
Nasdaq--charge more for taking liquidity than providing it.\14\
---------------------------------------------------------------------------
\12\ The NASD does not intend to provide an order routing
capability other than ITS because it believes it can better perform
our core investor protection mission by focusing on regulation
rather than market operations. The NASD also believes that market
participants already do, and can continue to, establish and run
order linkage facilities that are more efficient and innovative than
a facility the NASD could provide. The ITS ``exception'' is based
upon the fact that ITS is in place and is the current accepted
mechanism for intermarket linkage for CQS securities. As discussed
below, we would make use of ITS optional.
\13\ This order access rule would be the basis for satisfying,
among other things, locked and crossed quotation obligations. While
this rule would require intermarket links with other market centers,
as well as intra-ADF links, the proposed locked and crossed rule,
Rule 4612(d), unlike other market center locked and crossed rules,
is based on the ADF's own quotations. In the event that the markets
agree on a locked and crossed rule approach that encompasses
quotations in all markets, proposed Rule 4300 would still facilitate
compliance.
\14\ See Securities Exchange Act Release No. 44918 (Oct. 10,
2001), 66 FR 52814 (Oct. 17, 2001).
---------------------------------------------------------------------------
The proposed rule change defines ``indirect electronic access'' as
the ability to route an order through customer broker/dealers of an
NASD market participant for execution against the NASD market
participant's best bid and offer, without the need for voice
communication, and with equivalent speed, reliability, availability and
cost as are available to the market participant's customer broker/
dealer providing the indirect access or other active customers or
subscribers. Market participants would be prohibited from influencing
the prices that customer broker/dealers impose for providing indirect
access or in any way discouraging the provision of indirect access.
ADF market participants could satisfy these requirements either by
providing their own bilateral linkages or by participating in
multilateral linkage facilities provided by private vendors. In
addition, with respect to links with exchanges, market participants
could satisfy these requirements either by linking with the exchange or
by linking with market participants operating within those exchanges.
To allow NASD Regulation to monitor compliance with certain trading
rules, such as the firm quote rule and ``trade or move'' rules, the
proposed rule also requires that all NASD market participants that
display quotations or orders in the ADF record specified items of
information pertaining to orders they receive via direct or indirect
electronic access, and report this information to NASD Regulation on a
real-time basis. The proposed rule requires this information to be
provided to NASD Regulation within 10 seconds of the receipt of an
order and, if applicable, when an order is acted upon or responded to.
As part of the subscriber agreement approval process, market
participants would be required to provide the terms and methods by
which they would comply with these rules. The NASD would review these
terms prior to approving a subscriber agreement.
Trade Reporting and Trade Comparison Service: As noted above, the
NASD intends to operate trade reporting and comparison services as part
of the ADF. The trade reporting service would collect trade reports for
NASD registered market participants, as well as any NASD member
required to report transactions occurring otherwise than on an
exchange. The service would transmit the reports automatically to the
respective SIPs, if required, for dissemination to the public and the
industry. This mechanism would operate similar to the trade reporting
functions of Nasdaq's ACT Service,\15\ but would contain one notable
distinguishing feature.
---------------------------------------------------------------------------
\15\ The NASD service would not perform risk management services
that are provided by Nasdaq's ACT service.
---------------------------------------------------------------------------
The ADF would support a ``three party trade report'' that would
make it easier for ECNs to submit trade reports involving their
subscribers and for market makers to submit riskless principal trade
reports. A three party trade report would be a single last sale trade
report that would denote one reporting member (i.e., the party with the
trade reporting responsibility as defined in Rules 4633 and 6420) and
two contra parties. The ADF would be designed to split the three party
trade report into two separate reports that would then be processed
independently in accordance with existing trade reporting rules. Each
of these reports would contain its own identifier and a reference to
the original three party trade report, so that the separate reports can
be mapped to the same transaction.
Therefore, the ADF trade reporting system would streamline the
reporting process by reducing from three or two to one the number of
trade reports for most ECN and riskless principal transactions. The
proposed rules would require three party trade reports when the
reporting party is a registered ECN, and would permit such reports by
market makers that execute riskless principal transactions.
The NASD also intends to operate a trade comparison service as part
of TRACS that would: (1) Compare trade information entered by TRACS
participants and submit ``locked-in'' trades to Depository Trust
Clearing Corporation (``DTCC'') for clearance and settlement; (2)
transmit reports of the transactions automatically to the respective
SIPs, if required, for dissemination to the public and the industry;
and (3) provide participants with monitoring capabilities to facilitate
participation in a ``locked-in'' trading environment. The proposed
trade comparison rules are found in proposed Rule 6100.
The NASD expects that a significant volume of trades would be
locked-in and submitted directly to DTCC by way of agreements between
market participants and Qualified Service Representatives (``QSR''). As
a result, NASD expects the volume of trades sent through TRACS to be
relatively low.\16\ The proposed TRACS rules would apply only to those
members that from time to
[[Page 452]]
time need to compare trades in Nasdaq or CQS securities that are
effected otherwise than on an exchange and are not subject to QSR
agreements that result in direct submission to DTCC.
---------------------------------------------------------------------------
\16\ The NASD has not yet resolved how to compare and report
trades between an ADF market participant and a Nasdaq market
participant that has access to Nasdaq's ACT service. The NASD is
engaged in discussions with DTCC about the possibility of DTCC
continuing its existing trade comparison service for over-the-
counter equity securities to provide for those intermarket trades.
---------------------------------------------------------------------------
Rules 4633(c) and 6420(b) Which Party Reports a Transaction: The
proposed rule change adopts what the NASD understands to be the current
Nasdaq approach to trade reporting. In its exchange application rule
proposal, Nasdaq provides that the seller reports trades between market
makers, the market maker reports trades between it and a customer, and
an ECN reports only those trades where it is deemed to be the liquidity
provider. The NASD's current best understanding is that Nasdaq has
decided that the seller, rather than the liquidity provider, should
report transactions between two market makers or ECNs.\17\
---------------------------------------------------------------------------
\17\ Securities Exchange Act Release No. 44396 (June 7, 2001),
66 FR 31952 (June 13, 2001) (File No. 10-131). But see note 10,
supra.
---------------------------------------------------------------------------
Rule 5100 Short Sale Rule and Rule 4612 Primary Market Maker
Standards: The proposed rule change would amend the short sale rule and
its accompanying interpretation to make them applicable to trading in
Nasdaq-listed issues otherwise than on an exchange (including through
the ADF), rather than Nasdaq. The rule proposal would renumber the rule
and interpretation as Rule 5100 and IM-5100-1, respectively.
The proposed rule change would establish a different bid on which
to base the applicability of the short sale rule. The existing rule
prohibits members from effecting short sales in Nasdaq National Market
securities at or below the best bid, when the current best bid as
displayed in the Nasdaq Stock Market is below the preceding best bid in
that security. The proposed amendment would substitute the national
best (inside) bid for the Nasdaq best bid as the basis for determining
when the rule applies. Although a best (inside) bid would be calculated
for the ADF, the NASD believes that for the purposes of the short sale
rule, the national best (inside) bid would be more reflective of
market-wide trading in a security and therefore would better further
the purposes of the rule.
Aside from the changes noted above, the NASD intends to have a
short sale rule that mirrors Nasdaq's short sale rule. The rule
proposal represents NASD's best understanding as to the content of
Nasdaq's short sale rule. The existing Nasdaq rule provides an
exemption from the rule for a ``qualified market maker'' engaged in
bona fide market making activity. The existing rule--and Nasdaq's
proposed rule filing in connection with its exchange registration--
defines ``qualified market maker'' as a registered market maker that
meets the requirement set forth in Rule 4612 to be deemed a Primary
Market Maker. The proposed rule change would eliminate the ``qualified
market maker'' and ``Primary Market Maker'' standards, and consequently
delete Rule 4612. The existing Primary Market Maker Standards rule has
been suspended since implementation of the SEC's Order Handling Rules
in early 1997. In the event that Nasdaq makes the current Primary
Market Maker Standard rule--or an amended rule--effective, the NASD
would amend its rules accordingly. Until then, the NASD intends to have
a short sale rule that reflects the current exemption for registered
market makers engaged in bona fide market making activity.
Rule 5200 Trading Halts: Proposed Rule 5200 would provide NASD
with authority to halt trading otherwise than on an exchange in
securities quoted (i.e., listed securities) through the ADF. The rule
proposal also would provide NASD with the authority to halt trading in
non-exchange-listed foreign securities that trade in a quotation medium
other than a national securities exchange or through the ADF.
As under current NASD rules, trading halts require NASD members to
cease effecting trades as agent or principal, but do not preclude
customer-to-customer trades. For ADF-eligible securities, the proposed
rule would mandate a trade halt when another market halts trading in a
security for regulatory reasons and would give the NASD discretionary
authority to halt trading when another market halts trading for
operational reasons. Any trading halt initiated by the NASD would
become effective simultaneously with notification via an administrative
message sent through the ADF terminal or interface. Trading similarly
would resume after an administrative notice has been issued.
Specifically, the proposed rule would require that the NASD halt
trading through the ADF of a security listed on a national securities
exchange whenever a market eligible to trade that security imposes a
trading halt, or suspends a listing, for one of the following reasons:
(1) To permit dissemination of material news; (2) to obtain information
from the issuer related to material news; (3) to obtain information
related to an issuer's ability to meet listing qualifications; or (4)
to obtain other information that is necessary to protect investors and
the public interest. The proposed rule change would further require the
NASD to halt trading through the ADF in an American Depository Receipt
(``ADR''), if that security is listed on a national securities exchange
or foreign securities exchange, and one of those exchanges, or an
overseeing regulatory authority, halts trading in the security.
Finally, the rule would require the NASD to halt trading through the
ADF whenever that system is unable to transmit real-time quotation or
trade reporting information to the applicable SIP, or whenever a
market-wide trading halt is in effect under circuit breaker rules of a
primary exchange.
Since the proposed trading halt rules do not differentiate between
Nasdaq and other exchange-listed securities, there no longer is a need
for the separate trading halt provisions of existing Rule 6430, which
apply only to those securities eligible for trading and reporting to
the Consolidated Tape, as described in Rule 6400. Accordingly, Rule
6430 would be deleted and its provisions would be absorbed in Rule
5200, including the obligation of members to notify the NASD whenever
they have knowledge of information related to a security or issuer that
has not been adequately disclosed to the public.
The rule proposal would grant discretionary authority to the NASD
to halt trading otherwise than on an exchange by its members through
the ADF whenever another national securities exchange halts trading in
a security for operational reasons, defined as an order imbalance or
influx. Similar discretionary authority would extend to circumstances
where a security traded through the ADF is a derivative or component of
a security that has been halted by a national securities exchange. In
the event that NASD chooses not to halt trading under the
aforementioned discretionary circumstances, market participants could
continue to trade through the ADF and would be required to meet all
applicable trade reporting requirements.
With respect to non-exchange-listed foreign securities, which do
not trade through the ADF but only over-the-counter, the proposed rule
allows the NASD to impose halts for over-the-counter trading in
conjunction with regulatory halts imposed by foreign regulatory
authorities because of potential fraudulent conduct. The proposal would
not give the NASD authority to impose a trading and quotation halt if
the foreign regulatory halt was imposed solely for the dissemination of
material news, a regulatory filing deficiency, or operational reasons.
Currently, the NASD has no authority to impose
[[Page 453]]
trading and quotation halts in securities that are quoted and traded in
other quotation media, such as the National Quotation Bureau's Pink
Sheets. This proposed rule would grant such authority with respect to
foreign securities in circumstances in which it is necessary to protect
investors and the public interest.
Rule 4619 Withdrawal of Quotations and Passive Market Making: The
proposed rule change eliminates a condition in existing Rule 4619(b)(3)
for a market maker seeking excused withdrawal status based on vacation.
Under the current rule, excused withdrawal status may only be granted
to a market maker that has three or fewer Nasdaq Level 3 terminals. The
proposal does not replicate that requirement for ADF market makers
because the ADF will not operate as a primary market. As such, the
absence of a market maker with more than three ADF terminals would not
have a significant impact on the liquidity in those securities in which
it makes a market.
Rules 4614 and 4624 Stabilizing Bids and Penalty Bids: The
proposed rule change would delete existing Rules 4614 and 4624 relating
to stabilizing and penalty bids. These rules allow a market maker--
usually the underwriter of a securities offering--to enter these
special bids in connection with a distribution of securities under
Rules 101 and 104 of SEC Regulation M. The NASD believes such activity
should occur on the market listing the issue and thus proposes to
delete these rules.
Obligations When Quoting in Multiple Market Centers: Existing Rule
2320(g)(2) requires members that display quotations for non-Nasdaq
securities in two or more quotation mediums to post the same priced
quotations in each medium. To reflect Nasdaq's registration as an
exchange, the proposed rule change would amend the language of that
provision to apply to ``non-exchange-listed'' securities. At the same
time, the rule proposal would add a similar obligation for members that
display quotations for Nasdaq and CQS securities in two or more market
centers, including the ADF. The obligations for members quoting Nasdaq
and CQS securities are found in proposed Rules 4613(e)(1) and 6330(f),
respectively. Note that the proposed rules do not prohibit displaying
different size quotations in two or more mediums or market centers,
provided that the price displayed is the same.
Obligation To Have Quotations From Other Market Centers in Close
Proximity: Proposed Rule 4613(e)(2) would require a registered NASD
market maker to have in close proximity to the ADF terminal or
interface at which it makes a market in a Nasdaq security, a quotation
service that disseminates quotations in that security on behalf of
national securities exchanges and other market centers. A similar rule,
Rule 6330(c), currently exists with respect to CQS market makers. As
with the CQS rule, it is the NASD's intention for the quotations
displayed in the ADF terminals or interfaces to function as a
verification mechanism whereby ADF market participants can monitor
their current ADF quotations and ensure that the NASD is timely
updating and disseminating their quotations. The NASD would not
disseminate to ADF market participants any consolidated quotation or
trade data in a security from securities exchanges and market centers.
To ensure that ADF participants have the data necessary to make sound
order routing decisions and to satisfy the Vendor Display Rule,\18\ the
NASD would require ADF market participants to obtain from vendors
dynamic quotations and last-sale information on the securities they
trade through the ADF, and to display this data in close proximity to
the ADF data displayed on their terminals--just as is currently
required by Nasdaq of CQS market makers in Rule 6330(c).\19\
---------------------------------------------------------------------------
\18\ See Rule 11Ac1-1 under the Act. 17 CFR 240.11Ac1-1.
\19\ Concurrent with this filing, the NASD plans to request an
exemption from the Vendor Display Rule, as Nasdaq did with its
similar CQS rule.
---------------------------------------------------------------------------
A requirement to disseminate consolidated quotation and trade data
from securities exchanges and other market centers would result in
significantly increased costs to build the ADF because it would
necessitate substantially greater capacity and would require a more
complex technical design of the ADF terminals and user interfaces to
allow for receipt of that information.
Rule 4620 Voluntary Termination of Registration: The proposal
contains a new provision related to voluntary termination as an NASD
market maker. Proposed Rule 4620 provides that registration as a market
maker in a security is voluntarily terminated where the market maker
(1) withdraws its quotations from the ADF and does not re-enter
quotations in the security for five minutes or (2) fails to re-enter
quotations within 30 minutes of the end of a trading halt. In either
circumstance, a market maker would be prohibited from re-registering as
a market maker in that security for twenty (20) business days, unless
the market maker meets the conditions for excused withdrawal specified
in Rule 4619.
Rules 6350(a) and 6520(e) Obligations of CQS and ITS Market Makers
Related to Pre-Opening Applications: The proposed rule change contains
new obligations on registered CQS and ITS market makers that
participate in the pre-opening application process. Proposed Rule
6350(a) (CQS) and Rule 6520(e) (ITS) would provide that a registered
market maker that participates in the pre-opening application process
and does not enter and maintain two-sided quotations in the security on
that same trading day may not re-register to participate as a market
maker in that security for twenty (20) business days, unless the market
maker is granted an excused withdrawal from the NASD.
Rule 6500 Intermarket Trading System: The proposed rule change
reflects the NASD's anticipated participation in the ITS through the
ADF. In many respects, the NASD anticipates participating in ITS in a
manner similar to Nasdaq's current participation in ITS. However, the
ITS rules have been amended in the proposal to reflect that the ADF
will not use Nasdaq's Computer Assisted Execution System (``CAES'') to
effect ITS trades. As such, the proposed rule change deletes all
references to ``CAES'' in the ITS rules and elsewhere. In addition, the
proposal refers to market makers and ECNs participating in ITS as ITS/
ADF market makers.
The rule proposal would renumber and move the ITS rules to the 6500
Series. Furthermore, unlike Nasdaq, NASD market participants that
register to enter quotations in CQS securities would not be obligated
to participate in ITS. Participation in ITS, with the associated
obligations such as compliance with the trade-through rule and the
market probing requirement, would be completely voluntary. If a market
participant determines to participate in ITS, then it must abide by all
rules applicable to ITS, including the trade-through rule and the
market probing requirement. Also, the NASD would not provide an intra-
market order routing system such as CAES. Accordingly, market
participants would be responsible under Rule 4300 to establish links to
facilitate execution of CQS securities in the intra-market and, in the
case of non-ITS participants, direct or indirect linkages to the
exchanges.
The quote access requirements of proposed Rule 4300 would not
extend to intermarket access for trading Nasdaq securities. Unlike for
CQS securities, the Commission has not mandated an intermarket linkage
like ITS for Nasdaq securities. Moreover, intermarket
[[Page 454]]
linkage for trading Nasdaq securities is fundamentally a multilateral,
intermarket structural issue. Accordingly, the NASD does not believe it
appropriate for the NASD to unilaterally impose such an intermarket
linkage obligation. Rather, the NASD would propose--as is the case
today--that members of another market that desire to access an ADF
market participant's quotes in Nasdaq securities establish an execution
arrangement with that ADF market participant or, alternatively, become
a member of the NASD.
Additionally, the proposed rule change would add the option of a
30-second commitment to trade period for ITS/ADF Market Makers. This
option is permitted under an ongoing ITS Plan pilot program, and the
NASD believes it would benefit our member participants.
Fees and Assessments: The proposed rule change does not include any
proposed fees or assessments specifically related to the ADF. Existing
fees and assessments, including the gross assessment and Section 8
fees, would continue to apply to NASD members. Any specific fees or
assessments with respect to the ADF would be the subject of a future
rule filing.
2. Statutory Basis
The NASD believes that the proposed rule change is consistent with
Section 15A(b)(6) of the Act,\20\ which requires a national securities
association to have rules that prevent fraudulent and manipulative
acts, promote just and equitable principles of trade, foster
cooperation and coordination among persons engaged in regulating,
clearing, settling, processing information and facilitating
transactions in securities, 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. In addition,
this rule proposal is consistent with Section 15A(b)(6) because it does
not permit unfair discrimination between customers, issuers, brokers,
or dealers, fix minimum profits, impose any schedule or fix rates of
commissions, allowances, discounts, or other fees to be charged by
members, or regulate matters not related to the purposes of the Act or
the administration of the Association.
---------------------------------------------------------------------------
\20\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
Moreover, in the SuperMontage Order,\21\ the SEC required the NASD
to create a facility that ``permits NASD members to comply with their
obligations under Commission and NASD rules (including Exchange Act
Rule 11Ac1-1(c)(5) and Regulation ATS) without participating in the
Nasdaq execution facility. The facility will identify through the
central processor the identity of the NASD member that is the source of
each quote,'' as is required by Exchange Act Rule 11Ac1-
1(b)(1)(ii).\22\ Furthermore, the Commission stated that ``[t]he
facility will provide a market neutral linkage to the Nasdaq and other
marketplaces, but not an execution service.'' The NASD believes that
the proposed rule change fulfills the obligations specified by the
Commission in the SuperMontage Order. In particular, the NASD believes
that this proposal would provide a market neutral linkage by requiring
market participants to link, either directly or indirectly, to all
those seeking access to the market participants' quotations as required
in proposed Rule 4300.
---------------------------------------------------------------------------
\21\ Securities Exchange Act Release No. 43863 (Jan. 19, 2001),
66 FR 8020 (Jan. 26, 2001).
\22\ 17 CFR 240.11Ac1-1(b)(1)(ii).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The NASD does not believe that the proposed rule change, as
amended, will result in any burden on competition that is not necessary
or appropriate in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments on the proposed rule change were not solicited or
received.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the NASD consents, the Commission will:
(A) By order approve such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
The NASD has requested that the proposed rule change become
effective upon the later of Commission approval or the effectiveness of
Nasdaq's Exchange Registration.\23\ The NASD has waived the requirement
that the Commission either approve the proposed rule change, or
institute disapproval proceedings, within thirty-five days of
publication of the proposed rule change in the Federal Register.\24\
---------------------------------------------------------------------------
\23\ The proposed effective date is based upon NASD's assumption
that Nasdaq's exchange registration will be approved before
SuperMontage launches. If that turns out not to be the case, the
NASD would have to revisit the effective date of the proposed rule
change, including whether the rules related to the ADF should become
effective at a different time from the rules resulting from Nasdaq
separation.
\24\ See Amendment No. 1, supra note 3.
---------------------------------------------------------------------------
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposal, as
amended, is consistent with the Act. In particular, the Commission
solicits comment on whether the proposed rules are sufficient to meet
the NASD's obligations under Sections 15A(b)(11) \25\ and 11A(c)(1)
\26\ of the Act with respect to the over-the-counter market, including
providing NASD market makers and ECNs with the ability to comply with
their obligations under the Commission's Order Handling Rules and
Regulation ATS.\27\
---------------------------------------------------------------------------
\25\ 15 U.S.C. 78o-3(b)(11).
\26\ 15 U.S.C. 78k-1(c)(1); See also Section 11A(c)(3)(A) of the
Act.
\27\ See Exchange Act Release No. 37619A (September 6, 1996), 61
FR 48290 (September 12, 1996) (Order Handling Rules); Exchange Act
Release No. 40760 (December 8, 1998), 63 FR 70844 (December 22,
1998) (Regulation ATS).
---------------------------------------------------------------------------
In addition, in Rule 4300 the NASD proposes certain quote and order
access obligations. The Commission requests comment on whether this
rule will provide potential users with adequate access to quotations
displayed through the ADF and will allow the NASD to effectively
enforce its access requirements. In particular, the Commission requests
comment on what it means to make indirect electronic access ``readily
available'' (see proposed Rule 4300(a)(2)).
Persons making written submissions should file six copies thereof
with the Secretary, Securities and Exchange Commission, 450 Fifth
Street, NW., Washington, DC 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
[[Page 455]]
the Commission's Public Reference Room. Copies of the filing will also
be available for inspection and copying at the principal office of the
NASD. All submissions should refer to the File No. SR-NASD-2001-90 and
should be submitted by January 21, 2002.
---------------------------------------------------------------------------
\28\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\28\
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-31481 Filed 12-21-01; 8:45 am]
BILLING CODE 8010-01-P