[Federal Register Volume 59, Number 193 (Thursday, October 6, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-24690]
[[Page Unknown]]
[Federal Register: October 6, 1994]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-34753; File No. S7-28-94]
RIN 3235-AG21
Customer Limit Orders
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The Securities and Exchange Commission proposes a rule setting
standards for market makers in handling customer limit orders in NASDAQ
National Market System securities. The rule would prohibit a market
maker from trading for its own account, directly, or indirectly, at a
price at which the market maker could execute a customer limit order it
is holding, without executing the customer's limit order at the limit
price or a price more favorable to the customer under the specific
terms and conditions by which the order is accepted by the market
maker.
DATES: Comments should be submitted on or before December 5, 1994.
ADDRESSES: Interested persons should submit three copies of their
written data, views and opinions to Jonathan G. Katz, Secretary,
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, and should refer to File No. S7-28-94. All submissions will
be made available for public inspection and copying at the Commission's
Public Reference Room, Room 1024, 450 Fifth Street, N.W., Washington
D.C. 20549.
FOR FURTHER INFORMATION CONTACT: Scott C. Kursman, (202) 942-3197,
Attorney, Office of Market Supervision, Division of Market Regulation,
Securities and Exchange Commission, Mail Stop 5-1, 450 Fifth Street,
N.W., Washington, D.C. 20549.
SUPPLEMENTARY INFORMATION:
I. Introduction and Background
The Securities and Exchange Commission (``SEC'' or ``Commission'')
today is proposing a rule (17 CFR 240.15c5-1) to prohibit market makers
in NASDAQ National Market System (``NASDAQ/NMS'') securities from
trading ahead of customer orders that they are holding at the same or
better price. The Commission is proposing to change existing practices
because it believes this will enhance broker-dealer competition,
promote efficient pricing of securities, facilitate best execution of
customer orders and better reflect investor expectations in the NASDAQ/
NMS market. The growth of the NASDAQ market and the concomitant
visibility of and investor interest in its companies has changed
investors' expectations.
In designing the proposed rule, the Commission has been mindful of
the special role of NASDAQ market makers in discovering prices and
providing liquidity in NASDAQ/NMS stocks. The proposal seeks comment on
specific trading standards that would govern individual market makers.
The proposed rule is intended to have the effect of giving priority to
orders that improve the market (i.e., narrow the bid-ask spread) being
made by a specific market maker.
Generally, an order to buy or sell a security at a specified price
(``limit order'') is first received by the customer's broker, who
either routes the order to an affiliated or non-affiliated market maker
for execution or, if the firm is itself a market maker in the security,
to the firm's market making desk. The combination of limit order
execution and market maker functions can lead to the market maker
competing with a customer for executions. While the past few years have
seen several positive efforts at improving limit order handling
practices in the NASDAQ market, the Commission believes that it should
consider a limit order priority rule to ensure protection for all
customer orders in this market.
The priority accorded a customer limit order today is different
depending on the structure of the marketplace of execution. The rules
of national securities exchanges generally require specialists and
other market professionals to yield to a customer's limit order; the
specialist cannot trade for its own account at prices equal to or
better than the limit order until the limit order is executed.1
The rules of the National Association of Securities Dealers (``NASD'')
similarly prohibit third market makers (over-the-counter market makers
in listed securities) from trading ahead of customer limit orders in
the third market.2
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\1\See, e.g., New York Stock Exchange (``NYSE'') Rule 92, 2 NYSE
Guide (CCH) 2092. The priority rules of the New York Stock Exchange
do permit an exception to this general principle for pre-arranged
crosses of 25,000 shares or more. Such a cross may be executed on
the floor without interacting with pre-existing limit orders at the
same price. A preexisting limit order, however, may interact with
the buyer or seller in the cross if it provides a price that is
better than the proposed cross price. See Securities Exchange Act
Release No. 31343 (October 21, 1992), 57 FR 48645 (October 27,
1992).
\2\NASD Bylaws, Schedule G, Section 4(f), NASD Manual (CCH)
1921. Third market dealers account for more than 9% of listed stock
trades.
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In 1988, the Commission addressed the issue of customer limit order
protection in the NASDAQ market.3 In the Manning decision, the
Commission affirmed, based on principles of agency law, an NASD
determination that it is inconsistent with just and equitable
principles of trade for a market maker to trade ahead of a customer
limit order unless the customer is first informed of the firm's limit
order policy. As a result of the Manning decision, the NASD filed a
proposed rule change with the Commission stating that a member firm
will not be deemed to have violated NASD Rules of Fair Practice if it
provides customers with a statement setting forth the circumstances in
which the member firm accepts limit orders and the policies and
procedures that the firm follows in handling these orders.4
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\3\See In re E.F. Hutton & Co. (the so-called ``Manning
decision''), Securities Exchange Act Release No. 25887 (July 6,
1988), 41 SEC Doc. 473, appeal filed, Hutton & Co. Inc. v. SEC, Dec.
No. 88-1649 (D.C. Cir. Sept. 2, 1988), (Stipulation of Dismissal
Filed, Jan. 11, 1989).
\4\Securities Exchange Act Release No. 26824 (May 15, 1989), 54
FR 22046 (May 22, 1989). The proposal included model disclosure
language to be used by firms whose policy is not to grant priority
to customer limit orders over the member's own proprietary trading.
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In July, 1993, the NASD Board of Governors reviewed the handling of
limit orders in NASDAQ securities and concluded that ``the continuation
of the disclosure exception appeared inappropriate.''5 The NASD
solicited member comment on eliminating the disclosure ``safe-harbor''
approach for members trading ahead of customer limit orders and the
effect a rule prohibiting trading ahead might have on integrated
broker-dealers, on limit orders received from other firms, and on
market liquidity.6
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\5\See File No. SR-NASD-93-58, p.6.
\6\See NASD Notice to Members 93-49 (July 23, 1993).
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After full consideration of the concerns articulated in the comment
process, the NASD withdrew its rule filing proposing the disclosure
safe harbor approach,7 and submitted a proposed Interpretation to
its Rules of Fair Practice, prohibiting member firms from trading ahead
of their customers' limit orders in their market making capacity.8
The Division of Market Regulation's Market 2000 study examined this
practice and recommended that a ban apply to trading ahead of all
customer limit orders, not just those of a firm's own customer.9
The study noted that the adverse effects of trading ahead exist whether
the customer's order is handled by the customer's firm or by another
market maker.10
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\7\See Letter from Robert E. Aber, Vice President and General
Counsel, NASD, to Selwyn Notelovitz, Branch Chief, Over-the-Counter
Regulation, Division of Market Regulation, SEC (October 13, 1993).
\8\Securities Exchange Act Release No. 33697 (March 1, 1994), 59
FR 10842 (March 8, 1994).
\9\Division of Market Regulation, SEC, Market 2000: An
Examination of Current Equity Market Developments (``Market 2000
Study''), V-5 (1994).
\1\0Id.
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The Commission approved the NASD Interpretation on June 29, 1994,
but expressed concern that the prohibition did not extend to trading
ahead of limit orders of other firms' customers that have been sent to
the market maker for execution.\11\ The NASD also convened a special
task force to study the potential effect of expanded limit order
protection on market liquidity and market maker capital commitment and
to report back to the Board in September. The Commission stated that
while such a study could be helpful to a future consideration of this
issue, the Commission believed that member-to-member trades raise
significant concerns that should be addressed and, if necessary, the
Commission would consider instituting its own rulemaking proceeding for
that purpose.\12\
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\11\Securities Exchange Act Release No. 34279 (June 29, 1994),
59 FR 34883 (July 7, 1994).
\12\Id..
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The task force has now submitted its report to the NASD Board of
Directors and the Board has proposed for member comment market maker
standards that would restrict market makers from trading ahead of
certain member-to-member trades, keyed in part on the size of the
customer limit order.13 Under the NASD proposal, market makers
would be prohibited from trading at prices equal to or better than the
price of a customer limit order they hold if the size of that order was
1,000 shares or less and from trading at prices better than a
customer's limit order if the size of that order was greater than 1,000
shares.
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\1\3See Special NASD Notice to Members 94-79 (September 23,
1994).
11Securities Exchange Act Release No. 34279 (June 29,
1994), 59 FR 34883 (July 7, 1994).
12Id.
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The Commission believes that the NASD's proposal is an instructive
step and will provide useful comment from the member firm community.
The Commission, however, believes that comment from the broader
constituency of the investing public and other non-NASD members will be
critical in formulating adequate limit order protection for the NASDAQ
market. In addition, the Commission believes that alternatives which
provide more extensive limit order protection for public customers also
should be the subject of public comment. Therefore, the Commission has
determined to propose its own rule. Publication of the proposal will
complement the efforts of the NASD and enable the Commission to act on
its own initiative if it deems such action appropriate.
II. Discussion
The Commission proposes to adopt Rule 15c5-1 pursuant to Section
15(c)(5) of the Securities Exchange Act of 1934 (``Exchange
Act''),14 among other provisions.15 Section 15(c)(5) grants
the Commission authority over dealers acting in the capacity of market
makers by permitting the Commission to impose standards with respect to
dealing as the Commission, by rule, shall prescribe as necessary or
appropriate in the public interest and for the protection of investors,
to maintain fair and orderly markets, or to remove impediments to and
perfect the mechanism of a national market system.16
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\1\4Section 15(c)(5), 15 U.S.C. 78o.
\1\5Section 11A, 15 U.S.C. 78k-1; Section 23, 15 U.S.C. 78w.
\1\6See Exchange Act Section 15(c)(5), supra note 14.
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The legislative history of the Securities Acts Amendments of 1975,
under which Section 15(c)(5) was adopted, endorsed priority for
customer limit orders in national market system securities and stated
that the Commission should have discretion to achieve this protection.
Congress noted that for suitable securities, every effort should be
made to ensure that public investors in these securities would receive
the benefits and protections that would result from the placing of
public orders ahead of dealers' orders in determining the sequence in
which orders entering the market are executed.17
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\1\7S. Rep. No. 75, 94th Cong., 1st Sess. 16 (1975) (``Senate
Report'').
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NASDAQ has evolved from a market of thinly traded companies in 1975
to one that today accounts for 42% of share volume and 29.2% of dollar
volume in the U.S. equity markets.18 During that time, the
Commission, together with the NASD, has attempted to implement rules
that reflect increased investor interest in this market. The events
which gave rise to the Manning case date back to 1984 and the
Commission has been pressing for improved limit order priority since
then.
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\1\8See supra note 9, at 9.
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In its order approving the recent NASD Interpretation, the
Commission indicated that a further Commission rule might be necessary
to ensure protection for all public limit orders in NASDAQ/NMS
securities, should the NASD fail to do so. The NASD's Interpretation
prevents a market maker from trading ahead of its own customers' limit
orders, but does not prevent the same market maker from trading ahead
of the limit orders of other firms' customers that are sent to the
market maker for execution.19 The Commission believes that it is
reasonable for customers to expect that the quality of the execution
received will not vary from trade to trade. Under current NASD rules,
the quality of the execution received could vary depending on whether
the customer's firm or an affiliate makes a market in a security or
whether that firm sends the order to another market maker for
execution. Customers choose their brokers for a variety of reasons,
including cost and integrity; whether the broker also makes a market in
a security in which the customer may be interested should not affect
the quality of the execution.
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\1\9See supra note 11.
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The Commission agrees with the conclusion of the Division of Market
Regulation's Market 2000 Study that the adverse effects of trading
ahead exist whether the customer's order is handled by the customer's
firm or by another market maker.20 Rule 15c5-1 would apply to
customer limit orders, regardless of where the order is ultimately
routed for execution.
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\2\0See supra note 9, at V-8.
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The Commission believes that the principles of investor protection
and market integrity would be advanced by a limit order priority rule.
The lack of limit order protection results in inferior executions for
customers and adversely affects the price discovery process for these
securities.21
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\2\1Id. at V-7.
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By providing a customer's limit order priority over the market
maker's proprietary trading, more trade volume will be available to be
matched with the customer's order, resulting in quicker and more
frequent executions for limit order customers. In the past, customers
may have refrained from placing limit orders because of the uncertainty
of and difficulty in obtaining an execution at a price between the
spread. A customer limit order rule will encourage dealers that accept
customer limit orders to execute them in a timely fashion so that they
may resume their proprietary trading activities. With the improvement
in the quality of these executions, investors will have greater
confidence in this market and trade volume from retail investors could
increase.22
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\2\2Id.
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In addition, customer limit order priority would improve the price
discovery process in NASDAQ/NMS securities. Limit orders aid price
discovery by adding liquidity to the market and by tightening the
effective spread between the bid and ask price of a security, even
though these limit orders would not be displayed in the market maker's
quote. The practice of not executing a limit order until the inside
quotation price reaches the customer's limit order price also impedes
the price discovery process by preventing those orders from interacting
with other orders. More expeditious handling of customer limit orders
under the proposed rule could provide investors with a more accurate
indication of the buy and sell interest at a given moment.23
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\2\3Id.
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One of the problems with not giving customer limit orders priority
is the cost to public customers in terms of inferior or missed
executions for limit orders. It is currently impossible for customers
to monitor these costs. The ability of a customer to monitor the cost
of the transaction and choose a broker-dealer on that basis imposes a
competitive discipline on the market maker to achieve the best possible
execution for the customer or risk losing the business. Unlike
institutional clients who are in a better position to negotiate their
own protection with market makers, public customers have less viable
alternatives in determining where their orders are ultimately sent for
execution. Under these circumstances, market makers lack the same
incentive to provide superior executions to public customers.
Market makers who oppose a comprehensive rule mandating limit order
priority for customers do so in part on the ground that such a rule
would reduce their return from market making.24 Market makers are,
of course, entitled to earn a profit from their service; A limit order
rule could force market makers to recoup the cost of the transaction in
ways more apparent to the customer, such as by charging a commission
for handling the limit order. The Commission requests comment in the
form of specific data regarding the potential consequences of the
proposed rule for market liquidity and market maker capital commitment.
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\2\4See letter from Frank Masi, President, Securities Traders
Association of New York (``STANY''), to Jonathan G. Katz, Secretary,
SEC (March 29, 1994).
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III. Description of the Proposed Rule
Limit order protection in the NASDAQ market is now required only of
firms that execute their own customers' limit orders. Market makers
still may trade ahead of the limit orders entered by customers of other
firms that are sent to them for execution. Proposed Rule 15c5-1 would
provide limit order protection to all customers in NASDAQ/NMS
securities, regardless of where the order is ultimately sent for
execution.
A. General Prohibition on Trading Ahead
Paragraph (a) of the proposed rule establishes the general
prohibition on trading ahead of limit orders: a market maker shall not
effect a transaction involving a covered security for its own account,
directly or indirectly, at a price at which the market maker could
execute a customer limit order it is holding without executing the
customer limit order at the limit price or a price more favorable to
the customer, under the specific terms and conditions by which the
order was accepted by the market maker.
The rule applies once a market maker has accepted a customer limit
order for execution.25 The rule applies to all market makers,
whether they are handling orders for their firm's clients or orders
sent from another firm. Finally, the rule applies to all accounts of
the market maker in which the market maker or any person associated
with the market maker is directly or indirectly interested.
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\2\5NASD rules do not require a market maker to accept a
customer limit order.
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The application of the rule can best be illustrated through the
following example. Firm A is a retail brokerage firm. Firm B is a
market making firm with no customers of its own. Firm C is an
integrated firm with both brokerage and market making units. The
present NASD Interpretation applies only to orders received and
executed internally by firm C.26 The proposed rule would cover
these orders as well as orders sent from firm A to firm B or C, and
orders sent from firm C to firm B.
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\2\6The Interpretation also applies to firm A if it forwards
limit orders to an affiliated firm (e.g., Firm D, a firm that it
controls) for execution.
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For instance, firm A may send firm B a customer limit order to buy
1,000 shares of stock at $20\1/4\. Firm B, a market maker in that
security, is quoting a bid of $20 and an offer of $20\1/2\. Under the
proposed rule, a purchase of a certain number of shares by firm B at
$20\1/4\ or lower would trigger an obligation to fill the same number
of shares in the customer's order at $20\1/4\. A failure to execute the
customer's limit order either before or immediately after the market
maker's purchase would constitute a violation of the rule. The
Commission is requesting comment on whether it should exclude from the
protection of the rule limit orders to buy at the bid or limit orders
to sell at the offer.
B. ``Covered Security''
The rule would apply to NASDAQ securities that have been designated
National Market System securities. A NASDAQ security is a registered
equity security for which quotation information is disseminated in the
National Association of Securities Dealers Automated Quotation system.
A NASDAQ National Market System security is a NASDAQ security as
defined above for which transaction reports are required to be made on
a real-time basis pursuant to an effective transaction reporting
plan.27 The Commission requests comments on the feasibility of
extending the limit order protection measures incorporated herein to
other NASDAQ securities, such as NASDAQ SmallCap securities and over-
the-counter (``OTC'') Bulletin Board-eligible securities.28
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\2\7See 17 CFR 240.11Aa3-1.
\2\8A NASDAQ SmallCap security is one which (1) satisfies all
applicable requirements for qualification as a NASDAQ security and
is not a NASDAQ National Market System security; (2) is a right to
purchase such security; or (3) is a warrant to subscribe to such
security. See File No. SR-NASD-94-48.
The OTC Bulletin Board provides an electronic quotation medium
for subscribing members to reflect market making interest in
eligible securities, which are generally domestic or foreign equity
securities or American Depository Receipts not listed on NASDAQ or
the New York or American Stock Exchanges. See NASD Over-the-Counter
Bulletin Board Service Rules, Sec. 3, NASD Manual (CCH) 2573.
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C. Definition of ``Customer Limit Order''
Paragraph (c)(3) of the proposed rule defines the term ``limit
order'' as an order to buy or sell shares of a security at a specified
price or other price more favorable to the customer. In the example
above, the customer placed a limit order to buy 1,000 shares of stock
at $20\1/4\, indicating that the customer wishes to pay no more than
$20.25 for the security. The market maker may fill the order at a lower
price, but not at a price higher than the limit the customer has set.
The Commission proposes to limit the class of persons who would be
protected by the rule to public customers only. To this end, the term
``customer'' in paragraph (c)(3) is defined as a person who is not a
registered broker or dealer. Nevertheless, because customer limit
orders often are sent to a market maker by a broker or another market
maker that originally received the order, the definition of
``customer'' would encompass such orders as customer orders entitled to
protection under the rule. Orders for registered brokers or dealers
that are sent to a market maker by another broker or market maker would
not be entitled to this protection. The Commission requests comment on
the necessity of restricting limit order protection to customers and
the effectiveness of the definition in carrying out that purpose.
D. ``Terms and Conditions''
While the proposed rule does not distinguish institutional from
retail orders, the Commission believes that larger-sized orders may
qualify for special treatment. The language of the proposed rule that
would allow the parties to set the specific terms and conditions for
acceptance of limit orders is intended to permit market makers to
employ the appropriate strategy in filling a larger sized order without
being subjected to the requirements of the proposed ban.
By distinguishing the protection afforded a limit order by its size
or dollar value, the rule would recognize the greater significance of
larger size orders to market makers seeking to establish or liquidate a
position and the ability of larger sized customers to negotiate
specific order handling procedures. Market makers actively compete for
customer order flow. A customer dealing in greater size or amount
generally can better monitor the market for the security and negotiate
alternative execution procedures with another market maker.\29\
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\29\There are an average of 11.9 market makers for every NASDAQ/
NMS security. See NASD, 1994 NASDAQ Fact Book and Company Directory
(1994).
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The Commission preliminarily believes that larger sized orders
should be distinguished by measurable characteristics such as number of
shares or dollar amount. To this end, comment is requested on the
appropriate level of a size limit, i.e. 5,000 or 10,000 shares, and/or
a dollar value limit, i.e. $50,000, $100,000 or $200,000, that would
determine market maker obligations with respect to these two types of
orders in the final rule. This will insure that the rule ultimately
adopted includes limit order protection for retail investors while
maintaining the ability of market makers to negotiate order handling
arrangements with their institutional clients.
E. Exceptions
The rule proposal also establishes exceptions for all-or-none and
odd-lot orders as well as a general exemptive provision [paragraph
(d)]. The specific exceptions to the rule [paragraph (b)] are discussed
below. The Commission requests comment on the need for an all-or-none
or odd-lot order exception and a general exemptive provision.
Exception for All-or-None Orders
The proposed rule includes an exception for all-or-none customer
limit orders [paragraph (b)(2)]. An all-or-none customer limit order is
defined in paragraph (c)(1) as one that carries a condition that
instructs the market maker to execute all of the shares in the order
only if it can be done all at once. The purpose of this exception is to
prevent delays in executing other orders that a market maker may be
receiving at the time the market maker is handling the all-or-none
order. In the example above, the customer's limit order for 1,000
shares of stock could be filled in several separate transactions. With
an all-or-none order, a market maker must execute all the shares of the
order in a single trade. The market maker may not have immediate access
to that number of shares. In the meantime, other orders may be received
that require the market maker to purchase shares from other market
makers or their customers. Without this exception, the market maker
would not be able to buy any stock at less than the all-or-none limit
order price and, ultimately, the execution quality of other customer
orders would suffer. Thus, using the above example, the exception would
permit a market maker handling an all-or-none order to purchase shares
in the security for its own account at $20 \1/4\ or lower without
filling the customer's limit order, but only for amounts smaller than
the 1,000 shares in the all-or-none order. The market maker could not,
however, purchase 1,000 shares or more at $20 \1/4\ or lower for its
own account without satisfying the customer limit order.
IV. Initial Regulatory Flexibility Analysis
The Commission has prepared an Initial Regulatory Flexibility
Analysis (``IRFA'') in accordance with 5 U.S.C. 603 regarding proposed
Rule 15c5-1. The IRFA uses certain definitions of small entities
adopted by the Commission for purposes of the Regulatory Flexibility
Act. The IRFA indicates that regulatory action is required in order to
ensure that market makers in NASDAQ/NMS securities adhere to certain
minimum standards of fair treatment of customers. Specifically, by
prohibiting a market maker from trading ahead of a customer limit order
that it holds, the rule would improve the quality of executions for
customers and the price discovery process in the market for these
securities.
In 1993, there were 492 active NASDAQ market makers.\30\ Data on
the number of market makers meeting the definition of small entity that
make markets in NASDAQ/NMS securities and execute customer limit orders
is unavailable. The Commission is unable to quantify reasonably the
impact that the proposed rule would have on small market makers or
small issuers. The Commission does not believe it would be practicable
to exempt small market makers from the proposed rule because to do so
would be inconsistent with the Commission's statutory mandate to
protect investors.
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\30\See supra note 29.
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A copy of the Initial Regulatory Flexibility Analysis may be
obtained by contacting Scott C. Kursman, Attorney, Office of Market
Supervision, Division of Market Regulation, Securities and Exchange
Commission, Washington, D.C. 20549 (202) 942-3197.
V. Effects on Competition
Section 23(a)(2) of the Exchange Act\31\ requires the Commission,
in adopting rules under the Act, to consider any anti-competitive
effects of such rules and to balance these effects against the
regulatory benefits gained in furthering the purposes of the Act. As
previously noted, comment letters received prior to the adoption of the
NASD Interpretation suggested that such a rule would deny market makers
an opportunity to earn a profit in some situations. If true, this may
result in less market maker commitment in the NASDAQ/NMS market which
may in turn effect competition in this market. The Commission is
soliciting comment on the effect the rule may have on market maker
capital commitment and small issuers.
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\31\15 U.S.C. 78w(a)(2).
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The Commission preliminarily views Rule 15c5-1 as causing no burden
on competition unnecessary or inappropriate in furtherance of the
purposes of the Exchange Act. The Commission believes that the
principles of customer protection that Congress envisioned and that
would be advanced by this rule justify the burdens that the rule will
impose on market makers. The Commission, however, requests comment on
any competitive burdens that might result from adoption of the proposed
rule described in this release.
List of Subjects in 17 CFR Part 240
Reporting and recordkeeping requirements, Securities.
Text of Proposed Rule
For the reasons set out in the preamble, part 240 of Chapter II of
Title 17 of the Code of Federal Regulations is amended to read as
follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
1. The authority citation for Part 240 continues to read in part as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg,
77nnn, 77sss, 77ttt, 78c, 78d, 78i, 78j, 78l, 78m, 78n, 78o, 78p,
788s, 78w, 78x, 78ll(d), 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37,
80b-3, 80b-4 and 80b-11, unless otherwise noted.
* * * * *
2. Section 240.15c5-1 is added to read as follows:
Sec. 240.15c5-1. Prohibition on Market Makers Trading Ahead of
Customer Limit Orders.
(a) General Prohibition--A market maker shall not effect a
transaction involving a covered security for its own account, directly
or indirectly, at a price at which the market maker could execute a
customer limit order it is holding without executing the customer limit
order at the limit price or a price more favorable to the customer,
under the specific terms and conditions by which the order is accepted
by the market maker.
(b) Exceptions. The prohibition in paragraph (a) of this section
shall not apply to the following customer limit orders:
(1) ``all-or-none'' customer limit orders, provided that the number
of shares executed by the market maker is less than the number of
shares in the customer's all-or-none order; or
(2) odd-lot customer limit orders.
(c) Definitions. For purposes of this section:
(1) The term all-or-none refers to a condition placed upon a
customer limit order that instructs the market maker to either execute
all of the shares in the order at the specified price or execute none.
(2) The term covered security shall mean a NASDAQ security that has
been designated a National Market System security pursuant to
Sec. 240.11Aa2-1.
(3) The term customer limit order shall mean an order to buy or
sell a security at a specified price or a price more favorable to the
customer, that is not for the account of either a broker or dealer;
provided, however, that the term customer limit order shall include an
order transmitted by a broker or dealer on behalf of a customer.
(4) The term market maker shall have the meaning provided in
Section 3(a)(38) of the Act (15 U.S.C. 78c(a)(38)).
(d) Exemptions. The Commission, upon request or upon its own
motion, may exempt, by rule or by order, any market maker or any class
of market makers from the requirements of paragraph (a) of this section
with respect to any limit order or class of limit orders, either
unconditionally or on specified terms and conditions, if the Commission
determines that such exemption is consistent with the public interest
and the protection of investors.
Dated: September 29, 1994.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-24690 Filed 10-5-94; 8:45 am]
BILLING CODE 8010-01-P