[Federal Register Volume 61, Number 96 (Thursday, May 16, 1996)]
[Notices]
[Pages 24845-24846]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-12234]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37190; File No. SR-NASD-96-11]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by National Association of Securities Dealers, Inc. Relating to
Amendments to the Primary Maker Standards
May 9, 1996.
On March 27, 1996, the National Association of Securities Dealers,
Inc. (``NASD'' or ``Association'') filed with the Securities and
Exchange Commission (``SEC'' or ``Commission'') a proposed rule change
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder.\2\ The rule change amends the
Primary Market Maker (``PMM'') Standards rule be deleting a provision
of the rule that allows a market maker to qualify as a PMM in a
security by registering in that security and refraining from quoting
that security for five days.\3\
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\1\ 15 U.S.C. Sec. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ NASD Manual, Rules of Fair Practice, Art. III, Sec. 49 (CCH)
para. 2200I.
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Notice of the proposed rule change, together with the substance of
the proposal, was provided by issuance of a Commission release
(Securities Exchange Act Release No. 37062, April 2, 1996) and by
publication in the Federal Register (61 FR 15885, April 9, 1996). No
comment letters were received. This order approves the proposed rule
change.
On June 29, 1994, the Commission approved on a pilot basis the
NASD's short sale rule governing short sales in Nasdaq National Market
(``NNM'') securities (``Short Sale Rule'').\4\
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\4\ See Securities Exchange Act Release No. 34277 (June 29,
1994), 59 FR 34885 (July 7, 1994) (approving, inter alia, Article
III, Section 48 to the NASD Rules of Fair Practice). The pilot has
been approved to continue through August 3, 1996. See Securities
Exchange Act Release No. 36532 (Nov. 30, 1995), 60 FR 62519 (Dec. 6,
1995).
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The Short Sale Rule prohibits member firms from effecting short
sales \5\ at or below the current inside bid as disseminated by the
Nasdaq system whenever that bid is lower than the previous inside
bid.\6\
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\5\ A short sale is a sale of a security which the seller does
not own or any sale which is consummated by the delivery of a
security borrowed by, or for the account of, the seller. To
determine whether a sale is a short sale members must adhere to the
definition of a ``short sale'' contained in SEC Rule 3b-3, which
rule is incorporated into Nasdaq's short sale rule by Article III,
Section 48(l)(1) of the NASD Rules of Fair Practice.
\6\ Nasdaq calculates the inside bid and the best bid from all
market makers in the security (including bids on behalf of exchanges
trading Nasdaq securities on an unlisted trading privileges basis),
and disseminates symbols to denote whether the current inside bid is
an ``up bid'' or a ``down bid.'' Specifically, an ``up bid'' is
denoted by a green ``up'' arrow symbol and a ``down bid'' is denoted
by a red ``down'' arrow. Accordingly, absent an exemption from the
rule, a member can not effect a short sale at or below the inside
bid in a security in its proprietary account or an account of a
customer if there is a red arrow next to the security's symbol on
the screen. In order to effect a ``legal'' short sale on a down bid,
the short sale must be executed at a price at least a \1/16\th of a
point above the current inside bid. Conversely, if the security's
symbol has a green ``up'' arrow next to it, members can effect short
sales in the security without any restrictions. The rule is in
effect during normal domestic market hours (9:30 a.m. to 4:00 p.m.;
Eastern Time).
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The short sale rule provides an exemption to so-called
``qualified'' Nasdaq market makers (``market maker exemption'') to
ensure that the rule does not constrain market making activities that
provide liquidity and continuity to the market.\7\ The market maker
exemption is limited to transactions made in connection with bona fide
market making activity. A market maker that does not satisfy the
requirements for a qualified market maker can remain a market maker but
cannot rely upon the market maker exemption when effecting short sales
of a NNM security.
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\7\ Article III, Section 48(c)(1).
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A ''qualified'' Nasdaq market maker is currently defined to be a
market maker that satisfies the criteria for a PMM found in Section 49
of the NASD Rules of Fair Practice.\8\ A market maker may qualify as a
PMM if it satisfies at least two of the following four criteria: (1)
the market maker must be at the best bid or best offer as shown on the
Nasdaq system no less than 35 percent of the time; (2) the market maker
must maintain a spread no greater than 102 percent of the average
dealer spread; (3) no more than 50 percent of the market maker's
quotation updates may occur without being accompanied by a trade
execution of at least one unit of trading; or (4) the market maker
executes 1\1/2\ times its ``proportionate'' volume in the stock.\9\ A
market maker also may qualify as a PMM in a security by registering in
the security and refraining from quoting the security for five days
(``five-day quotation delay rule''). A ``P'' indicator is displayed
next to the market maker identification of a market maker that
qualifies as a PMM.
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\8\ Before the PMM standards went into effect, a ``qualified
market maker'' was defined to be a market maker that had entered
quotations in the relevant security on an uninterrupted basis for
the preceding 20 business days, the so-called ``20-day test.''
\9\ For example, if there are 10 market makers in a stock, each
dealer's proportionate share volume would be 10 percent; therefore,
1\1/2\ times proportionate share volume would mean 15 percent of
overall volume.
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Market makers are reviewed each month to determine whether they
have satisfied the PMM performance standards. If a PMM has not
satisfied the threshold standards after a particular review period, its
PMM designation is removed commencing on the next business day
following notice of failure to comply with the standards. A market
maker that loses its PMM designation may requalify for PMM designation
by satisfying the threshold standards for the next review period.
[[Page 24846]]
A market maker may register as a market maker in a NNM security and
become a PMM immediately if it is a PMM in at least 80% of the
securities in which it makes a market. If a market maker does not meet
the 80% threshold, it can either comply with the five-day quotation
delay rule or it can register in the security as a regular Nasdaq
market maker, enter quotes immediately, and satisfy the qualification
criteria for the next review period.
The NASD stated in its filing that the five-day quotation delay
rule originally was intended to ensure that market makers were not
registering in a security to take advantage of momentary short-selling
opportunities. However, the NASD expressed concern in its filing that
market making affiliates of the same firm are able to use the five-day
quotation delay rule to circumvent the application of the PMM standards
by ``swapping'' lists of stocks in which they make a market and
alternatively receive PMM designation without ever meeting the
quantitative PMM standards. The NASD also expressed concern in its
filing that market makers are able to use the five-day quotation delay
rule to inflate the percentage of stocks in which they are a PMM above
the 80 percent level, thereby entitling them to PMM status for all NNM
securities in which they register during the next month. In both
instances, the five-day quotation delay rule would allow a market maker
to become a PMM for reasons wholly unrelated to the quality of its
market-making.\10\ Therefore, the NASD has proposed to amend the
Primary Market Maker (``PMM'') Standards rule by deleting the five-day
quotation delay rule.
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\10\ The NASD stated in its filing that few market makers have
utilized the five-day quotation delay rule to become PMMs.
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The Commission finds that the rule change is consistent with the
provisions of section 15A(b)(6) of the Act. The rule change is designed
to prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general, to protect investors and the public interest
by ensuring that market makers qualify for PMM status only if they have
met certain performance standards. The rule change also is reasonably
designed to ensure that a market maker's short sale transactions are
made in connection with bona fide market making activity.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change SR-NASD-96-11 be, and hereby is,
approved.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-12234 Filed 5-15-96; 8:45 am]
BILLING CODE 8010-01-M