[Federal Register Volume 62, Number 3 (Monday, January 6, 1997)]
[Notices]
[Pages 776-778]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-149]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38092; File No. SR-NASD-96-52]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the National Association of Securities Dealers, Inc. Relating
to the Reporting of Short Sale Transactions by Market Makers Exempt
from the NASD's Short Sale Rule
December 27, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on December 17, 1996, the
National Association of Securities Dealers, Inc. (``NASD'' or
``Association'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the NASD.
The Commission is publishing this notice to
[[Page 777]]
solicit comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The NASD is proposing to amend its Automated Confirmation
Transaction (``ACT'') Service rules to require all Primary Market
Makers (``PMMs'') to mark their ACT reports to denote when they have
relied on the PMM exemption to the NASD's short sale rule.\2\ In order
to afford NASD members ample time to modify their automated systems to
comply with the proposed rule change, the NASD proposes to establish an
effective date for the rule change in a Notice-to-Members announcing
Commission approval of the proposal, which Notice-to-Members shall be
published within thirty days of Commission approval of the proposal and
which effective date shall be no longer than three weeks after the date
of publication of the Notice. The text of the proposed rule change is
as follows. (Deletions are bracketed.)
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\2\ 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 NASD Rule
3350(k)(1).
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* * * * *
NASD Rule 6130
* * * * *
(d) Trade Information To Be Input
Each ACT report shall contain the following information:
(1)-(5). No change.
(6) A symbol indicating whether the transaction is a buy, sell,
sell short, sell short exempt [*] or cross;
(7)-(12). No change.
[* The ``sell short'' and ``sell exempt'' indicators must be entered
for all customer short sales, including cross transactions, and for
short sales effected by members that are not qualified market makers
pursuant to Rule 3350.]
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 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
On June 29, 1994, the SEC approved the NASD's short sale rule
applicable to short sales in Nasdaq National Market (``NNM'')
securities on an eighteen-month pilot basis through March 5, 1996.\3\
The NASD's short sale rule prohibits member firms from effecting short
sales at or below the current inside bid as disseminated by Nasdaq
whenever that bid is lower than the previous inside bid.\4\ 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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\3\See Securities Exchange Act Release No. 34277 (June 29,
1994), 59 FR 34885 (July 7, 1994) (``Short Sale Rule Approval
Order''). The termination date for the pilot program has
subsequently been extended through October 1, 1997, See Securities
Exchange Act Release Nos. 36171 (August 30, 1995), 60 FR 46651;
36532 (November 30, 1995), 60 FR 62519; 37492 (July 29, 1996), 61 FR
40693; and 37919 (November 1, 1996), 61 FR 57934.
\4\ Nasdaq calculated the inside bid or 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 and a ``down bid'' is denoted by a
red ``down'' arrow. Accordingly, absent an exemption from the rule,
a member cannot effect a short sale at or below the inside bid for a
security in its proprietary account or a customer's account 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 1/16th 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.
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In order to ensure that market maker activities that provide
liquidity and continuity to the market are not adversely constrained
when the short sale rule is involved, the rule provides an exemption to
``qualified'' Nasdaq market makers. Even if a market maker is able to
avail itself of the qualified market maker exemption, it can only
utilize the exemption from the short sale rule for transactions that
are made in connection with bona fide market making activity. If a
market maker does not satisfy the requirements for a qualified market
maker, it can remain a market maker in the Nasdaq system, although it
cannot take advantage of the exemption from the rule.
To be a ``qualified'' market maker, a market maker must satisfy the
Nasdaq Primary Market Maker (``PMM'') Standards. Under the PMM
Standards, a market maker must satisfy at least two of the following
four criteria to be eligible for an exemption from the short sale rule:
(1) The market maker must be at the best bid or best offer as shown on
Nasdaq 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.\5\ If a market maker
is a PMM for a particular stock, there is a ``P'' indicator next to its
quote in that stock.
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\5\ Specifically, the proportionate volume test requires a
market maker to account for volume of at least 1\1/2\ times its
proportionate share of overall volume in the security for the review
period. For example, if a security has 10 market makers, each market
maker's proportionate share volume is 10 percent. Therefore, the
proportionate share volume is one-and-a-half times 10, or 15 percent
of overall volume.
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If a member firm is a PMM in 80 percent or more of the securities
in which it has registered, the firm may immediately become a PMM
(i.e., a qualified market maker) in an NNM security be registering and
entering quotations in that issue. Otherwise, it may become a PMM in a
stock only after it has registered in the stock as a regular Nasdaq
market maker an satisfied the PMM qualification standards for the next
review period. The ability of a member firm to achieve and maintain PMM
status in 80 percent of the NNM issues in which it is registered also
has other corollary effects in market maker registration situations
involving initial public offerings, secondary offerings, mergers and
acquisitions.
In order to enhance the NASD's ability to surveil for compliance
with the short-sale rule, when the Commission approved the NASD's
short-sale rule it also approved an NASD proposal to require NASD
members to append a designator to their ACT reports to denote whether
their sale transactions were long sales, short sales, or exempt short
sales. However, market makers exempt from the short-sale rule are not
required to append ``sell short'' or ``sell short exempt'' to their ACT
reports.\6\ Accordingly, in order to enhance the NASD's ability to
surveil for potential abuses of the market maker exemption and examine
and monitor the market impacts of the market maker exemption, the NASD
is
[[Page 778]]
proposing to delete the footnote to NASD Rule 6130(d)(6), thereby
requiring all exempt market makers to mark their ACT reports to denote
when they have relied on the market maker exemption.\7\ In this
connection, the NASD also notes that SEC staff has expressed
preliminary concerns with the fact that the NASD's short sale rule does
not apply uniformly to all market participants by virtue of the market
maker exemption. As a result, to justify retention of the market maker
exemption, SEC staff has indicated that the NASD must, among other
things, conduct a thorough analysis of the use and effects of the
market maker exemption.
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\6\ Specifically, the footnote to NASD Rule 6130(d)(6) provides
that ``[t]he `sell short' and `sell short exempt' indicators must be
entered for all customer short sales, including cross transactions,
and for short sales effected by members that are not qualified
market makers pursuant to Rule 3350.''
\7\ In this connection, consistent with SEC statements regarding
the intraday netting obligations of firms under SEC Rule 3b-3, the
NASD notes that it will be permissible for firms to conduct a
``firm-wide netting'' of long and short positions once a day.
Accordingly, the NASD believes it would be permissible for a Nasdaq
trading desk to receive a stock position report at the opening and
net those trades effected by the Nasdaq trading desk against this
position throughout the day to determine whether particular sale was
long or short. Of course, if a firm has developed the capability to
continuously net its positions throughout that day, that firm would
have to rely on such updated position reports to determine whether a
particular sale was long or short. See Securities Exchange Act
Release No. 27938 (April 23, 1990), 55 FR 17949, 17950.
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The NASD believes the short-sale information that would be gathered
upon approval of this rule filing would be a necessary and critical
component of such an analysis of the market maker exemption.
The NASD believes the proposed rule change is consistent with
Sections 15A(b)(6) of the Act.\8\ Section 15A(b)(6) requires that the
rules of a national securities association be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, and to remove impediments to and perfect the mechanism of a
free and open market. Specifically, the NASD believes that requiring
exempt market makers to mark their ACT reports to denote when they have
relied on the market maker exemption will help to enhance the ability
of NASD Regulation, Inc. to monitor whether market makers are abusing
the exemption and facilitate the NASD's ability to examine the market
impacts of the market maker exemption from the short sale rule.
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\8\ 15 U.S.C. Sec. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The NASD believes that the proposed rule change will not result in
any burden on competition that is not necessary or appropriate in
furtherance of the proposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The NASD requests that the proposed rule change be approved on an
accelerated basis. The NASD believes that good cause exists to
accelerate approval of the proposal because of the NASD's need to
commence capturing exempt sales by exempt market makers through ACT for
a sufficient time in advance of the expiration of the pilot program for
the rule on October 1, 1997. With the information collected, the NASD's
Economic Research Department can conduct a meaningful and statistically
significant study on, among other things, the market impact of the
market maker exemption from the rule.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.
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. Sec. 552, will be available for inspection and copying in
the Commission's Public Reference Room. Copies of such filing will also
be available for inspection and copying at the principal office of the
NASD. All submissions should refer to File No. SR-NASD-96-52, and
should be submitted by January 27, 1997.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\9\
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\9\ 17 CFR 200.30-3(a)(12) (1996).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-149 Filed 1-3-97; 8:45 am]
BILLING CODE 8010-01-M