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U.S. Securities and Exchange Commission

Securities and Exchange Commission
Washington, D.C.

Securities Exchange Act of 1934
Rel. No. 48573 / September 30, 2003

Admin. Proc. File No. 3-10772


In the Matter of the Application of the

NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.

and

NASDAQ STOCK MARKET, INC.

for Review of Action by the

OPERATING COMMITTEE OF THE INTERMARKET TRADING SYSTEM


OPINION OF THE COMMISSION

THE OPERATING COMMITTEE OF THE INTERMARKET TRADING SYSTEM -- REVIEW OF NATIONAL MARKET SYSTEM PLAN ACTION UNDER RULE 11Aa3-2(e) OF THE SECURITIES EXCHANGE ACT OF 1934.

Review of Plan Actions

The Operating Committee of the Intermarket Trading System ("ITS") rejected Applicants' proposed Amendment No. 20 to the ITS Plan seeking, among other things, to obtain the Nasdaq's admission to the ITS and to exempt certain of their members from the ITS trade-through rule. Applicants filed with the Commission an application for review. Held, the Commission determines not to exercise its discretion to consider the issues raised and the relief sought in the application for review in an adjudicatory proceeding. The application for review is dismissed.

APPEARANCES:

T. Grant Callery, for the National Association of Securities Dealers, Inc.

Edward S. Knight, for the Nasdaq Stock Market, Inc.

Ellen J. Neely, for the Chicago Stock Exchange, Inc.

Steven J. Abrams and Dean G. Yuzek, of Ingram Yuzek Gainen Carroll & Bertolotti, LLP, for the New York Stock Exchange, Inc.

Michael J. Ryan, for the American Stock Exchange LLC.

Robert L.D. Colby, for the Division of Market Regulation, as amicus curiae.

Appeal filed: April 8, 2002
Last brief received: October 17, 2002

I.

The National Association of Securities Dealers, Inc. ("NASD") and Nasdaq Stock Market, Inc. ("Nasdaq") (collectively, the "Applicants") jointly seek review under Rule 11Aa3-2(e) of the Securities Exchange Act of 1934 1 of action taken by the Operating Committee ("ITSOC") of the Intermarket Trading System ("ITS") rejecting their proposed Amendment No. 20 to the ITS Plan. For the reasons set forth below, we decline to exercise our discretionary jurisdiction to review the ITSOC's action under Exchange Act Rule 11Aa3-2(e). To the extent we make findings in this matter, we do so based on an independent review of the record.

II.

The ITS is an order routing network designed to facilitate intermarket trading among the participating self-regulatory organizations ("SROs") in exchange-listed equity securities, based on current quotation information emanating from their markets. 2 The terms of the linkage are governed by the ITS Plan, a national market system plan approved by the Commission under Exchange Act Section 11Aand Exchange Act Rule 11Aa3-2. 3 The ITS Plan is administered by the ITSOC. 4

III.

In November 2000, Nasdaq applied, pursuant to Exchange Act Section 6, 5 to register with the Commission as a national securities exchange. As relevant here, Nasdaq is seeking amendment of the ITS Plan to establish its separate participation in the ITS. An ITSOC subcommittee, consisting of representatives of the NASD, Nasdaq, Boston Stock Exchange, Inc., and New York Stock Exchange, Inc. ("NYSE"), began work on amendments to the ITS Plan. In the course of these discussions, NASD and Nasdaq circulated to ITSOC members various drafts of proposed amendments to the ITS Plan. The NYSE also presented a counter-proposal.

On March 1, 2002, NASD and Nasdaq submitted to the ITSOC proposed Amendment No. 20. As proposed by NASD and Nasdaq, Amendment No. 20 incorporated some comments from the ITSOC, but did not include provisions in the NYSE's counter-proposal that NASD and Nasdaq deemed unacceptable. Among other things, proposed Amendment No. 20 provided for NASD's and Nasdaq's separate membership in the ITS. Proposed Amendment No. 20 also recognized NASD's proposed establishment and operation of the Alternative Display Facility ("ADF") as a facility of an ITS participant. 6 In addition, proposed Amendment No. 20 gave NASD ADF members a choice of whether to participate in the ITS (and as a result be obligated to comply with the ITS Plan's trade-through rule, among other provisions), 7 and permitted NASD ADFmembers to access other Participants' markets by means of computer-generated outbound ITS commitments to trade. NASD and Nasdaq requested the ITSOC to adopt proposed Amendment No. 20.

At a March 7, 2002, meeting of the ITSOC, eight of the nine ITS Plan participants voted to reject proposed Amendment No. 20. Only the NASD voted in favor of the proposal. The minutes of the meeting reflect that the ITSOC did not oppose Nasdaq's admission as an ITS Plan participant. Nor did the ITSOC oppose the NASD's and Nasdaq's separate participation in the ITS Plan. Rather, ITSOC Participants expressed concern that NASD's ADF rules made participation in the ITS by ADF members optional, leading to the possibility that non-ITS ADF members might trade through the quotations of ITS participants. The ITSOC also objected that dual Nasdaq/NASD order entry firms, i.e., firms not acting as market makers or posting quotations, could print trades on NASD's ADF in order to trade through the quotations of ITS participants. The ITSOC further objected that proposed Amendment No. 20 lacked language limiting NASD ADF members' access to ITS to comport with the ITS Plan's narrow inter-market access privileges. Certain Participants also noted that Amendment No. 20 was a working draft and not in proper ITS Plan amendment form.

NASD and Nasdaq ask the Commission to "set aside" the ITSOC's action and to order the "immediate approval" of proposed Amendment No. 20. Alternatively, NASD and Nasdaq request the Commission to approve those provisions of proposed Amendment No. 20 necessary to recognize the Nasdaq's separate membership in the ITS and to establish NASD's ADF as a facility of an ITS Plan participant. 8

IV.

Exchange Act Rule 11Aa3-2 governs the Commission's authority to hear an appeal from action taken pursuant to a national market system plan such as the ITS Plan. Subsection (e) of Exchange Act Rule 11Aa3-2 provides that the Commission, in its discretion, may consider an appeal in connection with the operation or implementation of a national market system plan. 9 After considering the submissions of the parties, we have determined to dismiss NASD's and Nasdaq's joint application.

Exchange Act Rule 11Aa3-2(e) provides the Commission with broad discretion to "entertain appeals in connection with the implementation or operation of any effective national market system plan." 10 Nonetheless, we have determined not to exercise that discretion in these circumstances. We have not been asked to review a particularized action or failure to act in connection with a national market system plan that is alleged to result in a harm to the applicant. 11 Such a review would consider whether the action or failure to act conformed to the provisions of the plan and the standards provided in the rule.

Here, in contrast, NASD and Nasdaq request the Commission to "adopt" or "promulgate" Amendment No. 20 as drafted and establish conditions under which they will become separate participants in ITS. Exchange Act Rule 11Aa3-2(b) sets forth procedures for amending a national market system plan. 12 Under this Rule, two or more SROs may propose a plan amendment or the Commission may do so on its own initiative. In either event, the Commission must publish notice of the filing of the proposed amendment and provide all interested persons an opportunity to submit written comments.

In this case, Applicants admit that adoption of their proposal would initiate "fundamental structural and regulatory changes" to the national market system. Under the circumstances here, before the Commission determines whether to undertake changes that would result in major restructuring of the ITS, we need careful study and consideration of the potential effects, taking into account the input of market participants and other interested parties. A discretionary appeal under Exchange Act Rule 11Aa3-2(e) would not provide the wide-based participation needed to consider this range of policy matters. The fact that NASD's and Nasdaq's proposal raises issues that impact on-going rulemaking proceedings concerning the NASD ADF pilot program, the trade-through rule's de minimis exemption, and Nasdaq's registration application under Exchange Act Section 6, reinforces our conclusion not to use a discretionary appeal to consider adoption of proposed Amendment No. 20. 13

We also observe that the NASD's and Nasdaq's proposal is only a draft. The NASD and Nasdaq indicated on the face of the proposal that it is an incomplete "NASD DRAFT." A review of the proposal reveals that it contains numerous strike-throughs and annotations. The proposal thus may be unsuitable for adoption into the ITS Plan in its current form. Moreover, the fact that the NASD and Nasdaq have circulated various drafts of Amendment No. 20 to the ITSOC prior to their submission of the version at issue in this appeal suggests that Applicants recognize that the Amendment could include a variety of provisions. For all of these reasons, we have determined not to exercise our discretionary authority to review this matter.

An appropriate order will issue. 14

By the Commission (Chairman DONALDSON and Commissioners GLASSMAN, GOLDSCHMID and ATKINS); Commissioner CAMPOS, not participating.

Jonathan G. Katz
Secretary


Securities and Exchange Commission
Washington, D.C.

Securities Exchange Act of 1934
Rel. No.48573 / September 30, 2003

Admin. Proc. File No. 3-10772


In the Matter of the Application of the

NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.

and

NASDAQ STOCK MARKET, INC.

for Review of Action by the

OPERATING COMMITTEE OF THE INTERMARKET TRADING SYSTEM


ORDER DISMISSING APPLICATION FOR REVIEW OF ACTION TAKEN BY THE OPERATING COMMITTEE OF THE INTERMARKET TRADING SYSTEM

On the basis of the Commission's opinion issued this day, it is

ORDERED that the National Association of Securities Dealers, Inc.'s and the Nasdaq Stock Market, Inc.'s application for review of action by the Operating Committee of the Intermarket Trading System be, and it hereby is, dismissed.

By the Commission.

Jonathan G. Katz
Secretary

Endnotes

1 17 C.F.R. § 240.11Aa3-2(e).

2 Quotations in exchange-listed securities are collected and disseminated by the Consolidated Quotation System ("CQS"), which is governed by the Consolidated Quotation Plan.

3 15 U.S.C. § 78k-1; 17 C.F.R. § 240.11Aa3-2. See Exchange Act Rel. No. 19456 (Jan. 27, 1983), 27 SEC Docket 212.

4 The ITSOC members include the New York Stock Exchange, Inc., American Stock Exchange, LLC, Chicago Stock Exchange, Inc., Boston Stock Exchange, Inc., Chicago Board Options Exchange, Inc., Cincinnati Stock Exchange, Inc., Pacific Exchange, Inc., Philadelphia Stock Exchange, Inc., and NASD.

5 15 U.S.C. § 78(f). See Exchange Act Rel. No. 44396 (June 7, 2001), 75 SEC Docket 461.

6 The ADF is a quotation, trade comparison, and trade reporting facility developed by NASD in accordance with the Commission's SuperMontage approval order, see Exchange Act Rel. No. 43863 (Jan. 19, 2001), 74 SEC Docket 441, and in conjunction with the Nasdaq's application to register as a national securities exchange, see Exchange Act Rel. No. 44396 (June 7, 2001), 75 SEC Docket 461. On July 24, 2002, the Commission approved the ADF pilot program for a nine-month period. See Exchange Act Rel. No. 46249 (July 24, 2002), 78 SEC Docket 242. On April 10, 2003, the Commission extended the pilot period for another nine months, until January 25, 2004. See Exchange Act Rel. No. 47663 (Apr. 10, 2003), 79 SEC Docket 3843.

7 "A 'trade-through' occurs when an execution takes place in one ITS market center at a time when another ITS market center is offering a better price." Exchange Act Rel. No. 19456 (Jan. 27, 1983), 27 SEC Docket, 212, 213 n.11. The ITS Plan's trade-through rule currently prohibits participants from purchasing or selling ITS-eligible securities at prices that are lower than the bid or higher than the offer displayed by another ITS participant. See ITS Plan Section 8(d)(i).

On August 28, 2002, the Commission granted a nine-month, de minimis exemption from the ITS Plan's trade-through rule in exchange-traded funds tracking the Nasdaq-100 Index, Dow Jones Industrial Average, and the Standard & Poor's 500 Index. See Exchange Act. Rel. No. 46428 (Aug. 28, 2002), 78 SEC Docket 1180. On May 30, 2003, the Commission extended the de minimis exemption for an additional nine-month period. See Exchange Act Rel. No. 47950 (May 30, 2003), 80 SEC Docket 1245.

8 NASD and Nasdaq simultaneously filed a petition for rule-making requesting the Commission "to correct" the action of the ITSOC by amending the ITS Plan in accordance with proposed AmendmentNo. 20.

9 17 C.F.R. § 240.11Aa3-2(e).

10 Id.

11 See, e.g., Chicago Board Options Exchange, Admin. Proc. File No. 3-10561 (order accepting discretionary jurisdiction and directing briefs where plan participant objected to action reclassifying terminals on its floor and changing its fees).

12 17 C.F.R. § 240.11Aa3-2(b).

13 See supra notes 6 and 7.

14 We have considered all of the parties' contentions. We have rejected or sustained these contentions to the extent that they are inconsistent or in accord with the views expressed in this opinion.

 

http://www.sec.gov/litigation/opinions/34-48573.htm


Modified: 10/1/2003