June 22, 2001
Re: Request for Exemptions Under Rule 11Ac1-5
Dear Mr. Karn:
In your letter dated June 20, 2001 ("Letter"), Market Systems, Inc. ("MSI") requested two exemptions from Rule 11Ac1-5 ("Rule") under the Securities Exchange Act of 1934 ("Exchange Act"). The Letter states that MSI is a major provider of best execution analysis and has contracted with a broad range of market centers to provide Rule 11Ac1-5 reports. The requested exemptions relate to (1) orders received prior to dissemination of quotations by the primary market for a security, and (2) orders received during a time when the consolidated best bid and offer ("Consolidated BBO") reflects a spread (the difference between the offer and the bid) that exceeds $1 plus 5% of the midpoint of the Consolidated BBO. This letter responds to your request.
Adopted in November 2000,1 the Rule generally requires a "market center" (as defined in the Rule) that trades national market system securities to make available to the public monthly electronic reports that include uniform statistical measures of execution quality. The initial compliance date for the Rule was moved back by one month until May 1, 2001.2 In addition, the Commission has issued a temporary exemption from the reporting requirements of the Rule until July 31, 2001 for Nasdaq securities.3 The final phase-in date is October 1, 2001, on which the Rule is scheduled to apply to all national market system securities.
In the process of developing its reporting system, MSI has come to believe that two exemptions will further the purposes of the Rule. First, the Letter states that many orders received prior to the first dissemination of quotes on a trading day by the primary market are handled in a substantially different manner than other covered orders and that their inclusion with other orders could materially change the statistics reported under the Rule. MSI believes that the primary opening quote, which may be disseminated before or after the first print, is the first quote that accurately reflects the market. It therefore requests that the Commission exempt orders that are received prior to the opening quote from the primary market.
Second, MSI requests an exemption from the Rule to address a Consolidated BBO that does not represent a meaningful market because of an unrealistically wide spread. You note that the statistical analysis specified in the Rule is very sensitive to any erroneous quotes in the Consolidated BBO. The requested exemption relates to orders received when the Consolidated BBO spread is greater than $1 plus 5% of the midpoint of the Consolidated BBO.4
MSI believes that the Commission's granting of the requested exemptions will be in the best interest of investors and the public because it will contribute to the production of fairer and more meaningful statistics for determining execution quality across the entire industry.
On the basis of your representations and the facts presented, the Commission, by the Division pursuant to delegated authority,5 is granting the following two exemptions from the Rule:
1. The Commission is exempting from the Rule any order that is received prior to the dissemination of the first firm, uncrossed quotations for a trading day by the primary listing self-regulatory organization ("SRO") for the relevant security. The definition of covered order in paragraph (a)(8) of the Rule encompasses only those orders that are received during regular trading hours (beginning at 9:30 a.m. Eastern Time unless otherwise specified in accordance with the Joint-SRO Plan for the Rule) and at a time when a Consolidated BBO is being disseminated. When the primary listing SRO has not yet disseminated its first quotations in a security, the remaining quotations that may be disseminated often can result in quoted spreads that vary significantly from the norm. The exemption will assure that such quoted spreads do not skew the execution quality statistics included in the monthly market center reports and reduce their comparability. The Commission therefore finds that the exemption is necessary or appropriate in the public interest, and is consistent with the protection of investors.
2. The Commission is exempting any order received during a time when the Consolidated BBO reflects a spread (the difference between the offer and the bid) that exceeds $1 plus 5% of the midpoint of the Consolidated BBO. A spread of this width could be the result of potentially erroneous quotes or of abnormal trading conditions. In either case, the inclusion of statistics calculated with reference to such a Consolidated BBO could significantly affect the comparability and reliability of the execution quality measures in market center monthly reports. The Commission therefore finds that the exemption is necessary or appropriate in the public interest, and is consistent with the protection of investors.
The exemptions granted in this letter are subject to modification or revocation at any time if the Commission determines that such action is necessary or appropriate in the public interest or otherwise in furtherance of the purposes of the Exchange Act. If you have questions, please do not hesitate to contact me.
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.
Annette L. Nazareth