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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
Release No. 34-38110; File No. S7-30-95
RIN 3235-AG66
Order Execution Obligations
AGENCY: Securities and Exchange Commission
ACTION: Final Rule; Revised Effective Date; Revised Compliance
Dates
SUMMARY: The Securities and Exchange Commission is revising: (1)
the effective date of Rule 11Ac1-4 ("Limit Order Display Rule")
and amendments to Rule 11Ac1-1 ("ECN Amendment" to the "Quote
Rule") from January 10 to January 13, 1997; (2) the effective
date of the amendment to subsection (a)(25)(ii) of the Quote Rule
("Subject Security Definition") to April 10, 1997; and (3) the
compliance dates of the ECN Amendment with respect to most over-
the-counter ("OTC") securities.
EFFECTIVE DATE: The effective date for the Limit Order Display
Rule, and the amendments to the Quote Rule, adopted August 28,
1996, by the Securities and Exchange Commission, and published on
September 12, 1996 (61 FR 48290) (collectively, "Order Execution
Rules"), is being changed to January 13, 1997, except that the
effective date for the amendment to the Subject Security
Definition in the Quote Rule is April 10, 1997. Effective
[insert date of publication in the Federal Register], the
compliance dates with respect to the ECN Amendment (except for
the Subject Security Definition) with respect to exchange-traded
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securities and 50 of the 1000 most actively traded OTC securities
is January 13, 1997. The new compliance date of the ECN
Amendment for an additional 100 of these 1,000 securities is
January 31, 1997, and the compliance date for the remaining 850
most actively traded securities is February 21, 1997. The final
compliance date for the remainder of the securities is March 28,
1997.
FOR FURTHER INFORMATION CONTACT: Betsy Prout Lefler, Special
Counsel, Gail Marshall-Smith, Special Counsel, or David
Oestreicher, Special Counsel, (202) 942-0158, Division of Market
Regulation, Securities and Exchange Commission, 450 Fifth Street,
N.W., Mail Stop 5-1, Washington, D.C. 20549.
SUPPLEMENTARY INFORMATION:
I. Background
On August 28, 1996, the Securities and Exchange Commission
("Commission") adopted Rule 11Ac1-4,-[1]- the "Limit Order
Display Rule," and amendments to Rule 11Ac1-1, the "ECN
Amendment," to require OTC market makers and exchange specialists
to display certain customer limit orders, and to publicly
disseminate the best prices that the OTC market maker or exchange
specialist has placed in certain electronic communications
networks ("ECNs"), or to comply indirectly with the ECN Amendment
by using an ECN that furnishes the best market maker and
specialist prices therein to the public quotation system. The
Commission also expanded the definition of "subject security"
---------FOOTNOTES----------
-[1]- 17 CFR 240.11Ac1-4.
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under the Quote Rule, which brought all exchange-traded
securities, rather than just the subset of such securities known
as "Rule 19c-3 securities," under the scope of the mandatory
quotation requirements of the Quote Rule. In the Adopting
Release, the Commission deemed the effective date of all these
initiatives January 10, 1997. Thereafter, the Commission
modified the compliance dates with respect to the Limit Order
Display Rule so that the display of customer limit orders in OTC
securities now will be phased-in over several months.-[2]-
More recently, the Commission received a letter from the
National Association of Securities Dealers ("NASD") requesting
additional relief from the Limit Order Display Rule and the ECN
Amendment.-[3]- First, the NASD letter requests that the
implementation date of both the Limit Order Display Rule and the
ECN Amendment be delayed by one business day to ensure an orderly
and safe introduction of the software necessary to operate in
accordance with the new rules. Second, the NASD letter requests
that the ECN Amendment be phased-in according to the same
schedule as the Limit Order Display Rule.
The Commission is hereby modifying the effective dates and
compliance dates in response to the NASD letter. In addition, in
---------FOOTNOTES----------
-[2]- See Securities Exchange Act Release No. 37972
(November 22, 1996), 61 FR 63709.
-[3]- See Letter from Alfred R. Berkeley, III,
President, Nasdaq, to Richard R. Lindsey,
Director, Division of Market Regulation
("Division"), Commission, dated December 18,
1996 ("NASD letter").
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order to address concerns about the impact on marketwide
quotation systems and third market makers upon implementation of
the mandatory quotation requirement of the Order Execution Rules,
the Commission is moving from January 10, to April 10, 1997, the
effective date of the new definition of "subject security" under
the Quote Rule (Rule 11Ac1-1(a)(25)(ii)), as discussed below.
II. Discussion
A. Implementation Date of the ECN Amendment
With regard to the implementation date of the Limit Order
Display Rule and the ECN Amendment (collectively, "rules"), the
NASD letter expresses concern that introducing software that has
been significantly revised during the evening of January 9 poses
a serious risk of potential system malfunction or an untimely
start-up of the market. Instead, the NASD believes that
introduction of the new software over the weekend preceding
Monday, January 13, 1997, would provide the NASD with an
opportunity to take the appropriate time to carefully load the
software and build the necessary databases to ensure a smooth
transition. According to the NASD letter, the NASD's technology
staff, several ECNs, and many industry members including members
of the Quality of Markets Committee (made up of institutions,
retail investors and broker-dealers) agree that it would be
imprudent to commence implementation, and the attendant software
changes, on Friday, January 10th. Moreover, the NASD letter
notes that several broker-dealers that are revising their own
internal systems would not introduce their software changes on
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January 10 because of the risks in migrating to the new code
within a limited period of time during a trading week.
B. ECN Amendment Phase-in
The NASD letter also requests that the phase-in schedule for
securities under the Limit Order Display Rule be extended to the
ECN Amendment. This request is intended to ensure that investors
and other market participants have an opportunity to obtain
experience with the ECN Amendment scaled over a manageable set of
securities. The NASD believes this phase-in will enable all
interested parties to more accurately determine the impact that
full implementation of the ECN Amendment will have on issues such
as system capacity and trading patterns.
C. Implementation of the Subject Security Definition
The Order Execution Rules' amendment to the definition of
the term "subject security" under the Quote Rule brought all
exchange-traded securities, rather than just the subset of such
securities known as "Rule 19c-3 securities," under the scope of
the mandatory quotation requirements of the Quote Rule. Under
this amendment, an OTC market maker must publish firm two-sided
quotations for any exchange-traded security in which its executed
volume, during the most recent calendar quarter, comprised more
than one percent of the aggregate trading volume of the security.
Thus, firms that previously did not quote in certain exchange-
traded securities may be required to publish quotations in such
securities when the amendment becomes effective. In the Adopting
Release, the Commission asked the NASD and the Intermarket
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Trading System ("ITS") Participants to review their existing
limitations on the automated generation of quotations. This
review has not been completed. The Commission believes that
additional time should be provided for this review, prior to
implementation of the expanded definition of "subject security,"
because of the additional quotation obligations that may result
from the rules. The Commission also believes that extending the
effective date will give additional time to evaluate the effect
on existing systems of the potential increase in quotation
traffic that may be caused by the mandatory quotation requirement
for exchange-traded securities.
III. Conclusion
For the reasons described above, the Commission is modifying
the effective date of the Limit Order Display Rule and the
amendments to the Quote Rule (except as discussed below
concerning subsection (a)(25)(ii) of the Quote Rule) until the
start of business on Monday, January 13, 1997, rather than on
January 10, 1997.
In addition the Commission is modifying the compliance dates
of the ECN Amendment in order to phase-in the implementation of
the ECN Amendment. Accordingly, beginning on January 13, 1997,
compliance with the ECN Amendment will be required with respect
to all exchange-traded securities and 50 of the 1000 Nasdaq
securities, as identified by Nasdaq for the first phase of
compliance with the Limit Order Display Rule. On January 31,
1997, compliance with the ECN Amendment will be required with
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respect to the additional 100 of these 1,000 securities selected
by Nasdaq. The ECN Amendment will apply to the remaining 850 of
the 1,000 securities on February 21, 1997, as identified by
Nasdaq. The next phase-in date will be on March 28, 1997, and,
unlike the Limit Order Display Rule, will cover all remaining
Nasdaq securities. The Commission will review the operation of
the markets during this phase-in period.
Finally, the Commission is modifying the effective date of
the amendment to Rule 11Ac1-1(a)(25)(ii) from January 10, 1997,
to April 10, 1997. In the interim, the Commission expects the
NASD and the ITS Participants to continue to review the NASD's
and ITS Plan's limitations on automated quotations.
By the Commission.
Jonathan G. Katz
Secretary
DATE: January 2, 1997