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U.S. Securities and Exchange Commission

NASD Rulemaking:
Extension of the Comment Period –
Proposed Rule Change by NASD Re: Integrated Order Delivery and Execution System

(Release No. 34-39794; File No. SR-NASD-98-17)

March 25, 1998

Self-Regulatory Organizations; Notice of Extension of the Comment Period for the Proposed Rule Change by the National Association of Securities Dealers, Inc. Relating to an Integrated Order Delivery and Execution System

On February 19, 1998, the National Association of Securities Dealers, Inc. ("NASD"), through its wholly-owned subsidiary, The Nasdaq Stock Market, Inc. ("Nasdaq"), filed with the Securities and Exchange Commission ("SEC" or "Commission") a series of proposed rule changes. 1 The NASD is proposing new rules and amendments to existing NASD rules to establish an integrated order delivery and execution system ("System").

As proposed, the new System will have three types of registered executing participants (as it does currently): market makers, electronic communication networks ("ECNs"), and UTP exchange specialists. Executing participants' quotes will be displayed on Nasdaq workstations, disseminated through information vendors, and accessible by System participants. Registered NASD members, and certain customers they sponsor, will be able to deliver various sized orders (up to 999,999 shares, if the Actual Size Rule is expanded to all Nasdaq stocks) 2 through the new System to electronically access the displayed quotations.

The System features a voluntary central limit order file that all market participants will be able to access either directly or through a System participant. System participants will be able to send directed (i.e., to a particular market maker) or non-directed orders. Orders will remain anonymous until they are executed. The System will replace the Small Order Execution System ("SOES") and SelectNet (and related NASD rules), while maintaining features of each. Primary market makers will be able to sponsor other firms (e.g., institutions), giving them System access.

As proposed, the System would operate differently depending on whether the Commission approves the NASD's request to permit Market Makers to quote their actual size for all Nasdaq stocks. 3 If the Actual Size Rule is not extended to all Nasdaq stocks, the NASD proposes that non-market makers will not be permitted to enter orders larger than 1,000 shares for non-directed orders, and that the SOES prohibition on splitting orders and the Five Minute Rule ( i.e. , any orders sent within a five minute period are considered part of one order) will be retained. Also, if Actual Size is not expanded to cover all Nasdaq stocks, the NASD proposes that non-market makers be prohibited from entering principal orders. Finally, if Actual Size is approved for all Nasdaq stocks, the order splitting and Five Minute Rules will not apply.

Under the proposal, market makers will no longer be "SOESed-Out-of-the-Box" when they allow their quote size to be diminished to zero. 4 Instead, the NASD proposes that after three (rather than the current five) minutes, a firm that is effectively out of the market ( i.e. , has not refreshed its quote) will be automatically reestablished at the lowest ranked bid and offer for 1,000 shares.

Given the proposal's complexity and the Commission's desire to give the public sufficient time to consider the proposal, the NASD has consented to extend the comment period to May 8, 1998. 5

Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Exchange Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., 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. § 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-98-17 and should be submitted by May 8, 1998.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 6

Jonathan G. Katz


1 Exchange Act Release No. 39718 (March 4, 1998) 63 FR 12124 (March 12, 1998) (File No. SR-NASD-98-17). As originally noticed, the comment period ran through April 2, 1998.

2 The Actual Size Rule allows market makers to quote their actual size by reducing the minimum quotation size requirement to one normal unit of trading ( i.e. , 100 shares). The Actual Size Rule currently applies to 150 Nasdaq stocks on a pilot basis. The NASD has filed a proposal to expand the pilot program to cover all Nasdaq stocks permanently. See Exchange Act Release No. 39760 (March 16, 1998) 63 FR 13894 (March 23, 1998).

3 Id.

4 See Exchange Act Release No. 39423 (December 10, 1997) 62 FR 66160 (December 17, 1997).

5 See letterfrom Richard G. Ketchum, President and Chief Operating Officer, Nasdaq, to Katherine A. England, Assistant Director, Division of Market Regulation, SEC, datedMarch 24, 1998.

6 17 CFR 200.30-3(a)(12).