Order Execution Obligations

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

1280 Federal Register / Vol. 62, No. 6 / Thursday, January 9, 1997 / Rules and Regulations 1 17 CFR 240.11Ac1–4. 2See Securities Exchange Act Release No. 37972 (November 22, 1996), 61 FR 63709. 3See 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’’). 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. DATES: Effective January 9, 1997, 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 § 240.11Ac1–1(a)(25)(ii) the Subject Security Definition in the Quote Rule is April 10, 1997. The compliance date with respect to the ECN Amendment (except for the Subject Security Definition) for exchange-traded securities and 50 of the 1000 most actively traded OTC securities is January 13, 1997. The 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’’ 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 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 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 Trading System (‘‘ITS’’) Participants to review their existing limitations on the automated generation of quotations.

Federal Register / Vol. 62, No. 6 / Thursday, January 9, 1997 / Rules and Regulations 1281 1 18 CFR Parts 33, 34, 35, 36, 292, and 300. 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 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. Dated: January 2, 1997. By the Commission. Jonathan G. Katz, Secretary. [FR Doc. 97–440 Filed 1–8–97; 8:45 am] BILLING CODE 8010–01–M