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87-6 Request for Comments on Proposed Amendments to the NASD's Rules of Practice and Procedure For the Small Order Execution System (SOES)
TO: All NASD Members and Other Interested Persons
LAST DATE FOR COMMENTS: MARCH 2, 1987.
The NASD requests comments on two proposed amendments to Section (c)(l)(B) of the Rules of Practice and Procedure governing the NASD's Small Order Execution System (SOES). One amendment would prohibit NASDAQ market makers from utilizing SOES to execute agency orders in securities in which they are not registered as SOES market makers. The second amendment would prohibit persons associated with NASD members from utilizing SOES for executions in their personal accounts or in accounts in which they have an economic interest
The NASD believes that these amendments will help ensure maximum use of SOES for the benefit of public customers. The text of the proposed amendments is attached.
The NASD's Small Order Execution System was designed to provide a cost-effective system for the automated execution of small, public, agency orders in NASDAQ securities. Currently, customer transactions for up to 1,000 shares in NASDAQ National Market System securities or up to 500 shares in other NASDAQ securities may be automatically executed through SOES. Because SOES was designed to benefit public customers, only agency orders, including riskless principal transactions, received from public customers may be entered by SOES order-entry firms into SOES for execution.
At the recommendation of the NASD Market Surveillance and Trading Committees, the Board of Governors has approved the publication for comment of two proposed amendments to the SOES rules, both of which are intended to ensure that SOES is utilized for the benefit of public customers.
The first proposed amendment would prohibit NASDAQ market makers from utilizing SOES to execute agency orders in securities in which they are not registered as SOES market makers. For example, if firm ABC is a registered NASDAQ market maker in Apple Computer, but is not a registered SOES market maker in that security, it would be prohibited from using SOES to execute agency trades in the security. Although statistics indicate that the number of agency orders entered by non-SOES market makers is minimal in comparison to total SOES transaction volume, the Board of Governors believes that the proposed prohibition will eliminate the possible execution of principal transactions through SOES.
The second proposed amendment would prohibit persons associated with NASD members from using SOES for executions in their personal accounts or in accounts in which they have an economic interest. "Economic interest" is defined as an ownership interest in an account or any other type of direct financial interest, including the sharing of profits in an account. The proposed amendment is designed to ensure that SOES is utilized consistent with its intended purpose — to provide for the automated execution of small, public, agency orders in NASDAQ securities. To the extent that SOES is used to execute orders in the personal accounts of industry professionals, the Board is concerned that SOES may not be serving its intended purpose.
The second proposed amendment also addresses concerns of the NASD Market Surveillance and Trading Committees with respect to the practice of dividing agency orders in excess of the 500- or 1,000-share execution limits into smaller orders to meet SOES size requirements. This practice, which has resulted in the institution of NASD disciplinary proceedings against several NASD members, often involves the placing of orders in the personal accounts of persons associated with NASD members or accounts in which such persons have an economic interest.
The NASD encourages all members and other interested persons to comment on the proposed amendments. Comments should be directed to:
Mr. Lynn Nellius
National Association of Securities Dealers, Inc.
1735 K Street, N.W.
Washington, D.C. 20006-1506
Comments must be received no later than March 2, 1987. Comments received by this date will be considered by the NASD Market Surveillance and Trading Committees and the NASD Board of Governors. If the proposed amendments are approved by the Board, the amendments must be filed with and approved by the Securities and Exchange Commission before becoming effective.
Questions concerning this notice may be directed to either S. William Broka, Vice President, NASDAQ Operations-Members, at (202) 728-8050, or James M. Cangiano, Director, NASD Market Surveillance, at (202) 728-8186.
Frank J. Wilson
Executive Vice President and General Counsel
PROPOSED AMENDMENTS TO RULES OF PRACTICE AND PROCEDURE FOR THE SMALL ORDER EXECUTION SYSTEM (SOES)
(Existing language has been reorganized and divided into subsections. New language is underlined.)
B. SOES Order Entry Firms