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91-70 SEC Approval and Startup of Nasdaq InternationalSM Service

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EXECUTIVE SUMMARY

The Securities and Exchange Commission approved on October 10 the establishment of Nasdaq InternationalSM service for a two-year pilot period. All Nasdaq National Market issues, American Depositary Receipts on regular Nasdaq, and equity securities listed on U.S. exchanges qualify for inclusion in Nasdaq International. The startup of Nasdaq International is scheduled for early January 1992. The service will support a European trading session from 3:30 a.m. to 9 a.m., Eastern Time, tracking the initial business hours of the London financial markets, to accommodate international trading of U.S. securities by investors in the U.S.. United Kingdom (U.K.), and other parts of Europe. Nasdaq Workstation devices will support maker-maker participation from the U.S. or U.K.

BACKGROUND

In June 1990, the NASD filed a proposed rule change with the Securities and Exchange Commission (SEC) to extend electronic market facilities to a cross-border session that would run from 3:30 a.m. to 9 a.m., Eastern Time (ET) on each U.S. business day. This period overlaps the business hours of the London securities markets. The service is designed primarily to accommodate international trading by investors in the U.S., United Kingdom (U.K.), and other parts of Europe.

This service will mark the first instance that a U.S. securities market has operated across continents in a time period that had been used exclusively by foreign exchanges. Nasdaq International will offer the potential for European trading to many U.S. securities firms that don't operate there now. The service will enable domestic firms to participate in order flow in U.S. stocks that now is directed to foreign markets.

Market makers in the U.K. will be linked to London-based Nasdaq computers already in place that provide the same functions as do Nasdaq computers in the United States. A transatlantic cable connects the London facility to the NASD central computer complex in the U.S.

On October 10, 1991, the SEC approved the service and specialized NASD rules (International Rules) that will govern broker/dealer participation. The NASD expects to launch the service in early January 1992.

In approving the two-year service pilot, the SEC noted that this development advances the statutory goals of improving the efficiency of market operations, broadening the distribution of market information, enhancing opportunities to achieve best execution and promote competition among market participants, and linking all clearance and settlement facilities in a way that reduces costs.

FEATURES OF NASDAQ INTERNATIONAL

The Nasdaq International service will offer the basic Nasdaq automated services, except for the Small Order Execution System (SOES), now provided during the domestic session to support market making by NASD members. These include the SelectNet service, which allows trades to be negotiated entirely via computer, as well as the Automated Confirmation Transaction (ACT) service, which facilitates efficient clearance and settlement. Access to market-making services during the cross-border session will be provided exclusively through Nasdaq Workstation devices.

Bid and ask quotations from each market maker will be available on Nasdaq terminals throughout the European session. These quotations also will be disseminated to domestic and international vendors of market information.

To be eligible, market makers must be NASD members or approved U.K. affiliates of NASD members. A U.S. firm with no U.K. branch may participate by staffing its U.S. trading desk during the European session. Market makers must disseminate quotations throughout the European session.

Broker/dealers that are not NASD members but that are authorized to carry on an investment business in the U.K. and have a "control relationship" with an NASD member may participate in the service as the member's agent.1 All transactions effected by the affiliate will be captured on the books and records of the sponsoring NASD member. To participate in this fashion, the sponsor and its affiliate must enter into a specialized compliance agreement with the NASD.

The agreement also would provide that (1) only registered representatives of the sponsoring member may enter quotations into the service from the affiliate's premises in the U.K., (2) a registered principal of the sponsoring member must be designated to supervise those registered personnel, and (3) the sponsoring member must develop and have approved by the NASD adequate supervisory procedures covering the affiliate's participation before the affiliate begins to quote markets in the service. The registered principal responsible for supervising the affiliate's personnel must be assigned to the foreign affiliate's office within nine months of the affiliate's initial approval.

In addition, the sponsoring member must agree to assume full responsibility for the affiliate's compliance with all provisions of the service rules as well as other applicable NASD rules. The sponsor also must commit to ensure that all NASD regulatory data requests are satisfied and that the NASD can obtain access to original books and records located in the U.S. or U.K. that relate to the affiliate's participation in the service.

These procedures, the SEC noted in its approval order, are intended to place the same requirements on the sponsoring member that would pertain if it were to participate directly in the service.

Two classifications of market makers are authorized for the service — European only and International. European-only market makers must quote firm, two-sided markets in the qualified securities in which they have registered to trade during the cross-border session. International market makers will have identical obligations during the cross-border session and also will have to function as market makers in their respective registered securities during the domestic session. During the latter period, International market makers will assume the full range of obligations that now apply to member firms registered as Nasdaq or Consolidated Quotation Service (CQS) market makers. Approved U.K. affiliates will be limited to participating as European-only market makers.

To provide maximum flexibility, market-maker classifications will be assigned on an individual security and terminal basis, not on a firm-wide basis. Thus, a participating firm could use a Nasdaq Workstation terminal located in the U.S. to enter quotations as a European-only market maker in 10 qualified issues, an International market maker in 20 additional issues, and a U.S.-only market maker in another 15 issues.

A market maker's classification is set at the time of initial registration (or reregistration). Excused withdrawals and voluntary terminations of market-maker registration will be handled in essentially the same manner as they are today for Nasdaq's domestic session. Nasdaq personnel will be on duty throughout the cross-border session to handle operational matters.

One major difference between the domestic and cross-border sessions is in the application of the 20-day waiting period for reregistration in a Nasdaq security. Since SOES will not be available in the cross-border session, the 20-day waiting period will not apply, thereby adding greater flexibility for market-maker participants.

During the initial phase of Nasdaq International, all qualified issues will be quoted and traded exclusively in U.S. dollars. The ranking of market-maker quotes in an eligible security will continue to be based on price and by time within price. In addition, closed quotes will appear below all open positions.

REQUIREMENTS FOR MARKET MAKERS

Market makers participating in the cross-border session will be subject to most of the operational requirements that currently apply to broker/ dealers registered in Nasdaq or CQS issues. These requirements are summarized as follows:

1. Registration on a security-by-security basis by individual member firms is a prerequisite for market-maker participation.
2. Registered market makers must either be self-clearing or have a clearing arrangement with a firm that is a member of a registered clearing agency.
3. Participation in the Automated Confirmation Transaction (ACT) service and the Trade Acceptance and Reconciliation Service (TARS) will be mandatory for all participating firms, thereby providing immediate comparison as well as trade reporting for regulatory purposes.
4. All trades classified as international transactions must be cleared and settled through a registered clearing agency using a continuous net settlement system. A settlement cycle of five business days will apply to all "regular way" transactions.
5. Market-maker participants in the service must maintain firm, two-sided quotes throughout the European session in each qualified security in which they have registered as a European-only or International market maker.

QUALIFIED SECURITIES

Securities that qualify for quotation in the Nasdaq International service are:

  • Nasdaq National Market (Nasdaq/NMS) securities.

  • Foreign equities (excluding Canadian is sues) and American Depositary Receipts (ADRs) in regular Nasdaq.

  • Equity securities listed on U.S. exchanges. These securities will be included in Nasdaq

International at the request of any Nasdaq International or European market maker.

TRADE AND VOLUME REPORTING AND DISSEMINATION

A significant distinction between the domestic and European session concerns entry of trade reports. During the domestic session, transactions in Nasdaq/NMS or listed securities must be reported to the NASD within 90 seconds of execution through the ACT facility. For the cross-border session, the requirement will be three minutes, the prevailing standard for market makers in the U.K. The data elements to be reported, however, will be identical to those now required during the NASD's domestic market session.

While domestic transactions in reportable securities are disseminated instantly, individual transaction reports on Nasdaq/NMS and exchange-listed securities in the European session will not be disseminated to vendors, except for those securities that have such trade-by-trade information disseminated by the London Stock Exchange. With that exception, all other trade data will be gathered by the NASD for regulatory purposes only.

At the close of the European session, the NASD will furnish information on the high, low, and closing transaction prices and aggregate volume for securities with at least two market makers in the service. Data from the European session will not be consolidated with trade information from the domestic session. While this information is less than that provided for domestic Nasdaq/NMS transactions, it will mark the first time that any aggregate volume or trading-range information for U.S. securities has been publicly disseminated during U.K. trading hours.

The NASD expects that securities information vendors will disseminate the closing price and volume information.

For additional information about the service described in this notice, contact Gary Guinn, Director of Nasdaq International, at (202) 728-8087. For compliance-related questions, call Michael Kulczak, Associate General Counsel, at (202) 728-8811.


1 For this purpose, "control relationship" means hat the member controls, is controlled by, or is under common control with an NASD member.


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