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91-37 Market-Maker Obligations With Regard to Display of Size in Quotations

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EXECUTIVE SUMMARY

Since December 1, 1990, Nasdaq market makers that are also market makers in the Small Order Execution System (SOES) have been required to display sizes in their quotations equal to or greater than the SOES tier size of the security. At the same time, because of a temporary exemption from the Securities and Exchange Commission's (SEC) firm-quote rule, market makers did not have to execute more than 100 shares against competing market makers in the same issues. That exemption has now expired. As of June 1, 1991, Nasdaq market makers must execute any order at their displayed quotations.

BACKGROUND AND DISCUSSION

In response to a recommendation by the NASD's Quality of Markets Committee, the NASD on December 1, 1990, implemented a rule to require Nasdaq market makers that are also market makers in SOES to display size in Nasdaq at least equal to the maximum size of an order eligible for execution in SOES. Market makers were also required to extend such size to all parties except firms that are market makers in the same security.1

The order-size limits in SOES are currently set at 200, 500, and 1,000 shares, depending on the trading characteristics of the security. The NASD believes that the mandatory display of size provides a realistic picture of the actual size of executions available from market makers as well as the depth of the market in each security.

The mandatory display of size applies to all Nasdaq National Market securities and to market makers in regular Nasdaq securities that are registered as market makers in those securities in SOES. The rule, as implemented in December 1990, contained an exemption from the SEC's firm-quote rule for orders from competing market makers, requiring executions of only 100 shares. Although the firm-quote rule obligates a market maker to execute any order presented at its quoted price and size, the NASD requested a temporary exemption from the rule because of concerns about the impact on market-making risk should market makers be required to execute sizeable orders from competitors. The SEC approved the exemption for six months, expiring June 1, 1991.

As of June 1, 1991, market makers must execute all orders at their displayed sizes, regardless of whether the orders are from other market makers in the security. Moreover, market makers

are no longer able to avail themselves of the exemption from the firm-quote rule for orders from competing market makers.

Questions concerning this notice may be directed to Beth E. Mastro, Office of General Counsel, at (202) 728-6998.

(Note: Deleted language is in brackets.)

Schedule D

Part VI

Sec. 2 Character of Quotations

(b) Firm Quotations. A market maker that receives an offer to buy or sell from another member of the Association shall execute a transaction for at least a normal unit of trading at its displayed quotation as disseminated through the Nasdaq system at the time of receipt of any such offer. If a market maker displays a quotation for a size greater than a normal unit of trading, it shall, upon receipt of an offer to buy or sell from another member of the Association, [other than a member who is a market maker registered in the security,] execute a transaction at least at the size displayed.

1 See Notice to Members 90-75, November 1990.


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