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94-72 SEC Approves Elimination Of Access Market-Maker Procedures
Legal & Compliance
On July 22, 1994, the Securities and Exchange Commission (SEC) approved an NASD rule change that deletes Part IX, Schedule D to the NASD By-Laws. The deleted provision permitted NASD members to access The Nasdaq Stock Market (Nasdaq) in a market-making capacity without subscribing to Level 3 Nasdaq Workstation Service (Level 3 Service).1 These access market makers would enter into a contractual arrangement with a Level 3 Service subscriber, who would insert quotes for them. Effective August 1, 1994, member firms may no longer function as Nasdaq market makers without subscribing to Level 3 Service. The text of the deleted language follows the discussion below.
Background And Description
The SEC recently approved an NASD rule change to eliminate an outmoded procedure that allowed certain NASD member firms to participate in Nasdaq without subscribing to Level 3 Service. Under the deleted provision, Part IX, Schedule D to the NASD By-Laws, member firms that did not receive Level 3 Service could qualify as an access market maker by entering into a suitable arrangement with another member that was a Level 3 Subscriber (entering subscriber).
After the NASD's approval of such an arrangement, the entering subscriber could input two-sided quotations reflecting the dealer interest of the access market maker. These quotations would be displayed with the entering subscriber's market-maker identifier; a special indicator would also be displayed to inform other dealers that an access arrangement existed for the quotations displayed in the subject security. In this circumstance, the entering subscriber assumed responsibility for executing trades at the displayed bid/offer; yet, both the entering subscriber and the access market maker were jointly responsible for complying with the market-maker obligations in Part V, Schedule D to the NASD By-Laws.
This rule change was prompted in part by the technology migration that the NASD has undertaken to upgrade the Nasdaq market facilities and communications network. After careful analysis of the costs and feasibility of supporting access-market-maker functionality in the new environment, Nasdaq decided not to offer this functionality. Among other things, the staff's analysis revealed that recent changes in market-making practices and procedures had dramatically reduced the use of the access-market-maker arrangement. Indeed, when the NASD filed the proposal with the SEC, no such arrangements were in effect.
Given the lack of arrangements as well as any regulatory purpose, the NASD determined that the access-market-maker functionality did not warrant the expenditure of resources necessary to provide it in the new environment. Consequently, only Level 3 Service subscribers may function as Nasdaq market makers. This rule change took effect on August 1, 1994, the date that the SEC published its approval order in the Federal Register. The deleted text appears below. Questions regarding this rule change may be directed to Michael J. Kulczak, Associate General Counsel, The Nasdaq Stock Market, Inc., at (202) 728-8811.
1 See Release No. 34-34428, July 22, 1994; 59 FR 38992, August 1, 1994.
Text Of Part IX, Schedule D Of The NASD By-Laws
(Note: Deleted text is in brackets.)
Part IX [Procedures For Access To The Nasdaq System By Non-Nasdaq Market Makers]
[These procedures permit a registered NASDAQ market maker, upon approval by the Corporation, to enter quotations into the NASDAQ System on behalf of another market maker who does not subscribe to Level 3 NASDAQ Service.]