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93-2 Market-Maker Obligations With Regard to Display of Size in Quotations

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Executive Summary

Since December 1, 1990, market makers in Nasdaq Small-Cap MarketSM securities that also make markets in the Small Order Execution System (SOESSM) have had to display size in their quotations of at least 500 shares. Effective February 1, 1993, this requirement will apply to all market makers in Nasdaq Small-Cap equity issues irrespective of their participation in SOES.

Background and Discussion

The Securities and Exchange Commission (SEC) has approved an amendment to Schedule D of the NASD® By-Laws requiring market makers in Nasdaq Small-Cap Market securities to display size in their quotations equal to the maximum order size in SOES, 500 shares.

In 1990, the SEC approved a rule proposal by the NASD to require mandatory display of size for market makers that participate in SOES1 that included all market makers in Nasdaq National Market® securities and those market makers that voluntarily participated in SOES for Nasdaq Small-Cap stocks. The current rule proposal will extend that requirement to all market makers in Nasdaq Small-Cap issues, whether or not they participate in SOES.

Under the Rules of Practice and Procedures for SOES, market makers have to execute orders through SOES in sizes equal to or smaller than the "maximum order size" published from time to time by the NASD. These order-size limits are currently set at 200, 500, and 1,000 shares for Nasdaq National Market issues; and 500 shares for Nasdaq Small-Cap issues. The NASD

National Association of Securities Dealers, Inc. believes that it is now appropriate to expand the requirement to all market makers in Nasdaq Small-Cap securities because display of size in quotations reflects a more realistic picture of the actual size of executions available and the depth of the market in each security. In addition, display of size enhances investor knowledge and benefits issuers by publicizing the liquidity and depth of the market for their securities.

Additionally, requiring all Nasdaq® market makers to display minimum size in their quotations will end the inequitable application of the current display requirements. The requirement to post 500 shares now applies only to market makers that choose to participate in SOES, since SOES is voluntary for Nasdaq Small-Cap stocks. The market makers choosing to participate in SOES must also honor all incoming orders at their displayed size of 500 shares under the SEC's firm quote rule, Rule 11AC1-1. Thus, SOES market makers are disadvantaged by the current rule because they must honor phone orders from competing non-SOES market makers that need only execute orders for 100 shares in the same issues. The NASD believes that extending the requirement to display size to all market makers, whether they participate in SOES or not, is an equitable remedy.

Accordingly, the SEC has approved a rule requiring market makers in Nasdaq Small-Cap securities to display 500 shares in their quotation sizes. The NASD indicated that all Nasdaq Small-Cap securities will be subject to the 500-share size requirements unless the security has a bid price of $10 or more and an average daily non-block volume of less than 1,000 shares. In the Nasdaq Small-Cap issues that fall under these thresholds, market makers will continue to be required to post size of a normal unit of trading, 100 shares. Nasdaq convertible debt securities will also be exempt from the new size-display requirements. The NASD will periodically (approximately every six months) review and analyze the trading characteristics of Nasdaq Small-Cap securities, including share price and average volume in the stock, to determine whether any modifications to the 500-share requirement are appropriate and will publish a Notice to Members regarding any modifications.

Questions concerning this Notice may be directed to Beth E. Weimer, Associate General Counsel, at (202) 728-6998.


1 See Release 34-28450 (Sept. 18, 1990).


(Note: New language is underlined.)

Schedule D

Part VI

Requirements Applicable to Nasdaq Market Makers

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Sec. 2 Character of Quotations

(a) Two-sided Quotations. For each security in which a member is registered as a market maker, the member shall be willing to buy and sell such security for its own account on a continuous basis and shall enter and maintain two-sided quotations in the Nasdaq System, subject to the procedures for excused withdrawal set forth in Section 8 below. Each member registered as a Nasdaq market maker [and as a market maker in the Small Order Execution System] shall display the size for each quotation which size shall be no less than the maximum order size for such security eligible for execution through the Small Order Execution System, as shall be published from time to time by the Association pursuant to paragraph (a)(7) of the Rules of Practice and Procedure for the Small Order Execution System. Maximum order sizes for Nasdaq/NMS securities shall be 200, 500, or 1,000 shares depending upon trading characteristics of the securities. Maximum order size for Nasdaq Small-Cap securities shall be 100 or 500 shares depending upon trading characteristics of the securities. A 500 share display size for Nasdaq Small-Cap securities shall apply to securities with an average daily non-block volume of 1,000 shares or more and a bid price of less than $10.00 per share. A 100 share display size for Nasdaq Small-Cap securities shall apply to securities with an average daily non-block volume of less than 1,000 shares a day and a bid price equal to or greater than $10.00 a share. Individual securities may be reclassified from time to time depending upon unique circumstances as determined by the Association. These sizes shall not be applicable to convertible debt securities listed in Nasdaq.

* * * * *

Rules of Practice and Procedures for the Small Order Execution System

(a) Definitions

* * * * *
7. The term "maximum order size" shall mean the maximum size of individual orders for a security that may be entered into or executed through SOES. The maximum order size for each security shall be published from time to time by the Association. In establishing the maximum order size for each Nasdaq/NMS security, the Association will give consideration to the average daily non-block volume, bid price, and number of market makers for each security.

Maximum order sizes for Nasdaq/NMS securities shall be 200, 500, or 1,000 shares depending upon trading characteristics of the securities. Maximum order size for Nasdaq Small-Cap securities shall be 500 shares. These sizes may be adjusted on an issue by issue basis, depending upon unique characteristics of the issue as determined by the Association.

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