Self-Regulatory Organizations; Notice and Immediate Effectiveness of Proposed Rule Change by National Association of Securities Dealers, Inc., Relating to Small Order Execution System Tier Size Classifications

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34321; File No. SR-NASD-94-36]

Self-Regulatory Organizations; Notice and Immediate Effectiveness

of Proposed Rule Change by National Association of Securities Dealers,

Inc., Relating to Small Order Execution System Tier Size

Classifications

July 6, 1994.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on June 7,

1994, the National Association of Securities Dealers, Inc. (``NASD'' or

``Association'') filed with the Securities and Exchange Commission

(``Commission'' or ``SEC'') the proposed rule change as described in

Items I, II, and III below, which Items have been prepared by the NASD.

The Commission is publishing this notice to solicit comments on the

proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance

of the Proposed Rule Change

The NASD is submitting this filing to effectuate The Nasdaq Stock

Market, Inc.'s (``Nasdaq'') periodic reclassification of Nasdaq

National Market (``NNM'') securities into appropriate tier sizes for

purposes of the maximum order size tiers for Nasdaq's Small Order

Execution System (``SOES'') and the minimum quote size requirements for

Nasdaq market makers in NNM securities. Since the NASD's proposal is an

interpretation of existing NASD rules, there are no language changes.

II. Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the NASD included statements

concerning the purpose of and basis for the proposed rule change and

discussed any comments it received on the proposed rule change. The

text of these statements may be examined at the places specified in

Item IV below. The NASD has prepared summaries, set forth in Sections

(A), (B), and (C) below, of the most significant aspects of such

statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

The purpose of the rule change is to effectuate Nasdaq's periodic

reclassification of NNM securities into appropriate tier sizes for

purposes of the maximum order size tiers for SOES and the minimum quote

size requirements for Nasdaq market makers in NNM securities. Nasdaq

reviews the tier level applicable to each security periodically

(approximately every six months) to determine if the trading

characteristics of the issue have changed so as to warrant a tier level

adjustment. Such a review was conducted as of February 28, 1994, using

the following established criteria:\1\

\1\The classification criteria is set forth in footnote 1 to

Section (a)(7) of the SOES Rules and Section 2(a) of Part V of

Schedule D to the NASD By-Laws.

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NNM securities with an average daily non-block volume of 3,000

shares or more a day, a bid price less than or equal to $100, and

three or more market makers are subject to a minimum quotation size

requirement of 1,000 shares and a maximum SOES order size of 500

shares;\2\

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\2\On December 23, 1993, the Commission approved a reduction in

the maximum SOES tier size to 500 shares from 1,000 shares. See

Securities Exchange Act Release No. 33377 (Dec. 23, 1993), 58 FR

69419 (Dec. 30, 1993). Even though the maximum order size for SOES

is now 500 shares, Nasdaq has continued to classify NNM securities

within the 1,000 share tier size because Nasdaq market makers must

continue to display a size of 1,000 shares in their quotations for

these securities, and remain firm for a minimum of 1,000 shares at

their publicized quotations in these securities for orders outside

of SOES.

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NNM securities with an average daily non-block volume of 1,000

shares or more a day, a bid price less than or equal to $150, and

two or more market makers are subject to a minimum quotation size

requirement of 500 shares and a maximum SOES order size of 500

shares; and

NNM securities with an average daily non-block volume of less

than 1,000 shares a day, a bid price less than or equal to $250, and

less than two market makers are subject to a minimum quotation size

requirement of 200 shares and a maximum SOES order size of 200

shares.

Pursuant to the application of this classification criteria, 500

NNM securities will be reclassified effective July 11, 1994. These 500

NNM securities are set out in the NASD's Notice To Members 94-48 (June

1994).

In ranking NNM securities pursuant to the established

classification criteria, Nasdaq followed the changes dictated by the

criteria with two exceptions. First, an issue was not moved more than

one tier size level. For example, if an issue was previously

categorized in the 1,000-share tier size, it would not be permitted to

move to the 200-share tier even if the reclassification criteria showed

that such a move was warranted. In adopting this policy, Nasdaq was

attempting to maintain adequate public investor access to the market

for issues in which the tier size level decreased and minimize market

maker exposure in issues for which the tier size level increased.

Second, for eight securities priced below $1 where the reclassification

called for a reduction in tier size, Nasdaq determined not to recommend

a decline in tier size given the low price of these securities and the

negligible effect on market maker exposure. As a result, five

securities that would have been reduced to a tier size of 200 shares

from 500 shares remained at 500 shares and three securities that would

have been reduced to a tier size of 500 shares from 1,000 shares

remained at 1,000 shares.

The NASD believes that the proposed rule change is consistent with

Sections 15A(b)(6) and 15A(b)(11) of the Act. Section 15A(b)(6)

requires, among other things, that the rules of the NASD be designed to

foster cooperation and coordination with persons engaged in regulating,

clearing, settling, processing information with respect to, and

facilitating transactions in securities, and to remove impediments to

and perfect the mechanism of a free and open market. Section 15A(b)(11)

applies to the form and content of quotations. Section 15A(b)(11)

requires that rules relating to quotations must be fair and informative

so as to promote orderly procedures for collecting, distributing and

publishing quotations. The NASD believes that the reassignment of NNM

securities within SOES tier size levels and minimum quotation size

levels will further these ends by providing an efficient mechanism for

small, retail investors to execute their orders on Nasdaq and providing

investors with the assurance that they can effect trades up to a

certain size at the quotations displayed on Nasdaq.

B. Self-Regulatory Organization's Statement on Burden on Competition

The NASD believes that the proposed rule change will not result in

any burden on competition that is not necessary or appropriate in

furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed

Rule Change Received From Members, Participants, or Others

Comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for

Commission Action

The proposed rule change has become effective immediately pursuant

to section 19(b)(3)(A)(i) of the Act and subparagraph (e) of Securities

Exchange Act Rule 19b-4 because the reranking of NNM securities into

appropriate order size tiers and quotation size requirements was done

pursuant to the NASD's stated policy and practice with respect to the

administration and enforcement of two existing NASD rules. Further, in

the SOES Tier Size Order,\3\ the Commission requested that the NASD

provide this information as an interpretation of an existing NASD rule

under section 19(b)(3)(A) of the Act. At any time within 60 days of the

filing of such proposed rule change, the Commission may summarily

abrogate such rule change if it appears to the Commission that such

action is necessary or appropriate in the public interest, for the

protection of investors, or otherwise in furtherance of the purposes of

the Securities Exchange Act of 1934.

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\3\See Securities Exchange Act Release No. 25791 (June 9, 1988),

53 FR 22594 (June 16, 1988).

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IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and

arguments concerning the foregoing. Persons making written submissions

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 Fifth Street NW., Washington, DC 20549. Copies

of the submission, all subsequent amendments, all written statements

with respect to the proposed rule change that are filed with the

Commission, and all written communications relating to the proposed

rule change between the Commission and any person, other than those

that may be withheld from the public in accordance with the provisions

of 5 U.S.C. 552, will be available for inspection and copying in the

Commission's Public Reference Room. Copies of such filing will also be

available for inspection and copying at the principal office of the

NASD. All submissions should refer to file number SR-NASD-94-36 and

should be submitted by August 2, 1994.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\4\

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\4\17 CFR 200.30-3(a)(12).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-16823 Filed 7-11-94; 8:45 am]

BILLING CODE 8010-01-M