Self-Regulatory Organizations; Notice of Filing 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. 34-37370; File No. SR-NASD-96-23]

Self-Regulatory Organizations; Notice of Filing and Immediate

Effectiveness of Proposed Rule Change by National Association of

Securities Dealers, Inc. Relating to Small Order Execution System Tier

Size Classifications

June 26, 1996.

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 17,

1996, 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 determining the maximum size order for a particular

security eligible for execution through Nasdaq's Small Order Execution

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

market makers in NNM securities. Specifically, under the proposal, 728

NNM securities will be reclassified into a different SOES tier size

effective July 1, 1996. 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

[[Page 34916]]

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 determining the maximum size order for a particular

security eligible for execution through SOES and the minimum quote size

requirements for Nasdaq market makers in NNM securities. Nasdaq

periodically reviews the SOES tier size applicable to each NNM security

to determine if the trading characteristics of the issue have changed

so as to warrant a tier size adjustment. Such a review was conducted

using data as of March 31, 1996, pursuant to the following established

criteria:\1\

\1\ The classification criteria is set forth in NASD Rule

4613(a)(2) and the footnote to NASD Rule 4710(g).

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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 1,000

shares;

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, 728

NNM securities will be reclassified effective July 1, 1996. These 728

NNM securities are set out in the NASD's Notice To Members 96-40 (June

1996).\2\

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\2\ Notwithstanding the NASD's announcement in NTM 96-40 that

Microsoft and U.S. Robotics are scheduled to be moved to the 500-

share SOES tier size level, the NASD has determined that The Nasdaq

Stock Market will keep these stocks in the 1,000-share tier level.

Even though these stocks fall within the 500-share tier level,

pursuant to the criteria for determining tier levels, the NASD has

determined to keep these stocks at the 1,000-share level because of

their large market capitalization and high trading volume. See,

letter to Howard L. Kramer, Associate Director, Office of Market

Supervision, Division of Market Regulation, SEC, from Thomas R.

Gira, Associate General Counsel, The Nasdaq Stock Market, Inc.,

dated June 25, 1996.

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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 to help ensure the ongoing participation of market

makers in SOES for issues in which the tier size level increased.

Second, for securities priced below $1 where the reranking called for a

reduction in tier size, the tier size was not reduced.

The NASD believes that the proposed rule change is consistent with

Section 15A(b)(6) of the Act. Section 15A(b)(6) requires, among other

things, that the rules of the NASD governing the operation of The

Nasdaq Stock Market be designed to foster cooperation and coordination

with persons engaged in regulating, clearing, settling, and processing

information with respect to facilitating transactions in securities,

and to remove impediments to and perfect the mechanism of a free and

open market. The NASD believes that the reclassification of NNM

securities within SOES tier size levels and minimum quotation size

levels will further these objectives by providing an efficient

mechanism for small, retail investors to execute their orders on Nasdaq

and by providing investors with the assurance that they can effect

trades up to a certain size at the best prices quoted 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

Written 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 Rule 19b-4

thereunder in that the reranking of NNM securities into appropriate

SOES tier sizes 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, 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 sixty (60) days of the filing of a proposed rule

change pursuant to Section 19(b)(3)(A) of the Act, the Commission may

summarily abrogate the 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 Act.

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 the file number in the caption

above and should be submitted by July 24, 1996.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\3\

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\3\ 17 CFR 200.30-3(a)(12) (1989).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96-16923 Filed 7-2-96; 8:45 am]

BILLING CODE 8010-01-M