NASD Notice to Members 97-76
NASD<----------Screws public and eliminates risk to BIG FIRMS,allowing market maker status, without financial risk,and ability to hold naked short positions without actually exposure.!!!!!!!!
Nasdaq Eliminates Excess Spread Rule For Nasdaq Securities
Executive Summary
The Nasdaq Stock Market, Inc. (Nasdaq©) Board of Directors approved, and the
National Association of Securities Dealers, Inc. (NASD©) Board of Governors
ratified, a decision to allow NASD Rule 4613(d)?the ?excess spread? rule for
Nasdaq securities?to lapse as of October 13, 1997. Accordingly, NASD member
firms are no longer required to comply with excess spread parameters for Nasdaq
securities, as of October 13, 1997.
Questions regarding this rule change should be directed to John F. Malitzis,
Senior Attorney, Office of General Counsel, The Nasdaq Stock Market, Inc., at
(202) 728-8245.
Background And Summary
Prior to January 20, 1997, the NASD?s excess spread rule (the Rule or the Excess
Spread Rule) provided that registered market makers in Nasdaq securities could
not enter quotations that exceeded 125 percent of the average of the three
narrowest market maker spreads in that issue, provided, however, that the
maximum allowable spread could never be less than 1/4 of a point (125 Percent
Rule). The Rule originally was designed to enhance the quality of the Nasdaq
market by preventing firms from holding themselves out as market makers
without having a meaningful quote in the system. Despite the regulatory
objectives underlying the Rule, however, certain market participants believed that
the Rule produced a variety of unintended consequences that undermined the
integrity of Nasdaq. Most notably, the Securities and Exchange Commission
(SEC) found in its 21(a) Report on the NASD and Nasdaq that the then-current
Excess Spread Rule posed the potential for discouraging, rather than encouraging,
the narrowing of spreads.1 Accordingly, the SEC requested that the NASD
?modify the rule to eliminate its undesirable effects, or to repeal it.?2
In response to the SEC?s 21(a) Report, the NASD submitted a proposal, which
was approved by the SEC and which amended the Excess Spread Rule on a pilot
basis.3 Under the revised Excess Spread Rule, a registered market maker in a
Nasdaq security was precluded from being a registered market maker in that issue
for 20 business days if its average spread in the security over the course of any
full calendar month exceeded 150 percent of the average of all dealer spreads in
such issue for the month (150 Percent Rule). While the Commission approved the
150 Percent Rule on a pilot basis, in its approval order for the new rule, the SEC
stated that ?[a]lthough the amended excess spread rule may reduce some of the
anticompetitive concerns outlined in the 21(a) Report, the Commission believes
that the amendment . . . may not completely satisfy the NASD?s obligations under
the Commission?s Order with regard to the excess spread rule. Specifically, it
may not remove completely the anticompetitive incentives for market makers to
refrain from narrowing quotes because the market makers? quotation obligation
continues to be dependent to some extent upon quotations of other market makers
in the stock.?4
1 See Appendix to Report Pursuant to Section 21(a) of the Securities Exchange
Act of 1934 Regarding the NASD and The Nasdaq Stock Market at p. 98 (21(a)
Report) (SEC, Aug. 8, 1996).
2 Id. at 99.
3 See Exchange Act Rel. No. 38180 (Jan. 16, 1997), 62 FR 3725 (Pilot Program
Approval Order). The pilot originally was set to expire on July 1, 1997, but was
extended through September 30, 1997, and again through October 13, 1997. See
Securities Exchange Act Rel. No. 38804 (July 1, 1997); Securities
Exchange Act Rel. No. 39120 (Sept. 23, 1997).
4 Pilot Program Approval Order, supra note 4.
Furthermore, almost simultaneous with the implementation of the Excess Spread
Rule, the SEC?s Order Handling Rules were implemented in a specified number
of Nasdaq securities, and thereafter in the remaining Nasdaq securities on a
rolling basis.5 The rollout schedule for the implementation of these rules was
recently amended, so that all Nasdaq securities will be subject to the Order
Handling Rules (i.e., the Limit Order Display Rule and the Electronic
Communications Network (ECN) Amendments to the Quote Rule) by October 13,
1997.6 Under these rules, market maker spreads are affected by both customer
limit orders and market maker quotes, adding a new dimension to the Nasdaq
market which previously did not exist. In addition, studies by the NASD?s
Economic Research Department have shown that the Order Handling Rules have
narrowed dealer spreads in stock in which these rules have been implemented?a
primary aim of the Excess Spread Rule.7
5 See Securities Exchange Act Rel. No. 37619A (Sept. 6, 1996), 61 FR 48290
(Sept. 12, 1996) (Order Handling Rule Adopting Release). Among other things,
the SEC in the Order Handling Rule Adopting Release amended Rule 11Ac1-1
(ECN Amendments to Quote Rule) to the Securities Exchange Act of 1934
(Exchange Act), and adopted new Rule 11Ac1-4 (Limit Order Display Rule).
6 See Securities Exchange Act Rel. No. 38870 (July 24, 1997).
7 See Effects of the Removal of Minimum Sizes for Proprietary Quotes in The
Nasdaq Stock Market, Inc., p. 6, NASD Economic Research Department (June 5,
1997).
In light of the foregoing, the Nasdaq Board of Directors and the NASD Board of
Governors determined to allow NASD Rule 4613(d) to lapse as of October 13,
1997. The NASD and Nasdaq determined this appropriate because: (1) the need
for the Rule is obviated by the implementation of the Order Handling Rules in all
Nasdaq-listed securities as of October 13; and (2) the SEC has continuing
concerns with the Excess Spread Rule. Accordingly, NASD member firms are no
longer required to comply with excess spread parameters for Nasdaq securities as
of October 13, 1997.
¸ 1997, National Association of Securities Dealers, Inc. (NASD). All rights
reserved. |
