March 15, 2006
On January 13, 2006, the Securities and Exchange Commission (SEC) approved NASDAQ's application to register as a national securities exchange.1 NASDAQ is currently working with the SEC to determine the operational date - the date on which NASDAQ will begin operating as an exchange. This date is subject to NASDAQ satisfying the conditions specified in the approval order.
As part of its Exchange Application, NASDAQ incorporated NASD's OATS Rules in their entirety into the new NASDAQ Exchange Rules. This means that, as a general matter, firms that will be both NASD and NASDAQ exchange members will see minimal change from their current OATS reporting obligations upon the official operational date of the NASDAQ Exchange. One exception to this is the reporting of executions to OATS of trades executed in NASDAQ-listed securities otherwise than on a national securities exchange to the proposed Trade Reporting Facility.2 These transactions will now require a new Market Center Code to be included on the OATS Execution Report. Also as a result of exchange registration, firms will need to determine the membership status (NASD vs. NASDAQ) of any firm to which they route orders in NASDAQ-listed equity securities to ensure the proper Destination and Member Type Codes are reported to OATS. Both of these changes are explained in further detail below.
New Market Center Code for NASD Trade Reporting Facility
As part of Nasdaq's registration as an exchange, NASD has submitted a rule filing that, among other things, proposes change to NASD rules to reflect Nasdaq's separation from NASD upon Nasdaq's operation as a national securities exchange.3 As part of this filing, NASD also is proposing to establish rules for the trade reporting of transactions otherwise than on an exchange through a new NASD facility, called the Trade Reporting Facility. If this facility is approved by the SEC, members that execute over-the-counter trades in NASDAQ-listed securities and choose to report these transactions to the Trade Reporting Facility will be required to populate the Market Center Code on OATS Execution Reports with "L." These trades will be subject to Order/Trade Matching and firms will be required to enter a branch/sequence number in both their OATS Execution Report and the corresponding Trade Reporting Facility transaction report so that NASD can link the OATS report to the related trade report. This matching process will be identical to the matching process in place today for trades reported to the NASDAQ Market Center.
While NASDAQ anticipates that all conditions of their SEC approval may be met as soon as May 2006, NASD recognizes that members will require sufficient lead time to make the above-outlined Market Center Code change in their OATS reporting systems. The effective date for this new Market Center Code in OATS, therefore, will be June 1, 2006. In the event that NASDAQ satisfies all conditions of the SEC approval order prior to June 1, 2006, members should code all OATS Execution Reports for trades reported to the Trade Reporting Facility with a Market Center Code of "Q" until June 1, 2006. If the NASDAQ Exchange's operational date occurs after June 1, 2006, members should begin using the new Market Center Code of "L" on the actual date the NASDAQ Exchange becomes operational.
Orders Transmitted Between NASD-only and NASDAQ-only Members
In the event an order is routed from a NASD-only member to a NASDAQ-only member4, or vice-a-versa, under both NASD and NASDAQ OATS Rules, this would be viewed as a route to a non-member and would not require a routed order identifier to be passed, unless the non-member receiving the order requires such information be provided. Firms should review their systems to ensure they can properly identify NASD-only and NASDAQ-only members for OATS reporting purposes.
The following table addresses OATS reporting responsibilities in different scenarios that will be effective upon the operational date of NASDAQ's exchange registration.
|Routing Firm||Receiving Firm||Requirement to Pass Routed Order ID||Destination Code on Route Report||Member Type Code on receiving firm's New Order type Report|
|NASD only||NASD only||Yes||Member (M)||Member (M)|
|NASD only||NASDAQ only||No||Non-member (N)||Non-member (N)|
|NASD only||Joint member||Yes||Member (M)||Member (M)|
|NASDAQ only||NASDAQ only||Yes||Member (M)||Member (M)|
|NASDAQ only||NASD only||No||Non-member (N)||Non-member (N)|
|NASDAQ only||Joint member||Yes||Member (M)||Member (M)|
|Joint member||NASD only||Yes||Member (M)||Member (M)|
|Joint member||NASDAQ only||Yes||Member (M)||Member (M)|
|Joint member||Joint member||Yes||Member (M)||Member (M)|
Please call the OATS Helpdesk at (800) 321-NASD with any questions regarding this article or on OATS in general.
1 See Exchange Act Release No. 53128 (Jan. 13, 2006), 71 FR 3550 (Jan. 23, 2006).
2 See Exchange Act Release No. 52049 (July 15, 2005), 70 FR 42398 (July 22, 2005).
3 See Id.
4 Nasdaq Exchange rules require a broker-dealer to be a member of at least one other SRO before applying for membership in the Exchange and to remain a member of another SRO. Accordingly, the term Nasdaq-only member refers to a Nasdaq member that is not a member of NASD.