The Firm Quote Rule (SEC Rule 11Ac1-1) requires a member firm to execute trades submitted to it by a firm that has exceeded its Super Cap status unless: (i) the firm had failed to settle on a trade the previous day, (ii) ACT has publicized that the firm has exceeded its Super Cap status and its clearing firm is not willing to honor the trade, or (iii) the firm's clearing firm has deleted the clearing relationship.
March 8, 1999
Robert H. Stanley
Director of Trading
461 Fifth Avenue, 24th Floor
New York, New York 10017
Re: Request for Interpretation of Firm Quote Rule
Dear Mr. Stanley:
This is in response to your letter to the staff dated December 10, 1998. Your letter requested NASD Regulation, Inc.’s interpretation of the firm quote rule when a member firm has exceeded its Super Cap status and is accessing B-Trade Services ("BTRD") via SelectNet or a verbal negotiated trade.
National Association of Securities Dealers ("NASD") Notice to Members 90-80 announced Securities and Exchange Commission ("SEC") approval of the risk management functions of the NASD’s Automated Confirmation Transaction ("ACT") service, including a "Super Cap" calculation. As described in the Notice, ACT calculates the totals of compared locked-in trades for each of a clearing firm’s correspondents, and relates this figure to a "Super Cap" total, which is twice the assigned threshold but never less than $1 million.
If a correspondent broker’s locked-in trades exceed the Super Cap amount, the ACT system notifies ACT participants by placing a designated mark next to all of its quotes (if the firm is a market maker), and will cause all trades greater than $200,000 to be held for 15 minutes for clearing-firm approval. Trades not approved in this 15-minute time period will be rejected and sent back to the contra party. See NASD Rule 6150(g). Once the Super Cap is penetrated, it is the responsibility of the clearing firm to either raise the threshold, thus resetting the Super Cap for that correspondent, or to delete the clearing arrangement, thereby ceasing to act for that correspondent.
The firm quote rule, SEC Rule 11Ac1-1, provides, in pertinent part, that "each responsible broker or dealer shall be obligated to execute any order to buy or sell a subject security, other than an odd-lot order, presented to it by another broker or dealer . . . , at a price at least as favorable to such buyer or seller as the responsible broker’s or dealer’s published bid or published offer . . . in any amount up to its published quotation size." Exceptions to the SEC firm quote rule exist if: (1) prior to the order being presented, the market maker revises its quoted price or size and communicates its revision to The Nasdaq Stock Market; or (2) at the time the order is presented, the market maker is in the process of effecting a transaction and immediately upon completion of that transaction communicates a revised quotation to The Nasdaq Stock Market. NASD Conduct Rule 3320 and NASD Marketplace Rule 4613(b) also require a market maker to trade in an amount up to its published quotation size at its published quotation price, when presented with an order priced at its bid or offer.
In addition, in a letter dated November 22, 1996 to Mr. Joseph R. Hardiman,1 then President of NASD, the SEC’s Market Regulation Division stated:
[T]he Quote Rule should be interpreted as providing an exception from the general requirement that a market maker or specialist, or an ECN publishing a quote, be firm for its quoted size if the market maker, specialist, or ECN has a substantial basis for believing that the counterparty to the transaction will not be able to honor the trade. Examples would include a situation where the counterparty has failed to settle on a trade the previous day; the counterparty’s clearing firm has indicated that it is no longer willing to clear for the counterparty; or the NASD’s Automatic Confirmation Transaction ("ACT") service has publicized that the counterparty has exceeded its Super Cap and its clearing firm is not willing to honor the trade.
In light of the foregoing rules and the SEC’s interpretation of the firm quote rule, BTRD is obligated to continue to execute transactions at a price at least as favorable to its published bid or offer and in an amount up to its published quotation size even though it receives an order from a member firm that has exceeded its Super Cap status and its quotes are designated as such. BTRD would be obligated to continue to execute trades with a member firm that has exceeded its Super Cap status unless the firm had failed to settle on a trade the previous day, ACT has publicized that the firm has exceeded its Super Cap status and its clearing firm is not willing to honor the trade, or the firm’s clearing firm has deleted the clearing relationship, thereby ceasing to act for that correspondent.2 This interpretation applies to transactions submitted to BTRD via SelectNet and verbal negotiated trades.
I hope this letter is responsive to your inquiry. Please note, however, that the foregoing is only an interpretative position expressed by NASD Regulation, Inc. staff. Under NASD Regulation, Inc. and NASD procedures, any final determination regarding the application of NASD Rules rests with NASD Regulation, Inc.’s National Adjudicatory Council, and ultimately, NASD Regulation’s Board of Directors and the NASD Board of Governors.
If you have any questions, please contact Tamara L. Schmidt at (301) 208-2977.
Mary N. Revell
Associate General Counsel
1 Letter from Richard Lindsey, SEC Division of Market Regulation, to Mr. Joseph Hardiman, NASD, dated November 22, 1996, p.17.
2 If the clearing firm deletes the relationship, notice of the deletion will appear in the Status Window Box on the Nasdaq Workstation.