Clarification of application of OATS rules to customer allocations of executions.
April 3, 2003
Mr. Jess Haberman
Vice President, Compliance
royalblue financial corporation
17 State Street
New York, NY 10004-1501
Dear Mr. Haberman:
This letter is in response to your letters dated November 15, 2002 and December 19, 2002 and our phone conversation with Shelly Bohlin and Paul McKenney on December 16, 2002 in which you request guidance from NASD staff on the application of NASD Rules 6950 through 6957 (the "OATS rules") and Notice to Members 01-85 (December 2001) to orders handled by royalblue financial corporation ("royalblue") clients (NASD member firms) using fidessa's NWII Workstation emulator (NMS).
In your letters and our phone conversations, you indicate that royalblue, among other things, provides software to NASD member firms that enables the firms to direct trades to different Nasdaq systems. Traders employed by royalblue clients interact with Nasdaq execution systems via NMS to buy or sell securities and subsequently can use their discretion to allocate the resulting trades among their various existing customer orders. In your letter you indicate that the trader can determine which pre-existing orders should receive allocations and how much each order will be allocated. If applicable, shares not allocated are transferred to the firm's principal account from the Omnibus account.
As a general matter, members that enter orders into a Nasdaq system for execution must submit to OATS a Route Report indicating that the order was routed to a Nasdaq system. However, Notice to Members 01-85 generally provides that if, after the time of the original execution, a member chooses to allocate the components of a mixed capacity execution into its individual parts, the member must submit an Execution Report to OATS rather than a Route Report. As stated in Notice to Members 01-85, the rationale for providing an Execution Report rather than a Route Report is that the member would have executed the order before it had an opportunity to create a Route Report associated with a specific New Order Report.
As you stated in your letter and our conversations, royalblue's clients may not know, prior to the entry of an order into NMS, the specific customer order that will receive the allocation of any resulting execution. Accordingly, an Execution Report, rather than a Route Report, would be required under these specific circumstances. Any different facts or circumstances may require different OATS reporting obligations. For example, if the royalblue's clients have identified, prior to the entry of an order into a Nasdaq execution system, the specific customer order that will receive the allocation of any resulting execution, then a Route Report would be required.
Please note that the opinions expressed in this letter are staff opinions only and have not been reviewed or endorsed by the Board of Governors of NASD. This letter responds only to the issues you have raised based on the facts as you have described them in your letter, and does not necessarily address any other rule or interpretation of NASD or all the possible regulatory and legal issues involved.
Stephanie M. Dumont
Associate General Counsel
Richard Wallace, Vice President
Shelly Bohlin, Director
Paul McKenney, Team Leader
Cathleen Shine, Sr. Vice President and Director