Special NASD Notice to Members 01-85 - December 2001

Guidance on Compensation and Mixed Capacity Trading

Executive Summary

The Nasdaq Stock Market, Inc. (Nasdaq®) and NASD Regulation, Inc. (NASD Regulation) believe that market rules should enhance investor protection and promote competition among market participants. The advent of decimal pricing in the Nasdaq market has caused many Nasdaq market makers to re-evaluate methods of charging for their services, as well as the manner in which they represent customer orders in the marketplace. Consequently, firms have questioned whether Nasdaq rules accommodate different methods of compensation for a market maker's services. In turn, firms have approached Nasdaq and NASD Regulation for interpretive advice concerning their regulatory obligations when executing transactions on a commission or commission- equivalent basis. In response to these and other inquiries, Nasdaq and NASD Regulation have prepared this Notice to Members.

 

The guidance relating to mixed capacity trades and the capability to change the Automated Confirmation Transaction ServiceSM (ACTSM) report capacity indicator on a post-execution basis, which are discussed below, relate principally to Nasdaq securities (Nasdaq National Market and SmallCap). Nasdaq continues to evaluate whether there is a need for similar guidance regarding securities traded in the OTC Bulletin Board, and will provide information regarding this issue in a separate document at a future date.

 

Questions regarding this Notice may be directed to the Nasdaq Office of General Counsel at (202) 728-8088, and the Legal Section, Market Regulation Department, NASD Regulation at (240) 386-5126.