Notice to Members 96-65
New SEC Rules on Order Handling and Execution of Customer Orders
On August 29, 1996, the Securities and Exchange Commission (SEC) adopted significant market structure rules under the Securities Exchange Act of 1934 (Act) involving the handling and execution of customer limit orders. This Notice to Members is being issued to alert members to these important changes by providing a general description of the new rules and a complete copy of the SEC release as published in the Federal Register. Members are urged to review the SEC release to determine exactly how the rules affect them, paying specific attention to the SEC discussion on best execution, which is summarized at the end of this Notice.
The changes include a new rule, SEC Rule 11Ac1-4 (Display Rule), governing the display of limit orders that will require market makers to display in their quote, the price and full size of customer limit orders, and several amendments to SEC Rule 11Ac1-1 (Quote Rule), including: (1) the requirement that market makers display in their quote any better priced orders that the market maker places into an electronic communications network (ECN) such as SelectNet or Instinet, unless an alternative provided by the rule is available; (2) mandatory market-maker registration in exchange-listed securities for market makers that account for one percent or more of the trading volume in any such security; and (3) an expanded definition of the term OTC Market Maker to include broker/dealers that internalize order flow or hold themselves out only to particular firms.
The Quote Rule amendments will become effective January 10, 1997. The Display Rule requirements will be phased-in beginning January 10, 1997, according to the implementation schedule included at the end of this Notice.
Questions about this Notice may be directed to the Office of General Counsel, The Nasdaq Stock Market, at (202) 728-8294.