NASDAQ National Market System Grows to 2,580 Securities With 23 Voluntary Additions on October 7, 1986

TO: All NASD Members and Level 2 and Level 3 Subscribers

On Tuesday, October 7, 1986, 23 issues are scheduled to join the NASDAQ National Market System, bringing the total number of issues in NASDAQ/NMS to 2,580. These 23 issues, which will begin trading under real-time trade reporting, are entering NASDAQ/NMS pursuant to the Securities and Exchange Commission's criteria for voluntary designation.

The 23 issues scheduled to join NASDAQ/NMS on Tuesday, October 7, 1986, are:

The following issues may be included in NASDAQ/NMS prior to the next regularly scheduled phase-in date:

Pending Additions

NASDAQ/NMS Interim Additions

The following changes to the list of NASDAQ/NMS securities occurred since September 5, 1986:

NASDAQ/NMS Symbol* And/Or Name Changes

NASDAQ/NMS Deletions

Questions regarding this notice should be directed to Kit Milholland, Senior Analyst, NASDAQ Operations, at (202) 728-8281. Questions pertaining to trade reporting rules should be directed to the NASD's Market Surveillance Section, at (202) 728-8201.

Sincerely,

Gordon S. Macklin
President

NASD Market Services, Inc.

1735 K Street, N.W.
Washington, D.C.
(202) 728-8000

October 3, 1986

IMPORTANT

Principals * Traders * Compliance Directors

TO: All SOES Participants

RE: Review of SOES Operating Rules

EXECUTIVE SUMMARY

To assure members that they can continue to use the Small Order Execution System (SOES) with confidence and that it will continue to grow in share volume and member participation, the NASD is placing increased emphasis on its regulatory programs to determine members' compliance with SOES operating rules. This notice describes some of the more common practices that do not conform with SOES rules, the seriousness with which the NASD views infractions of those rules, and the extent of disciplinary actions taken.

BACKGROUND

SOES, which began operation in 1984, is a system that was designed by traders, automation and operations personnel and the senior managements of NASD members as a cost-effective system for the automated execution of small, public agency orders in NASDAQ securities.

Currently, customer trades for up to 1,000 shares in NASDAQ National Market System issues, and up to 500 shares in other NASDAQ stocks, may be automatically executed through SOES on an agency or riskless principal basis.

The SOES Users Committee, composed of representatives of NASD members that participate in SOES, is responsible for developing policies and procedures relating to the operation and enhancement of SOES. The Committee functions in an advisory capacity to the NASD Trading Committee, the NASD Board of Governors and the Board of Directors of NASD Market Services, Inc.

Since its inception, SOES has proven to be a valuable addition to the NASDAQ market, particularly on the high-volume days of the past year. However, continued growth and success of SOES is dependent upon preserving the confidence of SOES market makers that all participants are complying with system rules.

For its part, the NASD is making every effort to closely monitor the operation of the system's rules, adjusting them when necessary and, through the Market Surveillance Committee, taking appropriate disciplinary actions against both members and responsible individuals when infractions of these rules are uncovered.

A number of notices detailing SOES operating rules have been issued to the membership since the implementation of SOES. Discussion of the system and its rules are also contained in the NASD Manual and the NASDAQ/CQS Symbol Directory.

RECENT SOES RULE CHANGES

By way of summary, SOES rules governing the conduct of participant members permit only agency orders, including riskless principal transactions, of limited size received from public customers to be entered by SOES order-entry firms into SOES for execution. Through a recent enhancement, participants can now execute internalized trades with their customers through SOES. Customer orders in excess of the size limits may not be divided into smaller orders to meet the size requirements.

At the suggestion of the Market Surveillance and Trading Committees, the NASD Board recently amended the SOES rules to prohibit persons associated with members from utilizing SOES to execute trades in their own personal accounts or in accounts in which they have an economic interest. This amendment will become effective upon approval by the SEC.

PRACTICES NOT CONFORMING TO SOES RULES

The practice of dividing agency orders in excess of the 500/1,000-share execution limits in order to meet the SOES size requirements is inconsistent with SOES rules and is a matter of extreme concern to the Market Surveillance Committee. Practices of this type have resulted in the NASD bringing formal disciplinary actions against several NASD members. The Committee will continue to view future violations of the SOES execution limits as serious infractions of NASD rules, and it will take appropriate disciplinary actions as necessary.

As an example, SOES execution limits do not permit the dividing of a 3,500-share, customer agency order in a NASDAQ/NMS issue by entering it into SOES as four separate orders, each within the size limit. Similarly, the rules also prohibit the entering of 1,000 shares of a 3,500-share order in SOES, with the remaining 2,500 shares executed directly with market makers; the entire 3,500-share order must be executed outside of SOES.

Another area that has been the subject of formal disciplinary actions by the Committee is the use of SOES by order-entry or order-entry/market-maker firms to execute trades for firm accounts with other NASD members. This practice is specifically prohibited by SOES rules and will continue to come under the close scrutiny of the Committee.

NASD SURVEILLANCE OF SOES PRACTICES

The NASD's regular on-site examination has been expanded to include a comprehensive review of members' compliance with SOES rules. Also, special examinations of SOES order-entry and order-entry/market-maker firms are now under way across the country.

In addition to these on-site inspections by the NASD district offices, the NASD Market Surveillance Section reviews all SOES transactions and, via new automated programs, will be in a position to detect potential SOES violations on an on-line, real-time basis.

Members are strongly encouraged to review the rules governing trading in SOES with their registered representatives, traders and other appropriate personnel. Members are also urged to amend their written supervisory procedures to incorporate a system for monitoring in-house compliance with SOES rules.

SOES market makers should continue utilizing the SOES complaint procedures by calling the SOES Operations Center at (212) 839-6210 whenever they are concerned that orders may have been entered in violation of the SOES operating rules.

Questions concerning compliance with SOES rules may be directed to Mary Rose Murray, NASD Market Surveillance Section, at (202) 728-6962. Questions about this notice may be directed to the undersigned at (202) 728-8233.

Sincerely,

John E. Pinto
Senior Vice President
Compliance

* NASDAQ symbols are proprietary to the National Association of Securities Dealers, Inc.