Expanded Limit-Order Protection Rule Gets Further Clarification By NASD

Executive Summary

On September 6, 1995, the expanded Limit-Order Protection Interpretation to Article III, Section 1 of the NASD Rules of Fair Practice that prohibits member firms from trading ahead of customer limit orders (commonly known as Manning II) became fully effective. The expanded Interpretation extends the scope of limit-order protection in The Nasdaq Stock Market^SM to ensure that all customer limit orders are afforded the same protection throughout Nasdaq.

From June 21, 1995, to September 6, 1995, the Interpretation allowed a temporary phase-in period that permitted a market maker holding customer limit orders greater than 1,000 shares sent to it by another member firm(member-to-member orders) to trade at the same price as such limit order without protecting the limit order. On September 6, 1995, the temporary phase-in period expired. Since that date, all customer limit orders, whether they come from the firm's own customers or from another member firm's customers, must be handled in the same way by thefirm accepting the limit order. That is, the member firm must not trade ahead of anycustomer limit order it holds without protecting that order.

Since the SEC approved the rule change in June 1995, the NASD has issued Special Notice to Members 95-43 and Notice to Members 95-67 to provide guidance regarding a member's obligations under the Limit-Order Protection Interpretation. Since the Notices were issued, the NASD has continued to receive questions regarding the protection and reporting of limit orders handled on a net basis, defined as transactions where the customer wants the total transaction cost, inclusive of fees or commissions, to be set at a single price.

Questions regarding this Notice should be directed to NASD Market Surveillance at (800) 925-8156.