NASD Notice to Members 98-005 - January 1998

SEC Approves Changes to Third Market Trading Rules

Executive Summary

On November 26, 1997, the Securities and Exchange Commission (SEC or Commission) approved changes to National Association of Securities Dealers, Inc. (NASD®) rules governing trading in exchange-listed securities in the over-the-counter market (the Third Market). The amendments: (1) codify permissible uses of computer-generated quote systems; (2) eliminate the excess spread rule; (3) reduce the minimum quotation size applicable to Consolidated Quotation System (CQS) market makers to one unit of trading (i.e., 100 shares) regardless of whether the market maker is displaying a customer’s limit order or quoting for its own proprietary account; (4) extend pertinent provisions of the NASD’s limit order protection rule applicable to securities listed on The Nasdaq Stock MarketSM (the Manning Rule) to exchange-listed securities; and (5) change the Computer Assisted Execution SystemSM (CAESSM) to automatically execute at the firm’s displayed price and up to the firm’s displayed size only. The rule changes are effective December 16, 1997, with the exception of the rules relating to computer-generated quotations, which are effective December 22, 1997.