Notice to Members 03-74

Guidance Relating to the Application of NASD's Limit Order Protection Rule When Trading Proprietarily Through a Separate MPID

Recently The Nasdaq Stock Market, Inc. (NASDAQ) began permitting market makers and ECNs to request the use of a second Market Participant Identifier (MPID) in the NASDAQ quotation montage for the entry of quotes and orders and the display of quotations. Because members now may enter and display quotes and orders from other desks in a separate MPID, members have sought clarification concerning the applicability of previous guidance relating to Interpretive Material 2110-2, Trading Ahead of Customer Limit Order (commonly referred to as the "Manning Rule") provided in Special Notice to Members (NtM) 95-43 (June 5, 1995). Specifically, NtM 95-43 provided a "no knowledge" interpretation to the Manning Rule such that, if a firm implements and utilizes an effective system of internal controls, such as appropriate information barriers, that operate to prevent a non-market-making desk from obtaining knowledge of customer limit orders held at the firm's market-making desk, those other desks trading in a proprietary capacity may continue to trade at prices the same as or inferior to the customer limit orders held by the market-making desk. As described in more detail in this Notice, members using multiple MPIDs may continue to rely on the "no knowledge" interpretation to Manning contained in NtM 95-43 if they have established appropriate and effective information barriers between market-making desks and other trading desks exclusively engaged in proprietary trading.

Questions regarding this Notice may be directed to the Legal Section, Market Regulation, NASD, at (240) 386-5126; or the Office of General Counsel, Regulatory Policy and Oversight, NASD, at (202) 728-8071.