Notice to Members 98-78

NASD Clarifies Operation of the Limit Order Protection Rule During Unusual Market Conditions

The National Association of Securities Dealers, Inc. (NASD® or Association) is issuing this Notice to clarify the application of the Association’s Limit Order Protection Rule (Conduct Rule IM-2110-2) in instances where the market for a given security is experiencing “abnormal” market conditions. Specifically, consistent with pronouncements by the Securities and Exchange Commission (SEC) concerning the obligations of Market Makers to display customer limit orders during unusual market conditions, the NASD is modifying its interpretation of the Limit Order Protection Rule that was previously set forth in Notice to Members 95-67, to provide that, under appropriate circumstances, limit orders need not be filled within one minute if activated during unusual market conditions and if all reasonable steps are taken to execute the transaction as soon as possible following activation. In such instances, which often occur at the opening or upon the commencement of trading following a trading halt or an initial public offering (IPO), members are required to execute customer limit orders as soon as possible under the circumstances.