Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto Relating to the Nasdaq Market Center, 19573-19597 [06-3341]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 71, Number 72 (Friday, April 14, 2006)]
[Notices]
[Pages 19573-19597]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-3341]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53583; File No. SR-NASDAQ-2006-001]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto 
Relating to the Nasdaq Market Center

March 31, 2006.

    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 7, 2006, The NASDAQ Stock Market LLC (``Nasdaq''), filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by Nasdaq. On March 29, 2006, Nasdaq submitted 
Amendment No. 1 to the proposed rule change.\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 makes the following substantive and 
technical changes to the original proposal: (1) Eliminates from the 
original filing Nasdaq Rule 4611(d), Nasdaq's proposal to prohibit 
members from charging access fees triggered by the execution of a 
quotation within the System; (2) clarifies in Nasdaq Rules 
4751(f)(6), 4755(a)(4) and 4757(a) that members must designate 
orders as Intermarket Sweep Orders (``ISOs'') rather than have the 
system automatically default to treat orders as ISOs absent other 
designation and enumerates in Nasdaq Rule 4751(f)(6) members' 
obligations when entering ISOs into the system; (3) amends Nasdaq 
Rule 4613(e), Nasdaq's rule for implementing the locked and crossed 
markets provisions of Rule 610 of Regulation NMS under the Act, to 
track more closely the language developed by the Commission staff in 
consultation with other exchanges; (4) modifies several examples of 
system processing throughout the filing; (5) groups within Nasdaq 
Rule 4751(d) all definitions related to system quotation 
functionality; (6) modifies Nasdaq Rule 4756(c) to clarify the 
display and non-display of trading interest within the system and 
adds language in Nasdaq Rule 4756(c)(4) to the effect that Nasdaq 
has procedures in place to identify its quotes as manual or 
automated and to notify its members of the status of its quotations; 
(7) modifies Nasdaq Rule 4751(h)(5) to clarify the processing of 
MIOC Orders; (8) states that the Nasdaq Board has approved the 
submission of this proposed rule change; (9) eliminates the 
requirement in Nasdaq Rule 4612(d) that Participants append a 
geographic identifier for their separate trading locations; (10) 
inserts Nasdaq Rule 4620(b)(4) to clarify that Nasdaq will reveal 
contra party information at the end of the day when a member trades 
change, with its own quote or order, unless the member requests not 
to receive that information; and (11) makes various grammatical and 
syntactic modifications.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq is proposing to integrate the operations of the existing 
Nasdaq Market Center, along with Nasdaq's Brut Facility and Nasdaq's 
INET Facility to create the fairest, fastest, most efficient and most 
transparent system in Nasdaq's 35-year history. This integration will 
benefit investors by creating a single pool of liquidity from three, 
thereby increasing order interaction, and execution speed and fill 
rates. Integration will enable Nasdaq to further reduce the cost to 
investors of executing trades on Nasdaq by, for example, reducing the 
cost for subscriber connectivity and increasing the efficiency of the 
resulting facility.
    Nasdaq is currently on schedule to launch the proposed integrated 
system timely to comply with the requirements of the Fair Access and 
Order Protection rules, Rules 610 and 611 of Regulation NMS under the 
Act (``Regulation NMS''). The integrated system will be designed to 
enable Nasdaq to operate its execution system as that of a national 
securities exchange rather than as an association, pursuant to the 
Commission order, dated January 13, 2006, approving Nasdaq's 
application to register as a national securities exchange.\4\ Below is 
the text of the proposed rule change. Proposed new language is 
italicized and proposed deletions are in [brackets].
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    \4\ See Securities Exchange Act Release No. 53128 (January 13, 
2006), 71 FR 3550 (January 23, 2006) (``January 13, 2006 Order'').
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* * * * *

4120. Trading Halts

(a) Authority To Initiate Trading Halts
    In circumstances in which Nasdaq deems it necessary to protect 
investors and the public interest, Nasdaq may, pursuant to the 
procedures set forth in paragraph (b):
    (1) Halt trading on Nasdaq of a Nasdaq-listed security to permit 
the dissemination of material news; or
    (2) Halt trading on Nasdaq of a security listed on another national 
securities exchange during a trading halt imposed by such exchange to 
permit the dissemination of material news; or
    (3) Halt trading [by] on Nasdaq: (i) [ITS/CAES Market Makers] in a 
security listed on another national securities exchange when such 
exchange imposes a trading halt in that security because of an order 
imbalance or influx (``operational trading halt''); or (ii) [Nasdaq 
market makers] in a security listed on Nasdaq, when the security is a 
derivative or component of a security listed on another national 
securities exchange and such exchange imposes an operational trading 
halt in that security. [ITS/CAES Market Makers and] In the event that 
Nasdaq halts trading, Nasdaq Participants [Market Makers] may commence 
quotations and trading at any time following initiation of operational 
trading halts, without regard to procedures for resuming trading set 
forth in paragraph (b); or
    (4) Halt trading in an American Depository Receipt (``ADR'') or 
other security listed on Nasdaq, when the Nasdaq-listed security or the 
security underlying the ADR is listed on or registered with another 
national or foreign securities exchange or market, and the national or 
foreign securities exchange or market, or regulatory authority 
overseeing such exchange or market, halts trading in such security for 
regulatory reasons; or
    (5) Halt trading in a security listed on Nasdaq when Nasdaq 
requests from the issuer information relating to:
    (A) Material news;
    (B) The issuer's ability to meet Nasdaq listing qualification 
requirements, as set forth in the Rule 4300, 4400, and 4800 Series; or
    (C) Any other information which is necessary to protect investors 
and the public interest.
    (6) Halt trading in a security listed on Nasdaq when
    (A) Extraordinary market activity in the security is occurring, 
such as the execution of a series of transactions for a significant 
dollar value at prices substantially unrelated to the current market 
for the security, as measured by the national best bid and offer, and
    (B) Nasdaq determines that such extraordinary market activity is 
likely to have a material effect on the market for the security; and
    (C)(i) Nasdaq believes that such extraordinary market activity is 
caused by the misuse or malfunction of an electronic quotation, 
communication, reporting, or execution system operated by, or linked 
to, Nasdaq;
    (ii) After consultation with another national securities exchange 
trading the security on an unlisted trading privileges basis, Nasdaq 
believes that such extraordinary market activity is caused by the 
misuse or malfunction of an electronic quotation, communication, 
reporting, or execution system operated

[[Page 19574]]

by, or linked to, such other national securities exchange; or
    (iii) After consultation with NASD regarding an NASD facility 
trading the security, Nasdaq believes that such extraordinary market 
activity is caused by the misuse or malfunction of such NASD facility 
or an electronic quotation, communication, reporting, or execution 
system linked to such NASD facility.
    (7) Halt trading in a security that is the subject of an Initial 
Public Offering on Nasdaq.
(b) Procedure for Initiating a Trading Halt
    (1) Nasdaq issuers are required to notify Nasdaq of the release of 
certain material news prior to the release of such information to the 
public as required by Rules 4310(c)(16) and 4320(e)(14).
    (2) Notification shall be provided directly to Nasdaq's MarketWatch 
Department by telephone, facsimile, or other compatible means of 
electronic communication.\5\ Information communicated orally by 
authorized representatives of a Nasdaq issuer should be confirmed 
promptly in writing.
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    \5\ Notification may be provided to the MarketWatch Department 
by telephone 1-800-537-3929 and (240) 386-6046. Between 7 p.m. and 
7:30 a.m. eastern time, voice mail messages may be left on either 
number. The fax number is (240) 386-6047.
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    (3) Upon receipt of information, from the issuer or other source, 
Nasdaq will promptly evaluate the information, estimate its potential 
impact on the market and determine whether a trading halt in the 
security is appropriate.
    (4) Should Nasdaq determine that a basis exists under Rule 4120(a) 
for initiating a trading halt, the commencement of the trading halt 
will be effective at the time specified by Nasdaq in a notice posted on 
a publicly available Nasdaq Web site. In addition, Nasdaq shall 
disseminate notice of the commencement of a trading halt through major 
wire services.
    (5) Trading in a halted security shall resume at the time specified 
by Nasdaq in a notice posted on a publicly available Nasdaq Web site. 
In addition, Nasdaq shall disseminate notice of the resumption of 
trading through major wire services.
    (6)(i) In the case of a trading halt under Rule 4120(a)(6) based on 
the misuse or malfunction of an electronic quotation, communication, 
reporting, or execution system that is not operated by Nasdaq, Nasdaq 
will promptly contact the operator of the system in question (as well 
as any national securities exchange or NASD facility to which such 
system is linked) to ascertain information that will assist Nasdaq in 
determining whether a misuse or malfunction has occurred, what effect 
the misuse or malfunction is having on trading in a security, and what 
steps are being taken to address the misuse or malfunction. If the 
operator of the system is unavailable when contacted by Nasdaq, Nasdaq 
will continue efforts to contact the operator of the system to 
ascertain information that will assist Nasdaq in determining whether 
the trading halt should be terminated.
    (ii) A trading halt initiated under Rule 4120(a)(6) shall be 
terminated as soon as Nasdaq determines either that the system misuse 
or malfunction that caused the extraordinary market activity will no 
longer have a material effect on the market for the security or that 
system misuse or malfunction is not the cause of the extraordinary 
market activity.
    (7)(a) A trading halt initiated under Rule 4120(a)(1), (4), (5) or 
(6) shall be terminated when Nasdaq releases the security for trading. 
Prior to terminating the halt, there will be a 5-minute Display Only 
Period during which market participants may enter quotations and orders 
in that security in Nasdaq systems. At the conclusion of the 5-minute 
Display Only Period, the security shall be released for trading unless 
Nasdaq extends the Display Only Period for an additional 1-minute 
period pursuant to subparagraph (c) below. There shall be a period of 
between zero and 15 seconds (randomly selected) at which point the 
Display Only Period shall end and trading shall resume pursuant to Rule 
4753.
     (b) A trading halt initiated under Rule 4120(a)(7) shall be 
terminated when Nasdaq releases the security for trading. Prior to 
terminating the halt, there will be a 15-minute Display Only P[p]eriod 
during which market participants may enter quotes and orders in that 
security in Nasdaq systems. At the conclusion of the 15-minute Display 
Only P[p]eriod, [the halt shall be terminated and the security released 
for trading.] the security shall be released for trading unless Nasdaq 
extends the Display Only Period for one, two or three additional 5-
minute Display Only Periods pursuant to subparagraph (c) below. At the 
conclusion of the Display Only Period(s), there shall be an additional 
delay of between zero and 15 seconds (randomly selected) and then 
trading shall resume pursuant to Rule 4753.
    (c) If at the end of a Display Only Period, Nasdaq detects a 
liquidity imbalance in the security. Nasdaq will extend the Display 
Only Period as permitted under subparagraphs (a) and (b) above. 
Liquidity Imbalances shall be established when (1) the Current 
Reference Prices, as defined in Rule 4705(a)(2), disseminated 15 
seconds and immediately prior to the end of the Display Only Period 
differ by greater than (i) 10 percent or (ii) 50 cents (whichever is 
greater), or (2) all buy or sell market orders will not be executed in 
the cross.
* * * * *

4600. Requirements for Nasdaq Market Makers and Other Nasdaq Market 
Center Participants

4601. Scope

    Unless otherwise specified, the rules set forth in this 4600 Series 
apply only to the quoting and trading of System [Nasdaq] securities via 
the Nasdaq Market Center. [Participation in the Nasdaq Market Center as 
an ITS/CAES Market Maker shall be conditioned upon the initial and 
continuing compliance with the requirements set forth in the Rule 5200 
Series. Participation in the Nasdaq Market Center as a UTP Exchange 
shall be conditioned upon the UTP Exchange's initial and continuing 
compliance with the requirements set forth in Nasdaq Rule 4710(e). 
Terms used in the Rule 4600 Series shall have the meaning as defined in 
Rule 4701.]

4602. Definitions

    The following definitions apply to the Rule 4600 and 4750 Series 
for the trading of securities listed on a national securities exchange 
other than Nasdaq.
    (a) The term ``Non-Nasdaq ITS Participant Market'' shall mean a 
participant in the ITS Plan that is a national securities exchange 
(other than Nasdaq) or a national securities association.
    (b) The term ``ITS Plan'' shall mean the plan agreed upon by the 
ITS participants, as from time to time amended in accordance with the 
provisions therein, and approved by the Commission pursuant to Section 
11A(a)(3)(B) of the Act and SEC Rule 608 thereunder.
    (c) The term ``ITS Security'' shall mean any security which may be 
traded through the ITS System by Nasdaq.
    (d) The term ``ITS System'' shall mean the communications network 
and related equipment that links electronically the Non-Nasdaq ITS 
Participant Markets and Nasdaq as described in the Plan.
    (e) The term ``Nasdaq Market Maker'' when used in reference to ITS 
Securities, shall mean a member of Nasdaq that is registered as a 
market

[[Page 19575]]

maker with Nasdaq for the purposes of participation in ITS with respect 
to one or more ITS securities in which it is then actively registered. 
The term ``Nasdaq Market Maker'' shall also include a member of Nasdaq 
that meets the definition of electronic communications network 
(``ECN''), as defined in SEC Rule 600, or alternative trading system 
(``ATS''), subject to SEC Regulation ATS Rule 301(b), and has 
voluntarily chosen to register with Nasdaq and meets the terms of 
registration set forth in Rule 4752.
    (f) The term ``Participant Market'' shall mean the securities 
market of each participating Non-Nasdaq ITS Market and the markets of 
Nasdaq in ITS securities.
    (g) A ``Third Participating Market Center Trade-Through,'' as that 
term is used in this Rule, occurs whenever Nasdaq initiates the 
purchase of an ITS Security by sending a commitment to trade-through 
the System and such commitment results in an execution at a price which 
is higher than the price at which the security is being offered (or 
initiates the sale of such a security by sending a commitment to trade-
through the System and such commitment results in an execution at a 
price which is lower than the price at which the security is being bid 
for) at the time of the purchase (or sale) in another ITS Participant 
Market as reflected by the offer (bid) then being displayed by Nasdaq 
Market Makers from such other market center. The member described in 
the foregoing sentence is referred to in this Rule as the ``member who 
initiated a third participating market center trade-through.''
    (h) ``CAES'' means the ``Computer Assisted Execution System, ``the 
computerized order routing and execution facility for ITS Securities, 
as from time to time modified or supplemented, that is operated by 
Nasdaq and made available to Nasdaq members. CAES functionality is 
offered through the Nasdaq Market Center pursuant to the Rule 4750 
Series.

4610. Registration and Other Requirements

4611. Nasdaq Market Center Participant Registration

    (a) Participation in the Nasdaq Market Center as a Nasdaq Market 
Maker, Nasdaq ECN or Order Entry Firm requires current registration as 
such with Nasdaq. Such registration shall be conditioned upon the 
participant's initial and continuing compliance with the following 
requirements:
    (1) Execution of applicable agreements with Nasdaq;
    (2) Membership in, or access arrangement with a participant of, a 
clearing agency registered with the Commission which maintains 
facilities through which Nasdaq Market Center compared trades may be 
settled;
    (3) Compliance with all applicable rules and operating procedures 
of Nasdaq and the Commission, including with respect to Nasdaq Market 
Makers in ITS Securities, the ITS Plan in their use of the System;
    (4) Maintenance of the physical security of the equipment located 
on the premises of the Nasdaq Market Maker, Nasdaq ECN or Order Entry 
Firm to prevent the improper use or access to Nasdaq systems, including 
unauthorized entry of information into the Nasdaq Market Center; and
    (5) Acceptance and settlement of each Nasdaq Market Center trade 
that the Nasdaq Market Center identifies as having been effected by 
such participant, or if settlement is to be made through another 
clearing member, guarantee of the acceptance and settlement of such 
identified Nasdaq Market Center trade by the clearing member on the 
regularly scheduled settlement date.
    A member's registration shall become effective upon receipt by the 
member of notice of an approval of registration by Nasdaq. The 
registration required hereunder will apply solely to the qualification 
of a Participant to participate in the System. Such registration shall 
not be conditioned upon registration in any particular Nasdaq Market 
Center securities.
    (b) Each Nasdaq Market Maker, Nasdaq ECN or Order Entry Firm shall 
be under a continuing obligation to inform Nasdaq of noncompliance with 
any of the registration requirements set forth above.
    (c) Nasdaq may impose upon any Nasdaq Market Maker, Nasdaq ECN or 
Order Entry Firm such temporary restrictions upon the automated entry 
or updating of orders or Quotes/Orders as Nasdaq may determine to be 
necessary to protect the integrity of Nasdaq's systems. For example, 
such temporary restrictions may be necessary to address a system 
problem at a particular Nasdaq Market Maker, Nasdaq ECN or Order Entry 
Firm or at Nasdaq, or an unexpected period of extremely high message 
traffic. The scope of any such restrictions shall be communicated to 
the affected Nasdaq Market Maker, Nasdaq ECN or Order Entry Firm in 
writing.

4612. Registration as a Nasdaq Market Maker

    (a) Quotations and quotation sizes may be entered into the Nasdaq 
Market Center only by a member registered as a Nasdaq Market Maker or 
other entity approved by Nasdaq to function in a market-making 
capacity.
    (b) A Nasdaq Market Maker may become registered in an issue by 
entering a registration request via a Nasdaq approved electronic 
interface with Nasdaq's systems or by contacting Nasdaq Market 
Operations. Registration shall become effective on the day the 
registration request is entered.
    (c) A Nasdaq Market Maker's registration in an issue shall be 
terminated by Nasdaq if the market maker fails to enter quotations in 
the issue within five (5) business days after the market maker's 
registration in the issue becomes effective.
    [(d) In cases where a Nasdaq Market Maker has more than one trading 
location, a fifth character geographic indicator shall be appended to 
the Nasdaq Market Maker's identifier for that security to identify the 
branch location where the security is traded. The fifth-character 
branch indicators are established by Nasdaq and published from time to 
time in the Nasdaq symbol directory.]

4613. Character of Quotations

    A member registered as a Nasdaq Market Maker shall engage in a 
course of dealings for its own account to assist in the maintenance, 
insofar as reasonably practicable, of fair and orderly markets in 
accordance with this Rule.
(a) Quotation Requirements and Obligations
    (1) Two-Sided Quote Obligation. For each security in which a member 
is registered as a Nasdaq Market Maker, the member shall be willing to 
buy and sell such security for its own account on a continuous basis 
and shall enter and maintain a two-sided quotation (``Principal 
Quote''), which is attributed to the market maker by a special maker 
participant identifier (``MPID'') and is displayed in the Nasdaq Market 
Center at all times, subject to the procedures for excused withdrawal 
set forth in Rule 4619.
    (A) A registered market maker [in a Nasdaq-listed security] must 
display a quotation size for at least one normal unit of trading (or a 
larger multiple thereof) when it is not displaying a limit order in 
compliance with SEC Rule 604, provided, however, that a registered 
Nasdaq Market Maker may augment its

[[Page 19576]]

displayed quotation size to display limit orders priced at the market 
maker's quotation. Unless otherwise designated, a ``normal unit of 
trading'' shall be 100 shares.
    (B) [Minimum Price Variation for Decimal-based Quotations--The 
minimum quotation increment for Nasdaq securities authorized for 
decimal pricing shall be $0.01. Quotations failing to meet this 
standard shall be rejected.] The minimum quotation increment for 
quotations of $1.00 or above in all System Securities shall be $0.01. 
The minimum quotation increment in the System for quotations below 
$1.00 in System Securities shall be $0.0001.
(b) Firm Quotations
    (1) All quotations and orders to buy or sell entered into the 
System by Nasdaq Market Makers, Nasdaq ECNs, and Nasdaq Order Entry 
firms are firm and automatically executable for their displayed and 
non-displayed size in the System. [A Nasdaq Market Maker that receives 
an offer to buy or sell from another member shall execute a transaction 
for at least a normal unit of trading at its displayed quotations as 
disseminated in the Nasdaq Market Center at the time of receipt of any 
such offer. If a Nasdaq Market Maker displays a quotation for a size 
greater than a normal unit of trading, it shall, upon receipt of an 
offer to buy or sell from another member, execute a transaction at 
least at the size displayed.]
    [(2) If a Nasdaq Market Maker, upon receipt of an offer to buy or 
sell from another member in any amount that is at least one normal unit 
of trading greater than its published quotation size as disseminated in 
the Nasdaq Market Center at the time of receipt of any such offer, 
executes a transaction in an amount of shares less than the size of the 
offer, then such market maker shall, immediately after such execution, 
display a revised quotation at a price that is inferior to its previous 
published quotation. The failure of a Nasdaq Market Maker to execute 
the offer in an amount greater than its published quotation size shall 
not constitute a violation of subparagraph (c) of this rule.]
(c) Quotations Reasonably Related to the Market
    A Nasdaq Market Maker shall enter and maintain quotations that are 
reasonably related to the prevailing market. Should it appear that a 
market maker's quotations are no longer reasonably related to the 
prevailing market, Nasdaq may require the market maker to re-enter its 
quotations. If a Nasdaq Market Maker whose quotations are no longer 
reasonably related to the prevailing market fails to re-enter its 
quotations, Nasdaq may suspend the market maker's quotations in one or 
all securities.
    In the event that a Nasdaq Market Maker's ability to enter or 
update quotations is impaired, the market maker shall immediately 
contact Nasdaq Market Operations to request the withdrawal of its 
quotations.
    In the event that a Nasdaq Market Maker's ability to enter or 
update quotations is impaired and the market maker elects to remain in 
Nasdaq, the Nasdaq Market Maker shall execute an offer to buy or sell 
received from another member at its quotations as disseminated through 
the Nasdaq Market Center.
    (d) Reserved
    (e) Locked and Crossed Markets
    (1) Locked and Cross Markets within the System: Any quotes or 
orders that are entered into the System that would lock or cross 
another order in the System will be executed by the System. This 
processing, set forth in Rule 4757, ensures that no locked or crossed 
markets can exist within the System and that price improvement is 
allocated fairly.
    (2) Inter-market Locked and Crossed Markets
    (A) Definitions. For purposes of this Rule, the following 
definitions shall apply:
    (i) The terms automated quotation, effective national market system 
plan, intermarket sweep order, manual Quotation, NMS stock, protected 
quotation, regular trading hours, and trading center shall have the 
meanings set forth in Rule 600(b) of Regulation NMS under the 
Securities Exchange Act of 1934.
    (ii) The term crossing quotation shall mean the display of a bid 
for an NMS stock during regular trading hours at a price that is higher 
than the price of an offer for such NMS stock previously disseminated 
pursuant to an effective national market system plan, or the display of 
an offer for an NMS stock during regular trading hours at a price that 
is lower than the price of a bid for such NMS stock previously 
disseminated pursuant to an effective national market system plan.
    (iii) The term locking quotation shall mean the display of a bid 
for an NMS stock during regular trading hours at a price that equals 
the price of an offer for such NMS stock previously disseminated 
pursuant to an effective national market system plan, or the display of 
an offer for an NMS stock during regular trading hours at a price that 
equals the price of a bid for such NMS stock previously disseminated 
pursuant to an effective national market system plan.
    (B) Prohibition. Except for quotations that fall within the 
provisions of paragraph (D) of this Rule, Nasdaq members shall 
reasonably avoid displaying, and shall not engage in a pattern or 
practice of displaying any quotations that lock or cross a protected 
quotation, and any manual quotations that lock or cross a quotation 
previously disseminated pursuant to an effective national market system 
plan.
    (C) Manual Quotations. If a member of the Exchange displays a 
manual quotation that locks or crosses a quotation previously 
disseminated pursuant to an effective national market system plan, such 
member of the Exchange shall promptly either withdraw the manual 
quotation or route an intermarket sweep order to execute against the 
full displayed size of the locked or crossed quotation.
    (D) Exceptions.
    (i) The locking or crossing quotation was displayed at a time when 
the trading center displaying the locked or crossed quotation was 
experiencing a failure, material delay, or malfunction of its systems 
or equipment.
    (ii) The locking or crossing quotation was displayed at a time when 
a protected bid was higher than a protected offer in the NMS stock.
    (iii) The locking or crossing quotation was an automated quotation, 
and the Nasdaq member displaying such automated quotation 
simultaneously routed an intermarket sweep order to execute against the 
full displayed size of any locked or crossed protected quotation.
    (iv) The locking or crossing quotation was a manual quotation that 
locked or crossed another manual quotation, and the member of the 
Exchange displaying the locking or crossing manual quotation 
simultaneously routed an intermarket sweep order to execute against the 
full displayed size of the locked or crossed manual quotation.
    [(1) A Nasdaq Market Maker shall not, except under extraordinary 
circumstances, enter or maintain quotations in Nasdaq during normal 
business hours if:
    (A) The bid quotation entered is equal to (``lock'') or greater 
than (``cross'') the asked quotation of another Nasdaq Market Maker 
entering quotations in the same security; or
    (B) The asked quotation is equal to (``lock'') or less than 
(``cross'') the bid quotation of another Nasdaq Market Maker entering 
quotations in the same security.

[[Page 19577]]

    (2) A Nasdaq Market Maker shall, prior to entering a quotation that 
locks or crosses another quotation, make reasonable efforts to avoid 
such locked or crossed market by executing transactions with all Nasdaq 
Market Makers whose quotations would be locked or crossed. Pursuant to 
the provisions of paragraph (b) of this Rule, a Nasdaq Market Maker 
whose quotations are causing a locked or crossed market is required to 
execute transactions at its quotations as displayed through Nasdaq at 
the time of receipt of any order.
    (3) For purposes of this rule, the term ``market maker'' shall 
include:
    (A) Any Nasdaq member that enters into an ECN, as that term is 
defined in SEC Rule 600, a priced order that is displayed in the Nasdaq 
Market Center;
    (B) Any Nasdaq member that operates the ECN when the priced order 
being displayed has been entered by a person or entity that is not a 
Nasdaq member;
    (C) Any Nasdaq member that enters into an ATS, as that term is 
defined in SEC Regulation ATS, an order that is displayed in the Nasdaq 
Market Center; and
    (D) Any Nasdaq member that operates the ATS when the order being 
displayed has been entered by a person or entity that is not a Nasdaq 
member.]

 4614. Stabilizing Bids

(a) Nasdaq Market Maker [and ITS/CAES Market Maker] Obligation/
Identifier
    A Nasdaq Market Maker [or ITS/CAES Market Maker] that intends to 
stabilize the price of a security that is a subject or reference 
security under SEC Rule 101 shall submit a request to Nasdaq 
MarketWatch for the entry of a one-sided bid that is identified on 
Nasdaq as a stabilizing bid in compliance with the standards set forth 
in this Rule and SEC Rules 101 and 104.
(b) Eligibility
    Only one Nasdaq Market Maker [or ITS/CAES Market Maker] in a 
security may enter a stabilizing bid.
(c) Limitations on Stabilizing Bids
    (1) A stabilizing bid shall not be entered in Nasdaq unless at 
least one other Nasdaq Market Maker [or ITS/CAES Market Maker] in 
addition to the market maker entering the stabilizing bid is registered 
as a Nasdaq Market Maker [or ITS/CAES Market Maker] in the security and 
entering quotations that are considered an independent bid under SEC 
Rule 104.
    (2) A stabilizing bid must be available for all freely tradable 
outstanding securities of the same class being offered.
(d) Submission of Request to Nasdaq
    (1) A Nasdaq Market Maker [or ITS/CAES Market Maker] that wishes to 
enter a stabilizing bid shall submit a request to Nasdaq MarketWatch 
for entry on Nasdaq of a one-sided bid identified as a stabilizing bid. 
The Nasdaq Market Maker [or ITS/CAES Market Maker] shall confirm its 
request in writing no later than the close of business the day the 
stabilizing bid is entered by submitting an Underwriting Activity 
Report to Nasdaq MarketWatch that includes the information required by 
subparagraph (d)(2).
    (2) In lieu of submitting the Underwriting Activity Report as set 
forth in subparagraph (d)(1), the market maker may provide written 
confirmation to Nasdaq MarketWatch that shall include:
    (A) The identity of the security and its symbol;
    (B) The contemplated effective date of the offering and the date 
when the offering will be priced;
    (C) The date and time that an identifier should be included on 
Nasdaq; and
    (D) A copy of the cover page of the preliminary or final prospectus 
or similar offering document, unless Nasdaq determines otherwise.

4615. Reserved

4616. Reports

    A Nasdaq Market Maker, Nasdaq ECN, or Order Entry Firm [or ITS/CAES 
Market Maker] shall make such reports to Nasdaq as may be prescribed 
from time to time by Nasdaq.

4617. Normal Business Hours

    The System operates from 7 a.m. to 8 p.m. eastern time on each 
business day, unless modified by Nasdaq. A Nasdaq Market Maker shall be 
open for business as of 9:30 a.m. Eastern Time and shall close no 
earlier than 4 p.m. Eastern Time. [Should a] A Nasdaq Market Maker 
[wish to] may voluntarily open for business prior to 9:30 a.m. and 
remain open for business later than 4 p.m. eastern time[, it shall so 
notify Nasdaq Market Operations and shall close only on the hour or the 
half hour, but no later than 6:30 p.m. eastern time]. Nasdaq Market 
Makers whose quotes are open prior to 9:30 a.m. Eastern time or after 4 
p.m. eastern time shall be obligated to comply, while their quotes are 
open, with all Nasdaq Rules that are not by their express terms, or by 
an official interpretation of Nasdaq, inapplicable to any part of the 7 
a.m. to 9:30 a.m. or 4 p.m. to [6:30] 8 p.m. eastern time period.

4618. Clearance and Settlement

    (a) All transactions through the facilities of the Nasdaq Market 
Center shall be cleared and settled through a registered clearing 
agency using a continuous net settlement system. This requirement may 
be satisfied by direct participation, use of direct clearing services, 
or by entry into a correspondent clearing arrangement with another 
member that clears trades through such an agency.
    (b) Notwithstanding paragraph (a), transactions in Nasdaq listed 
securities may be settled ``ex-clearing'' provided that both parties to 
the transaction agree.

4619. Withdrawal of Quotations and Passive Market Making

    (a) Except as provided in paragraph (b) of this Rule, a market 
maker that wishes to withdraw quotations in a security or have its 
quotations identified as the quotations of a passive market maker shall 
contact Nasdaq MarketWatch to obtain excused withdrawal status prior to 
withdrawing its quotations or identification as a passive market maker. 
Withdrawals of quotations or identifications of quotations as those of 
a passive market maker shall be granted by Nasdaq MarketWatch only upon 
satisfying one of the conditions specified in this Rule.
    (b) A Nasdaq Market Maker that wishes to obtain excused withdrawal 
status based on a market maker's systemic equipment problems, such as 
defects in a Nasdaq Market Maker's software or hardware systems or 
connectivity problems associated with the circuits connecting Nasdaq 
Market Center systems with the Nasdaq Market Maker's systems, shall 
contact Nasdaq Market Operations. Nasdaq Market Operations may grant 
excused withdrawal status based on systemic equipment problems for up 
to five (5) business days, unless extended by Nasdaq Market Operations.
    (c)(1) For Nasdaq-listed securities, e[E]xcused withdrawal status 
based on circumstances beyond the Nasdaq Market Maker's control, other 
than systemic equipment problems, may be granted for up to five (5) 
business days, unless extended by Nasdaq MarketWatch. Excused 
withdrawal status based on demonstrated legal or regulatory 
requirements, supported by appropriate documentation and accompanied by 
a representation that the condition necessitating the withdrawal of 
quotations is not permanent in nature, may, upon

[[Page 19578]]

notification, be granted for not more than sixty (60) days (unless such 
request is required to be made pursuant to paragraph (e) below). 
Excused withdrawal status based on religious holidays may be granted 
only if written notice is received by Nasdaq one business day in 
advance and is approved by Nasdaq. Excused withdrawal status based on 
vacation maybe granted only if:
    ([1]A) The written request for withdrawal is received by Nasdaq one 
business day in advance, and is approved by Nasdaq
    ([2]B) The request includes a list of the securities for which 
withdrawal is requested; and
    ([3]C) The request is made by a Nasdaq Market Maker with three (3) 
or fewer Nasdaq level 3 terminals. Excused withdrawal status may be 
granted to a Nasdaq Market Maker that has withdrawn from an issue prior 
to the public announcement of a merger or acquisition and wishes to re-
register in the issue pursuant to the same-day registration procedures 
contained in Rule 4611 above, provided the Nasdaq Market Maker has 
remained registered in one of the affected issues. The withdrawal of 
quotations because of pending news, a sudden influx of orders or price 
changes, or to effect transactions with competitors shall not 
constitute acceptable reasons for granting excused withdrawal status.
    (2) For ITS Securities, a Nasdaq Market Maker that wishes to 
withdraw quotations shall contact Nasdaq MarketWatch to obtain excused 
withdrawal status prior to withdrawing its quotations. Excused 
withdrawal status based on illness, vacations or physical circumstances 
beyond the Market Maker's control may be granted for up to five (5) 
business days, unless extended by Nasdaq MarketWatch. Excused 
withdrawal status based on investment activity or advice of legal 
counsel, accompanied by a representation that the condition 
necessitating the withdrawal of quotations is not permanent in nature, 
may, upon written request, be granted for not more than sixty (60) 
days. The withdrawal of quotations because of pending news, a sudden 
influx of orders or price changes, or to effect transactions with 
competitors shall not normally constitute acceptable reasons for 
granting excused withdrawal status, unless Nasdaq has initiated a 
trading halt for Market Makers in the security. pursuant to Rule 4120.
    (d) Excused withdrawal status may be granted to a Nasdaq Market 
Maker that fails to maintain a clearing arrangement with a registered 
clearing agency or with a member of such an agency and is withdrawn 
from participation in the trade reporting service of the Nasdaq Market 
Center, thereby terminating its registration as a Nasdaq Market Maker. 
Provided however, that if Nasdaq finds that the Nasdaq Market Maker's 
failure to maintain a clearing arrangement is voluntary, the withdrawal 
of quotations will be considered voluntary and unexcused pursuant to 
Rule 4620 and the Rule 4700 Series governing the Nasdaq Market Center. 
Nasdaq Market Makers that fail to maintain a clearing relationship will 
have their Nasdaq Market Center system status set to ``suspend'' and be 
thereby prevented from entering, or executing against, any quotes/
orders in the system.
    (e) Excused withdrawal status or passive market maker status may be 
granted to a Nasdaq Market Maker that is a distribution participant 
(or, in the case of excused withdrawal status, an affiliated purchaser) 
in order to comply with SEC Rule 101, 103, or 104 under the Act on the 
following conditions:
    (1) A member acting as a manager (or in a similar capacity) of a 
distribution of a security that is a subject security or reference 
security under SEC Rule 101 and any member that is a distribution 
participant or an affiliated purchaser in such a distribution that does 
not have a manager shall provide written notice to Nasdaq MarketWatch 
and the Market Regulation Department of NASD Regulation, Inc. no later 
than the business day prior to the first entire trading session of the 
one-day or five-day restricted period under SEC Rule 101, unless later 
notification is necessary under the specific circumstances.
    (A) The notice required by subparagraph (e)(1) of this Rule shall 
be provided by submitting a completed Underwriting Activity Report that 
includes a request on behalf of each Nasdaq Market Maker that is a 
distribution participant or an affiliated purchaser to withdraw the 
Nasdaq Market Maker's quotations, or that includes a request on behalf 
of each Nasdaq Market Maker that is a distribution participant (or an 
affiliated purchaser of a distribution participant) that its quotations 
be identified as those of a passive market maker and includes the 
contemplated date and time of the commencement of the restricted 
period.
    (B) The managing underwriter shall advise each Nasdaq Market Maker 
that it has been identified as a distribution participant or an 
affiliated purchaser to Nasdaq MarketWatch and that its quotations will 
be automatically withdrawn or identified as passive market maker 
quotations, unless a market maker that is a distribution participant 
(or an affiliated purchaser of a distribution participant) notifies 
Nasdaq MarketWatch as required by subparagraph (e)(2), below.
    (2) A Nasdaq Market Maker that has been identified to Nasdaq 
MarketWatch as a distribution participant (or an affiliated purchaser 
of a distribution participant) shall promptly notify Nasdaq MarketWatch 
and the manager of its intention not to participate in the prospective 
distribution or not to act as a passive market maker in order to avoid 
having its quotations withdrawn or identified as the quotations of a 
passive market maker.
    (3) If a Nasdaq Market Maker that is a distribution participant 
withdraws its quotations in a Nasdaq security in order to comply with 
the net purchases limitation of SEC Rule 103 or with any other 
provision of SEC Rules 101, 103, or 104 and promptly notifies Nasdaq 
MarketWatch of its action, the withdrawal shall be deemed an excused 
withdrawal. Nothing in this subparagraph shall prohibit Nasdaq from 
taking such action as is necessary under the circumstances against a 
member and its associated persons for failure to contact Nasdaq 
MarketWatch to obtain an excused withdrawal as required by 
subparagraphs (a) and (e) of this Rule.
    (4) The quotations of a passive market maker shall be identified on 
Nasdaq as those of a passive market maker.
    (5) A member acting as a manager (or in a similar capacity of a 
distribution subject to subparagraph (e)(1) of this Rule shall submit a 
request to Nasdaq MarketWatch and the Market Regulation Department of 
NASD Regulation, Inc. to rescind the excused withdrawal status or 
passive market making status of distribution participants and 
affiliated purchasers, which request shall include the date and time of 
the pricing of the offering, the offering price, and the time the 
offering terminated, and, if not in writing, shall be confirmed in 
writing no later than the close of business the day the offering 
terminates. The request by this subparagraph may be submitted on the 
Underwriting Activity Report.
    (f) The Market Operations Review Committee shall have jurisdiction 
over proceedings brought by Nasdaq Market Makers seeking review of the 
denial of an excused withdrawal pursuant to this Rule 4619, or the 
conditions imposed on their reentry.

4620. Voluntary Termination of Registration

    (a) A market maker may voluntarily terminate its registration in a 
security by withdrawing its two-sided quotation

[[Page 19579]]

from the Nasdaq Market Center. A Nasdaq Market Maker that voluntarily 
terminates its registration in a security may not re-register as a 
market maker in that security for twenty (20) business days in the case 
of Nasdaq-listed securities or for one (1) business day in the case of 
ITS securities. Withdrawal from participation as a Nasdaq Market Maker 
in the Nasdaq Market Center shall constitute termination of 
registration as a market maker in that security for purposes of this 
Rule; provided, however, that a Nasdaq Market Maker that fails to 
maintain a clearing arrangement with a registered clearing agency or 
with a member of such an agency and is withdrawn from participation in 
the Nasdaq Market Center and thereby terminates its registration as a 
Nasdaq Market Maker may register as a market maker at any time after a 
clearing arrangement has been reestablished unless Nasdaq finds that 
the Nasdaq Market Maker's failure to maintain a clearing arrangement is 
voluntary, in which case the withdrawal of quotations will be 
considered voluntary and unexcused.
    (b) Notwithstanding the above, a Nasdaq Market Maker that 
accidentally withdraws as a Nasdaq Market Maker may be reinstated if:
    (1) The Nasdaq Market Maker notified MarketWatch of the accidental 
withdrawal as soon as practicable under the circumstances, but within 
at least one hour of such withdrawal, and immediately thereafter 
provided written notification of the withdrawal and reinstatement 
request;
    (2) It is dear that the withdrawal was inadvertent and the market 
maker was not attempting to avoid its market making obligations; and
    (3) The Nasdaq Market Maker's firm would not exceed the following 
reinstatement limitations:
    (A) For firms that simultaneously made markets in less than 250 
stocks during the previous calendar year, the firm can receive no more 
than two (2) reinstatements per year;
    (B) For firms that simultaneously made markets in 250 or more but 
less than 500 stocks during the previous calendar year, the firm can 
receive no more than three (3) reinstatements per year; and
    (C) For firms that simultaneously made markets in 500 or more 
stocks during the previous calendar year, the firm can receive no more 
than six (6) reinstatements per year.
    (c) Factors that Nasdaq will consider in granting a reinstatement 
under paragraph (b) of this rule include, but are not [be] limited to:
    (1) The number of accidental withdrawals by the Nasdaq Market Maker 
in the past, as compared with Nasdaq Market Makers making markets in a 
comparable number of stocks;
    (2) The similarity between the symbol of the stock that the Nasdaq 
Market Maker intended to withdraw from and the symbol of the stock that 
the Nasdaq Market Maker actually withdrew from;
    (3) Market conditions at the time of the withdrawal;
    (4) Whether, given the market conditions at the time of the 
withdrawal, the withdrawal served to reduce the exposure of the 
member's position in the security at the time of the withdrawal to 
market risk; and
    (5) The timeliness with which the Nasdaq Market Maker notified 
MarketWatch of the error.
    (d) For purposes of paragraph (a) of this Rule, a market maker 
shall not be deemed to have voluntarily terminated its registration in 
a security by voluntarily withdrawing its two-sided quotation from the 
Nasdaq Market Center if the Nasdaq Market Maker's two-sided quotation 
in the subject security is withdrawn by Nasdaq's systems due to issuer 
corporate action related to a dividend, payment or distribution, or due 
to a trading halt, and one of the following conditions is satisfied:
    (1) The Nasdaq Market Maker enters a new two-sided quotation prior 
to the close of the regular market session on the same day when 
Nasdaq's systems withdrew such a quotation;
    (2) The Nasdaq Market Maker enters a new two-sided quotation on the 
day when trading resumes following a trading halt, or, if the 
resumption of trading occurs when the market is not in regular session, 
the Nasdaq Market Maker enters a new two-sided quotation prior to the 
opening of the next regular market session; or
    (3) Upon request from the market maker, Nasdaq MarketWatch 
authorizes the market maker to enter a new two-sided quotation, 
provided that Nasdaq MarketWatch receives the market maker's request 
prior to the close of the regular market session on the next regular 
trading day after the day on-which the market maker became eligible to 
re-enter a quotation pursuant to subparagraph (d)(1) or (d)(2) hereof 
and determines that the market maker was not attempting to avoid its 
market making obligations by failing to re-enter such a quotation 
earlier.
    (e) The Market Operations Review Committee shall have jurisdiction 
over proceedings 29 brought by market makers seeking review of their 
denial of a reinstatement pursuant to paragraphs (b) or (d) of this 
Rule.

4621. Suspension and Termination of Quotations

    Nasdaq may, pursuant to the procedures set forth in the Rule 9000 
Series, suspend, condition, limit, prohibit or terminate the authority 
of a Nasdaq Market Maker, Nasdaq ECN, or Order Entry Firm [or ITS/CAES 
Market Maker] to enter quotations in one or more authorized securities 
for violations of applicable requirements or prohibitions.

4622. Termination of Nasdaq Service

    Nasdaq may, upon notice, terminate Nasdaq service in the event that 
a Nasdaq Market Maker, Nasdaq ECN, or Order Entry Firm [or ITS/CAES 
Market Maker] fails to qualify under specified standards of eligibility 
or fails to pay promptly for services rendered by Nasdaq.

4623. Alternative Trading Systems

    (a) Nasdaq may provide a means to permit alternative trading 
systems (``ATSs''), as such term is defined in Regulation ATS, and 
electronic communications networks (``ECNs''), as such term is defined 
in SEC Rule 600,
    (1) To comply with SEC Rule 301(b)(3);
    (2) To comply with the terms of the ECN display alternative 
provided for in SEC Rule 602(b)(5)(ii)(A) and (B) (``ECN display 
alternatives''); or
    (3) To provide orders to Nasdaq voluntarily.
    In providing any such means, Nasdaq shall establish a mechanism 
that permits the ATS or ECN to display the best prices and sizes of 
orders entered into the ATS or ECN by [Nasdaq market makers (and other] 
subscribers of the ATS or ECN, if the ECN or ATS so chooses or is 
required by SEC Rule 301(b)(3) to display a subscriber's order in 
Nasdaq[)], and allows any Nasdaq member the electronic ability to 
effect a transaction with such priced orders that is equivalent to the 
ability to effect a transaction with a Nasdaq market maker quotation in 
Nasdaq operated systems.
    (b) An ATS or ECN that seeks to utilize the Nasdaq-provided means 
to comply with SEC Rule 301(b)(3), the ECN display alternatives, or to 
provide orders to Nasdaq voluntarily shall:
    (1) Demonstrate to Nasdaq that it is in compliance with Regulation 
ATS or that it qualifies as an ECN meeting the definition in the SEC 
Rule 600;
    (2) Be registered as a Nasdaq member;
    (3) Enter into and comply with the terms of applicable agreements 
with Nasdaq;

[[Page 19580]]

    (4) Agree to provide for Nasdaq's dissemination in the quotation 
data made available to quotation vendors the prices and sizes of 
[Nasdaq market maker orders (and orders from other] subscriber[s] 
orders of the ATS or ECN, if the ATS or ECN so chooses or is required 
by SEC Rule 301(b)(3) to display a subscriber's order in Nasdaq[)], at 
the highest buy price and the lowest sell price for each Nasdaq 
security entered in and widely disseminated by the ATS or ECN; and 
prior to entering such prices and sizes, register with Nasdaq Market 
Operations as an ATS or ECN;
    (5) Provide an automatic[ ed] execution [or, if the price is no 
longer available, an automated rejection] of any quote or order [routed 
to] entered into the System by the ATS or ECNJ through the Nasdaq-
provided display alternative.]
    [(6) Not charge to broker-dealers that access the ATS or ECN 
through the Nasdaq Market Center any fee that is inconsistent with the 
requirements of SEC Rule 301(b)(4) or that exceeds $0.003 per share].
    [(c) When a Nasdaq member attempts to electronically access through 
a Nasdaq-provided system an ATS or ECN-displayed order by sending an 
order that is larger than the ATS's or ECN's Nasdaq-displayed size and 
the ATS or ECN is displaying the order in Nasdaq on a reserved size 
basis, the Nasdaq member that operates the ATS or ECN shall execute 
such Nasdaq-delivered order:]
    [(1) Up to the size of the Nasdaq-delivered order, if the ATS or 
ECN order (including the reserved size and displayed portions) is the 
same size or larger than the Nasdaq-delivered order; or]
    [(2) Up to the size of the ATS or ECN order (including the reserved 
size and displayed portions), if the Nasdaq-delivered order is the same 
size or larger than the ATS or ECN order (including the reserved size 
and displayed portions).]
    [No ATS or ECN operating in Nasdaq pursuant to this rule is 
permitted to provide a reserved-size function unless the size of the 
order displayed in Nasdaq is 100 shares or greater. For purposes of 
this rule, the term ``reserved size'' shall mean that a customer 
entering an order into an ATS or ECN has authorized the ATS or ECN to 
display publicly part of the full size of the customer's order with the 
remainder held in reserve on an undisplayed basis to be displayed in 
whole or in part as the displayed part is executed.]
    [Nothing in this Rule shall require the provision to Nasdaq of a 
locking or crossing bid or offer, if such locking or crossing bid or 
offer is instead provided to another display alternative operated by a 
national securities exchange or national securities association.]

4624. Penalty Bids and Syndicate Covering Transactions

    (a) A Nasdaq Market Maker [or ITS/CAES Market Maker] acting as a 
manager (or in a similar capacity) of a distribution of a security that 
is a subject or reference security under SEC Rule 101 shall provide 
written notice to the Corporate Financing Department of NASD 
Regulation, Inc. of its intention to impose a penalty bid on syndicate 
members or to conduct syndicate covering transactions pursuant to SEC 
Rule 104 prior to imposing the penalty bid or engaging in the first 
syndicate covering transaction. A Nasdaq Market Maker [or ITS/CAES 
Market Maker] that intends to impose a penalty bid on syndicate members 
may request that its quotation be identified as a penalty bid on Nasdaq 
pursuant to paragraph (c) below.
    (b) The notice required by paragraph (a) shall include:
    (1) The identity of the security and its symbol;
    (2) The date the member is intending to impose the penalty bid and/
or conduct syndicate covering transactions.
    (c) Notwithstanding paragraph (a), a Nasdaq Market Maker [or ITS/
CAES Market Maker] may request that its quotation be identified as a 
penalty bid on Nasdaq display by providing notice to Nasdaq 
MarketWatch, which notice shall include the date and time that the 
penalty bid identifier should be entered on Nasdaq and, if not in 
writing, shall be confirmed in writing no later than the close of 
business the day the penalty bid identifier is entered on Nasdaq.
    (d) The written notice required by this Rule may be submitted on 
the Underwriting Activity Report.

4625. Obligation To Provide Information

    (a) A Nasdaq Market Maker, Nasdaq ECN, or Order Entry Firm [or ITS/
CAES Market Maker] operating in or participating in the Nasdaq Market 
Center or other Nasdaq-operated system shall provide information 
orally, in writing, or electronically (if such information is, or is 
required to be, maintained in electronic form) to the staff of Nasdaq 
when:
    (1) Nasdaq MarketWatch staff makes an oral, written, or 
electronically communicated request for information relating to a 
specific Nasdaq rule, SEC rule, or provision of a joint industry plan 
(e.g., ITS, UTP, CTA, and CQA) (as promulgated and amended from time-
to-time) that Nasdaq MarketWatch is responsible for administering or to 
other duties and/or obligations imposed on Nasdaq MarketWatch by 
Nasdaq; this shall include, but not be limited to, information relating 
to:
    (A) A locked or crossed market; or
    (B) Reserved
    (C) Trading activity, rumors, or information that a member may 
possess that may assist in determining whether there is a basis to 
initiate a trading halt, pursuant to Nasdaq Rule 4120 and IM-4120-1; or
    (D) A quotation that appears not to be reasonably related to the 
prevailing market; or
    (E) A clearly erroneous transaction, pursuant to Nasdaq Rule 11890; 
or
    (F) A request for an excused withdrawal or reinstatement, pursuant 
to Nasdaq Rules 4619[,] and 4620[, and 5222]; or
    (G) The resolution of a trade-through complaint, or other 
transaction, pursuant to Nasdaq Rules 4759 [, 5262, 5265,] and 11890; 
or
    (H) A request to submit a stabilizing bid, pursuant to Nasdaq Rule 
4614, or a request to have a quotation identified as a penalty bid on 
Nasdaq, pursuant to Nasdaq Rule 4624.
    (2) Nasdaq Market Operations staff makes an oral, written, or 
electronically communicated request for information relating to a 
specific Nasdaq rule, SEC rule, provision of a joint industry plan 
(e.g., ITS, UTP, CTA, and CQA) (as promulgated and amended from time-
to- time) that Nasdaq Market Operations is responsible for 
administering or to other duties and/or obligations for which Nasdaq 
Market Operations is responsible, this shall include, but not be 
limited to, information relating to an equipment failure.
    (b) A failure to comply in a timely, truthful, and/or complete 
manner with a request for information made pursuant to this rule may be 
deemed conduct inconsistent with just and equitable principles of 
trade.

4626. Limitation of Liability

    (a) Except as provided for in paragraph (b) below, Nasdaq and its 
affiliates shall not be liable for any losses, damages, or other claims 
arising out of the Nasdaq Market Center or its use. Any losses, 
damages, or other claims, related to a failure of the Nasdaq Market 
Center to deliver, display, transmit, execute, compare, submit for 
clearance and settlement, adjust, retain priority for, or otherwise 
correctly process an order, Quote/Order, message, or other data entered 
into, or created by,

[[Page 19581]]

the Nasdaq Market Center shall be absorbed by the member, or the member 
sponsoring the customer, that entered the order, Quote/Order, message, 
or other data into the Nasdaq Market Center.
    (b) Nasdaq, subject to the express limits set forth below, may 
compensate users of the Nasdaq Market Center or Nasdaq's Brut [order 
execution] system for losses directly resulting from the systems' 
actual failure to correctly process an order, Quote/Order, message, or 
other data, provided the Nasdaq Market Center, or Brut system, as 
applicable, has acknowledged receipt of the order, Quote/Order, 
message, or data.
    (1) For one or more claims made by a single market participant 
related to the use of the Nasdaq Market Center or Brut system on a 
single trading day, Nasdaq's liability shall not exceed the larger of 
$100,000, or the amount of any recovery obtained by Nasdaq under any 
applicable insurance policy.
    (2) For the aggregate of all claims made by all market participants 
related to the use of the Nasdaq Market Center or Brut system on a 
single trading day, Nasdaq's liability shall not exceed the larger of 
$250,000, or the amount of the recovery obtained by Nasdaq under any 
applicable insurance policy.
    (3) For the aggregate of all claims made by all market participants 
related to the use of the Nasdaq Market Center or Brut system during a 
single calendar month, Nasdaq's liability shall not exceed the larger 
of $500,000, or the amount of the recovery obtained by Nasdaq under any 
applicable insurance policy.
    (4) In the event all of the claims arising out of the use of the 
Nasdaq Market Center or Brut system cannot be fully satisfied because 
in the aggregate they exceed the maximum amount of liability provided 
for in this Rule, then the maximum amount will be proportionally 
allocated among all such claims arising on a single trading day, or 
during a single calendar month, as applicable.
    (5) All claims for compensation pursuant to this Rule shall be in 
writing and must be submitted no later than the opening of trading on 
the next business day following the day on which the use of the Nasdaq 
Market Center or the Brut system gave rise to such claims. Nothing in 
this rule shall obligate Nasdaq or Brut to seek recovery under any 
applicable insurance policy.

4627. Obligation To Honor System Trades

    (a) If a Participant, or clearing member acting on a Participant's 
behalf, is reported by the System, or shown by the activity reports 
generated by the System, as constituting a side of a System trade, such 
Participant, or clearing member acting on its behalf, shall honor such 
trade on the scheduled settlement date.
    (b) Nasdaq shall have no liability if a Participant, or a clearing 
member acting on the Participant's behalf, fails to satisfy the 
obligations in paragraph (a).

4628. Compliance With Rules and Registration Requirements

    (a) Failure by a Participant to comply with any of the rules or 
registration requirements applicable to the Nasdaq Market Center 
identified herein shall subject such Participant to censure, fine, 
suspension or revocation of its registration as a Nasdaq Market Maker, 
Order Entry Firm and/or Nasdaq ECN or any other fitting penalty under 
the Nasdaq Rules.
    (b)(1) If a Participant fails to maintain a clearing relationship 
as required under paragraphs (a)(2) of Rule 4611, it shall be removed 
from the Nasdaq Market Center until such time as a clearing arrangement 
is reestablished.
    (2) A Participant that is not in compliance with its obligations 
under paragraphs (a)(2) of Rule 4611 shall be notified when Nasdaq 
exercises it authority under paragraph (b)(1) above.
    (3) The authority and procedures contained in this paragraph (b) do 
not otherwise limit Nasdaq's authority, contained in other provisions 
of the Nasdaq Rules, to enforce its rules or impose any fitting 
sanction.

[4700. NASDAQ MARKET CENTER--EXECUTION SERVICES]

    Nasdaq is proposing to delete each and every rule in the 4700 
Series that was approved in the Order dated January 13, 2006.

 4750. NASDAQ MARKET CENTER--EXECUTION SERVICES

 4751. Definitions

    The following definitions apply to the Rule 4600 and 4750 Series 
for the trading of securities listed on a national securities exchange 
other than Nasdaq.
    (a) The term ''Nasdaq Market Center,'' or ``System'' shall mean the 
automated system for order execution and trade reporting owned and 
operated by The NASDAQ Stock Market LLC. The Nasdaq Market Center 
comprises:
    (1) An order execution service that enables Participants to 
automatically execute transactions in System Securities; and provides 
Participants with sufficient monitoring and updating capability to 
participate in an automated execution environment;
    (2) A trade reporting service that submits ``locked-in'' trades for 
clearing to a registered clearing agency for clearance and settlement; 
transmits last-sale reports of transactions automatically to the 
National Trade Reporting System, if required, for dissemination to the 
public and industry; and provides participants with monitoring and risk 
management capabilities to facilitate participation in a ``locked-in'' 
trading environment;
    (3) A data feed(s) that can be used to display with attribution to 
Participants' MPIDs all Quotes and Displayed Orders on both the bid and 
offer side of the market for all price levels then within the Nasdaq 
Market Center.
    (b) The term ``System Securities'' shall mean all securities listed 
on Nasdaq and all securities subject to the Consolidated Tape 
Association Plan and the Consolidated Quotation Plan.
    (c) The term ``Participant'' shall mean an entity that fulfills the 
obligations contained in Rule 4611 regarding participation in the 
System, and shall include:
    (1) ``Nasdaq ECNs.'' members that meet all of the requirements of 
Rule 4623, and that participates in the System with respect to one or 
more Nasdaq-listed securities.
    (2) ``Nasdaq Market Makers,'' members that are registered as Nasdaq 
Market Makers for purposes of participation in the System on a fully 
automated basis with respect to one or more System securities.
    (3) ``Order Entry Firms,'' members that are reg