Alternative Display Facility (ADF) Nine-Month Pilot Approved for Trading in Nasdaq Securities

Alternative Display Facility

Executive Summary

On July 24, 2002, the Securities and Exchange Commission (SEC) approved amendments to NASD rules that establish, implement, and operate NASD's Alternative Display Facility (ADF) on a pilot basis for nine months.¹ As described in more detail herein, members that choose to participate in the ADF during the pilot may quote and trade Nasdaq-listed securities on or through the ADF, commencing on July 29, 2002. NASD has proposed the permanent establishment and operation of the ADF in a separate rule filing, which would provide market participants the ability to quote and trade Nasdaq and exchange-listed securities.² However, several regulatory issues relating to the trading of exchange-listed securities on the ADF have not been resolved. Because these open issues do not relate to trading Nasdaq securities, NASD has received approval to operate the ADF on a pilot basis with respect to Nasdaq securities only.

The SEC Approval Order, which includes the text of the amendments, is available at www.sec.gov/rules/sro/34-46249.html. This Notice is intended to provide an overview of how the ADF will operate and member requirements in this regard. For additional information regarding ADF, members should review the SEC Approval Order and other ADF documentation available at www.nasd.com/ mkt_sys/adf_info.asp.

Questions concerning this Notice related to the rules should be directed to either the Division of Regulatory Policy and Oversight, Office of General Counsel, at (202) 728-8071, or Market Regulation Department, at (240) 386-5126. Questions related to the operation of the ADF or becoming an ADF participant should be directed to the Division of Regulatory Services and Operations, Market Operations and Information Services, at (866) 776-0800 or (212) 858-5178.

Background

The ADF is a quotation collection, trade comparison, and trade reporting facility developed by NASD in accordance with the SEC's SuperMontage Approval Order³ and in conjunction with The Nasdaq Stock Market, Inc.'s (Nasdaq) anticipated registration as a national securities exchange.⁴ Initially, the ADF will be operated on a pilot basis for nine months. During the pilot, ADF market participants (market makers and ECNs) will be able to post quotations in Nasdaq securities and all members that participate in the ADF will be able to view quotations and report transactions in Nasdaq securities. The facility also will provide for trade reporting and comparison through the Trade Reporting and Comparison Service ("TRACS"), which is described in detail below.

Because the ADF pilot will be operating prior to the approval of Nasdaq's registration as an exchange, NASD will operate both Nasdaq and the ADF during the pilot period. Accordingly, the new rules applicable to quotation and trading requirements for activities through the ADF are separate from the quotation and trading rules relating to Nasdaq. Certain rules applicable to trading on Nasdaq have been amended, but only to reflect that members that choose to participate in both Nasdaq and the ADF may elect to trade report to either facility, except as specifically described herein. Otherwise, rules applicable to trading on Nasdaq have not changed.

The ADF trade reporting rules are consistent with current requirements applicable to Nasdaq market participants and are not intended to require new or different trade reporting responsibilities for parties to transactions. As described in more detail herein, the new Rule 5400 Series details which party to a transaction has the trade reporting responsibility and where (ADF or Nasdaq) the party with the trade reporting responsibility is required, or has the choice, to trade report.

Market Maker and ECN Registration

Similar to the existing rules applicable to Nasdaq market makers, ADF participants must register as market makers or ECNs to make a market or display orders on the ADF. Market makers will receive approval for registration upon demonstration that they are members in good standing and comply with the net capital and other financial responsibility requirements of the Exchange Act. To ease the administrative burden on NASD members, the pilot ADF rules initially will allow registration as a market maker in the ADF upon proof that a member is a registered Nasdaq market maker.

The ADF rules track Nasdaq requirements that market makers maintain continuous two-sided firm quotations and prescribes market maker obligations when a bid or offer locks or crosses the market. ECNs, however, may post one-sided quotes in the ADF. If an ADF Market Maker that also is a Nasdaq Market Maker is seeking excused withdrawal status, it must obtain such excused withdrawal status in both facilities for the same time period.

The ADF rules also provide that registration as an ADF market maker in a security is voluntarily terminated when the market maker: (1) withdraws its quotations from the ADF and does not re-enter quotations in the security for five minutes; or (2) fails to re-enter quotations within 30 minutes after the end of a trading halt. In either circumstance, a market maker would be prohibited from participating as an ADF market maker in that security for twenty (20) business days.

Order Access Rule

NASD will not provide an order routing capability. Instead, the pilot ADF Rule 4300A ("order access rule") requires NASD "market participants" to provide "direct electronic access" to other "market participants" and to provide to all other NASD members "direct electronic access" or allow for "indirect electronic access" to the individual market participant's quote ("order access rule"). The rule defines "market participants" as either an ADF Registered Market Maker, or an ADF Registered ECN or ATS. In other words, "market participants" are those members that post quotations in the ADF.

As stated above, the order access rule requires market participants to provide other market participants with direct electronic access to their quotes. "Direct electronic access" is defined in the rule as the ability to deliver an order for execution directly against an individual NASD market participant's best bid or offer without the need for voice communication, with equivalent speed, reliability, availability, and cost, as are made available to NASD market participants' own customers. Therefore, while the linkage must be electronic — telephone access is insufficient — the rule allows market participants flexibility to determine the type and method of linkage. For example, market participants are permitted to link directly among themselves bilaterally using their own technology or to use a provider with multilateral order routing facilities to satisfy the linkage requirements. The rule requires that a market participant be equally accessible to all other market participants via this electronic link.

The rule also requires market participants to provide all other NASD broker/dealer members (i.e., those members that do not quote in ADF but want to access ADF quotes) with direct electronic access or allow for "indirect electronic access" through their customer broker/dealers. "Indirect electronic access" is defined as the ability to route an order through a market participant's customer broker/dealer for execution against the market participant's best bid and offer, without the need for voice communication, with equivalent speed, reliability, availability, and cost, as are made available to the market participant's customer broker/dealer providing access to the market participant's quotes.

A market participant may not deny indirect access to its quotes by requiring that all broker/dealers link directly to it. The requirement to allow for indirect access also does not permit market participants to refuse direct access to members that would prefer direct connectivity; rather, it creates an additional means for non-market participant broker/dealers to access market participants' quotes.

The order access rule applies only to a market participant's top of book, i.e., the best bid and offer that is displayed in the ADF. Therefore, market participants retain substantial flexibility to negotiate the terms of many other services, such as full book access, placing orders, and use of reserve sizes. ECNs are permitted to charge more for "hit or take" access only - purely a liquidity taking function — than for full subscriber services, provided that the fee is reasonable, based on objective criteria, and not imposed discriminatorily.

Costs of Providing Order Access

Market participants must share equally the costs of providing to each other the direct electronic access required by the rule, unless those market participants agree upon another cost-sharing arrangement. For example, assume the ADF consisted of five market participants and a sixth broker/dealer registered as an ADF market participant. Under this scenario, each of the five existing market participants would be required to split with the new market participant the costs to establish their respective bilateral links with the new market participant, unless the parties agreed upon a different cost allocation.

Market participants also must pay the costs to enable direct electronic access to their quotes by non-market participant broker/dealers seeking access. Thus, a market participant must bear the costs to build, upgrade, or otherwise reconfigure its technology to allow other broker/dealers to connect to it, including the costs to accommodate additional volume resulting from indirect electronic access order flow through customer broker/dealers. Similarly, those non-market participant broker/dealers seeking access to a market participant's quote must bear the line or other costs necessary to connect with a market participant's network.

A customer broker/dealer may charge its customers a fee to provide indirect access to a market participant's quotes. A market participant may not influence or prescribe what a customer broker/dealer may charge its customers for indirect access to the market participant.⁵ Further, a market participant may not preclude or discourage a specific customer broker/dealer from providing indirect access, either through discriminatory pricing or by degrading its quality of service to its customer broker/dealer. A market participant may, however, offer to provide direct electronic access at a competitive price as part of the services it provides to customers.

Connectivity costs should be distinguished from fees for various other services provided by market participants. NASD recognizes that market participants have a variety of existing business relationships with broker/dealers for which they charge fees for services rendered, e.g., the handling of limit orders, price improvement opportunities, and liquidity enhancement. Market participants may continue to assess fees for these types of services, as permissible under current rules and regulations.

While ECNs may charge to execute against their best bid and offer, the fee must be based on reasonable and objective criteria. And while ECNs are permitted under the proposal to charge more for hit-or-take access than for full service access, they may not impose hit-or-take fees in a way that discriminates against a particular broker/dealer or class of broker/dealers. Thus, in setting its fee schedule, an ECN may not look through its order flow to identify and discriminate against the source of the order flow, e.g., a competitor or a broker/dealer that is accessing the quote indirectly. Rather, an ECN may set a reasonable fee for order flow that takes liquidity - a fee that may be higher than for order flow that provides liquidity — and apply that fee to all such order flow, irrespective of its origin. Similarly, an ECN that offers a volume discount must offer the same terms to all broker/dealers accessing its quote via direct or indirect access, without regard to the identity of the broker/dealer or the source of its order flow.

Minimum Performance Standards

To ensure that ADF quotes are reliable and accessible, order access linkages must meet specified minimum performance standards. Specifically, the pilot ADF rules impose a technological requirement on market participants, mandating that their order linkage system provide them the capability to respond to an order - i.e. accept or decline it - from another market participant or customer broker/dealer, within two seconds of receipt. Additionally, market participants are required to have in place a system that can accomplish a "round trip" of an order from another market participant in three or fewer seconds, measured from the time an order is released by a market participant until the time notification of action taken on the order is received back by the market participant that sent the order.

Market participants will be required to certify that their systems can meet these standards at peak capacity, based on reasonable forecasts, before they are authorized to post quotes on the ADF. On an ongoing basis, market participants will be required to re-certify that they can meet these performance standards when volumes exceed those on which the initial certification was based. NASD will review test data to confirm the accuracy of such certifications.

It is important to note that these performance standards are independent of existing firm quote requirements in Exchange Act Rule 11Ac1-1, NASD Rule 3320, and new NASD Rule 4613A(b), which require prompt execution of an order up to the quotation size displayed by the market participant upon receipt of an order to buy or sell. The performance standards ensure that all market participants have adequate technology that will not degrade the overall accessibility of ADF quotes. By comparison, the firm quote rule addresses market participants' obligation to honor their quotes when they receive an order. Accordingly, the performance standards do not require market makers to fill orders in two seconds; however, due to their structure, broker/dealers whose business models rely primarily upon electronic executions systems, for example, ECNs, would be expected to fill orders in less than two seconds.

Market Participant Inaccessibility

To further ensure the reliability of linkages and the integrity of the ADF, NASD will have the authority to suspend from quoting or displaying orders for 20 business days any market participant that experiences three unexcused, confirmed system outages during any period of five business days. System outages are defined as an inability to quote or an inability to respond to orders. A review and appeal process is available, whereby the burden will rest with the market participant to establish that a confirmed system outage was attributable to another party. NASD will have discretion to excuse certain outages where the market participant voluntarily brings the matter to the attention of NASD. NASD also will receive and investigate complaints related to failure to provide direct or indirect access. Complaints of this nature can be reported to NASD, Market Operations at (866) 776-0800 or (212) 858-5178.

Reporting of Order Access Data to NASD

To allow NASD to monitor compliance with certain trading rules, such as the firm quote rule and "trade or move" rules, all market participants that display quotations or orders in the ADF must record specified items of information pertaining to orders they receive from broker/dealers via direct or indirect electronic access and report this information to NASD on a real-time basis. This information must be provided to NASD within 10 seconds of the receipt of an order and, if applicable, when an order is acted upon or responded to.

Trade Reporting and Trade Comparison Service

As described above, TRACS is a trade reporting and comparison service that will operate as part of the ADF pilot. TRACS will collect trade reports for NASD registered market participants, as well as any NASD member that chooses to or is required to report transactions through the ADF. The service will transmit the reports automatically to the Exclusive Securities Information Processor (ESIP), if required, for dissemination to the public and the industry.

TRACS operates similarly to the trade reporting functions of Nasdaq's Automated Confirmation Transaction Service (ACT)⁶ but contains one notable distinguishing feature. TRACS supports a "three party trade report" that will make it easier for ECNs to submit trade reports involving their subscribers and for market makers to submit riskless principal trade reports. A three party trade report is a single last sale trade report that will denote one reporting member - i.e., the party with the trade reporting responsibility as defined in the Rule 4630A Series - and two contra parties. The ADF will split the three party trade report into two separate reports that will then be processed independently in accordance with existing trade reporting rules. Each of these reports will contain its own identifier and a reference to the original three party trade report, so that the separate reports can be mapped to the same transaction. Therefore, the ADF trade reporting system streamlines the reporting process by reducing from three or two to one the number of trade reports for most ECN and riskless principal transactions.

The TRAC's trade comparison service: (1) compares trade information entered by TRACS participants and submits "lockedin" trades to clearance and settlement; (2) transmits reports of the transactions automatically to the ESIP, if required, for dissemination to the public and the industry; and (3) provides participants with monitoring capabilities to facilitate participation in a "locked-in" trading environment. The trade comparison rules are found in the new Rule 6100A Series.

For those trades where one party is a TRACS subscriber and the other party is an ACT subscriber, both TRACS and ACT will accept one-sided trade reports and submit those trades to the National Securities Clearing Corporation (NSCC). In such cases, NSCC will compare the trade.

Transaction Reporting

The pilot rules adopt the current Nasdaq approach to trade reporting for Nasdaq securities, regardless of whether the member is reporting through TRACS or ACT. The pilot rules adopt a new Rule 5430(b), which designates which party to a transaction has the trade reporting responsibility and where, TRACS or ACT, the party with the trade reporting responsibility is required, or has the choice, to trade report.

Specifically, Rule 5430(b) requires that the seller report trades between two market makers or two non-market makers, the market maker report trades between it and a customer, and an NASD member report trades between it and a customer. NASD members that are market makers in both the ADF and Nasdaq and have a trade reporting obligation under the rule, have a choice to trade report to ADF or Nasdaq, except for those transactions that are executed or facilitated by a Nasdaq system. If a member is a market maker in either Nasdaq or the ADF, but not the other facility, and has a trade reporting obligation under the rule, the member must report to the facility in which it is a market maker.

For example, if a member is an ADF market maker, but not a Nasdaq market maker, in a security, the member, if it has a trade reporting obligation, must report the transaction in that security to TRACS, unless the trade is executed using ACES, the Nasdaq National Market Execution System (NNMS), the SelectNet Service, the SmallCap Small Order Execution System (SOES), or the Primex Auction System (Primex). A trade executed using ACES must be reported using ACT, and trades executed using NNMS, SelectNet, SOES, or Primex will be reported to ACT automatically. A member that is not a market maker in either facility but is a participant in both facilities and has a trade reporting obligation may trade report to either facility, unless the trade is executed using ACES, NNMS, SelectNet, SOES, or Primex.

With respect to trade reporting by ECNs, ECNs that currently display quotes in Nasdaq have developed different methods of reporting trades. ECNs may continue to report to Nasdaq and/or the ADF in this same manner.

Short Sale Rule

The short sale rule and its accompanying interpretation have been amended for the purposes of the pilot to provide that the current Nasdaq short rule applies to trading in Nasdaq-listed issues on the ADF. Specifically, members trading on the ADF must comply with the short sale rule based on the national best bid, as currently required under Rule 3350, and also includes the current exemption for registered market makers engaged in bona fide market making activity. The short sale rule will continue to apply as it does today to short sale activities on Nasdaq.

Trading Halts

Rule 4120A provides NASD with authority to halt trading through the ADF in Nasdaq securities. ADF will halt trading when another market halts trading in a security for regulatory reasons. If another market halts trading for operational reasons, market participants may continue to trade in the ADF and would be required to meet all applicable trade reporting requirements. In addition, the ADF has the authority to close ADF to quotation activity when the ADF is unable to transmit real-time quotation and trade reporting data to the ESIP. Under such circumstances where the ADF closes due to an inability to transmit quotation or trade reporting data under Rule 4120A(a)(2), members would not be prohibited from trading through, another market, such as Nasdaq, that has not halted trading, or within their own systems.

Any trading halt initiated by NASD would become effective simultaneously with notification via an administrative message sent through the ADF terminal or interface. Trading similarly would resume after an administrative notice has been issued.

Obligations When Quoting in Multiple Market Centers

Existing Rule 2320(g)(2) requires members that display quotations for non-Nasdaq securities in two or more quotation mediums to post the same priced quotations in each medium. Similar to this obligation, new Rule 4613A(e)(1) requires members that display quotations for Nasdaq securities in two or more market centers, including the ADF, to display the same priced quotations in each medium. It does not, however, prohibit displaying different size quotations in two or more mediums or market centers, provided that the price displayed is the same.

Obligation to Have Quotations From Other Market Centers in Close Proximity

New Rule 4613A(e)(2) requires a registered NASD market maker to have in close proximity to the ADF terminal or interface at which it makes a market in a Nasdaq security a quotation service that disseminates quotations in that security from other market centers. A similar rule, Rule 6330(c), currently exists with respect to Consolidated Quotation Service (CQS) market makers. As with the CQS rule, it is NASD's intention for the quotations displayed in the ADF terminals or interfaces to function as a verification mechanism whereby ADF market participants can monitor their current ADF quotations and ensure that NASD is timely updating and disseminating their quotations. NASD will not disseminate to ADF market participants any consolidated quotation or trade data in a security from securities exchanges and market centers. To ensure that ADF participants have the data necessary to make proper order routing decisions and to satisfy the Vendor Display Rule,⁷ NASD requires ADF market participants to obtain from vendors dynamic quotations and last-sale information on the securities they trade through the ADF, and to display this data in close proximity to the ADF data displayed on their terminals, just as is currently required of CQS market makers in Rule 6330(c).

OATS Requirements

OATS requirements will remain substantially the same as current requirements, with one exception. All NASD members must complete an additional field on the OATS execution report indicating where the order was reported. This requirement will enable NASD to clearly identify which execution reports are associated with ADF trade reports and which are associated with Nasdaq trade reports and, thereby, keep this data separate and confidential, as necessary. This requirement will not be effective until September 27, 2002, to allow time for necessary system charges.

All NASD members must continue to record in electronic form and report to NASD on a daily basis certain information with respect to orders originated, received, transmitted, modified, canceled, or executed ("reportable events") by NASD members relating to equity securities traded on Nasdaq. When the ADF and Nasdaq are both operating, NASD members, in many cases, will have at least two options as to where they may choose to report their transactions in Nasdaq securities. As such, NASD must "match" OATS execution reports to either TRACS data or ACT data, depending upon where the transaction was reported. By having a field in the OATS execution report indicating where the order was reported, NASD systems will be able to more efficiently compare the execution report to the appropriate trade report.

Fees and Assessments

The fees and assessments applicable to activities through the ADF are contained in the new Rule 7000A Series. The following are fees that will be charged relating to transactions on the ADF: Comparison — $0.014/side per 100 shares (minimum 400 shares; maximum 7,500 shares); Automated Give-Up — $0.029/side; Late Report - T+N — $0.30/side; Browse/query — $0.28/query; Trade Reporting — $.029/side (applicable only to reportable transaction not subject to trade comparison through TRACS); and Corrective Transaction Charge —$0.25.

Members choosing to participate in the ADF will be charged a minimum of $5,000 for installation costs associated with connecting to the ADF. Additional reimbursement from members will be required for charges incurred by NASD above $5,000 due to the installation, removal, relocation, or maintenance of terminal and related equipment. However, the ADF will provide members with a credit of up to $5,000 toward their trade reporting and comparison charges. Members also will be charged an ADF workstation fee of $275 per month for each ADF terminal software license and $550 per month for each ADF server license.

ADF market participants will be charged a quotation update fee of $.01 per quotation update in the ADF quotation montage. This quotation update fee, however, will apply only to those quotation updates by the member in the ADF that exceed three times the number of transactions reported by the member through the ADF. This quotation update fee will be determined on a monthly basis. By imposing this fee only where the quotation updates significantly exceed the number of transactions reported, this fee structure fairly imposes costs on those members whose quotation activity creates system capacity demands and, therefore, costs not covered by trade reporting fees.

Fee Waiver and Discount

ADF participants will not be charged for transaction and quotation update fees (Rules 7010A(a) and (b), respectively) for a period of up to three months during the initial six months of operation of the ADF. As a result, during this six-month period, for up to three months starting from the initial transaction by an ADF participant, a participant will not be charged transaction or quotation fees. However, the time period for which the three-month "fee waiver" is available concludes at the end of the six-month period, irrespective of whether the member has participated in the ADF for three months. For example, if the ADF has been operational for four months and a market participant begins trading at that time, it only would be eligible for the "fee waiver" for two months.

Also during the initial six months of operation of the ADF, NASD will adjust its fees imposed on trade reporting and quotation activities through the ADF to provide for volume discounts subsequent to the three month "fee waiver" period, as applicable. Specifically, discounted fees will apply to those members that have greater than 2,000 trades per month and for those members that have greater than 8,000 chargeable quotes per month. The volume discounts would apply to all transaction fees incurred under Rule 7010A(a), except the browse/query fee, and all quotation update fees incurred under Rule 7010A(b). The discounts would apply in the increments per the chart below.

For example, if a member had 5,000 trades and 16,000 quotation updates during a month, the discounted fee structure would apply as follows: no discount would apply to the first 2,000 trades; the fees imposed on trades 2,001 through 4,000 would be discounted by 10%; and the fees imposed on trades 4,001 through 5,000 would be discounted by 25%. The quotation update charge on 1,000 quotations (those quotations that exceed three times the number of trades) would not be discounted because it is less than 8,001.

For additional information regarding requirements related to quoting and/or trading through the ADF, members should review the rule text, SEC Approval Order, and other additional ADF documentation available at www.nasd.com/mkt_sys/adf_info.asp.

Endnotes

¹See Securities Exchange Act Release No. 46249 (July 24, 2002), (File No. SR-NASD-2002-97) ("SEC Approval Order").

²See SR-NASD-2001-90. It is possible that the SEC may take action prior the expiration of the pilot period on the proposed rule change to make permanent the ADF for trading both Nasdaq and exchange-listed securities. Fees and assessments applicable to the ADF on a permanent basis are proposed in SR-NASD-2002-28.

³ Securities Exchange Act Release No. 43863 (January 19, 2001), 66 Fed. Reg. 8020 (January 26, 2001) (File No. SR-NASD-99-53).

⁴ Securities Exchange Act Release No. 44396 (June 7, 2001), 66 Fed. Reg. 31952 (June 13, 2001) (File No. 10-131).

⁵ The fact that a market participant has an ownership interest in a customer broker/dealer or multilateral linkage provider does not, in itself, constitute influence for the purposes of this rule.

⁶ TRACS will not perform risk management services that are provided by Nasdaq's ACT service.

⁷ Exchange Act Rule 11Ac1-2.

SEC Approval Order

SECURITIES AND EXCHANGE COMMISSION

(Release No. 34-46249; File No. SR-NASD-2002-97)

July 24, 2002

Self-Regulatory Organizations; Notice of Filing and Order Granting Accelerated Approval on a Pilot Basis to a Proposed Rule Change by the National Association of Securities Dealers, Inc. Relating to the Operation of the Alternative Display Facility for Quoting and Trading in Securities of The Nasdaq Stock Market, Inc.

The Commission is approving the National Association of Securities Dealers, Inc.'s ("NASD's" or "Association's") Alternative Display Facility ("ADF") for Nasdaq stocks for a nine-month pilot period. This proposal for a pilot was filed with the Securities and Exchange Commission ("SEC" or "Commission") pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 ("Act"),¹ and Rule 19b-4 thereunder,² on July 22, 2002, by the NASD. In this proposal, as described by the NASD in Items I, II, and III below, the NASD proposes to establish, implement, and operate the ADF on a pilot basis ("ADF Pilot"). As discussed below, the Commission is granting accelerated approval of the proposed rule change for a pilot period to expire at the close of daily operation of the ADF Pilot on April 24, 2003. The rules related to the establishment, implementation, and operation of the Pilot ADF are substantially similar to the proposed permanent rules contained in the original ADF proposal related to the establishment, implementation, and operation of the permanent ADF.³

I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

The NASD proposes to establish, implement, and operate, on a pilot basis, the ADF. For purposes of this ADF Pilot, NASD members will be able to quote and trade only Nasdaq securities on or through the Pilot ADF. The text of the proposed rule change is below. Additions are in italics, and deletions are in brackets.

IM-2110-5. Anti-Intimidation/Coordination

The Board of Governors is issuing this interpretation to codify a longstanding policy. It is conduct inconsistent with just and equitable principles of trade for any member or person associated with a member to coordinate the prices (including quotations), trades, or trade reports of such member with any other member or person associated with a member; to direct or request another member to alter a price (including a quotation); or to engage, directly or indirectly, in any conduct that threatens, harasses, coerces, intimidates, or otherwise attempts improperly to influence another member or person associated with a member. This includes, but is not limited to, any attempt to influence another member or person associated with a member to adjust or maintain a price or quotation, whether displayed on any [automated system] facility operated by NASD [The Nasdaq Stock Market, Inc. (Nasdaq),] or otherwise, or refusals to trade or other conduct that retaliates against or discourages the competitive activities of another market maker or market participant. Nothing in this interpretation respecting coordination of quotes, trades, or trade reports shall be deemed to limit, constrain, or otherwise inhibit the freedom of a member or person associated with a member to:

2700. SECURITIES DISTRIBUTIONS

2720. Distribution of Securities of Members and Affiliates --Conflicts of Interest

3340. Prohibition on Transactions, Publication of Quotations, or Publication of Indications of Interest During Trading Halts

No member or person associated with a member shall, directly or indirectly, effect any transaction or publish a quotation, a priced bid and/or offer, an unpriced indication of interest (including "bid wanted" and "offer wanted" and name only indications), or a bid or offer accompanied by a modifier to reflect unsolicited customer interest, in any security as to which a trading halt is currently in effect. If ADF closes trading in Nasdaq securities pursuant to its authority under Rule 4120A(a)(2), members would not be prohibited from trading through other markets for which trading is not halted.

3350. Short Sale Rule

IM-3350. Short Sale Rule

3370. Prompt Receipt and Delivery of Securities

4000. THE NASDAQ STOCK MARKET

4619. Withdrawal of Quotations and Passive Market Making

4600. NASDAQ MARKET MAKER REQUIREMENTS

This Rule 4600 Series applies to quotation and trading activities by Nasdaq market makers, ATS or ECNs in The Nasdaq Stock Market, Inc. operated on behalf of NASD by the Nasdaq Stock Market, Inc.

4630. Reporting Transactions in Nasdaq National Market Securities

This Rule 4630 Series applies to the reporting by [all] members of transactions in Nasdaq National Market securities ("designated securities") through the Automated Confirmation Transaction Reporting Service (ACT). [These securities have been designated pursuant to the "National Market System Securities Designation Plan with Respect to Nasdaq Securities" ("Plan") which has been approved by the Commission pursuant to SEC Rule 11Aa2-1.]

4631. Definitions

[(a)] Terms used in this Rule 4630 Series shall have the meaning as defined in [the Association's] NASD's By-Laws and Rules, SEC Rule 11Aa2-1 and the Joint Self-Regulatory Organization Plan Governing the Collection, Consolidation, and Dissemination of Quotation and Transaction Information for Nasdaq-Listed Securities Traded on Exchanges on an Unlisted Trading Privilege Basis [Plan], unless otherwise defined herein.

Paragraphs (b) through (d) are renumbered as paragraphs (b) through (d) of proposed Rule 5420.

4632. Transaction Reporting

Paragraphs (a) and (b) are renumbered as paragraphs (a) and (b) of proposed Rule 5430.

4640. Reporting Transactions in Nasdaq SmallCap Market Securities

This Rule 4640 Series sets forth the [applicable reporting] requirements for reporting transactions in Nasdaq SmallCap Market securities ("designated securities") utilizing [. Members shall utilize] the Automated Confirmation Transaction Service (ACT)[ for transaction reporting].

4641. Definitions

[(a)]Terms used in this Rule 4640 Series shall have the same meaning as those defined in [the Association's] NASD's By-Laws and Rules, SEC Rule 11Aa2-1 and Joint Self-Regulatory Organization Plan Governing the Collection, Consolidation, and Dissemination of Quotation and Transaction Information for Nasdaq-Listed Securities Traded on Exchanges on an Unlisted Trading Privilege Basis, unless otherwise specified herein.

Paragraphs (b) through (d) are renumbered as paragraphs (b) through (d) of Rule 5420.

4642. Transaction Reporting

Paragraphs (a) and (b) are renumbered as paragraphs (a) and (b) of proposed Rule 5430.

4650. Reporting Transactions in Nasdaq Convertible Debt Securities

This Rule 4650 Series sets forth the applicable reporting requirements for transactions in convertible bonds that are listed on Nasdaq (designated securities)[. Members shall utilize] and reported utilizing the Automated Confirmation Transaction Service (ACT) [for transaction reporting].

4651. Definitions

[(a)] Terms used in this Rule 4650 Series shall have the same meaning as those defined in [the Association's] NASD's By-Laws and Rules, unless otherwise specified herein.

Paragraphs (b) through (d) are renumbered as paragraphs (b) through (d) of Rule 5420.

4652. Transaction Reporting

Paragraphs (a) and (b) are renumbered as paragraphs (a) and (b) of Rule 5430.

4000A. NASD Alternative Display Facility

4100A. General

NASD Alternative Display Facility ("ADF") is the facility to be operated by NASD on a nine-month pilot basis for members that choose to quote or effect trades in Nasdaq securities ("ADF-eligible securities") otherwise than on Nasdaq or on an exchange. The ADF will collect and disseminate quotations, compare trades, and collect and disseminate trade reports. Those NASD members that utilize ADF systems for quotation or trading activities must comply with the Rule 4000A, Rule 5400 and Rule 6000A Series, as well as all other applicable NASD Rules. The ADF pilot will expire on [insert nine months from SEC approval date].

4110A. Use of NASD Alternative Display Facility Data Systems

NASD may at any time authorize the use of NASD's Alternative Display Facility data systems on a test basis for whatever studies it considers necessary and appropriate.

4120A. Trading Halts

4200A. DEFINITIONS

4300A. Quote and Order Access Requirements

4600A. TRADING IN NASDAQ SECURITIES

4610A. Registration and Other Requirements

4611A. Registration as an ADF Market Maker

4612A. Reserved

4613A. Character of Quotations

IM-4613A. Autoquote Policy

4614A. Reserved

4615A. Reserved

4616A. Reserved

4617A. Normal Business Hours

A Registered Reporting ADF Market Maker shall be open for business as of 9:30 a.m. Eastern Time and shall close no earlier than 4:00 p.m. Eastern Time. A Registered Reporting ADF Market Maker may remain open for business on a voluntary basis for any period of time between 4:00 p.m. Eastern time and 6:30 p.m. Eastern Time. Registered Reporting ADF Market Makers whose quotes are open after 4:00 p.m. Eastern Time shall be obligated to comply, while their quotes are open, with all NASD Rules that are not by their express terms, or by an official interpretation of NASD, inapplicable to any part of the 4:00 p.m. to 6:30 p.m. Eastern Time period.

4618A. Clearance and Settlement

4619A. Withdrawal of Quotations and Passive Market Making

4620A. Voluntary Termination of Registration

A Registered Reporting ADF Market Maker may voluntarily terminate its registration in a security by (1) withdrawing its quotations from NASD's Alternative Display Facility and not re-entering its quotations for five (5) minutes, or (2) failing to re-enter quotations within thirty (30) minutes of the end of a trading halt. A Registered Reporting ADF 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, absent an excused withdrawal specified in Rule 4619A. Withdrawal from participation as a Registered Reporting ADF Market Maker in NASD's Alternative Display Facility shall constitute termination of registration as a market maker in that security for purposes of this Rule; provided, however, that a Registered Reporting ADF Market Maker that fails to maintain a clearing arrangement with a registered clearing agency or with a member of such an agency and thereby terminates its registration as a market maker in Nasdaq securities may register as a market maker at any time after a clearing arrangement has been reestablished.

4621A. Suspension and Termination of Quotations by NASD Action

NASD may, pursuant to the procedures set forth in the Rule 9000 Series, suspend, condition, limit, prohibit or terminate a Registered Reporting ADF Market Maker's authority to enter quotations in one or more authorized securities for violations of applicable requirements or prohibitions.

4622A. Termination of NASD Alternative Display Facility Data System Service

NASD may, upon notice, terminate NASD Alternative Display Facility Data System service in the event that a Registered Reporting ADF Market Maker fails to qualify under specified standards of eligibility or fails to pay promptly for services rendered by NASD.

4623A. Alternative Trading Systems

4624A. Reserved

4625A. Reserved

4630A. Reporting Transactions in Nasdaq Securities

This Rule 4630A Series governs the reporting by members of ADF-eligible securities through NASD's Trade Reporting and Comparison Service ("TRACS"). The Rule 5400 Series provides the rules for determining which member must report a trade and whether a trade must be reported to TRACS pursuant to this Rule 4630A Series. Participation in the trade reporting function of TRACS is mandatory for all members that have a trade reporting obligation through TRACS under the Rule 5400 Series or that choose to report transactions through TRACS. Participation in the trade reporting function of TRACS is conditioned upon (a) execution of, and continuing compliance with, a TRACS trade reporting Participant Application Agreement and (b) maintenance of the physical security of the equipment on the premises of the member to prevent unauthorized entry of information into the trade reporting function of TRACS.

4631A. Reserved

4632A. Transactions Reported by Members

5400. Nasdaq Stock Market and Alternative Display Facility Trade Reporting

5410. Applicability

5420. Definitions

5430. Transaction Reporting

6000. NASD SYSTEMS AND PROGRAMS

6100. AUTOMATED CONFIRMATION TRANSACTION SERVICE (ACT)

6110. Definitions

6120. Participation in ACT

6130. Trade Report Input

6000A. NASD ADF SYSTEMS AND PROGRAMS

6100A. TRACS TRADE COMPARISON SERVICE

6110A. Definitions

6120A. Participation in TRACS Trade Comparison Feature by Participants in the Alternative Display Facility

The following Rules 6120A through 6190A apply to members that effect transactions in ADF-eligible securities through the Alternative Display Facility.

6130A. Trade Report Input

6140A. TRACS Processing

Locked-in trades may be determined through the TRACS trade comparison feature through one of the following methods:

6150A. Reserved

6160A. Obligation to Honor Trades

If a TRACS trade comparison Participant is reported by TRACS as a party to a trade that has been treated as locked-in and sent to DTCC, notwithstanding any other agreement to the contrary, that party shall be obligated to act as a principal to the trade and shall honor such trade on the scheduled settlement date.

6170A. Audit Trail Requirements

The data elements specified in the Rule 4600A Series are critical to NASD's compilation of a transaction audit trail for regulatory purposes. As such, all member firms using the TRACS Service have an ongoing obligation to input such information accurately and completely.

6180A. Reserved

6190A. Termination of TRACS Service

NASD may, upon notice, terminate TRACS service as to a Participant in the event that a TRACS Participant fails to abide by any of the rules or operating procedures of the TRACS service or NASD, or fails to honor contractual agreements entered into with NASD or its subsidiaries, or fails to pay promptly for services rendered by the TRACS Service.

6950. ORDER AUDIT TRAIL SYSTEM

6954. Recording of Order Information

7000A. CHARGES FOR ADF SERVICES AND EQUIPMENT

7010A. System Services

7020A. Equipment Related Charges

The charge for using ADF terminal software shall be $275 per month for each terminal and $550 per month for each server.

7030A.Reserved

7040A. Installation, Removal, Relocation or Maintenance

ADF subscribers shall pay a minimum charge of $5,000 for installation costs associated with connecting to the ADF. Upon installation, removal, relocation or maintenance of terminal and related equipment, or combination thereof, the subscriber shall pay charges incurred by NASD or its subsidiaries above the $5,000 minimum, on behalf of the subscriber for the work being performed by the maintenance organization retained by NASD or its subsidiaries. Upon payment of $5,000 under this provision, members will receive a credit of up to $5,000 to be used toward their trade reporting and comparison charges imposed under Rule 7010A(a).

7050A. Other Services

7060A. Partial Month Charges

The charges for the month of commencement or termination of service will be prorated based on the number of trade days in that month.

7070A. Reserved

7080A. Late Fees

7100A. Minor Modifications in Charges

9000. CODE OF PROCEDURE

9100. APPLICATION AND PURPOSE

9120. Definitions

9700. PROCEDURES ON GRIEVANCES CONCERNING THE AUTOMATED SYSTEMS

9710. Purpose

The purpose of this Rule 9700 Series is to provide, where justified, redress for persons aggrieved by the operations of any automated quotation, execution, or communication system owned or operated by NASD[the Association], or any subsidiary thereof, and approved by the Commission, not otherwise provided for by the Code of Procedure as set forth in the Rule 9000 Series the Uniform Practice Code as set forth in the Rule 11000 Series or the Procedures for Review of Nasdaq Listing Determinations as set forth in the Rule 4800 Series.

9720. Form of Application

All applications shall be in writing, and shall specify in reasonable detail the nature of and basis for the redress requested. If the application consists of several allegations, each allegation shall be stated separately. All applications must be signed and shall be directed to Nasdaq relating to automated quotation, execution or communications system owned or operated by Nasdaq and to NASD for any such system owned and operated by NASD.

9730. Request for Hearing

Upon request, the applicant shall be granted a hearing after reasonable notice. In the absence of such request for a hearing, NASD or Nasdaq, as applicable, may, in its discretion, have any application set down for hearing or consider the matter on the basis of the application and supporting documents.

II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the NASD included statements concerning the purpose of, and the basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. NASD has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements.

III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action

Within 35 days of the publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will:

The NASD has requested accelerated approval of the proposed rule change pursuant to Section 19(b)(2) of the Act,²⁰ because the proposed rule change proposes implementing ADF rules substantially similar to those previously proposed and noticed for comment in the ADF Proposal. The NASD requests that the Commission accelerate the effectiveness of the proposed rule change prior to the 30^th day after its publication in the Federal Register.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC20549-0609. Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission's Public Reference Room.Copies of such filing will also be available for inspection and copying at the principal office of the NASD. All submissions should refer to File No. SR-NASD-2002-97 and should be submitted by [insert date 21 days from the date of publication].

V. Commission Findings and Order Granting Accelerated Approval of the Proposed Rule Change

The Commission finds that the proposed rule change is consistent with the Act and the rules and regulations promulgated thereunder.²¹Specifically, the Commission finds that approval of the proposed rule change is consistent with Section 15A(b)(11) of the Act.²²

Pursuant to Section 15A(b)(11) of the Act,²³ the rules of a registered securities association must be designed generally to facilitate the orderly collection, distribution, and publication of quotations. Moreover, these rules must be designed to produce fair and informative quotations and to prevent fictitious or misleading quotations. As the NASD has proposed to sever its corporate relationship with Nasdaq, it is critical that the ADF (in pilot or permanent form) be established, implemented and operating prior to Nasdaq being registered as a national securities exchange. Therefore, the Commission believes that launching the ADF Pilotfurthers the public interest by ensuring that continuity in the over-the-counter market is maintained and that the NASD satisfies its statutory obligation to regulate the over-the-counter market.²⁴

In addition, in the SuperMontage approval order,²⁵ the Commission required the NASD to create a facility that "permits NASD members to comply with their obligations under Commission and NASD rules (including Exchange Act Rule 11Ac1-1(c)(5) and Regulation ATS) without participating in the Nasdaq execution facility. The facility will identify through the central processor the identity of the NASD member that is the source of each quote, as is required by Exchange Act Rule 11Ac1-1(b)(1)(ii). "Furthermore, the Commission stated that "[t]he facility will provide a market neutral linkage to the Nasdaq and other marketplaces, but not an execution service."

Thus, approval of the ADF Pilot furthers the obligations of the NASD under the Act and as specified by the Commission in the SuperMontage Approval Order.²⁶In particular, the ADF Pilot will provide the Commission with an opportunity to gauge whether the ADF in practice fulfills the NASD's statutory obligations. The Commission emphasizes, however, that approval of this ADF Pilot is not a determination that the conditions of the SuperMontage Approval Order described above have been satisfied.

The Commission finds good cause for granting the NASD's request for approval of the proposed rule change on a pilot basis prior to the thirtieth day after the date of publication in the Federal Register. The Commission notes that the substance of the proposal has previously been published for notice and comment as part of the ADF Proposal. The Commission has received 30 comment letters on the ADF Proposal.²⁷

Generally, commenters expressed concern with, among other things, (1) the lack of centralized linkage among market participants and an order routing and execution facility;²⁸ (2) the lack of information regarding technological requirements;²⁹ (3) whether ITS participation for trading in listed stocks should be mandatory or voluntary;³⁰ (4) the timing of the launch of the ADF, especially with respect to Nasdaq's pending registration as an exchange and the launch of SuperMontage (several commenters recommended some sort of "test" period before the launch of SuperMontage);³¹ and (5) the proposed fees, including the lack of market data revenue rebates.³²

A number of commenters criticized the ADF for not providing a central linkage facility operated and funded by the NASD. They argued that the lack of a core ADF linkage would impede access to the quotes displayed in ADF, discouraging ADF participation, and would impose access costs on order routing firms. Other commenters, however, stated that the approach to access relied upon by the NASD -- linkages developed by private access providers -- encouraged the development of efficient, technologically innovative access services.

After considering the comments, the Commission believes that the NASD's rule-based access solution has the potential to provide effective market-neutral linkages among ADF market participants and between the ADF and other markets. The sharp reduction in communication line costs in recent years and the advent of competing access providers in the equity markets offer the potential for multiple competitive means of access widely available to participants in the market for Nasdaq securities. This approach has been advocated in other market contexts, and the Commission has previously discussed favorably the potential for a private linkage approach.³³

Moreover, the NASD rules require direct connectivity between ADF participants to be in place before the participants begin quoting, and the NASD plans to review with each ADF participant the extent that other NASD members have connectivity to their quotes Moreover, the pilot program will give the Commission and the NASD the opportunity to review the practical operation of this access approach and to make changes where necessary to improve access capabilities.

The commenters also raised concerns about the lack of information regarding the requirements for the system. Some of these comments were in fact criticisms of the communications protocols used by the ADF system.

The Commission notes that the NASD made its technical specifications for the ADF available as early as March, 2002. Although these specifications were known in March, few market participants have familiarized themselves with these requirements. Some commenters criticized the ADF for not employing a FIX protocol. It should be noted that the FIX protocol is not commonly used by other markets at this time.(The NASD has indicated its willingness to develop a FIX interface to the ADF if justified by interest from market participants.)

Commenters also wrote at length about the NASD's proposal to allow ADF quoting participants in listed stocks to choose whether to participate in the Intermarket Trading System. Because the NASD's pilot program is limited to Nasdaq securities, these comments are not germane to the current filing.

Several commenters expressed concern about the commencement of ADF and the need for potential market participants to program and test with the ADF before quoting and trade reporting through the system. The Commission recognizes that, as with any other new system, potential ADF participants must code to the ADF and test their systems before they can begin using the ADF. The Commission notes that the approval of the ADF pilot program is not in itself a determination that the conditions precedent contained in the SuperMontage approval order have been satisfied.

A number of commenters also criticized the ADF as not offering a competitive alternative to Nasdaq because the NASD's fee levels were deemed excessive and because the NASD does not share market data revenues as do Nasdaq and certain other markets. In response, the NASD has proposed a set of fee waivers and discounts to make the ADF more attractive financially, and it intends to review its fees on an ongoing basis as it gains experience with the costs and revenues from operating the ADF. Although the NASD does not intend to share market data revenues, it does not believe that it need do so to offer a useful alternative quoting and trading venue.

The Commission believes that the concerns raised by commenters have been preliminarily addressed, and that the approval of the ADF Pilot will help the Commission evaluate these concerns more fully after practical experience with the ADF. Accordingly, the Commission finds that good cause exists, consistent with Sections 15A(b)(11) of the Act,³⁴ and Section 19(b)(2) of the Act³⁵ to accelerate approval of the proposed rule change prior to the thirtieth day after publication in the Federal Register.

IT IS THEREFORE ORDERED, pursuant to Section 19(b)(2) of the Act,³⁶ that the proposed rule change (File No. SR-NASD-2002-97) is approved on a pilot basis to expire at the close of daily operation of the ADF Pilot on April 24, 2003.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.³⁷

Margaret H. McFarland
Deputy Secretary

Action as set forth or recommended herein
APPROVED pursuant to authority delegated by the
Commission under Public Law 87-592.
For the Division of Market Regulation

by:______________________________________
(DATE)

____________________________

¹ 15 U.S.C. 78s(b)(1).

² 17 CFR 240.19b-4.

³See Securities Exchange Act Release Nos. 45156 (December 14, 2002), 67 FR 388 (January 3, 2002) (Notice of filing of SR-NASD-2001-90); 45278 (January 14, 2002), 67 FR 3252 (January 23, 2002) (Extending the public comment period for SR-NASD-2001-90); 45501 (March 4, 2002), 67 FR 10942 (March 11, 2002) (Notice of filing of SR-NASD-2002-28 relating to ADF fees); 45991 (May 28, 2002), 67 FR 39476 (June 7, 2002) (Notice of filing of Amendment No. 2 to SR-NASD-2001-90) (collectively, "ADF Proposal").The Commission intends to approve simultaneously and set an identical effective date for SR- NASD-2001-90 and SR-NASD-2002-28. The Commission notes that the ADF Proposal contains additional proposed rules not contained in the ADF Pilot. For instance, the ADF Proposal contains rules related to the separation of the NASD and the Nasdaq Stock Market, Inc. ("Nasdaq") corporate entities. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.

^*Each TRACS query incurs the $0.28 fee; however, the first accept or decline processed for a transaction is free, to insure that no more than $0.28 is charged per comparison. Subsequent queries for more data on the same security will also be processed free. Any subsequent query on a different security will incur the $0.28 query charge.

^**The trade reporting service charge is applicable to those trades input into TRACS for reporting purposes only, such as NSCC Qualified Special Representative reports and reports of internalized transactions.

⁴ Securities Exchange Act Release No. 44396 (June 7, 2001), 66 FR 31952 (June 13, 2001) (File No. 10-131).

⁵ Securities Exchange Act Release No. 43863 (January 19, 2001), 66 FR 8020 (January 26, 2001) (File No. SR-NASD-99-53).

⁶ Proposed ADF Pilot Rule 4300A defines "Market Participants" as either an NASD registered Market Maker or an NASD Registered electronic communication network ("ECN").

⁷ Nasdaq initially will be the designated SIP for all transactions in Nasdaq securities. It is anticipated that during the ADF Pilot, the SIP will distribute a best bid and offer for both NASD and Nasdaq.See note 24, infra for further discussion on this issue.

⁸See proposed ADF Pilot Rule 4630, Rule 5430, and Rule 6100.

⁹ The NASD will not provide an order routing capability for Nasdaq securities because the NASD believes this will allow it to better perform its core investor protection mission by focusing on regulation rather than market operations. The NASD also believes that market participants already do, and can continue to, establish and run order linkage facilities that are as or more efficient and innovative than a facility NASD could provide. The NASD believes that this approach comports with the requirements of the Act and is consistent with the NASD's obligation to promulgate rules that are designed generally to facilitate the orderly collection, distribution, and publication of quotations in securities traded otherwise than on a national securities exchange.See Section 15A(b)(11) of the Act, 15 U.S.C. 78o-3(b)(11).

¹⁰ This proposed Rule 4300A would be the basis for satisfying, among other things, locked and crossed quotation obligations.

¹¹ The fact that a Market Participant has an ownership interest in a customer broker-dealer or multilateral linkage provider does not, in and of itself, constitute influence for the purposes of this proposed rule.

¹² 17 CFR 240.11Ac1-1.

¹³ The NASD service would not perform risk management services that are provided by Nasdaq's ACT service.

¹⁴ DTCC has agreed to continue its existing trade comparison service for over-the-counter equity securities to provide comparison services between an ADF Pilot Market Participant and a Nasdaq market participant.

¹⁵ Securities Exchange Act Rule 11Ac1-1, 17 CFR 240.11Ac1-1.

¹⁶ 15 U.S.C. 78o-3(b)(6).

¹⁷ 15 U.S.C. 78o-3(b)(6).

¹⁸See Securities Exchange Act Release No. 45991 (May 28, 2002), 67 FR 39476 (June 7, 2002).

¹⁹ Amendment No. 1 is available for inspection and copying in the Commission's Public Reference Room and at the principal office of the NASD.

²⁰ 15 U.S.C. 78s(b)(2).

²¹ In granting accelerated approval of the proposal, the Commission has considered theproposal's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

²² 15 U.S.C. 78o-3(b)(11).

²³ 15 U.S.C. 78o-3(b)(11).

²⁴ The Commission notes that the launch of the ADF Pilot will result in a new data feed, theOver-the-Counter Montage Data Feed ("OMDF"), being disseminated by the Nasdaq SIP.While the NASD ADF Pilot and Nasdaq operate as the same SRO, the submission of multiple best bid and offers ("BBOs") by the NASD to the Nasdaq SIP is inconsistent with the OTC-UTP Plan.The Commission has addressed this issue in the 13^th Amendment to the OTC-UTP Plan.See Securities Exchange Act Release No. 46139 (June 28, 2002), 67 FR 44888 (July 5, 2002).Moreover, the display by market data vendors of either the OMDF or the Nasdaq Quotation Dissemination Service ("NQDS") without the other is inconsistent with the Vendor Display Rule, SEC Rule 11Ac1-2, 17 CFR 240.11Ac1-2.The Commission has addressed this issue in an interpretive guidance letter.See letter to Edward S. Knight, Executive Vice President and General Counsel, Nasdaq, from Robert L.D. Colby, Deputy Director, Division of Market Regulation, Commission, dated July 23, 2002.

²⁵ Securities Exchange Act Release No. 43863 (January 19, 2001), 66 FR 8020 (January 26, 2001) (File No. SR-NASD-99-53) ("SuperMontage Approval Order").

²⁶ Specifically, the Commission conditioned the SuperMontage Approval Order upon the following, which must be implemented prior to or at the same time as the SuperMontage: "(1) that the NASD will offer a quote and trade reporting alternative that satisfies the Order Handling Rules, Regulation ATS, and other regulatory requirements for ATSs, ECNs, and market makers; (2) that NASD quotes disseminated through the exclusive SIP will identify the ATS, ECN, or market maker source of the quote; and (3) thatparticipation in SuperMontage will be entirely voluntary, because NASD quotes will be included in the Nasdaq quotation management system while Nasdaq is the exclusive SIP, but only for display purposes, and the NASD will provide access to its quotes on amarket-neutral basis."Id. at 8054.

²⁷ The Commission received 26 comment letters on SR-NASD-2001-90.See Letter from Sol Reicher, Co-Chairman, Amex Specialists Associations; John Hawkey, Chairman, Amex Floor Brokers Association; and James Hyde, Chairman, Amex Options Market Maker Association, writing on behalf of The Member Associations of the American Stock Exchange, dated January 29, 2002 ("Member Associations of the American Stock Exchange Letter"); Letter from Meyer S. Frucher, Chairman and Chief Executive Officer, Philadelphia Stock Exchange, Inc., dated January 24, 2002 ("PHLX Letter #1"); Letter from Meyer S. Frucher, Chairman and Chief Executive Officer, Philadelphia Stock Exchange, Inc., dated February 25, 2002 ("PHLX Letter #2"); Letter from Marc E. Lackritz, President, Securities Industry Association, dated July 24, 2001 ("SIA Letter"); Letter from Michael A. Bird, Chairman, and John C. Giesea, President and CEO, Security Traders Association, dated July 1, 2002 ("STA Letter"); Letter from Darla C. Stuckey, Corporate Secretary, New York Stock Exchange, Inc., dated February 15, 2002 ("NYSE Letter #1"); Letter from Robert G. Britz, President and Co-Chief Operating Officer, New York Stock Exchange, Inc., dated May 21, 2002 ("NYSE Letter #2"); Letter from Darla C. Stuckey, Corporate Secretary, New York Stock Exchange, Inc., dated July 15, 2002 ("NYSE Letter #3"); Letter from Kevin M. Foley, Bloomberg Tradebook LLC, dated February 7, 2002 ("Bloomberg Letter #1"); Letter from Kevin M. Foley, Bloomberg Tradebook LLC, dated June 28, 2002 ("Bloomberg Letter #2"); Letter from Michael T. Dorsey, Senior Vice President, General Counsel, and Secretary, Knight Trading Group, Inc., dated February 6, 2002 ("Knight Letter"); Letter from William O'Brien, Senior Vice President & General Counsel, Brut, LLC, dated February 13, 2002 ("Brut Letter #1"); Letter from William O'Brien, Senior Vice President & General Counsel, Brut, LLC, dated March 20, 2002 ("Brut Letter #2"); Letter from Douglas M. Atkin, President and Chief Executive Officer, Instinet, dated February 13, 2002 ("Instinet Letter #1"); Letter from Jon Kroeper, First Vice President and Regulatory Policy/Strategy, Instinet, dated July 1, 2002 ("Instinet Letter #2"); Letter from Mark P. Barracca, Corporate Counsel, NexTrade, Inc., dated January 18, 2002 ("NexTrade Letter #1"); Letter from John M. Schaible, President, NexTrade, Inc., dated April 8, 2002 ("NexTrade Letter #2"); Letter from John M. Schaible, President, NexTrade, Inc., dated June 9, 2002 ("NexTrade Letter #3"); Letter from K. Richard B. Niehoff, Chairman, President, and CEO, WEBIXTRADER.COM, dated June 27, 2002 ("Webix Letter"); Letter from Amy Montague, dated June 21, 2002 ("Montague Letter"); Letter from William Joseph, dated June 25, 2002 ("Joseph Letter"); Letter from Jim Hendricks, dated February 21, 2002 ("Hendricks Letter"); Letter from Jim Ryan, dated June 20, 2002 ("Ryan Letter"); Letter from George A. Robles, dated June 15, 2002 ("Robles Letter"); Letter from Ira Rosenbloom, dated June 10, 2002 ("Rosenbloom Letter"); and Letter from John Tarleton, dated June 20, 2002 ("Tarleton Letter").The Commission received four comment letters on SR-NASD-2002-28.See Letter from William O'Brien, Senior Vice President and General Counsel, Brut LLC, dated March 20, 2002 ("Brut Fee Letter"); Letter from Douglas M. Atkin, President, Chief Executive Officer, Instinet, dated April 1, 2002 ("Instinet Fee Letter"); Letter from Mark P. Barracca, Corporate Counsel, NexTrade, dated April 1, 2002 ("NexTrade Fee Letter"); and Letter from Kevin M. Foley, Bloomberg Tradebook LLC, dated April 2, 2002 ("Bloomberg Fee Letter").

²⁸See e.g. NexTrade Letters #1, 2, and 3; SIA Letter; Phlx Letter #2.The Commission also notes that some commenters were not very concerned with the lack of a linkage or execution facility.See e.g. Bloomberg Letter #1; BRUT Letter #1.

²⁹See e.g. BRUT Letter #2; NexTrade Letters #1, 2, and 3; Bloomberg Letter #2; Instinet Letter #2.

³⁰See e.g. NYSE Letters #1 and 2; Instinet Letter #1; Members Association of the American Stock Exchange Letter; Bloomberg Letter #2.

³¹See e.g. Instinet Letter; SIA Letter; Bloomberg Letter #2; Instinet Letter #2.

³²See e.g. Brut Fee Letter; Instinet Fee Letter; NexTrade Fee Letter; Bloomberg Fee Letter.

³³See Securities Exchange Act Release No. 43084 (July 28, 2000), 65 FR 48406 (August 8, 2000)(File No. S7-16-00)(proposing rules regarding disclosure of order routing and execution practices).

³⁴ 15 U.S.C. 78o-3(b)(11).

³⁵ 15 U.S.C. 78s(b)(2).

³⁶ 15 U.S.C. 78s(b)(2).

³⁷ 17 CFR 200.30-3(a)(12).

www.sec.gov/rules/sro/34-46249.htm