Trade Reporting Rule Changes for NASDAQ Equity Audit Trail — Phase II

TO: All NASD Members and Other Interested Persons

ATTN: Trading and Operations Personnel

The Securities and Exchange Commission recently approved amendments to Schedules D and G of the NASD By-Laws that will require real-time trade reports in NASDAQ National Market System securities and listed securities traded off-board to include a buy, sell or cross indicator. To report this information, firms will use an additional keystroke in the trade reporting sequence. The text of the amendments is attached.

Background

At its July 1984 meeting, the NASD Board of Governors approved the development of a NASDAQ equity audit trail, which will be implemented in seven stages. Phase I became effective July 1, 1985. It requires clearing corporations to collect and provide to the NASD information pertaining to the time of the trade and the capacity of the executing broker-dealer (as principal or agent). If your firm does not currently comply with Phase I, you should take immediate steps to do so.

Phase II, which will be implemented on November 29, 1985, will require members to indicate in trade reports for transactions in NASDAQ/NMS securities and off-board trades in listed securities whether the transaction is a buy, sell or cross trade. A purchase by a reporting member should be indicated as a buy (B); a sale by a reporting member should be indicated as a sell (S). A riskless principal transaction or a dual agency transaction should be indicated as a cross (X).

Reporting Instructions

Include the buy/sell/cross indicator in trade reports for NASDAQ/NMS securities and listed securities traded off-board immediately following the T in the trade reporting sequence. The indicator should precede the number of~shares reported, as demonstrated.

Errors, cancellations and "No/Was" corrections should similarly include the buy/sell/cross indicator. The following examples demonstrate corrective entries to a trade report of security ABCD executed at 24 1/4 and reported to the NASDAQ System at 10:40 a.m. E.T.

Firms using a computer-to-computer interface (CTCI) for reporting trades should refer to their computer interface specification for the proper formatting of the buy/sell/cross indicator. Executions through the Small Order Execution System (SOES) and the Computer Assisted Execution System (CAES) already include the buy/sell/cross indicator.

You are encouraged to utilize the buy/sell/cross indicator voluntarily until November 27, 1985. After November 27, 1985, use of the buy/sell/cross indicator will be mandatory and trade reports that do not include the indicator will be rejected by the system. The NASD will review members' compliance with these Phase II requirements through its automated Market Surveillance program as well as on-site examinations.

Questions concerning reporting requirements should be directed to Christopher R. Franke, Director, Market Surveillance, at (202) 728-8186. Questions concerning the computer-to-computer interface should be directed to Jack Donlon, Systems Development, at (212) 839-6375.

Sincerely,

John E. Pinto, Jr.
Senior Vice President
Compliance

Attachment

AMENDMENTS TO SCHEDULES D AND G*

NASD BY-LAWS

Effective November 29, 1985

Schedule D, Part X, Section 2(c):

Schedule G, Section 2(c):

* New language is underlined.