SEC Approves NASD New Order Confirmation Transaction (OCT) Service

TO: NASD Members and Other Interested Persons

BACKGROUND

On January 11, 1988, the Securities and Exchange Commission approved the Order Confirmation Transaction (OCT) service, a new communications enhancement for the NASDAQ System.

The SEC granted approval for a period of 90 days under the accelerated approval provisions of the Securities Exchange Act of 1934. During this 90-day period, the SEC is soliciting public comment as a basis for taking final action on the service.

The OCT allows NASDAQ subscribers with Level 3 service to send orders in NASDAQ securities to market makers over the computer, without voice contact. This alternative means of accessing market makers helps overcome the limitations of telephone contact, particularly in high-volume, fast-moving markets, as were experienced in October.

The new service permits member firms to direct orders — of any size and for both firm and customer accounts — to specific market makers using NASDAQ terminals and a pre-formatted message layout. Orders sent via this service instantly appear on designated NASDAQ terminals in the market-making firms receiving the orders — normally the terminals from which the quotations in the securities to be bought or sold are entered. The trader who receives an order sent via OCT can either accept or decline the order by making a few simple keyboard entries. Following an accept/ decline decision, a report is immediately sent to the order-entry firm.

Orders entered and accepted through OCT are "locked-in." That is, the transactions are automatically (1) confirmed via displays on the terminals of both the order-entry and market-making firms (with printed copies an available option); (2) reported to the NASDAQ System and distributed worldwide to information vendors; and (3) sent to the clearing corporation as compared trades.

The new service is now operational and available for use on NASDAQ Harris terminals and with the Harris Standard Terminal Emulation and the new NASDAQ Workstation™ software. There will be no separate charge or fee for this new NASDAQ System enhancement.

HOW TO USE OCT

Order-Entry Firms

Use Partition A to enter an order. Press Display Select, type the letter A. Then type the letters K and O, and press the TRansmit key. The following OCT order-entry mask will then appear:

Next, enter the details of the order, i.e., Buy or Sell, number of shares, security symbol, and price. For example, to place an order to buy 2,000 shares of MCI Communications at 11 1/2, type B2000MClCU/2. Next, type in the four-character MMID of the market maker to whom the order will be sent. Following P/A/X-, type P for principal trade, A fop an ftgeney trade, or X for a cross transaction. If no letter is entered after P/A/X-, the system will consider it an agency trade and will assign an A. Entries following BRSQ, i.e., Branch Identifier and Sequence Number, are optional at the election of the order-entry firm. To send the order, press TRansmit. When the order is accepted by the system, an "accepted message" will be displayed.

Pending orders of order-entry firms sent via OCT immediately appear on the bottom of Partition B preceded by the designation EORD. If the market maker accepts the order within two minutes, the order-entry firm will receive a report of the transaction. If the market maker takes no action within two minutes, the order will automatically expire and the order-entry firm will receive an expiration report. If the market maker declines the order, a rejection notice will be sent. All transaction, expiration, and rejection reports appear at the bottom of Partition B and scroll upward as additional messages are received.

Market-Maker Firms

Market makers receive notifications of incoming orders sent via OCT on the "unsolicited message" segment of Partition B. The notifications arrive on the specific NASDAQ terminals designated by the market maker to receive orders in specific securities. Labeled EOCT, the single-line message shows the details of the order and the control number assigned to it by the system. To accept or reject the order, press the letters K and A, followed by the SPACE bar. Then enter the control number and press the TRansmit key. This produces the order-acceptance mask with the details of the order. To accept the order, type A and press the TRansmit key. To decline an order, type D and press the TRansmit key.

Confirmation of the action instantly appears on the terminals of both the order-entry firm and the market maker in Partition B of their respective terminals.

Market makers may scan all orders directed to them via OCT during the trading day. The service will not route orders to firms that are not registered as market makers.

FOR INFORMATION

For more information or assistance in using this new communications service, members are invited to contact the OCT Operations Department at (212) 839-6363. An OCT user guide will be sent to all Level 3 subscribers shortly.

Sincerely,

John T. Wall
Executive Vice President
Member and Market Services