Interpretive Letter to Jack Hodges, William O'Neil + Co, Inc.

January 6, 1999

Mr. Jack Hodges
AVP Trading
William O’Neil &+ Co., Inc.
12655 Beatrice Street
Los Angeles, CA 90066-7002

Re: Order modifications

Dear Mr. Hodges:

This letter is in response to your letter dated June 12, 1998, in which you asked a number of questions about the NASD’s Order Audit Trail System (OATS). In a letter to you dated October 27, 1998, we answered all but one of your questions. As we stated in our letter, that question was under review. This letter provides a response to your question.

The unanswered question in your June 12^th letter concerned your firm’s OATS reporting obligations when modifying orders sent to an electronic communications network (ECN), such as Instinet. You noted that all orders routed to Instinet must have limit prices even if they are market orders. In addition, your trader will modify the limit price as market conditions warrant in order to obtain the best price for the customer. You noted that in a fast moving market this can mean modifying the limit price 10 or more times a minute. You asked whether your firm is obligated under OATS Rules to report each modification made by the trader. Your question relates only to trader modifications to an order. Your firm must report customer modifications to an order by filing a Cancel/Replace Report and a Route Report with OATS.

Under the OATS Rules, your firm must report the transmission of an order to Instinet by filing a Route Report with OATS and Instinet must report the receipt of the order by filing a New Order Report. The OATS Rules also require your firm to report to OATS all modifications to an order. This is accomplished by generating a Cancel/Replace Report and a Route Report for each modification. Instinet has informed us that it intends to file a Cancel/Replace Report for each trader modification to an Instinet order.¹

Compliance with the obligation to file a Cancel/Replace Report and a Route Report for each modification would be very difficult for your firm because of the large number of possible modifications to each order. Moreover, filing a Cancel/Replace Report for each modification would duplicate the reports Instinet will make for each order modification. Because the Cancel/Replace Reports filed by Instinet will capture all of the essential regulatory information regarding the order, we believe that it will be acceptable for Instinet to report modifications to orders in the manner described. Your firm will not be required to file a Cancel/Replace Report and a Route Report for trader modifications to orders. However, your firm will be required to report customer modifications to orders by filing a Cancel/Replace Report and a Route Report for each modification.

We hope that this letter has been responsive to your inquiry. Please understand that the opinions expressed in this letter are staff opinions only and have not been reviewed or endorsed by the Board of Directors of NASD Regulation. The letter responds only to the issues you have raised based on the facts as you have described them in your letter and does not necessarily address any other rule or interpretation of the NASD or all the possible regulatory and legal issues involved.

Sincerely yours, 

Mary N. Revell
Associate General Counsel

1 See letter from Charles R. Hood, Senior Vice President and General Counsel, Instinet Corporation, to James Cangiano, Senior Vice President, NASD Regulation, Inc., dated November 25, 1997.