1 Securities Exchange Act Release No. 42353 (January 20, 2000), 65 FR 4857 (February 1, 2000).
2 The ITS is a communication network designed to facilitate intermarket trading in exchange-listed securities by linking the
NASD and the national securities exchanges. Under the current ITS Plan, NASD members participating as ITS market
makers must limit their market making to “Rule 19c-3 securities,” which are reported securities that were not traded on a
national securities exchange prior to April 26, 1979. This limitation will be removed effective February 14, 2000.
[11609]
February 7, 2000
TO: COMPLIANCE ADVISORY COMMITTEE No. 7-00
EQUITY MARKETS ADVISORY COMMITTEE No. 6-00
SEC RULES COMMITTEE No. 17-00
RE: NASD PROPOSED RULE CHANGE RELATING TO ECN PARTICIPATION IN
THE ITS/CAES SYSTEM
______________________________________________________________________________
The National Association of Securities Dealers, Inc., through its wholly-owned subsidiary, the
Nasdaq Stock Market, Inc. (“Nasdaq”), has filed a proposed rule change1 with the Securities and
Exchange Commission to permit ECNs to register as market makers in listed securities through Nasdaq
provided quotation and trading facilities.
Nasdaq currently operates the Computer Assisted Execution System (“CAES”), a trading system
which allows NASD member firms to direct orders in Consolidated Quotation System (“CQS”)
securities to market makers for execution. Through CAES, NASD order-entry firms and market makers
can participate in off-exchange trading of exchange-listed securities by entering market and limit orders
in exchange-listed securities to be executed against other market makers quoting at the best bid or offer
in those securities. CAES also serves as the NASD's interface with the Intermarket Trading System
(“ITS”).2
Nasdaq is proposing to modify the CAES system to allow ECNs to register as market makers in
listed securities through CAES. Nasdaq believes that ECN participation in CAES would have a positive
impact by significantly increasing order flow, thereby contributing to a more active and liquid market. In
addition, Nasdaq believes that ECNs should be given the opportunity to participate in off-exchange
trading of exchange-listed securities on an equal basis with other NASD members who choose to
register as ITS/CAES market makers. An ECN that chooses to exercise this option of registration
would be required to post two-sided quotations, be firm for the price and size of those quotations, and
participate in the CAES execution service on the same basis as other non-ECN ITS/CAES market
makers.
2Comments on this proposal are due to the SEC no later than February 22, 2000. If you have
any comments you would like the Institute to consider including in a comment letter, please
provide them to Ari Burstein by phone at (202) 371-5408, by fax at (202) 326-5839, or by e-mail at
aburstein@ici.org no later than February 15.
Ari Burstein
Assistant Counsel
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