[12853]
November 14, 2000
TO: EQUITY MARKETS ADVISORY COMMITTEE No. 58-00
RE: NASD PROPOSED RULE CHANGE AMENDING SUPERMONTAGE PROPOSAL
The Securities and Exchange Commission has published for comment Amendment No.
8 to Nasdaq’s proposed Order Display Facility (“SuperMontage”).1 The SEC’s release is
attached and the aspects of the proposal most relevant to the buyside are summarized below.
In addition, attached is a paper prepared by Nasdaq discussing the SuperMontage system
functionality.
A. Non-Directed Order Processing
In response to concerns expressed by commenters regarding ECN quote access fees and
to address comments that factors other than cost may be important to a market participant in
making investment decisions, the NASD proposes to amend the Order Execution Algorithm for
non-directed orders. Under the amended algorithm, the NASD proposes to give SuperMontage
participants that enter non-directed orders three options on how their orders would interact
with the quotes/orders in Nasdaq.
1. Strict Price/Time Priority
The first option would have orders executed in strict price/time priority and would be
the default algorithm for SuperMontage. Therefore, unless a market participant affirmatively
selects one of the alternative algorithms, non-directed orders would be executed in strict
price/time priority, in the following order: (1) against displayed quotes/orders of market
makers, ECNs, and non-attributable agency interest of UTP Exchanges; (2) against reserve size
of market makers and ECNs; and (3) against principal quotes of UTP Exchanges.
2. Price/Size/Time Priority
The second option would enable a market participant to indicate that its orders be
executed on a price/size/time basis. Under this option, non-directed orders at a particular
price level would execute against displayed quotes and then reserve size based on the size of
the displayed quote, and then time if there is a tie in size. Reserve size would be executed
1 Securities Exchange Act Release No. 43514 (November 3, 2000).
2against based on the size of the related displayed quote, not the total amount held in reserve.
Therefore, under this option, non-directed orders would be executed in the following order: (1)
against displayed quotes/orders of market makers, ECNs, and non-attributable agency interest
of UTP Exchanges in price/size/time priority between such interest; (2) against reserve size of
market makers and ECNs, in price/size/time priority of such interest, with size priority based
on the size of the related displayed quote/order; and (3) against principal quotes of UTP
Exchanges, in price/size/time priority between such interest.
3. Price/Time Priority that Accounts for ECN Quote-Access Fees
The third option would take into account an ECN’s separate quote-access fee.
Specifically, under this option, non-directed orders would be executed in the following order:
(1) against displayed quotes/orders of market makers, ECNs that do not charge a separate
quote-access fee, and non-attributable agency interest of UTP Exchanges, as well as
quotes/orders of ECNs that charges a separate quote-access fee where the ECN indicates that
the price improvement offered by the quote/order is equal to or exceeds the quote-access fee, in
time priority between such interest; (2) against displayed quotes/orders of ECNs that charge a
separate quote-access fee to non-subscribers; (3) against reserve size of market makers and
ECNs that do not charge a separate quote-access fee to non-subscribers, as well as reserve size
of quotes/orders from ECNs that charge a separate quote-access fee to non-subscribers where
the ECN entering such quote/order has indicated that the price improvement offered is equal to
or exceeds the quote-access fee, in time priority between such interest; (4) against reserve size of
ECNs that charge a separate quote-access fee to non-subscribers, in time priority between such
interest; and (5) against principal quotes of UTP Exchanges, in time priority between such
interest.
The internalization feature of SuperMontage will be preserved in all three of the
proposed algorithms. In particular, SuperMontage will internalize non-directed orders entered
by a market maker or an ECN when they are also at the inside market by matching the non-
directed order with the inside quote/order instead of sending it to the participant next in the
queue.
B. Preferenced Orders
The amended proposal would create a new class of orders called “preferenced orders.”
Preferenced orders would be processed in the same queue as non-directed orders and would be
considered liability orders. When a preferenced order is next to be executed within the non-
directed order queue, SuperMontage would execute against both the displayed quote/order
and the reserve size of the preferenced quoting market participant. Any unexecuted portion
would be returned to the entering market participant.
Two possible approaches to preferenced orders are proposed: Alternative A, which
would provide for preferenced orders with no price restrictions and Alternative B, which would
provide for preferenced orders with price restrictions. Comments are specifically requested on
whether Alternative A or Alternative B is the proper approach for preferenced orders.
31. Alternative A - Preferenced Orders with No Price Restrictions
Under Alternative A, when a preferenced order is next to be executed within the non-
directed order queue, the preferenced order would execute at the preferenced quoting market
participant’s price, regardless of whether the quoting market participant is at the BBO.
Therefore, under Alternative A, preferenced orders could be executed at the BBO or outside the
BBO.
2. Alternative B - Preferenced Orders with Price Restrictions
Under Alternative B, when a preferenced order is next to be executed within the non-
directed order queue, the preferenced order would execute at the preferenced quoting market
participant’s price only if the quoting market participant is at the BBO. If that quoting market
participant is not at the BBO when the preferenced order is next to be delivered or executed, the
preferenced order will be returned to the entering participant.
C. Preservation of Time Priority for Size Increases to Quotes/Orders
In response to concerns expressed by commenters, the NASD proposes to modify
SuperMontage to protect the time priority of a market participant that changes its displayed
trading interest by increasing its displayed size. Specifically, under the proposal, quote entries
would receive a time stamp which would be used in determining their ranking in the execution
algorithm relative to other quotes/orders at that price level. If a market participant increases its
displayed size, the system will maintain the original time stamp for the original quantity,
protecting its time priority, and assign a separate timestamp for the increased portion.
Decreases in size will be deducted from individually stamped entries in reverse time priority.
D. Increased Dissemination of Quotation Information
The NASD is proposing to create a new vendor data feed, “NQDS Prime,” that would
provide, on a real-time basis, all individual attributable quote/order information at the three
best price levels displayed in the SuperMontage. The proposal states that NQDS Prime is
intended to eliminate any purported informational advantage accruing to the SuperMontage
system from the retention of this information.
Comments on the proposed rule change are due to the SEC no later than 21 days from
the date of publication of the proposed rule change in the Federal Register. Publication is
expected the week of November 13. If you have any comments you would like the Institute
to consider including in its comment letter, please provide them to the undersigned by
phone at (202) 371-5408, by fax at (202) 326-5839, or by e-mail at aburstein@ici.org no later
than November 29.
Ari Burstein
Associate Counsel
Attachments (in .pdf format)