June 1, 1998

NASDAQ Integrated Order Delivery and Execution System

Key materials
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Rulemaking:

Nasdaq Integrated Order Delivery and Execution System; Release No. 34-39718; File No. SR-NASD-98-17

Stated Purpose:

To improve the efficiency of Nasdaq's integrated order delivery and execution system

Summary of RSP Comment:

Nasdaq's proposed changes to its integrated order delivery and execution system would generate net benefits to investors. However several further improvements to these systems could be made:

The proposal to replace SOES and SelectNet with one unified order delivery and execution system likely will enhance market efficiency and benefit the investing public by (1) speeding execution of customer orders, (2) removing part of "double liability" market makers face from having to honor their quotes when they receive simultaneous orders through various systems. However, the proposed time delay for large orders is likely to reduce market transparency and increase costs to investors. A better system would be to provide immediate automatic execution of all orders, regardless of size, up to a market maker's depth.

The Limit Order File proposal offers a facility for exposing limit orders to the market. However, its design and implementation by Nasdaq may have long-term negative competitive effects on the marketplace, including reduced incentives for innovation that, in turn, could harm investors.

The proposed Sponsored Access for individual and institutional investors will allow them to establish a market presence and to trade directly with other market participants without the intervention of a broker or market maker. Future consideration should be given to extending this rule to allow all members, not only registered market makers, to sponsor direct access.

The Firm Quote Compliance Facility, which temporarily closes a market maker's quote while leaving the market maker's price displayed in the market, could remove a market maker's double liability, but would also reduce market transparency. A better approach would be to move a market maker's quoted price away from the current side of the quote that is at risk to the in-house or telephone order.