Three Quote Rule - finra.org

1 685 NASD Notice to Members 00-84 Request For CommentThree QuoteRuleNASD RegulationRequests Comment On A Proposed Amendment To NASD Rule 2320(g)To Exclude CertainTransactions In Foreign Securities;Comment Period Expires January 11, 2001 The Suggested Routing function is meantto aid the reader of this document. EachNASD member firm should consider theappropriate distribution in the context of its own organizational structure. Executive Representatives Legal & Compliance Operations Trading and Market Making Three Quote Rule NASD Rule 2320(g)ACTION REQUESTED BYJANUARY 11, 2001 SUGGESTED ROUTINGKEY TOPICSNASD Notice to Members 00-84 Request For CommentDecember 2000 Executive SummaryNASD Regulation, Inc.

2 (NASDR egulation ) requests commentfrom members, investors, andother interested parties on a pro-posed amendment to NASD Rule2320(g) (the Three Quote Rule )to exclude transactions in foreignsecurities effected by a NationalAssociation of Securities Dealers,Inc. (NASD ) member as agent or riskless principal on a foreignmarket that is the primary marketfor the security. Under the propos-al, primary market would bedefined as either: (1) the marketwith at least 50 percent of theworldwide trading volume in theparticular foreign security duringthe Three -month period precedingthe date of the transaction in question.

3 Or (2) any market whosequotations are part of a consolidat-ed quotation system that includesquotations from the market thathad at least 50 percent of theworldwide trading volume in theparticular foreign security duringthe Three -month period precedingthe date of the transaction in with this NASD Notice toMembersare Attachment A (thetext of the proposed rule change)and Attachment B (specific questions on which NASD Regula-tion requests comments from members and interested parties).Action RequestedNASD Regulation is seeking com-ment on a proposed amendmentto NASD Rule 2320(g) (the ThreeQuote Rule ) to exclude transac-tions in foreign securities effectedby an NASD member as agent or riskless principal on a foreignmarket that is the primary marketfor the security.

4 NASD Regulationencourages all members, investors,and other interested parties tocomment on the proposed rulechange. Comments must bereceived by, January 11, 2001. Comments should be mailed to:Joan C. ConleyOffice of the Corporate SecretaryNASD Regulation, K Street, NWWashington, DC 20006-1500or e-mailed Note:The only commentsthat will be considered are those submitted in writing or by e-mail. Before becoming effective, anyrule change developed as a resultof comments received must beadopted by the NASD RegulationBoard of Directors, may bereviewed by the NASD Board ofGovernors, and must be approvedby the Securities and ExchangeCommission (SEC) following further public noted, written commentsshould be submitted to Joan Questions concerning this NASD Notice to Members Request for Commentsmay bedirected to the Legal Section, Market Regulation Department, at (240) 386-5126; or StephanieM.

5 Dumont, Associate GeneralCounsel, Office of General Counsel, NASD Regulation, at (202) Notice to Members 00-84 Request For CommentDecember 2000 BackgroundMembers have raised concernsregarding the potential adverseimpact on obtaining best executionof customer orders in foreign securities as a result of the Three Quote ,members have indicated that the application of the Three QuoteRule to customer transactions inforeign securities executed on a foreign market is unnecessaryand potentially harmful to the customer s best interests when a member, using reasonable diligence, has determined that thebest market for a foreign securityis a foreign market and sends thecustomer order to that market as agent or riskless principal for execution.

6 In this regard, the staff previouslyhas granted exemptions from therequirements of the Three QuoteRule relating to transactions in for-eign securities pursuant to itsexemptive authority under Rule2320(g)(5).2 For example, the staffgranted exemptive relief to a mem-ber firm for customer transactionsin Canadian securities executedon a Canadian exchange, underthe following conditions:(1) the member periodically moni-tors and reviews customer execu-tions to assure that the member isachieving best execution underNASD Rule 2320; and(2) the customer transactions inCanadian securities are handledon an agency or riskless exemption granted was basedon representations that executionson a Canadian exchange at theexchange price ordinarily result incustomers obtaining best execu-tion of their orders.

7 In its letterseeking exemptive relief, the mem-ber stated that a recent analysis of dealer prices compared toexchange prices indicated that, invirtually all cases, the exchangehad the best price. The member,therefore, concluded that, underthese circumstances, the functionof contacting and obtaining quotesfrom Three dealers would result insignificant delays and would be ahindrance to achieving best execu-tion for the RuleTo address these concerns, NASDR egulation is soliciting commenton a proposed rule change thatwould exclude from the ThreeQuote Rule s coverage transac-tions in foreign securities effectedby an NASD member as agent or riskless principal on a foreignmarket that is the primary marketfor the the proposal, primary mar-ket would be defined as either.

8 (1)the market with at least 50 percentof the worldwide trading volume inthe particular foreign security during the Three -month period pre-ceding the date of the transactionin question; or (2) any marketwhose quotations are part of aconsolidated quotation system that includes quotations from themarket that had at least 50 percentof the worldwide trading volume in the particular foreign securityduring the Three -month period preceding the date of the transac-tion in question. Among other issues, NASD Regu-lation staff is soliciting comment on whether the proposed definitionof primary market adequatelyaddresses the concerns raised inthis area.

9 For example, do activeforeign markets exist, whereby nosingle market contains 50 percentof the worldwide trading volume,but where the transaction may beappropriate for exclusion from therequirements of the Three QuoteRule?As under the current requirements,compliance with the Three QuoteRule, in and of itself, does notmean the member has met its bestexecution obligations. Best execu-tion requires each member to usereasonable diligence to ascertainthe best inter-dealer market for asecurity, and to buy or sell in thatmarket so that the resultant priceto the customer is as favorable aspossible under prevailing The Three Quote Rule requires membersthat execute transactions in non-Nasdaqsecurities on behalf of customers to contact a minimum of Three dealers (or all dealers if Three or less)

10 And obtainquotations in determining the best inter-dealer market, unless two or more firmquotations are displayed in an inter-dealer quotation system that permits quotation updates on a real-time The SEC, in its approval order grantingNASD Regulation exemptive authoritywith respect to the Three Quote Rule,specifically indicated that exemptive reliefmay be appropriate for transactions executed on a foreign exchange. TheSEC stated that exemptive relief may be appropriate in such circumstancesbecause the foreign exchange marketmay constitute the best market for securi-ties that are listed on that market and thetime delay involved in contacting threedealers in that market may, therefore, hinder a member from obtaining best execution for the customers.