Federal Register, Volume 70 Issue 19 (Monday, January 31, 2005)

[Federal Register Volume 70, Number 19 (Monday, January 31, 2005)]
[Notices]
[Pages 4902-4911]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-1697]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51078; File No. SR-NASD-2004-173]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 Thereto by the National Association of
Securities Dealers, Inc., To Establish Rules Governing the Operation of
Nasdaq's Brut Facility

January 25, 2005.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on November 3, 2004, the National Association of Securities Dealers,
Inc. (``NASD''), through its subsidiary, The Nasdaq Stock Market, Inc.
(``Nasdaq''), filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by Nasdaq. On January 24,
2005, Nasdaq submitted Amendment No. 1 to the proposed rule change.\3\
The Commission is publishing this notice to solicit comments on the
proposed rule change, as amended, from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1 replaced and superseded the originally filed
proposed rule change.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

Nasdaq proposes to establish rules governing the operation of its
Brut trading facility. Nasdaq will implement the proposed rule change,
as amended, immediately upon approval by the Commission. Below is the
text of the proposed rule change, as amended. Proposed new language is
italicized; proposed deletions are in [brackets].

4900. BRUT SYSTEM (System)

4901. Definitions

Unless stated otherwise, the terms described below shall have the
following meaning:
(a) The term ``System securities'' shall mean Nasdaq Market Center
eligible securities as that term is defined in NASD Rule 4701(s) and
exchange-listed Intermarket Trading System (ITS) eligible securities as
defined in NASD Rule 5210(c).
(b) The term ``Effective Time'' shall mean, for orders so
designated, the time at which the order shall become eligible for
display and potential execution with other orders in the System.
(c) The term ``Immediate or Cancel'' shall mean, for limit orders
so designated, that if after entry into the System the order (or a
portion thereof) is not marketable, the order (or unexecuted portion
thereof) shall be canceled and returned to the entering Participant.
(d) The term ``limit order'' shall mean an order to buy or sell a
stock at a specified price or better. This order type is available for
Nasdaq-listed and Exchange-listed securities.
(e) The term ``market order'' shall mean an unpriced order to buy
or sell a stock at the market's current best price. A market order may
have a limit price beyond which the order shall not be executed. This
order type is available for Nasdaq-listed and Exchange-listed
securities.
(f) The term ``mixed lot'' shall mean an order that is for more
than a normal unit of trading but not a multiple thereof.
(g) The term ``Nasdaq Market Center'' shall mean the automated
system owned and operated by The Nasdaq Stock Market, Inc. pursuant to
NASD Rule 4700 Series.
(h) The term ``The BRUT ECN System,'' or ``System,'' shall mean the
automated system owned and operated by Brut, which is owned and
operated by The Nasdaq Stock Market, Inc., which enables Participants
to execute transactions in System securities; to have reports of the
transactions automatically forwarded to the appropriate National Market
Trade Reporting System, if required, for dissemination to the public
and the industry, and to ``lock in'' these trades by sending both sides
to the applicable clearing corporation(s) designated by the System
Participant(s) for clearance and settlement; and to provide System
Participants with sufficient monitoring and updating capability to
participate in an automated execution environment.
(i) The term ``Participant'' shall mean an NASD member that
fulfills the obligations contained in Rule 4902 regarding participation
in the System.
(j) The term ``System Book Feed'' shall mean a data feed for System
eligible securities that Brut will make available to Participants and
third-party vendors.
(k) The term ``odd-lot order'' shall mean an order that is for less
than a normal unit of trading.
(l) The term ``Reserve Size'' shall mean the functionality that
permits a Participant to display a portion of an order, with the
remainder held in reserve on an undisplayed basis.
(m) The term ``Good-till-Cancelled'' shall mean, for orders so
designated, that if after entry into the System, the order is not fully
executed, the order (or unexecuted portion thereof) shall remain
available for potential display and/or execution only until 4 p.m.
Eastern Time on the day they are submitted unless cancelled before then
by the entering party.
(n) The term ``Good-till-Cancelled-Overnight'' shall mean, for
orders so designated, that if after entry into the System, the order is
not fully executed, the order (or unexecuted portion thereof) shall
remain available for potential display and/or execution until 4 p.m.
Eastern Time, after which it shall be held by the System in a pending
state, ineligible for display or execution, until the following trading
day, when it will become eligible for display and execution from 7:30
a.m. until 4 p.m. Eastern Time on that and all subsequent trading days,
until a date provided by the entering party (or if no such date is
given, indefinitely) until cancelled by the entering party.
(o) The term ``Good-till-Time,'' shall mean, for orders so
designated, that if after entry into System, the order is not fully
executed, the order (or unexecuted portion thereof) shall remain
available for potential display and/or execution until the time
designated by the entering party, after which the order will be
cancelled by the system. This time may

[[Page 4903]]

be relative time (e.g. 30 minutes after entry) or an actual time (e.g.
2 p.m.).
(p) The term ``Day'' shall mean, for orders so designated, that if
after entry into the System, the order is not fully executed, the order
(or unexecuted portion thereof) shall remain available for potential
display and/or execution only until 4 p.m. Eastern Time on the day they
are submitted unless cancelled before then by the entering party.
(q) The term ``End-of-Day'' shall mean, for orders so designated,
that if after entry into the System, the order is not fully executed,
the order (or unexecuted portion thereof) shall remain available for
potential execution and/or display until 8 p.m. Eastern Time, after
which it shall be returned to the entering party.
(r) The term ``Pegged'' shall mean, for priced limit orders so
designated, that after entry into the System, the price of the order is
automatically adjusted by the System in response to changes in the
Nasdaq inside bid or offer (for Nasdaq-listed securities) or the
national best bid or offer (for ITS securities), as appropriate. The
Participant entering a Pegged Order can specify that order's price will
either equal the inside quote or improves the inside quote by an amount
set by the entering party on the same side of the market (a ``Regular
Pegged Order'') or offset the inside quote on the contra side of the
market by an amount (the ``Offset Amount'') set by the Participant
(e.g., $0.01 less than the inside offer or $0.02 more than the inside
bid) (a ``Reverse Pegged Order''). The Participant entering a Pegged
Order may (but is not required to) specify a limit price, to define a
price at which pegging of the order will stop and the order will be
permanently converted into an un-pegged limit order at limit price.
This order type is available for Nasdaq-listed and Exchange-listed
securities.
(s) The term ``Discretionary'' shall mean an order that when
entered into System has both a displayed bid or offer price, as well as
a non-displayed discretionary price range and size (which shall be
equal to or less than the Order's Reserve Size) at which the
Participant is also willing to buy or sell, if necessary. This order
type is available for Nasdaq-listed and Exchange-listed securities.
(t) The term ``Post Only'' shall mean, for To Brut limit orders so
designated, that if an order is marketable against an order then-
displayed in the System upon receipt, it shall be rejected and returned
to the entering Participant. If the order is marketable against a quote
displayed outside of Brut, the price of the order is adjusted to a
price $0.01 inferior to the best bid (or offer, as appropriate) then
displayed in the Nasdaq Market Center, and then displayed in the
System. This order type is available for Nasdaq-listed and Exchange-
listed securities.
(u) The term ``Agency Away'' shall mean an agency order designated
by the entering Participant as eligible for execution at a price
inferior to the then-current national best bid/offer. This order type
is available only for Nasdaq-listed securities.
(v) The term ``Principal Inside Only'' shall mean a principal order
designated by the entering Participant as only eligible for execution
at a price equal or better than the then-current national best bid/
offer. This order type is available for Nasdaq-listed and Exchange-
listed securities.
(w) The term ``normal unit of trading'' shall mean one hundred
(100) shares.

4902. System Participant Registration

(a) Participation in Brut requires current registration with the
System and is conditioned upon the Participant's initial and continuing
compliance with the following requirements:
(1) Execution of a System Subscriber Agreement;
(2) Satisfaction of the Brut New Accounts Policies & Procedures
requirements;
(3) Membership in, or access arrangement with a participant of, a
clearing agency registered with the Commission that maintains
facilities through which System compared trades may be settled;
(4) Acceptance and settlement of each System trade that System
identifies as having been effected by such Participant, or if
settlement is to be made through another clearing member, guarantee of
the acceptance and settlement of such identified System trade by the
clearing member on the regularly scheduled settlement date;
(5) Compliance with all applicable rules and operating procedures
of the Association and the Securities and Exchange Commission.
(b) Access to the System by non-System participants is available
through the Nasdaq Market Center as defined in NASD Rule 4701(r) and
related rules.

4903. Order Entry Parameters

(a) To Brut Orders--
(1) General. A To Brut Order is an order that is displayed in the
System and is executable only against marketable contra-side orders in
the System. This order type is available for Nasdaq-listed and
Exchange-listed securities. The following requirements shall apply to
To Brut Orders entered by Participants:
(A) A To Brut Order shall be a limit order, and shall indicate
whether it is a buy, short sale, short-sale exempt, or long sale. A To
Brut Order can be designated as End-of-Day, Immediate or Cancel, Good-
till-Cancelled, Day, Good-till-Canceled Overnight, Good-till-Time,
Effective Time, Post Only, Pegged or Discretionary.
(B) To Brut Orders shall be executed pursuant to the Brut Book
Process as described in Rule 4905(a).
(C) A To Brut Order to sell short shall not be executed if the
execution of such order would violate NASD Rule 3350 or, in the case of
ITS Securities, SEC Rule 10a-1. In said circumstances, the price of the
To Brut Order shall be adjusted to $.01 above the Nasdaq inside bid for
Nasdaq-listed securities or, in the case of exchange-listed securities,
$.01 above the national best bid or offer, and thereafter be processed
as if a Reverse Pegged Order.
(D) The System shall not accept To Brut Orders that are All-or-
None, or have a minimum size of execution.
(b) Brut Cross Orders--
(1) General. A Brut Cross Order is an order that is displayed in
the System, and is executable against marketable contra-side orders in
the System. The order also is eligible for routing to other market
centers. If marketable upon receipt against both orders in the System
as well as other market centers, the order shall execute first against
System orders. With the exception of Directed Cross Orders, once a Brut
Cross Order is routed (in whole or in part) to another market center,
any remaining unexecuted or returned portion of the order shall be
posted in System and shall no longer be eligible for routing to other
market centers.
(A) A Brut Cross Order shall be a limit order, and shall indicate
whether it is a buy, short sale, short-sale exempt, or long sale. A
Brut Cross Order can be designated as Immediate or Cancel, End-of-Day,
Good-till-Cancelled, Day, Good-till-Cancelled Overnight, Good-till-
Time, Effective Time.
(B) A Brut Cross Order may also be designated as an Aggressive
Cross Order. An Aggressive Cross Order is an order that is displayed in
the System during market hours and is executable against marketable
contra-side orders in the System. The order also is eligible for
routing to other market centers. If marketable upon receipt against
both orders in the System as well as other market centers, the order
shall execute first against System orders. If, after being posted in
the Brut System, and after it has exhausted available liquidity

[[Page 4904]]

in the Brut System, the Aggressive Cross Order has its price crossed by
the displayed quote of another market center, the System will be routed
by Brut to that market center for potential execution. Aggressive Cross
Orders may comply with paragraph (A) of this rule.
(C) A Brut Cross Order may also be designated as a Super Aggressive
Cross Order. A Super Aggressive Cross Order is an order that is
displayed in the System during market hours and is executable against
marketable contra-side orders in the System. The order also is eligible
for routing to other market centers. If marketable upon receipt against
both orders in the System as well as other market centers, the order
shall execute first against System orders. If, after being posted in
the Brut System, and after it has exhausted available liquidity in the
Brut System, the Aggressive Cross Order has its price locked or crossed
by the displayed quote of another market center the System will be
routed by Brut to that market center for potential execution.
(D) A Brut Cross Order may also be designated as a Directed Cross
Order. A Directed Cross Order is an order that entered in the System
during market hours and is executable against marketable contra-side
orders in the System. The order also is eligible for routing to other
market centers. If, after being processed in the Brut System and
exhausting available liquidity in the Brut System, the order is
automatically routed by Brut to the specific market center selected by
the entering party for potential execution. Any portion of the Directed
Cross Order that remains unfilled after being routed to the selected
market center will be returned to the entering party.
(E) Brut Cross Orders, including those designated as Aggressive
Cross Orders, Super Aggressive Cross Orders and Directed Cross Orders,
shall be executed pursuant to:
(i) The To Brut Order Process described in Rule 4905(a) to the
extent marketable against an order resident in the System; and
(ii) With the exception of Directed Cross Orders, the Brut Order
Routing Process described in Rule 4905(b) to the extent not marketable
against an order resident in the System.
(F) A Brut Cross Order, including those designated as an Aggressive
Cross Order, Super Aggressive Cross Order and Directed Cross Order, to
sell short shall not be executed in the System if the execution of such
order would violate NASD Rule 3350 or, in the case of ITS Securities,
SEC Rule 10a-1. In said circumstances, the price of the Brut Cross
Order shall be adjusted to $.01 above the Nasdaq inside bid for Nasdaq-
listed securities or, in the case of exchange-listed securities, $.01
above the national best bid or offer, and thereafter be processed as if
a Reverse Pegged Order.
(c) Thru Brut Orders--
(1) General. A Thru Brut Order is an order submitted to the System
that is designated for routing to another market center. This order
type is available for Nasdaq-listed and Exchange-listed securities. The
following requirements shall apply to Thru Brut Orders:
(A) A Thru Brut Order shall be a market order or a limit order, and
must indicate whether it is a buy, short sale, short-sale exempt, or
long sale. A Thru Brut Order can be designated as Immediate or Cancel,
End-of-Day, Good-till-Cancelled, Day, or Good-till-Time, or Effective
Time.
(B) Thru Brut Orders do not participate in Brut Routing Process as
described in Rule 4905(b). Instead such orders are sent directly to the
market center selected by the entering party. If unexecuted, the order
(or unexecuted portion thereof) shall be returned to the entering
party.
(d) Hunter Orders--
(1) General. A Hunter Order is a non-displayed order that will
execute against trading interest in the System or another market
center. This order type is available only for Nasdaq-listed securities.
After 6:30 p.m. Eastern Time, Hunter Orders will execute only against
other orders in the System. The following requirements shall apply to
Hunter Orders:
(A) A Hunter Order shall be a limit order, and must indicate
whether it is a buy, short sale, short-sale exempt, or long sale. A
Hunter Order can be designated as Immediate or Cancel, End-of-Day,
Good-till-Cancelled, Day, or Good-till-Time, or Effective Time.
(B) Hunter Orders shall be executed as follows:
(i) To the extent marketable upon receipt against orders in the
System, pursuant to the Brut Book Process as described in Rule 4905(a);
then/or
(ii) If not marketable upon receipt against orders in the System
but marketable against the displayed quotes of other market centers,
pursuant to the Brut Routing Process as described in Rule 4905(b).
(iii) If not marketable upon receipt against any quote displayed in
the System or another market center, the order shall be retained, but
not be displayed, in the System and shall remain available for
execution via the Brut Book and/or Brut Routing Processes should the
order become marketable.
(e) Entry of Agency and Principal Orders--Participants are
permitted to submit agency, riskless principal, and principal orders
for processing in the System. Participants shall correctly note their
capacity at the time of entry of an order(s) into the System.
(1) Unless designated as ``Agency Away'', no agency order shall be
executed at a price inferior to the then current National Best Bid (for
sell orders) or Best Offer (for buy orders), taking into account prior
efforts to execute against the bids/offers of other market centers.
(2) Unless designated as ``Principal Inside Only'', principal and
riskless principal orders may be executed at a price inferior to the
then current National Best Bid (for sell orders) or Best Offer (for buy
orders).
(f) Order Size--Any order in whole shares up to 1,000,099 shares
may be entered into the System, subject to a dollar volume limitation
of $25,000,000.

4904. Entry and Display of Orders

(a) Entry of Orders--Participants can enter orders into the System,
subject to the following requirements and conditions:
(1) Participants shall be permitted to transmit to the System
multiple orders at a single as well as multiple price levels. Each
order shall indicate the amount of reserve size (if applicable).
(2) The System shall time-stamp an order upon receipt, which time-
stamp shall determine the ranking of the order for purposes of
processing To Brut Orders and Brut Cross Orders.
(3) Good-till-Cancelled, Day, orders can be entered into the System
(or previously entered orders cancelled) between the hours 7:30 a.m. to
4 p.m. Eastern Time. Pegged, Discretionary, Immediate-or-Cancel and
End-of-Day To Brut Orders, Good-till-Time, Good-till-Canceled Overnight
and GTX orders can be entered into System (or previously entered orders
cancelled) between the hours 7:30 a.m. to 8 p.m. Eastern Time. Orders
entered prior to market open and Good-till-Time orders carried over
from previous trading days, shall not become available for execution
until 7:30 a.m. Eastern Time. Good-till-Time orders carried over from
previous trading days with an Effective Time will not become available
for execution until the Effective Time on all subsequent trading days
the order is held by the System.
(b) Display of Orders--The System will display orders submitted to
the System as follows:

[[Page 4905]]

(1) System Book Feed--orders resident in the System will be
displayed to Participants via the System Book Feed.
(2) Nasdaq Market Center--For each Nasdaq Market Center eligible
security, the best priced order to buy and sell resident in the System
shall be displayed and eligible for execution within the Nasdaq Market
Center. The System may also provide to the Nasdaq Market Center
additional orders, up to and including all orders in System, in Nasdaq
Market Center eligible securities.
(3) Exceptions--The following exceptions shall apply to the display
parameters set forth in paragraphs (1) and (2) above:
(A) Odd-lots, Mixed Lots, and Rounding--The System Book Feed shall
be capable of displaying trading interest in round lot and mixed-lot
amounts, and sub-penny increments for quotations priced under $1.00.
For Nasdaq Market Center display purposes, the System shall
aggregate all shares, including odd-lot share amounts, entered by
Participants at a single price level and round the total share amount
down to the nearest round-lot amount. Any odd-lot portion of an order
that is not displayed as a result of the rounding process shall remain
available for execution, in accordance with the time-priority of their
original entry time. Round-lots that are subsequently reduced by
executions to a mixed lot amount shall also be rounded for to the
nearest round-lot amount for purposes of display in the Nasdaq Market
Center. Any odd-lot number of shares that do not get displayed as a
result of rounding will remain available for execution, in accordance
with the time-priority of their original entry time.
(B) Minimum Increments and Rounding--The minimum trading increment
for System quotations priced $1.00 and above is $.01. For quotations
priced below $1.00 the minimum increment is $.0001.
(i) For System display purposes, quotations in sub-penny increments
$1.00 and above will be rounded down (for bids) or up (for offers) by
the System to the nearest $.01 increment. Orders so rounded shall have
no superior execution priority compared to orders previously submitted
at the relevant $.01 increment.
(ii) For Nasdaq Market Center display purposes, any quotations in
sub-penny increments shall be rounded down (for bids) and up (for
offers) to the nearest $.01 increment. Sub-penny quotations that are
rounded for display purposes shall be executed at their actual price,
rather than the rounded price at which they are displayed.
(C) Reserve Size--Reserve Size shall not be displayed in the
System, but shall be accessible as described in Rule 4905.
(D) Discretionary & Hunter Orders--Hunter Orders, and the
discretionary portion of Discretionary Orders shall be available for
execution only upon the appearance of contra-side marketable trading
interest, and shall be executed pursuant to Rule 4905.

4905. Order Processing

(a) Brut Book Order Process
Orders subject to the Brut Book Order Process shall be executed as
follows:
(1) Default Execution Algorithm--Price/Time--The System shall
execute interest within the System in price/time priority in the
following order:
(A) Displayed Orders;
(B) Reserve Size;
(C) Discretionary Orders within the Discretionary Order's
discretionary price range; and
(D) Hunter Orders.
(2) Decrementation--Upon execution, an order shall be reduced by an
amount equal to the size of that execution. In the case of orders that
have both a displayed and reserve share component, share amounts shall
be reduced starting first with their reserve portions.
(3) Processing of Locking/Crossing Orders: If during market hours,
a Participant enters a To Brut order that will lock/cross the market
(as defined in NASD Rule 4613(e) or in NASD Rule 5263(a) or (b)), the
System shall adjust the price of the order to $.01 less than the
current best bid quotation (for buy orders) or $.01 more than the
current best offer quotation (for sell orders) and thereafter be
processed as a Reverse Pegged Order.
(4) Processing of Directed, Aggressive and Super Aggressive Cross
Orders--The System shall process crossed Directed and Aggressive Cross
Orders, and locked or crossed Super Aggressive Cross Orders as follows:
(A) Displayed orders which are designated as ``Directed Cross
Orders'' by a Participant shall be routed to the market center selected
by the entering party for potential execution by the System. This order
type is available Nasdaq-listed and Exchange-listed securities.
(B) Displayed orders which are designated as ``Aggressive Cross
Orders'' by a Participant that are subsequently crossed by the
displayed quotation of another market center shall be executed pursuant
to the Brut Order Routing Process upon being so crossed. This order
type is available for Nasdaq-listed and Exchange-listed securities.
(C) Displayed orders which are designated as ``Super Aggressive
Cross Orders'' by a Participant that are subsequently locked or crossed
by the displayed quotation of another market center shall be executed
pursuant to the Brut Order Routing Process upon being so locked or
crossed. This order type is available for Nasdaq-listed and Exchange-
listed securities.
(b) Brut Order Routing Process
(1) The Brut Order Routing Process shall be available to
Participants from 7:30 a.m. to 6:30 p.m. Eastern Time, and shall route
orders in accordance with parameters described in Rule 4903 for a
particular order type.
(2) With the exception of Thru Brut and Directed Cross Orders that
specifically direct which market center an order is to be routed,
orders routed out of the Brut System to other market centers for
potential execution are generally delivered to other market centers in
price/size priority. If the routed order is smaller in size than the
total combined displayed share amounts of accessible market centers at
the best price level, the Brut System delivers the routed order to the
available market centers in price/size priority. If the routed order is
larger than the total combined displayed share amounts of accessible
market centers at the best price level, the Brut System delivers over-
sized orders to each displayed market center's quote in proportion to
the individual market's center share of that total displayed share
amount.
(3) In the event an order routed to another market center is not
executed in its entirety, the remaining portion of the order shall be
returned to the System and, if upon return the order is marketable
against a System order then priced at the NBBO, it will be subjected to
Brut Book Process prior to any further routing.
(4) An order that has been routed to another market shall have no
time standing in the System execution queue relative to other orders in
the System. A request from a Participant to cancel an order while it is
outside the System shall be processed subject to the applicable rules
of the market center to which the order has been routed.

4906. Clearance and Settlement

All transactions executed in, or reported through, System shall be
cleared and settled by and between the System Participant and Brut,
through a registered clearing agency using a continuous net settlement
system.

[[Page 4906]]

4907. Obligation To Honor System Trades

(a) If a Participant, or clearing member acting on a Participant's
behalf, is reported by the System, or shown by the activity reports
generated by the System, as constituting a side of a System trade, such
Participant, or clearing member acting on its behalf, shall honor such
trade on the scheduled settlement date.
(b) Brut and/or Nasdaq shall have no liability if a Participant, or
a clearing member acting on the Participant's behalf, fails to satisfy
the obligations in paragraph (a).

4908. Compliance With Rules and Registration Requirements

(a) Failure by a Participant to comply with any of the rules or
registration requirements applicable to the System identified herein
shall subject such Participant to censure, fine, suspension or
revocation of its registration a Participant or any other fitting
penalty under the Rules of the Association.
(b) If a Participant fails to maintain a clearing relationship to
honor its obligations under Rule 4906, it shall have its access to the
System restricted until such time as a clearing arrangement is
reestablished.
(c) The authority and procedures contained in paragraph (b) do not
otherwise limit the Association's authority, contained in other
provisions of the Association's Rules, to enforce its rules or impose
any fitting sanction.

4909. Adjustment of Open Orders

Except when a cash dividend or distribution is less than one cent
($0.01), on the ex-date of a corporate action, the System shall
automatically adjust the price and/or size of Good-till-Cancelled
Overnight orders resident in the System in response to issuer corporate
actions related to a cash dividend as follows:
(a) Sell Orders--Sell orders shall not be adjusted by the System
and must be modified, if desired, by the entering party,
(b) Buy Orders--Buy orders shall be reduced by the dividend amount.
To the extent that the dividend includes a sub-penny increment, the
order will be displayed and processed as set forth in Rule
4904(b)(3)(B). Open buy and sell orders that are adjusted by the System
pursuant to the above rules, and that thereafter continuously remain in
the System, shall retain the time priority of their original entry.

4910. Anonymity

(a) Transactions executed in the System shall be cleared and
settled with Brut. The transaction reports produced by the System will
indicate the details of the transactions, and shall not reveal contra
party identities other than Brut.
(b) Brut shall reveal a member's identity in the following
circumstances:
(1) When the National Securities Clearing Corporation (``NSCC'')
ceases to act for a member, or the member's clearing firm, and NSCC
determines not to guarantee the settlement of the member's trades;
(2) For regulatory purposes or to comply with an order of an
arbitrator or court;

4911. Clearly Erroneous Transactions

All matters related to clearly erroneous transactions executed in
the System shall be initiated and adjudicated pursuant to NASD Rule
11890.
[4912. Minimum Quotation Increment
The minimum quotation increment in the BRUT ECN System for
quotations of $1.00 or above in Nasdaq-listed securities and in
securities listed on a national securities exchange shall be $0.01. The
minimum quotation increment in the BRUT ECN System for quotations below
$1.00 in Nasdaq-listed securities and in securities listed on a
national securities exchange shall be $0.0001.]

4912. Normal Business Hours

The Brut System operates from 6:30 a.m. to 8 p.m. Eastern Time on
each business day.

4913. Limitation of Liability

The Association and its subsidiaries, as well as Nasdaq and Brut
and their subsidiaries, shall not be liable for any losses, damages, or
other claims arising out of the System or its use. Any losses, damages,
or other claims, related to a failure of the System to deliver,
display, transmit, execute, compare, submit for clearance and
settlement, adjust, retain priority for, or otherwise correctly process
an order, Quote/Order, message, or other data entered into, or created
by, the System shall be absorbed by the member, or the member
sponsoring the customer, that entered the order, Quote/Order, message,
or other data into the System.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, Nasdaq included statements
concerning the purpose of, and basis for, the proposed rule change and
discussed any comments it received on the proposed rule change, as
amended. The text of these statements may be examined at the places
specified in Item IV below. Nasdaq has prepared summaries, set forth in
Sections A, B, and C below, of the most significant aspects of such
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose

Background

On September 7, 2004, Nasdaq completed its purchase of Brut, LLC
(``Brut''), a registered broker-dealer and member of the NASD, and
operator of the Brut ECN (the ``Brut System'' or ``System'').\4\
According to Nasdaq, as a member of the NASD, Brut remains subject to
all NASD rules applicable to its activities as a broker-dealer,
including those requiring its participation in market surveillance and
audit trail programs conducted by Nasdaq and the NASD. Nasdaq states
that, as an ECN, Brut participates in the Nasdaq Market Center system
as an Order-Delivery ECN pursuant to the NASD Rule 4700 Series, and as
an ITS Market Maker pursuant to the NASD Rule 5200 Series. Brut
continues to act as a counter-party to all trades taking place in its
system, for anonymity as well as clearance and settlement purposes.
Brut also continues to provide outbound order routing services to other
market centers for its subscribers. According to Nasdaq, to meet its
limit order display obligations, Brut currently provides the Nasdaq
Market Center its best single ``top-of-file'' priced orders in
individual securities Brut has within the System.
---------------------------------------------------------------------------

\4\ Nasdaq owns Brut via Nasdaq's 100% ownership interest in
Toll Associates LLC. Toll Associates LLC, in turn, owns 99.78% Brut
LLC and 100% of Brut Inc., which owns the remaining 0.22% of Brut
LLC. Both Toll Associates LLC and Brut Inc. conduct no business
other than serving as holding entities for their respective
ownership interests in Brut LLC, the entity that operates the Brut
ECN.
---------------------------------------------------------------------------

Nasdaq states that, once purchased by Nasdaq, the Brut System
became a ``facility'' of a national securities association subject to
the standards set forth in Sections 15A and 19(b)(1) of the Exchange
Act.\5\ As such, Nasdaq is obligated to file with the Commission rules
to govern the operation of the Brut System. This filing is intended to
meet that obligation and includes a description of the Brut System, its

[[Page 4907]]

various features, order processing method, and a proposed set of Brut
System rules.
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\5\ Nasdaq currently operates Brut pursuant to a Temporary
Conditional Exemption from Rule 19(b) of the Exchange Act issued by
the Commission. See Exchange Act Release No. 50311 (September 3,
2004), 69 FR 54818 (September 10, 2004).
---------------------------------------------------------------------------

The Brut System

1. Order Display/Matching System

The Brut System allows subscribers to enter market and priced limit
orders to buy and sell Nasdaq and Exchange-listed securities. Such
orders may be in round-lots, mixed-lots, or odd-lots of any size up to
1,000,099 shares up to a maximum single order dollar cap amount of
$25,000,000, and may be entered on a principal, riskless principal, or
agency basis. Nasdaq states that Brut acts only as an agent on behalf
of its subscribers and engages in no proprietary trading save that
necessary to correct system errors. Subscribers may enter multiple
orders at single or multiple price levels. Subscribers have the option
to have a portion of their order held in reserve and not displayed to
the marketplace. Brut, in turn, makes available to System subscribers
and market data vendors a data feed of all displayable orders on both
the bid and offer side of the market (excluding reserve size share
amounts) for all price levels at which shares are available within its
System. According to Nasdaq, to the extent that Brut displays orders in
the Nasdaq Market Center, those orders are displayed under the same
terms and conditions generally applicable to Nasdaq Quoting Market
Participants, including the rounding and aggregation procedures
contained in NASD Rule 4707. Although Brut currently provides only its
best top-of-file prices to the Nasdaq Market Center, Nasdaq proposes
that Brut be given the option to provide the Nasdaq Market Center
additional orders at other price levels, up to and including Brut's
full depth-of-book, so that Nasdaq Market Center users may have the
full benefit of Brut's liquidity.
Brut also currently accepts sub-penny amounts for orders priced
under $1.00 a share. Nasdaq states that, for orders priced $1.00 a
share and above, Brut accept orders only in penny increments.\6\ Sub-
penny order prices are viewable by System subscribers. If a sub-penny
order is required to be displayed via the Nasdaq Market Center, the
Brut system rounds such orders down (for bids) or up (for offers) to
the nearest $.01 increment. Sub-penny orders executed via the Nasdaq
Market Center, however, will be executed at their actual price, rather
than the rounded price at which they are displayed.\7\
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\6\ See Securities Exchange Act Release No. 50956 (January 3,
2005), 70 FR 1746 (January 10, 2005) (NASD-2004-190).
\7\ This filing relocates the standards governing the Brut
System's acceptance and processing of sub-penny orders from current
NASD Rule 4912 to proposed NASD Rule 4904(b)(3)(B).
---------------------------------------------------------------------------

2. Access Standards

According to Nasdaq, to obtain access to the Brut System as a
system participant, a user must execute a Brut subscriber agreement and
be a participant in, or have an access arrangement with a participant
in, a Commission-registered clearing agency. In addition, the Brut
subscriber must also agree to:
a. Comply with all applicable rules of the NASD and the Commission;
and
b. Accept all Brut System trades identified by the System as being
effected by the subscriber.
Broker-dealers may also access System orders through the Nasdaq
Market Center, regardless of their status as a system participant as
described above, provided they have met the conditions for access to
the Nasdaq Market Center.

3. Order Types

The Brut System makes available to subscribers several order types.
These order types are described below.
Limit Order--an order to buy or sell a stock at a specified price
or better. This order type is available for Nasdaq-listed and Exchange-
listed securities.
Market Order--an un-priced order to buy or sell a stock at the
market's current best price. A market order may have a limit price
beyond which the order shall not be executed. This order type is
available for Nasdaq-listed and Exchange-listed securities.
Agency Away Order--an agency order that is designated by the
entering party as eligible for execution at a price inferior to the
then-current national best bid/offer. This order type is available for
Nasdaq-listed securities.
Principal Inside Only Order--a principal order that is designated
by the party as only eligible for execution at a price equal or better
than the then-current national best bid/offer. This order type is
available for Nasdaq-listed and Exchange-listed securities.
Brut Cross Order--an order that is displayed in Brut and executable
against marketable contra-side orders in any market center, including
the Brut System, at the time of receipt. If equally-priced executable
orders are available both in Brut and another market center, the order
will first execute against Brut System orders. Once a Brut Cross Order
is routed out in whole or in part to another market center, any
remaining unexecuted or returned portion of the order will be posted in
the Brut System and will no longer be routed out for potential
execution, unless the order is designated as an Aggressive Cross Order
or Super Aggressive Cross Order. This order type is available for
Nasdaq-listed and Exchange-listed securities.
Example:
The market is 10.00 bid--10.01 offer.
Brut receives a Brut Cross sell order, priced at 10.00.
Brut will route this order out to any crossing market center for
potential execution.\8\ If the routed order is only partially executed,
the outstanding shares remaining will be posted in the Brut book on the
offer at 10.00. Once posted, the order will no longer be routed out for
execution.
---------------------------------------------------------------------------

\8\ For all order type examples, the term ``market center''
refers to any trading venue other than Brut, including the Nasdaq
Market Center.
---------------------------------------------------------------------------

Directed Cross Order--an order that if, after entry into the Brut
System and after it has exhausted available liquidity in the Brut
System is routed by Brut to that specific market center for potential
execution. This order type is available for Nasdaq-listed and Exchange-
listed securities.
Example:
The market is 10.00 bid--10.01 offer.
Brut receives a Directed Cross sell order, priced at 10.00 and
directed to Market Center A.
After checking the Brut system for available liquidity, the system
will route this order to Market Center A for potential execution. If
the routed order is only partially executed, the outstanding shares are
returned to the entering party.
Aggressive Cross Order--a Brut Cross Order that if, after being
posted in the Brut System and after it has exhausted available
liquidity in the Brut System, has its price crossed by the displayed
quote of another market center is routed by Brut to that market center
for potential execution. This order type is available for Nasdaq-listed
and Exchange-listed securities.
Example:
The market is 10.00 bid--10.01 offer.
Brut receives an Aggressive Cross sell order, priced at 10.01.
Brut will first post this order on the offer at 10.01. Soon
thereafter, another market center posts a bid price at 10.02. Since
this 10.02 price is marketable against the Aggressive Cross Order's
limit price of 10.01, the order will be routed out by Brut to the other
market center for execution. If the liquidity priced at 10.02 is
depleted, and the Aggressive Cross Order still has outstanding shares
remaining, the order

[[Page 4908]]

will be re-posted in the Brut book at its price of 10.01. If the price
of returned shares is again crossed, the shares will again be routed
for potential execution.
Super Aggressive Cross Order--a Brut Cross Order that, if after
being posted in the Brut System, has its price locked or crossed by the
displayed quote of another market center, is routed by Brut for
potential execution. This order type is available for Nasdaq-listed and
Exchange-listed securities.
Example:
The market is 10.00 bid--10.01 offer
Brut receives a Super Aggressive Cross sell order, priced at 10.01.
Brut will first post this order on the offer at 10.01. Soon
thereafter, another market center posts a bid price at 10.01. Since
this 10.01 price is equal to the Super Aggressive Cross Order's limit
price of 10.01, the order will be routed out by Brut to the other
market center for execution. If the liquidity priced at 10.01 is
depleted, and the Super Aggressive Cross Order still has shares
remaining, the order will be re-posted in the Brut book at its price of
10.01. This same process would be followed if the other market center
had posted a price that crossed the Super Aggressive Cross Order. If
the price of returned shares is again locked or crossed, the shares
will again be routed for potential execution.
Thru Brut Order--an order that is directed to a market center other
than Brut for execution. This order type is available for Nasdaq-listed
and Exchange-listed securities.
To Brut Order--an order eligible for execution upon receipt solely
against Brut System orders, and displayed in the System to the extent
the order cannot be executed upon receipt. This order type is available
for Nasdaq-listed and Exchange-listed securities.
Hunter Order--an order that is not displayed in the System, but
will execute against available trading interest residing in the Brut
System or another market center. This order type is available for
Nasdaq-listed and Exchange-listed securities.
Example:
The market is 10.00 bid--10.02 offer.
Brut receives a Hunter Order to buy, priced at 10.01.
Since there is no liquidity at the 10.01 price, Brut will hold the
order undisplayed until marketable trading interest is available. If
thereafter an offer is posted at 10.01 either in Brut or in another
market center Brut will execute or route the Hunter Order to access
that liquidity. Any unexecuted shares will remain/return to the book
and wait undisplayed until another order is marketable against the
Hunter Order or the Hunter Order times out. If the returned shares of
the Hunter Order again become marketable, the shares will again be
routed for potential execution.
Pegged Order--a To Brut limit order that, after entry, has its
price automatically adjusted by the System in response to changes in
the Nasdaq Market Center (for Nasdaq-listed securities) or national
best bid or offer (for Exchange-listed securities), as appropriate.
Pegged Orders can specify that its price will either equal the inside
quote on the same side of the market or improves the inside quote by an
amount set by the entering party (a ``Regular Pegged Order''), or a
price that is offset from the inside quote on the contra side of the
market by an amount (the ``Offset Amount'') set by the entering party
(e.g., $0.01 less than the inside offer or $0.02 more than the inside
bid) (a ``Reverse Pegged Order''). The Pegged Order only moves towards,
or up to, the best price as appropriate. The entering party may
voluntarily specify a limit price at which pegging price changes of the
order will stop and the order will be permanently converted into an un-
pegged limit order at the limit price. This order type is available for
Nasdaq-listed and Exchange-listed securities. Pegged orders may not be
combined with other order processing designations.
Example:
The market is 10.00 bid--10.01 offer.
Brut receives a Regular Pegged buy order, with a peg limit of
10.05.
Brut will post the order at 10.00. If the inside bid moves to
10.01, Brut will move the Pegged Order also to the 10.01 bid price.
This process will continue until the order is executed or its price
reaches the peg limit of 10.05.
Discretionary Order--an order that has both a displayed price, as
well as a non-displayed discretionary price range and size (which shall
be equal to or less than the order's reserve size) in which the
entering party, if necessary, is also willing to buy or sell. This
order type is available for Nasdaq-listed and Exchange-listed
securities.
Example:
The market is 10.00 bid--10.50 offer.
Brut receives a Discretionary buy order, with a limit price of
10.00 and a display quantity of 200 shares, a discretion price of 10.25
and a discretion quantity of 1,000 shares.
Brut posts the order at 10.00. Thereafter, another market
participant posts an offer for 1,000 shares at 10.20. Since this is
within the Discretionary Order's price range, Brut will route the full
discretion quantity (i.e., 1,000 shares) for potential execution while
the displayed portion remains in the Brut book.
Post Only Order--a To Brut Limit Order that, if marketable upon
receipt against an order then-displayed in the System, is rejected and
returned to the entering party. If the order is marketable against a
quote displayed outside of Brut, the price of the order is adjusted to
a price $0.01 inferior to the best bid (or offer, as appropriate) then
displayed in the Nasdaq Market Center, and then displayed in Brut. This
order type is available for Nasdaq-listed and Exchange-listed
securities.
Example:
The market is at 10.00 bid--10.01 offer. Brut is at the 10.00 bid.
Brut receives Post-Only sell order, priced at 10.00.
Normally, this order would execute against the Brut 10.00 bid, but
since the order is post-only, the order is rejected back to the
entering party. Had the 10.00 bid not been in Brut but another venue,
Brut would not reject the order but instead adjust the order's price
and post it in the Brut System.

4. Time in Force Designations

Orders entered into the Brut System may be designated by the
entering party to remain in force and available for display and/or
potential execution for varying periods of time. Unless cancelled
earlier, once these time periods expire, the order (or the unexecuted
portion thereof) is returned to the entering party. These ``time in
force'' designations are described below:
Immediate or Cancel (IOC)--limit orders with this designation are
returned to the sender if not immediately executed. If partially
executed, un-executed remainders of these orders are returned
immediately to the entering party.
Good-till-Canceled (GTC)--orders with this designation (or the
unexecuted portions of such orders) are held by the Brut System and
remain available for potential display/execution until 4 p.m. Eastern
Time on the day they are submitted unless cancelled before then by the
entering party.\9\
---------------------------------------------------------------------------

\9\ Currently, the Brut System processes orders designated as
GTC and Day in the exact same manner. In the near future, Nasdaq
states that Brut will modify the names of its order types to
eliminate this duplication.
---------------------------------------------------------------------------

Day (DAY)--orders with this designation (or the unexecuted portions
of such orders) are held by the Brut System and remain available for
potential display/execution until 4 p.m. Eastern Time on the day they
are submitted unless cancelled before then by the entering party. This
is the default

[[Page 4909]]

time in force where none is provided by the entering party.
Good-till-Canceled-Overnight (GTCO)--orders with this designation
(or the unexecuted portions of such orders) are treated like GTC
orders, but are held by the Brut System overnight and remain available
for potential display/execution until 4 p.m. of a date provided by the
entering party, or indefinitely, unless and until cancelled by the
entering party. GTCO orders are not eligible for execution between 4
p.m. and 8 p.m. Eastern Time.
End-of-Day (GTX)--orders with this designation (or the unexecuted
portions of such orders) are held by the Brut System and remain
available for potential display/execution until 8 p.m. Eastern Time on
the day they are submitted unless cancelled before then by the entering
party.
Good-till-Time (GTT)--orders with this designation (or the
unexecuted portions of such orders) are held by the Brut System and
remain available for potential display/execution until the time
designated by the entering party. This time may be a relative time
(e.g., 30 minutes after receipt) or an actual time (e.g., 2 p.m.).
Effective Time (EFT)--orders with this designation (or the
unexecuted portions of such orders) are held by the Brut System and
only become available for potential display/execution at an actual time
during the trading day selected by entering party (e.g., 3 p.m.).
Nasdaq states that the Brut System normally operates between the
hours of 6:30 a.m. and 8 p.m. Eastern Time. Orders with the above time
in force designations may be entered into the Brut System, or
previously entered orders cancelled, starting at 6:30 a.m. Eastern
Time. With the exception of the GTC and DAY designations, which may
only be entered until 4 p.m. Eastern Time, all time in force
designations may be entered into Brut until 8 p.m. Eastern Time. Though
the entry of various time in force designations is permitted throughout
the System's hours of operation, the Brut System will not execute an
order in contravention of the time in force period selected by the
entering party, and instead will hold all such entries until they can
be processed in conformity with the time in force parameters selected
upon entry.

5. Routing

The Brut System provides the capability to route orders to other
available market centers between the hours of 7:30 a.m. and 6:30 p.m.
Eastern Time.\10\ The entering party designates, through the order type
it selects (e.g., Thru Brut, Brut Cross, Aggressive Cross, Super
Aggressive Cross, Directed Cross, or Hunter), whether the System should
first seek to execute the order against contra-side marketable orders
in the System prior to routing. Nasdaq states that in no event,
however, does the router give an order to a market center displaying an
inferior-priced order until the router has attempted to access better-
priced displayed orders in that or other market centers.\11\
---------------------------------------------------------------------------

\10\ Nasdaq states that Brut routes to other market centers
trading Nasdaq securities as well as to National Securities
Exchanges, including the American and New York stock exchanges and
other regional stock exchanges using the Intermarket Trading System
(``ITS''). Access to the New York Stock Exchange's DOT system is
currently provided to Brut through an agreement with NYSE-member
SunGuard Global Execution Services. As part of this access
arrangement, Brut allows subscribers to send orders for immediate
pass-through to SunGuard and then to DOT, including market on open/
close and limit on open/close orders and orders with the fill-or-
kill and all-or-none share amount designations.
\11\ According to Nasdaq, use of the Brut router is voluntary.
Users can select, by the type of order entered, if they want the
Brut System to route their order to another market center for
potential execution.
---------------------------------------------------------------------------

According to Nasdaq, with the exception of Thru Brut and Directed
Cross Orders that specifically direct which market center an order is
to be routed, orders routed out of the Brut System to other market
centers for potential execution are generally delivered to other market
centers in price/size priority. If the Nasdaq Market Center has
displayed shares at the best price level, the System will first deliver
to the displayed Nasdaq Market Center quote/order before routing to
other market centers. If the routed order is smaller in size than the
total combined displayed share amounts of accessible market centers at
the best price level, the Brut System delivers the routed order to the
available market centers in price/size priority. If the routed order is
larger than the total combined displayed share amounts of accessible
market centers at the best price level, the Brut System delivers over-
sized orders to each displayed market center's quote in proportion to
the individual market's center share of that total displayed share
amount. For example, if Market Center A is showing 60% of the total
amount of displayed shares across all markets at the best price level,
and Brut has a routable order greater in size than the total displayed
share amount across all markets, Brut will send an oversized order to
Market Center A representing 60% of the total amount of shares Brut is
attempting to execute via the routed order. The other market centers at
that price will likewise receive oversized orders in proportion to
their displayed amounts.
Nasdaq states that orders routed by Brut to another market do not
retain time priority with respect to other orders in Brut's System and
Brut continues to execute other orders while the routed order is away
at another market. Once routed by Brut, an order becomes subject to the
rules and procedures of the destination market including, but not
limited to, short-sale regulation and order cancellation.

6. Execution Algorithm

Nasdaq states that the Brut System has an execution algorithm of
price/time priority. For each order, among equally-priced trading
interest, the System executes against available contra-side displayed
share amounts in full, in price/time priority, before then moving to
reserve shares which are likewise executed in price/time priority.
After display and reserve size are exhausted at a particular price
level, the Brut System will then access, if available, share amounts of
Discretionary Orders within the Discretionary Order's discretionary
price range at that same price level, followed by executable Hunter
Orders before moving on to the next price level.
For example, assume the following orders in particular security at
the best price level in System:

2 p.m.--Order 1 BUY 100 at 20.00 (100 displayed, 0 reserved).
2:02 p.m.--Order 2 BUY 2,500 at 20.00 (1,500 displayed, 1,000
reserved).
2:03 p.m.--Order 3 BUY 1,000 at 20.00 (discretion to 20.07)
(500 displayed, 500 reserved).
2:04 p.m.--Order 4 BUY 400 at 20.00 (Hunter Order) (0
displayed, 400 reserved).
2:05 p.m.--Order 5 BUY 500 at 20.00 (200 displayed, 300
reserved).

Thereafter, the system receives a 10,000 share To Brut limit order
to sell at 19.99.

Matching

In the above situation, the System will match Order 1 for
100 shares, then match the 1,500 share displayed portion of Order
2, followed by the 500 share displayed portion of Order
3, and finally the 200 share displayed portion of Order
5 for a total of 2,300 shares. Since 7,700 shares are still
needed to fill the market sell order in full, the system will then
match the 1,000 share reserve amount of Order 2, and then 500
share displayed portion of Order 3, followed next by the 300
share reserve amount of Order 5.

[[Page 4910]]

Decrementation

Having determined which orders are eligible for execution via the
matching process, the Brut System then proceeds to decrement (reduce)
share amounts from those orders. These share amounts are decremented
from the matched orders starting with reserve size of the orders, if
any.\12\ (Order 1--no reserve, 100 shares display portion
decremented in full; Order 2--1,000 shares reserve decremented
followed by 500 shares of displayed 1,500 shares, leaving 1,000 shares
displayed; Order 3--500 shares (discretionary amount treated
as reserve = 500 executed, 500 share displayed portion remains); Order
5--300 shares reserve decremented by 200 shares, leaving 300
shares). Finally, the System will execute the 400 share Hunter Order
4. Having exhausted all trading interest at the best price
level in the system, the order would then move on to seek additional
shares at the next price level in the System.
---------------------------------------------------------------------------

\12\ This decrementation process differs from that of the Nasdaq
Market Center, which decrements shares directly from the matched
portion of quotes/orders and then refreshes those matched portions
from any remaining reserve share amounts. See NASD Rule 4710.
---------------------------------------------------------------------------

7. Clearly Erroneous Trade Procedures

According to Nasdaq, Brut adjudicates clearly erroneous trade
disputes for executions taking place exclusively within its System.
While generally reviewing clearly erroneous trade claims in response to
subscriber requests, Brut reserves the right to take action on its own
initiative if it determines that a trade is clearly erroneous and needs
to be modified or cancelled. Nasdaq states that, in the normal course,
Brut limits its clearly erroneous review to only those Brut System
trades that execute at prices that are a certain percentage or raw
dollar price away from the National Best Bid/Offer at the time of
execution. These parameters, which vary based on the execution price of
the asserted clearly erroneous trade, are summarized below:

------------------------------------------------------------------------
Execution price Range away from the NBBO
------------------------------------------------------------------------
$.01-$.99.............................. 10%.
$1-$19.99.............................. 5%.
$20 and above.......................... 1 Point.
------------------------------------------------------------------------

According to Nasdaq, if a Brut-only trade satisfies the above, Brut
considers the trade potentially erroneous and conducts a facts and
circumstances analysis to determine what, if any, action should be
taken. In addition to the individual facts and circumstances of the
trade, Brut also considers other factors in evaluating clearly
erroneous trade claims including: If the trade created a new high or
low in the stock; if the trade consisted of an excessive number of
shares; if the trade took place in close proximity to news released on
the security; if the trade took place during a locked or crossed market
or during a period of extreme volatility; if the trade took place
before or after normal market hours; if the trade took place in close
proximity to halt and subsequent resumed trading in the security; how
soon after the trade the subscriber notified Brut of the potentially
erroneous trade; and if the trade or trades at issue involves a
security whose issuer was recently reorganized.
Nasdaq states that, while Brut follows the above procedures today,
when Brut operates pursuant to rules approved by the Commission, Brut
will automatically cease operating an independent clearly erroneous
review process and instead trades taking place in its System will
immediately become subject to NASD Rule 11890 that already governs
trades in the Nasdaq Market Center and grants authority to designated
Nasdaq officers ``to review any transaction arising out of the use or
operation of any execution or communication System owned or operated by
Nasdaq and approved by the Commission, * * *'' \13\
---------------------------------------------------------------------------

\13\ See NASD Rule 11890(a)-(b) and proposed NASD Rule 4911.
Telephone conversation between Thomas Moran, Associate General
Counsel, Nasdaq, and David Liu, Attorney, Division of Market
Regulation, Commission, on January 25, 2005.
---------------------------------------------------------------------------

8. Other System Features and Standards

As part of the proposed set of rules governing its Brut Facility,
Nasdaq is also proposing to codify current Brut system functions and,
where appropriate, establish similar standards regarding operational
issues between the Nasdaq Market Center and Brut. For example, Nasdaq
is proposing that the Brut System have a limitation of liability rule
substantially similar to that already in place for the Nasdaq Market
Center.\14\ Nasdaq is also proposing that the Brut system adjust open
orders in its system in a manner substantially similar to the way they
are adjusted in the Nasdaq Market Center,\15\ as well codifying
standards regarding the obligation of users to honor system trades,\16\
and the removal of users for failing to maintain a required clearing
relationship.\17\
---------------------------------------------------------------------------

\14\ See NASD Rule 4705(h).
\15\ See proposed NASD Rule 4909.
\16\ See proposed NASD Rule 4907.
\17\ See proposed NASD Rules 4908.
---------------------------------------------------------------------------

9. Brut/Nasdaq Integration Plan

Though now sharing common ownership, Brut and Nasdaq currently
operate separate order display and execution systems. With respect to
the processing of quotes/orders, Nasdaq states that the interaction
between the entities is limited to Brut participating in the Nasdaq
Market Center as a Nasdaq Order-Delivery ECN pursuant to the NASD Rule
4700 Series and as an ITS Market Maker pursuant to NASD Rule 5200
Series. In these capacities Brut provides the Nasdaq Market Center its
best single ``top-of-file'' price orders in individual securities Brut
has within the System.
Nasdaq states that its goal is to increase the scope and quality of
the interaction between its two systems to ensure that the users of
either the Nasdaq Market Center or Brut have access to the best-priced
orders in both systems. According to Nasdaq, as currently contemplated
and proposed in this filing, Nasdaq's first step in integrating Brut's
System and its orders more closely into the Nasdaq Market Center will
be to have Brut provide its full depth of its order book to the Nasdaq
Market Center. In addition, Brut will connect to the Nasdaq Market
Center using a dedicated direct voluntary linkage that Nasdaq makes
available to any Nasdaq Order-Delivery ECN that wants it.
Nasdaq states that its long-term vision is to have Brut and Nasdaq
unified in a single technology platform that will further enhance
execution quality for system users. Nasdaq currently contemplates using
the Brut broker-dealer in a manner ancillary to the market execution
system as an outbound access broker dealer to other market centers.
2. Statutory Basis
Nasdaq believes that the proposed rule change, as amended, is
consistent with section 15A of the Act,\18\ in general, and furthers
the objectives of section 15A(b)(6),\19\ in particular, in that it is
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general, to protect investors and the public
interest.
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\18\ 15 U.S.C. 78o-3.
\19\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

Nasdaq does not believe that the proposed rule change, as amended,
will

[[Page 4911]]

impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding, or (ii) as to
which Nasdaq consents, the Commission will:
(A) By order approve such proposed rule change, as amended; or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an e-mail to [email protected]. Please include
File Number SR-NASD-2004-173 on the subject line.

Paper Comments

Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0609.
All submissions should refer to File Number SR-NASD-2004-173. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for inspection
and copying in the Commission's Public Reference Room. Copies of such
filing also will be available for inspection and copying at the
principal office of Nasdaq. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-NASD-2004-173 and should be submitted on or before
February 22, 2005.

For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 05-1697 Filed 1-28-05; 8:45 am]
BILLING CODE 8010-01-P