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Nasdaq Files Modification of Limit Order Protection Pilot for OTCBB Securities;
Modifications to Take Effect November 1, 2001
(Head Trader Alert #2001-168)

Nasdaq® has filed with the Securities and Exchange Commission (SEC) certain modifications to the minimum price improvement standard set forth in National Association of Securities Dealers, Inc. (NASD®) Rule 6541 (Rule), that will be effective Thursday, November 1, 2001. The Rule applies basic customer limit order protection principles to certain designated securities that are quoted on the OTC Bulletin Board® (OTCBB). A list of these securities is available on the OTCBB Web site at Limit Order Protection Pilot Securities.

The Rule, in general, prohibits member firms that accept customer limit orders in these securities from “trading ahead” of their customers for their own account at prices equal or superior to the limit orders, without executing them at the limit price. Members may, however, trade ahead of a customer limit order if the trade for their own account provides a minimum level of price improvement over the limit order price. For a complete description of the Rule, see NASD Notice to Members 01-46 (which does not contain the modifications described below), available on the NASD Regulation® Web site at nasdr.com/pdf-text/0146ntm.pdf.

The filed modifications, which take effect on November 1, 2001, on a pilot basis through January 14, 2002, narrow the minimum price improvement standards for customer limit orders priced outside the current inside spread. For customer limit orders priced at or inside the current inside spread, the minimum price improvement will remain the lesser of (i) one cent or (ii) one-half of the current inside spread. For customer limit orders priced outside the current inside spread, any degree of price improvement will be sufficient. The filed modifications also clarify that the basic prohibition on trading ahead of held limit orders at prices equal or superior to the limit orders applies to limit orders that are priced more than $0.01 away from the current inside spread.

Notice of Filing of Amendment to Limit Order Protection Pilot - SR-NASD-2001-78

For additional information, please contact:

  • Liz Heese, Nasdaq Alternative Markets, at (202) 728-8191 (liz.heese@nasdaq.com),
  • Jeffrey Davis, Office of General Counsel, at (202) 728-8088, or
  • John Yetter, Office of General Counsel, at (202) 728-8088.

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