January 26, 2005

Mr. Edward S. Knight
Executive Vice President and General Counsel
The Nasdaq Stock Market, Inc.
9513 Key West Avenue
Rockville, MD 20850

Dear Mr. Knight:

In your letter of January 24, 2005, you request assurance that the staff of the Division of Market Regulation ("Staff") will not recommend enforcement action to the Commission under paragraph (a)(2) of Rule 10b-10 under the Securities Exchange Act of 1934 if an NASD member that executes orders for its customers in the Nasdaq Market Center execution system indicates on a customer confirmation that the member acted as agent in those circumstances in which the member has acted as agent in submitting a customer's order to the Nasdaq Market Center, and the order is executed in the Nasdaq Market Center by matching against principal (including proprietary) trading interest of the same member (using either the same four-letter market participant identifier ("MPID") or another MPID of the member), provided that the member complies with all other requirements of Rule 10b-10 in confirming the customer's order, including paragraph (a)(2)(i) thereof. Your request for no-action relief is limited to those situations in which: (1) the party submitting principal orders does not have knowledge about the agency orders submitted by the member, and the party submitting agency orders does not have knowledge about the principal orders submitted by the member ("No Knowledge Requirement"); and (2) the member does not determine or influence the selection of the trading interest against which the agency order will be executed, including through the use of functionality of the Nasdaq Market Center designed for that purpose ("Randomness Requirement").

Response:

Based on the facts and representations set forth in your letter, the Staff will not recommend enforcement action to the Commission under paragraph (a)(2) of Rule 10b-10 if an NASD member that executes orders for its customers in the Nasdaq Market Center execution system indicates on a customer confirmation that the member acted as agent in those circumstances in which the member has acted as agent in submitting a customer's order to the Nasdaq Market Center, and the order is executed in the Nasdaq Market Center by matching against principal trading interest of the same member (using either the same MPID or another MPID of the member), provided that the member complies with all other requirements of Rule 10b-10 in confirming the customer's order, including paragraph (a)(2)(i) thereof. This no-action relief is limited to those circumstances in which the member complies with the No Knowledge and Randomness Requirements, as described in your letter.

In granting this relief, we note in particular the low probability of a customer's agency order executing against the member's principal trading interest when the agency order is marked with the I Value AIQ.¹ We also note that NASD members continue to have a duty of best execution.²

This position concerns enforcement action only and is based solely upon the representations you have made and is limited strictly to the facts and conditions described in your incoming letter. Any different facts or circumstances, including any change to the operation of the Nasdaq Market Center, may require a different response. Finally, we express no view with respect to other questions the proposed activities of Nasdaq or any NASD member relying on this relief may raise, including the applicability of any other federal or state laws or the applicability of self-regulatory organization rules concerning customer account statements or confirmations.

Endnotes

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¹ When an order is marked with the I Value AIQ, the Nasdaq Market Center system will not deviate from price/time priority (i.e., the internalization processing exception to the execution algorithm will not operate) and the order will execute against the member submitting the order if it is the next party against whom an order should be executed in accordance with price/time priority.

² See, e.g., Regulation NMS, Exchange Act Rel. No. 49325 (February 26, 2004), 69 Fed. Reg. 11126, 11137 (March 9, 2004) ("A broker-dealer still must seek the most advantageous terms reasonably available under the circumstances for all customer orders. A broker-dealer must carry out a regular and rigorous review of the quality of market centers to evaluate its best execution policies, including the determination as to which markets it routes customer order flow.").

Incoming Letter:

The Incoming Letter is in Acrobat format.

http://www.sec.gov/divisions/marketreg/mr-noaction/nasdaq012605.htm