The Nasdaq Stock Market

Form 1 - Exhibit E

I. Introduction

Nasdaq7 is a screen-based market, operating in an efficient, highly competitive

electronic trading environment. In contrast to traditional floor-based, auction markets,
Nasdaq has no single specialist through which transactions pass. At the core of Nasdaq are
trading services that use computer technology to provide market participants access to the
market. Most of these trading services reside on the Nasdaq Workstation II7, and are
designed to create an efficient, flexible, trading environment. Nasdaq's market structure
allows multiple market participants to trade stock through a sophisticated computer
network linking geographically dispersed buyers and sellers. Together, these participants
help ensure transparency and liquidity for a company's stock while maintaining an orderly
market.

Set forth below are descriptions of the market participants that provide liquidity in
the Nasdaq market, as well as the manner in which they enter and access quotes and
orders. This is followed by a description of the trading services that Nasdaq provides
market participants to facilitate trading, including order entry, order routing, trade
reporting, settlement, and clearance. Finally, there is a description of certain system
enhancements that the Commission has approved and that will be implemented shortly, as
well as other system changes that have been proposed but not yet approved.

II. Market Participants

There are two types of entities that trade securities through the Nasdaq system –
market makers and Order Entry Firms. Market makers are individual dealers who commit
capital and openly compete with one another for investors' buy and sell orders. Order
Entry Firms (including electronic communications networks (“ECNs”)) are brokers,
dealers, or trading systems that bring additional customer orders into Nasdaq, but that do
so without ordinarily taking proprietary positions.

A market maker is a Nasdaq member firm that buys and sells securities at prices it
displays in Nasdaq for its own account (principal trades) and for customer accounts
(agency trades). Market makers actively compete for investor orders by displaying
quotations representing their buy and sell interest— plus customer limit orders— in
Nasdaq-listed stocks. Each market maker has equal access to Nasdaq's trading system,
which broadcasts their quotations simultaneously to all market participants. By standing
ready to buy and sell shares of a company's stock, market makers provide to Nasdaq-listed
companies a unique service. The result of their combined sponsorship helps meet investor
demand and creates an environment of immediate and continuous trading. In fact,
Nasdaq’s system is so finely calibrated that market makers located 25, 250, and 2,500
miles from Nasdaq’s technology center each receive quotation updates at precisely the
same time. Currently, more than 500 market making firms provide capital support for
Nasdaq-listed stocks.

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 The Nasdaq Stock Market
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The primary types of market-making firms are retail, institutional, wholesale,

regional, and those that trade pursuant to unlisted trading privileges (“UTP”). The retail
market-making firm has a retail brokerage network serving individual investors that
provides a continuous flow of orders or sales opportunities. This order flow helps
facilitate liquidity for the company's stock and stability in the marketplace. The
institutional market-making firm specializes in executing large block orders for pension
funds, mutual funds, insurance companies, and asset management companies, among
others. The regional market-making firm focuses on both the companies and the investors
of a particular region. The regional market maker gives the company the advantage of
specialized, in-depth knowledge of the stocks and investors of a particular area of the
country, providing more extensive coverage than might be available elsewhere. The
wholesale market-making firm trades shares for institutional clients as well as for other
broker-dealers that are not registered market makers in a company's stock, but need to
execute orders in that stock for customers. They help create liquidity for a company's
stock by being an important source of shares for retail, institutional and regional firms.
Firms that trade Nasdaq stocks via unlisted trading privileges may route their customer or
proprietary orders through another exchange, if a quote on that exchange represents the
inside market.

Regardless of their business model or location, all Nasdaq market makers have
similar obligations and rights. Market makers are required to (1) display two-sided quotes
in all stocks in which they choose to make a market; (2) display both quotes and orders in
Nasdaq, in compliance with the Commission's Order Handling Rules; (3) honor their
quoted prices; and (4) report trading in a timely manner. Failure to do so can lead to
disciplinary action. In return for undertaking these obligations, market makers gain the
right to enter, retrieve, monitor, and adjust quotations and to enter and execute orders in
all of Nasdaq's automated services (e.g. Small Order Execution SystemK (“SOES”)and
SelectNet7); report trades in Nasdaq National Market7 (“NNM”), Nasdaq SmallCapK,
and other listed stocks within 90 seconds of execution; and compare and clear trades
through automated services, such as the Automated Confirmation Transaction SystemK
(“ACT”).

ECNs are the newest market participants in Nasdaq's inclusive marketplace. These
private trading systems were incorporated into the Nasdaq market structure in 1997, when
Nasdaq implemented the SEC's Order Handling Rules. To trade on Nasdaq, ECNs must
be certified with the SEC and registered with Nasdaq. When a market maker uses an ECN
to represent an order, the order is first routed through the ECN to check for matches, and
is then posted electronically in Nasdaq as an ECN quote. The forwarded order can then be
executed on Nasdaq or matched with a new order through the ECN.

Buy and sell orders that are represented in Nasdaq through ECN quotes are either
public orders forwarded to the ECN by subscribing broker/dealers, or orders from
institutions subscribing to an ECN. Additionally, ECNs provide institutions and market
makers with an anonymous way to enter orders for stock into the marketplace.

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 The Nasdaq Stock Market
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III. System Access

Market participants gain access to the Nasdaq market via a direct or indirect
electronic link to Nasdaq’s computer facilities. The primary device for accessing the
market is the Nasdaq Workstation II (“NWII”). NWII consists of two components: (1)
the actual connection to the Nasdaq trading network and (2) Nasdaq software that allows
market participants to access the various trade negotiation, execution, and reporting
services Nasdaq offers. The NWII software can be installed on a market participant’s
personal computer and can be customized to address a market participant’s individual
requirements.

Introduced in 1995, NWII is the primary device for trading Nasdaq stocks. This
network of workstations gives securities traders a centralized quotation service and
automated trade executions, trade reporting, trade negotiation, and clearing. Nasdaq
keeps NWII cutting-edge through frequent software and hardware upgrades. In 1999,
Nasdaq replaced the network upon which NWII is run with a new network that will
effectively meet the future technological needs of the marketplace by more than doubling
the speed and capacity of its predecessor. Each NWII trading device connects to a server,
which links directly to Nasdaq’s computer facility through dual T1 telecommunication
lines.

NWII subscribers have three service-level options. Level I service allows the user
to view inside quote information only; no orders can be entered or trades made. Nasdaq
Level II users can query market maker quotes and enter orders and trade reports. Level
III service provides the functionality of Levels I and II plus the ability to enter quotations
for individual securities.

NWII runs on Windows NT 4.0x, as well as Sun Solaris 2.5x and can be integrated
with most in-house systems. NWII employs advanced Windows technology to create a
fast, flexible, and convenient trading environment. Each terminal receives immediate
connection to a Nasdaq server, which links directly to the main Nasdaq computer facility
in Trumbull, CT. A back-up facility is located in Rockville, MD. Quick response times
required by the marketplace are fully maintained by the NWII telecommunications
network and mainframe.

Market participants can also access the Nasdaq market through a Computer-to-
Computer Interface (“CTCI”). CTCI is a two-way communications link over point-to-
point circuits that permits market participants to transmit transactions from their computer
systems to Nasdaq’s computer systems. CTCI also is designed to permit a firm acting as
Service Bureau to interface with Nasdaq on behalf of multiple firms.

IV. Order Entry, Routing, and Handling Systems

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 The Nasdaq Stock Market
Form 1 - Exhibit E

The services that are currently available through NWII and CTCI are: the Order
Confirmation Transaction Service (“SelectNet”); the Small Order Execution System
(“SOES”); the Advanced Computerized Execution SystemK (“ACES”); Computer-
Assisted Execution System/Intermarket Trading SystemK (“CAES/ITS”), and the
OptiMark facility of Nasdaq.

A. SelectNet

SelectNet offers market participants the ability to automate the negotiation and
execution of trades, eliminating the need for verbal contact between trading desks. Orders
of any size within six digits can be traded on SelectNet. SelectNet allows order-entry
firms and market makers to direct orders to specified market makers or ECNs/ATSs, or to
broadcast orders to all market makers and ECNs/ATSs. SelectNet also identifies
incoming and outgoing orders and allows traders to see subsequent messages and
negotiation results. SelectNet is the exclusive Nasdaq-operated, automated system for
communicating with, sending orders to, and receiving executions from ECNs/ATSs.

SelectNet's flexibility begins with the ability to set up a "watch list" to control what
information comes to a trading screen. Traders can specify those securities for which they
will receive SelectNet messages— buy or sell orders. Market makers can assign SelectNet
orders in specific securities to the responsible traders. Traders can enter "directed" orders
in SelectNet, which are displayed to a specific market maker.

Market participants follow a few easy steps to enter, negotiate, and accept orders.
To enter an order the market participant must choose buy or sell or sell short; enter the
share size; enter the security ID; designate a price; indicate whether price and/or size are
negotiable; leave the order open from three to 99 minutes, make it a day order, or leave it
open until after-hours trading has ended. Market participants can respond to an order in
several ways: accept the order; price improve it; decline it; counter the order or accept a
portion of an order; or allow order to expire or time out. When an order is countered,
negotiations begin and the parties exchange messages until they produce a full or partial
execution, decline the transaction, or the transaction times out.

After an order is executed, SelectNet automatically confirms it on the workstation

displays of the order-entry firms, market makers, and ECNs/ATSs, sends the trade report
through Nasdaq for public dissemination, and compares, matches, and sends the locked-in
trade to a clearing corporation. All Nasdaq order-entry or market maker subscribers are
eligible to participate in SelectNet, provided that have a clearing arrangement with an
approved clearing agent.

B. SOES

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SOESK is an execution system that automatically executes small agency orders,

reports trades for public dissemination, and sends trades to clearing for comparison and
settlement. By automatically executing small agency orders at the best quoted price,
SOES helps traders manage investors' small orders and allows more time for trades that
require negotiation. Participation in SOES is mandatory for market makers in Nasdaq
NMS securities and voluntary for market makers in Nasdaq SmallCap securities. A
Nasdaq member firm may participate in SOES if it has a clearing arrangement with an
approved clearing agent.

SOES accepts market orders and marketable limit orders in both Nasdaq National
Market System and SmallCap Market securities. Orders entered into SOES can be either
preferenced or unpreferenced. A preferenced order is executed, at the inside market price,
against the market maker to which the order is directed. Market makers can choose the
order-entry firms from whom they will accept preferenced orders. An unpreferenced
order is executed, at the inside market, against market makers in a rotation. ECN/ATS
and unlisted trading privilege (“UTP”) participant quotes are not accessible through
SOES.

C. ACES

ACES7 routes orders between order-entry firms and market makers that have
established relationships, providing the benefits of an advanced order routing tool without
the start-up costs of a stand-alone system. ACES streamlines routine order entry by
routing orders directly into the market maker's internal system for execution and routing
the executed message back to the order-entry firm. ACES eliminates a considerable
amount of routine paperwork and nonessential telephone negotiations

ACES is a voluntary service for which market makers must register to be

authorized subscribers. To use ACES, market makers elect to provide order-entry firms
with access to their internal trading systems through ACES using the NWII. Once
authorized, order-entry firms can route orders directly to specified market makers through
their NWIIs or their own proprietary systems. These orders are executed within the
market makers' internal trading systems and execution reports are routed back to the
order-entry firms. Market makers have the ability to add, delete, or restore one or all of
the designated order-entry firms routing their orders.

D. OptiMark

Nasdaq operates the OptiMark Trading System as a trading facility of The Nasdaq
Stock Market7 in conjunction with OptiMark Technologies, Inc. This screen-based
trading facility provides a computerized, optimal matching cycle designed to satisfy the
trading interests of market participants. The facility adds a “third” dimension to trading
criteria by allowing participants to anonymously represent their trading interest across a
full spectrum of prices and sizes, rather than a single price and size.

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 The Nasdaq Stock Market
Form 1 - Exhibit E

OptiMark users submit customized expressions of trading interest called Profiles.

Profiles give users the ability to visually depict complex trading strategies by reflecting an
investor’s willingness to trade at a variety of prices and sizes, and by enabling an investor
to add a third dimension to his or her trading strategy. This third dimension is the level of
preference, on a sliding scale, of trading at a given price and size. The preference levels
are expressed as a number between zero and one for each coordinate on a price/size grid.
In addition to Profiles submitted directly by users, the facility includes certain system-
generated Profiles known as the "Nasdaq Quote Montage Profiles," reflecting the Inside
Bid and Offer quotes from Nasdaq market makers, ECNs, and UTP exchange specialists
as displayed in the Nasdaq Quote Montage at the start of a matching cycle.

The OptiMark Matching Module measures and ranks all relevant trading interests
for a particular stock in matching cycles of no longer than three seconds. There are two
separate stages in each matching cycle. In the first stage, aggregation, the Matching
Module will process only buy and sell coordinates with a full satisfaction value of one.
Smaller-sized coordinates may be aggregated to build sufficient size to be matched with
larger-sized coordinates. Upon completion of the aggregation stage, the Matching
Module will consider potential matches between buy and sell coordinates where one or
both parties have less than one, but greater than zero, satisfaction values.

Just prior to the start of a Matching Cycle, OptiMark reads all quotes being
displayed in Nasdaq for the particular security to be matched. Those quotations (price and
displayed size) are converted to OptiMark Profiles and are eligible for matching as
described below:

• Two Profiles are generated for each quote, one each for the Bid and Offer.
• If a match would trade through the quotes, a SelectNet order will be generated to
the affected market maker(s).
• When the SelectNet order is generated, the member that entered the OptiMark
Profile receives a Fill Pending message in their Book View window.
• The order is generated at the Aggregation price of the Match and could afford the
Nasdaq market maker or ECN price improvement over his/her quote.
• The market maker or ECN has the ability to accept the order at which time a Fill
Notice is generated to the OptiMark Profile.
• If the market maker or ECN has met its Firm Quote Obligation, the order may be
declined, at which time the member that entered the OptiMark Profile would
receive a Nothing Done message.

After each matching cycle, the OptiMark Trading System sends all fill results to
ACTK for trade reporting and clearing. A public trade report--not distinguished from any
other trade reported through Nasdaq--is immediately disseminated by Nasdaq for any
executions resulting from a match. Final locked-in trades will be forwarded to NSCC and
will clear and settle regular way just as any other Nasdaq transaction.

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 The Nasdaq Stock Market
Form 1 - Exhibit E

Nasdaq market makers and order-entry subscribers can access OptiMark through
the NWII as well as other software interfaces and systems. To become an authorized user
of the OptiMark Trading System, firms must sign an OptiMark subscriber agreement.

E. CAES/ITS

The Computer Assisted Execution System (CAES) is an automatic execution

system for exchange-listed securities. ITS is a trading link between Nasdaq's system and
U.S. stock exchanges. CAESK allows Nasdaq member firms to direct orders in exchange-
listed securities to market makers for automatic execution. The Intermarket Trading
System (ITS) features in the system provide an interface between the ITS (operated by the
Securities Industry Automation Corporation) and Nasdaq market makers authorized as
CAES/ITS market makers.

Although CAES is linked to ITS, CAES is itself a self-standing linkage that can
accommodate various market participants and competing market centers. On March 16,
2000, the SEC approved a proposal that allows ECNs to participate in CAES on an equal
basis as market makers, and therefore, to link to ITS. CAES will be open to all Nasdaq
member ECNs that are able to demonstrate compliance with the CAES rules and system
requirements. To date, several ECNs have expressed interest in CAES participation and
were recently provided with the modified CAES system specifications that will allow them
to assess any internal system modifications necessary for participation in CAES.

Nasdaq order-entry firms and market makers enter market and limit orders in
exchange-listed securities to be executed against other Nasdaq market makers quoting at
the best bid or offer in those securities. Orders in CAES can be delivered as preferenced to
a specific market maker or can be unpreferenced and sent in a principal or agency
capacity.

Nasdaq market makers and order-entry firms may participate in CAES. Only
Nasdaq market makers currently participate in ITS. Nasdaq member firms that quote in
eligible exchange-listed securities must participate in CAES/ITS, allowing the firm to be
exposed for execution at its quoted price for a fixed number of shares through CAES from
other Nasdaq member firms or the exchanges. Exchange specialists at the following
exchanges may also participate:

American Stock Exchange

Boston Stock Exchange
Chicago Stock Exchange
Cincinnati Stock Exchange
New York Stock Exchange
Pacific Stock Exchange (Los Angeles and San Francisco)
Philadelphia Stock Exchange

CAES/ITS trading is available through the NWII or through CTCI.

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 The Nasdaq Stock Market
Form 1 - Exhibit E

V. Trade Reporting

The ACT service provides market participants with the ability to perform three
important post-execution functions: trade reporting, trade comparison, and risk
management. Participation in ACT is mandatory for all Nasdaq members that are
members of a clearing agency registered with the SEC pursuant to Section 17A of the Act
and for all Nasdaq members that have a clearing relationship with a member of a clearing
agency.

Once a trade is executed on Nasdaq, the details of the trade (e.g., trade price and
number of shares) must be reported within 90 seconds of the time of execution. ACT is
the service market participants use to report these trade details. In addition, ACT
calculates last sale information and disseminates it to the Nasdaq last sale tape as well as
to the media through the Nasdaq Trade Dissemination Service.

The ACT service is also integral to the timely settlement of trades. ACT provides
several different methods for parties to a trade to confirm the details of a trade. For
example, in a trade by trade match, both parties to the trade submit transaction data and
the ACT system performs an on-line match. Another method of matching permits one
party to enter its version of the trade and the other party (the contra party) can accept or
reject the trade. Once the trade details are confirmed, by either ACT performing a match
or the contra party accepting the trade, the trade is considered locked-in and is forwarded
to the NSCC for settlement. Trades that are rejected are purged from the system each
day. Open trades (i.e., unmatched or unaccepted trades) are not purged at the end of day,
but are carried over until the next business day for continued comparison and
reconciliation. ACT will automatically lock in and transmit to NSCC any carried-over,
open trade if it remains open as of 2:30 p.m. on the next business day. In addition, ACT
provides an on-line facility that permits members to monitor the status of their trades (e.g.,
accepted, matched, or open).

Once an ACT participant is reported by ACT as a party to a trade that is locked-in

and sent to NSCC, notwithstanding any other agreement to the contrary, that party is
obligated to act as a principal to the trade and must honor the trade on the scheduled
settlement date.

ACT also provides risk management functions to clearing firms that enable these
firms to monitor the trading activity of their correspondents. Clearing firms can establish
gross dollar thresholds for purchases and sales by their correspondent executing brokers,
and ACT will alert the clearing firm and its correspondent if the correspondent’s trading
activity equals or exceeds either threshold. ACT will also alert the clearing firm and its
correspondent when the correspondent’s trading activity equals or exceeds 70% of either
gross dollar threshold. The thresholds can be set on a intra or inter day basis.

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 The Nasdaq Stock Market
Form 1 - Exhibit E

Clearing firms can also set a Super Cap on a correspondent’s trading activity. The
Super Cap is set at two times the gross dollar thresholds for purchases and sales, but in no
event less than $1 million. When a correspondent's Super Cap is exceeded, notice will be
furnished to ACT participants and no trade in excess of $200,000 will be accepted for
ACT processing unless the clearing firm accepts the trade within 15 minutes of execution.

ACT also permits clearing firms to set single trade limits for their correspondents.
For any trade that equals or exceeds $1 million, clearing firms have 15 minutes from the
time the trade report is entered in ACT to decide whether it will clear the trade. If,
however, the clearing firm does not affirmatively accept or decline the trade, at the end of
15 minutes the trade will be subject to normal ACT processing and the clearing firm will
be obligated to act as principal to clear the trade.

Finally, clearing firms that access ACT through the CTCI linkage have additional
functions to monitor their correspondents’ trading. These clearing firms can monitor the
intra-day activity of their correspondents as it is reported and can receive an end of day
recap of all trade detail information of their correspondents. These additional functions
are not available to clearing firms that access ACT through NWII.

VI. Fees and Hours of Operation

The Rule 7000 Series of the Nasdaq Manual (attached hereto as Exhibit A)
describe the fees currently assessed for each service offered by The Nasdaq Stock Market.

Similarly, Nasdaq will maintain its current trading schedule after it becomes an
Exchange. The trading schedule is as follows:

The Nasdaq Stock Market Trading Sessions

Pre-Open Trading Hours from 8:00 to 9:30 a.m. eastern time.
Regular Trading Hours from 9:30 a.m. to 4:00 p.m. eastern time.
After Hours from 4:00 p.m. to 6:30 p.m. eastern time.

The Nasdaq International Market Session

From 3:30 a.m. to 9 a.m. eastern time

In addition, OptiMark conducts Profile matching cycles on a periodic basis from

9:45 a.m. to 3:45 p.m., Profiles that are active at the end of the day are placed in a
"dormant" state. All "dormant" Profiles from the prior day must be reactivated by the user
the following day prior to 9:20 a.m., in order to retain their time stamp and to be included
in subsequent match cycles.

Finally, ACES orders can be entered as early as 7 a.m. Orders entered between 7
a.m. and 8 a.m. will not be delivered until 8 a.m..

VII. Market Surveillance

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Nasdaq maintains a real-time surveillance department, MarketWatch comprised of

two units -- StockWatch and TradeWatch -- that constantly monitor trading activity in
Nasdaq.

A. StockWatch

The StockWatch section provides real-time surveillance of issuer activity in The

Nasdaq Stock Market. To accomplish this task, StockWatch continually reviews press
releases issued by Nasdaq-listed companies for material news and monitors price and
volume activity in Nasdaq securities on a real-time basis using automated surveillance
systems. These combined functions allow StockWatch to maintain an orderly market to
protect investors as well as Nasdaq-listed companies.

Nasdaq Stock Market Rules IM-4120-1, 4310(c)16 and 4320(d)(14) require that,
except in unusual circumstances, Nasdaq-listed companies promptly notify the public
through the news media of any material information. These rules also require issuers to
give StockWatch advance notice of news events. This requirement permits StockWatch to
assess press releases for materiality and in certain circumstances, implement temporary
trading halts to allow for even-handed dissemination of material news.

Trading Halts provide an opportunity for investors to gain equal access to

information until the material news is disseminated. Such a pause benefits existing and
potential shareholders by ensuring that material news is distributed equally among all
market participants and by ensuring trading is based on publicly-held facts. Although
trading halts may vary in length, trading normally resumes in about 30 minutes following
the coverage of the news by one of the following: Dow Jones, Reuters, BusinessWire, PR
Newswire, the Wall Street Journal, Bloomberg, Bridge News, Barron’s or The New York
Times. For the purposes of trading halt evaluations, Nasdaq market hours are 9 a.m. to
6:30 p.m., Eastern Time, Monday through Friday. This includes the morning and
afternoon SelectNet trading sessions.

An automated detection system monitors the trading activity in each issue and
generates price and volume alerts. StockWatch analysts review these alerts and use news
gathering resources and telephone contacts with the company and market makers to
determine if there is a reasonable explanation for the activity. StockWatch immediately
refers all noted suspicious activity for further review and investigation StockWatch can
receive notification of press releases 24 hours a day. Nasdaq companies may speak with a
StockWatch Analyst from 8 a.m. to 7 p.m., Eastern Time, Monday through Friday.
Outside of normal business hours, issuers are still obligated to give prior notification to
StockWatch of material press releases. The prior notification may be given by phone, fax
or voice mail.

B. TradeWatch

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TradeWatch provides real-time monitoring of trading activity on The Nasdaq

Stock Market and is responsible for the immediate resolution of real-time trade reporting
issues. It is the responsibility of the TradeWatch analysts to monitor automated detection
systems and review alerts to make certain the price and volume information reported by
market participants is accurate, thereby ensuring integrity in the marketplace.

Specifically, TradeWatch resolves pre-market and intraday locked/crossed

markets in accordance with the applicable Nasdaq rules. In addition, the TradeWatch
section is responsible for immediate resolution of real-time issues related to the trade
reporting of Nasdaq, OTCBB, and Nasdaq Intermarket transactions.

TradeWatch is also a resource for NASD market participants requesting

information regarding general trade reporting rules and various NASD and SEC rules and
regulations such as the SEC order handling rules, short sale rules, limit order protection
and best execution.

The TradeWatch section coordinates and executes the Initial Public Offering (IPO)
release process. The analysts actively monitor the IPO during the opening quote period
and make the decision to open trading or extend the quote period in accordance with SR
NASD 98-98.

TradeWatch is responsible for monitoring the opening and closing trading activity
for securities in the Nasdaq 100on a daily basis and S&P 400 and S&P 500 indices on
monthly expirations. On a daily basis, TradeWatch facilitates immediate resolution of
index calculation problems caused by trade reporting errors. TradeWatch also monitors
quotes posted by market makers to ensure compliance with the Reasonably Related
Quotations Rule 4613(c).

C. NASD Regulation

In addition to surveillance by Nasdaq, Nasdaq has contracted with NASD

Regulation for NASD Regulation to surveil Nasdaq in the same manner that it does today.
NASD Regulation’s Market Regulation Department operates a highly automated process
of investigating and preventing abusive, manipulative, or illegal trading practices in The
Nasdaq Stock Market. NASD Regulation carries out its regulatory responsibilities
through education, examinations, market surveillance, registration of securities personnel,
advertising and underwriting reviews, disciplinary actions that violate rules, investigation
of customer complaints, and forums to resolve disputes.

To ensure effective regulation, investor confidence, and to protect market

participants, Market Regulation has put in place regulatory programs and has established
specialized units focused on determining compliance with specific Nasdaq rules and
regulations and federal securities laws. Market Regulation is comprised of 16
investigative, examination, and operational units comprised of over 180 analysts,
attorneys, and examiners based in Rockville, Maryland, Chicago and New York. The

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Market Regulation Department utilizes state-of-the-art technology to carry out its

regulatory responsibilities. This technology provides the ability to reconstruct market
transactions utilizing trading data and quote information that is captured second-by-
second throughout the trading day, and alert staff to potential violative activity.

The Market Regulation Department also conducts onsite inspections of the largest
Nasdaq market-making and trading firms to assess compliance with Nasdaq market-
making and trading rules and regulations and federal securities laws. The regulatory
information gathered from online surveillance, customer and broker/dealer complaints, and
on-site examinations of trading activity is shared and analyzed by experts in the Market
Regulation Department to determine whether violative activity has occurred and
disciplinary action is warranted. The staff‘s mission is to serve investors and all market
participants by being a fair, efficient, and effective regulator.

VIII. Pending System Changes

On January 14, 2000 the SEC approved modifications to Nasdaq’s negotiation and
automatic execution systems to deal with the problem of dual liability. As a general matter,
SelectNet, through rule and system changes, will be re-established as a non-liability, order
delivery and negotiation system for NNM securities. The current automatic execution
system for small orders from public customers will be substantially enhanced and recast for
the trading of NNM securities through the following changes: (1) increasing the maximum
order size for NNM securities to 9,900 shares; (2) allowing market participants (including
market makers) to enter proprietary orders into the new system and to obtain automatic
execution for their proprietary and agency orders in NNM securities; (3) reducing the
current 17-second delay between executions against the same market maker to 5 seconds;
and (4) enabling NNM orders to interact on an automatic basis with market markers’
displayed size and reserve size. These rule changes will reduce dual liability, improve the
speed of executions, and increase access to the full depth of a security’s trading interest by
all market participants.

A. Changes to SelectNet

SelectNet will be transformed to an order delivery and negotiation system through

rule changes prohibiting the use of SelectNet for the entry of any preferenced orders
directed to market makers in NNM securities unless such orders are at least 100 shares in
excess of the displayed amount of the market maker's quote to which they are directed
("over-sized order requirement"). In addition, such orders must also be designated as
either: 1) "All - or - None" ("AON") of a size that is at least 100 shares greater than the
displayed amount of the market maker's quote to which the order is directed; or 2) a
"Minimum Acceptable Quantity" order ("MAQ") with an MAQ value of at least 100
shares greater than the displayed amount of the market maker's quote to which the order is
directed. SelectNet will automatically reject preferenced messages that fail to meet these
requirements. The over-sized order requirement will also apply to orders directed to
ECNs that take automatic execution against their quotes in NNMS. These changes will

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ensure that market makers and ECNs that take automatic execution are not subject to
potential dual liability arising under the Firm Quote rule as the result of receiving orders
from different systems. Recipients of over-sized NNM SelectNet orders will have the
option to execute, or initiate electronic negotiation in response to the message.

ECNs will have the ability to be accessed through the SelectNet linkage, or fully
participate in the NNMS system and be subject to automatic execution through NNMS.
Nasdaq currently is working with UTP Exchanges to integrate them into the automatic
execution functionality of the NNMS. If this occurs, UTP Exchanges may be accessed via
the NNMS, and they may access Nasdaq market participants that take automatic
execution via the NNMS.

B. Nasdaq National Market Execution System (“NNMS”)

NNMSK will be the Nasdaq market's primary trading and execution medium. The
NNMS system transforms the currently-operating execution systems for small orders from
public customers into a more efficient, automated facility for the handling of all NNM
orders of less than 9,900 shares. NNMS will execute automatically against market
makers' quotes -- displayed and reserve size -- as more fully described below.

1. Order Entry Parameters. First, the maximum order size for

NNM securities entered into NNMS will be 9,900 shares. Second, Nasdaq members
(including market makers) will be allowed to use NNMS on a proprietary basis, including
being able to obtain automatic execution for orders sent to other NNMS participants,
when trading NNM securities. Third, the interval delay between automatic executions
against the same market maker will be 5 seconds. Fourth, the system will have a reserve
size feature for quotes. NNMS will permit interaction of orders against a market maker's
"reserve size" after yielding priority to displayed quotes at the same price. Additionally,
market makers will have the option of having their quote automatically refreshed from that
reserve to a size level of their choosing. If no particular size is designated by the market
maker, the quote will automatically be refreshed by NNMS at a 1000 share displayed-size
level.

2. Reserve Size Participants in the NNMS will be able to indicate a

reserve size amount, which will not be displayed in Nasdaq. Rather, reserve size will
refresh quotes that have been decremented to zero, and will be accessed automatically if
all displayed interest is exhausted. The reserve size feature of NNMS will yield priority to
all displayed quotes at the same price level, so that the system will execute against
displayed size in time priority and then against the reserve size in time priority. NNMS will
require those using the NNMS reserve-size feature to display at least 1000 shares in its
quote. Moreover, quotes at the inside of the market that are to be refreshed at the same
price level must be refreshed to at least 1000 share in order for a market maker to
continue using reserve size.

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 The Nasdaq Stock Market
Form 1 - Exhibit E

Failure to update a fully exhausted quote will result in the system placing the
market maker's quote in a "closed" state that, if not updated within 5 minutes, will be
cause for suspension of the market maker's quote for 20 business days. Market makers
will still have the ability, through Nasdaq's automatic quote update facility, to pre-select a
tick value and size, and have Nasdaq refresh their proprietary quote away from the inside
market. If a market maker's quote is refreshed to a different price or size level, another
order will not be delivered to that market maker for 5 seconds after that quote is refreshed
at the new price or size level.

3. “No Decrementation” Eliminated NNMS will not offer the "NO

DEC" feature for NNM securities. NO DEC, which currently allows continuous
executions against a market maker's quote at the same price, is unnecessary in an
environment where market makers can manage their quote by displaying their actual size
and refresh their quote at a size they determine.

4. Preferencing Eliminated Similarly, Nasdaq is also eliminate the

existing SOES preferencing feature for NNM securities because it is inconsistent with the
processing of orders in time priority. Preferencing in an automatic execution system also
reduces market maker incentives to aggressively compete for orders by showing the full
size and true price of their trading interest.

5. ECN and UTP Exchange Participation ECNs will have two

options for participation in NNMS, and the manner in which they choose to participate
shall be governed by an addendum to the Nasdaq Workstation II Subscriber Agreement
for ECNs. Specifically, ECNs can choose to be Order-Entry ECNs or Full-Participant
ECNs.

First, Order Entry ECNs (“OE ECNs”) will participate in Nasdaq in substantially
the same manner as ECNs do today. That is, market participants would be able to access
OE ECN quotes via the SelectNet linkage and to send preferenced SelectNet messages of
any size (up to 999,999 shares) to such ECNs The oversized order requirement for a
preferenced SelectNet order would not apply to OE ECNs. OE ECNs that want to access
other market maker quotes would need to request order-entry capability in the NNMS
system. That is, OC ECNs would enter orders into the NNMS for automatic execution
against quotes of market makers and other ECNs that choose to accept automatic
execution against their quotes. Order Entry ECNs can also send preferenced SelectNet
orders to NNMS market makers subject to the over-sized order restrictions described
above.

Second, Full-Participant ECNs will agree to provide automatic execution against

their quotes for orders entered into the NNMS, similar to market makers. Like OE ECNs,
Full-Participant ECNs will use the NNMS system to obtain automatic execution of orders
they send to market makers or other Full-Participant ECNs. Full Participant ECNs will
use SelectNet to deliver liability orders to OE ECNs.

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 The Nasdaq Stock Market
Form 1 - Exhibit E

National securities trading pursuant to grants of unlisted trading privilege (“UTP”)

will continue to have access to the full range of SelectNet’s capabilities as their primary
linkage with Nasdaq. UTP Exchanges will continue to receive, and be obligated to
execute, preferenced SelectNet liability orders. Additionally, UTP Exchanges will retain
their ability to send SelectNet preferenced liability orders to market makers. Thus, a
market maker will face dual liability on the sporadic occasions when its quote is accessed
simultaneously by a UTP Exchange via SelectNet and also by an NNMS market maker or
order entry firm via the NNMS system.

As noted above, Nasdaq currently is working with UTP Exchanges to integrate

them into the automatic execution functionality of the NNMS. If this occurs, UTP
Exchanges may be accessed via the NNMS, and they may access Nasdaq market
participants that take automatic execution via the NNMS.

C. Nasdaq SmallCap

For Nasdaq SmallCap securities, the trading rules for automatic execution will not
change. Participation in the automatic execution system for SmallCap will remain
voluntary, and be available only for the small orders of public customers. Maximum order
size limits will remain in effect as well as the prohibition against splitting larger orders to
avoid those limits. Restrictions on access by market professionals will likewise be
maintained. Lastly, SelectNet in the Small Cap environment will not change. Specifically,
the over-sized order requirement will not apply to SmallCap issues. Thus, market makers
that receive SelectNet orders in SmallCap issues at their quoted price and size will owe an
obligation to honor these orders under the SEC's and Nasdaq's firm quote rules.

IX. Pending Rule Filing

In rule filing SR-NASD-99-53, Nasdaq is proposing to enhance the Nasdaq

quotation montage and Nasdaq’s pending trading platform– the Nasdaq National Market
System (“NNMS”). In particular, Nasdaq is proposing: 1) to add a new display to the
NWII called the Nasdaq Order Display Facility (“NODF,” also called by some the
“SuperMontage”), which will show the best bid/best offer in Nasdaq and two price levels
away, accompanied by the aggregate size at each price level of the “displayed” trading
interest of market makers, electronic communication networks (“ECN”), and UTP
Exchanges; 2) to make substantial enhancements to the NNMS, which will improve the
efficiency of the current trading platform; 3) allow market makers and ECNs to designate
orders for “display” in Nasdaq on either an attributable (i.e., not anonymous) or non-
attributable (i.e., anonymous) basis; 4) to establish the Order Collector Facility (“OCF”)
as part of the NNMS, which will allow Nasdaq market makers and ECNs to give the
Nasdaq system multiple quotes/orders at a single as well as multiple price levels, which
will be displayed in the Nasdaq Quotation Montage and the NODF, consistent with an
order’s parameters; 5) to establish the OCF as a single point of order entry and single
point of delivery of liability orders and executions; and 6) to create an odd-lot processing

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 The Nasdaq Stock Market
Form 1 - Exhibit E

facility in Nasdaq.

The upper portion of the SuperMontageK will show the best bid/best offer in
Nasdaq and two price levels away from the best bid/offer. Each price level will be
accompanied by the aggregate size of the trading interest at the price that is in the system
from market makers, ECNs, and exchanges granted Unlisted Trading Privileges for
Nasdaq securities (“UTP Exchanges”). The display will not identify the orders of any
particular market participant; rather, it will represent all displayed interest in the system at
the inside and two price levels away on an anonymous basis.

The lower portion of the SuperMontage, like the current quote montage, will
display the quotes of market makers, ECNs, and UTP Exchanges, each identified with
their four-character trading symbol. However, with the SuperMontage, Nasdaq market
participants will be able to designate an order as “non-attributable” (anonymous). The
best-priced of these orders will be aggregated and displayed in the quote montage under a
non-specific market participant identifier. Attributable orders will be displayed in the
current Nasdaq quotation montage next to the Nasdaq market participant’s identifier.
Both attributable and non-attributable orders will be displayed in the upper part of the
SuperMontage as part of the aggregate trading interest at the inside (and two prices
away).

Most significantly, Nasdaq market makers and ECNs will be permitted for the first
time to give multiple orders and orders at multiple price levels, which the system will
manage. That is, if a market participant chooses to give Nasdaq its orders, the system will
display those orders in the montage as part of the aggregate trading interest when the
order is at the best bid/best offer or two price levels away. As a result, when an investor
looks at the Nasdaq Workstation II, the investor will be able to view the entire depth of
the market at the inside bid and offer and two price-levels away (to the extent the market
participants have given Nasdaq those orders).

Finally, Nasdaq market participants will be able to access orders in SuperMontage

almost instantaneously using a substantially enhanced Nasdaq order delivery and execution
system, built on an architecture that accommodates the technology needs of all Nasdaq
market participants (market makers and ECNs alike).

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