security in which the member firm is registered as a market maker. The SEC specifically censured the NASD for failure to enforce adequately the mandatory suspension penalties applicable to Nasdaq market makers that did not maintain continuous quotations in accordance with these rules. Under the rules, a member firm that withdrew its quotations in a particular security must also have withdrawn as a market maker in that security for a 20-day period. An exception may have been granted if the market maker obtained excused withdrawal status from the NASD before withdrawing its quote.
Excused withdrawals may have been granted only for the specific reasons enumerated in the rule. In addition, under the rules in the NASD Manual a market maker that did not "refresh" its quote in a security within a 5-minute period after its SOES exposure limit had been exhausted would have been deemed to have withdrawn as a market maker in that security for 20 business days (a "SOES withdrawal").
The NASD began routinely to grant waivers for SOES withdrawals for reasons outside the scope of the rules. This practice allowed market makers that failed to refresh their quotes after their SOES exposure was exhausted to avoid the requisite 20-day suspension. Until 1995, the practice of Nasdaq Market Operations was to grant SOES withdrawal waivers as a matter of course without inquiring into the reasons for the withdrawals.
The SEC reviewed a taped conversation between an operations clerk in Nasdaq Market Operations and a trader, which exemplifies this practice.
TRADER: Hey it's [trader's name] from [firm]. How you doing?
CLERK: Alright. Yourself?
TRADER: Good and not so good. I got suspended in Apple. The trader's assistant's out and we're a little short on the desk, I'm calling from [firm name].
CLERK: [firm symbol]?
TRADER: Yeah.
CLERK: Okay, I'll put you back in.
TRADER: And I'm, I'm going to update it so it's, so it's a greater amount.
