[Federal Register: November 15, 2004 (Volume 69, Number 219)]
[Notices]
[Page 65664-65667]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15no04-116]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-50640; File No. SR-NASD-2004-172]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed
Rule Change Regarding Pilot Modifications and Minor Modifications to
the Nasdaq Opening Process for Nasdaq-Listed Stocks
November 5, 2004.
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 and
II below, which items have been prepared by Nasdaq. Nasdaq has
designated the proposed rule change as ``non-controversial'' under
section 19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(6) thereunder,\4\
which renders the proposed rule change effective upon filing with the
Commission. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Nasdaq is filing the proposed rule change to modify the opening
process for Nasdaq securities as follows: (1) Establish a three-month
pilot during which Nasdaq would reject the entry of Total Day Orders
prior to 9:25 a.m.; (2) clarify the language of Rule 4704(a)(8) which
governs the suspension between 9:28 and 9:30 a.m. of requests for
cancellation or modification of Regular Hours Orders; and (3) clarify
the language of Rule 4120(a)(7) which governs the opening of stocks
that are subject to a trade halt. The text of the proposed rule change
is set forth below.\5\ Proposed new language is in italics; proposed
deletions are in [brackets].\6\
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\5\ The proposed rule change is marked to show changes from the
rule text appearing in the NASD Manual available at http://www.nasd.com and
the rule text approved by the Commission in Securities Exchange Act
Release No. 50405 (September 16, 2004), 69 FR 57118 (September 23,
2004) (SR-NASD-2004-071), and amended in Securities Exchange Act
Release No. 50602 (October 28, 2004), 69 FR 64350 (November 4, 2004)
(SR-NASD-2004-152). This sentence was corrected by the Commission to
reflect the fact that the NASD Manual available at http://www.nasd.com has
not been updated to include the rule text for NASD Rule 4704.
Telephone conversation between Jeffrey S. Davis, Associate Vice
President and Associate General Counsel, Nasdaq, and Ann E. Leddy,
Special Counsel, Division of Market Regulation (``Division''),
Commission (November 4, 2004).
\6\ The Commission corrected proposed rule text on Nasdaq's
behalf to mark changes in Rule 4704(a)(8) and new subparagraph
(b)(3). Telephone conversation between Jeffrey S. Davis, Associate
Vice President and Associate General Counsel, Nasdaq, and Ann E.
Leddy, Special Counsel, Division, Commission (November 4, 2004).
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* * * * *
4120. Trading Halts
(a) No Change.
(b) Procedure for Initiating a Trading Halt.
(1)-(6) No Change.
(7) A trading halt initiated under Rule 4120(a)(7) shall be
terminated when Nasdaq releases the security for trading. Prior to
terminating the halt, there will be a 15-minute period during which
market participants may enter quotes in that security in Nasdaq
systems. [If the inside market is not locked or crossed at the
conclusion of that 15-minute period, Nasdaq will release the security
for trading and terminate the halt. If the inside market is locked or
crossed at the conclusion of the initial 15-minute period, Nasdaq will
extend the halt for an additional 15 minutes during which quotations
may be entered in Nasdaq systems.] At the conclusion of the [second]
15-minute period, the halt shall be terminated and the security
released for trading.
* * * * *
4701. Definitions
(a)-(rr) No Change.
(ss) The term ``Total Day'' or ``X Order'' shall mean,
(a) No Change.
(b) For orders in Nasdaq-listed securities so designated, that if
after entry into the Nasdaq Market Center, the order is not fully
executed, the order (or unexecuted portion thereof) shall remain
available for potential display [between 7:30 a.m. and 4:00 p.m. and
for potential] and execution between 9:25 a.m. and 4:00 p.m., after
which it shall be returned to the entering party. X Orders entered
prior to 9:25 a.m. will be rejected back to the entering party.
(tt)-(uu) No Change.
* * * * *
4704. Opening Process for Nasdaq-Listed Securities
(a) Definitions. For the purposes of this rule the term:
[[Page 65665]]
(1)-(7) No Change.
(8) ``Regular Hours Orders'' shall mean any order that may be
entered into the system and designated with a time-in-force of IOC,
DAY, or GTC. Regular Hours Orders shall be available for execution only
during the opening and then during normal trading hours. Regular Hours
Orders shall be designated as ``Early Regular Hours Orders'' if entered
into the system prior to 9:28 a.m. and designated as ``Late Regular
Hours Orders'' if entered into the system at 9:28 a.m. or after.
Beginning at 9:28 a.m., requests to cancel or modify Regular Hours
Orders shall be suspended until after completion of the Opening Cross
at which time such requests shall be processed, to the extent that such
orders remain available within the system.
(b) Trading Prior To Normal Market Hours. The system shall open all
eligible Quotes[/Orders] in Nasdaq-listed securities at 9:25 a.m. in
the following manner to prevent the creation of locked/crossed markets.
(1) At 9:25 a.m., the system shall open all Quotes [and limit
priced X Orders] in time priority. Quotes [and X Orders] whose limit
price does not lock or cross the book shall be added to the book in
strict time priority. Quotes [and X Orders] whose limit price would
lock or cross the book shall be placed in an ``In Queue'' state.
(2) Next, the system shall begin processing the In Queue Quotes[,
IOX Orders, and X Orders] in strict time priority against the best bid
(ask) if the In Queue order is a sell (buy) order. If an In Queue Quote
[or X Order] is not executable when it is next in time for execution,
the system shall automatically add that Quote [or X Order] to the book.
[(3) All Quotes and X Orders that are entered while the system is
completing subparagraphs (1) and (2) shall be added to the In Queue
file in strict time priority.]
([4]3) Once the process set forth in subparagraphs (1)-([3]2) is
complete, the system shall begin processing Quotes and X and IOX Orders
in accordance with their entry parameters
(5)-(6) Re-numbered as (4) and (5).
(c)-(d) No Change.
* * * * *
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. 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
Nasdaq has previously proposed to create two new voluntary opening
processes--the Modified Opening Process and the Nasdaq Opening Cross--
that together constitute the beginning of the trading day for all
Nasdaq-listed securities. The Commission approved that proposal on
September 16, 2004.\7\ Upon implementation of the Opening Cross, Nasdaq
has identified several modifications to the operation and rules
governing the pre-opening trading environment that it believes would
improve the fair and orderly opening of the market in Nasdaq listed
securities.
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\7\ See, Securities Exchange Act Release No. 50405 (September
16, 2004), 69 FR 57118 (September 23, 2004) (SR-NASD-2004-071).
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Specifically, upon implementing the improved pre-opening trading
environment set forth in Rule 4704(b), Nasdaq identified a harmful
unintended consequence of the Modified Opening Process (``MOP'') by
which Nasdaq establishes its opening order book and unlocks and
uncrosses the market. As described in SR-NASD-2004-071, firms have
three options for determining the price at which their carryover quotes
are opened at 9:25: (1) The last quotation price entered during the
previous day; (2) the last quotation price the firm enters after 7:30
and before 9:25 a.m.; or (3) the quote limits for Nasdaq, currently
$.01 (bid) and $2,000 (ask). Many Nasdaq participants have programmed
their quotation management systems to select the first option, carrying
over the final quotation entered during the previous trading day. At
the same time, a small number of firms have entered X Orders into
Nasdaq's system that cross the market by a significant amount, in some
cases by as much as 20 dollars. When Nasdaq applies the MOP, which
automatically executes orders that would cross the market, the system
executes those X Orders that are significantly away from the market
against the stale carryover quotations of other members resulting in
inferior executions.
To address this situation quickly, Nasdaq proposes to change the
pre-opening trading environment for a three-month pilot period.
Specifically, Nasdaq proposes to move the beginning entry time for X
Orders from 7:30 a.m. to 9:25 a.m. As a result, X Orders would not
participate in the market opening process described in Rule 4704(b),
which begins at 9:25 a.m., and there would be no risk of X Orders
automatically executing against a stale quote during that process.
Nasdaq believes that this proposed change is necessary and sufficient
to address quickly the harmful unintended consequence described above
and preserve a fair and orderly opening of trading in Nadsaq. Nasdaq is
aware that these changes impose a burden on some firms, but it has
concluded that this approach would be the fastest way to effectively
address the situation and improve the quality of executions in the MOP.
It is important to note that participation in pre-opening trading is
completely voluntary on firms' part, that the actual opening of the
market and concomitant market maker obligations would continue to begin
at 9:30 a.m. as is the case today.
In addition, Nasdaq is already designing further system
modifications that would address the problem on a permanent basis.
Specifically, Nasdaq is considering three potential changes: (1)
Applying the Market Opening Process at 9 a.m. rather than 9:25 as
currently approved; (2) extending the availability of Total Day and
Total Immediate or Cancel Orders to 9 a.m. from 9:25 as currently
approved; and (3) establishing a system default that protects market
participants from unexpected executions upon the opening of Nasdaq's
execution functionality at 9 a.m. These modifications would provide a
more efficient long-term solution, but they would take longer to
implement than simply rejecting X Orders until 9:25. Nasdaq believes it
is imperative to address the situation quickly and to simultaneously
pursue a long-term solution.
Nasdaq has identified two additional technical modifications,
unrelated to the substantive proposal at hand, that it believes would
eliminate potential confusion about the effect of Nasdaq's approved
rules. First, Nasdaq proposes to clarify that requests for suspension
or modification of orders governed by Rule 4704(a)(8) would be
processed only if such orders remain available for execution within
Nasdaq's system. Such orders would not be available if, for example,
the system executed the order during the Nasdaq Opening Cross or during
the opening process for non-cross eligible Nasdaq securities.
[[Page 65666]]
Second, Nasdaq proposes to modify the language of Rule 4120(a)(7)
to clarify the manner in which Nasdaq will open trading in stocks that
are the subject of an initial public offering (``IPO''). Currently Rule
4120(a)(7) provides for up to two 15-minute Quote Only Periods prior to
the release of trading in an IPO. The second quote only period is
necessary only in the event that the market is locked or crossed at the
end of the first quote only period. The MOP is designed to create an
unlocked and uncrossed bid and offer for the opening of trading, and to
execute quotes and orders that would lock or cross the market in a fair
and orderly manner. Because Nasdaq would apply the MOP at the close of
the first 15-minute Quote Only Period, and the MOP will automatically
unlock/uncross the market, the second 15-minute period is unnecessary.
2. Statutory Basis
Nasdaq believes that the proposed rule change is consistent with
the provisions of section 15A of the Act,\8\ in general, and with
section 15A(b)(6) of the Act,\9\ in particular, in that section
15A(b)(6) requires, among other things, that the NASD's rules be
designed to protect investors and the public interest. Nasdaq believes
that its current proposal is consistent with the NASD's obligations
under these provisions of the Act because it would result in a more
orderly opening for all Nasdaq stocks. The proposed rule change would
create a fair, orderly, and unified opening for Nasdaq stocks, prevent
the occurrence of locked and crossed markets in halted securities, and
preserve price discovery and transparency that is vital to an effective
opening of trading.
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\8\ 15 U.S.C. 78o-3.
\9\ 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 would result
in 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
Nasdaq neither solicited nor received written comments with respect
to the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not:
(i) Significantly affect the protection of investors or the public
interest;
(ii) Impose any significant burden on competition; and
(iii) Become operative for 30 days from the date on which it was
filed, or such shorter time as the Commission may designate, if
consistent with the protection of investors and the public
interest,\10\ it has become effective pursuant to section 19(b)(3)(A)
of the Act \11\ and Rule 19b-4(f)(6) thereunder.\12\ At any time within
60 days of the filing of the proposed rule change, the Commission may
summarily abrogate such rule change if it appears to the Commission
that such action is necessary or appropriate in the public interest,
for the protection of investors, or otherwise in furtherance of the
purposes of the Act.
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\10\ The Commission revised this section to add the
representations on Nasdaq's behalf that the proposed rule change
does not significantly affect the protection of investors or the
public interest and does not impose any significant burden on
competition. Nasdaq made these representations in the filing itself
but failed to include them in the exhibit. Telephone conversation
between Jeffrey S. Davis, Associate Vice President and Associate
General Counsel, Nasdaq, and Ann E. Leddy, Special Counsel,
Division, Commission (November 4, 2004).
\11\ 15 U.S.C. 78s(b)(3)(A).
\12\ 17 CFR 240.19b-4(f)(6). The Commission notes that Nasdaq
provided written notice of its intent to file the proposed rule
change, along with a brief description and text of the proposed rule
change at least five business days prior to the date of filing of
the proposed rule change.
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Nasdaq has requested that the Commission waive the 30-day operative
delay. The Commission believes that waiving the 30-day operative delay
is consistent with the protection of investors and the public interest
because it will allow Nasdaq to implement the proposed pilot without
delay, which should provide a temporary remedy to the problem posed by
X Orders automatically executing against stale quotes during the MOP.
The Commission also believes that waiving the 30-day operative delay
would permit Nasdaq to effect the clarifying changes to Rule 4120(b)(7)
and Rule 4704(a)(8) without delay. For this reason, the Commission
designates the proposal to be effective and operative upon filing with
the Commission.\13\
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\13\ For purposes only of waiving the 30-day operative delay of
the proposed rule change, the Commission considered the proposed
rule's impact on efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
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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 rule-comments@sec.gov. Please include
File Number SR-NASD-2004-172 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-2004-172. 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 the NASD. 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-2004-172 and should be submitted on or before
December 6, 2004.
[[Page 65667]]
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E4-3160 Filed 11-12-04; 8:45 am]
BILLING CODE 8010-01-P