[Federal Register: March 29, 2006 (Volume 71, Number 60)]
[Notices]
[Page 15792-15794]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29mr06-147]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-53541; File No. SR-NASD-2006-033]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed
Rule Change and Amendments No. 1 and 2 Thereto To Amend NASD Rule 11890
March 22, 2006.
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 March 1, 2006, 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. On March 13, 2006
and March 22, 2006, Nasdaq submitted Amendments No. 1\3\ and 2,\4\
respectively, to the proposed rule change. Nasdaq has designated the
proposed rule change as constituting a non-controversial rule change
under Rule 19b-4(f)(6) under the Act,\5\ which renders the proposal
effective upon filing with the Commission. The Commission is publishing
this notice to solicit comments on the proposed rule change, as
amended, from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Form 19b-4 dated March 13, 2006 (``Amendment No. 1'').
In Amendment No. 1, Nasdaq amended its filing to indicate that
Nasdaq proposes to implement the proposed rule change on March 13,
2006, rather than immediately, in the event the Commission waives
the 30-day operative waiting period.
\4\ See Form 19b-4 dated March 21, 2006 (``Amendment No. 2'').
In Amendment No. 2, Nasdaq amended its proposed definition of
``Nasdaq security'' and ``non-Nasdaq security.''
\5\ 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 proposes to clarify the scope of NASD Rule 11890. Nasdaq
proposes to implement the proposed rule change on March 13, 2006.\6\
The text of the proposed rule change is below.\7\ Proposed new language
is italicized; proposed deletions are in brackets.
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\6\ See Amendment No. 1, supra note 3.
\7\ The proposed rule change is marked to show changes from the
rule as it appears in the electronic NASD Manual available at http://www.nasd.com.
Prior to the date when The NASDAQ Stock Market LLC
(``NASDAQ LLC'') commences operations, NASDAQ LLC will file a
conforming change to the rules of NASDAQ LLC approved in Securities
Exchange Act Release No. 53128 (January 13, 2006), 71 FR 3550
(January 23, 2006).
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11890. Clearly Erroneous Transactions
(a) Authority To Review Transactions Pursuant to Complaint of
Market Participant
(1) No change.
(2) Procedures for Reviewing Transactions
(A)--(B) No change.
(C) Following the expiration of the period for submission of
supporting material, a Nasdaq officer shall determine whether the
complaint is eligible for review. A complaint shall not be eligible for
review under paragraph (a) unless:
(i) The complainant has provided all of the supporting information
required under paragraph (a)(2)(B), and
(ii) For trades in Nasdaq securities executed between 9:30 a.m. and
4 p.m. Eastern Time, or trades in non-Nasdaq securities executed
between the time when the primary market for the security first posts
an executable two-sided quote for its regular market trading session
and 4 p.m. Eastern Time, the price of transaction to buy (sell) that is
the subject of the complaint is greater than (less than) the best offer
(best bid) by an amount that equals or exceeds the minimum threshold
set forth below:
Inside Price Minimum Threshold
$0-$0.99--$0.02 + (0.10 x Inside Price)
$1.00-$4.99--$0.12 + (0.07 x (Inside Price--$1.00))
$5.00-$14.99--$0.40 + (0.06 x (Inside Price--$5.00))
$15 or more $1.00
For a transaction to buy (sell) a Nasdaq [listed] security, the inside
price shall be the best offer (best bid) in Nasdaq at the time that the
first share of the order that resulted in the disputed transaction was
executed, and for a transaction to buy (sell) a[n exchange-listed] non-
Nasdaq security, the inside price shall be the national best offer
(best bid) at the time that the first share of the order that resulted
in the disputed transaction was executed. A ``Nasdaq security'' means a
security for which transaction reports are disseminated under the
Nasdaq UTP Plan, and a ``non-Nasdaq security'' means a security for
which transaction reports are disseminated under the Consolidated Tape
Association Plan. The ``primary market'' for a non-Nasdaq Security is
the market designated as the primary market under the Consolidated Tape
Association Plan.
(D)-(G) No change.
(b)-(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
NASD Rule 11890(a) allows designated officers of Nasdaq to declare
transactions that arise out of the use or operation of Nasdaq execution
or communications systems to be clearly erroneous and to nullify or
modify the terms of such transactions. In SR-NASD-2004-009,\8\ Nasdaq
established a minimum price deviation threshold to provide a ``bright
line'' rule standard for determining when transactions are considered
eligible for review. A transaction price that meets these thresholds
does not automatically trigger a clearly erroneous determination, but
if the transaction price does not meet these thresholds the transaction
will not be considered for clearly erroneous review. Thus, there is now
a conclusive presumption that a transaction to buy (sell) is not
clearly erroneous unless its price is greater than (less than) the best
offer (best bid) by an amount that equals or exceeds the minimum
threshold set forth below:
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\8\ See Securities Exchange Act Release No. 52141 (July 27,
2005), 70 FR 44709 (August 3, 2005) (SR-NASD-2004-009).
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Inside price Minimum threshold
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$0-$0.99............................ $0.02 + (0.10 x Inside Price).
[[Page 15793]]
$1.00-$4.99......................... $0.12 + (0.07 x (Inside Price--
$1.00)).
$5.00-$14.99........................ $0.40 + (0.06 x (Inside Price--
$5.00)).
$15 or more......................... $1.00
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In SR-NASD-2005-115,\9\ Nasdaq amended this rule to clarify that
the minimum price deviation thresholds are applicable only to
transactions executed during regular market hours, i.e., between 9:30
a.m. and 4 p.m. This amendment reflected the fact that the analysis
conducted by Nasdaq to determine the appropriate levels for the
thresholds was based on pricing during normal market hours, and that
therefore application of the thresholds during other trading sessions
was not consistent with the intent underlying the rule. During pre-
market and post-market trading sessions, the inside price of many
stocks may not fully reflect trading interest in the stock, since the
range of market participants in these trading sessions is far more
limited than during regular market hours. As a result, a trade that
occurs at a price that deviates significantly from a stock's trading
range during the most recent regular market session may nevertheless be
sufficiently close to the pre-market or post-market inside price that
it would not meet the minimum deviation threshold for the stock.
Because the thresholds established by Nasdaq were based on analysis of
trading patterns during regular market hours, Nasdaq concluded that the
rule should be clarified by limiting the thresholds' application to
such hours. The change has resulted in a larger number of transactions
being eligible for review under NASD Rule 11890, since transactions
occurring during pre-market and post-market sessions are always be
eligible for adjudication under the rule unless the market participant
seeking an adjudication failed to provide the information required
under NASD Rule 11890(a)(2)(B) (i.e., the approximate time of
transaction(s), security symbol, number of shares, price(s), contra
broker(s) if the transactions are not anonymous, Nasdaq system used to
execute the transactions, and the reason the review is being sought).
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\9\ See Securities Exchange Act Release No. 52549 (October 3,
2005), 70 FR 58762 (October 7, 2005) (SR-NASD-2005-115).
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Nasdaq has now concluded that further clarification of the rule, in
accordance with the foregoing discussion, is needed with respect to
non-Nasdaq stocks (i.e., stocks for which transaction reports are
disseminated through the Consolidated Tape Association Plan).\10\
Because the primary market \11\ for such stocks may not post an
executable two-sided quotation precisely at 9:30 a.m., the pre-market
trading session for such stocks may, in effect, run beyond that time.
As a result, Nasdaq has found that trades in these stocks occurring
after 9:30 but before the time when the primary market quote is
available are frequently not subject to adjudication even though the
price of the trades may deviate significantly from a stock's trading
range during the most recent regular market session. The proposed rule
change will address this concern by clarifying that for non-Nasdaq
securities, the thresholds do not apply before the time when the
primary market for the security first posts an executable two-sided
quote for its regular market trading session.
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\10\ See Amendment No. 2, supra note 4.
\11\ The rule defines ``primary market'' with reference to the
Consolidated Tape Association Plan (``CTA Plan''), which references
the market in which the greatest number of transactions in the
security reported on the consolidated tape during the preceding six
month period (or such shorter period as the security has been
reported on the consolidated tape if it has not been so reported for
a full six month period) has taken place. See CTA Plan (second
restatement), Section XI, Operational Matters.
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2. Statutory Basis
Nasdaq believes that the proposed rule change, as amended, is
consistent with the provisions of Section 15A of the Act,\12\ in
general and with Section 15A(b)(6) of the Act,\13\ in particular, in
that the proposal is designed to prevent fraudulent and manipulative
acts and practices, to promote just and equitable principles of trade,
to foster cooperation and coordination with persons engaged in
regulating, clearing, settling, processing information with respect to,
and facilitating transactions in securities, to remove impediments to
and perfect the mechanism of a free and open market and a national
market system, and, in general, to protect investors and the public
interest. The proposed rule change will ensure that NASD Rule 11890's
minimum price deviation thresholds do not bar adjudication of clearly
erroneous petitions in circumstances where the wider spreads prevailing
before the primary market for a non-Nasdaq stock posts a quotation may
make the application of such thresholds excessively restrictive.
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\12\ 15 U.S.C. 78o-3.
\13\ 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, as amended,
will 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 any written comments.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change, as amended, 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 after the date of the filing or such
shorter time as the Commission may designate if consistent with the
protection of investors and the public interest, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \14\ and Rule 19b-
4(f)(6) thereunder.\15\
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\14\ 15 U.S.C. 78s(b)(3)(A).
\15\ 17 CFR 240.19b-4(f)(6).
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Nasdaq has requested that the Commission waive the 30-day operative
delay to permit Nasdaq to implement the rule proposal on March 13,
2006. The Commission believes that waiving the 30-day operative delay
is consistent with the protection of investors and the public interest
because such waiver will ensure that NASD Rule 11890's minimum price
deviation thresholds do not bar adjudication of clearly erroneous
petitions for transactions occurring prior to the time that the primary
market for a non-Nasdaq security disseminates a two-sided quote for the
security, which is a period when wider spreads can prevail.
Accordingly, the Commission has determined to waive the operative
delay, and the proposed rule change has become effective upon filing
with the Commission and operative as of March 13, 2006.\16\ 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,
[[Page 15794]]
or otherwise in furtherance of the purposes of the Act.\17\
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\16\ For purposes only of waiving the operative date of this
proposal, the Commission has considered the proposed rule's impact
on efficiency, competition and capital formation. See 15 U.S.C.
78c(f).
\17\ For purposes of calculating the 60-day period within which
the Commission may summarily abrogate the proposed rule change, as
amended, under Section 19(b)(3)(C) of the Act, the Commission
considers the period to commence on March 22, 2006, the date on
which Nasdaq submitted Amendment No. 2. See 15 U.S.C. 78s(b)(3)(C).
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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, as amended, 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-2006-033 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, Station Place, 100 F
Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASD-2006-033. 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, as
amended, that are filed with the Commission, and all written
communications relating to the proposed rule change, as amended,
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. 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-2006-033 and should be
submitted on or before April 19, 2006.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-4541 Filed 3-28-06; 8:45 am]
BILLING CODE 8010-01-P