[Federal Register: November 15, 2006 (Volume 71, Number 220)]
[Notices]
[Page 66571-66574]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15no06-110]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-54706; File No. SR-NASDAQ-2006-036]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Exempt Certain Cross Transactions From NASDAQ Rule 3350(a)
November 3, 2006.
Pursuant to Section 19(b)(1) under the Securities Exchange Act of
1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on September 25, 2006, The NASDAQ Stock Market LLC (``Nasdaq''),
filed with the Securities and Exchange Commission (``Commission'' or
``SEC'') the proposed rule change as described in Items I and II below,
which Items have been prepared by Nasdaq. On October 31, 2006, Nasdaq
filed Amendment No. 1 to the proposed rule change.\3\ Nasdaq has
designated the proposed rule change, as amended, as constituting a non-
controversial rule change under Rule 19b-4(f)(6) under the Act,\4\
which renders the proposal, as amended, 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\ Amendment No. 1 was a partial amendment in which Nasdaq made
certain technical changes following discussions with Commission
staff.
\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 proposes to exempt all transactions executed in the Nasdaq
Crossing Network pursuant to NASDAQ Rule 4770 from the price test set
forth in NASDAQ Rule 3350(a). Nasdaq plans to implement the proposed
rule change, as amended, on November 6, 2006.
The text of the proposed rule change is below. Proposed new
language is underlined; proposed deletions are in brackets.\5\
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\5\ Changes are marked to the rule text that appears in the
electronic NASDAQ Manual found at http://www.nasdaqtrader.com.
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* * * * *
3350 Short Sale Rule
(a)-(b) No Change.
(c)(1)-(10) No Change.
(11) Short sales of securities in the Nasdaq Crossing Network
pursuant to NASDAQ Rule 4770 provided that:
(a) Such short sales involve securities that comprise the S&P 500
Index;
(b) Such short sales involve securities that qualify as ``actively-
traded securities'' under Regulation M; or
(c) Such short sales are part of a basket transaction of 20 or more
securities in which the subject security does not comprise more than
five percent of the value of the basket traded.
(d)-(l) 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.
[[Page 66572]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Nasdaq is proposing to amend Rule 3350(c) to create an exemption
from the short sale rule for transactions executed in the Nasdaq
Crossing Network pursuant to NASDAQ Rule 4770. Nasdaq states that Rule
3350, voluntarily adopted by the NASD in 1994, is modeled closely on
SEC Rule 10a-1.\6\ Nasdaq notes that in its January 13, 2006 order
approving Nasdaq's registration as a national securities exchange, the
Commission granted Nasdaq an exemption from Rule 10a-1 to permit the
continued application of Rule 3350 to the trading of Nasdaq-listed
securities on Nasdaq.\7\ Nasdaq notes, however, that Rule 10a-1
continues to apply to Nasdaq's trading of securities listed on other
national securities exchanges.
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\6\ Securities Exchange Act Release No. 34277 (June 29, 1994),
59 FR 34885 (July 7, 1994).
\7\ Securities Exchange Act Release No. 53128 (January 13,
2006), 71 FR 3550 (January 23, 2006). Nasdaq Rule 3350 will continue
to apply to Nasdaq Global Market securities and not to Nasdaq
Capital Market securities.
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Background. Nasdaq states that the Nasdaq Crossing Network will
consist of a series of trading day and after hours Reference Price
Crosses. Nasdaq states that Reference Price Crosses involve the
execution of trades at an externally derived price and in accordance
with a predetermined algorithm. Nasdaq asserts that the purpose of the
Nasdaq Crossing Network is to provide market participants and investors
with an accurate single trading price at specific times during and
after the trading day, resulting in an enhanced ability to execute
block trades quickly and anonymously, while minimizing market impact
and associated price movements. Nasdaq states that it expects to launch
the Nasdaq Crossing Network on November 6, 2006.
Nasdaq explains that during the regular trading hours session (i.e.
9:30 a.m. to 4 p.m.), a series of Nasdaq Reference Price Crosses would
allow market participants to place orders that will be executed at the
midpoint of the national best bid and offer (``NBBO'') during a
designated trading window. An additional cross would be scheduled to
take place after the close of the trading day and eligible orders would
be executed at either the Nasdaq official closing price (``NOCP'') for
Nasdaq-listed securities or the official closing price of the primary
market (``Primary Market Close'') for non-Nasdaq securities. Nasdaq
states that eligible orders can be either market or limit orders and
must be designated for one or more Nasdaq Reference Price Crosses with
time-in-force indicators.\8\ Nasdaq notes that eligible orders will not
be displayed.
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\8\ Orders may be submitted as existing market or limit order
types and would be designated by the firm upon entry with a time-in-
force indicator as follows: (i) participate in the next scheduled
regular hours cross with unexecuted shares being immediately
canceled back to the user after that cross (NXT), (ii) participate
in all of the regular hours crosses (i.e., 10:45 a.m., 12:45 p.m. or
2:45 p.m. ET) with unexecuted shares being immediately canceled back
to the user following the last regular hours cross (REG) or (iii)
participate in all crosses for the current day (i.e., 10:45 a.m.,
12:45 p.m., 2:45 p.m. and 4:30 p.m. ET) with unexecuted shares
immediately canceled back to the user following the after hours
cross (AHX).
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Nasdaq states that it will execute the cross through an automated
and random matching mechanism at a randomly designated time during a
predetermined one minute trading window. Nasdaq notes that initially,
the Nasdaq Reference Price Crosses will commence during the trading day
at 10:45 a.m., 12:45 p.m. and 2:45 p.m. ET. In addition, an after hours
cross would take place at 4:30 p.m. ET.\9\
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\9\ In the event that Nasdaq wishes to institute further
Reference Price Crosses or alter the timing of the crosses, it will
submit a rule change to the Commission.
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Nasdaq states that orders would be required to be entered in round
lots with a minimum of one round lot and may designate a minimum
acceptable quantity for execution. In addition, Nasdaq notes that
orders may not be canceled or replaced during the time of the cross,
but may at any other time, including periods when trading in the
applicable security is halted. Nasdaq states that Reference Price Cross
orders would be required to be available for automatic execution. All
market participants would be able to enter automatically executable
orders into the Nasdaq Market Center to participate in the Reference
Price Cross. Orders that are not automatically executable would not be
accommodated by the Reference Price Cross. Further, Nasdaq states that
Reference Price Crosses would have no order delivery capability and no
special orders would be accommodated.
Nasdaq states that upon initiation of a cross, available shares
would be treated as if they were the same price and would be allocated
on a pro-rata basis to eligible orders. Such shares would be allocated
based on the original size of the order, not on the size of the
remaining unexecuted portion of the order. If additional shares remain
after the initial pro-rata allocation, those shares would continue to
be allocated pro-rata to eligible orders until a number of round lots
remain that is less than the number of eligible orders. Any remaining
shares would be allocated to the oldest eligible order.
Nasdaq states that the executions would be reported to the market
participants via Nasdaq Market Center execution reports as a single
trade reflecting the aggregate shares executed. In addition, Nasdaq
notes that in order to reduce information leakage that could lead to
adverse price movements, executions would be reported as anonymous
trades, without identifying a contra party. Nasdaq also states that
each execution would be reported to the Nasdaq Market Center trade
reporting service for trade reporting, clearance and settlement.
Rationale for Proposed Exemption. Nasdaq believes that exempting
the Reference Price Cross transactions from Rule 3350 is consistent
with the goals of short sale regulation. Nasdaq states that
Congressional and Commission objectives included allowing relatively
unrestricted short selling in an advancing market, preventing short
selling at successively lower prices; and preventing short sellers from
accelerating a declining market by exhausting all remaining bids at one
price level. Nasdaq asserts that given the algorithmic nature of the
Nasdaq crosses, the proposed exemption poses little risk to investors.
Nasdaq states that in proposing Regulation SHO, the Commission
noted that, due to the passive nature of pricing and the lack of price
discovery, passive pricing systems ``generally do not appear to involve
the types of abuses that Exchange Act Rule 10a-1 was designed to
prevent.'' \10\ Nasdaq states that the Commission also noted that one
of the reasons for its proposed bid test was to ``better accommodate
the recent growth of matching systems that execute trades at an
independently derived price above the consolidated best bid.'' \11\ In
addition, Nasdaq states that in connection with the representations
made by other parties requesting relief for similar matching systems,
the Commission took the view that these trades would not appear to
involve the types of abuses that Rule 10a-1 was designed to
address.\12\
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\10\ See Securities Exchange Act Release No. 48709 (October 28,
2003), 68 Fed. Reg. 62972, 62982 (November 6, 2003).
\11\ Id. Although the Commission decided to defer consideration
on adopting a uniform bid test until the conclusion of the Pilot
Program established under Rule 202T of Regulation SHO, this decision
does not appear to be related to the Commission's views on passive
pricing systems.
\12\ See e.g., Letter from James A. Brigagliano, Assistant
Director, SEC, to Anitra T. Cassas, Wilmer, Cutler & Pickering, LLP
(April 22, 2005) (granting ITG an extension of modified exemptive
relief from Rule 10a-1 for certain transactions executed through
ITG's Portfolio System for Institutional Trading; see also Letter
from James A. Brigagliano, Acting Associate Director, SEC, to Alan
G. Reed, Instinet Group, LLC (June 15, 2006) (granting Instinet an
extension of exemptive relief from Rule 10a-1 for transactions
executed through Instinet's Intraday Crossing System).
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[[Page 66573]]
Nasdaq believes that, consistent with the Commission's articulated
belief regarding passive pricing systems and its view with respect to
similar matching systems, trades executed in the Nasdaq Crossing
Network are not the types of abuses that Rule 3350 was designed to
address. Nasdaq states that the purpose of the Reference Price Cross is
to provide an accurate single trading price at specific times of the
day, resulting in an enhanced ability to execute block trades quickly
and anonymously, thereby minimizing market impact and associated price
movements.
Nasdaq notes that the Reference Price Crosses are designed to occur
at an externally derived price and in accordance with a predetermined
algorithm. There would be no price discovery, as orders would not be
displayed and prices of orders are not specified, providing minimal
information to persons interested in engaging in abusive short sale
practices. Nasdaq also states that because a customer cannot predict in
advance the final execution price of the cross, which during the
trading day will be the mid-point of the NBBO and, for post-close cross
executions, the NOCP for Nasdaq-listed securities or the Primary Market
Close for non-Nasdaq-listed securities, the cross transactions will not
exert downward pressure on a subject stock's price. In addition, Nasdaq
notes that all short sale orders will be marked in accordance with Rule
200(g) of Regulation SHO.
Furthermore, Nasdaq states that each Reference Price Cross will
occur through an automated and random matching mechanism at a randomly
selected time during a predetermined one minute trading window so no
participant will know precisely when a match will occur, and no
participant will be assured of receiving a match. During each one-
minute trading window of cross, there will not be solicitation of
orders from customers, nor will there be any communication to customers
that the match has not yet occurred.
Nasdaq notes that the exemption for the Crossing Network would
apply to short sale transactions involving securities that comprise the
S&P 500 Index or that qualify as ``actively-traded securities'' under
Regulation M.\13\ If the Reported Security is not an S&P 500 Index
security or an ``actively-traded security,'' the exemption would apply
only if the transaction is part of a basket transaction of 20 or more
securities in which the subject security does not comprise more than
five percent of the value of the basket traded.
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\13\ 17 CFR 242.101(c)(1). Under Rule 101(c)(1) of Regulation M,
actively-traded securities have an average daily trading volume
(ADTV) value of at least $1 million and are issued by an issuer with
a public float value of at least $150 million. For purposes of this
letter, the ADTV would be calculated in reference to the date on
which the proposed Nasdaq Reference Price Cross is to take place.
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Nasdaq states that it is working with NASD to develop procedures to
monitor for signs of manipulation and suspicious activity, which
systems will be in place by the launch date of the Crossing
Network.\14\ Nasdaq states that in connection with these procedures,
Nasdaq will advise persons relying on this exemption to participate in
the Crossing Network that they may not be represented in the primary
market offer or otherwise influence the NBBO at the time of the
transaction. Furthermore, Nasdaq states that it will advise such
persons that transactions effected on the Crossing Network shall not be
made for the purpose of creating actual, or apparent, active trading in
or depressing, or otherwise manipulating, the price of any security.
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\14\ The surveillance systems specifically designed for the
Reference Price Crosses will be in place for the launch of the
Reference Price Crosses, currently scheduled for November 6, 2006.
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Nasdaq states that the proposed exemption will also remove the
disparity in short sale regulation that Nasdaq believes currently
exists between markets. Nasdaq asserts that as opposed to Nasdaq, which
has voluntarily adopted a short sale rule for Nasdaq securities,
several exchanges that trade Nasdaq securities do so with no short sale
regulation, encouraging market participants to route short sale orders
to their markets to avoid any regulatory restriction. As a result,
Nasdaq believes that the level of regulatory protection an investor
receives depends almost entirely on the market to which the investor's
order is routed. Nasdaq states that this disparity harms customers on
all markets by forcing traders to choose between bypassing limit orders
posted on Nasdaq, delaying executing those orders, or declining to
execute. Nasdaq states that the proposed exemption is designed to help
to alleviate these issues.
2. Statutory Basis
Nasdaq believes that the proposed rule change, as amended, is
consistent with the provisions of Section 6 of the Act,\15\ in general,
and with Section 6(b)(5) of the Act,\16\ in particular, in that it is
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, remove impediments to a
free and open market and a national market system, and, in general, to
protect investors and the public interest.
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\15\ 15 U.S.C. 78f.
\16\ 15 U.S.C. 78f(b)(5).
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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
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
(a) This proposed rule change, as amended, is filed pursuant to
paragraph (A) of section 19(b)(3) of the Act.
(b) Because the foregoing 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, it has become effective pursuant to
Section 19(b)(3)(A) of the Act \17\ and Rule 19b-4(f)(6)
thereunder.\18\
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\17\ 15 U.S.C. 78s(b)(3)(A).
\18\ 17 CFR 240.19b-4(f)(6).
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At any time within 60 days of the filing of a rule change pursuant
to Section 19(b)(3)(A) of the Act, the Commission may summarily
abrogate the 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.
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
[[Page 66574]]
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-NASDAQ-2006-036 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2006-036. 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 Section, 100 F Street,
NE., Washington, DC 20549. 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-NASDAQ-2006-036 and should
be submitted on or before December 6, 2006.
For the Commission, by the Division of Market Regulation, pursuant
to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).\
Nancy M. Morris,
Secretary.
[FR Doc. E6-19206 Filed 11-14-06; 8:45 am]
BILLING CODE 8011-01-P