[Federal Register: December 26, 2002 (Volume 67, Number 248)]
[Notices]
[Page 78840-78843]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26de02-120]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-47022; File No. SR-NASD-2002-158]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the National Association of Securities Dealers, Inc. Relating
to the Establishment of a Nasdaq Official Closing Price and a Trade
Report Modifier With Which To Identify That Price to the Public
December 18, 2002.
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 1, 2002, 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, II,
and III below, which items have been prepared by Nasdaq. The Commission
is publishing this notice to solicit
[[Page 78841]]
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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Nasdaq is proposing to establish a Nasdaq Official Closing Price
(``NOCP''), and a trade report modifier with which to identify that
price to the public. Nasdaq would program its proprietary systems to
append the new modifier--``.M'' for Market Close--to one trade report
message in each Nasdaq National Market and SmallCap security to
identify it as the NOCP in that security. The dissemination of the NOCP
would not affect the consolidated last sale price disseminated pursuant
to the national market system plan governing trading of Nasdaq
securities (``Nasdaq UTP Plan'') or the last sale price of any exchange
that is a member of that plan.
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
Background
Currently, Nasdaq does not have an official closing price. Instead,
market participants generally use a last sale price that vendors
identify from among the last sale prices that Nasdaq disseminates in
its role as the Exclusive Securities Information Process (``ESIP'') for
the Nasdaq UTP Plan. As the ESIP, Nasdaq currently disseminates a
consolidated last sale price (``Consolidated Close''), which is the
price of the last trade reported to the ESIP by any UTP Participant
prior to 4:01:30 p.m. In addition, Nasdaq disseminates the last sale
price of each individual participant in the Nasdaq UTP Plan
(``Individual Market Close''), including Nasdaq, which is the price of
the last trade reported by each individual Participant market center
prior to 4:01:30 p.m. Nasdaq market participants rely on either the
Consolidated Close or Nasdaq's Individual Market Close for many post-
close activities, including pricing indices, large institutional orders
(commonly called ``market-on-close orders''), and mutual fund values.
The Consolidated Close is the primary measure of the market for a
variety of constituents, including sell-side and buy-side institutions,
market indexers, securities issuers, and individual investors.
Despite their widespread acceptance, the Consolidated Close and
Nasdaq Individual Market Close are imperfect measures of the value of
Nasdaq issues at the close of normal market hours. For instance, the
Consolidated Close is somewhat arbitrary in that it is simply the price
of the final unmodified trade to be reported to Nasdaq prior to 4:01:30
p.m. by any Nasdaq member or UTP Exchange. Due to wide disparities in
the speed at which market participants report trades within Nasdaq's
90-second trade reporting window, trades reported at 4:01:30 p.m. can
be significantly away from the market when it closes at 4:00:00 p.m. In
addition, although Nasdaq has traditionally monitored the Consolidated
Close to guard against the prospect of gaming, as a result of changes
to the Nasdaq UTP Plan, Nasdaq no longer performs that function on
behalf of other UTP Plan Participants. As a result, Nasdaq is concerned
that the Consolidated Close may no longer reliably and accurately
reflect each security's value at the close of the market.
Mechanics of the Proposal
Nasdaq proposes to replace the methodology currently used to
calculate Nasdaq's Individual Market Close with the NOCP methodology
described below. The NOCP would be based on the price of the last
unmodified trade reported to Nasdaq's proprietary trade reporting
system--Automated Confirmation Transaction System or ``ACT''--at or
before 4:00:02 p.m. (the ``Predicate Trade''). Nasdaq systems would
``normalize'' the price of the Predicate Trade by comparing it to
Nasdaq's best bid and ask prices (i.e., the best prices displayed by
all SuperMontage participants) at the time the Predicate Trade was
reported, or by comparing it to the Nasdaq best bid and offer at
4:00:00 p.m. for trades reported after that time (``Predicate
BBO'').\3\ If the price of the Predicate Trade falls at either side of
or within the Predicate BBO, that price becomes the NOCP. If the price
of the Predicate Trade falls outside the Predicate BBO, Nasdaq would
adjust it up to the Predicate BBO bid if it is below the bid price or
down to the Predicate BBO ask if it is above the ask price. As
described in more detail below, the NOCP methodology would only impact
the Individual Market Close for Nasdaq; it would not impact the
Consolidated Close or Individual Market Closes of the UTP Exchanges
that are disseminated by the ESIP.
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\3\ Nasdaq Market participants would not have the ability to
append the new modifier to trade reports; only Nasdaq trade
reporting systems would append this modifier, and only for
transactions in Nasdaq National Market and SmallCap Market
securities.
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The Predicate Trade can be any trade that currently updates the
Individual Market Close for Nasdaq, subject to certain limitations.
First, Nasdaq would only consider trades submitted with the Nasdaq
market center identifier. Specifically, Nasdaq would only consider
trade reports submitted to ACT, either by NASD members or by UTP
Exchanges that use Nasdaq's proprietary execution systems. Nasdaq would
not consider trades reported by NASD members to any venue outside of
Nasdaq, including the NASD Alternative Display Facility or other UTP
Exchanges, nor would it consider any trades reported by UTP Exchanges
not executed through Nasdaq proprietary systems. Thus, if no NASD
member reports a trade in a given security to Nasdaq prior to 4:00:02
p.m., Nasdaq would report no NOCP in that security.
Second, Nasdaq would only consider unmodified trades reported at or
before 4:00:02 p.m. Nasdaq chose 4:00:02 p.m. as the proper reference
point to provide every trade type a reasonable chance to set the close.
The current close disadvantages certain trade types that are reported
too quickly to set the closing price, such as trades reported via
Nasdaq execution systems or by market participants' own automated
systems, which often report trades almost instantly. In fact, NASD
members report over 90 percent of trades to Nasdaq within two seconds
of execution, despite Nasdaq's 90-second trade reporting window. Nasdaq
believes that unmodified trades would more accurately reflect the true
state of the market at the close of normal market hours. Thus, Nasdaq
would not consider trade reports submitted after 4:00:02 p.m. and, with
one exception, it would not consider any trades reported with a
modifier, such as a .T (after normal market hours), .OR (out of range),
or .PRP (prior reference price).\4\
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\4\ Nasdaq would consider a trade submitted to Nasdaq with a
.SLD modifier (reported more than 90 seconds after execution) or a
.PRP modifier to be the Predicate Trade if, and only if, it is the
only trade of the day by any market participant. In that case, the
Predicate BBO would be the BBO at the time the trade was reported.
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[[Page 78842]]
Third, Nasdaq would adjust the NOCP only if the Predicate Trade is
cancelled or corrected by 4:30:00 p.m., even though Nasdaq would
continue to accept trade cancel and correction messages via ACT until
5:15:00 p.m. If, between 4:00:02 p.m. and 4:30:00 p.m., a market
participant enters a cancel or correct message regarding the Predicate
Trade, Nasdaq would process that message, and recalculate the NOCP.
Nasdaq would not consider in the NOCP calculation any cancel or correct
message that arrives after 4:30:00 p.m. Nasdaq believes 4:30:00 p.m. is
the proper deadline because data vendors, mutual funds, and investors
need a timely, definitive closing price, and, even on busy days, Nasdaq
receives over 99 percent of cancels and corrections before 4:30 p.m.
Consider the following example:
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Time of report Price of report Market center Concurrent BBO
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3:59:55................................. 19.98..................... Nasdaq.................... 20.00-20.02
3:59:58................................. 20.00 .SLD................ Nasdaq.................... 19.99-20.01
4:00:00................................. 20.02..................... NASD...................... 20.01-20.02
4:00:01................................. 20.05..................... CINN...................... 19.99-20.01
4:00:03................................. 20.02..................... Nasdaq.................... 20.01-20.02
4:01:29................................. 19.95..................... CINN...................... 19.99-20.01
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In this scenario, Nasdaq's Individual Market Close, under the
proposed NOCP methodology, would be 20.00, whereas the Nasdaq
Individual Market Close under the current methodology would be 20.02
and the Consolidated Close would be 19.95. The Predicate Trade would be
the trade reported at 3:59:55 p.m.; the Predicate BBO would be 20.00-
20.02; and the Nasdaq NOCP would result from normalizing the 19.98
price up to the Predicate BBO of 20.00. The NASD and CINN prints are
not eligible to be the Predicate Trade because UTP Exchanges reported
them to the ESIP, not to ACT. Nor is the 3:59:59 p.m. trade eligible
since it has an .SLD modifier appended. The 4:00:03 p.m. and 4:01:29
p.m. trades are ineligible because they were reported after 4:00:02
p.m.
Impact on the Consolidated Last Sale Calculation
The NOCP would not be eligible to set the Consolidated Close under
the Nasdaq UTP Plan, although the Predicate Trade would be eligible as
are all unmodified trade reports. While the NOCP is based on an actual
trade, it is not necessarily an actual trade price. Therefore, Nasdaq
believes that including it in the Consolidated Close is not consistent
with the Nasdaq UTP Plan. It would also give Nasdaq an unfair advantage
by manufacturing an additional opportunity for Nasdaq to set the
Consolidated Close. To avoid that result, Nasdaq would append the .M
modifier and publish it with a trade size of zero to signal to the ESIP
and vendors not to include it in the Consolidated Close calculation.
The NOCP would, on the other hand, be used to populate the Nasdaq
Individual Market Close field that the ESIP currently disseminates. The
Predicate Trade would be reported to the ESIP according to Nasdaq's
existing trade reporting rules and it would be eligible to set the
Consolidated Close, as it would be today.
Nasdaq recognizes that it must educate investors and vendors about
its new NOCP and the .M modifier to avoid creating confusion.
Currently, the Nasdaq ESIP disseminates a Closing Trade Summary Report
that includes the Consolidated Close as well as the Individual Market
Closes for Nasdaq and for each UTP Exchange that trades Nasdaq
securities. If this proposal is approved, the Individual Market Close
field for Nasdaq in the Closing Trade Summary Report would contain the
NOCP in place of its last sale price. Neither the Consolidated Close
nor any of the Individual Market Closes for any UTP Exchange would be
affected by this proposal.
The Nasdaq ESIP is engaged in a development effort to accommodate
the new trade modifier and its treatment in the consolidated data
streams. Nasdaq has also discussed the addition of the new .M trade
modifier with the UTP Operating Committee, and has made it clear that
any UTP participant can use the new trade modifier if it chooses.
2. Statutory Basis
Nasdaq believes the proposed rule change is consistent with the
provisions of sections 15A of the Act \5\ in general, and with section
15A(b)(6) of the Act \6\ in particular, because it is designed, among
other things, to protect investors and the public interest. Nasdaq's
current proposal is consistent with the NASD's obligations under these
provisions of the Act because it would result in the public
dissemination of information that more accurately reflects the trading
in a particular security at the close. Furthermore, to the extent a
security is a component of an index, the index would more accurately
reflect the value of the market, or segment of the market, the index is
designed to measure. The corresponding result should be trades, or
other actions, executed at prices more reflective of the current market
when the price of an execution, or other action, is based on the last
sale, the high price or low price of a security, or the value of an
index.
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\5\ 15 U.S.C. 78o-3.
\6\ 15 U.S.C. 78o-3(b)(6).
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Nasdaq also believes the proposal is consistent with the NASD's
obligations under its transaction reporting plan for Nasdaq National
Market System securities approved by the Commission.\7\
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\7\ See Securities Exchange Act Release No. 18590 (March 24,
1982), 47 FR 13617 (March 31, 1982).
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B. Self-Regulatory Organization's Statement on Burden on Competition
Nasdaq does not believe that the proposed rule change will impose
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
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such
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longer period to be appropriate and publishes its reasons for so
finding or (ii) as to which Nasdaq consents, the Commission will:
(A) By order approve such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609.
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 will also be
available for inspection and copying at the principal office of the
NASD. All submissions should refer to File No. SR-NASD-2002-158 and
should be submitted by January 16, 2003.
For the Commission, by the Division of Market Regulation, pursuant
to delegated authority.\8\
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\8\ 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-32532 Filed 12-24-02; 8:45 am]
BILLING CODE 8010-01-P