[Federal Register Volume 62, Number 106 (Tuesday, June 3, 1997)]
[Notices]
[Pages 30363-30364]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-14413]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38678; File No. SR-NASD-97-27]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Granting Approval to Proposed Rule Change To 
Decrease the Minimum Quotation Increment for Certain Securities Listed 
and Traded on The Nasdaq Stock Market to \1/16\th of $1.00

May 27, 1997.

I. Introduction

    On April 17, 1997, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association'') submitted to the Securities and 
Exchange Commission (``SEC'' or ``Commission''), pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ And Rule 
19b-4 thereunder,\2\ a proposed rule change to modify The Nasdaq Stock 
Market's (``Nasdaq'') automated quotation system to permit Nasdaq 
securities whose bid is $10 or higher to be quoted in increments as 
small as one-sixteenth of a dollar.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in the Federal 
Register on April 25, 1997.\3\ After the comment period expired, the 
Commission received a number of comment letters.\4\ This order approves 
the proposal.
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    \3\ Securities Exchange Act Release No 38531 (Apr. 21, 1997), 62 
FR 20233 (Apr. 25, 1997).
    \4\ As of May 22, 1997, the Commission received 111 comment 
letters. These letters, as well as any others received after this 
order, may be found in the Commission's Public Reference Room in 
File No. SR-NASD-97-27.
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II. Description

    Presently, Nasdaq's automated quotation system is configured so 
that a market maker or electronic communications network (``ECN'') can 
only enter a quote for a particular security in an increment of \1/8\ 
of $1 if the market maker's bid price in that security is equal to or 
greater than $10. If a market maker's bid is less than $10, it may 
enter quotes in increments of \1/32\ of $1. Nasdaq proposes to modify a 
system parameter in its automated quotation system to enable market 
makers and ECNs to enter quotations in sixteenths for Nasdaq securities 
when their bid price is equal to or greater than $10.
    Nasdaq believes allowing Nasdaq market makers and investors to 
display their trading interest in these securities in sixteenths will 
enhance the transparency of the Nasdaq market, provide investors with a 
greater opportunity to receive better execution prices, facilitate 
greater quote competition, promote the price discovery process, 
contribute to narrower spreads, and enhance the capital formation 
process. Moreover, Nasdaq believes the proposed rule change is wholly 
consistent with, and in furtherance of, the important investor 
protection goals underlying the Order Execution Rules.\5\ Customer 
limit orders and orders entered into ECNs priced in sixteenths are 
currently rounded to the nearest eighth for public display.\6\ The 
proposal would allow all such orders to be publicly displayed at their 
actual price. By displaying these orders at their actual prices, Nasdaq 
believes the already substantial benefits provided by implementation of 
the Order Execution rules will be commensurately increased. Nasdaq also 
believes it is appropriate to reduce the minimum quotation increment 
for these securities in light of the SEC's decision to modify the 
phase-in schedule of the Order Execution Rules.\7\
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    \5\ On August 28, 1996, the Commission adopted Rule 11Ac1-4, the 
``Limit Order Display Rule,'' and amendments to Rule 11Ac1-1, the 
``ECN Rule,'' to require over-the-counter (``OTC'') market makers 
and exchange specialists to display certain customer limit orders, 
and to publicly disseminate the best prices that the OTC market 
maker or exchange specialist has placed in certain ECNs, or to 
comply indirectly with the ECN Amendment by using an ECN that 
furnishes the best market maker and specialist prices therein to the 
public quotation system (collectively, the ``Order Execution Rules'' 
or the ``Rules''). See Securities Exchange Act Release No. 37619A 
(Sept. 6, 1996), 61 FR 48290 (Sept. 12, 996).
    \6\ In particular, orders to buy (sell) are rounded down (up) to 
the nearest eighth.
    \7\ See Securities Exchange Act Release No. 38490 (Apr. 9, 
1997), 62 FR 18514 (Apr. 16, 1997) (announcing the revised phase-in 
schedule, providing exemptive relief to accommodate the new 
schedule, and providing exemptive relief from compliance with the 1% 
requirement of the Quote Rule with respect to non-19c-3 securities.)
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III. Summary of Comments

    As of May 22, 1997, the Commission received 111 comment letters 
concerning the proposed rule change.\8\

[[Page 30364]]

All of the commenters supported the proposal. In expressing their 
support, the commenters stated that reducing the minimum quotation 
increment would improve market transparency by allowing a more complete 
display of the buying and selling interest in the affected securities. 
In general, they maintained that this would facilitate quote 
competition which would reduce spreads and, in turn, provide investors 
with better prices. Furthermore, they explained that this would 
increase investors' confidence in the market and, thus, would encourage 
greater participation and increase liquidity. Several commenters also 
addressed the issue of pricing stocks in decimals.\9\
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    \8\ See letters to Jonathan G. Katz, Secretary, SEC, from Daniel 
J. Balber, dated May 12, 1997, Stephen S. Baldente, undated, Adam 
Bandel, undated, Laurence Bag, undated, Sayan Bhattacharyya, dated 
May 14, 1997, Jessica Brooks, dated May 16, 1997, Michael Broudo, 
dated May 14, 1997, John Bucci, dated May 15, 1997, David M. Burns, 
dated May 16, 1997, Matthew H. Carlson, dated May 12, 1997, Cornel 
Catrrina, dated May 14, 1997, Donald Cherry, dated May 12, 1997, 
Mark Chin, dated May 13, 1997, Robert Chung, dated May 15, 1997, 
Charles Cianfrani Jr., dated May 12, 1997, Richard D. Connell, 
undated, Henry Davar, dated May 15, 1997, Michael Di Domenico, dated 
May 15, 1997, Omar Divina, dated May 13, 1997, Patrick G. Dolan, 
dated May 13, 1997, Michael Eisner, dated May 12, 1997, David 
Filibertro, undated, Douglas Y. Finn, dated May 16, 1997, Campbell 
Foster, undated, James W. Frame, undated, Aaron Francis, dated May 
12, 1997, Louis C. Galli, dated May 14, 1997, John Geisler, dated 
May 13, 1997, Nicolas Gentin, dated May 10, 1997, James R. Gibbs, 
dated May 12, 1997, Michael S. Gleeson, dated May 16, 1997, Jason B. 
Gold, dated May 11, 1997, J. Michael Gostigan, dated May 14, 1997, 
Kurt J. Hellmers, dated May 16, 1997, Anthony J. Hernandez, dated 
May 14, 1997, Bryan Hollander, undated, Hirokazu Iwasa, dated May 
14, 1997, Greg Honan, dated May 14, 1997, Patrick Hsieh, dated May 
13, 1997, Scott S. Ignall, undated, Marina Kaneti, dated May 10, 
1997, Matthew Kansler, dated May 13, 1997, Andrew Kashdan, undated, 
Gene Keyser, dated May 12, 1997, Devon B. Kitchens, dated May 13, 
1997, Jason Klarreich, dated May 15, 1997, Michael D. Klug, dated 
May 16, 1997, Stephen M. Kovacs, dated May 14, 1997, Seth C. Koppel, 
dated May 13, 1997, David D. Kuang, dated May 13, 1997, Gabriel 
Levin, dated May 9, 1997, Eben Light, undated, Robert Lindauer, 
undated, Louis Liu, undated, Jamie Maltese, undated, Andrew A. 
Mancuso III, dated May 15, 1997, Daniel Mandell, dated May 16, 1997, 
Richard Marble, undated, James Maroney, dated May 14, 1997, John F. 
McEnroe III, dated May 15, 1997, Gordon McDonald, dated May 14, 
1997, Kevin McGrory, dated May 13, 1997, John P. McMullan, dated May 
12, 1997, Robert Meurer, dated May 13, 1997, Winston Meyer, dated 
March 11, 1997, Jeffrey L. Miller, undated, Marcus Motroni, undated, 
Kenneth Nadan, dated April 24, 1997, Paul Naden, dated April 24, 
1997, Seth Nemeroff, dated May 13, 1997, Michael O'Buachalla, dated 
April [sic] 17, 1997, Michael O'Reilly, dated May 15, 1997, Randall 
Oser, dated May 12, 1997, Christopher M. Owens, dated May 13, 1997, 
M. Yousuf Paracha, dated May 13, 1997, Tausif Paracha, undated, John 
Parente, undated, Mike Parsons, dated May 12, 1997, Ilian P. Petrov, 
dated May 13, 1997, Antonio J. Cecin, Managing Director and Director 
of Equity Trading, Piper Jaffray, Inc., dated May 16, 1997, Dario J. 
Pompeo, undated, Reid Richman, undated, Joel Rebhun, undated, Marcie 
D. Rebhun, undated, Tami Beth Rock, dated May 12, 1997, Noah 
Roffman, dated May 18, 1997, Jason Rosen, dated May 12, 1997, David 
G. Rosenberg, dated May 14, 1997, Paul R. Rudd, dated May 15, 1997, 
Shahriar Saadullah, dated May 13, 1997, Kevin J. Sanbeg, dated May 
12, 1997, Patrick S. Schultz, dated May 10, 1997, Cary S. Segall, 
dated May 16, 1997, Gil Shapiro, dated May 12, 1997, Hiro Shinohara, 
dated May 12, 1997, Daniel Sherwood, dated May 11, 1997, Joseph 
Socolof, dated May 13, 1997, Drew Sohn, dated May 15, 1997, Alphonse 
Soued, dated May 15, 1997, Feral Talib, undated, Mark Tashea, dated 
May 13, 1997, Howard Teitelman, dated May 10, 1997, Alexis 
Theofilactidis, dated May 12, 1997, Michael E. Tobin, undated, Nancy 
Tom, dated May 15, 1997, Tai Truong, dated May 13, 1997, Abbott 
Wang, dated May 16, 1997, Oliver Wang, dated May 13, 1997, Alan 
Weber, dated May 14, 1997, Timothy Whelan, dated May 12, 1997, 
Timothy J. Wilson, dated May 15, 1997.
    \9\See letters to Jonathan G. Katz, Secretary, SEC, from Sayan 
Bhattacharyya, dated May 14, 1997 (stating that decimalization is a 
very good idea), Robert Chung, dated May 15, 1997 (encouraging the 
SEC to study the feasibility of a decimal pricing system), Michael 
S. Gleeson, dated May 16, 1997 (recommending the use of decimals as 
a means to add further transparency and liquidity to the market), 
Hirokazu Iwasa, dated May 14, 1997 (encouraging Nasdaq to adopt 
decimals), Andrew Kashdan, undated (awaiting consideration of 
decimal quotes to further increase efficiency), Eben Light, undated 
(anticipating the NASD's study), Richard Marble, undated (supporting 
the idea of decimalization), Winston Meyer, dated March 11, 1997 
(stating that decimals should vastly improve the pricing mechanism), 
Paul Naden, dated April 24, 1997 (supporting decimalization of stock 
prices), Michael O'Buachalla, dated April [sic] 17, 1997 (same), M. 
Yousuf Paracha, dated May 13, 1997 (categorizing the proposal as an 
intermediate step towards trading in decimals), Shahriar Saadullah, 
dated May 13, 1997 (encouraging the NASD to pursue the idea of 
decimal pricing), Cary S. Segall, dated May 16, 1997 (categorizing 
the proposal as an intermediate step towards trading in decimals), 
Gil Shapiro, dated May 12, 1997 (same), Alexis Theofilactidis, dated 
May 12, 1997 (encouraging a further move to a decimal pricing 
system), Michael E. Tobin, undated (categorizing the proposal as the 
first step towards the ultimate goal of decimalization), Timothy 
Whelan, dated May 12, 1997 (encouraging the adoption of decimals).
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IV. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange and, in 
particular, with Sections 11A and 15A of the Act.\10\
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    \10\ 15 U.S.C. Secs. 78k-1, 78o-3
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    The Commission believes the quality of the market for the affected 
Nasdaq securities \11\ will likely be enhanced by allowing a minimum 
quotation increment of a sixteenth, rather than an eighth.\12\ 
Decreasing the minimum quotation increment should help to produce more 
accurate pricing of such securities and can result in tighter 
quotations. In addition, if the quoted markets are improved by reducing 
the minimum quotation increment, the change could result in added 
benefits to the market such as reduced transaction costs.\13\
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    \11\ Nasdaq noted in its proposal that, as of March 31, 1997, 
there were 2,714 Nasdaq securities (43.2% of all Nasdaq securities) 
priced equal to or greater than $10. These securities represent 90% 
of the capitalization of the Nasdaq market and 68.6% of the share 
volume in Nasdaq. Nasdaq also noted that 98.7% of all trades in 
Nasdaq securities priced equal to or greater than $10 occur in 
increments equal to or greater than a sixteenth and 98.5% of all 
share volume in such securities occurs in increments equal to or 
larger than sixteenth.
    \12\ A study that analyzed the reduction in the minimum tick 
size from \1/8\ to \1/16\ for securities listed on the American 
Stock Exchange priced between $1.00 and $5.00 found that, in 
general, the spreads for those securities decreased significantly 
while trading activity and market depth was relatively unaffected. 
See Hee-Joon Ahn, Charles Q. Chao, and Hyuk Choe, Tick Size, Spread, 
and Volume, 5 J. Fin Intermediation 2 (1996).
    \13\ The rule change is consistent with the recommendation of 
the Division of Market Regulation (``Division'') in its Market 2000 
Study, in which the Division noted that the \1/8\ minimum variation 
can cause artificially wide spreads and hinder quote competition by 
preventing offers to buy or sell at prices inside the prevailing 
quote. See SEC, Division of Market Regulation, Market 2000: An 
Examination of Current Equity Market Developments 18-19 (Jan. 1994).
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    Furthermore, this change in the minimum increment will compliment 
the Order Execution Rules.\14\ Currently, customer limit orders and 
orders entered into ECNs priced in sixteenths are rounded to the 
nearest eight for public display.\15\ The proposed change will allow 
such orders to be publicly displayed at their actual price, thus 
allowing a more complete display of the buying and selling interest in 
Nasdaq securities, giving these orders greater visibility, and 
facilitating quote competition. Moreover, the enhanced transparency 
will improve access to the best available prices.
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    \14\ See supra note 5.
    \15\ In particular, orders to buy (sell) are rounded down (up) 
to the nearest eight.
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\16\ that the proposed rule change (SR-NASD-97-27) is approved.

    \16\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\ 
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    \17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-14413 Filed 6-2-97; 8:45 am]
BILLING CODE 8010-01-M