[Federal Register Volume 64, Number 19 (Friday, January 29, 1999)]
[Notices]
[Pages 4729-4730]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-2104]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40968; File No. SR-NASD-98-98]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the National 
Association of Securities Dealers, Inc. Relating to the Pre-Trading 
Quotation Period for Initial Public Offerings

January 22, 1999.
    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 December 23, 1998, the National Association of Securities Dealers, 
Inc. (``NASD''), through its wholly-owned 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. The 
Commission is publishing this notice and order to solicit comments on 
the proposed rule change from interested persons and to grant 
accelerated approval of the proposed rule change.
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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

    The NASD, through its wholly-owned subsidiary Nasdaq, is proposing 
to revise its practices concerning market maker quotations in Nasdaq 
securities that are being quoted for the first time after an initial 
public offering (``IPO''). Under the proposal, the pre-opening period 
for the initial display of market maker quotes will be extended to 15 
minutes prior to the commencement of trading to permit the development 
of orderly quotations, with provision for a single additional fifteen 
minute extension of the pre-opening period of the market is locked or 
crossed at the conclusion of the first fifteen minute period.

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 III 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
    In 1994, Nasdaq established a five minute quotation-only time 
period for market makers to enter and adjust their first quotations for 
securities newly released for trading in its market.\3\ This period, 
similar to the daily pre-opening display of quotations allowed for 
Nasdaq securities already trading in the secondary market,\4\ was 
created to facilitate the opening of trading for IPOs and replaced the 
previous practice of only allowing immediate and simultaneous initial 
quotation and trading of Nasdaq IPO securities.
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    \3\ See Securities Exchange Act Release No. 34254 (June 24, 
1994), 59 FR 33808 (June 30, 1994). When an IPO is first authorized 
for inclusion in Nasdaq, the system displays the time of day when 
quoting in the issue may begin and the time of day when trading in 
that issue may begin. Specifically, when a new security is released 
for trading, the window for quotations has been set to allow market 
makers a period of five minutes to enter and adjust their quotations 
prior to the commencement of trading.
    \4\ Nasdaq has represented that its practices of providing a 
pre-trading, quotation-only period for IPO securities is related to 
Nasdaq Rule 4120, ``Trading Halts,'' and Nasdaq Rule 4613, 
``Character of Quotations.'' Nasdaq stated that this practice, like 
the objectives in Nasdaq Rule 4120, is designed to ensure that 
markets are not open for trading when unusual circumstances may 
prevent such markets from remaining fair and orderly. Nasdaq also 
stated that its current practice is similar to Nasdaq Rule 4613(c) 
and (e) in that market maker quotations are required to be 
reasonably related to the prevailing market, and market makers are 
prohibited from locking or crossing markets. Telephone conversation 
between Michael L. Loftus, Attorney, Division of Market Regulation, 
Commission; Robert E. Aber, Senior Vice President and General 
Counsel; and Thomas P. Moran, Senior Attorney, Office of General 
Counsel, Nasdaq (Jan. 22, 1999).
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    Recently, significant increased volatility has been observed in the 
opening of IPOs for secondary market trading on Nasdaq. This volatility 
appears to be the result of many converging factors, including the 
recent popularity of internet-related stocks, an increase in the influx 
of retail orders through on-line trading linkages, investor perceptions 
and expectations as well as other technological and economic factors. 
Nasdaq believes this excessive volatility has inhibited the smooth 
functioning of the Nasdaq market during the initial trading of these 
IPOs to the detriment of all market participants, including public 
investors.
    In response, Nasdaq proposes to extend the current five minute pre-
trading quotation period for all IPOs to fifteen minutes, with the 
potential for a single, further extension of an additional fifteen 
minute pre-trade quotation period if the issue is locked or crossed at 
the conclusion of the first fifteen minute period.\5\ Nasdaq believes 
that these extended time periods will allow the market participants to 
better digest and respond to market price indications before an IPO is 
released for trading and thus provide better information upon which to 
make trading decisions. Nasdaq also believes that its proposal provides 
a modicum of opportunity in volatile, fast-paced markets to review and 
react to dramatic market movements that may manifest themselves in 
pricing anomalies. While this proposal represents an initial response, 
Nasdaq notes that it will continue to monitor and review trading 
activity and market practices with a view towards developing additional 
proposals to further mitigate excessive volatility in all areas of 
Nasdaq trading.
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    \5\ Nasdaq's MarketWatch Department will determine whether an 
additional fifteen minute quotation-only period is necessary before 
trading in an IPO security may begin. The determination of 
MarketWatch will be based solely upon whether a market is locked or 
crossed to such an extent that releasing the IPO security for 
trading would be detrimental to the market or investors. Although 
MarketWatch will closely monitor pre-trading quotation activity 
during the entire fifteen minute period, the determination of 
MarketWatch will be predicated on the status of the market at the 
expiration of the initial fifteen minute period. Telephone 
conversation between Michael L. Loftus, Attorney, Division of Market 
Regulation, Commission; Robert E. Aber, Senior Vice President and 
General Counsel; and Thomas P. Moran, Senior Attorney, Office of 
General Counsel, Nasdaq (Jan. 22, 1999).
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2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Sections 15A(b)(6) and 15A(b)(11) \6\ of the Act in 
that the proposal is designed to facilitate transactions in securities 
as well as produce fair and informative quotations and prevent 
fictitious or misleading quotations.
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    \6\ 15 U.S.C. 78o-3(b)(6) and 78o-3(b)(11).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change 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 did not solicit or receive written comments with respect to 
the proposed rule change.

[[Page 4730]]

III. 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, N.W., Washington, D.C. 20549. 
Copies of the submissions, 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 persons, 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, 450 Fifth Street, N.W., 
Washington, D.C. 20549. 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-98-98 and should be 
submitted by February 19, 1999.

IV. Commission's Findings and Order Granting Accelerated Approval 
of Proposed Rule Change

    The Commission has carefully reviewed Nasdaq's proposed rule change 
and believes the proposal is consistent with the requirements of 
Section 15A(b) of the Act \7\ and the rules and regulations thereunder 
applicable to a national securities association. Specifically, the 
Commission believes the proposal is consistent with Sections 15A(b)(6) 
and 15A(b)(11) of the Act \8\ which require, among other things, that a 
national securities association's rules be designed to promote just and 
equitable principles of trade, remove impediments to and perfect the 
mechanism of a free and open market and a national market system, 
facilitate transactions in securities, produce fair and informative 
quotations, prevent fictitious or misleading quotations, and promote 
orderly procedures for collecting, distributing, and publishing 
quotations.\9\
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    \7\ 15 U.S.C. 78o-3(b).
    \8\ 15 U.S.C. 78o-3(b)(6) and 78o-3(b)(11).
    \9\ In approving this proposed rule change, the Commission has 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
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    Under current Nasdaq practice, market makers are permitted to enter 
and adjust their first quotations for IPO securities during a pre-
trading, quotation-only time period that lasts five minutes. Nasdaq 
created this quotation-only time period to facilitate the opening of 
trading for IPOs. Previously, when an IPO was authorized for trading on 
Nasdaq, market makers were permitted to immediately and simultaneously 
enter quotations and trade on the subject security.\10\
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    \10\See Securities Exchange Act Release No. 34254 (June 24, 
1994), 59 FR 33808 (June 30, 1994).
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    The Commission recognizes that it may be difficult at times to 
accurately gauge interest in an IPO, and that as a result, the opening 
of secondary market trading for Nasdaq IPO securities may be subject to 
increased volatility. As Nasdaq notes, such excessive volatility could 
impede the smooth functioning of the Nasdaq market during the initial 
trading of IPOs to the detriment of all market participants, including 
public investors.
    The Nasdaq proposal was designed to address the increased 
volatility associated with the opening of IPOs for secondary market 
trading on Nasdaq. The proposal would extend the current five minute 
pre-trading quotation period for all IPOs to fifteen minutes, and 
provide the potential for an additional fifteen minute pre-trade 
quotation period if an IPO issue was locked or crossed at the 
conclusion of the first fifteen minute period. The Commission believes 
that this additional time should assist market participants in gauging 
the likely interest in an IPO and adjusting their quotes accordingly.
    Pursuant to Section 19(b)(2) of the Act,\11\ the Commission finds 
good cause for approving the proposed rule change prior to the 
thirtieth day after the date of publication of notice of filing in the 
Federal Register. The Commission recognizes that increased investor 
demand for the securities of high-technology companies, especially 
those offered through IPOs, may be contributing to greater volatility 
of Nasdaq securities. The Commission believes it is important that 
before trading in an IPO security commences, Nasdaq market makers be 
provided sufficient time to determine an appropriate opening price that 
accurately reflects market interest in the IPO security. Setting a more 
accurate opening price for an IPO could help to reduce volatility in 
those securities as trading begins.
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    \11\ 15 U.S.C. 78s(b)(2).
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    The Commission further believes that the availability of an 
additional fifteen minute quotation-only time period is an appropriate 
response to those instances where the market may be locked or crossed 
at the conclusion of the first fifteen minute period. Finally, the 
Commission notes that the proposal to extend the pre-trading quotation 
period represents one element of Nasdaq's response to excessive 
volatility, and encourages Nasdaq to continue to develop additional 
proposals as part of its ongoing review of trading activity and Nasdaq 
market practices.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\12\ that the proposed rule change, SR-NASD-98-98, is hereby 
approved on an accelerated basis.

    \12\ Id.
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-2104 Filed 1-28-99; 8:45 am]
BILLING CODE 8010-01-M