[Federal Register Volume 64, Number 111 (Thursday, June 10, 1999)]
[Notices]
[Pages 31335-31338]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-14681]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41473; File No. SR-NASD-99-23]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 to the Proposed Rule Change by the National 
Association of Securities Dealers, Inc. Relating to Locked and Crossed 
Markets that Occur at or Prior to the Market's Open

June 2, 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 May 3, 1999, the National Association of Securities Dealers, Inc. 
(``NASD'' or ``Association''), through its wholly owned subsidiary, 
Nasdaq Stock Market, Inc. (``Nasdaq''), filed with the Securities and 
Exchange Commission (``Commission'' or ``SEC'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by the NASD.\3\ The Commission is publishing this notice 
to solicit 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.
    \3\ On May 14, 1999, Nasdaq amended its proposal to require a 
market participants that sends a Trade-or-Move Message (as defined 
below) to place a modifier on the message indicating the message is 
a Trade-or-Move Message. See letter from Robert E. Aber, Senior Vice 
President and General Counsel, Nasdaq, to Richard Strasser, 
Assistant Director, Division of Market Regulation, Commission, date 
May 14, 1999 (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Nasdaq is proposing to amend the portion of NASD Rule 4613(e) 
regarding locked and crossed market conditions \4\ that occur prior to 
the market's opening. Below is the text of the proposed rule change. 
Proposed new language is in italics; proposed deletions are in 
brackets.
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    \4\ A locked market occurs when the quoted bid price is the same 
as the quoted ask price. A crossed market occurs when the quoted bid 
price is greater than the quoted ask price.
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    4613. Character of Quotations.
    (a)-(d) No changes.
    (e) Locked and Crossed Markets.
    (1) A market shall not, except under extraordinary circumstances, 
enter or maintain quotations in Nasdaq during normal business hours if:
    (A) the bid quotation entered is equal to (``lock'') or greater 
than (``cross'') the asked quotation of another market maker entering 
quotations in the same security; or
    (B) the asked quotation is equal to (``lock'') or less than 
(``cross'') the bid quotation of another market maker entering 
quotations in the same security.
    [The prohibitions of this rule include the entry of a locking or 
crossing quotation at or after 9:25:00 a.m. Eastern Time if such 
quotation continues to lock or cross the market at the market's 
opening, and requires a market maker or ECN that enters a locking or 
crossing quotation at or after 9:25:00 a.m. Eastern Time to take action 
to avoid the lock or cross at the market's open or immediately 
thereafter, but in no case more than 30 seconds after 9:30:00 a.m.]
    (C) Obligations Regarding Locked/Crossed Market Conditions Prior to 
Market Opening.
    (i) Locked/Crossed Market Prior to 9:20 a.m.--For locks/crosses 
that occur prior to 9:20 a.m. Eastern Time, a market maker that is a 
party to a lock/cross because the market maker either has entered a bid 
(ask) quotation that locks/crosses another market maker's quotation(s) 
or has had its quotation(s) locked/crossed by another market maker 
(``party to a lock/cross'') may, beginning at 9:20 a.m. Eastern Time, 
send through Nasdaq's SelectNet system (or its successor system) a 
message of any size that it at the receiving market maker's quoted 
price (``Trade-or-Move Message''). Any market maker that receives a 
Trade-or-Move Message at or after 9:20 a.m. Eastern Time, and that is a 
party to a lock/cross, must within 30 seconds of receiving such message 
either: fill the incoming Trade-or-Move Message for the full size of 
the message; or move its bid down (offer up) by a quotation increment 
that unlocks/uncrosses the market.
    (ii) Locked/Crossed Market Between 9:20 and 9:29:59 a.m.--If a 
market maker locks or crosses the market between 9:20 and 9:29:59 a.m. 
Eastern Time, the market maker must immediately send through SelectNet 
to the market maker whose quotes it is locking or crossing a Trade-or-
Move Message that is at the receiving market maker's quoted price and 
that is for at least 5,000 shares (in instances where there are 
multiple market makers to lock/cross, the locking/crossing market maker 
must send a message to each party to the lock/cross and the aggregate

[[Page 31336]]

size of all such messages must be at least 5,000 shares). A market 
maker that receives a Trade-or-Move Message during this period and that 
is party to a lock/cross, must within 30 seconds of receiving such 
message either: fill the incoming Trade-or-Move Message for the full 
size of the message; or move its bid down (offer up) by a quotation 
increment that unlocks/uncrosses the market.
    (iii) A market maker that sends a Trade-or-Move Message pursuant to 
subparagraphs (e)(1)(C)(i) or (e)(1)(C)(ii) of this rule must append to 
the message a Nasdaq-provided symbol indicating that it is a Trade-or-
Move Message.
    (2)-(3) 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

    Nasdaq is proposing amendments to NASD Rule 4613(e) that would 
alter the obligations regarding locked and crossed markets that occur 
prior to the market's open.
Background
    Nasdaq has observed a number of locked/crossed markets on the open. 
This often occurs because a member will enter a quote prior to the open 
that will lock/cross the market on the open. Nasdaq's current role 
regarding locked/crossed markets has alleviated some, but not all, of 
the locked/crossed market situations. Specifically, current NASD Rule 
4613(e) provides that if a market participant enters a quote at or 
after 9:25 a.m. that would lock/cross the market on the open, the 
locking/crossing market participant must take action when the market 
opens, but in no case later than 9:30:30 a.m., to unlock/uncross the 
market by (for example) sending a SelectNet message to the market 
participant(s) it is locking/crossing. Under the current rule, however, 
locks/crosses still occur at the open because the passively locked/
crossed market participant may not respond immediately to the incoming 
SelectNet message. To address ongoing concerns with locked and crossed 
markets, Nasdaq is proposing the following amendments to NASD Rule 
4613(e).
    Generally, the proposed amendments provide that if a market 
participant is a party to a locked/crossed market prior to the open, 
beginning at 9:20 a.m. the market participant has the right to send the 
other parties to the lock/cross a SelectNet message (``Trade-or-Move 
Message''), to which the receiving market participant(s) must respond 
in one of two ways. Specifically, the receiving market participant(s) 
must respond to the Trade-or-Move Message within 30 seconds by either: 
(1) Trading with the message for the full size of the message; or (2) 
moving its quotation to a price level that unlocks or uncrosses the 
market. Thus, the receiving market participant has the choice of either 
trading in full or moving its quote out of the way.\5\ Under the 
proposal, a market participant's obligations would vary slightly 
depending on whether the lock/cross occurs prior to or after 9:20 a.m., 
as specified below.
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    \5\ As discussed more fully below, the receiving market 
participant also may trade with a portion of the incoming Trade-or-
Move Message, and move its quote. A market participant that trades 
in full with the incoming Trade-or-Move Message is not required to 
move its quote.
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Locks/Crosses Occurring At or After 9:20 and Before 9:30 a.m.
    If a market participant locks/crosses the market between 9:20 a.m. 
and 9:29:59 a.m. Eastern Time, the market participant would be required 
to send--prior to or immediately after entering a locking/crossing 
quotation--a Trade-or-Move message(s) that was for at least an 
aggregate size of 5,000 shares to the party or parties that he or she 
is locking/crossing. (If there are multiple market participants being 
locked/crossed, the proposed rule will require the ``initiating'' or 
``active'' locker to send Trade-or-Move Messages--whose aggregate size 
was at least 5,000 shares--to all parties to the lock/cross.)\6\ The 
receiving market participant will then be required to trade in full 
with the incoming message within 30 seconds or move its quote out of 
the way within 30 seconds.\7\ Prior to sending a Trade-or-Move Message, 
a market participant must append to the SelectNet message a symbol 
indicating that such message has been designated as ``Trade-or-Move.'' 
Nasdaq is requiring market participants to append such a symbol so that 
the receiving market participant knows that it owes some obligation to 
the incoming message.\8\ Of course, a market participant could accept a 
portion of the incoming Trade-or-Move Message, but would be required to 
move its quote within the 30 second time period.
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    \6\ Thus, a market participant would be prohibited from locking/
crossing the market in the 10-minute period prior to the open unless 
the actively locking/crossing market participant is willing to trade 
at least 5,000 shares.
    \7\ Nasdaq states that because the proposed rule will apply to 
quotations entered prior to the market's open, the market 
participant receiving a Trade-or-Move Message prior to the open 
would have no liability under NASD Rule 4613(b) (``NASD's Firm Quote 
Rule''). In addition, Nasdaq believes that a market maker receiving 
a Trade-or-Move Message prior to the open would owe no liability to 
the message under SEC Rule 11Ac1-1 (``SEC Firm Quote Rule''). Thus, 
a market maker would be permitted to move its quote without trading 
upon the receipt of what, during market hours, would be a SelectNet 
``liability'' order.
    \8\ See Amendment No. 1, supra note 3. Specifically, Nasdaq 
plans to change its system so that a Trade-or-Move SelectNet message 
may be encoded with the following message: ``trad or mov.'' This 
change will allow market participants to distinguish a Trade-or-Move 
Message (to which the recipient has an obligation to respond under 
the proposed rule) from other pre-opening messages that a market 
participant may receive.
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    In addition, if the receiving market participant trades in full 
with the message (i.e., up to the full amount of the incoming Trade-or-
Move-Message), the market participant may maintain its locked/crossed 
quotes and not move if it wishes to trade more shares. Thereafter, any 
party to the lock/cross would have the right, but not the obligation, 
to send a Trade-or-Move Message to any other party to the lock/cross, 
and any party to the lock/cross that receives a Trade-or-Move Message 
would then have the obligation to trade or move within 30 seconds.
Locks/Crosses Prior to 9:20 a.m.
    For locks/crosses that occur prior to 9:20 a.m. Eastern Time, any 
party to a lock/cross would have the right but not the obligation 
beginning at 9:20 a.m., to send a Trade-or-Move Message of any size to 
any party to the lock/cross. Similar to the above, any party to the 
lock/cross that receives a Trade-or-Move Message would have the 
obligation, beginning at 9:20 a.m., to trade or move within 30 seconds. 
Unlike locks/crosses that occur at or after 9:20 a.m., there is no 
requirement that the ``actively'' locking/crossing market participant 
send a specific number of shares to the parties to the lock/cross. The 
rationale for this distinction is that it is often difficult to 
determine which party actively locked/crossed the market in the period 
prior to 9:20 a.m. because market participants often do not actively

[[Page 31337]]

monitor their quotes prior to that time. This is also the reason why, 
under the proposed rule, the obligations and rights of the parties to 
the lock/cross do not start until 9:20 a.m.
    Nasdaq believes that the 9:20 a.m. benchmark establishes a 
reasonable point in time for when market participants should be 
actively monitoring their quotes, responding to incoming Trade-or-Move 
Messages, and monitoring prospectively for whether they are the 
actively locking/crossing market participants in the market and thus 
required to send out a Trade-or-Move Message for at least an aggregate 
of 5,000 shares, It is Nasdaq's view that if a party receives a Trade-
or-Move Message at or after 9:20 a.m. and stays at its quote without 
trading at all or trading in full, this generally would be considered a 
violation of the locked/crossed market rule, as amended by this 
proposal, and would not be considered a violation of NASD's Firm Quote 
Rule.\9\
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    \9\ If a market maker receives a Trade-or-Move Message within 
the last 30 seconds before the opening (i.e., at or after 9:29:30 
a.m.), the market maker still has the obligation to trade or move 
within 30 seconds, even if the end of that 30 seconds occurs after 
the market's open. Unlike today, a market that actively locked the 
market prior to the open would not be required to resend to the 
parties to the lock/cross a SelectNet message at or after (9:30:00 
a.m., in an attempt to unlock/uncross the market on the open.
    However, a market maker that wishes to enter a locking/crossing 
quote at or after 9:30:00 a.m. would be required to use reasonable 
means to avoid locking/crossing the market by, for example, sending 
a SelectNet message to the party (or parties) it will lock/cross. 
See NASD Notice to Members 97-49.
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    The following are examples of how the proposed rule would work.
    At 9:21 a.m., MMA locks four market participants--MMB, MMC, MMD and 
MME--each quoting 1,000 shares. Since the lock has occurred after 9:20 
a.m., MMA is required to send a Trade-or-Move Message for at least 
5,000 shares to each of these four market makers. Accordingly, MMA 
sends a Trade-or-Move Message for 1,100 shares to MMB, who declines and 
moves. MMC receives a 1,500 share order, fills it partially (1,000 
shares), and, as required, moves its quote out of the way. MMD receives 
a message for 400 shares, fills the message in full, and then moves 
down \1/8\ to unlock the market.\10\ MME receives a 2,000 share 
message, and fills it completely; MME is permitted to remain at her 
quote, but is not required to do so. MME also may send a Trade-or-Move 
Message to MMA, who must trade or move, or MMA may send another Trade-
or-Move Message to MME, who then would have to trade or move.
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    \10\ Because MMD has filled the message in full, he is not 
required to move his quote.
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    As a second example, assume that at 9:18 a.m., MMW and MMX are 
bidding 74, and MMY and MMX enter offer prices of 73, thus crossing the 
market. Since it is before 9:20 a.m., no Trade-or-Move Messages may be 
sent yet. At 9:20 a.m., all four market participants would have the 
right to send Trade-or-Move Messages of any size to either of the two 
market participants crossing them. Any party not filling such an order 
in full within 30 seconds would have to move its quote out of the 
cross.
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A(b)(6) \11\ and Section 11A \12\ of the 
Act. Section 15A(b)(6) requires that the rules of a registered national 
securities association are designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principals 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. An association's rules may 
not be designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers. Section 11A(a)(1)(C) provides that it is 
in the public interest and appropriate for the protection of investors 
and the maintenance of fair and orderly markets to assure: (1) 
Economically efficient execution of securities transactions; (2) fair 
competition among brokers and dealers; (3) the availability to brokers, 
dealers and investors of information with respect to quotations and 
transactions in securities; (4) the practicability of brokers executing 
investors' orders in the best market; and (5) an opportunity for 
investors' orders to be executed without the participation of a dealer.
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    \11\ 15 U.S.C. 78o-3(b)(6).
    \12\ 15 U.S.C. 78k-1.
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    Nasdaq believes that the proposed amendments to NASD rule 4613(e) 
are consistent with sections 15A(b)(6) and 11A(a)(1)(C) of the Act. By 
attempting to resolve locks and crosses on the market's opening, the 
proposed amendments foster cooperation and coordination with members. 
In addition, Nasdaq believes that the proposal also will ensure the 
fair and orderly operation of Nasdaq and the protection of investors, 
as its purpose is to limit disruptions to the Nasdaq market and the 
potential for harm to investors.

B. Self-Regulation 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-Regulation 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

    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 longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange 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 number SR-NASD-99-23 and 
should be submitted by July 1, 1999.


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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. 99-14681 Filed 6-9-99; 8:45 am]
BILLING CODE 8010-01-M