[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.
[[Page 31338]]
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