[Federal Register Volume 65, Number 111 (Thursday, June 8, 2000)]
[Notices]
[Pages 36482-36484]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-14407]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42869; File No. SR-NASD-00-28]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc. Relating to Trade-Reporting of Average-Price 
Trades in Nasdaq-Listed Securities

May 31, 2000.
    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 17, 2000, the National Association of Securities Dealers, Inc. 
(``NASD'' or ``Association''), 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, II, and III below, which Items have been prepared 
by Nasdaq. On May 17, 2000, Nasdaq submitted Amendment No. 1 to the 
proposed rule change.\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\ Nasdaq originally filed the proposal of May 11, 2000, 
pursuant to Section 19(b)(2) of the Act. 15 U.S.C. 78s(b)(2). On May 
17, 2000, Nasdaq submitted a letter from Robert E. Aber, Senior Vice 
President and General Counsel, Nasdaq, to Alton Harvey, Division of 
Market Regulation, Commission, amending the proposal (``Amendment 
No. 1''). In Amendment No. 1, Nasdaq requested that the Commission 
consider the proposal under Section 19(b)(3)(A) of the Act. 15 
U.S.C. 78s(b)(3)(A). Because Nasdaq amended the proposal to file it 
under Section 19(b)(3)(A) of the Act, the Commission considers the 
proposal re-filed as of the date of the amendment. Therefore, the 
date of the amendment is deemed the date of the filing of the 
proposal.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Nasdaq proposes to require all transaction in Nasdaq-listed 
securities that are done on a weighted average basis or effected based 
on other special-pricing formulae, to be reported with a special .W 
indicator. Proposed deletions are in brackets.
* * * * *

Rule 4632. Transaction Reporting

    (a)(1)-(5) No Change.
    (6) All members shall report [agency cross] transactions 
occurring at prices based on average-weighting or other special-
pricing formulae to Nasdaq using a special indicator, as designated 
by the Association and set out in the Symbol Directory.

[[Page 36483]]

    (7)-(8) No Change.
    (b)-(f) No Change.

Rule 4642. Transaction Reporting

    (a)(1)-(5) No Change.
    (6) All members shall report [agency cross] transactions 
occurring at prices based on average-weighting or other special-
pricing formulae to Nasdaq using a special indicator, as designated 
by the Association and set out in the Symbol Directory.
    (7)-(8) No Change.
    (b)-(f) 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

1. Purpose
    Recently, the NASD filed SR-NASD-00-21 with the Commission to amend 
Rule 6420, Transaction Reporting, to require all transactions in 
exchange-listed securities that are executed in the over-the-counter 
market (i.e., in the ``Third Market'') and that are executed on a 
weighted average or other special-pricing basis to be reported with a 
.W indicator.\4\ The purpose of SR-NASD-00-21 is to increase pricing 
transparency and eliminate investor confusion that could occur if 
investors see prints go across the tape that are unrelated to the 
current market. Faced with similar concerns for Nasdaq-listed 
securities, Nasdaq proposes in this filing to amend NASD Rules 4632 and 
4642, to require all transactions (not just agency crosses) in Nasdaq-
listed securities that are executed on a weighted-average or other 
special-pricing formulae basis to be reported with a .W trade modifier.
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    \4\ See SR-NASD-00-21.
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    By way of background, prior to proposing the amendments to NASD 
Rule 6420 for the listed environment, the NASD learned that a sizable 
number of trades in exchange-listed securities effected in the Third 
Market after hours are volume-weighted/special-pricing formula 
transactions, which are effected on a principal or riskless principal 
basis. These volume-weighted/special-pricing formula trades are often 
effected at a price unrelated to the close--or if effected during the 
trading day, the last sale--on the primary exchange. These trades are 
then reported to the NASD and the consolidated tape without a special 
modifier to denote they are being effected at a price unrelated to the 
last sale on the primary exchange. Because these trades are not 
effected as agency crosses and thus not subject to the .W reporting 
requirement in NASD Rule 6420(a)(6), they are reported to the NASD and 
the consolidated tape without a modifier. Consequently, these weighted 
average/special-pricing formula trades affect the reporting to the 
media and vendors of the last sale in the exchange-listed security. The 
reporting of trades on a weighted average/special-pricing formulae 
basis without a modifier creates investor confusion regarding the last 
sale price. Moreover, there exists the potential for disorderly markets 
when a security opens the next day on the primary exchange at a price 
that, although related to the last sale on the primary exchange, is 
unrelated to the last reported price that was effected on a weighted 
average basis on the previous day prior to 6:30 p.m. Eastern Time.\5\ 
In response to these concerns, the NASD recently proposed to amend NASD 
Rule 6420 to require a .W trade modifier for all weighted average price 
trades, not just those effected on an agency-cross basis. This proposal 
(SR-NASD-00-21) currently is pending before the Commission.
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    \5\ All times mentioned in this proposal are Eastern Standard 
times.
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    Nasdaq believes that many of the same concerns associated with last 
sale reporting of weighted average or special-priced formula trades 
that exist for listed securities also exist for Nasdaq securities. In 
an effort to reduce investor confusion by increasing pricing 
transparency for last sale data, Nasdaq proposes to amend NASD Rules 
4632 and 4642 to require the .W modifier for all weighted average and 
special-pricing formula trades that occur in Nasdaq-listed securities.
    Specifically, NASD Rules 4632(a)(6) and 4642(a)(6) require members 
to append a .W to a trade report when effecting transactions occurring 
at prices based on average-weighting or other special-pricing formulae 
in the security. When adopted, the scope of Rules 4632(a)(6) and 
4642(a)(6) was limited to agency cross trades effected on a weighted 
average or other special-pricing formulae basis because a majority of 
the trades, at the time, were being effected on an agency-cross basis. 
Since 1992, the market has changed in many ways. In particular, Nasdaq 
recently amended a number of its rules to allow certain systems, 
including the Automated Confirmation and Transaction System (``ACT''), 
to stay open until 6:30 p.m. to facilitate the reporting of trades 
executed after-hours. \6\ As part of this initiative, Nasdaq amended 
Rules 4632 and 4642 to require members to report within 90 seconds 
transactions effected between 9:30 a.m. and 6:30 p.m. Prior to this 
change, the 90 second trade-reporting requirement applied to 
transactions effected between 9:30 a.m. and 5:15 p.m. and transaction 
effected between 5:15 and 6:30 p.m. were not subject to 90 second trade 
reporting requirements. Rather, such transactions were reported the 
next day (i.e., T+1) on an ``as of'' basis.
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    \6\ See Securities Exchange Act Release No. 42003 (October 13, 
1999), 64 FR 56554 (October 20, 1999) (order approving File No. SR-
NASD-99-57 on a pilot basis).
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    One effect of the after-hours rule changes has been to subject 
transactions that previously were reported on an ``as of'' basis, T+1--
because they were effected between 5:15 p.m. and 6:30--to 90 second 
trade reporting requirements. Similar to the listed environment, Nasdaq 
recently has learned that a sizable number of trades effected during 
the 5:15 p.m. and 6:30 p.m. time period are volume-weighted or special-
pricing formula transactions, which are effected on a principal or 
riskless principal basis. These trades are often effected at a price 
unrelated to the close or if effected during the trading day, the last 
sale on Nasdaq. Because these trades are not executed as agency 
crosses, they are not subject to the .W reporting requirements in Rules 
4632(a)(6) and 4642(a)(6). Thus, these trades are reported to the tape 
without a modifier. Nasdaq believes that there is the potential for 
investor confusion because these trades are often effected at a price 
unrelated to the current market, yet investors have no way of knowing 
this from the media report. Thus, investors may believe that the trade 
they are seeing represents the current market, when in actuality, the 
trade represents a price determined by a special formula. As a short-
term method of alleviating confusion before this rule change could be 
proposed, the Nasdaq requested that NASD members report these weighted 
average trades effected between 4:00 and 6:30 p.m., on an ``as of'' 
basis, T+1.
    In light of the foregoing efforts, the Nasdaq proposes to amend 
NASD Rules 4632 and 4642 to require all

[[Page 36484]]

transactions, not just agency crosses, in Nasdaq-listed securities that 
are based on a weighted average or other special-pricing formulae, to 
be reported with the .W modifer.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
Section 15A(b)(6) \7\ of the Act. Among other things, Section 15A(b)(6) 
requires that the rules of a national securities association be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles 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. In addition, the 
Nasdaq believes that the proposed rule change furthers the objective 
set forth in Section 11A(a)(1)(C)(iii) \8\ of the Act by ensuring the 
availability to brokers, dealers and investors of information with 
respect to quotations for and transactions in securities. Nasdaq 
believes that reporting transactions in exchange-listed securities that 
are marked with a special indicator to identify their unique pricing 
formulae is appropriate for regulatory purposes and reduces investor 
confusion with regard to these transactions.
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    \7\ 15 U.S.C. 78o-3(b)(6).
    \8\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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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

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Because the foregoing proposed rule change: (1) Does not 
significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) does not become operative for 30 days from May 17, 2000, the 
date on which it was filed and, since the Exchange provided the 
Commission with written notice of its intent to file the proposed rule 
change at least five business days prior to the filing date,\9\ the 
proposed rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \10\ and subparagraph (f)(6) of Rule 19b-4 
thereunder.\11\
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    \9\ The Commission notes that Nasdaq gave the Commission notice 
of its intent to file the proposed rule change through its original 
filing of the proposal pursuant to Section 19(b)(2) of the Act on 
May 11, 2000.
    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
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-00-28 and should be 
submitted by June 29, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-14407 Filed 6-7-00; 8:45 am]
BILLING CODE 8010-01-M