[Federal Register Volume 66, Number 25 (Tuesday, February 6, 2001)]
[Notices]
[Pages 9115-9117]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-3043]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43906; File No. SR-NASD-01-10]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Relating 
to Implementation of Decimal Pricing in the Nasdaq Market

January 30, 2001.
    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 January 29, 2001, 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. 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.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Nasdaq proposes to adopt a mandatory conversion rule for the open 
fractional orders of Nasdaq securities commencing quotation and trading 
in decimals pursuant to the Decimals Implementation Plan For the 
Equities and Options Markets (``Implementation Plan'' or ``Plan''), 
which was submitted on July 24, 2000, to the Commission. Under the 
proposal, Nasdaq would mandate that all open orders priced in fractions 
in NASD member firms' systems on the evening before that security is to 
commence quoting in decimals be converted to appropriately rounded 
decimal values of no more than two places beyond the decimal point (to 
the penny). An NASD member firm would be free to accept, and retain in 
its internal systems, decimal based orders in those securities of any 
number of values beyond the decimal point that the firm chooses.\3\ 
Nasdaq proposes to implement the conversion rule change commencing 
March 12, 2001, and thereafter, on each Nasdaq security as it converts 
from fractional to decimal pricing pursuant to the Plan. The text of 
the proposed rule change is below. Proposed new language is in italics.
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    \3\ Nasdaq notes that its systems will only accept and display 
quotations to two places beyond the decimal point (to the penny). 
Quotations submitted to Nasdaq that are not rounded to the penny 
will be rejected by Nasdaq systems. Similarly, Nasdaq's Automated 
Confirmation Transaction Service (``ACT'') will accept prices in 
trade reports only to six places beyond the decimal point and 
Nasdaq's Trade Dissemination Service (``NTDS'') will disseminate 
transaction information only to four places beyond the decimal 
point.
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* * * * *
3220. Adjustment of Open Orders
    (a) No Change.
    (1)-(3) No Change.
    (b) No Change.
    (c) No Change.
    (d) No Change.
    (e) No Change.
    (1)-(6) No Change.
    (f) Mandatory Open Order Conversion for Securities Commencing 
Decimal Pricing All open orders in Nasdaq securities priced in 
fractions remaining in a firm's internal system on the evening prior 
to, or received thereafter and prior to, the security's commencing 
decimal pricing pursuant to the Decimals Implementation Plan for the 
Equities and Options Markets shall be converted, no later than midnight 
on that evening prior to their first day of decimal pricing, as 
follows:
    (1) Prior to the conversion, member firms should notify their 
customers and inform them of the change to their open fractional 
order(s) as a result of the conversion to decimal pricing. Customers 
should be afforded the opportunity to take action if they do not wish 
to participate in the conversion. Customers not wishing to participate 
in the mandatory conversion should be allowed the opportunity to cancel 
their open order(s) prior to the evening of the conversion.
    (2) No later than midnight on the evening prior to a security's 
first day of decimal pricing, all open orders priced in fractions that 
have not been canceled, including those with price qualifiers such as 
DNR and DNI, shall be converted as follows:
     The fractional price of all open Buy Orders (GTC, GTX, Buy 
Stop and Buy Stop Limits) will be converted to their decimal equivalent 
and then ``rounded down'' to the nearest $0.01.
     The fractional price of all open Sell Orders (GTC, GTX, 
Sell Stop and Sell Stop Limits) will be converted to their decimal 
equivalent and then ``rounded up'' to the nearest $0.01.

Example:
    Buy 1000 MSFT 88\1/16\ would convert to B 1000 MSFT 88.06 (\1/16\ = 
0.0625)

    Sell 1000 MSFT 88\1/16\ would convert to S 1000 MSFT 88.07
    This rule is to be in effect only in preparation for the first day 
of decimal trading of the newly-converted security. After conversion, 
firms may accept orders of any number of spaces beyond the decimal 
point in the newly-converted security and submit them, after 
appropriate rounding (See NASD Rule 4613(a)(1)(D)), to Nasdaq for 
display.
* * * * *

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.

[[Page 9116]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    On June 8, 2000, the Commission ordered the exchanges and the NASD 
to submit a decimal pricing phase-in plan no later than July 24, 2000. 
Under the Plan, the NASD is to fully convert the Nasdaq market to 
decimal pricing no later than April 9, 2001. Before full 
implementation, Nasdaq is also to commence a decimal pricing pilot 
program for 10-15 Nasdaq issues on or before March 12, 2001. Recently, 
Nasdaq also determined to add a second decimal phase-in of 
approximately 100+ additional Nasdaq securities on March 26, 2001.
    In February 2000, Nasdaq, as part of its preparations for decimal 
pricing, issued guidelines to all member firms on the conversion of 
open orders. In short, the conversion guidelines directed firms to 
convert, on the evening before the first day a Nasdaq security is 
scheduled to commence quoting in decimals, all open orders priced in 
fractions for that security in their systems by converting them to 
their decimal equivalent and then rounding them (down for buys/up for 
sells) to the minimum quote increment ($0.01). This would have resulted 
in all such open fractional orders being converted to two values beyond 
the decimal point.
    To reduce potential confusion on the crucial first day of a 
security's transition to decimal pricing that could result from 
inconsistent conversion standards, Nasdaq proposes to adopt a mandatory 
conversion rule for all open orders in Nasdaq securities that are 
priced in fractions and reside in the internal systems of NASD member 
firms on the evening prior to the first day a particular security 
commences quoting in decimals. Under the proposal, all open orders, 
including those with price qualifiers such as ``Do Not Reduce'' 
(``DNR'') and ``Do Not Increase'' (``DNI''), priced in fractions that 
reside in a firm's internal system on the evening before the start of 
decimal pricing, will be converted as follows: (1) The price of all 
open Buy Orders (including ``Good-til-Canceled'' (``GTC''), ``Good-til-
Executed'' and (``GTX''), Buy Stop and Buy Stop Limits) priced in 
fractions will be converted to their decimal equivalent and ``rounded 
down'' to the nearest $0.01; and (2) the price of all open Sell Orders 
(GTC, GTX, Sell Stop and Sell Stop Limits) priced in fractions will be 
converted to their decimal equivalent and ``rounded up'' to the nearest 
$0.01. An example of a sample fractional buy and sample fractional sell 
conversation is provided below:

Example:
    Buy 1000 MSFT 88\1/16\ would covert to B 1000 MSFT 88.06 (\1/16\ = 
0.0625)
    Sell 1000 MSFT 88\1/16\ would convert to S 1000 MSFT 88.07

    After the conversion, market participants would be free to accept 
decimal-priced orders for any number of values beyond the decimal point 
as they deem appropriate. Nasdaq will continue to require that firms 
round orders to two decimal places before submitting them to Nasdaq for 
display in the quote montage. Likewise, ACT will only accept trade 
reports up to six places beyond the decimal point and disseminate 
decimal priced transaction reports to four decimal points to the tape.
    Nasdaq believes that a uniform open fractional order conversion 
methodology, one that will be followed by all industry participants, is 
necessary to ensure a smooth and orderly transition from fractional to 
decimal pricing. Such uniformity is particularly important for the 
first day of decimal trading in a security and for orders that may 
reside in multiple systems. Nasdaq believes a single fractional open 
order conversion standard can be expected to reduce investor confusion, 
prevent discrepancies in reconciliation, and reduce the potential that 
customers may be disadvantaged by inferior executions.
    A conversion of open orders to two places beyond the decimal point 
also is consistent with Nasdaq's quotation and execution facilities 
that likewise will provide quotes and executions in pennies. Moreover, 
such a conversion approach should also be readily understood by 
investors as well as firms that have already programmed for, and 
participated in, a two-point conversion of open fractional orders in 
the listed environment. Finally, the two-point conversion standard is 
structured to be applicable to all firms, including those that intend 
to maintain limit orders files to two places beyond the decimal point 
on an ongoing basis, as well as those that intend to operate systems 
allowing quotes beyond two decimal places.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A(b)(6) of the Act \4\ in that it is 
designed to promote just and equitable principles of trade, and to 
remove impediments to and perfect the mechanism of a national market 
system.
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    \4\ 15 U.S.C. 78o-3(b)(6).
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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

    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.
    Nasdaq has requested accelerated approval of the proposed rule 
change. While the Commission will not grant accelerated approval at 
this time, the Commission will consider granting accelerated approval 
of the proposal at the close of an abbreviated comment period of 15 
days from the date of publication of the proposal in the Federal 
Register.

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

[[Page 9117]]

the Commission's Public Reference Room. Copies of such filing will also 
be available for inspection and copying at the principal office of the 
Association. All submissions should refer to file number SR-NASD-01-10 
and should be submitted by February 21, 2001.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-3043 Filed 2-5-01; 8:45 am]
BILLING CODE 8010-01-M