[Federal Register Volume 67, Number 101 (Friday, May 24, 2002)]
[Notices]
[Pages 36659-36661]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-13101]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45965; File No. SR-NASD-2002-56]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the National Association of 
Securities Dealers, Inc. Establishing a Uniform Process for Opening 
Daily Trading in Nasdaq's Upcoming SuperMontage System

May 20, 2002.
    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 April 22, 2002, the National Association of Securities Dealers, Inc. 
(``NASD'' or ``Association''), through its subsidiary, the Nasdaq Stock 
Market, Inc. (``Nasdaq''), filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by Nasdaq. On May 17, 2002, Nasdaq filed Amendment No. 1 to the 
proposed rule change.\3\ The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, from 
interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ This notice, representing Amendment No 1, replaces the 
original Rule 19b-4 filing in its entirety.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NASD, through Nasdaq, proposes to establish a uniform process 
for opening daily trading in Nasdaq's future Order Display and 
Collector Facility (``SuperMontage'').
    The text of the proposed rule change, as amended, is available at 
the Office of the Secretary, Nasdaq and at the Commission.

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 36660]]

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

1. Purpose
    As part of its ongoing preparation for the launch of SuperMontage, 
Nasdaq is engaging in a continuing review of the system's functionality 
and rules with a view to constant improvement. As a result of this 
review, and in consultation with industry professionals, Nasdaq has 
determined to alter the method originally approved for opening daily 
trading in SuperMontage. Through a combination of rules and system 
processing, Nasdaq's proposed new opening process proposes to cure, and 
thereafter prevent, locked and crossed market conditions immediately 
prior to the 9:30 a.m. market open, while allowing the continued 
execution of pre-market priced orders during that same time period.
    Specifically, Nasdaq proposes to:
    (1) Clarify that the system will accept market orders prior to 9:30 
a.m. Eastern Time;
    (2) Modify the opening process by providing for the automatic 
clearing of locked/crossed quotes beginning at 9:29:30 a.m. Eastern 
Time, and by matching off of locked/crossed quotes between the most 
aggressive orders, at the price of the newest of those orders; and
    (3) Amend its Trade-or-Move Rule to conform to the changes in the 
opening process.
a. Expansion of Order Entry During Pre-Market Hours
    Currently, the SuperMontage system rules do not explicitly permit 
the entry of Non-Directed market orders prior to 9:30 a.m. Eastern 
Time. Under the approved SuperMontage rules, market participants may 
enter Non-Directed limit orders prior to the market open, subject to 
certain qualifiers.\4\ Nasdaq proposes to clarify that all market 
participants in SuperMontage may enter both limit orders and market 
orders prior to 9:30 a.m. Market orders and priced orders designated as 
IOC, will be held in queue until 9:30 a.m., at which time they will be 
executed or returned back to the entering firm if non-marketable.
---------------------------------------------------------------------------

    \4\ Order-entry firms may enter Non-Directed limit (priced) 
orders before 9:30 a.m. Eastern Time but these orders must be 
designated as Immediate or Cancel (``IOC''). Quoting market 
participants (e.g., registered market makers and ECNs in a security) 
may enter limit orders, but are not required to designate them 
exclusively as IOC orders. Accordingly, limit orders from quoting 
market participants that are not IOC are displayed in the Nasdaq 
system both during market hours and the pre-market period.
---------------------------------------------------------------------------

b. SuperMontage Pre-Open Clearing of Locking and Crossing Quotes and 
Orders
    Currently, SuperMontage's opening process resolves locked and 
crossed markets by pairing off the oldest in time sell quote/order with 
the oldest in time buy quote/order, and then executing the buying/
selling interest at the price of the oldest quote/order. Under approved 
SuperMontage rules, this process begins at 9:30 a.m. Eastern Time, and 
is repeated until an unlocked and uncrossed inside market in Nasdaq is 
generated.
    Nasdaq proposes to change and streamline the above process as 
follows. At 9:29:30 a.m. Eastern Time, the system will begin an 
automated process to clear any locked or crossed markets that then 
exists, using a new matching and pricing formula. First, the system 
will pair off the most aggressively priced buy quote/order against the 
most aggressively priced sell quote/orders. Once this ``best-priced 
pair'' is determined, the system will execute the two identified orders 
at the price of the newer order until the older order is fully 
satisfied. Nasdaq represents that, in essence, price improvement 
accrues to the older order. If the displayed size becomes exhausted at 
that price level, SuperMontage will continue to execute against 
available reserve size at that price level. This process will be 
repeated until an unlocked and uncrossed market results. Non-
Attributable Orders that are displayed under SIZE will also participate 
in this process and will be subject to execution logic described above.
    Once the lock/cross is cleared, any additional locking or crossing 
quotes/orders entered between 9:29:30 a.m. and 9:30:00 a.m. will be 
turned into an order and will be executed against the quote/order in 
Nasdaq that it would lock/cross. The execution will occur at the price 
of the quote/order that would be locked/crossed consistent with the 
locking/crossing process applicable during market hours.\5\ Non-
Attributable Orders that are displayed under SIZE will also participate 
in this process and will be subject to execution logic described above.
---------------------------------------------------------------------------

    \5\ See NASD Rule 4710(b)(3).
---------------------------------------------------------------------------

    Since these trades will be executed prior to the 9:30 a.m. market 
open, these trades will be designated as ``.T'' to reflect that they 
were executed outside of normal market hours.\6\ Nasdaq notes that if a 
market maker or ECN receives an order and its customer has indicated 
that it does not wish the order to be executed prior to 9:30 a.m., the 
market participant can enter the order into SuperMontage prior to the 
open but enter it as either a market order or as an IOC limit order. 
These orders would not drive a quote, would not participate in the pre-
market lock/cross clearing process, and would be held in queue until 
9:30 a.m., at which time they will be executed (or canceled if not 
marketable).
---------------------------------------------------------------------------

    \6\ If at any time a market participant enters a quote that 
would lock/cross the market in the SuperMontage, the Nasdaq system 
will send the market participant a warning message. If the market 
participant chooses to override the warning message, the quote will 
participate in the unlocking/uncrossing process described above. 
This is, a locking/crossing quote entered between 9:20 a.m. and 
9:29:30 a.m. will be turned into an order and become executable at 
9:29:30 a.m. A locking/crossing quote entered at or after 9:29:30 
a.m., but before market close, will be turned into an order that 
will be subject to immediate execution. Quotes entered at or after 
market close will receive the warning message but will not be 
subject to execution until 9:29:30 a.m. the following market day.
---------------------------------------------------------------------------

c. Modifications to ``Trade-or-Move'' Rule Timeframes
    Nasdaq proposes to amend its Trade-or-Move Rule to reflect that the 
system will begin the unlocking/uncrossing process at 9:29:30 a.m., 
thus market participants would be required to send Trade-or-Move 
Directed Orders \7\ between 9:20 a.m. and 9:29:29 a.m. (as opposed to 
9:29:59 a.m.). Under the proposal the Trade-or-Move will operate as 
follows. Market participants will have an obligation to send Trade-or-
Move Directed Orders beginning at 9:20:00 a.m. to all quotes they would 
lock/cross (except for SIZE) using a SuperMontage Directed Order. 
Currently, a market participant will be required to send a Trade-or-
Move Directed Order to the party it would lock/cross contemporaneous to 
entering an Attributable quote/order or Non-Attributable quote/order 
into SIZE.\8\ Thus, under the proposal if a market participant would 
actively lock or cross the market by posting an Attributable quote/
order or Non-Attributable quote/order in SIZE during 9:20 a.m. and

[[Page 36661]]

9:29:30 a.m., that market participant will be required to send a Trade-
or-Move Directed Order to the party it would lock or cross. However, if 
at or after 9:20 a.m. there is an order being displayed in SIZE, a 
market participant will not be obligated to send a Trade-or-Move 
Directed Order to SIZE if they would actively lock/cross SIZE because 
the system currently cannot route a Trade-or-Move Directed Order to the 
market participant representing the Non-Attributed Order behind 
SIZE.\9\ As noted above, Non-Attributable Orders that are represented 
under SIZE will participate in the lock/cross clearing process that 
commences at 9:29:30 a.m., and thus will be subject to execution prior 
to the market's open.
---------------------------------------------------------------------------

    \7\ Nasdaq proposes to change the term ``Trade-or-Move Message'' 
to ``Trade-or-Move Directed Order.'' See proposed NASD Rule 
4613(e)(1)(C).
    \8\ Under another proposal pending before the Commission, ECNs 
would be required to send a Trade-or-Move Message before entering a 
locking or crossing quotation and market makers would be required to 
send a Trade-or-Move Message immediately after entering a locking or 
crossing quote. See Securities Exchange Act Release No. 45508 (March 
5, 2002), 67 FR 10956 (March 11, 2002) (Notice of Amendment Nos. 2 
and 3 for File No. SR-NASD-00-76). This proposal would not alter 
that aspect of the Trade-or-Move rule, if approved.
    \9\ The Commission notes that Nasdaq is developing the 
capability to send a Trade-or-Move Directed Order to SIZE and would 
have to submit a proposed rule change to the Commission to implement 
this as a SuperMontage feature.
---------------------------------------------------------------------------

    Accordingly, Nasdaq believes that its proposed process will 
significantly improve the Nasdaq market opening by ensuring that quotes 
in Nasdaq securities are not locked or crossed at the start of normal 
trading. In addition, Nasdaq believes that its proposed approach of 
basing pre-market executions on the prices of individual quotes/orders 
provides maximum flexibility for market participants to price and 
potentially execute their own trading interest, while still maintaining 
an orderly market going into the open.
2. Statutory Basis
    Nasdaq believes that the proposed rule change, as amended, is 
consistent with the provisions of Section 15A of the Act,\10\ in 
general and with Section 15A(b)(6) of the Act,\11\ in particular, in 
that the proposal is designed to promote just and equitable principles 
of trade, foster cooperation and coordination with persons engaged in 
processing information with respect to and facilitating transactions in 
securities, as well as removing impediments to and perfect the 
mechanism of a free and open market, and, in general, to protect 
investors and the public interest.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78o-3.
    \11\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

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 neither solicited nor received written comments with respect 
to the proposed rule change.

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 self-regulatory organization 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.\12\
---------------------------------------------------------------------------

    \12\ Nasdaq has requested that the Commission find good cause 
pursuant to Section 19(b)(2) of the Act to approve the proposed rule 
change prior to the 30th day after publication in the Federal 
Register. See Amendment No. 1, supra note 3.
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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-2002-56 and should be submitted by June 14, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
---------------------------------------------------------------------------

    \13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-13101 Filed 5-23-02; 8:45 am]
BILLING CODE 8010-01-P