[Federal Register Volume 67, Number 115 (Friday, June 14, 2002)]
[Notices]
[Pages 40975-40977]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-15076]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46056; File No. SR-NASD-2002-59]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Relating 
to a New Trade Report Modifier to be Attached to Trades Whose Prices 
Exceed Certain Parameters

June 10, 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 29, 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 (``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 is proposing to create a new trade report modifier to be 
attached to trades whose prices exceed certain parameters. Under the 
proposed rule change, members would not have the ability to append this 
modifier to trade reports. Nasdaq proposes that only Nasdaq staff and 
Nasdaq systems would append this modifier, and only for transactions in 
Nasdaq National Market System, SmallCap Market, and OTC Bulletin Board 
securities.

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
    Trades reported to Nasdaq using the Automated Confirmation 
Transaction (``ACT'') Service are subject to procedures that identify 
trades executed at prices away from the current market. This process 
helps to ensure a fair and orderly market by preventing such trades 
from being disseminated to the public as last sale reports and/or by 
detecting trades that are reported at erroneous prices.
    The process differs slightly depending on whether a trade is 
executed using a Nasdaq system, which then automatically reports the 
trade to ACT (e.g., SelectNet), or the trade is submitted to ACT 
directly by a member. ACT rejects a trade that is submitted directly by 
a member if the price reported is outside established parameters. The 
member has an opportunity to resubmit the trade, which then will be 
subject to a different set of parameters. If the price is rejected 
after this second process, the member must call Nasdaq's MarketWatch 
Department to explain why the execution price was so far away from the 
current market. If the MarketWatch staff determines, on the basis of 
its conversation with the member, that there is an adequate rationale 
for such price, the staff would submit the trade to ACT.\3\ In such 
circumstances, the trade is normally being reported more than 90 
seconds after the trade was

[[Page 40976]]

executed, and so the MarketWatch staff would report the trade with the 
.SLD modifier attached, which indicates a late trade report.\4\ Trades 
reported with a .SLD modifier are not included in the last sale 
calculation, but are included in the calculation of the high and low 
price for the security.
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    \3\ If the MarketWatch staff believes the price would be 
misleading to the market, the trade report would be submitted for 
clearing purposes only. Nasdaq believes that the number of instances 
in which the staff submits the report only for clearing purposes is 
very limited. The staff estimates that this occurs less than 10 
times a year. In addition, the staff can refer the transaction to 
NASD Regulation for further investigation.
    \4\ NASD rules require that trades be marked late, using the 
.SLD modifier, if they are reported more than 90 seconds after 
execution. See e.g., NASD Rule 4632.
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    Trades executed using Nasdaq systems, however, are subject to a 
different process due to the manner in which such trades are 
transmitted to ACT. The information passed to ACT from a Nasdaq system 
does not include the exact location, or terminal, within a member from 
which an order/execution emanates. Therefore, such trades are not 
subject to the second validation process which allows members to 
resubmit a trade report after it is rejected initially, since the exact 
location within a member to which a reject message can be sent is 
unknown. To compensate for this difference and to prevent such trades 
from being included in the last sale calculation, Nasdaq automatically 
attaches the .SLD modifier to any trades executed using a Nasdaq system 
whose prices exceed the initial parameters. Nasdaq also includes 
another modifier with these trade reports to indicate that the .SLD 
modifier has been attached by a Nasdaq system. This other modifier 
ensures that members would not be cited for late trade reporting on the 
basis of these trades.
    Nasdaq believes that the process described above has worked well in 
promoting a fair and orderly market because it has prevented certain 
anomalous prices from being included in the last sale calculation, 
which is used for many purposes including as a measure of the current 
market for a security; a determinant of the execution price of certain 
types of orders (e.g., market on close orders); and in determining 
index values. Nasdaq believes this process has helped provide more 
accurate information about the prices at which individual securities 
are trading, and for that matter, the market, or a segment of the 
market, if such securities are components of indices designed to 
measure the entire market or a particular segment.
    However, Nasdaq has identified a means of further improving the 
current process. The .SLD modifier prevents a trade report from being 
included in the last sale calculation, but it does not prevent such a 
report from being included in the calculation of the high and low price 
of a security. As such, a trade that has been excluded from the last 
sale calculation because its price exceeds the parameters, 
nevertheless, may set the high or low price for a security. Nasdaq 
believes that these trades should not establish the high or low price 
for a security because the high and low prices are also used as a 
measure of a security's performance, or could trigger certain actions.
    Therefore, Nasdaq is proposing to create a new modifier that would 
exclude such trades from the high/low calculations, as well as the last 
sale calculation.\5\ This new modifier tentatively would be known as 
the ``Out of Range,'' or .OR , modifier and would be used instead of 
the .SLD modifier in the circumstances described above.\6\ For example, 
if a trade executed using SelectNet exceeds the price parameters, ACT 
automatically would append the .OR modifier to the trade report instead 
of the .SLD modifier. Similarly, the Nasdaq MarketWatch staff would 
append the .OR modifier to reports they submit. Nasdaq believes that 
the number of trade reports that contain the .SLD modifier either 
attached by ACT or the Nasdaq MarketWatch staff because the price is 
outside the parameters is very small.\7\ Nasdaq believes that the 
current proposal to create a new modifier would not affect this number 
since all that is being changed is the modifier that is being attached, 
and Nasdaq is not proposing to modify the price parameters.
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    \5\ Nasdaq recognizes that trades whose prices exceed the price 
parameters nevertheless may be valid transactions that the parties 
want to settle. As such, these trades are transmitted to The 
Depository Trust and Clearing Corporation for clearing and 
settlement.
    \6\ As discussed earlier, members will not have the ability to 
append the .OR modifier to trade reports. Only Nasdaq staff and 
Nasdaq systems will append this modifier, and only for transactions 
in Nasdaq National Market System, SmallCap Market, and OTC Bulletin 
Board securities.
    \7\ Nasdaq estimates that, on a daily average, less than .002% 
of trades executed on Nasdaq are reported with the .SLD modifier due 
to the trade being executed at a price that exceeds the price 
parameters.
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    Nasdaq recognizes that, in certain circumstances, members may 
believe that they have executed a trade at a price that provides 
valuable information to the market, even though the price is outside 
the parameters. To ensure that such trades are not inappropriately 
withheld from the last sale and high/low calculations, members would be 
able to contact the Nasdaq MarketWatch staff to request that the .OR 
modifier be removed from the trade report. The member must explain the 
facts and circumstances surrounding the trade and why the price was 
reasonable, as measured against the market at the time of execution. If 
the MarketWatch staff agrees with the explanation, it can remove the 
.OR modifier from the trade report.
    The process for developing and implementing the modifier, which 
will include testing with market data vendors, will take several 
months. Nasdaq will continue to utilize the .SLD modifier in the manner 
described until the new modifier can be implemented.
2. Statutory Basis
    Nasdaq believes the proposed rule change is consistent with the 
provisions of sections 15A(b)(2) of the Act \8\ in that the proposal is 
designed for the NASD to be organized and have the capacity to carry 
out the purposes of the Act. Nasdaq also believes the proposal is 
consistent with section 15A(b)(6) of the Act \9\ in that it is designed 
to protect investors and the public interest. In addition, Nasdaq 
believes that its proposal is consistent with the NASD's obligations 
under these provisions of the Act because it will result in the public 
dissemination of information that more accurately reflects the current 
trading in a particular security. Furthermore, Nasdaq believes that, to 
the extent a security is a component of an index, the index will more 
accurately reflect the value of the market, or segment of the market, 
that the index is designed to measure. Nasdaq believes that the 
corresponding result should be trades, or other actions, executed at 
prices more reflective of the current market when the price of an 
execution, or other action, is based on the last sale, the high price 
or low price of a security, or the value of an index.
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    \8\ 15 U.S.C. 78o-3(b)(2).
    \9\ 15 U.S.C. 78o-3(b)(6).
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    Nasdaq also believes the proposal is consistent with the NASD's 
obligations under its transaction reporting plan for Nasdaq National 
Market System securities approved by the Commission.\10\ In this plan, 
the NASD committed to validate prices for reasonableness as measured 
against previous trades in a security.
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    \10\ Securities Exchange Act Release No. 18590 (March 24, 1982), 
47 FR 13617 (March 31, 1982).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

[[Page 40977]]

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    No written comments were solicited or received 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 Nasdaq 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 No. SR-NASD-2002-59 and 
should be submitted by July 5, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 02-15076 Filed 6-13-02; 8:45 am]
BILLING CODE 8010-01-P