[Federal Register Volume 67, Number 215 (Wednesday, November 6, 2002)]
[Notices]
[Pages 67676-67678]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-28132]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46742; File No. SR-NASD-2002-123]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of a Proposed Rule Change and Amendment 
No. 1 by the National Association of Securities Dealers, Inc. Relating 
to Modification of the Trade or Move Process in the Nasdaq Order 
Collection and Display Facility (``SuperMontage'')

October 30, 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 September 19, 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'' or ``SEC'') the proposed rule change as 
described in Items I and II below, which Items have been prepared by 
Nasdaq.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule change and Amendment No. 1 from interested persons 
and to approve the proposal, as amended, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On October 16, 2002, Nasdaq filed Amendment No. 1 to the 
proposal. Amendment No. 1 revised the proposal to: (1) provide that 
Nasdaq may declare null and void a trade resulting from the 
execution of a Trade-or-Move Directed Order during the SuperMontage 
pre-opening process only upon the filing of a complaint by a member 
or by an Unlisted Trading Privilege (``UTP'') Exchange; and (2) 
clarify that Nasdaq may declare null and void the execution of a 
Trade-or-Move Directed Order, not an execution against a quotation 
during the SuperMontage opening process.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to amend NASD Rule 4613, ``Character of 
Quotations,'' to permit Nasdaq, upon the filing of a complaint by a 
member or an Unlisted Trading Privilege (``UTP'') Exchange, to declare 
null and void a Trade-or-Move Directed Order executed at or after 
9:29:30 a.m. The text of the proposed rule change appears below. 
Proposed new language is in italics.

Rule 4613--Character of Quotations

    (a)-(d) No Change.
    (e) Locked and Crossed Markets.
    (1) A market maker shall not, except under extraordinary 
circumstances, enter or maintain quotations in Nasdaq during normal 
business hours if:
    (A) No Change.
    (B) No Change.
    (C) Obligations Regarding Locked/Crossed Market Conditions Prior to 
Market Opening
    (i)-(vi) No Change.
    (vii) A Trade or Move Directed Order that is executed at or after 
9:29:30 may, upon the filing of a complaint by a member or UTP 
Exchange, be declared null and void in accordance with the procedures 
set forth in NASD Rule 11890.
* * * * *

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 III 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
    NASD Rule 4613(e) sets out the obligations of market participants 
who enter locking/crossing quotations during the pre-market opening 
period.\4\ The rule requires a market participant that locks or crosses 
the market between 9:20 a.m. and 9:29:30 a.m. to send a Directed 
Order(s) with a ``Trade-or-Move'' designator (``Trade-or-Move Directed 
Order'') to the parties it is locking or crossing. The aggregate size 
of the Trade-or-Move Directed Order must be at least 10,000 shares for 
S&P 400 Index issues and Nasdaq 100 Index issues, and 5,000 shares for 
other issues.\5\ Within ten seconds of the receipt of a Trade-or-Move 
Directed Order, the recipient must either trade in full with the 
incoming Trade-or-Move Directed Order or move its quote to a price that 
would unlock/uncross the market. In essence, the rule prohibits a 
market participant from locking/crossing the market during the ten 
minutes prior to the opening, unless the market participant is willing 
to commit the required number of shares.
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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.
    \5\ See Securities Exchange Act Release No. 45990 (May 28, 
2002), 67 FR 38535 (June 4, 2002 (order approving File No. SR-NASD-
00-76).
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    Under the SuperMontage opening process, starting at 9:29:30 a.m., 
Nasdaq will take steps to resolve any outstanding locks/crosses by 
automatically executing any remaining overlapping buy and sell quotes 
using the most aggressively priced matching method contained in NASD 
Rule 4710(b)(3)(B). At the end of this automated process, which should 
be completed before the 9:30:00 a.m. market open, all locked /crossed 
markets will be eliminated.
    A Trade-or-Move Directed Order has a minimum life of ten seconds by 
rule before it may be canceled, and the Directed Order process has a 
built-in five-second minimum life. Therefore, a market participant 
could receive an execution on a Trade-or-Move Directed Order sent in 
the final seconds before 9:29:30 a.m. and also receive an execution 
against its locking/crossing quote in the SuperMontage opening process. 
Thus, a market participant could be subject to a double execution 
(i.e., against its quote during the SuperMontage opening process and 
for the outstanding Trade-or-Move Directed Order).
    To address these potential double executions, Nasdaq believes that 
the recipient of a Trade-or-Move Directed Order should not execute the 
Trade-or-Move Directed Order after 9:29:30 a.m. and that members should 
consider Trade-or-Move Directed Orders pending at 9:29:30 a.m. to be 
null and void. According to Nasdaq, because member firms are concerned 
that they or others may inadvertently execute a Trade-or-Move Directed 
Order after 9:29:30 a.m. due to a system malfunction or human error, 
members have asked that Nasdaq staff be permitted to cancel trades 
resulting from the improper execution of a Trade-or-Move Directed 
Order.
    NASD Rule 4613(e), as amended, will convey the authority to declare 
an execution null and void, and is based on the fact of executing a 
Trade-or-Move Directed Order at or after 9:29:30 a.m.

[[Page 67677]]

Under the proposal, Nasdaq seeks the authority to declare null and void 
only the execution of the Trade-or-Move Directed Order, and not an 
execution against a quotation during the SuperMontage opening process. 
The execution of a market participant's Trade-or-Move Directed Order 
and against that market participant's locking/crossing quotation would 
constitute a double execution and, under the proposal, could trigger 
the filing of a complaint asking Nasdaq to declare null and void the 
Trade-or-Move Directed Order.
    The procedures to declare an execution null and void are those 
contained in NASD Rule 11890, ``Clearly Erroneous Transactions.'' While 
the execution of a Trade-or-Move Directed Order is not ``clearly 
erroneous'' as ordinarily used in the context of NASD Rule 11890, 
Nasdaq believes that the procedures contained in that rule are 
particularly well suited to resolving the improper execution of a 
Trade-or-Move Directed Order. Thus, Nasdaq staff will be required only 
to determine that a Trade-or-Move Directed Order was executed at or 
after 9:29:30 a.m. to declare that execution null and void after 
following the complaint procedures set forth in NASD Rule 11890.
    In particular, NASD Rule 11890 provides Nasdaq with the authority 
to receive petitions from market participants requesting that 
designated officers of Nasdaq review the terms of a transaction and 
nullify or modify it if the transaction is found to be clearly 
erroneous. Under subsections (a) and (b) of current NASD Rule 11890, a 
market participant may seek review by submitting a written complaint to 
Nasdaq Market Operations within specified time parameters. Subsection 
(c) of current NASD Rule 11890 sets forth the procedures for designated 
Nasdaq officers to review transactions on their own motion. In this 
proposal, Nasdaq seeks the authority to declare transactions null and 
void in accordance with current subsections (a) and (b) of NASD Rule 
11890, but not with current subsection (c) of that rule.\6\
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    \6\ On September 23, 2002, Nasdaq filed proposed rule change SR-
NASD-2002-127 to amend NASD Rule 11890 to clarify the scope of its 
authority to declare trades null and void. That proposal combines 
subsections (a) and (b) of current NASD Rule 11890 into a single 
subsection (a), and re-letters current subsection (c) as new 
subsection (b). If the Commission approves SR-NASD-2002-127, Nasdaq 
would have authority to review Trade-or-Move transactions only under 
new subsection (a) of NASD Rule 11890.
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(2) Basis
    Nasdaq believes that the proposed rule change is consistent with 
section 15A of the Act, \7\ and, in particular with section 15A(b)(6), 
\8\ which requires, among other things, that a registered national 
securities association's rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. Nasdaq believes that the proposed rule change is 
consistent with these requirements because the amendment will enhance 
the interaction of the Trade-or-Move rule with the SuperMontage 
opening, thereby ensuring a smooth opening of daily trading for the 
ultimate benefit of investors.
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    \7\ 15 U.S.C. 78o-3.
    \8\ 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. 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-2002-123 and 
should be submitted by November 27, 2002.

IV. Commission Findings and Order Granting Accelerated Approval of the 
Proposed Rule Change

    Nasdaq has asked the Commission to approve the proposal on an 
accelerated basis to allow the implementation of SuperMontage, which 
began on October 14, 2002, to proceed smoothly. Nasdaq notes that 
market participants are familiar with the procedures used to declare a 
trade null and void, and that those procedures provide substantial 
protections to all parties.
    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities association and, in 
particular, with the requirements of section 15A(b)(6) of the Act \9\ 
in that it is designed to promote just and equitable principles of 
trade, to remove impediments to and perfect the mechanism of a free and 
open market, and, in general, to protect investors and the public 
interest.\10\ The Commission believes that the proposal will contribute 
to an orderly opening by facilitating the effective interaction of the 
Trade-or-Move requirements and the SuperMontage opening process. 
Specifically, the proposal will allow a member or UTP Exchange to file 
a complaint asking Nasdaq to declare null and void the execution of a 
Trade-or-Move Directed Order executed at or after 9:29:30 a.m., thereby 
providing a means to address the double execution that would result 
from the execution of a market participant's Trade-or-Move Directed 
Order at or after 9:29:30 a.m. and an execution against that market 
participant's locking/crossing quotation during the SuperMontage 
opening process. According to Nasdaq, market participants are concerned 
that a Trade-or-Move Directed Order pending at 9:29:30 a.m. could be 
executed inadvertently due to a system malfunction or human error. The 
Commission believes that the proposal provides a means to eliminate the 
double execution that could result from the inadvertent execution of a 
Trade-or-Move Directed Order during the SuperMontage opening process.
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    \9\ 15 U.S.C. 78o-3(b)(6).
    \10\ In approving the proposed rule, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
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    Under the proposal, a market participant must follow the procedures 
set forth in NASD Rule 11890 to ask Nasdaq to declare null and void a

[[Page 67678]]

Trade-or-Move Directed Order.\11\ The Commission concluded previously 
that the procedures in NASD Rule 11890 promote the fair and efficient 
resolution of disputes involving clearly erroneous transactions.\12\ 
Similarly, the Commission believes that the procedures in NASD Rule 
11890 will provide a fair and efficient means for addressing a double 
execution resulting from the execution of a market participant's Trade-
or-Move Directed Order and an execution against that market 
participant's locking/crossing quotation during the SuperMontage 
opening process.
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    \11\ As discussed more fully above, the proposal does not 
authorize Nasdaq on its own motion to declare null and void the 
execution of a Trade-or-Move Directed Order.
    \12\ See Securities Exchange Act Release No. 39550 (January 14, 
1998), 63 FR 4333 (January 28, 1998) (order approving File No. SR-
NASD-96-51).
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    The Commission finds good cause for approving the proposed rule 
change and Amendment No. 1 prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. 
Specifically, the Commission finds that the proposal will contribute to 
an orderly opening by facilitating the effective interaction of the 
Trade-or-Move requirements and the SuperMontage opening process. The 
Commission finds that Amendment No. 1 clarifies the proposal by 
indicating that Nasdaq will declare null and void the execution of a 
Trade-or-Move Directed Order only after a member or UTP Exchange files 
a complaint regarding the execution, and by specifying that Nasdaq 
would declare null and void the execution of a Trade-or-Move Directed 
Order rather than an execution against a locking/crossing quotation 
during the SuperMontage opening process. Accordingly, the Commission 
believes that there is good cause, consistent with sections 15A(b)(6) 
and 19(b)(2) of the Act,\13\ to approve the proposal, as amended, on an 
accelerated basis.
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    \13\ 15 U.S.C. 78o-3(b)(6) and 78s(b)(2).
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    It is therefore Ordered, pursuant to section 19(b)(2) of the Act, 
that the proposed rule change (SR-NASD-2002-123), as amended, is 
approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-28132 Filed 11-5-02; 8:45 am]
BILLING CODE 8010-01-P