[Federal Register Volume 68, Number 57 (Tuesday, March 25, 2003)]
[Notices]
[Pages 14446-14451]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-6985]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47517; File No. SR-NASD-2002-158]


Self-Regulatory Organizations; Order Granting Approval to 
Proposed Rule Change and Notice of Filing and Order Granting 
Accelerated Approval to Amendment No. 1 Thereto by the National 
Association of Securities Dealers, Inc. Relating to the Establishment 
of a Nasdaq Official Closing Price and a Trade Report Modifier With 
Which To Identify That Price to the Public

March 18, 2003.

I. Introduction

    On November 1, 2002, the National Association of Securities 
Dealers, Inc. (``NASD''), through its subsidiary, the Nasdaq Stock 
Market, Inc. (``Nasdaq''), filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission''), pursuant to section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to establish a Nasdaq Official 
Closing Price (``NOCP''), and a trade report modifier with which to 
identify that price to the public. The proposed rule change was 
published for comment in the Federal Register on December 26, 2002.\3\ 
The Commission received seven comment letters regarding the 
proposal.\4\ Nasdaq responded to the commenters in an amendment which 
Nasdaq filed with the Commission on January 28, 2003 \5\ and in a 
second response letter that Nasdaq filed with the Commission on March 
7, 2003.\6\ This order approves the proposed rule change, and approves 
Amendment No. 1 on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 47022 (December 18, 
2002), 67 FR 78840.
    \4\ See letter from Brett W. Redfearn, Senior Vice President, 
Business Strategy and Equity Order Flow, American Stock Exchange 
LLC, to Jonathan G. Katz, Secretary, Commission, dated January 29, 
2003 (``Amex Letter''); letter from Jeffrey T. Brown, Senior Vice 
President, Secretary and General Counsel, the Cincinnati Stock 
Exchange, Inc., to Mr. Jonathan G. Katz, Secretary, Commission, 
dated January 24, 2003 (``CSE Letter''); letter from Jon Kroeper, 
First Vice President and Associate General Counsel, Instinet Group 
Incorporated, to Mr. Jonathan G. Katz, Secretary, Commission, dated 
February 13, 2003 (``Instinet Letter''); letter from Donald J. 
Boteler, Vice President-Operations, Investment Company Institute, to 
Mr. Jonathan G. Katz, Secretary, Commission, dated January 15, 2003 
(``Institute Letter''); letter from C. Thomas Richardson, Managing 
Director, Nasdaq Trading, and David Weisberger, Managing Director, 
U.S. Equities Models Trading, Salomon Smith Barney, to Mr. Jonathan 
Katz, Secretary, Commission, dated January 15, 2003 (``SSB 
Letter''); letter from Hendrik J. Kranenburg, Executive Vice 
President, Standard & Poor's, to Secretary, Commission, dated 
January 17, 2003 (``S&P Letter''); and letter from Scott W. 
Anderson, Associate Director and Counsel, Region Americas Legal, UBS 
Warburg LLC, to Jonathan G. Katz, Secretary, Commission, dated 
January 15, 2003 (``UBSW Letter'').
    \5\ See letter from Jeffrey S. Davis, Associate General Counsel, 
Nasdaq, to Alton S. Harvey, Office Head, Division of Market 
Regulation (``Division''), Commission, dated January 27, 2003 
(``Amendment No. 1''). In Amendment No. 1, Nasdaq addresses the 
positive comments submitted with respect to the proposed rule change 
and proposes, in response to comments, to revise its original 
proposal to consider canceled or corrected trades submitted until 
5:15:00 PM rather than 4:30:00 PM for the calculation of the NOCP.
    \6\ See letter from Jeffrey S. Davis, Associate General Counsel, 
Nasdaq, to Alton S. Harvey, Office Head, Division, Commission, dated 
March 7, 2003 (``Second Response Letter'').
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II. Description of the Proposed Rule Change

A. Background

    Nasdaq is proposing to establish an NOCP, and a trade report 
modifier with which to identify that price to the public. Nasdaq would 
program its proprietary systems to append the new

[[Page 14447]]

modifier--``.M'' for Market Close--to one trade report message in each 
Nasdaq National Market and SmallCap security to identify it as the NOCP 
in that security. The dissemination of the NOCP would not affect the 
consolidated last sale price disseminated pursuant to the national 
market system plan governing trading of Nasdaq securities (``Nasdaq UTP 
Plan'') or the last sale price of any exchange that is a member of that 
plan.
    Currently, Nasdaq does not have an official closing price. Instead, 
market participants generally use a last sale price that vendors 
identify from among the last sale prices that Nasdaq disseminates in 
its role as the Exclusive Securities Information Process (``ESIP'') for 
the Nasdaq UTP Plan. As the ESIP, Nasdaq currently disseminates a 
consolidated last sale price (``Consolidated Close''), which is the 
price of the last trade reported to the ESIP by any UTP Participant 
prior to 4:01:30 p.m. In addition, Nasdaq disseminates the last sale 
price of each individual participant in the Nasdaq UTP Plan 
(``Individual Market Close''), including Nasdaq, which is the price of 
the last trade reported by each individual participant market center 
prior to 4:01:30 p.m. Nasdaq market participants rely on either the 
Consolidated Close or Nasdaq's Individual Market Close for many post-
close activities, including pricing indices, large institutional orders 
(commonly called ``market-on-close orders''), and mutual fund values. 
The Consolidated Close is the primary measure of the market for a 
variety of constituents, including sell-side and buy-side institutions, 
market indexers, securities issuers, and individual investors.
    Nasdaq believes that, despite their widespread acceptance, the 
Consolidated Close and Nasdaq Individual Market Close are imperfect 
measures of the value of Nasdaq issues at the close of normal market 
hours. For instance, the Consolidated Close is somewhat arbitrary in 
that it is simply the price of the final unmodified trade to be 
reported to Nasdaq prior to 4:01:30 p.m. by any Nasdaq member or UTP 
Exchange. Due to wide disparities in the speed at which market 
participants report trades within Nasdaq's 90-second trade reporting 
window, trades reported at 4:01:30 p.m. can be significantly away from 
the market when it closes at 4:00:00 p.m. As a result, Nasdaq is 
concerned that the Consolidated Close may no longer reliably and 
accurately reflect each security's value at the close of the market.

B. Mechanics of the Proposal

    Nasdaq proposes to replace the methodology currently used to 
calculate Nasdaq's Individual Market Close with the NOCP methodology 
described below. The NOCP would be based on the price of the last 
unmodified trade reported to Nasdaq's proprietary trade reporting 
system--Automated Confirmation Transaction System or ``ACT''--at or 
before 4:00:02 p.m. (the ``Predicate Trade''). Nasdaq systems would 
``normalize'' the price of the Predicate Trade by comparing it to 
Nasdaq's best bid and ask prices (i.e., the best prices displayed by 
all SuperMontage participants) at the time the Predicate Trade was 
reported, or by comparing it to the Nasdaq best bid and offer at 
4:00:00 p.m. for trades reported after that time (``Predicate 
BBO'').\7\ If the price of the Predicate Trade falls at either side of 
or within the Predicate BBO, that price becomes the NOCP. If the price 
of the Predicate Trade falls outside the Predicate BBO, Nasdaq would 
adjust it up to the Predicate BBO bid if it is below the bid price or 
down to the Predicate BBO ask if it is above the ask price. The NOCP 
methodology would only impact the Individual Market Close for Nasdaq; 
it would not impact the Consolidated Close or Individual Market Closes 
of the UTP Exchanges that are disseminated by the ESIP.
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    \7\ Nasdaq Market participants would not have the ability to 
append the new modifier to trade reports; only Nasdaq trade 
reporting systems would append this modifier, and only for 
transactions in Nasdaq National Market and SmallCap Market 
securities.
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    The Predicate Trade can be any trade that currently updates the 
Individual Market Close for Nasdaq, subject to certain limitations. 
First, Nasdaq would only consider trades submitted with the Nasdaq 
market center identifier. Specifically, Nasdaq would only consider 
trade reports submitted to ACT, either by NASD members or by UTP 
Exchanges that use Nasdaq's proprietary execution systems. Nasdaq would 
not consider trades reported by NASD members to any venue outside of 
Nasdaq, including the NASD Alternative Display Facility or other UTP 
Exchanges, nor would it consider any trades reported by UTP Exchanges 
not executed through Nasdaq proprietary systems. Thus, if no NASD 
member reports a trade in a given security to Nasdaq prior to 4:00:02 
p.m., Nasdaq would report no NOCP in that security.
    Second, Nasdaq would only consider unmodified trades reported at or 
before 4:00:02 p.m. Nasdaq chose 4:00:02 p.m. as the proper reference 
point to provide every trade type a reasonable chance to set the close. 
The current close disadvantages certain trade types that are reported 
too quickly to set the closing price, such as trades reported via 
Nasdaq execution systems or by market participants' own automated 
systems, which often report trades almost instantly. In fact, NASD 
members report over 90 percent of trades to Nasdaq within two seconds 
of execution, despite Nasdaq's 90-second trade reporting window. Nasdaq 
believes that unmodified trades would more accurately reflect the true 
state of the market at the close of normal market hours. Thus, Nasdaq 
would not consider trade reports submitted after 4:00:02 p.m. and, with 
one exception, it would not consider any trades reported with a 
modifier, such as a .T (after normal market hours), .OR (out of range), 
or .PRP (prior reference price).\8\
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    \8\ Nasdaq would consider a trade submitted to Nasdaq with a 
.SLD modifier (reported more than 90 seconds after execution) or a 
.PRP modifier to be the Predicate Trade if, and only if, it is the 
only trade of the day by any market participant. In that case, the 
Predicate BBO would be the BBO at the time the trade was reported.
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    Third, in its original filing, Nasdaq proposed to adjust the NOCP 
only if the Predicate Trade is cancelled or corrected by 4:30:00 p.m., 
even though Nasdaq would continue to accept trade cancel and correction 
messages via ACT until 5:15:00 p.m. If, between 4:00:02 p.m. and 
4:30:00 p.m., a market participant enters a cancel or correct message 
regarding the Predicate Trade, Nasdaq would process that message, and 
recalculate the NOCP. Nasdaq would not consider in the NOCP calculation 
any cancel or correct message that arrives after 4:30:00 p.m. However, 
as discussed more fully below, Nasdaq has revised its proposal in 
Amendment No. 1 to consider cancelled or corrected trades submitted 
until 5:15:00 p.m. rather than 4:30:00 p.m. for the calculation of the 
NOCP.\9\
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    \9\ See Amendment No. 1, supra note 5.
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C. Impact on the Consolidated Last Sale Calculation

    The NOCP would not be eligible to set the Consolidated Close under 
the Nasdaq UTP Plan, although the Predicate Trade would be eligible as 
are all unmodified trade reports. While the NOCP is based on an actual 
trade, it is not necessarily an actual trade price. Therefore, Nasdaq 
believes that including it in the Consolidated Close is not consistent 
with the Nasdaq UTP Plan. It would also give Nasdaq an unfair advantage 
by providing an additional opportunity for Nasdaq to set the 
Consolidated Close. To avoid that

[[Page 14448]]

result, Nasdaq would append the .M modifier and publish it with a trade 
size of zero to signal to the ESIP and vendors not to include it in the 
Consolidated Close calculation. The NOCP would, on the other hand, be 
used to populate the Nasdaq Individual Market Close field that the ESIP 
currently disseminates. The Predicate Trade would be reported to the 
ESIP according to Nasdaq's existing trade reporting rules and it would 
be eligible to set the Consolidated Close, as it would be today.
    Nasdaq recognizes that it must educate investors and vendors about 
its new NOCP and the .M modifier to avoid creating confusion. 
Currently, the Nasdaq ESIP disseminates a Closing Trade Summary Report 
that includes the Consolidated Close as well as the Individual Market 
Closes for Nasdaq and for each UTP Exchange that trades Nasdaq 
securities. If this proposal is approved, the Individual Market Close 
field for Nasdaq in the Closing Trade Summary Report would contain the 
NOCP in place of its last sale price. Neither the Consolidated Close 
nor any of the Individual Market Closes for any UTP Exchange would be 
affected by this proposal.
    The Nasdaq ESIP is engaged in a development effort to accommodate 
the new trade modifier and its treatment in the consolidated data 
streams. Nasdaq has also discussed the addition of the new .M trade 
modifier with the UTP Operating Committee, and has made it clear that 
any UTP participant can use the new trade modifier if it chooses.

III. Summary of Comments and Nasdaq's Responses

    As noted above, the Commission received seven comment letters 
regarding the original proposal.\10\ Nasdaq filed Amendment No. 1 to 
the proposal \11\ to respond to the positive comments received by four 
of the commenters \12\ and also filed the Second Response Letter \13\ 
to address further concerns raised by three of the commenters.\14\
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    \10\ See supra note 4.
    \11\ See Amendment No. 1, supra note 5.
    \12\ See Institute Letter, SSB Letter, S&P Letter and UBSW 
Letter, supra note 4.
    \13\ See Second Response Letter, supra note 6.
    \14\ See Amex Letter, CSE Letter and Instinet Letter, supra note 
4.
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A. Amendment No. 1

    Three of the commenters addressed in Amendment No. 1 fully 
supported Nasdaq's proposed rule change.\15\ One commenter believed 
that the institution of an official closing price for the Nasdaq market 
would greatly enhance the overall integrity of the market and that the 
proposed methodology for calculating the NOCP appeared sensible and 
reasonably impervious to manipulation.\16\ Another commenter stated 
that the implementation of Nasdaq's proposal would result in the 
determination of closing values that accurately and consistently 
reflect market conditions at the close and is an improvement that would 
provide greater financial market transparency.\17\ The third commenter 
believed that the proposal would provide tremendous benefits to the 
marketplace and improve stability and predictability across the Nasdaq 
market and enthusiastically supported each of the three components of 
the proposal: (1) Reducing the consideration time for inclusion in the 
closing price from 4:01:30 to 4:00:02 p.m.; (2) restricting the closing 
price to trades effected on Nasdaq; and (3) ``normalizing'' closing 
prices based upon the closing inside market.\18\
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    \15\ See SSB Letter, S&P Letter and UBSW Letter, supra note 4.
    \16\ See UBSW Letter, supra note 4.
    \17\ See S&P Letter, supra note 4.
    \18\ See SSB Letter, supra note 4.
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    Furthermore, under the proposal, Nasdaq would adjust the NOCP only 
if the Predicate Trade is cancelled or corrected by 4:30:00 p.m., even 
though Nasdaq would continue to accept trade cancel and correction 
messages via its ACT until 5:15:00 p.m. Although supporting the 
proposed rule change, one commenter questioned Nasdaq's willingness to 
accept trade cancel and correction messages via ACT until 5:15:00 p.m., 
inasmuch as this would result in a disconnect between the NOCP and 
ACT.\19\ While Nasdaq asserted that it receives over 99 percent of 
cancel or corrections before 4:30:00 p.m., this commenter believed that 
material changes consistently occur after 4:30:00 p.m. The commenter 
also believed that a failure to synchronize these two events would very 
likely result in mutual funds being compelled to disregard the NOCP at 
4:30:00 p.m.\20\ Similarly, another commenter indicated that the 
4:30:00 p.m. deadline would be 45 minutes prior to the time that other 
markets continue to accept adjustments.\21\ In response to comments, 
Nasdaq revised its proposal in Amendment No. 1 to extend the 
calculation of the NOCP to 5:15:00 p.m.\22\ Nasdaq believed that the 
5:15:00 p.m. cut-off would permit flexibility to review and correct 
trades that occur during the busiest trading of the day, while 
fulfilling the equally important need for finality in the closing price 
calculation.
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    \19\ See Institute Letter, supra note 4.
    \20\ This commenter also suggested that the deadline for cancel 
and correction messages for both the NOCP and for ACT be set at 
5:00:00 p.m. rather than 5:15:00 to provide mutual funds an 
additional 15 minutes to calculate daily closing prices. See 
Institute Letter, supra note 4. In response, Nasdaq stated that, 
while it cannot implement that recommendation via this proposal, it 
understands the logic of the commenter's recommendation and commits 
to continue discussions on this proposal with the commenter and with 
Nasdaq's membership. See Amendment No. 1, supra note 5.
    \21\ See CSE Letter, supra note 4.
    \22\ See Amendment No. 1, supra note 5.
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B. Second Response Letter

    As noted above, the Commission received three comment letters that 
raised procedural, competitive, and methodological concerns with 
respect to the proposed rule change.\23\ Nasdaq filed the Second 
Response Letter to specifically address these comments.\24\
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    \23\ See Amex Letter, CSE Letter and Instinet Letter, supra note 
4.
    \24\ See Second Response Letter, supra note 6.
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1. Procedural Issues
    Because Nasdaq would be replacing the Nasdaq UTP Plan's methodology 
in calculating its close with the NOCP methodology, proposing that the 
Predicate Trade be ``normalized,'' and introducing new cut off times 
for calculating its individual close and disseminating that info 
through the ESIP facilities and thus changing the closing reports 
disseminated by the ESIP to display the NOCP instead of the Nasdaq UTP 
Plan's standard calculation, three of the commenters believed that 
Nasdaq should not be permitted to bypass the UTP Operating Committee or 
the terms of the Nasdaq UTP Plan, but instead should seek UTP Operating 
Committee interpretation or Nasdaq UTP Plan amendment to accommodate 
the NOCP.\25\ The commenters also criticized Nasdaq for not involving 
other interested Nasdaq UTP Plan participants in developing the 
specifications for the SIP system changes before starting development 
work \26\ and that Nasdaq designed the .M modifier accommodated by the 
ESIP in a fashion that is suited to its own particular system 
needs.\27\ Furthermore, one of the commenters questioned Nasdaq's 
stated purpose for proposing the rule change, stating that if Nasdaq 
had a legitimate concern about the methodology specified in the Nasdaq 
UTP Plan for calculating the consolidated close, the appropriate forum 
to address that issue would be the UTP Operating

[[Page 14449]]

Committee.\28\ Moreover, this commenter believed that Nasdaq was 
baselessly questioning the integrity of the consolidated close and the 
surveillance conducted by the Nasdaq UTP Plan participants and argued 
that the quality of a market's surveillance procedures should be 
evaluated by the Commission and not by competing markets.
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    \25\ See Amex Letter, CSE Letter and Instinet Letter, supra note 
4.
    \26\ See Amex Letter and CSE Letter, supra note 4.
    \27\ See CSE Letter and Instinet Letter, supra note 4.
    \28\ See CSE Letter, supra note 4.
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    In the Second Response Letter, Nasdaq indicated that on March 4, 
2003, the UTP Operating Committee unanimously approved a resolution 
that was designed to address the commentors' procedural concerns.\29\ 
Nasdaq introduced this resolution to the UTP Operating Committee to 
address the concerns expressed by two of the commenters.\30\ According 
to Nasdaq, the UTP Operating Committee discussed Nasdaq's proposal 
during several meetings in January and February, and, on March 4, 2003, 
unanimously voted that the establishment and use of the .M modifier 
would be consistent with the terms of the Nasdaq UTP Plan. The 
Operating Committee also approved the modifications to the SIP that are 
needed to implement the proposed establishment and use of the .M 
modifier.
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    \29\ See Second Response Letter, supra note 6.
    \30\ See Amex Letter and CSE Letter, supra note 4.
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    Furthermore, Nasdaq agreed to delay the implementation of the 
proposal until April 14, 2003 to provide members of the UTP Operating 
Committee with additional time to consider the technical specifications 
prior to implementing the proposed trade message modifier in their own 
markets. Nasdaq believes that the approval of this resolution and the 
agreed-upon delay in implementation clearly address the commentors' 
procedural objections regarding compliance with the Nasdaq UTP Plan.
2. Competitive Issues
    Two commenters believed that Nasdaq did not comply with its 
obligations as ESIP to operate independently of its associated order 
matching facility and that the apparent circumstances surrounding the 
exclusive SIP's engagement in system development work to accommodate 
the NOCP, without any apparent joint decisions by the UTP Operating 
Committee, raises serious competitive concerns.\31\ Such circumstances 
may indicate that Nasdaq has undue influence over Nasdaq UTP Plan 
systems development priorities.
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    \31\ See Amex Letter and Instinet Letter, supra note 4.
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    Two commenters expressed concern that Nasdaq may be disrupting the 
established system for calculating the consolidated close for its own 
anticompetitive reasons or may be receiving preferential treatment from 
the SIP and thus would frustrate the requirements for a national market 
system \32\ in section 11A and section 11A(a)(1)(C)(ii) of the Act.\33\ 
One commenter urged the Commission to examine whether the SIP is being 
operated in a truly market-neutral manner, is not unduly influenced by 
Nasdaq, and is not providing Nasdaq with any competitive advantages 
over other participant markets.\34\ Similarly, the other commenter did 
not view Nasdaq's proposal as an example of the fair competition and 
regulatory harmony contemplated under the Act because Nasdaq appeared 
to be: disregarding the Nasdaq UTP Plan requirements and 
inappropriately using its position as ESIP to establish parallel 
dissemination practices applicable only to its market data for its own 
competitive advantage; dictating the introduction of earlier 
dissemination times without necessity of UTP Operating Committee vote, 
and unilaterally modifying the calculation of the consolidated 
close.\35\ Furthermore, because the calculations and displays would no 
longer be based on a single standardized methodology and would 
introduce factors other than an actual reported trade in the 
determination of a closing price, both commenters believed that 
Nasdaq's proposal would afford the opportunity for investor confusion 
as it would eliminate the ``apples-to-apples'' comparison of individual 
market prices.\36\ Due to the significant value of retaining consistent 
methodologies in a market like that for Nasdaq-quoted securities, where 
trading activity is widely dispersed among different trading venues, 
these commenters suggested that existing reports should continue to 
contain the same calculations as necessary to maintain the integrity 
and clarity of the closing price information across the markets.\37\
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    \32\ See CSE Letter and Instinet Letter, supra note 4.
    \33\ 15 U.S.C 78k and 15 U.S.C. 78k-1(a)(1)(C)(ii).
    \34\ See Instinet Letter, supra note 4.
    \35\ This commenter was also concerned with the precedential 
impact this proposal would have on future proposals by any market 
participant. See CSE Letter, supra note 4.
    \36\ See CSE Letter and Instinet Letter, supra note 4.
    \37\ See CSE Letter and Instinet Letter, supra note 4.
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    Finally, one commenter expressed the view that Nasdaq's actions 
were inconsistent with (b)(6) and (b)(9) of section 15A \38\ which 
require that Nasdaq not design rules intended to discourage cooperation 
and coordination among regulators, regulate matters not related to the 
purposes of the administration of its markets, and impose unnecessary 
and inappropriate burdens on competition.\39\
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    \38\ 15 U.S.C. 78o-3(b)(6) and 15 U.S.C. 78o-3(b)(9).
    \39\ See CSE Letter, supra note 4.
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    In response to comments, Nasdaq stated that it is not attempting to 
disrupt the calculation of the consolidated close, but rather has 
avoided interfering with the existing consolidated close, which would 
be calculated and disseminated exactly as it has been regardless of 
this proposal.\40\ Furthermore, every trade that currently is eligible 
to set the consolidated close would continue to be eligible if this 
proposal is approved, and no trade that is currently not eligible would 
become so. Similarly, Nasdaq clarified that the Predicate Trade that 
forms the basis of the NOCP would be eligible to set the consolidated 
close, as it is today, while the NOCP message itself, which is new, 
would not be eligible. Nasdaq also noted, in response to the comments, 
that use of the NOCP is completely voluntary on the part of industry 
participants; Nasdaq's proposal would simply create one alternative 
closing price for industry participants to use. Moreover, Nasdaq's 
proposal would not preclude the use of other closing prices, such as 
the consolidated close or market specific closing prices that exist 
today. In fact, Nasdaq believes that its proposal explicitly invites 
other markets to establish a competing market-centric closing price, 
and to use the .M modifier to designate their own official closing 
price to market participants.
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    \40\ See Second Response Letter, supra note 6.
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    Furthermore, Nasdaq does not believe that the commenters presented 
a credible argument that Nasdaq was operating anti-competitively. 
Specifically, Nasdaq believes that it has not abused its role as the 
SIP. Because Nasdaq is aware of its unique role as the processor for 
the Nasdaq UTP Plan and to avoid the appearance of bias, Nasdaq agreed 
to delay the implementation of its proposal until April 14, 2003 from 
the original, scheduled implementation date of March 24, 2003. 
According to Nasdaq, this extension would permit Nasdaq UTP Plan 
participants, including the commentors, extra time to program their 
systems to use the .M modifier or to develop a proposal that would 
better serve their needs.
3. Methodological Issues
    Although one commenter supported reducing the inclusion time for 
calculating the NOCP at 4:00:02 p.m.

[[Page 14450]]

because it would eliminate the incentive and opportunity for 
gamesmanship,\41\ another commenter believed that the earlier cut off 
and dissemination aspect of the proposal has competitive effects on the 
Consolidated Close that is disseminated 88 seconds later, and excludes 
legitimate trades from consideration for Nasdaq's individual market 
closing price (i.e. those trades reported after 4:00:02 PM).\42\ Three 
of the commenters also stated that the timing is materially different 
and contrary to the Nasdaq UTP Plan and thus would undermine the Nasdaq 
UTP Plan's methodology used to calculate its close.\43\
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    \41\ See SSB Letter, supra note 4.
    \42\ See CSE Letter, supra note 4.
    \43\ See Amex Letter, CSE Letter and Instinet Letter, supra note 
4.
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    With respect to Nasdaq only considering trade reports submitted to 
ACT, either by NASD members or by UTP Exchanges that use Nasdaq's 
proprietary execution systems, two commenters stated that Nasdaq, as 
the primary market for Nasdaq securities, would clearly be in the best 
position to function in the capacity of determining the closing 
price.\44\ In contrast, one commenter believed that other markets' 
trades should be measured separate from the Nasdaq market close,\45\ 
and another commenter similarly questioned whether it would be 
appropriate to use UTP Exchange information in the ``normalization'' 
process for determining a Nasdaq market-specific close, or whether it 
would it be more appropriate for Nasdaq to filter out UTP Exchange 
information from the Nasdaq BBO used in the ``normalization'' 
process.\46\
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    \44\ See SSB Letter and UBSW Letter, supra note 4. The SSB 
Letter indicated that designating the closing process to Nasdaq and 
the establishment of a uniform, consistent system would have 
infrequent but important positive marketplace impact over the 
current environment. The UBSW Letter noted that this is similar to 
the New York Stock Exchange, Inc.'s (``NYSE'') long-established 
practice of disseminating an NYSE Closing Price based upon the last 
NYSE-only regular way trade in each NYSE-listed security. Id.
    \45\ See CSE Letter, supra note 4.
    \46\ See Instinet Letter, supra note 4.
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    Furthermore, some of the commenters indicated that the potential 
anti-competitive impact of Nasdaq's proposed methodology for 
calculating and disseminating the NOCP require that Nasdaq not use the 
term ``official'' to describe any value that it may disseminate 
according to the proposed methodology.\47\ The commenters considered 
this to be misleading to vendors and market participants as well as 
encourages consumers of closing price information (i.e. issuers, mutual 
funds, and the media) to use the NOCP to the exclusion of other closing 
price data. Furthermore, they believed that Nasdaq should not be 
permitted to characterize the price that it proposes to disseminate as 
the ``official'' price in view of its exclusion of so much Nasdaq 
volume from its calculation (i.e. transactions of Nasdaq UTP Plan 
participants not using ACT).\48\
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    \47\ See Amex Letter and Instinet Letter, supra note 4. The Amex 
Letter stated that any Nasdaq closing information designated as 
``official'' should be as agreed to by all Nasdaq UTP Plan 
participants. Id.
    \48\ See Amex Letter and Instinet Letter, supra note 4. As the 
NOCP calculations would not take into account quotation and trade 
reporting activity occurring outside of Nasdaq, the Instinet Letter 
expressed the view that the NOCP would not be an acceptable 
surrogate for a consolidated closing price, and using it would not 
appear to present the complete view of the overall market required 
to ensure the accuracy and integrity of closing values and thus 
serve investors' interests. Id.
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    Finally, although one commenter favored Nasdaq's proposed process 
of ``normalization'' in calculating the NOCP,\49\ two commenters 
believed that the ``normalization'' process could exacerbate the issue 
of inaccurate closing prices and create an incentive for Nasdaq market 
makers to manipulate quotes in order to set the closing price or 
potentially expose the NOCP to greater risk of manipulation than the 
current process, particularly in lower-volume securities.\50\ One of 
these commenters further questioned whether the NOCP, through 
``normalizing'' a Predicate Trade, would produce a better measurement 
of the closing price than the Predicate or the Nasdaq individual market 
close under the existing Nasdaq UTP Plan methodology.\51\
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    \49\ See SSB Letter (noting that the process helps eliminate 
outlying inconsistencies and exclude from the closing price trades 
that are clearly unrelated to contemporaneous closing inside 
markets), supra note 4. See also S&P Letter (indicating that the 
proposal would reduce the risk of an outlier setting the closing 
price for a given equity security), supra note 4.
    \50\ See CSE Letter and Instinet Letter, supra note 4.
    \51\ See Instinet Letter, supra note 4.
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    In its Second Response Letter, Nasdaq expressed the view that each 
market should be free to determine its own closing price methodology, 
provided its chosen method is consistent with the Act.\52\ Nasdaq 
indicated that it had carefully considered the aspects of the NOCP 
methodology and does not believe that its proposal raises any statutory 
basis for rejecting the proposal. Nasdaq also noted that the commentors 
failed to identify a way in which Nasdaq's proposal would be 
inconsistent with the Act.\53\
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    \52\ See Second Response Letter, supra note 6.
    \53\ Nasdaq also corrected the comment in the CSE Letter which 
inaccurately stated that Nasdaq would separately disseminate its 
NOCP information at 4:00:02 p.m., when, in fact, that information 
would be disseminated at 4:01:30 p.m. See Second Response Letter, 
supra note 6.
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    With respect to the objections raised against Nasdaq's use of the 
term ``official'' in describing the NOCP, Nasdaq believes these 
arguments rely on the faulty premise that market participants are 
statutorily required to utilize the consolidated closing price 
established in the Nasdaq UTP Plan, when they are not. Nasdaq indicated 
that market participants are free to use myriad closing prices, each of 
which is consistent with the Act. Nasdaq believed that the consolidated 
closes, the individual closing price of the NYSE, and the NOCP, if 
approved, are constructs used to assess the value of a given security 
at the close of regular trading, leaving investors free to determine 
which closing price to use.
    In response to issues raised by the commenters, Nasdaq indicated 
that ultimately it would be competition, rather than anti-competition, 
that would determine whether market participants consider the NOCP 
meaningful. Nasdaq argued that if Nasdaq's method for determining its 
own closing price is flawed, as some commenters claimed, then market 
participants would not utilize the NOCP and Nasdaq's attempt to compete 
would fail. However, based upon the overwhelmingly positive comments by 
disinterested market participants that would be using a closing price, 
Nasdaq is confident that its chosen methodology is valid and likely to 
be accepted in the marketplace. In either case, Nasdaq believes that 
competition would have occurred as contemplated by the Act.
    Furthermore, Nasdaq acknowledged that no closing price methodology, 
the NOCP included, would produce a perfect closing price in every stock 
every day. In response, Nasdaq would like to ensure market participants 
that Nasdaq MarketWatch would continue its intensive, real-time 
surveillance of quoting and trading activity in Nasdaq at the close of 
trading. Just as Nasdaq MarketWatch has the authority to suppress 
trades that could improperly affect the closing price today, it would 
retain the same authority with respect to the NOCP.

IV. Discussion

    After careful review of the proposed rule change, the comment 
letters, and Nasdaq's response to comments, the Commission finds that 
the proposed rule change, as amended, is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities

[[Page 14451]]

association.\54\ Specifically, the Commission finds that the proposed 
rule change, as amended, is consistent with the requirements of section 
15A of the Act in general,\55\ and section 15A(b)(6) of the Act in 
particular,\56\ which provides that the rules of the association be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principals 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.
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    \54\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \55\ 15 U.S.C. 78o-3.
    \56\ 15 U.S.C. 78o-3(b)(6).
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    The Commission believes that the establishment of an NOCP and a 
trade report modifier with which to identify that price to the public 
may be a reasonable alternative closing price that industry 
participants may choose to use. The Commission also notes that Nasdaq 
has represented that the NOCP methodology would only impact the 
Individual Market Close for Nasdaq and would not impact the 
Consolidated Close or Individual Market Closes of the Nasdaq UTP Plan 
exchanges that are disseminated by the ESIP. While the NOCP is based on 
an actual trade, it is not necessarily an actual trade report. 
Therefore, the Commission believes that the NOCP may provide benefits 
to the marketplace and investors so long as investors are aware of the 
nature of the NOCP and its calculation. The Commission also believes 
that the elements of Nasdaq's proposal appear to be a reasonable 
attempt at increasing transparency and providing stability and 
predictability to the closing prices in Nasdaq securities.
    Furthermore, in response to the procedural objections against 
Nasdaq for not consulting with and receiving approval from the UTP 
Operating Committee prior to filing the proposed rule change, the 
Commission notes that Nasdaq received a unanimous approval for the 
establishment and use of the .M modifier from the UTP Operating 
Committee and has also agreed to delay its implementation of the NOCP 
until April 14, 2003 in order to provide members of the UTP Operating 
Committee with additional time to consider the technical specifications 
prior to implementing the proposed modifier in their own markets.\57\
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    \57\ See Second Response Letter, supra note 6.
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    With regard to the other issues raised by commenters, the 
Commission is satisfied that Nasdaq has reasonably addressed the 
commenters' concerns.
    Furthermore, the Commission finds good cause for approving 
Amendment No. 1 prior to the thirtieth day after the date of 
publication of the notice of filing thereof in the Federal 
Register.\58\ Nasdaq filed Amendment No. 1 in response to comments it 
received after the publication of the notice of filing of the proposed 
rule change to address certain commenters' concerns.\59\ Because 
Amendment No. 1 is responsive to these commenters' concerns, the 
Commission finds good cause for accelerating approval of Amendment No. 
1.
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    \58\ 15 U.S.C. 78s(b)(2).
    \59\ Certain commenters objected to Nasdaq's proposal to adjust 
the NOCP only if the Predicate Trade is cancelled or corrected by 
4:30:00 PM, even though Nasdaq would continue to accept trade cancel 
and correction messages via ACT until 5:15:00 p.m. See CSE Letter 
and Institute Letter, supra note 4. However, in response to 
comments, Nasdaq revised its proposal in Amendment No. 1 to consider 
cancelled or corrected trades submitted until 5:15:00 PM rather than 
4:30:00 PM for the calculation of the NOCP. See Amendment No. 1, 
supra note 5.
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V. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 1, including whether Amendment No. 1 
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 Amendment No. 1 that are filed with the Commission, and all 
written communications relating to Amendment No. 1 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-2002-158 and should be 
submitted by April 15, 2003.

VI. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\60\ that the proposed rule change (SR-NASD-2002-158) be, and it 
hereby is, approved, and that Amendment No. 1 to the proposed rule 
change be, and it hereby is, approved on an accelerated basis.
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    \60\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\61\
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    \61\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-6985 Filed 3-24-03; 8:45 am]
BILLING CODE 8010-01-P