[Federal Register Volume 68, Number 230 (Monday, December 1, 2003)]
[Notices]
[Pages 67249-67252]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-29800]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48823; File No. SR-NASD-2003-154]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment Nos. 1 and 2 by the 
National Association of Securities Dealers, Inc. Concerning Late Trade 
Reports, Reports of Trades Executed Outside Normal Market Hours, and 
Clarifying NASD Rule 6420

November 21, 2003.
    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 October 7, 2003, the National Association of Securities Dealers, 
Inc. (``NASD''), 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. Nasdaq amended 
the proposed rule change on November 12, 2003.\3\ On November 20, 2003, 
Nasdaq again amended the proposed rule change.\4\ Nasdaq filed the 
proposed rule change pursuant to Section 19(b)(3)(A)(i) of the Act,\5\ 
and Rule 19b-4(f)(1) thereunder,\6\ as one constituting a stated 
policy, practice, or interpretation with respect to the meaning, 
administration, or enforcement of an existing rule, which renders the 
proposed rule change effective upon filing with the Commission. The 
Commission is

[[Page 67250]]

publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See November 10, 2003 letter from Peter R. Geraghty, 
Associate Vice President (``AVP'') and Associate General Counsel 
(``AGC''), Nasdaq, to Katherine A. England, Assistant Director, 
Division of Market Regulation (``Division''), Commission 
(``Amendment No. 1''). In Amendment No. 1, Nasdaq added language to 
the proposed rule indicating that Nasdaq will append the .T modifier 
automatically in the circumstances described in the filing, and 
clarifies that the language governs the appending of the .T and .SLD 
modifiers in the circumstances described in the instant proposed 
rule change as well as in SR-NASD-2003-83. Securities Exchange Act 
Release No. 48120 (July 2, 2003), 68 FR 41032 (July 9, 2003).
    \4\ See November 19, 2003 letter from Peter R. Geraghty, AVP and 
AGC, Nasdaq, to Katherine A. England, Assistant Director, Division, 
Commission (``Amendment No. 2''). Amendment No. 2 does not propose 
any substantive modifications to the proposed rule change. It 
provides in a single document the proposed rule language, as 
modified by Amendment No. 1. For purposes of calculating the 60-day 
abrogation period, the Commission considers the period to have begun 
on November 20, 2003, the day Nasdaq filed Amendment No. 2.
    \5\ 15 U.S.C. 78s(b)(3)(A)(i).
    \6\ 17 CFR 240.19b-4(f)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to modify the Automated Confirmation Transaction 
Service (``ACT'') to append the .T modifier automatically to trade 
reports erroneously submitted to ACT without the modifier. In addition, 
Nasdaq is proposing to codify guidance that members must report on the 
following day on an ``as/of'' basis pre-open trades not reported before 
9:30 a.m. Eastern Time. Finally, Nasdaq is making a non-substantive 
language change to NASD Rule 6420 to clarify that the term ``executed 
during the trading hours of the Consolidated Tape'' means between the 
hours of 9:30 a.m. to 4 p.m. Eastern Time. The text of the proposed 
rule change is below. Proposed new language is in italics; proposed 
deletions are in brackets.

5430. Transaction Reporting

(a) When and How Transactions are Reported

* * * * *
(4) Transaction Reporting Outside Normal Market Hours
    (A)(i) Last sale reports of transactions in designated securities 
executed between 8 a.m. and 9:30 a.m. Eastern Time shall be reported 
within 90 seconds after execution and shall be designated as ``.T'' 
trades to denote their execution outside normal market hours. 
Additionally, last sale reports of transactions in designated 
securities executed between the hours of 4 p.m. and 6:30 p.m. Eastern 
Time shall be reported within 90 seconds after execution; trades 
executed and reported after 4 p.m. Eastern Time shall be designated as 
``.T'' trades to denote their execution outside normal market hours. 
Transactions not reported within 90 seconds must include the time of 
execution on the trade report.
    (ii) Last sale reports of transactions in designated securities 
executed between 8 a.m. and 9:30 p.m. Eastern Time not reported to ACT 
prior to 9:30 a.m. shall be reported the following day on an ``as/of'' 
basis and include the time of execution. The requirements of this 
paragraph (ii) apply only to those trades that are required to be, or 
are voluntarily, reported to ACT pursuant to Rule 5430(b).
    (B) Last sale reports of transactions in designated securities 
executed outside the hours of 8:00 a.m. and 6:30 p.m. Eastern Time 
shall be reported as follows:
    (i)a. Last sale reports of transactions executed between midnight 
and 8 a.m. Eastern Time shall be reported between 8 a.m. and 9:30 a.m. 
Eastern Time on trade date, be designated as ``.T'' trades to denote 
their execution outside normal market hours, and be accompanied by the 
time of execution.
    b. Last sale reports of transactions executed between midnight and 
8 a.m. Eastern Time not reported to ACT between 8 a.m. and 9:30 a.m. 
Eastern Time on trade date shall be reported to ACT the following day 
on an ``as/of'' basis and include the time of execution. The 
requirements of this paragraph b. apply only to those trades that are 
required to be, or are voluntarily, reported to ACT pursuant to Rule 
5430(b).
    (ii) Last sale reports of transactions executed between 6:30 p.m. 
and midnight Eastern Time shall be reported on the next business day 
(T+1) between 8 a.m. and 6:30 p.m. Eastern Time, be designated ``as/
of'' trades to denote their execution on a prior day, and be 
accompanied by the time of execution.
* * * * *

    (10) Nasdaq will append the .T modifier or the .SLD modifier, as 
appropriate, to those reports submitted to ACT that contain the time of 
execution, but that do not contain the appropriate modifier.

6400. Reporting Transactions In Listed Securities

6420. Transaction Reporting

(a) When and How Transactions are Reported

    (1) Registered Reporting Members shall transmit through ACT, within 
90 seconds after execution, last sale reports of transactions in 
eligible securities executed between 9:30 a.m. and 4 p.m. Eastern Time 
[during the trading hours of the Consolidated Tape] otherwise than on a 
national securities exchange. Transactions not reported within 90 
seconds after execution shall be designated as late and such trade 
reports must include the time of execution. Registered Reporting 
Members shall also transmit through ACT, within 90 seconds after 
execution, last sale reports of transactions in eligible securities 
executed in the United States otherwise than on a national securities 
exchange between 4 p.m. and 6:30 p.m. Eastern Time; trades executed and 
reported after 4 p.m. Eastern Time shall be designated as ``.T'' trades 
to denote their execution outside normal market hours. Transactions not 
reported within 90 seconds after execution must include the time of 
execution on the trade report.
    (2)(A) Non-Registered Reporting Members shall, within 90 seconds 
after execution, transmit through ACT or if ACT is unavailable due to 
system or transmission failure by telephone to the Nasdaq Market 
Operations Department, last sale reports of transactions in eligible 
securities executed between 9:30 a.m. and 4 p.m. Eastern Time [during 
the trading hours of the Consolidated Tape] otherwise than on a 
national securities exchange.
* * * * *

6600. Over-The-Counter Equity Securities

6620. Transaction Reporting

(a) When and How Transactions are Reported

    (1) through (6) No Changes.
    (7) Nasdaq will append the .T modifier or the .SLD modifier, as 
appropriate, to those reports submitted to ACT that contain the time of 
execution, but that do not contain the appropriate modifier.
* * * * *

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. 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
    NASD trade reporting rules are designed to ensure timely and 
accurate reports of executed trades, including trades executed before 
and after normal trading hours. To distinguish trades executed during 
the pre and after hours sessions from trades executed during normal 
market hours (i.e., between 9:30 a.m. and 4 p.m. Eastern Time), NASD 
members generally are required to append the .T modifier to reports of 
trades executed outside of normal market hours.\7\ Trade reports that 
do not

[[Page 67251]]

include the .T modifier, or any other modifier, are assumed to be 
timely reports of normal market hours trades and are included in the 
last sale, high price, and low price calculations for a security, which 
calculations are designed to provide information about the current 
trading of a security during normal market hours.\8\ Therefore, when 
reports of trades executed outside normal market erroneously do not 
include the .T modifier, the trades appear as normal market hours 
trades, which can distort the market because the price being reported 
may be significantly different from the prices in the normal market 
hours. These erroneously reported trades can cause confusion for 
members, issuers, and investors and can lead to investment decisions 
being made based upon inaccurate information. Automatically appending 
the .T modifier in these circumstances will prevent this market 
confusion.
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    \7\ Some trades executed outside normal market hours are not 
reported with the .T modifier, but instead are required to be 
reported as ``as/of'' trades on the day following the date of 
execution. For example, Rule 5430(a) requires members to report a 
trade on an ``as/of'' basis if the trade is executed between 6:30 
p.m. and midnight. A trade executed during this time period must be 
reported the following day as an ``as/of'' trade. The current 
proposal to append the .T modifier automatically does not change 
members ``as/of'' reporting obligations.
    \8\ Nasdaq's systems assume that trades reported without the .T 
modifier have been executed during normal market hours and are 
indicative of the current market for the security.
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    In some circumstances today, ACT appends the .T modifier 
automatically. If a trade is executed and reported at or after 4:01:30 
p.m. and up until 6:30 p.m., ACT automatically appends the .T 
modifier.\9\ However, if the submission to ACT is a report of a trade 
executed between midnight and 9:30 a.m., or between 4 p.m. and 4:01:30 
p.m., ACT does not append the .T modifier automatically; the member 
must submit the report with the .T modifier attached. As described 
earlier, members occasionally fail to include the .T modifier on these 
reports. While NASD can, and does, bring disciplinary actions against 
members when they do not properly report trades, the immediate result 
of an improperly reported trade is that potentially misleading 
information is disseminated. Therefore, to prevent this result, Nasdaq 
is proposing to modify ACT to append the .T modifier automatically to 
any transaction report that contains an execution time between midnight 
and 9:30 a.m., or between 4 p.m. and 4:01:30 p.m.\10\
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    \9\ Id. Trades executed between 6:30 p.m. and midnight must be 
reported the following day on an ``as/of'' basis.
    \10\ A trade executed at 9:30 a.m. or 4 p.m. Eastern Time is 
considered executed during normal market hours, and thus not 
reported with a .T modifier.
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    To append the .T modifier automatically, ACT must be reprogrammed 
to include a validation parameter that compares the time of execution 
and the modifier field.\11\ Once the validation parameter is operative, 
if the time of execution on a submission to ACT indicates a trade was 
executed between midnight and 9:30 a.m. or between 4 p.m. and 4:01:30 
p.m., and the .T modifier is not included in the report, ACT will 
append the .T modifier automatically.\12\
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    \11\ Nasdaq intends to implement the ACT program changes on, or 
about, November 3, 2003.
    \12\ Supra note 8. The .T modifier will not be appended to a 
trade report that contains a time of execution of 9:30 a.m. or 4 
p.m. Eastern Time.
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    The validation parameter relies on the time of execution to 
identify improperly reported trades and to append the .T modifier. 
Today, nearly all trades reported to Nasdaq include the time of 
execution, but some trades are still reported without this 
information.\13\ Therefore, a small number of improperly reported 
trades will not be corrected automatically and thus will continue to be 
included in the last sale, high price, and low price calculations. 
However, Nasdaq staff will continue to conduct surveillance for these 
instances and manually correct the calculations when such errors are 
discovered. To eliminate the small number of incidences in which ACT 
cannot identify and correct improperly reported trades, Nasdaq soon 
will file a proposal to require the time of execution on all trade 
reports.
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    \13\ Today, over 99% of the trades submitted to ACT include the 
time of execution.
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    Nasdaq also is proposing to codify a requirement that members must 
report on the following day on an ``as/of'' basis trades executed 
between midnight and 9:30 a.m., but not reported before 9:30 a.m. on 
trade date. This guidance has been given to members in the past, but 
Nasdaq believes it is necessary to codify the requirement at this time 
so that the rules clearly state a member's obligations.\14\ Nasdaq 
believes that requiring members to report these trades the following 
day is necessary to prevent members from reporting pre-open trades 
during the normal or after-hours sessions, which could distort the 
prices in these time periods due to the potential differences in prices 
between the pre open session and these other sessions.\15\
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    \14\ The proposed requirement would apply only to those NASD 
members that are required to report trades to ACT or that choose to 
report trades to ACT, as specified in NASD Rule 5430(b).
    \15\ While members have been informed of this position in the 
past, there is no written guidance on the issue. As such, pre-open 
trades sometimes are reported during normal market hours. Once the 
current proposal is implemented, the .T modifier will be appended 
automatically to any report of a pre-open trade that contains the 
time of execution. For example, if a member attempts to report a 
pre-open trade during normal market hours, ACT will append the .T 
modifier. However, ACT also will reject the trade, because during 
normal market hours ACT rejects any report containing the .T 
modifier, even a report that contains a .T appended by ACT itself. 
In these circumstances, the member must resubmit the report the 
following day.
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    Finally, Nasdaq is proposing non-substantive language changes to 
NASD Rule 6420(a)(1) to clarify the meaning of the phrase ``executed 
during the trading hours of the Consolidated Tape.'' Until recently, 
this phrase was commonly understood to mean between the hours of 9:30 
a.m. and 4 p.m. Eastern Time. However, the Consolidated Tape recently 
began disseminating trades executed on an exchange whose normal market 
hours are from 8 a.m. to 8 p.m. Thus, some members have sought 
clarification of their trade reporting responsibilities.
    The proposed language change does not modify members' trade 
reporting obligations. Paragraphs (a)(1), (a)(2)(B), and (a)(3)(A) of 
NASD Rule 6420 specifically articulate members' reporting obligations 
between 4 p.m. and 6:30 p.m., and outside the hours of 9:30 a.m. and 
6:30 p.m., which leads to the logical conclusion that the only time 
period that could be governed by the phrase ``executed during the 
trading hours of the Consolidated Tape'' is the period between 9:30 
a.m. and 4 p.m. However, to prevent any further confusion, Nasdaq is 
proposing to replace the phrase at issue with the phrase ``executed 
between 9:30 a.m. and 4:00 p.m. Eastern Time.''
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A(b)(6) of the Act,\16\ which requires that 
NASD's rules, among other things, protect investors and public 
interest. Nasdaq believes the proposal to append the .T modifier 
automatically to trade reports submitted to ACT is consistent with this 
obligation because it will prevent nearly all reports of trades 
executed outside normal market hours from being included in the 
calculations designed to inform investors of the current market for a 
security during normal market hours. As a result, members and the 
public will possess more accurate information when making investment 
decisions. In

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addition, specifically including language in NASD Rule 5420 concerning 
the obligation to report on the following day pre-open trades not 
reported before 9:30 a.m. on trade date will clarify members' trade 
reporting responsibilities and should facilitate proper reporting of 
trades. Finally, modifying the language in NASD Rule 6420 also 
clarifies members' trade reporting responsibilities and should 
facilitate proper reporting of trades.
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    \16\ 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, as amended.

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

    The foregoing proposal has become effective pursuant to Section 
19(b)(3)(A)(i) of the Act,\17\ and Rule 19b-4(f)(1) \18\ thereunder, in 
that it constitutes a stated policy and interpretation with respect to 
the meaning of an existing rule.
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    \17\ 15 U.S.C. 78s(b)(3)(A)(i).
    \18\ 17 CFR 240.19b-4(f)(1).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act. The programming changes that 
will append the .T modifier automatically are scheduled for 
implementation on, or about, November 3, 2003.

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 number SR-NASD-2003-154 and 
should be submitted by December 22, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-29800 Filed 11-28-03; 8:45 am]
BILLING CODE 8010-01-P