[Federal Register Volume 68, Number 238 (Thursday, December 11, 2003)]
[Notices]
[Pages 69098-69102]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-30699]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48878; File No. SR-NASD-2003-173]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Relating 
to the Nasdaq Closing Cross

December 4, 2003.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on November 25, 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. 
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's proposed rule change would establish the Nasdaq Closing 
Cross for certain Nasdaq National Market securities. There would be 
three components of the Nasdaq Closing Cross: (1) The creation of On 
Close and Imbalance Only order types (``Nasdaq Closing Orders'') (2) 
the dissemination of an order imbalance indicator via electronic means; 
and (3) closing cross processing in SuperMontage at 4:00:00 that would 
execute the maximum number of shares at a single, representative price 
that would be the Nasdaq Official Closing Price. The text of the 
proposed rule change is set forth below. Proposed new language is in 
italics.
* * * * *

Rule 4709 Nasdaq Closing Cross

    (a) Definitions. For the purposes of this rule the term:
    (1) ``Imbalance'' shall mean the number of shares of buy or sell 
MOC or LOC orders that cannot be matched with other MOC or LOC or IO 
order shares at any given time.
    (2) ``Imbalance Only Order'' or ``IO'' shall mean an order to buy 
or sell at a specified price or better that may be executed only during 
the Nasdaq Closing Cross and only against an Imbalance. IO orders can 
be entered between 9:30:01 a.m. and 3:59:59 p.m., but they cannot be 
cancelled or modified after 3:50:00 except to increase the number of 
shares or to increase (decrease) the buy (sell) limit price. IO sell 
(buy) orders will only execute at or above (below) the 4:00:00 
SuperMontage offer (bid). All IO orders must be available for automatic 
execution.
    (3) ``Limit On Close Order'' or ``LOC'' shall mean an order to buy 
or sell at a specified price or better that is to be executed only 
during the Nasdaq Closing Cross. LOC orders can be entered, cancelled, 
and corrected between 9:30:01 a.m. and 3:50:00 p.m. and will execute 
only at the price determined by the Nasdaq Closing Cross. All LOC 
orders must be available for automatic execution.
    (4) ``Market on Close Order'' shall mean an order to buy or sell at 
the market that is to be executed only during the Nasdaq Closing Cross. 
MOC orders can be entered, cancelled, and corrected between 9:30:01 
a.m. and 3:50:00 p.m. and will execute only at the

[[Page 69099]]

price determined by the Nasdaq Closing Cross. All MOC orders must be 
available for automatic execution.
    (5) ``Nasdaq Closing Cross'' shall mean the process for determining 
the price at which orders shall be executed at the close and for 
executing those orders.
    (6) ``Order Imbalance Indicator'' shall mean a message disseminated 
by electronic means containing information about MOC, LOC, and IO 
orders and the price at which those orders would execute at the time of 
dissemination.
    (b) Order Imbalance Indicator. Beginning at 3:50 p.m., Nasdaq shall 
disseminate by electronic means an Order Imbalance Indicator every 30 
seconds until 3:55, and then every 15 seconds until 3:58, and then 
every 5 seconds until 3:59, and then every second until market close. 
The Order Imbalance Indicator shall contain the following real time 
information:
    (1) The number of shares represented by MOC, LOC, and IO orders 
that are paired at the current SuperMontage inside;
    (2) The MOC and LOC imbalance at the current SuperMontage best bid 
or offer, depending on the direction of the imbalance;
    (3) The buy/sell direction of any imbalance at the current 
SuperMontage inside; and
    (4) An indicative price range at which the Nasdaq Closing Cross 
would occur if the Nasdaq Closing Cross were to occur at that time and 
the percent by which that range varies from the then current 
SuperMontage inside. The indicative price range contains the following 
values:
    (A) The price at which the MOC, LOC, and IO orders in the Nasdaq 
Closing Book would execute, and
    (B) The price at which both the MOC, LOC, and IO orders and all 
executable orders in SuperMontage (excluding volume that is available 
only by order delivery) would execute.
    (C) If no price satisfies subparagraph (A) or (B) above, Nasdaq 
will disseminate the phrase ``market buy'' or ``market sell''.
    (c) Processing of Nasdaq Closing Cross.
    (1) The Nasdaq Closing Cross will begin at 4:00:00, and after hours 
trading will commence when the Nasdaq Closing Cross concludes.
    (2) The Nasdaq Closing Cross will occur at the price that:
    (A) Maximizes the number of shares executed. If more than one such 
price exists, the Nasdaq Closing Cross shall occur at the price that:
    (B) Minimizes the imbalance of on-close orders. If more than one 
such price exists, the Nasdaq Closing Cross shall occur at the price 
that:
    (C) Minimizes the distance from the 4:00:00 SuperMontage bid-ask 
midpoint.
    (D) If the Nasdaq Closing Cross price established by subparagraphs 
(A) through (C) above is outside the benchmarks established by Nasdaq 
by a threshold amount, the Nasdaq Closing Cross will occur at a price 
within the threshold amounts that best satisfies the conditions of 
subparagraphs (A) through (C) above. Nasdaq management shall set and 
modify such benchmarks and thresholds from time to time upon prior 
notice to market participants.
    (3) If the Nasdaq Closing Cross price is selected and fewer than 
all MOC, LOC and IO orders and fewer than all continuous orders that 
are available for automatic execution in SuperMontage would be 
executed, orders will be executed at the Nasdaq Closing Cross price in 
the following priority:
    (A) MOC orders, with time as the secondary priority;
    (B) LOC orders, limit orders, IO orders, displayed quotes and 
reserve interest priced more aggressively than the Nasdaq Closing Cross 
price;
    (C) LOC orders, displayed interest of limit orders, and displayed 
interest of quotes at the Nasdaq Closing Cross price with time as the 
secondary priority;
    (D) Reserve interest and IO orders at the Nasdaq Closing Cross 
price with time as the secondary priority; and
    (E) Unexecuted MOC, LOC, and IO orders will be canceled.
    (4) All orders executed in the Nasdaq Closing Cross will be 
executed at the Nasdaq Closing Cross price and reported to the 
consolidated tape with SIZE as the contra party. The Nasdaq Closing 
Cross price will be the Nasdaq Official Closing Price for stocks that 
participate in the Nasdaq Closing Cross.
* * * * *

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
    Nasdaq is proposing to establish the Nasdaq Closing Cross, a new 
process for determining the Nasdaq Official Closing Price (``NOCP'') 
for the most liquid Nasdaq stocks. Nasdaq represents that the proposed 
Nasdaq Closing Cross is designed to create a more robust close that 
would allow for price discovery, and an execution that would result in 
an accurate, tradable closing price. SuperMontage would operate as it 
does today up until the close. Nasdaq would create two new on-close 
orders types (``Nasdaq Closing Orders'') that would be executable only 
during the SuperMontage closing cross. Information about the contents 
and likely market clearing price of the Nasdaq Closing Orders would be 
disseminated. In the closing process, the Nasdaq Closing Orders and 
SuperMontage continuous orders would be brought together to create a 
single Nasdaq Closing Cross. To be executable, all orders and quotes 
would be required to be subject to automatic execution to avoid the 
uncertainty and delay associated with order delivery trading interest. 
Following the Nasdaq Closing Cross, after hours trading would proceed 
as it does today.
    There would be three components of the Nasdaq Closing Cross: (1) 
The creation of On Close and Imbalance Only order types; (2) the 
dissemination of an order imbalance indicator via a Nasdaq proprietary 
data feed; and (3) closing cross processing in SuperMontage at 4:00:00 
that would execute the maximum number of shares at a single, 
representative price that would be the Nasdaq Official Closing Price. 
Each component is described in detail below.
    On Close and Imbalance Only Orders In The Closing Book. The closing 
process would begin with market participants entering On-Close and 
Imbalance Only order types in SuperMontage. On-Close orders would be 
able to be un-priced and entered as market-on-close (``MOC''), or 
priced and entered as limit-on-close (``LOC''). On-Close orders would 
be able to be entered, cancelled, and corrected between 9:30:01 a.m. 
EST and 3:50:00 p.m. but they would not be displayed in the Nasdaq 
Order Display Facility or disseminated via any data feed. On-Close 
orders, both MOC and LOC, would execute only at the price determined by 
the closing Nasdaq cross. Thus, LOC orders would be subject to

[[Page 69100]]

price improvement if the buy (sell) order were to be greater than (less 
than) the closing price.
    Imbalance Only (``IO'') orders would supplement the liquidity 
provided by On Close orders and they would execute only within the 
closing cross against any imbalance in liquidity. IO order types would 
be required to be priced limit orders; SuperMontage would reject IO 
orders entered without a price. Like On Close orders, IO orders would 
not be displayed in the Nasdaq Order Display Facility or disseminated 
via any data feed. IO orders would be able to be entered until 3:59:59, 
but they would not be able to be cancelled or modified after 3:50:00 
except to increase the number of shares or to increase (decrease) the 
buy (sell) limit price. IO sell orders would only execute at or above 
the 4:00:00 SuperMontage inside offer, and IO buy orders would only 
execute at or below the 4:00:00 SuperMontage inside bid.
    The On Close and IO orders would constitute the ``Nasdaq Closing 
Orders'' which, as described below, would serve as the basis for the 
Closing Cross Order Imbalance Indicator.
    Order Imbalance Indicator. At 3:50:00, Nasdaq would begin the 
closing auction calculation and would disseminate an order imbalance 
indicator on Nasdaq's proprietary data feed. Imbalance information 
would include several pieces of information regarding the closing 
cross: (1) The number of shares represented by MOC, LOC, and IO orders 
that paired at the current SuperMontage inside; (2) the MOC and LOC 
imbalance at the current SuperMontage best bid or offer, depending on 
the direction of the imbalance; (3) the buy/sell direction of that 
imbalance, and the current inside price; (4) an indicative clearing 
price range at which the Nasdaq Closing Cross would occur if the Nasdaq 
Closing Cross were to occur at that time; and (5) the percent by which 
that indicative price varies from the SuperMontage inside price. The 
indicative clearing price range would be bounded on the far side by the 
price at which the MOC, LOC, and IO orders would clear with only each 
other. It would be bounded on the near side by the price at which the 
Nasdaq Closing Orders and the SuperMontage continuous orders (excluding 
volume available only by order delivery) would clear. Where no clearing 
price exists, Nasdaq would disseminate the phrase ``market buy'' or 
``market sell.''
    Nasdaq would disseminate the order imbalance indicator via the 
Nasdaq Total View data feed at no additional charge to subscribers. The 
indicator would be disseminated beginning at 3:50:00 and then at more 
frequent intervals as the time to market close decreases: every 30 
seconds beginning at 3:50, every 15 seconds beginning at 3:55, every 5 
seconds beginning at 3:58, and every second from 3:59 until market 
close.
    For example, if the SuperMontage Book at 3:59:00 pm were to contain 
the following orders:

                               Buy Orders
------------------------------------------------------------------------
                             Size                                 Price
------------------------------------------------------------------------
4000..........................................................     19.99
3000..........................................................     19.98
2000..........................................................     19.97
10000.........................................................     19.96
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                               Sell Orders
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                             Size                                 Price
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500...........................................................     20.00
35000.........................................................     20.01
3000..........................................................     20.02
10000.........................................................     20.04
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    And the Nasdaq Closing Orders at that time contains the following 
orders:

                               Buy Orders
------------------------------------------------------------------------
                             Size                                 Price
------------------------------------------------------------------------
3000..........................................................     20.02
8000..........................................................    Market
1000..........................................................     19.99
4000..........................................................     19.97
500...........................................................     19.97
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                               Sell Orders
------------------------------------------------------------------------
                             Size                                 Price
------------------------------------------------------------------------
5000..........................................................    Market
3000..........................................................     19.98
1000..........................................................     20.00
1000..........................................................     20.02
1000..........................................................     19.98
------------------------------------------------------------------------

    Nasdaq would disseminate the following indicative closing 
information:
    [sbull] 10,000 shares paired at $20.00;
    [sbull] 1,000 share buy imbalance;
    [sbull] Indicative Price Range: $20.01-20.02; and
    [sbull] Variance from SuperMontage inside of less than 10 percent.
    Nasdaq Closing Cross. The Nasdaq Closing Cross would begin at 
4:00:00 and, thus, would not affect SuperMontage processing that exists 
today during normal market hours. The Nasdaq Closing Cross would 
conclude at approximately 4:00:05 at which time the closing executions 
would be reported to the consolidated tape for Nasdaq securities and 
after hours trading would commence just as it does today. The Nasdaq 
Closing Cross would be designed to accomplish three goals in decreasing 
priority: (1) Maximize the number of shares executed, (2) minimize the 
imbalance of on-close orders; and (3) minimize the distance from the 
4:00:00 SuperMontage inside bid-ask midpoint.
    If the Nasdaq Closing Cross price were to be selected and fewer 
than all Nasdaq Closing Orders and all continuous orders available for 
automatic execution in SuperMontage would be executed, the system would 
execute orders in the following priority:
    (1) MOC orders, with time as the secondary priority;
    (2) LOC orders, limit orders, IO orders, displayed quotes and 
reserve interest priced more aggressively than the Nasdaq Closing Cross 
price;
    (3) LOC orders, displayed interest of limit orders, and displayed 
interest of quotes at the Nasdaq Closing Cross price with time as the 
secondary priority; and
    (4) Reserve interest and IO orders at the Nasdaq Closing Cross 
price with time as the secondary priority.\3\
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    \3\ Short sale orders that participate in the Nasdaq Closing 
Cross would be required to comply with the applicable Nasdaq short 
sale rule.
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    All executable orders would be executed at the Nasdaq Closing Cross 
price and reported to the consolidated tape with SIZE as the contra 
party. The Nasdaq Closing Cross price and the associated paired volume 
would then be disseminated via the UTP Trade Data Feed (``UTDF'') as 
the NOCP.
    For example, if the continuous SuperMontage and Nasdaq Closing 
Orders were to contain the following orders:

[[Page 69101]]



                                                   Buy Orders
----------------------------------------------------------------------------------------------------------------
                  Entry time                                  Side                     Size            Price
----------------------------------------------------------------------------------------------------------------
3:00..........................................  Buy--OC.........................            8000          Market
2:30..........................................  Buy--OC.........................            3000           20.02
3:31..........................................  Buy--Day........................            4000           19.99
3:35..........................................  Buy--OC.........................            1000           19.99
3:59..........................................  Buy--Day........................            3000           19.98
3:59..........................................  Buy--Day........................            2000           19.97
3:40..........................................  Buy--OC.........................            4000           19.97
3:52..........................................  Buy--IO.........................             500           19.97
3:30..........................................  Buy--Day........................           10000           19.96
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                                                   Sell Orders
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                  Entry time                                  Side                     Size            Price
----------------------------------------------------------------------------------------------------------------
2:45..........................................  Sell--OC........................            5000          Market
3:00..........................................  Sell--OC........................            3000           19.98
3:55..........................................  Sell--IO........................            1000           19.98
3:59..........................................  Sell--Day.......................             500           20.00
3:35..........................................  Sell--IO........................            1000           20.00
3:48..........................................  Sell--Day.......................            5000           20.01
3:31..........................................  Sell--GTC.......................            3000           20.02
3:40..........................................  Sell--OC........................            1000           20.02
3:30..........................................  Sell--Day.......................           10000           20.04
----------------------------------------------------------------------------------------------------------------

    The Nasdaq Closing Cross would execute 11,000 shares at $20.01.
    Nasdaq would establish a circuit breaker for the closing cross to 
protect against very unusual occurrences where the price discovery 
mechanism at the close did not function as expected. Nasdaq has 
selected two benchmark values representing market conditions 
approximately five seconds prior to the close: (1) The Volume Weighted 
Average Nasdaq Inside (``VWAI'') over the period from 3:59:54 to 
3:59:57; \4\ and (2) the Volume Weighted Average Price (``VWAP'') based 
upon SuperMontage executions over the period from 3:59:55 to 
4:00:00.\5\ After the Nasdaq Crossing Price is selected, Nasdaq would 
then compare it to the two benchmarks. If the expected Nasdaq Crossing 
Price were to be within a preset boundary of either the VWAI or the 
VWAP, the cross would occur at the expected Nasdaq Crossing Price.
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    \4\ For example, Nasdaq would take every Nasdaq Inside Ask in 
effect 3:59:54:000 through 3:49:56:999, weight the Ask Price by the 
product of the time (milliseconds) the quote was in effect and the 
displayed size (roundlots). The weighted average of all the Inside 
Ask updates during the indicated time period would be the VWAI Ask 
for the stock.
    \5\ For example, Nasdaq would take every last sale eligible 
SuperMontage Trade report between 3:59:55:000 and the start of the 
closing process and weight the trade price by the reported volume. 
The weighted average of all the SuperMontage trade reports would be 
the VWAP for the stock.
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    If the expected Nasdaq Crossing Price were to be outside a preset 
boundary (``Threshold Percentage'') of both benchmarks, Nasdaq would 
change the Nasdaq Crossing Price such that it would be within the 
threshold percentage. The Threshold Percentage would be set by Nasdaq 
officials and would vary based on market conditions and experience with 
the close. Nasdaq would publish the Threshold Percentages via its 
public NasdaqTrader Web site.\6\ The modified price would then follow 
the principles for ordinary crosses: Maximizing volume executed, 
minimizing the imbalance of On Close orders, and minimizing the 
distance from the 4:00 SuperMontage bid-ask midpoint (unexecuted shares 
would be canceled).
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    \6\ Nasdaq would also be able to also employ the Benchmark 
Values and Threshold Percentages for determining the Nasdaq Official 
Closing Price for stocks that are not included in the Nasdaq Closing 
Cross.
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    Implementation. Upon initial implementation, Nasdaq proposes to 
apply the closing process to its most liquid issues, namely securities 
included in the Nasdaq 100 Index, the S&P 500 Index, and the Nasdaq 
Biotech Index. Nasdaq would have the authority to apply the closing 
cross to any and all Nasdaq NMS securities. For those securities, the 
Nasdaq Closing Cross price would be the NOCP. Issues that are not 
subject to the closing auction would continue to have their NOCP value 
calculated and disseminated as today. All NOCP values will be 
disseminated by 4:02:00 with the .M sale condition modifier.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A of the Act,\7\ in general, and with 
Section 15A(b)(6) of the Act,\8\ in particular, in that Section 
15A(b)(6) requires the NASD's rules to be designed, among other things, 
to protect investors and the public interest. Nasdaq's believes that 
its current proposal is consistent with the NASD's obligations under 
these provisions of the Act because it would result in the public 
dissemination of information that more accurately reflects the trading 
in a particular security at the close. Furthermore, to the extent a 
security is a component of an index, Nasdaq believes the index would 
more accurately reflect the value of the market, or segment of the 
market, the index is designed to measure. Nasdaq believes 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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    \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.

[[Page 69102]]

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

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

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    A. By order approve such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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. 
Comments may also be submitted electronically at the following e-mail 
address: [email protected]. All comment letters should refer to 
File No. SR-NASD-2003-173. This file number should be included on the 
subject line if e-mail is used. To help us process and review comments 
more efficiently, comments should be sent in hardcopy or by e-mail but 
not by both methods. 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 the 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-2003-173 and should be 
submitted by January 2, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-30699 Filed 12-10-03; 8:45 am]
BILLING CODE 8010-01-P