[Federal Register Volume 69, Number 52 (Wednesday, March 17, 2004)]
[Notices]
[Pages 12727-12730]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-5980]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-49404; File No. SR-NASD-2003-159]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 by the National Association of Securities
Dealers, Inc. to Permit Nasdaq to Append a New Modifier to Trade
Reports of Pre-Open and After-Hours Trades Not Submitted to Nasdaq's
Automated Confirmation Transaction Service, and Other Changes Regarding
Trade Reporting
March 11, 2004.
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 16, 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. On February 5,
2004, Nasdaq amended the proposal.\3\ The Commission is 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 February 4, 2004 letter from Peter R. Geraghty,
Associate Vice President and Associate General Counsel, Nasdaq, to
Katherine A. England, Assistant Director, Division of Market
Regulation, Commission and attachments (``Amendment No. 1'').
Amendment No. 1 completely replaced and superseded the original
proposed rule change.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Nasdaq proposes changes to permit it to append a new modifier to
trade reports of pre-open and after-hours trades not submitted to
Nasdaq's Automated Confirmation Transaction Service (``ACT'') within 90
seconds after execution, and to require members to: (1) Include the
time of execution on all reports submitted to ACT; (2) append the .W
modifier to reports of ``stop stock transactions;'' (3) append the .W
modifier, as appropriate, to reports submitted to ACT after 5:15
p.m.,\4\ and (4) append the .PRP modifier to reports of transactions in
listed securities that are executed at a price that is based on a prior
point in time.
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\4\ Nasdaq also is proposing to clarify that members must append
the .W modifier to a trade report if a trade can be properly
reported with both a .T modifier and a .W modifier. This
clarification is necessary because ACT can accept only one modifier
per trade report. See infra note 14.
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The proposal to implement a new trade report modifier for pre-open
and after hours trades that are reported late must be approved by the
respective members of the Consolidated Tape Association and the Nasdaq
Unlisted Trading Privilege Plan. In addition, the proposal to require
members to append the .PRP modifier, as appropriate, to reports of
listed securities must be approved by the members of the Consolidated
Tape Association.
The amendments contained in this filing will be implemented as soon
as practical, should the Commission approve the filing, taking into
consideration the system changes required to be made by members and
vendors.\5\ If the Commission approves the proposed rule change, Nasdaq
will announce an implementation schedule soon after Commission
approval, but in no case would the changes be implemented in less than
90 days after approval.
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\5\ The NASD Small Firm Advisory Board (``SFAB'') requested that
the change to require the time of execution on all trade reports be
implemented one year from the date of Commission approval so that
small members would have sufficient time to make the necessary
system modifications.
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The text of the proposed rule change is available at Nasdaq and at
the Commission.
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
Market participants make trading and investment decisions based, in
part, on information disseminated by Nasdaq about trades executed in
its market. Nasdaq is proposing several changes that are designed to
improve the quality of the information disseminated. The proposed
changes will permit Nasdaq to append a new modifier to trade reports of
pre-open and after-hours trades not submitted to ACT within 90 seconds
after execution, and to require members to: (1) Include the time of
execution on all reports submitted to ACT; (2) append the .W modifier
to reports of ``stop stock transactions;'' (3) append the .W modifier,
as appropriate, to reports submitted after 5:15 p.m.; and (4) append
the .PRP modifier to reports of transactions in listed securities that
are executed at a price that is based on a prior point in time.
Late Pre-Open and After-Hours Trade Reports
To provide market participants with more accurate information about
the prices at which a security is trading outside normal market hours,
Nasdaq is proposing to create a new trade
[[Page 12728]]
reporting modifier (the .ST modifier) to identify pre-open and after-
hours trades that are reported late. Today, members generally are
required to submit trade reports to ACT within 90 seconds of the time
of execution. However, if during normal market hours a trade is not
reported within 90 seconds, the member must include a modifier (the
.SLD modifier) on the submission to ACT to indicate that the trade
report is late. The modifier prevents the trade report from affecting
the last sale calculation of the security and informs the market that
the price is ``stale'' because it is associated with a trade executed
at least a minute and a half earlier. In contrast, for trades executed
and reported in the pre-open and after-hours sessions, there is no
modifier equivalent to the .SLD modifier that can inform market
participants that a price may be stale. Nasdaq is proposing to create
the .ST modifier to identify stale prices in the pre-open and after-
hours sessions.
Unlike the rules governing the .SLD modifier, members will not be
required to append the .ST modifier to late reports of pre-open and
after-hours trades. Members will continue to be required to append the
.T modifier and include the time of execution on late reports of pre-
open and after-hours trades; Nasdaq will convert the .T modifier to
.ST, as appropriate, after comparing the time of execution to the time
of submission to ACT.
Reporting Time of Execution
To improve the accuracy of the information disseminated to market
participants and to enhance its automated surveillance, Nasdaq is
proposing to require members to include the time of execution on all
reports submitted to ACT.\6\ For example, when a report contains the
time of execution, Nasdaq's systems can determine whether the trade was
submitted timely or late. If the trade is submitted late and does not
include the late trade report modifier (the .SLD modifier), Nasdaq can
automatically append the modifier. Automatically appending the .SLD
modifier improves the accuracy of the information disseminated, because
when a trade is reported late without the modifier it appears on the
tape as a current trade, which can cause confusion if the price of the
late reported trade is different from the current prices at which the
security is trading. Appending the .SLD modifier eliminates the
opportunity for this confusion.
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\6\ Because of the SFAB's comments concerning the proposal to
require the time of execution on all reports submitted to ACT,
Nasdaq will delay implementation of this requirement for a year
after Commission approval. To provide members with notice of the
effective date of the requirement, Nasdaq is proposing to add
Interpretive Materials to the trade reporting rules stating the
exact date when the obligation becomes effective. Until such time,
members will remain obligated to provide the time of execution only
in those circumstances articulated in the NASD's rules. To prevent
confusion, the rule language modifications in this filing do not
contain the changes required to mandate the time of execution on all
reports submitted to ACT. These language changes will be made at a
time closer to the effective date of the requirement.
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Including the time of execution on a report also assists the NASD
in enforcing certain NASD rules, including determining whether a trade
is consistent with a member's duty of best execution. When NASD
possesses the execution time of a trade they can compare the trade
price to, among other things, the bids and offers for the security at
and around the time the trade was executed to determine whether the
price is consistent with those prices. Again, without the time of
execution, NASD's ability to perform this surveillance is complicated.
Today, approximately 99% of trade reports submitted to ACT contain
the time of execution, which means NASD can conduct its automated
surveillance and Nasdaq can append the modifiers automatically, for
nearly all of the trades submitted to ACT. However, Nasdaq can improve
both the quality of information it disseminates and the surveillance of
its market if all reports submitted to ACT contain the time of
execution. With this current proposal, Nasdaq will eliminate the few
instances in which late trades are inappropriately disseminated as
current trades and the full benefits of the NASD's automated
surveillance systems can be achieved.
Reporting Stop Stock Transactions
Nasdaq is proposing that members use the .W modifier to report the
trade execution scenario known as ``stop stock'' transactions.\7\ Using
the .W modifier to identify stop stock transactions will ensure that
the ``stop stock prices'' are not disseminated to market participants
as trades reflective of the current market for the security.\8\
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\7\ Presently, the .W modifier must be appended to reports of
trades whose prices are determined based upon an average price or
other special pricing formulae.
Members have been given guidance that the .W modifier is
appropriate to report the equity trade component of an ``exchange
for physical'' transaction. An exchange for physical transaction
involves two parties simultaneously executing a futures contract
transaction and an equity transaction (for the securities covered by
the futures contract), typically involving baskets (or exchange
traded funds `` ETFs) that replicate common indices. For example,
party A will sell a basket of stocks (or ETF) to party B, and party
B simultaneously will sell to party A a futures contract covering
the basket (or ETF).
Members also have been told that the equity leg of an exchange
for physical transaction can be reported on an ``as of'' basis on
the day following the date of execution. Either approach is
acceptable because both ensure that the equity leg trades do not get
disseminated as normal trades, and thus do not affect the high, low,
and last sale calculations. Excluding the equity leg trades from
these calculations is important because the equity leg transaction
prices often include factors and adjustments that are not based on
contemporaneous trading in the securities.
Nasdaq will be seeking a proposed rule change in the future to
provide specific, standard guidance as to the appropriate method for
reporting exchange for physical transactions. At this time, Nasdaq
has not determined the manner that will be prescribed, but until
such time, members can continue to report these trades on an ``as
of'' basis on the day following execution, or on the same day using
the .W modifier.
\8\ Until such time that the .W modifier is approved and
implemented for stop stock transactions, Nasdaq believes it is
appropriate for members to use the .SLD modifier. Using the .SLD
modifier in these circumstances is not desirable as a permanent
solution, however, because the modifier can be used only during
normal market hours. In contrast, the .W modifier can be used
between 9:30 a.m. and 5:15 p.m., and Nasdaq is proposing to extend
the use of the .W modifier until 6:30 p.m. Appending the .SLD
modifier for stop stock situations is satisfactory as a temporary
solution because it will prevent these trades from being included in
the last sale calculation and market participants will be informed
that the price in [sic] not current.
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Members and customers today often have an understanding or
explicitly agree as to how a customer's order will be executed,
especially if the order is for a large number of shares. For example,
upon receiving a market order from a customer, the member and the
customer agree that the member will execute the order in pieces
throughout the day, with the expectation that this ``working'' of the
order will result in a price to the customer that is superior to the
price at which the stock is trading at the time the member receives the
order. However, the member also may promise to ``stop'' the customer at
or near the current market price to ensure that the customer does not
receive an inferior price if the market moves against the customer's
interest (e.g., the price of the stock rises throughout the day when
the member is seeking to buy the security). In such situations, when
the customer's order is executed, the trade must be reported at
whichever price the member used to fill the order, either the ``stop
stock price'' or the better price.
Currently, if the member fills the customer's order at a price that
is the average of several different execution prices, the trade must be
reported with the .W modifier, which informs market participants that
the price is not based on current trading.\9\ However, today
[[Page 12729]]
there is no modifier designated to identify a trade executed at a stop
stock price. As a result, trades executed at stop stock prices appear
as current market trades, when in fact the price may be based on the
market several hours earlier. For example, a member fills a customer's
order at the end of the day (which it received in the morning) at a
stop stock price of $50, when the current market is trading at $52.
When reported without a modifier, there is nothing to distinguish the
trade at $50 from other trades occurring at that time at $52.
Therefore, market participants can be led to believe that the market is
falling, especially if the stop stock transaction is for a large number
of shares. Requiring members to use the .W modifier to identify these
trades will improve the information disseminated about the prices at
which stocks are trading on Nasdaq.
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\9\ In some instances, however, a trade may not be required to
be reported to Nasdaq if that the trade qualifies as the riskless
leg of a riskless principal transaction. See e.g., NASD Rule
4632(d)(3)(B). See also, Nasdaq General News--Riskless Principal
Negative Consent Letters and .W Modifier (January 31, 2001), which
is available at http://www.nasdaqtrader. com/Trader/News/2001/
generalnews/ 01312001.stm.
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To prevent confusion with the terms ``stop order''\10\ and ``stop-
limit order,''\11\ and to provide guidance as to the exact
circumstances in which use of the .W modifier will be required, Nasdaq
will define the terms ``Stop Stock Price'' and ``Stop Stock
Transaction'' in its rules. Nasdaq is proposing to define the term
``Stop Stock Price'' as the specified price at which a member and
another party agree a Stop Stock Transaction will be executed, and
which price is based upon the prices at which the security is trading
at the time the order is received by the member, taking into
consideration that the specified price may deviate from the current
market prices to factor in the size of the order and the number of
shares available at those prices.
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\10\ Barron's Dictionary of Finance and Investment Terms (4th
ed. 1995) defines the term ``stop order'' as an ``order to a
securities broker to buy or sell at the market price once the
security has traded at a specified price called the stop price.''
\11\ Barron's Dictionary of Finance and Investment Terms (4th
ed. 1995) defines the term ``stop-limit order'' as an ``order to a
securities broker with instructions to buy or sell at a specified
price or better (called the stop-limit price) but only after a given
stop price has been reached or passed.''
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Nasdaq is proposing to define a ``Stop Stock Transaction'' as any
transaction that is the result of an order in which a member and
another party agree that the order will be executed at a Stop Stock
Price or better, and the order is executed at the Stop Stock Price. An
order that is not executed at the Stop Stock Price does not comply with
the definition of a Stop Stock Transaction, but nevertheless may need
to be reported with the .W modifier if the price is based on average
weighting or some other special pricing formula.\12\
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\12\ Because members will be required to include the .W modifier
and the time of execution on reports of Stop Stock Transactions, ACT
is being programmed to reject any report submitted with the .W
modifier that does not include the time of execution. However, the
time of execution is not presently required when reporting .W trades
based on average weighting or any other special pricing formula,
unless the trade is reported late. Because ACT will not be able to
distinguish between Stop Stock Transactions and other trades being
reported with the .W, Nasdaq is proposing to require members to
include the time of execution on all trades reported with the .W
modifier, including those based on average weighting or other
special pricing formulae.
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To enable the NASD to conduct surveillance for proper use of the .W
modifier for Stop Stock Transactions, members will be required to
record the time at which the member and the other party agreed to the
Stop Stock Price.\13\ Specifically, members must populate the time of
execution field on the ACT report with the time the member and the
other party agreed to the Stop Stock Price; members will not be
required to include on the ACT report the actual time the trade was
executed.
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\13\ In contrast, members will be required to include the actual
time a trade is executed when using the .W modifier to identify a
trade whose price is based on average weighting or some other
special pricing formulae.
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Nasdaq also is seeking to extend the hours during which the .W
modifier can be submitted to ACT. Presently, the .W modifier is
accepted from 9:30 a.m. until 5:15 p.m., while ACT remains open until
6:30 p.m. Eastern Time. Nasdaq is proposing to modify ACT to accept the
.W modifier from 5:15 p.m. until 6:30 p.m. With this change, members
will be required to use the .W modifier, as appropriate, for trades
executed between 9:30 a.m. and 6:30 p.m.\14\ However, for Stop Stock
Transactions, the .W modifier is not required if the trade is executed
and reported within 90 seconds of the time the member and the party
agreed to the Stop Stock Price.\15\
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\14\ ACT can accept only one modifier per trade report. In some
instances, however, a trade can be executed in a manner in which the
.T modifier and the .W modifier would be appropriate. For example,
an average price trade that is executed between 4 p.m. and 6:30 p.m.
Because the trade is executed and reported outside normal market
hours, the .T modifier is appropriate. However, the .W modifier also
would be appropriate because the trade price is based on an average
price. Whenever a trade is executed in a manner that implicates both
the .T modifier and the .W modifier, Nasdaq is proposing that
members must utilize the .W modifier. Using the .W modifier in these
situations will ensure that market participants are informed that
the price is not based on current trading of the security.
\15\ Because members have 90 seconds to report a trade, the
presumption is that any prices reported in that time period are
informative to the market as an indication of current trading.
Therefore, when a Stop Stock Transaction is executed and reported
within 90 seconds of the time the member and the other party agreed
to the Stop Stock Price, the Stop Stock Price is presumed to be
informative to market participants because it is based on current
market prices within the last 90 seconds.
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Prior Reference Price Trades--Listed Securities
Presently, members are required to append the .PRP modifier to
reports of transactions in Nasdaq securities when the price of a trade
is based on prior point in time.\16\ For example, a member is required
to append the .PRP modifier to a market on open order for a Nasdaq-
listed stock executed more than 90 seconds after the market opens. The
.PRP modifier, however, is not required when reporting such
transactions in listed securities.\17\ Requiring members to append the
.PRP modifier to a trade whose price is based on a prior point in time
improves the quality of information disseminated because market
participants are informed that the price is not based on current market
trading. Therefore, to improve the quality of information disseminated
concerning trading in listed securities, Nasdaq is proposing to require
members to append the .PRP modifier, as appropriate, to reports of
transaction in listed securities.\18\
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\16\ The .PRP modifier also is required when reporting
transactions in OTC Bulletin Board and OTC Equity Securities.
\17\ For example, securities listed on the NYSE and reported to
Nasdaq pursuant to Rule 6420.
\18\ Until such time that the .PRP modifier is approved and
implemented, Nasdaq believes it is appropriate for members to use
the .SLD modifier in circumstances in which the .PRP modifier would
be appropriate. Using the .SLD modifier in these circumstances is
not desirable as a permanent solution, however, because the .SLD
modifier identifies trades that are executed timely, but the report
of the trade is late. Whereas the .PRP modifier identifies trades
that are executed late, when measured against the reference time,
but that are reported within 90 seconds of the time the trade is
actually executed. Appending the .SLD modifier in the ``.PRP''
circumstances is satisfactory as a temporary solution because it
will prevent the trade from being included in the last sale
calculation and market participants will be informed that the price
in [sic] not current.
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Members will be required to use the .PRP modifier in the same
manner as required today for Nasdaq securities. Specifically, the price
must be based on prior point in time and the member must include that
prior time on the report to ACT. That is, the price must have existed
at the time identified on the ACT report. In addition, the .PRP
modifier is not required if the trade is executed and reported within
90 seconds from the prior reference time.\19\
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\19\ For example, a member is not required to append the .PRP
modifier to a market on open order executed and reported prior to
9:31:30 a.m. Eastern Time. Members have up to 90 seconds from time
of execution to report a trade. As such, reports received within the
90-second period are considered current. In this example, the market
on open order was executed and reported within 90 seconds from the
time that the market opened at 9:30 a.m. Therefore, the price would
be considered current and does not need to be identified with a
modifier.
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[[Page 12730]]
2. Statutory Basis
Nasdaq believes that the proposed rule change is consistent with
the provisions of section 15A of the Act,\20\ in general, and section
15A(b)(6) of the Act,\21\ in particular, in that it is designed to
prevent fraudulent and manipulative acts and practices, to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, and to protect investors and
the public interest. Nasdaq believes the proposed rule change will
improve the quality of information disseminated by Nasdaq about the
prices at which stocks are trading in its market and will improve the
regulation of the Nasdaq market by increasing the number of trades
monitored using the NASD's automated surveillance systems.
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\20\ 15 U.S.C. 78o-3.
\21\ 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
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 NASD 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-2003-159. This file number should be included on the
subject line if e-mail is used. To help the Commission process and
review your 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 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-2003-159 and should be
submitted by April 7, 2004.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 04-5980 Filed 3-16-04; 8:45 am]
BILLING CODE 8010-01-P