[Federal Register Volume 69, Number 108 (Friday, June 4, 2004)]
[Notices]
[Pages 31650-31652]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-12688]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49783: File No. SR-NASD-2004-065]


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

May 27, 2004.
    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 April 19, 2004, 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

    The proposed rule change would amend NASD Rule 4709 governing the 
NASDAQ Closing Cross. Specifically, Nasdaq is proposing to clarify that 
market participants would not be able to cancel Imbalance Only orders 
(``IOs''), Market on Close orders (``MOC''), or Limit on Close orders 
(``LOC'') after 3:50 p.m. EST except to correct a legitimate error, 
including side, size, symbol, price or duplication of an order. The 
text of the proposed rule change is set forth below. Proposed new 
language is in italics; proposed deletions are in [brackets].
* * * * *

4709. Nasdaq Closing Cross

    (a) Definitions. For the purposes of this rule the term:
    (1) No Change.
    (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 MOC or LOC orders. IO orders 
can be entered between 3:30 p.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 orders 
can be cancelled between 3:50:00 p.m. and 3:55:00 p.m. only by 
requesting Nasdaq to correct a legitimate error (e.g., side, size, 
symbol, price or duplication of an order). IO orders cannot be 
cancelled after 3:55:00 p.m. for any reason. 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. LOC orders can be 
cancelled between 3:50:00 p.m. and 3:55:00 p.m. only by requesting 
Nasdaq to correct a legitimate error (e.g., side, size, symbol, price 
or duplication of an order). LOC orders cannot be cancelled after 
3:55:00 p.m. for any reason. LOC Orders 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. MOC orders can be cancelled between 3:50:00 p.m. 
and 3:55:00 p.m. only by requesting Nasdaq to correct a legitimate 
error (e.g., side, size, symbol, price or duplication of an order). MOC 
orders cannot be cancelled after 3:55:00 p.m. for any reason. MOC 
orders will execute only at the price determined by the Nasdaq Closing 
Cross. All MOC orders must be available for automatic execution.
    (5) No Change.
    (6) No Change.
    (b) No Change.
    (c)No Change.
* * * * *

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 amend NASD Rule 4709 governing the NASDAQ 
Closing Cross to provide that market participants would be able to 
cancel IO, MOC, or LOC orders between 3:50 p.m. EST and 3:55 p.m. only 
by requesting Nasdaq to correct a legitimate error, including side, 
size, symbol, price or duplication of an order. Market participants 
would not be permitted to cancel IO, MOC, or LOC orders after 3:55 p.m. 
for any reason.
    Nasdaq believes that providing the ability to cancel orders that 
contain legitimate errors would protect the marketplace from the 
potential distortions that inadvertent errors might cause during the 
Nasdaq Closing Cross. Other markets permit similar types of corrections 
to take place in advance of the actual close. For example, the New York 
Stock Exchange provides similar protection for on close orders. NYSE 
Rule 123C provides that ``[b]etween 3:40

[[Page 31651]]

p.m. and 3:50 p.m., MOC orders are irrevocable, except to correct a 
legitimate error (e.g., side, size, symbol, price or duplication of an 
order).''
    Nasdaq Regulation staff in the TradeWatch section of MarketWatch 
(``MW'') would perform the correction of legitimate errors based upon 
members'' requests. The cancellation of IO, LOC, and MOC orders would 
be limited to circumstances where a firm could clearly demonstrate that 
it made a legitimate error. Because of the time constraints in 
operation at the end of the trading day, Nasdaq's staff would not be 
able to engage in a review of whether an the order entry was in fact 
erroneous.
    Accordingly, the criteria that Nasdaq would use to determine 
whether an entry is a legitimate error would include:
    Size of Order: If an order were to be entered with the wrong size 
and such erroneous size was greater than 1000 shares and the mistake in 
size was greater than 20% from the correct size, MW would cancel the 
order. Orders entered not exceeding the threshold factors would not be 
corrected.
    Price of Order: If a LOC were to be entered at a price different 
from that intended by 10% or more, MW would cancel the order. If error 
were to be less than 10%, or if an order were to be entered as an MOC 
instead of LOC, MW would not take action.
    Symbol: If a market participant were able to show it made a mistake 
in entering an order in the wrong stock by identifying the symbol for 
which it meant to enter an order, MW would cancel the incorrect order. 
Nasdaq would not make an entry for the firm for the intended symbol.
    Side of Order: If the order were to be entered as a buy (sell) 
order when it should have been a sell (buy) order, MW would cancel the 
order.
    Duplication of Order: If a firm were to duplicate an order, MW 
would cancel the duplicate order.
    In all of the above instances, time permitting, TradeWatch would 
use its best efforts to cancel MOC, LOC, or IO orders that contain a 
legitimate error. The firm making the error would be required to 
contact TradeWatch by telephone in a timely manner and, during that 
communication, would be required to provide all necessary details 
regarding the specific order(s) entered in error to be cancelled. 
Failure to provide the necessary details in a timely manner would 
result in no cancellation. The firm seeking cancellation of an order 
would be required to provide objective proof that a mistake was made. 
Submission by e-mail or fax of an order ticket or other proof of the 
error would be required to be made as soon as practicable and no later 
than 5:00:00 p.m. on the day of the cancellation. Failure to provide 
satisfactory information regarding the basis of the error would be a 
per se violation of the rule.
    Because of the impact on price formation in the closing seconds of 
the trading day that cancellations could cause, Nasdaq staff would not 
attempt to cancel any orders after 3:55:00 p.m. All efforts by Nasdaq 
to act on cancellation requests would be made on a best efforts basis 
and might not be successful prior to 3:55:00 p.m. For example, firms 
that enter orders for a basket of stocks must understand that if the 
basket is large and involves a number of erroneous entries, Nasdaq may 
be unable to cancel all of the orders entered prior to 3:55:00 p.m.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A of the Act,\3\ in general, and with 
section 15A(b)(6) of the Act,\4\ 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.
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    \3\ 15 U.S.C. 78o-3.
    \4\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

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

    Written comments were neither solicited nor received.

III. 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. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-NASD-2004-065 on the subject line.

Paper Comments

    Send paper comments in triplicate to Jonathan G. Katz, Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609.

    All submissions should refer to File Number SR-NASD-2004-065. 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, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml).
    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 Section, 450 Fifth Street, NW., 
Washington, DC 20549. Copies of such

[[Page 31652]]

filing also will be available for inspection and copying at the 
principal office of the NASD. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-NASD-2004-065 and should be submitted on or before June 
25, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-12688 Filed 6-3-04; 8:45 am]
BILLING CODE 8010-01-P