[Federal Register Volume 69, Number 116 (Thursday, June 17, 2004)]
[Notices]
[Pages 33971-33980]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-13639]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-49842: File No. SR-NASD-2004-071]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 Thereto by the National Association of
Securities Dealers, Inc. Regarding Improved Nasdaq Opening Process
June 9, 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 23, 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. On May 27,
2004, Nasdaq amended the proposed rule change.\3\ 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.
\3\ See letter from Mary M. Dunbar, Vice President and Deputy
General Counsel, Nasdaq, to Katherine A. England, Assistant
Director, Division of Market Regulation (``Division''), Commission,
dated May 26, 2004 (``Amendment No. 1''). In Amendment No. 1, Nasdaq
restated the proposed rule change in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Nasdaq is filing the proposed rule change to improve the opening
process for Nasdaq securities. There are four components of the
proposal: (1) Modification of the pre-market hours trading environment
for all Nasdaq securities, including the elimination of the Trade-or-
Move process contained in Rule 4613(e) and the opening of quotations at
9:25 a.m. rather than 9:29:30 a.m.; (2) the creation of voluntary On
Open, Imbalance Only, and Extended Hours order types (``Nasdaq Opening
Orders'') and the application of new time-in-force rules for existing
orders; (3) the creation of the Nasdaq Opening Cross; and (4) the
creation of a Modified Opening Process for Nasdaq-listed securities
that do not participate in the Nasdaq Opening Cross. The text of the
proposed rule change is set forth below.\4\ Proposed new language is in
italics; deletions are in [brackets].\5\
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\4\ The Commission made the following corrections to the
proposed rule text: (1) Internal cross references in proposed Rule
4704(a)(2)(a)(i) and (iii) were corrected; and (2) the title of Rule
4710 was corrected. Telephone conversation between Jeffrey S. Davis,
Associate Vice President and Associate General Counsel, Nasdaq, and
Ann E. Leddy, Special Counsel, Division, Commission (June 8, 2004).
\5\ The proposed rule change is marked to show changes from the
rule text appearing in the NASD Manual available at www.nasd.com, as
amended by the following: SR-NASD-2003-149 (Securities Exchange Act
Release No. 49349 (March 2, 2004), 69 FR 10775 (March 8, 2004)); SR-
NASD-2004-046 (Securities Exchange Act Release No. 49547 (April 9,
2004), 69 FR 20091 (April 15, 2004)); SR-NASD-2004-064 (Securities
Exchange Act Release No. 49650 (May 4, 2004), 69 FR 25941 (May 10,
2004)); SR-NASD-2004-051 (Securities Exchange Act Release No. 49597
(April 21, 2004), 69 FR 23244 (April 28, 2004)); and SR-NASD-2004-
076 (filed on an immediately effective basis on May 5, 2004).
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* * * * *
4613. Character of Quotations
(a)-(d) No Change.
(e) Locked and Crossed Markets.
(1) A market maker shall not, except under extraordinary
circumstances, enter or maintain quotations in Nasdaq during normal
business hours if:
(A) No Change.
(B) No Change.
[(C) Obligations Regarding Locked/Crossed Market Conditions Prior
to Market Opening.
(i) Locked/Crossed Market Prior to 9:20 a.m.--For locks/crosses
that occur prior to 9:20 a.m. Eastern Time, a market maker that is a
party to a lock/cross because the market maker either has entered a bid
(ask) quotation that locks/crosses another market maker's quotation(s)
or has had its quotation(s) locked/crossed by another market maker
(``party to a lock/cross'') may, beginning at 9:20 a.m. Eastern Time,
send a Directed Order of any size that is at the receiving market
maker's quoted price (``Trade-or-Move Directed Order''). Exception: A
market maker that is a party to a lock/cross may not send such an order
to the SIZE MMID.
(ii) Locked/Crossed Market Between 9:20 and 9:29:29 a.m.--
a. Before an ECN enters a quote that would lock or cross the market
between 9:20 and 9:29:59 a.m. Eastern Time, the ECN must first send a
Trade-or-Move Directed Order to the market maker or ECN whose quote it
would lock or cross that is at or superior to the receiving market
maker's or ECN's quoted price. An ECN that sends a Trade-or-Move
Directed Order during these periods must then wait at least 10 seconds
before entering a quote that would lock or cross the market. Exception:
An ECN is not required to send such an order to the SIZE MMID.
b. If a market maker enters a quote that would lock or cross the
market between 9:20 and 9:29:29 a.m. Eastern Time, the market maker
must then immediately send a Trade-or-Move Directed Order to the market
maker or ECN whose quote it would lock or cross that is at or superior
to the receiving market maker's or ECN's quoted price. Exception: A
market maker is not required to send such an order to the SIZE MMID.
c. If any market participant enters a quote that would lock or
cross the market between 9:29:30 and 9:29:59, that quote will be
processed as set forth in Rule 4710(b)(3)(B).
(iii)
a. In the case of securities included in the Nasdaq 100 Index or
the S&P 400 Index, a Trade-or-Move Directed Order must be at least
10,000 shares (if multiple market makers would be locked/crossed, each
one must receive a Trade-or-Move Directed Order and the aggregate size
of all such messages must be at least 10,000 shares); provided,
however, that if a market participant is representing an agency order
(as defined in subparagraph (vi) of this rule), the market participant
shall be required to send a Trade-or-Move Directed Order(s) in an
amount equal to the agency order, even if that order is less than
10,000 shares.
b. In the case of all other securities, a Trade-or-Move Directed
Order must be for at least 5,000 shares (if multiple market makers
would be locked/crossed, each one must receive a Trade-or-Move Directed
Order and the aggregate size of all such orders must be at least 5,000
shares); provided, however, that if a market participant is
representing an agency order (as defined in subparagraph (vi) of this
rule), the market participant shall be required to send a Trade-or-Move
Directed Order(s)
[[Page 33972]]
in an amount equal to the agency order, even if that order is less than
5,000 shares.
A market maker that receives a Trade-or-Move Directed Order must,
within 10 seconds of receiving such message, either fill the incoming
Trade-or-Move Directed Order for the full size of the message, or move
its bid down (offer up) by a quotation increment that restores or
maintains an unlocked/uncrossed market.
A market maker that sends a Trade-or-Move Directed Order pursuant
to subparagraphs (e)(1)(C)(i) or (e)(1)(C)(ii)(b) of this rule, or an
ECN that sends a Trade-or-Move Directed Order pursuant to subparagraph
(e)(1)(C)(ii)(a) of this rule, must append to the message a Nasdaq-
provided symbol indicating that it is a Trade-or-Move Message.
(vi) For the purposes of this rule ``agency order'' shall mean an
order(s) that is for the benefit of the account of a natural person
executing securities transactions with or through or receiving
investment banking services from a broker/dealer, or for the benefit of
an ``institutional account'' as defined in NASD Rule 3110. An agency
order shall not include an order(s) that is for the benefit of a market
maker in the security at issue, but shall include an order(s) that is
for the benefit of a broker/dealer that is not a market maker in the
security at issue.
(vii) The execution of a Trade or Move Directed Order that occurs
at or after 9:29:30 may, upon the filing of a complaint by a member or
UTP Exchange, be declared null and void in accordance with the
procedures set forth in NASD Rule 11890.]
(2) No Change.
(3) [Except as indicated in subsection (1)(C)(ii), f]For purposes
of this rule, the term ``market maker'' shall include:
(A)-(D) No Change.
* * * * *
4701. Definitions
(a)-(rr) No Change.
(ss) The term ``Total Day'' or ``X Order'' shall mean,
(a) [f]For orders in ITS Securities so designated, that if after
entry into the Nasdaq Market Center, the order is not fully executed,
the order (or unexecuted portion thereof) shall remain available for
potential display between 7:30 a.m. and 6:30 p.m. and for potential
execution between 9:30 a.m. and 6:30 p.m., after which it shall be
returned to the entering party.
(b) For orders in Nasdaq-listed securities so designated, that if
after entry into the Nasdaq Market Center, the order is not fully
executed, the order (or unexecuted portion thereof) shall remain
available for potential display between 7:30 a.m. and 4 p.m. and for
potential execution between 9:25 a.m. and 4 p.m., after which it shall
be returned to the entering party.
(tt) No Change.
(uu) The term ``Total Immediate or Cancel'' or ``IOX Order'' shall
mean,
(a) [f]For limit orders in ITS Securities so designated, that if
after entry into the Nasdaq Market Center a marketable limit order (or
unexecuted portion thereof) becomes non-marketable, the order (or
unexecuted portion thereof) shall be cancelled and returned to the
entering participant. Such orders may be entered between 7:30 a.m. and
6:30 p.m. and are available for potential execution between 9:30 a.m.
and 6:30 p.m.
(b) For limit orders in Nasdaq-listed securities so designated,
that if after entry into the Nasdaq Market Center a marketable limit
order (or unexecuted portion thereof) becomes non-marketable, the order
(or unexecuted portion thereof) shall be cancelled and returned to the
entering participant. Such orders may be entered and are available for
potential execution between 9:25 a.m. and 4 p.m.
* * * * *
4704. Opening Process for Nasdaq-Listed Securities
(a) Definitions. For the purposes of this rule the term:
(1) ``Imbalance'' shall mean the number of shares of buy or sell
MOO, LOO or Early Regular Hours orders that may not be matched with
other MOO, LOO, Early Regular Hours or OIO order shares at a particular
price at any given time.
(2) The Order Imbalance Indicator shall disseminate three prices,
defined as follows:
(a) ``Inside Match Price'' shall mean:
(i) The single price that is at or within the current Nasdaq Market
Center best bid and offer at which the maximum number of shares of MOO,
LOO, OIO and Early Regular Hours orders can be paired.
(ii) If more than one price exists under subparagraph (i), the
Inside Match Price shall mean the price that minimizes any Imbalance.
(iii) If more than one price exists under subparagraph (ii), the
Inside Match Price shall mean the price that minimizes the distance
from the previous Nasdaq official closing price.
(b)``Near Clearing Price'' shall mean the price at which both the
MOO, LOO, OIO, and Early Regular Hours orders and all executable quotes
and orders in the Nasdaq Market Center (excluding volume that is
available only by order delivery) would execute.
(c)``Far Clearing Price'' shall mean the price at which the MOO,
LOO, OIO, and Early Regular Hours orders in the Nasdaq Opening Book
would execute.
(3)(a) ``Limit On Open Order'' or ``LOO'' shall mean an order to
buy or sell at a specified price or better that is to be executed only
during the Nasdaq Opening Cross. LOO orders shall execute only at the
price determined by the Nasdaq Opening Cross and shall be available for
automatic execution. LOO orders may be entered, cancelled and corrected
between 7:30 a.m. and 9:28 a.m. without restriction.
(b) LOO orders entered after 9:28 a.m. shall be price validated as
follows:
(i) In the case of a sell imbalance, sell orders shall be priced no
lower than the Near Clearing Price or they shall be rejected. Buy
orders shall be priced no higher than the Inside Match Price or they
shall be rejected.
(ii) In the case of a buy imbalance, buy orders shall be priced no
higher than the Near Clearing Price or they shall be rejected. Sell
orders shall be priced no lower than the Inside Match Price or they
shall be rejected.
(iii) If there is no imbalance, buy orders shall be priced no
higher than the Inside Match Price and sell orders shall be priced no
lower than the Inside Match Price or they shall be rejected.
(c) After 9:28 a.m., LOO orders may only be modified to improve
their price or increase the number of shares available. Modifications
to improve the price or number of shares of an existing LOO order shall
pass the price validation in Rule 4704 (a)(2)(b) or the modification
shall be rejected.
(d) LOO orders shall execute only at the price determined by the
Nasdaq Opening Cross and shall be available for automatic execution.
(e) LOO orders may not be cancelled or corrected after 9:28. After
9:28 a.m., LOO orders may only be modified to improve their price or
increase the number of shares available.
(4) ``Market on Open Order'' or ``MOO'' shall mean an order to buy
or sell at the market that is to be executed only during the Nasdaq
Opening Cross. MOO orders may be entered, cancelled, and corrected
between 7:30 a.m. and 9:28 a.m. and shall execute only at the price
determined by the Nasdaq Opening Cross. All MOO orders shall be
available for automatic execution.
(5) ``Nasdaq Opening Cross'' shall mean the process for determining
the price at which orders shall be executed at the open and for
executing those orders.
[[Page 33973]]
(6) ``Opening Imbalance Only Order'' or ``OIO'' shall mean an order
to buy or sell at a specified price or better that may be executed only
during the Nasdaq Opening Cross and only against MOO, LOO or Regular
Hours orders. OIO orders may be entered between 7:30 a.m. and 9:29:59
p.m., but they may not be cancelled or modified after 9:28 except to
increase the number of shares or to increase (decrease) the buy (sell)
limit price. OIO sell (buy) orders shall only execute at or above
(below) the 9:30 Nasdaq Market Center offer (bid). All OIO orders shall
be available for automatic execution.
(7) ``Order Imbalance Indicator'' shall mean a message disseminated
by electronic means containing information about MOO, LOO, OIO, and
Early Regular Hours orders and the price at which those orders would
execute at the time of dissemination.
(8) ``Regular Hours Orders'' shall mean any order that may be
entered into the system and designated with a time-in-force of IOC,
DAY, or GTC. Regular Hours Orders shall be available for execution only
during the opening and then during normal trading hours. Regular Hours
Orders shall be designated as ``Early Regular Hours Orders'' if entered
into the system prior to 9:28 a.m. and designated as ``Late Regular
Hours Orders'' if entered into the system at 9:28 a.m. or after.
(b) Trading Prior To Normal Market Hours. The system shall open all
eligible Quotes/Orders in Nasdaq-listed securities at 9:25 a.m. in the
following manner to prevent the creation of locked/crossed markets.
(1) At 9:25, the system shall open all Quotes and limit priced X
Orders in time priority. Quotes and X Orders whose limit price does not
lock or cross the book shall be added to the book in strict time
priority. Quotes and X Orders whose limit price would lock or cross the
book shall be placed in an ``In Queue'' state.
(2) Next, the system shall begin processing the In Queue Quotes,
IOX Orders, and X Orders in strict time priority against the best bid
(ask) if the In Queue order is a sell (buy) order. If an In Queue Quote
or X Order is not executable when it is next in time for execution, the
system shall automatically add that Quote or X Order to the book.
(3) All Quotes and X Orders that are entered while the system is
completing subparagraphs (1) and (2) shall be added to the In Queue
file in strict time priority.
(4) Once the process set forth in subparagraphs (1)-(3) is
complete, the system shall begin processing Quotes and X and IOX Orders
in accordance with their entry parameters.
(5) All trades executed prior to 9:30 shall be automatically
appended with the ``.T'' modifier.
(6) Notwithstanding subparagraphs (1) through (5), if a Nasdaq
Quoting Market Participant has entered a Locking/Crossing Quote/Order
into the system that would become subject to the automated processing
described above, the system shall, before sending the order to any
other Quoting Market Participant or Order Entry Firm, first attempt to
match off the order against the locking/crossing Nasdaq Quoting Market
Participant's own Quote/Order if that participant's Quote/Order is at
the highest bid or lowest offer, as appropriate. A Nasdaq Quoting
Market Participant may avoid this automatic matching through the use of
anti-internalization qualifier as set forth in Rule
4710(b)(1)(B)(ii)(a). Order Entry Firms that enter locking/crossing
Quotes/Orders shall have those Quotes/Orders processed as set forth in
subparagraphs (1) through (4), unless they voluntarily select a ``Y''
AIQ Value as provided for in Rule 4710 (b)(1)(B)(ii)(a).
(c) Nasdaq-listed securities that are not designated by Nasdaq to
participate in the Nasdaq Opening Cross shall begin trading at 9:30
a.m. in the following manner:
(1) At 9:30, the system shall suspend processing as set forth in
paragraph (b) in order to open and integrate Regular Hours orders into
the book in time priority.
(2) Limit priced Regular Hours Orders whose limit price does not
lock or cross the book shall be added to the book in time priority and
limit priced Regular Hours Orders whose limit price does lock or cross
the book shall be held In Queue in time priority along with IOC and
Regular Hours market orders.
(3) In Queue Orders shall then be executed in strict time priority
against the best bid (ask) if the In Queue order is a buy (sell) order.
Non-marketable IOC orders shall be cancelled and non-marketable Regular
Hours Orders shall be added to the book.
(4) When all In Queue orders have been processed, the system shall
resume processing for potential display in conformity with Rule 4707(b)
and/or potential execution in conformity with Rule 4710(b)(1)(B).
(d) Processing of Nasdaq Opening Cross. For certain Nasdaq-listed
securities designated by Nasdaq, the Nasdaq Opening Cross shall occur
at 9:30, and regular hours trading shall commence when the Nasdaq
Opening Cross concludes.
(1) Beginning at 9:28 a.m., Nasdaq shall disseminate by electronic
means an Order Imbalance Indicator every 15 seconds until 9:29, and
then every 5 seconds until market open. The Order Imbalance Indicator
shall contain the following real time information:
(A) the Inside Match Price;
(B) the number of shares represented by MOO, LOO, OIO, and Early
Regular Hours orders that are paired at the Inside Match Price;
(C) the size of any Imbalance;
(D) the buy/sell direction of any Imbalance; and
(E) indicative prices at which the Nasdaq Opening Cross would occur
if the Nasdaq Opening Cross were to occur at that time and the percent
by which the indicative prices are outside the then current Nasdaq
Market Center best bid or best offer, whichever is closer. The
indicative prices shall be:
(i) The Far Clearing Price, and
(ii) The Near Clearing Price.
(iii) If no price satisfies subparagraph (i) or (ii) above, Nasdaq
shall disseminate an indicator for ``market buy'' or ``market sell''.
(2)(A) The Nasdaq Opening Cross shall occur at the price that
maximizes the number of MOO, LOO, OIO, Early Regular Hours orders, and
executable quotes and orders in the Nasdaq Market Center to be
executed.
(B) If more than one price exists under subparagraph (A), the
Nasdaq Opening Cross shall occur at the price that minimizes any
Imbalance.
(C) If more than one price exists under subparagraph (B), the
Nasdaq Opening Cross shall occur at the price that minimizes the
distance from the previous Nasdaq official closing price.
(D) If the Nasdaq Opening Cross price established by subparagraphs
(A) through (C) is outside the benchmarks established by Nasdaq by a
threshold amount, the Nasdaq Opening Cross shall occur at a price
within the threshold amounts that best satisfies the conditions of
subparagraphs (A) through (C). Nasdaq management shall set and modify
such benchmarks and thresholds from time to time upon prior notice to
market participants.
(3) If the Nasdaq Opening Cross price is selected and fewer than
all MOO, LOO, OIO and Regular Hours Orders that are available for
automatic execution in the Nasdaq Market Center would be executed, all
Quotes/Orders shall be executed at the Nasdaq Opening Cross price in
the following priority:
(A) MOO and Early Regular Hours market orders, with time as the
secondary priority;
[[Page 33974]]
(B) LOO orders, Early Regular Hours limit orders, OIO orders, X
limit orders, displayed quotes and reserve interest priced more
aggressively than the Nasdaq Opening Cross price with time as the
secondary priority;
(C) LOO orders, OIO Orders, displayed interest of Early Regular
Hours and X limit orders, and displayed interest of quotes at the
Nasdaq Opening Cross price with time as the secondary priority;
(D) Reserve interest of quotes and Early Regular Hours and X limit
orders at the Nasdaq Opening Cross price with time as the secondary
priority; and
(E) Eligible Late Regular Hours orders in strict time priority.
Unexecuted MOO, LOO, and OIO orders shall be cancelled.
(4) All Quotes/Orders executed in the Nasdaq Opening Cross shall be
executed at the Nasdaq Opening Cross price, trade reported with SIZE as
the contra party, and disseminated via a national market system plan.
The Nasdaq Opening Cross price shall be the Nasdaq Official Opening
Price for stocks that participate in the Nasdaq Opening Cross.
* * * * *
4706. Order Entry Parameters
(a) Non-Directed Orders--
(1) General. The following requirements shall apply to Non-Directed
Orders Entered by Nasdaq Market Center Participants:
(A) A Nasdaq Market Center Participant may enter into the Nasdaq
Market Center a Non-Directed Order in order to access the best bid/best
offer as displayed in Nasdaq.
(B) A Non-Directed Order must be a market or limit order, must
indicate whether it is a buy, short sale, short-sale exempt, or long
sale, and may be designated as ``Immediate or Cancel,'' ``Day,''
``Good-till-Cancelled,'' ``Auto-Ex,'' ``Fill or Return,'' ``Pegged,''
``Discretionary,'' ``Sweep,'' ``Total Day,'' ``Total Good till
Cancelled,'' ``Total Immediate or Cancel,'' or ``Summary.''
(i)-(iii) No Change.
(iv) Starting at 7:30 a.m., until the 4 p.m. market close, IOC and
Day Non-Directed Orders may be entered into the Nasdaq Market Center
(or previously entered orders cancelled), but such orders entered prior
to market open will not become available for execution until 9:30 a.m.
Eastern Time. GTC orders may be entered (or previously entered GTC
orders cancelled) between the hours 7:30 a.m. to 6:30 p.m. Eastern
Time, but such orders entered prior to market open, or GTC orders
carried over from previous trading days, will not become available for
execution until 9:30 a.m. Eastern Time. [Exception: For Nasdaq listed
securities only, Non-Directed Day (other than Pegged, Postable Auto-Ex,
and Discretionary Orders) and GTC orders (other than Postable Auto-Ex
Orders) may be executed prior to market open if required under Rule
4710(b)(3)(B).]
(v)-(xii) No Change.
(xiii) An order may be designated as ``Summary,'' in which case the
order can be designated either as Day or GTC. A Summary Order that is
marketable upon receipt by [NNMS] the Nasdaq Market Center shall be
rejected and returned to the entering party. If not marketable upon
receipt by [NNMS] the Nasdaq Market Center, it will be retained by
[NNMS] the Nasdaq Market Center. [Summary Day and GTC orders shall be
executed prior to the market open if required under Rule
4710(b)(3)(B).] Summary Orders may only be entered by [NNMS] Order-
Delivery ECNs. Summary Orders may only be designated as Non-
Attributable Orders.
(C) No Change.
(D) No Change.
(E) No Change.
(F) No Change.
(2) No Change.
(b)-(e) No Change.
* * * * *
Rule 4710. Participant Obligations in the Nasdaq Market Center
(a) No Change.
(b) Non-Directed Orders
(1)-(2) No Change.
(3) Entry of Locking/Crossing Quotes/Orders. The system shall
process locking/crossing Quotes/Orders as follows:
(A) No Change.
[(B) Locked/Crossed Quotes/Orders Immediately Before the Open--If
the market in a Nasdaq-listed security is locked or crossed at 9:29:30
a.m., Eastern Time, the Nasdaq Market Center will clear the locked and/
or crossed Quotes/Order by executing (or delivering for execution) the
highest bid against the lowest offer(s) against which it is marketable,
at the price of the newer in time of the two quotes/orders. This
process will be repeated until an un-locked and un-crossed market
condition is achieved. Between 9:29:30 a.m. and 9:29:59 Eastern Time,
once the Nasdaq Market Center has cleared a locked or crossed market,
or if a newly submitted quote/order would create a locked or crossed
market, the Nasdaq Market Center will prevent a locked or crossed
market from being created by processing such locking or crossing quote/
order in a manner consistent with subparagraph (b)(3)(a) of this Rule.
(i) Exception--The following exception shall apply to the above
locked/crossed processing parameters:
If a Nasdaq Quoting Market Participant has entered a Locking/
Crossing Quote/Order into the system that would become subject to the
automated processing described in section (B) above, the system shall,
before sending the order to any other Quoting Market Participant or
Order Entry Firm, first attempt to match off the order against the
locking/crossing Nasdaq Quoting Market Participant's own Quote/Order if
that participant's Quote/Order is at the highest bid or lowest offer,
as appropriate. A Nasdaq Quoting Market Participant may avoid this
automatic matching through the use of anti-internalization qualifier as
set forth in Rule 4710(b)(1)(B)(ii)(a). Order Entry Firms that enter
locking/crossing Quotes/Orders shall have those Quotes/Orders processed
as set forth in paragraph (B) above, unless they voluntarily select a
``Y'' AIQ Value as provided for in Rule 4710 (b)(1)(B)(ii)(a).]
[(C)] (B) Locked/Crossed Quotes/Orders in ITS Securities at the
Open--If the market in an ITS Security is locked or crossed at 9:30
a.m., Eastern Time, the Nasdaq Market Center will clear the locked and/
or crossed Quotes/Order by executing (or delivering for execution) the
highest bid against the lowest offer(s) against which it is marketable,
at the price of the newer in time of the two quotes/orders. This
process will be repeated until an un-locked and un-crossed market
condition is achieved. While the Nasdaq Market Center is clearing a
locked or crossed market, if a newly submitted Quote/Order would create
a locked or crossed market, the Nasdaq Market Center will prevent a
locked or crossed market from being created by holding such Quotes/
Orders in queue.
(i) Exception--The following exception shall apply to the above
locked/crossed processing parameters: If an ITS/CAES Market Maker has
entered a Locking/Crossing Quote/Order into the system that would
become subject to the automated processing described in [section (C)]
subparagraph (B) above, the system shall, before sending the order to
any other ITS/CAES Market Maker or Order Entry Firm, first attempt to
match off the order against the locking/crossing ITS/CAES Market
Maker's own Quote/Order if that participant's Quote/Order is at the
highest bid or lowest offer, as appropriate. An ITS/CAES Market Maker
may avoid this automatic matching through the use of anti-
internalization qualifier as set forth in
[[Page 33975]]
Rule 4710(b)(1)(B)(ii)(a). Order Entry Firms that enter locking/
crossing Quotes/Orders shall have those Quotes/Orders processed as set
forth in subparagraph (B) above, unless they voluntarily select a ``Y''
AIQ Value as provided for in Rule 4710(b)(1)(B)(ii)(a).
(4)-(8) No Change.
(c)-(e) 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, as
amended, 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 improve the pre-open trading environment for
Nasdaq-listed securities, and to create two new voluntary opening
processes that would together constitute the beginning of the trading
day for all Nasdaq-listed securities. The changes to the pre-open
environment would eliminate Trade-or-Move, open all market participant
quotes at 9:25 a.m., and create new extended hours order types for
trading in a firm quote environment beginning at 9:25 a.m. The new 9:30
a.m. opening processes would take one of two forms: the Modified Nasdaq
Opening or the Nasdaq Opening Cross. According to Nasdaq, the Modified
Nasdaq Opening would integrate quotes and orders entered during pre-
market hours with orders designated for execution during the normal
trading day (9:30 a.m. to 4 p.m.), create an unlocked inside bid and
offer in the Nasdaq Market Center, and facilitate an orderly process
for opening trading at 9:30 a.m. For certain stocks designated by
Nasdaq, the Opening Cross would include the creation of On Open and
Extended Hours order types including Market-on-Open (``MOO''), Limit-
on-Open (``LOO''), and Opening Imbalance Only (``OIO'') orders, an
opening order imbalance indicator to be disseminated via a Nasdaq data
feed, and a single-price opening cross that would execute eligible
orders at 9:30 a.m. According to Nasdaq, the proposal is designed to
create a more robust opening that allows for price discovery, and
executions that result in an accurate, tradable opening price.
The Modified Pre-Open Trading Environment
In response to industry demand for improvements to the pre-market
trading session, Nasdaq would modify the pre-opening trading
environment for all Nasdaq-listed stocks, to improve price discovery,
permit executions, and minimize the creation and duration of locked and
crossed markets leading into the open of the normal trading day. The
modified pre-opening environment would have three components: (1)
Elimination of Trade-or-Move; (2) creation of pre-opening eligible
orders; and (3) opening quotations and pre-opening eligible orders at
9:25 a.m. rather than 9:29:30. This modified pre-opening process would
apply to all Nasdaq-listed securities, including those that will not
participate in the Opening Cross.
Eliminating Trade-or-Move. The first element of the modified
opening environment would be the elimination of the Trade-or-Move
process currently set forth in Rule 4613(e)(1)(C). Since its adoption,
the Trade-or-Move process has reduced the instances and duration of
locked and crossed markets prior to the market open and generally
improved the quality of the opening. It is, however, widely regarded as
overly complex with respect to programming, administration, and
compliance. In addition, the utility of Trade-or-Move has diminished
since Nasdaq implemented an automated unlocking and uncrossing process
in the Nasdaq Market Center. Because that automated process ensures an
unlocked market at or shortly after 9:29:30, the primary function of
Trade-or-Move has been reduced to maintaining unlocked markets prior to
9:29:30 when market participants' quotes are still closed. As described
in more detail below, Nasdaq believes that moving the unlocking process
from 9:29:30 to 9:25 and opening quotations at that time would capture
all of the benefits that Trade-or-Move currently offers and improve
upon them.
New Extended Hours Order Types. Nasdaq would create two new order
types for Nasdaq-listed securities: the Extended Hours Day Order (``X
Order'') and the Extended Hours Immediate or Cancel (``IOX'').\6\
Members would be able to enter X Orders beginning at 7:30 a.m. on
either an attributable or a non-attributable basis. X Orders would be
available for execution beginning at 9:25 and continuing until the end
of that trading day, currently 4:00:00 p.m. If not executed by that
time, X Orders would be cancelled automatically from the system and
returned to the entering party.
---------------------------------------------------------------------------
\6\ These order types, referred to as Total Day and Total
Immediate or Cancel, exist for use in trading ITS Securities. See
NASD Rule 4701(ss) and (uu). They operate under different order
entry time parameters for trading ITS Securities.
---------------------------------------------------------------------------
IOX Orders would function much as Immediate or Cancel (``IOC'')
Orders currently function. An IOX Order would be required to be priced
and if after entry into the Nasdaq Market Center it were to become non-
marketable, the unexecuted portion would be cancelled and returned to
the entering party. IOX Orders would only be available for entry and
execution between 9:25 a.m. and 4 p.m.
Nasdaq would also modify the time-in-force for Day, IOC, and Good-
till-Cancel (``GTC'') orders. Today those order types are eligible to
participate in the 9:29:30 process for clearing locks and crosses.
Nasdaq is proposing to modify those order types to make them ineligible
for pre-opening processing. Those orders would still be available for
entry at 7:30 but would not be available for execution until 9:30.
Set forth below is a description of how the X and IOX Orders and
quotes would function in the new pre-open trading environment.
The ``Wake Up'' Process. As stated above, to preserve and enhance
the price discovery process that currently occurs prior to market open,
Nasdaq proposes to open all quotes and pre-opening eligible orders at
9:25, making those quotes and orders available for execution. Nasdaq
currently employs a similar process, set forth in Rule 4710(b)(3), at
9:29:30 to clear locked or crossed markets remaining at the end of the
Trade-or-Move period, and to maintain those markets as unlocked and
uncrossed until market open at 9:30. Nasdaq proposes to begin that
process at 9:25:00 and to change that process slightly with the same
goal of maintaining unlocked and uncrossed markets until the market
open at 9:30.
The Nasdaq Market Center would use the following process to ``wake
up'' market participant quotes and X and IOX Orders. All market
participant quotes would be woken up in accordance with each firm's
instructions to the Nasdaq Market Center. All quotations would be
carried over from the previous trading day and, firms would have
several options for how
[[Page 33976]]
their carryover quotes are opened at 9:25. First, if the quote is not
modified between 7:30 a.m. and 9:25 a.m., the quote would be able to be
opened at the last quotation price entered during the previous day.
Second, if the firm's quote is modified between 7:30 a.m. and 9:25
a.m., that quote would be able to be opened at the price of the last
price change entered after 7:30 a.m. Third, Nasdaq would add a feature
that would allow the firm automatically to set the firm's bid and ask
at the quote limits for Nasdaq, currently $.01 (bid) and $2,000 (ask).
All quotes and limit price X Orders would wake up at 9:25:00. Any
order or quote whose limit price does not lock or cross the book would
be added to the book in strict time priority. Orders or quotes whose
limit price would lock or cross the book would be placed in an ``In
Queue'' state also in time priority. Upon completion of the wake-up
process, within seconds after 9:25, the Nasdaq Market Center would
begin executing quotes and X Orders that were held In Queue in strict
time priority regardless of quote or order type. X orders that are not
executable would be added to the book. In Queue quotes and orders that
are not executable would be added to the book. All quotes and X or IOX
Orders entered while the system is waking up and sorting to clear locks
and crosses, would be suspended. Once this process is complete, the
system would resume processing the input queue of quotes, X and IOX
Orders as needed to maintain an unlocked market.
All trades executed prior to 9:30 would be considered as executed
outside of regular trading hours and would be appended automatically
with the ``.T'' modifier, as they are today between 9:29:30 and 9:30.
The Nasdaq Opening Cross
Certain Nasdaq-listed stocks would be designated to participate in
the Nasdaq Opening Cross, which Nasdaq represents it has designed to
complement the recently implemented Nasdaq Closing Cross. There would
be three components of the Nasdaq Opening Cross: (1) The creation of On
Open and Imbalance Only order types; (2) the dissemination of an order
imbalance indicator via a Nasdaq proprietary data feed; and (3) opening
cross processing in the Nasdaq Market Center at 9:30 that would execute
the maximum number of shares at a single, representative price that
would be the Nasdaq Official Opening Price. Each component is described
in detail below.
On Open and Opening Imbalance Only Order Types. The new opening
cross would begin with market participants entering On Open and Opening
Imbalance Only order types in the Nasdaq Market Center. These orders
would only be accepted for stocks eligible for participation in the
Opening Cross process. Opening Orders would be required to be available
for automatic execution but all firms, both automatic execution and
order delivery participants would be able to enter them into the Nasdaq
Market Center. The On Open Orders would not be displayed in the
quotation montage or disseminated via any Nasdaq data feeds. On Open
orders would only execute at the price determined by the opening Nasdaq
cross.
On Open orders would be able to be un-priced and entered as MOO, or
priced and entered as LOO. MOO orders would be able to be entered,
cancelled, and corrected anytime between 7:30 a.m., when the system
would open, until 9:28:00 a.m., when Nasdaq would begin disseminating
the opening order imbalance indicator. LOO orders would be able to be
entered from 7:30:00 until 9:29:59. LOO orders would be subject to
price improvement if the buy (sell) order were to be greater than (less
than) the opening price. A LOO order at the opening price would not be
filled if there were to be insufficient shares available on the
opposite side of the market to fill the LOO order.
To reduce price volatility in the Opening Cross, LOO orders
submitted after 9:28:00 a.m. would be treated differently than those
submitted before 9:28:00. LOO orders entered prior to 9:28:00 would be
able to have any limit price and would be able to be cancelled anytime
prior to 9:28:00 a.m. Late LOO Orders would be able to be submitted
only within a specified price range based on the last calculated Nasdaq
Order Imbalance Indicator. Late LOO Orders submitted outside the
prescribed price range would be rejected. If there were to be a sell
imbalance, Late LOO Orders to sell would be required to be priced no
lower than the ``near clearing price'' (described below) or they would
be rejected. Late LOO Orders to buy would be required to be priced no
higher than the ``inside match price'' (also described below) or they
would be rejected. If there were to be a buy imbalance, Late LOO Orders
to buy would be required to be priced no higher than the near clearing
price and Late LOO Orders to sell would be required to be priced no
lower than the inside match price or they would be rejected. Finally,
if there were to be no imbalance, Late LOO Orders to buy would be
required to be priced no higher than the inside match price and Late
LOO Orders to sell would be required to be priced no lower than the
inside match price or they would be rejected. Late LOO orders would not
be able to be cancelled at any time for any reason, although their
price would be able to be improved or their share size increased.
In order to add sufficient liquidity to the market at and prior to
the open, Nasdaq would enable market participants to enter OIO orders.
OIO orders would be required to be priced as limit orders and would not
be displayed or disseminated. These orders would provide supplemental
liquidity and would execute only on the opening cross against any
imbalance, similar to imbalance only orders on the closing cross. OIO
orders priced more aggressively than the Nasdaq Market Center Inside
ask (bid) before the open would be re-priced to the ask (bid) both for
the purposes of the imbalance dissemination message and for executing
on the opening cross. In this regard, they would allow market
participants to add liquidity to the market and help to ensure the
execution of MOO and marketable LOO orders. OIO orders would be able to
be entered beginning at 7:30 a.m. until immediately before the market
open. The entering firm would not be able to cancel these orders after
a predetermined time, currently planned for 9:28:00. Imbalance orders
would be able to be improved after the cancellation threshold and if
improved would receive a new timestamp.
Additional Opening-Eligible Quotes/Orders. In addition to MOO, LOO,
and OIO Orders, the Opening Cross would include: (1) Market participant
quotations, both displayed and reserve size; (2) orders entered with a
time-in-force of Day, GTC or IOC prior to 9:28:00 (collectively ``Early
Regular Hours Orders''), which would fully participate in the Opening
Cross; (3) Day, GTC, and IOC orders entered after 9:28:00 (collectively
``Late Regular Hours Orders''), which would participate in the Opening
Cross only to the extent that there were to be available liquidity on
the other side at the Crossing Price; and (4) Extended Hours Orders.
Additionally, after 9:28, all requests to cancel and cancel/replace
Regular Hours Orders would be suspended. If those orders were to not be
executed during the Opening Cross, the requests for cancellation would
be processed.
Nasdaq Order Imbalance Indicator (``NOII''). At 9:28 a.m. Nasdaq
would begin disseminating an opening order imbalance indicator on one
or more Nasdaq proprietary data feeds. Although the Opening Cross would
occur at 9:30,
[[Page 33977]]
the order imbalance indicator would be disseminated to give
participants insight into the state of the book and the opening cross
if it were to take place at that time. This message would add
transparency to the market and encourage market participants to add
liquidity to the market prior to the open.
Similar to the closing order imbalance indicator, the opening
imbalance information would include several pieces of information
regarding the cross: (1) The Inside Match Price, which would be
designed to maximize the number of paired shares of MOO, LOO, OIO and
Early Regular Hours orders and minimize any imbalance and divergence
from the previous official closing price; (2) the number of shares
represented by MOO, LOO, OIO and Early Regular Hours orders paired at
the Inside Match Price; (3) the MOO, LOO, and Early Regular Hours
orders imbalance at the Inside Match Price; (4) the buy/sell direction
of that imbalance at the Inside Match Price; (5) an indicative clearing
price range at which the Nasdaq Opening Cross would occur if the Nasdaq
Opening Cross were to occur at that time; and (6) the percent by which
that indicative price would vary from the Inside Match Price. The
indicative clearing price range would be bounded on the far side by the
price at which all MOO, LOO, OIO, and Early Regular Hours orders would
cross with only each other. It would be bounded on the near side by the
price at which the MOO, LOO, OIO Early Regular Hours orders, Extended
Hours Orders and Quotes would clear. Where no clearing price would
exist, Nasdaq would disseminate an indicator for ``market buy'' or
``market sell.''
Nasdaq would disseminate the NOII via Nasdaq proprietary data feeds
at no additional charge to subscribers. The indicator would be
disseminated beginning at 9:28:00 and then at more frequent intervals
as the time to market open decreases: every 15 seconds beginning at
9:28 and every 5 seconds beginning at 9:29 until market open.
For example, if the Nasdaq Market Center Opening Book were to
contain the following orders:
Buy Orders
----------------------------------------------------------------------------------------------------------------
Entry Time Type Size Price
----------------------------------------------------------------------------------------------------------------
9:24:00............................. IOC.................... 8000................... Market
9:24:00............................. OO..................... 1000................... 19.99
8:40:00............................. OO..................... 4000................... 19.97
9:22:00............................. IO..................... 500.................... 19.97
9:22:00............................. Quote.................. 2000................... 19.97
----------------------------------------------------------------------------------------------------------------
Sell Orders
----------------------------------------------------------------------------------------------------------------
Entry Time Type Size Price
----------------------------------------------------------------------------------------------------------------
8:29:00............................. OO..................... 1000................... 19.99
9:18:00............................. Quote.................. 5000................... 20.01
8:40:00............................. OO..................... 1000................... 20.02
8:30:00............................. Quote.................. 10000.................. 20.04
----------------------------------------------------------------------------------------------------------------
The NOII information disseminated would be: 1,000 shares paired,
7,000 share buy imbalance at $20.01.
Indicative Prices: MKT BUY far clearing price, $20.04 near clearing
price.
Similarly, if the Nasdaq Market Center were to contain the
following orders:
Buy Orders
----------------------------------------------------------------------------------------------------------------
Entry Time Type Size Price
----------------------------------------------------------------------------------------------------------------
9:24:00............................. IOC.................... 8000................... Market
9:28:20............................. OO..................... 5000................... 20.04
9:24:00............................. OO..................... 1000................... 19.99
8:40:00............................. OO..................... 4000................... 19.97
9:22:00............................. IO..................... 500.................... 19.97
9:22:00............................. Quote.................. 2000................... 19.97
----------------------------------------------------------------------------------------------------------------
Sell Orders
----------------------------------------------------------------------------------------------------------------
Entry Time Type Size Price
----------------------------------------------------------------------------------------------------------------
8:29:00............................. OO..................... 1000................... 19.99
9:18:00............................. Quote.................. 5000................... 20.01
8:40:00............................. OO..................... 1000................... 20.02
8:30:00............................. Quote.................. 10000.................. 20.04
9:28:10............................. OO..................... 10000.................. 20.05
----------------------------------------------------------------------------------------------------------------
The NOII information disseminated would be: 1,000 shares paired,
12,000 share buy imbalance at $20.01.
Indicative Prices: 20.05 far clearing price, $20.04 near clearing
price.
Nasdaq Opening Cross. The Nasdaq Opening Cross, like the Closing
Cross, would be designed to accomplish three goals in decreasing
priority: (1) Maximize the MOO, LOO, OIO, and Early Regular Hours
orders and
[[Page 33978]]
executable quotes and orders in the Nasdaq Market Center to be
executed; (2) minimize the Imbalance of such shares; and (3) minimize
the distance from the previous Nasdaq official closing price. In other
words, Nasdaq's matching engine would algorithmically evaluate all
eligible prices at which an Opening Cross would be able to occur and
identify the price or prices at which the maximum shares would be
executed. If more than one price would result in the same number of
shares being executed, the matching engine would evaluate those prices
only and determine which price would minimize the imbalance of on open
orders. If more than one price would still qualify, the matching engine
would identify the single price that would minimize the distance from a
crossing price to the previous Nasdaq official closing price.
If the Nasdaq Opening Cross price were to be selected and fewer
than all quotes and orders that are available for automatic execution
in the Nasdaq Market Center would be executed, the system would execute
quotes and orders in the following priority:
(A) MOO and Early Regular Hours market orders, with time as the
secondary priority;
(B) LOO orders, Early Regular Hours limit orders, OIO orders, X
limit orders, displayed quotes and reserve interest priced more
aggressively than the Nasdaq Opening Cross price with time as the
secondary priority;
(C) LOO orders, OIO orders, displayed interest of Early Regular
Hours and X limit orders, displayed interest of limit orders, and
displayed interest of quotes at the Nasdaq Opening Cross price with
time as the secondary priority;
(D) Reserve interest of quotes and Early Regular Hours and X limit
orders at the Nasdaq Opening Cross price with time as the secondary
priority;
(E) Late Regular Hours orders in strict time priority; and
(F) Unexecuted MOO, LOO, and OIO orders would be cancelled.
The Opening Cross would occur at 9:30. All orders that are
executable would be executed at the Nasdaq Opening Cross price,
reported to Nasdaq's trade reporting system with SIZE as the contra
party on both sides of the trade, and then transmitted to the
consolidated tape. The Nasdaq Opening Cross price and the associated
paired volume would then be disseminated via the UTP Trade Data Feed
(``UTDF'') as a bulk print and on the Nasdaq Index Dissemination
Service (``NIDS'') and the Nasdaq Application Program Interface as the
Nasdaq Official Opening Price (``NOOP'').
While the Opening Cross occurs, all entry of quotes and orders
would be suspended. When the Opening Cross concludes, normal trading
would commence just as it does today.
To illustrate the Opening Cross, if the Nasdaq Market Center were
to contain the following orders at 9:30:
Buy Orders
----------------------------------------------------------------------------------------------------------------
Entry time Type Size Price
----------------------------------------------------------------------------------------------------------------
9:24:00............................. IOC.................... 8000................... Market
9:28:20............................. OO..................... 5000................... 20.04
9:29:57............................. Quote.................. 5000................... 20.03
9:24:00............................. OO..................... 1000................... 19.99
8:40:00............................. OO..................... 4000................... 19.97
9:22:00............................. OIO.................... 500.................... 19.97
9:22:00............................. Quote.................. 2000................... 19.97
----------------------------------------------------------------------------------------------------------------
Sell Orders
----------------------------------------------------------------------------------------------------------------
Entry time Type Size Price
----------------------------------------------------------------------------------------------------------------
8:29:00............................. OO..................... 1000................... 19.99
9:29:54............................. OO..................... 20000.................. 19.99
9:29:58............................. OO..................... 10000.................. 19.99
8:40:00............................. OO..................... 1000................... 20.02
8:30:00............................. Quote.................. 10000.................. 20.04
9:28:10............................. OO..................... 10000.................. 20.05
----------------------------------------------------------------------------------------------------------------
The Opening Cross would occur at $19.99 with 19,000 shares crossed.
The inside market after the cross would be 19.97 by 20.04.
Opening Cross Circuit Breaker. As it did with the Nasdaq Closing
Cross, Nasdaq would establish a circuit breaker for the Opening Cross
to protect against unusual occurrences where the price discovery
mechanism at the open did not function as expected. Nasdaq has selected
as a benchmark values representing market conditions approximately five
seconds prior to the open the Volume Weighted Average Price (``VWAP'')
based upon the Nasdaq Market Center executions over the period from
9:29:55 to 9:30.\7\ After the selection of the Opening Cross price but
before execution, Nasdaq would compare the selected price to the
benchmark. If the expected Opening Cross price would be within a preset
boundary of the VWAP, the cross would occur at the expected Opening
Cross price.
---------------------------------------------------------------------------
\7\ If there are no transactions from which to calculate a VWAP,
Nasdaq will use the 9:30 SuprerMontage bid-ask midpoint to determine
the circuit breaker.
---------------------------------------------------------------------------
If the expected Opening Cross price would be outside a preset
boundary (``Threshold Percentage'') of the benchmark, Nasdaq would
change the Opening Cross price such that it is within the threshold
percentage. This change would happen automatically prior to execution
of the Opening Cross, and would not involve any human intervention. The
modified price would then follow the principles for ordinary crosses:
Maximizing volume executed, minimizing the imbalance of On Open orders,
and minimizing the distance from the previous Nasdaq official closing
price. All unexecuted shares from On Open orders would be cancelled.
The Threshold Percentage would be set by Nasdaq officials in
advance and communicated to members. Nasdaq would be able to adjust the
Threshold Percentage based on Nasdaq's
[[Page 33979]]
experience with the Opening Cross and on unusual market conditions,
such as certain options and derivatives expiration days that are
heavily affected by the opening price of Nasdaq securities. The
threshold would be set so the use of the bounds is very rare. Such
changes would occur in advance and would be communicated to members.
Nasdaq would publish the Threshold Percentages via its public
NasdaqTrader Web site.\8\
---------------------------------------------------------------------------
\8\ Nasdaq may also employ the Benchmark Value and Threshold
Percentages for determining the Nasdaq Official Opening Price for
stocks that are not included in the Nasdaq Opening Cross.
---------------------------------------------------------------------------
Modified Opening Process
Not all Nasdaq securities would participate in the Nasdaq Opening
Cross. For those that do not, Nasdaq has developed an improved
procedure to ensure that all stocks open with an unlocked inside
market. Like the process that Nasdaq applies today at 9:29:30 to clear
locks and crosses, the improved process would ``wake up'' orders that
are eligible for execution beginning at 9:30, and process them in an
orderly fashion to prevent the creation of locks and crosses.
The process would have several steps, each of which occur in strict
time priority. First, limit orders that have a time-in-force of Day or
GTC would wake-up. Of those, orders whose limit price would not lock or
cross the book would be added to the book. Orders whose limit price
would lock or cross the book would be placed in an ``In Queue'' state
in strict time priority. Second, reverse Pegged orders would wake up.
If the price created by the reverse Pegged order would not lock or
cross the book, the order would be placed on the book. If the price
created by the reverse Pegged order would lock or cross the book, the
order would be placed in ``In Queue'' status. Third, regular Pegged
orders would wake up in strict time priority. Since these orders can
only join the current highest bid or lowest offer price level, they
would simply add depth to the book at that price. The In Queue orders
also would include market and IOC orders in strict time priority. At
this point, all eligible orders that would not lock or cross the market
would be on the Nasdaq Market Center book and all other eligible orders
would be In Queue.
After the wake-up process has been completed, the system would
process the ``In Queue'' orders, including market orders, in strict
time priority order regardless of order type. IOC orders that would not
be executable would be cancelled as is currently done. Orders with a
time in force of DAY and GTC that would not be executable would be
added to the book in strict time priority. Once this process is
complete, the system would resume processing the input queue as normal.
Implementation. Upon initial implementation, Nasdaq plans to apply
the opening cross process to 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 Opening Cross to any and all Nasdaq NMS
securities. For those securities, the Nasdaq Opening Cross price would
be the NOOP. Issues that are not subject to the Opening Cross would be
subject to the Modified Opening Process, and would continue to have
their NOOP value calculated and disseminated as today.
2. Statutory Basis
Nasdaq believes that the proposed rule change, as amended, is
consistent with the provisions of section 15A of the Act,\9\ in
general, and with section 15A(b)(6) of the Act,\10\ 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
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 open. 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.
---------------------------------------------------------------------------
\9\ 15 U.S.C. 78o-3.
\10\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
Nasdaq does not believe that the proposed rule change, as amended,
would 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
Nasdaq neither solicited nor received written comments with respect
to the proposed rule change, as amended.
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, as amended, or
B. Institute proceedings to determine whether the proposed rule
change, as amended, 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, as amended, 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-2004-071 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-2004-071. 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
[[Page 33980]]
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 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-2004-071 and should be
submitted on or before July 8, 2004.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-13639 Filed 6-16-04; 8:45 am]
BILLING CODE 8010-01-P