[Federal Register Volume 69, Number 184 (Thursday, September 23, 2004)]
[Notices]
[Pages 57118-57119]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2349]



[[Page 57118]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50405; File No. SR-NASD-2004-071]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Approving Proposed Rule Change and Amendment Nos. 
1 and 2 Thereto Relating to Improved Nasdaq Opening Process

September 16, 2004.

I. Introduction

    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''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to improve the opening process for Nasdaq 
securities. On May 27, 2004, Nasdaq amended the proposed rule 
change.\3\
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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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    The proposed rule change, as amended by Amendment No. 1, was 
published for comment in the Federal Register on June 17, 2004.\4\ The 
Commission received two comment letters on the proposal, as amended.\5\ 
Nasdaq submitted a response to the comment letters.\6\ On September 15, 
2004, Nasdaq amended the proposed rule change.\7\ This order approves 
the proposed rule change, as amended.
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    \4\ See Securities Exchange Act Release No. 49842 (June 9, 
2004), 69 FR 33971.
    \5\ See letter from James P. Selway III, Managing Director, 
White Cap Trading LLC, to Jonathan G. Katz, Secretary, Commission, 
dated July 7, 2004 (``White Cap Letter''); and letter from Kim Bang, 
President and Chief Executive Officer, Bloomberg Tradebook LLC, to 
Jonathan G. Katz, Secretary, Commission, dated July 13, 2004 
(``Bloomberg Letter'').
    \6\ See letter from Jeffrey Davis, Associate General Counsel, 
Nasdaq, to Katherine England, Division of Market Regulation, 
Commission, dated July 21, 2004 (``Nasdaq Response Letter'').
    \7\ See letter from Mary M. Dunbar, Vice President and Deputy 
General Counsel, Nasdaq, to Katherine A. England, Assistant 
Director, Division, Commission, dated September 15, 2004 
(``Amendment No. 2''). In Amendment No. 2, Nasdaq revised the 
language of Rule 4706(a)(1)(B)(xiii) to reflect changes made by File 
No. SR-NASD-2004-076. See Securities Exchange Act Release No. 50074 
(July 23, 2004), 69 FR 45866 (July 30, 2004). This was a technical 
amendment and is not subject to notice and comment.
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II. Description of Proposed Rule Change

    The proposed rule change is intended by Nasdaq 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 the Trade-or-Move 
process contained in NASD Rule 4613(e), create pre-opening eligible 
order types, and open all market participant quotes at 9:25 a.m. rather 
than 9:29:30 a.m.
    The new 9:30 a.m. opening process would take one of two forms: The 
Nasdaq Opening Cross or the Modified Nasdaq Opening. Certain Nasdaq-
listed stocks would be designated to participate in the Nasdaq Opening 
Cross, which Nasdaq 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 a.m. that would execute the maximum number 
of shares at a single, representative price that would be the Nasdaq 
Official Opening Price. Upon initial implementation, Nasdaq plans to 
apply the Nasdaq Opening Cross to securities included in the Nasdaq 100 
Index, the S&P 500 Index, and the Nasdaq Biotech Index, although Nasdaq 
would have the authority to apply the Nasdaq Opening Cross to any and 
all Nasdaq securities. Nasdaq designed the proposal to create a more 
robust opening that allows for price discovery, and executions that 
result in an accurate, tradable opening price.
    For those Nasdaq securities that do not participate in the Nasdaq 
Opening Cross, 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. These 
securities would continue to have their Nasdaq Official Opening Price 
calculated as today.

III. Comment Summary

    The White Cap Letter supported Nasdaq's proposed rule change. In 
particular, the White Cap Letter stated that the Nasdaq Opening Cross 
would remedy a long-standing problem with Nasdaq's market structure: 
i.e., the lack of a formalized and transparent opening process. White 
Cap stated that, based on its experience with the Nasdaq Closing Cross 
over the preceding three months, it believed that the Nasdaq Opening 
Cross would afford market participants the opportunity to enter on-open 
orders for execution at a single price, to view indicated prices and 
volumes as well as any imbalances, and to interact with such 
indications on a competitive basis. White Cap acknowledged the fact 
that order-delivery electronic communication networks (``ECNs'') would 
not participate in the Nasdaq Opening Cross as a consequence of 
technological concerns and competitive realities. White Cap believed 
that, because the Nasdaq Opening Cross would be directly accessible to 
all interested and qualified parties, its benefits should redound to 
the marketplace regardless of the fact that certain quotes do not 
participate.
    The Bloomberg Letter objected to the requirement that trading 
interest be subject to automatic execution in order to take part in the 
Nasdaq Opening Cross, which it said would effectively eliminate 
participating ECNs from the process. The Bloomberg Letter opined that, 
because the Nasdaq Opening Cross would exclude trades, and therefore 
liquidity, in Nasdaq securities that occur on ECNs that have elected 
order delivery rather than automatic execution, the opening price 
likely would be inaccurate, incomplete and misleading, harm 
participating ECNs and their investor participants, and make it more 
difficult for broker-dealers participating in SuperMontage to meet 
their best execution obligations. Bloomberg stated that Nasdaq had 
offered no legitimate basis for excluding ECNs from the Nasdaq Opening 
Cross. The Bloomberg Letter also argued that the amendments to the pre-
opening process would effectively mean that the Nasdaq market would 
open at 9:25 a.m., and that Nasdaq had not explained this in the 
proposed rule change. The Bloomberg Letter opined that mixing firm 
quotes of ECNs with the indicative quotations of market makers in an 
undifferentiated data stream would not be in the public interest. The 
Bloomberg Letter stated that Nasdaq has ``buried secret rules in its 
technical specification,'' that should have been the subject of public 
disclosure and public comment. Finally, the Bloomberg Letter commented 
that the proposed rule change would violate Section 15A(b)(6) of the 
Act,\8\ which requires that the rules of a national securities

[[Page 57119]]

association not be designed to permit unfair discrimination between 
customers, issuers, brokers or dealers, and would constitute a 
constructive denial of access to ECNs, which would constitute, in turn, 
an unnecessary or inappropriate burden on competition in violation of 
Section 15A(b)(8) of the Act.\9\
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    \8\ 15 U.S.C. 78o-3(b)(6).
    \9\ 15 U.S.C. 78o-3(b)(8).
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    In its response letter, Nasdaq acknowledged the White Cap Letter 
and spoke to the comments raised in the Bloomberg Letter. Nasdaq stated 
that Bloomberg's business decision to execute orders internally within 
Bloomberg's book rather than offering automatic execution on 
SuperMontage should not impede Nasdaq from proceeding with a market 
enhancement. Nasdaq suggested that there are multiple options that 
Bloomberg could pursue to satisfy its customers' interest in 
participating fully in the Nasdaq Opening Cross, such as (1) by 
participating in the Opening Cross on an automatic execution basis; (2) 
by routing standing limit orders through another participant that 
participates on an automatic execution basis, or (3) by discussing with 
Nasdaq the possibility of establishing a second market participant 
identifier for the entry of orders eligible to participate in the 
Nasdaq Opening Cross. Moreover, Nasdaq stated that the Opening Cross is 
inherently a ``match''--matching interest of buyers and sellers at a 
single instant in time--and is not conducive to an iterative order 
delivery process, which would create substantial technical difficulties 
for Nasdaq and unwarranted risk for other market participants. Nasdaq 
pointed out that participation in the Nasdaq Opening Cross is 
completely voluntary and that Bloomberg is effectively excluding itself 
from the process.
    Nasdaq stated that Bloomberg misunderstood the proposed rule change 
with respect to the pre-opening process, saying that Nasdaq is 
modifying the pre-opening process in order to improve and emphasize the 
official open at 9:30 a.m., and that the 9:25 a.m. opening of quotes 
would dramatically improve the 9:30 a.m. open, not replace it. Nasdaq 
also pointed out that, with respect to Nasdaq's ``buried secret 
rules,'' Nasdaq has a practice of making its technical specifications 
publicly available far in advance of its proposed launch dates and has 
a natural interest in having the document widely scrutinized and used 
by market participants.\10\
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    \10\ Nasdaq published the technical specifications on June 17, 
2004.
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    Nasdaq stated that the Closing Cross has performed as it was 
designed and, overall has improved the Nasdaq closing process. Thus, 
Nasdaq believes that the Nasdaq Opening Cross will provide similar 
benefits to the opening process.

IV. Discussion and Commission's Findings

    After careful consideration of the proposed rule change, the 
comment letters, and Nasdaq's response to the comment letters, the 
Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
association.\11\ The Commission believes that the proposed rule change 
is consistent with Section 15A(b) of the Act,\12\ in general, and 
furthers the objectives of Section 15A(b)(6),\13\ in particular, in 
that it is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and in general, to protect investors and the public interest.
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    \11\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \12\ 15 U.S.C. 78o-3(b).
    \13\ 15 U.S.C. 78o-3(b)(6).
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    The Commission believes that Nasdaq has adequately addressed the 
comments raised in the comment letters. The Commission also believes 
that the proposed rule change, as amended, should provide useful 
information to market participants and increase transparency and order 
interaction at the open. In addition, the Commission believes that the 
proposed rule change, as amended, should result in the public 
dissemination of information that more accurately reflects the trading 
in a particular security at the open.

V. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as amended, is consistent with the requirements of the Act 
and rules and regulations thereunder applicable to a national 
securities association, and, in particular, Section 15A(b) of the 
Act.\14\
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    \14\ 15 U.S.C. 78o-3(b).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change (SR-NASD-2004-071), as amended, 
is approved.
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    \15\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E4-2349 Filed 9-22-04; 8:45 am]
BILLING CODE 8010-01-P