[Federal Register Volume 69, Number 213 (Thursday, November 4, 2004)]
[Notices]
[Pages 64350-64353]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-3005]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50602; File No. SR-NASD-2004-152]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Regarding Minor Modifications to the Nasdaq Opening Process 
for Nasdaq-Listed Stocks

October 28, 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 12, 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 and 
II below, which Items have been prepared by Nasdaq. Nasdaq has 
designated the proposed rule change as ``non-controversial'' under 
Section 19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(6) thereunder,\4\ 
which renders the proposed rule change effective upon filing with the 
Commission. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq is filing the proposed rule change to modify in four ways 
the opening process for Nasdaq securities to: (1) Open the trading of 
Nasdaq stocks that have been the subject of a trading halt using the 
same process by which it will open trading at 9:30 a.m. for Nasdaq 
stocks that are not designated to participate in the Opening Cross; (2) 
amend the last tie-breaker that will be used to determine the price at 
which the Nasdaq Opening Cross will occur; (3)

[[Page 64351]]

suspend the cancellation or modification of Regular Hours Orders that 
are entered into the Nasdaq Market Center at 9:28 a.m.; and (4) modify 
the process for calculating the Nasdaq Official Opening Price 
(``NOOP''). The text of the proposed rule change is set forth below.\5\ 
Proposed new language is in italics; proposed deletions are in 
[brackets].\6\
---------------------------------------------------------------------------

    \5\ The Commission made the following corrections on Nasdaq's 
behalf to the proposed rule text: (1) An internal cross reference in 
Rule 4704(a)(2)(A)(iii) was corrected; and (2) the current text of 
Rule 4704(c)(1) was corrected to include omitted punctuation. 
Telephone conversation between Jeffrey S. Davis, Associate Vice 
President and Associate General Counsel, Nasdaq, and Ann E. Leddy, 
Special Counsel, Division of Market Regulation (``Division''), 
Commission (October 21, 2004).
    \6\ The proposed rule change is marked to show changes from the 
rule text approved by the Commission in Securities Exchange Act 
Release No. 50405 (September 16, 2004), 69 FR 57118 (September 23, 
2004) (SR-NASD-2004-071). This sentence was corrected by the 
Commission to reflect the fact that the NASD Manual available at 
www.nasd.com has not been updated to include the rule text for NASD 
Rule 4704. Telephone conversation between Jeffrey S. Davis, 
Associate Vice President and Associate General Counsel, Nasdaq, and 
Ann E. Leddy, Special Counsel, Division, Commission (October 18, 
2004).
---------------------------------------------------------------------------

* * * * *

4704. Opening Process for Nasdaq-Listed Securities

    (a) Definitions. For the purposes of this rule the term:
    (1) No Change.
    (2) The Order Imbalance Indicator shall disseminate three prices, 
defined as follows:
    ([a]A) ``Inside Match Price'' shall mean:
    (i) No Change.
    (ii) No Change.
    (iii) If more than one price exists under subparagraph (ii), the 
Inside Match Price shall mean the price that minimizes the distance 
from the bid-ask midpoint of the inside quotation prevailing at 9:30 
a.m. [previous Nasdaq official closing price.]
    ([b]B) No Change.
    ([c]C) No Change.
    (3)-(7) No Change.
    (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. 
Beginning at 9:28 a.m., requests to cancel or modify Regular Hours 
Orders shall be suspended until after completion of the Opening Cross 
at which time such requests shall be processed.
    (b) No Change.
    (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. or, in the case of Nasdaq-listed securities in which trading is 
halted pursuant to Rule 4120(a), at the time specified by Nasdaq 
pursuant to Rule 4120 in the following manner:
    (1) At 9:30 or at the time specified by Nasdaq pursuant to Rule 
4120, 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)-(4) No Change.
    (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) No Change.
    (2)
    (A) No Change.
    (B) No Change.
    (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 bid-ask midpoint of the inside quotation prevailing 
at 9:30 a.m. [previous Nasdaq official closing price.]
    (D) No Change.
    (3) No Change.
    (4) 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 has previously proposed to create two new voluntary opening 
processes--the Modified Opening Process and the Nasdaq Opening Cross--
that together constitute the beginning of the trading day for all 
Nasdaq-listed securities. The Commission approved that proposal on 
September 16, 2004.\7\ Through quality control and testing, Nasdaq has 
identified four minor modifications to the operation and rules 
governing the Nasdaq Opening Cross and Modified Opening Process that it 
believes would improve the fair and orderly opening of the market in 
Nasdaq-listed securities.
---------------------------------------------------------------------------

    \7\ See, Securities Exchange Act Release No. 50405 (September 
16, 2004), 69 FR 57118 (September 23, 2004) (SR-NASD-2004-071).
---------------------------------------------------------------------------

    First, Nasdaq proposes to open the trading of Nasdaq stocks that 
have been the subject of a trading halt using the same process by which 
it will open trading at 9:30 a.m. for Nasdaq stocks that are not 
designated to participate in the Opening Cross. NASD Rule 4704(c) 
specifies that the opening process for stocks that are not included in 
the Opening Cross will begin at 9:30 a.m. Nasdaq inadvertently failed 
explicitly to permit stocks to open after 9:30 a.m., as can occur when 
trading has been halted due, for example, to material news or the 
release of an initial public offering.
    Nasdaq believes that the Modified Opening Process (``MOP''), which 
the Commission has already found to be consistent with the Act should 
be employed equally for all non-crossing stocks, and that Nasdaq's 
rules should explicitly so state. Nasdaq believes that the MOP would 
improve the opening of trading following a trading halt under NASD Rule 
4120. The MOP is designed to create an unlocked and uncrossed bid and 
offer for the opening of trading, and to execute quotes and orders that 
would lock or cross the market in a fair and orderly manner. The MOP 
would work identically and equally well at the open after a trading 
halt, regardless of whether the halt is initiated under NASD Rule 
4120(a)(1), (4), (5), (6), or (7).
    Second, Nasdaq proposes to amend the last tie-breaker that will be 
used to determine the price at which the Nasdaq Opening Cross will 
occur. In its recently-approved proposal, Nasdaq specified that the 
Nasdaq Opening Cross would occur at the price that maximizes the number 
of Market on Open (``MOO''), Limit on Open (``LOO''), Opening Imbalance 
Only (``OIO''), Early Regular Hours orders, and executable quotes and 
orders in the Nasdaq Market Center to be executed or, if a tie occurs, 
the price that minimizes any Imbalance or, if another tie occurs, the 
price that

[[Page 64352]]

minimizes the distance from the previous Nasdaq official closing price.
    Nasdaq has determined that referring to the previous official 
closing price in this manner could produce an unpredictable Opening 
Cross Price if there is substantial price fluctuation after the 
previous day's close. Nasdaq has determined that the last Opening Cross 
tie-breaker should instead be the price that minimizes the distance 
from the bid-ask midpoint of the inside quotation prevailing at 9:30 
a.m. This would minimize price fluctuations and leverage the additional 
transparency into the opening process that has been created by the 
Nasdaq Order Imbalance Indicator. Nasdaq believes that this outcome 
would be consistent with the Act and would serve investors better than 
the current rule.
    Third, Nasdaq proposes to suspend at 9:28 a.m. the cancellation or 
modification of Regular Hours Orders that are entered into the Nasdaq 
Market Center. Currently, NASD Rule 4704 defines Regular Hours Orders 
either as ``Early Regular Hours Orders'' if entered into the system 
prior to 9:28 a.m. or as ``Late Regular Hours Orders'' if entered into 
the system at 9:28 a.m. or after. The current rule does not address the 
cancellation or modification of Regular Hours Orders as it does with 
MOO, LOO, and OIO orders.
    In order to preserve the stability and predictability of the Nasdaq 
Opening Cross, Nasdaq proposes to suspend, as opposed to prohibit, the 
cancellation or modification of all Regular Hours Orders beginning at 
9:28 a.m. As with MOO, LOO, and OIO Orders, the late cancellation or 
modification of a large Regular Hours Order that would otherwise 
participate in the Opening Cross could substantially impact the Opening 
Cross Price, surprising market participants, diminishing market quality 
and potentially harming investors.
    Nasdaq would not prohibit the cancellation or modification of 
Regular Hours Orders, but rather would suspend the effectiveness of 
such cancellation and modification requests until after the completion 
of the Nasdaq Opening Cross. If a Regular Hours Order is not executed 
in the Nasdaq Opening Cross, the cancellation or modification request 
would immediately be processed in accordance with its terms and the 
order modified or returned to the entering party.
    Fourth, Nasdaq proposes to modify the process for calculating the 
Nasdaq Official Opening Price (``NOOP''). Currently, the NOOP is equal 
to the reported price of the first trade executed by the execution 
functionality of the Nasdaq Market Center based upon orders that are in 
queue when Nasdaq begins trading at 9:30 a.m. (``Opening Match''). If 
there is no Opening Match within five seconds after the system opens at 
9:30 a.m., the NOOP is based upon the first, last sale eligible trade 
that is submitted to the trade reporting functionality of the Nasdaq 
Market Center.
    Nasdaq proposes to change from five to fifteen seconds the length 
of time Nasdaq would wait for an Opening Match within Nasdaq's 
execution functionality before looking for a last sale eligible trade 
submitted to Nasdaq's trade reporting functionality. Nasdaq believes 
that this additional ten seconds is needed due to the added time that 
may elapse while Nasdaq's execution functionality is processing the 
Nasdaq Opening Cross. In other words, if Nasdaq were to apply the 
current five-second standard and the Nasdaq's Opening Cross were to 
take more than five seconds to process, the Opening Cross price would 
not qualify as the NOOP. If the Opening Cross were to be processed 
sooner than fifteen seconds or, in the case of non-crossing stocks, the 
system were to execute a trade sooner than fifteen seconds, the NOOP 
would be calculated at that time rather than waiting the full fifteen 
seconds.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A of the Act,\8\ in general, and with 
Section 15A(b)(6) of the Act,\9\ in particular, in that Section 
15A(b)(6) requires, among other things, that a national securities 
association's rules be designed 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 a more orderly opening for all Nasdaq stocks. The 
proposed rule change would create a fair, orderly, and unified opening 
for Nasdaq stocks, prevent the occurrence of locked and crossed markets 
in halted securities, and preserve price discovery and transparency 
that is vital to an effective opening of trading.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78o-3.
    \9\ 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 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.

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

    Because the foregoing proposed rule change does not:
    (i) Significantly affect the protection of investors or the public 
interest;
    (ii) Impose any significant burden on competition; and
    (iii) Become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, if 
consistent with the protection of investors and the public 
interest,\10\ it has become effective pursuant to Section 19(b)(3)(A) 
of the Act \11\ and Rule 19b-4(f)(6) thereunder.\12\ At any time within 
60 days of the filing of the proposed rule change, the Commission may 
summarily abrogate such rule change if it appears to the Commission 
that such action is necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of the Act.
---------------------------------------------------------------------------

    \10\ The Commission revised this section to add the 
representations on Nasdaq's behalf that the proposed rule change 
does not significantly affect the protection of investors or the 
public interest and does not impose any significant burden on 
competition. Telephone conversation between Jeffrey S. Davis, 
Associate Vice President and Associate General Counsel, Nasdaq, and 
Ann E. Leddy, Special Counsel, Division, Commission (October 21, 
2004).
    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 7 CFR 240.19b-4(f)(6). The Commission notes that Nasdaq 
provided written notice of its intent to file the proposed rule 
change, along with a brief description and text of the proposed rule 
change at least five business days prior to the date of filing of 
the proposed rule change.
---------------------------------------------------------------------------

    Nasdaq has requested that the Commission waive the 30-day operative 
delay. The Commission believes that waiving the 30-day operative delay 
is consistent with the protection of investors and the public interest 
because it will allow Nasdaq to conduct its planned testing and roll-
out schedule for the modified opening without delay. For this reason, 
the Commission designates the proposal to be effective and operative 
upon filing with the Commission.\13\
---------------------------------------------------------------------------

    \13\ For purposes only of waiving the 30-day operative delay of 
the proposed rule change, the Commission considered the proposed 
rule's impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).

---------------------------------------------------------------------------

[[Page 64353]]

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-2004-152 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-2004-152. 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 Room. Copies of such 
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-2004-152 and should be submitted on or before 
November 26, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Lynn Taylor,
Assistant Secretary.
 [FR Doc. E4-3005 Filed 11-3-04; 8:45 am]
BILLING CODE 8010-01-P