[Federal Register Volume 69, Number 219 (Monday, November 15, 2004)]
[Notices]
[Pages 65664-65667]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-3160]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50640; File No. SR-NASD-2004-172]


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

November 5, 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 November 3, 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.
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    \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).
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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 modify the opening 
process for Nasdaq securities as follows: (1) Establish a three-month 
pilot during which Nasdaq would reject the entry of Total Day Orders 
prior to 9:25 a.m.; (2) clarify the language of Rule 4704(a)(8) which 
governs the suspension between 9:28 and 9:30 a.m. of requests for 
cancellation or modification of Regular Hours Orders; and (3) clarify 
the language of Rule 4120(a)(7) which governs the opening of stocks 
that are subject to a trade halt. The text of the proposed rule change 
is set forth below.\5\ Proposed new language is in italics; proposed 
deletions are in [brackets].\6\
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    \5\ The proposed rule change is marked to show changes from the 
rule text appearing in the NASD Manual available at www.nasd.com and 
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), and amended in Securities Exchange Act 
Release No. 50602 (October 28, 2004), 69 FR 64350 (November 4, 2004) 
(SR-NASD-2004-152). 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 of Market Regulation (``Division''), 
Commission (November 4, 2004).
    \6\ The Commission corrected proposed rule text on Nasdaq's 
behalf to mark changes in Rule 4704(a)(8) and new subparagraph 
(b)(3). Telephone conversation between Jeffrey S. Davis, Associate 
Vice President and Associate General Counsel, Nasdaq, and Ann E. 
Leddy, Special Counsel, Division, Commission (November 4, 2004).
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* * * * *
4120. Trading Halts
    (a) No Change.
    (b) Procedure for Initiating a Trading Halt.
    (1)-(6) No Change.
    (7) A trading halt initiated under Rule 4120(a)(7) shall be 
terminated when Nasdaq releases the security for trading. Prior to 
terminating the halt, there will be a 15-minute period during which 
market participants may enter quotes in that security in Nasdaq 
systems. [If the inside market is not locked or crossed at the 
conclusion of that 15-minute period, Nasdaq will release the security 
for trading and terminate the halt. If the inside market is locked or 
crossed at the conclusion of the initial 15-minute period, Nasdaq will 
extend the halt for an additional 15 minutes during which quotations 
may be entered in Nasdaq systems.] At the conclusion of the [second] 
15-minute period, the halt shall be terminated and the security 
released for trading.
* * * * *
4701. Definitions
    (a)-(rr) No Change.
    (ss) The term ``Total Day'' or ``X Order'' shall mean,
    (a) No Change.
    (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 4:00 p.m. and 
for potential] and execution between 9:25 a.m. and 4:00 p.m., after 
which it shall be returned to the entering party. X Orders entered 
prior to 9:25 a.m. will be rejected back to the entering party.
    (tt)-(uu) No Change.
* * * * *
4704. Opening Process for Nasdaq-Listed Securities
    (a) Definitions. For the purposes of this rule the term:

[[Page 65665]]

    (1)-(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, to the extent that such 
orders remain available within the system.
    (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 a.m., 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]3) Once the process set forth in subparagraphs (1)-([3]2) is 
complete, the system shall begin processing Quotes and X and IOX Orders 
in accordance with their entry parameters
    (5)-(6) Re-numbered as (4) and (5).
    (c)-(d) 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\ Upon implementation of the Opening Cross, Nasdaq 
has identified several modifications to the operation and rules 
governing the pre-opening trading environment that it believes would 
improve the fair and orderly opening of the market in Nasdaq listed 
securities.
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    \7\ See, Securities Exchange Act Release No. 50405 (September 
16, 2004), 69 FR 57118 (September 23, 2004) (SR-NASD-2004-071).
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    Specifically, upon implementing the improved pre-opening trading 
environment set forth in Rule 4704(b), Nasdaq identified a harmful 
unintended consequence of the Modified Opening Process (``MOP'') by 
which Nasdaq establishes its opening order book and unlocks and 
uncrosses the market. As described in SR-NASD-2004-071, firms have 
three options for determining the price at which their carryover quotes 
are opened at 9:25: (1) The last quotation price entered during the 
previous day; (2) the last quotation price the firm enters after 7:30 
and before 9:25 a.m.; or (3) the quote limits for Nasdaq, currently 
$.01 (bid) and $2,000 (ask). Many Nasdaq participants have programmed 
their quotation management systems to select the first option, carrying 
over the final quotation entered during the previous trading day. At 
the same time, a small number of firms have entered X Orders into 
Nasdaq's system that cross the market by a significant amount, in some 
cases by as much as 20 dollars. When Nasdaq applies the MOP, which 
automatically executes orders that would cross the market, the system 
executes those X Orders that are significantly away from the market 
against the stale carryover quotations of other members resulting in 
inferior executions.
    To address this situation quickly, Nasdaq proposes to change the 
pre-opening trading environment for a three-month pilot period. 
Specifically, Nasdaq proposes to move the beginning entry time for X 
Orders from 7:30 a.m. to 9:25 a.m. As a result, X Orders would not 
participate in the market opening process described in Rule 4704(b), 
which begins at 9:25 a.m., and there would be no risk of X Orders 
automatically executing against a stale quote during that process. 
Nasdaq believes that this proposed change is necessary and sufficient 
to address quickly the harmful unintended consequence described above 
and preserve a fair and orderly opening of trading in Nadsaq. Nasdaq is 
aware that these changes impose a burden on some firms, but it has 
concluded that this approach would be the fastest way to effectively 
address the situation and improve the quality of executions in the MOP. 
It is important to note that participation in pre-opening trading is 
completely voluntary on firms' part, that the actual opening of the 
market and concomitant market maker obligations would continue to begin 
at 9:30 a.m. as is the case today.
    In addition, Nasdaq is already designing further system 
modifications that would address the problem on a permanent basis. 
Specifically, Nasdaq is considering three potential changes: (1) 
Applying the Market Opening Process at 9 a.m. rather than 9:25 as 
currently approved; (2) extending the availability of Total Day and 
Total Immediate or Cancel Orders to 9 a.m. from 9:25 as currently 
approved; and (3) establishing a system default that protects market 
participants from unexpected executions upon the opening of Nasdaq's 
execution functionality at 9 a.m. These modifications would provide a 
more efficient long-term solution, but they would take longer to 
implement than simply rejecting X Orders until 9:25. Nasdaq believes it 
is imperative to address the situation quickly and to simultaneously 
pursue a long-term solution.
    Nasdaq has identified two additional technical modifications, 
unrelated to the substantive proposal at hand, that it believes would 
eliminate potential confusion about the effect of Nasdaq's approved 
rules. First, Nasdaq proposes to clarify that requests for suspension 
or modification of orders governed by Rule 4704(a)(8) would be 
processed only if such orders remain available for execution within 
Nasdaq's system. Such orders would not be available if, for example, 
the system executed the order during the Nasdaq Opening Cross or during 
the opening process for non-cross eligible Nasdaq securities.

[[Page 65666]]

    Second, Nasdaq proposes to modify the language of Rule 4120(a)(7) 
to clarify the manner in which Nasdaq will open trading in stocks that 
are the subject of an initial public offering (``IPO''). Currently Rule 
4120(a)(7) provides for up to two 15-minute Quote Only Periods prior to 
the release of trading in an IPO. The second quote only period is 
necessary only in the event that the market is locked or crossed at the 
end of the first quote only period. 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. Because Nasdaq would apply the MOP at the close of 
the first 15-minute Quote Only Period, and the MOP will automatically 
unlock/uncross the market, the second 15-minute period is unnecessary.
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 the NASD'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.
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    \8\ 15 U.S.C. 78o-3.
    \9\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change 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.
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    \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. Nasdaq made these representations in the filing itself 
but failed to include them in the exhibit. Telephone conversation 
between Jeffrey S. Davis, Associate Vice President and Associate 
General Counsel, Nasdaq, and Ann E. Leddy, Special Counsel, 
Division, Commission (November 4, 2004).
    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 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.
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    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 implement the proposed pilot without 
delay, which should provide a temporary remedy to the problem posed by 
X Orders automatically executing against stale quotes during the MOP. 
The Commission also believes that waiving the 30-day operative delay 
would permit Nasdaq to effect the clarifying changes to Rule 4120(b)(7) 
and Rule 4704(a)(8) without delay. For this reason, the Commission 
designates the proposal to be effective and operative upon filing with 
the Commission.\13\
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    \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).
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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-2004-172 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-2004-172. 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-2004-172 and should be submitted on or before 
December 6, 2004.


[[Page 65667]]


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E4-3160 Filed 11-12-04; 8:45 am]
BILLING CODE 8010-01-P