[Federal Register Volume 69, Number 244 (Tuesday, December 21, 2004)]
[Notices]
[Pages 76511-76512]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-3761]



[[Page 76511]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50862; File No. SR-NASD-2004-150]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment 1 Thereto by the 
National Association of Securities Dealers, Inc. Relating to an 
Interpretation of Rule 3350

December 15, 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 4, 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 December 6, 2004, Nasdaq filed Amendment No. 1 to 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 Edward S. Knight, Executive Vice President 
and General Counsel, Nasdaq, to Kathy A. England, Assistant 
Director, Division of Market Regulation, Commission, dated December 
6, 2004. Amendment No. 1 provides additional explanatory text that 
relates to the purpose of the proposed rule change.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    Nasdaq is filing this proposed rule change to implement an 
interpretation of NASD Rule 3350, the ``Short Sale Rule,'' as it 
applies to the execution functionality of the Nasdaq Market Center. 
Specifically, Nasdaq is interpreting Rule 3350(a) to establish that the 
bid arrow for each security subject to the Rule will be programmed to 
be an ``up'' arrow at the opening of the market, rather than calculated 
based upon changes from the previous day's closing bid.
    Pursuant to Section 19(b)(3)(A)(i) of the Act \4\ and Rule 19b-
4(f)(1) thereunder,\5\ Nasdaq has designated this proposal as 
constituting a stated policy, practice, or interpretation with respect 
to the meaning, administration, or enforcement of an existing rule, and 
therefore the proposed rule change is effective immediately upon 
filing.
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    \4\ 15 U.S.C. 78s(b)(3)(A)(i).
    \5\ 17 CFR 240.19b-4(f)(1).
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    The proposed rule language for this proposal is set forth below. 
Additions are italicized.\6\
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    \6\ The proposed rule change is marked to show changes from the 
rule text appearing in the NASD Manual available at http://www.nasd.com.
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* * * * *
IM-3350. Short Sale Rule
    (a)-(c) No Change.
    (d) Nasdaq calculates changes to the inside bid displayed in the 
Nasdaq Market Center and disseminates a ``bid arrow'' via Nasdaq data 
feeds for market participants to use to comply with Rule 3350 when 
utilizing the execution functionality of the Nasdaq Market Center. The 
initial bid arrow each day shall be calculated at market open as 
follows.
    (1) For stocks subject to Rule 4709(c), the initial bid arrow after 
completing the process described in Rule 4709(c)(1) through (3) shall 
be up and the next and subsequent bid arrows shall be calculated by 
comparing the bid arrow with each quotation update processed by the 
Nasdaq system after the system begins processing pursuant to Rule 
4709(c)(4).
    (2) For stocks described in Rule 4704(d), the initial bid arrow at 
the conclusion of the Nasdaq Opening Cross shall be up and the next and 
subsequent bid arrows shall be calculated by comparing the bid arrow 
with each quotation update processed by the Nasdaq system after the 
Nasdaq Opening Cross concludes.
* * * * *

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
    Rule 3350(a)(2) states that with respect to trades executed on or 
reported to Nasdaq, ``no member shall effect a short sale for the 
account of a customer or for its own account in a Nasdaq National 
Market security at or below the current best (inside) bid displayed in 
the Nasdaq Market Center when the current best (inside) bid is below 
the preceding best (inside) bid in the security.'' Between the hours of 
9:30 a.m. and 4 p.m., when Rule 3350 operates, Nasdaq continuously 
calculates changes to the best bid and disseminates that information to 
market participants via a ``bid arrow'' that is included in Nasdaq's 
quotation data feeds.
    Rule 3350 is silent about how the bid arrow is to be calculated at 
the beginning of the trading day when Nasdaq is calculating its first 
inside bid and the first inside bid change. Upon approval of the Rule, 
the NASD issued a Notice to Members explaining the Rule's operation, 
which states that

     The calculation of ``up bids'' and ``down bids'' at the 
opening incorporates bids from the previous close. Thus, if the 
opening inside bid is the same as the previous day's closing inside 
bid, and the closing bid was a down bid, then the opening bid would 
be a down bid. Similarly, if the opening inside bid is below the 
previous day's closing inside bid, the opening inside bid is a down 
bid.''

    NASD NTM 94-68 (Aug. 1994) (Q&A 5). Thus, while there is 
no rule language or interpretation in the NASD rule manual, the 
publicly stated practice has been to calculate the opening bid tick by 
referring back to the prior day's closing bid.
    Nasdaq believes that referring back to the previous day's closing 
bid no longer offers the investor protections that it did in 1994. In 
the interim, Nasdaq believes that the increase in quoting and trading 
after hours has reduced the relevance of the previous day's closing bid 
to the direction of the bid arrow at 9:30. In addition, Nasdaq believes 
the increased levels of transparency and surveillance in Nasdaq have 
reduced the risk of undetected manipulation and permit the NASD to 
monitor the types of activities that Rule 3350 is designed to prevent.
    Nasdaq has determined that the better approach is to designate the 
opening bid arrow as an up arrow for all securities that are subject to 
the Rule. Under this approach, Nasdaq would program its system to 
generate and disseminate an up arrow for all subject securities at the 
start of trading, and to compute the next bid arrow by comparing the 
first bid change to it. The first bid arrow would always be up, but 
would immediately turn down if the first bid change to be processed 
after the market opens is at a price below the opening bid.
    Disseminating an up arrow at the conclusion of the Nasdaq Opening 
Cross or at 9:30 for stocks in which there is

[[Page 76512]]

no cross, is consistent with the Exchange Act and the policy underlying 
short sale regulation. Nasdaq believes that short selling provides the 
market with important benefits, such as market liquidity and pricing 
efficiency, and that short selling should not be restricted 
unnecessarily. As a result, the primary objective of short sale 
regulation is to prevent manipulative short selling, such as ``bear 
raids'' from driving the price of securities through successively lower 
price levels. Nasdaq also believes that its two opening processes, the 
Nasdaq Opening Cross and the Modified Opening Process, will reduce the 
incentive and potential effectiveness of manipulative short selling at 
the open by aggregating substantial trading interest and executing it 
in an organized, transparent fashion. After those processes are 
complete, the short sale bid arrow is immediately recalculated 
according to the first bids Nasdaq receives, making it immediately 
available to detect and address problematic short selling that could 
occur on Nasdaq. Nasdaq also notes that Nasdaq's proposed regulation of 
short selling is far more effective than the practice in other markets 
that currently trade Nasdaq securities with no price test at all.
    Nasdaq will implement this change with the launch of its recently 
proposed modified opening process described in SR-NASD-2004-71.\7\ In 
that filing, Nasdaq proposed to establish an Opening Cross for certain 
Nasdaq-listed stocks and to improve the opening process for all others. 
Under the interpretation herein, the bid arrow would be designated as 
an up arrow during the Opening Cross, which will be the first activity 
in the market at 9:30. The bid arrow would be up at the conclusion of 
the Opening Cross, and would change based upon the first bid change 
processed immediately following the Opening Cross. For Nasdaq stocks 
for which there is no Opening Cross, the bid arrow will be designated 
as an up arrow immediately at 9:30 and then will change based upon the 
first bids processed after 9:30.
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    \7\ Release No. 34-50405 (Sept. 16, 2004), 69 FR 57118 (Sept. 
23, 2004) (Notice of Filing).
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2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A(b)(6) of the Act,\8\ which requires, 
among other things, that NASD rules be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. Nasdaq believes the proposed rule change is consistent 
with the Act in that it updates Nasdaq's short sale rule to reflect the 
increase in after-hours and pre-opening trading and also promotes 
compliance with and regulation of short sale requirements.
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    \8\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

    Written comments were neither solicited nor received.

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

    The forgoing rule change has become effective pursuant to Section 
19(b)(3)(A)(i) \9\ of the Act, and subparagraph (f)(1) of Rule 19b-
4,\10\ because the proposal constitutes a stated policy, practice, or 
interpretation with respect to meaning, administration, or enforcement 
of an existing NASD rule. At any time within 60 days of the filing of a 
proposed rule change pursuant to Section 19(b)(3)(A) of the Act, the 
Commission may summarily abrogate the proposed 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.\11\
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    \9\ 15 U.S.C. 78s(b)(3)(A)(i).
    \10\ 17 CFR 240.19b-4(f)(1).
    \11\ For purposes of calculating the 60-day period within which 
the Commission may summarily abrogate the proposed rule change under 
Section 19(b)(3)(C) of the Act, the Commission considers that period 
to commence on December 6, 2004, the date Nasdaq filed Amendment No. 
1. See 15 U.S.C. 78s(b)(3)(C).
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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, 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-2004-150 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-2004-150. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Section, 450 Fifth 
Street, NW., Washington, DC 20549-0609. 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-2004-150 and should be submitted on or before January 11, 2005. 

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E4-3761 Filed 12-20-04; 8:45 am]
BILLING CODE 8010-01-P