[Federal Register Volume 70, Number 37 (Friday, February 25, 2005)]
[Notices]
[Pages 9404-9406]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-771]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51233; File No. SR-NASD-2005-017]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change and Amendment No. 1 Thereto Regarding Modifications to the 
Nasdaq Opening Process For Nasdaq-Listed Stocks

February 18, 2005.
    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 January 25, 2005, 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 February 
15, 2005, Nasdaq amended the proposed rule change (``Amendment No. 
1'').\3\ Nasdaq has designated the proposed rule change as ``non-
controversial'' under Section 19(b)(3)(A) of the Act \4\ and Rule 19b-
4(f)(6) thereunder,\5\ 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\ In Amendment No. 1, Nasdaq restated the proposed rule change 
in its entirety.
    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ 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, as amended, to extend a 
current pilot program until April 30, 2005, during which time Nasdaq 
will continue

[[Page 9405]]

to reject the entry of Total Day Orders prior to 9:25 a.m. The pilot 
rule language under NASD Rule 4701(ss)(2) was established on November 
3, 2004, and is effective through February 2, 2005.\6\ This proposal 
would extend the pilot language under Rule 4701(ss)(2) without change 
through April 30, 2005. Therefore, there is no proposed rule language 
contained in this proposal.
---------------------------------------------------------------------------

    \6\ See Securities Exchange Act Release No. 50640 (November 5, 
2004), 69 FR 65664 (November 15, 2004) (SR-NASD-2004-172) (``Release 
No. 34-50640'').
---------------------------------------------------------------------------

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 extend through April 30, 2005, a pilot 
designed to address a harmful unintended consequence of the Modified 
Nasdaq Opening. 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).\7\ 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.
---------------------------------------------------------------------------

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

    To address this situation quickly, Nasdaq changed the pre-opening 
trading environment for a pilot period ending February 2, 2005.\8\ 
Specifically, Nasdaq moved the beginning entry time for X Orders from 
7:30 a.m. to 9:25 a.m. As a result, X Orders do not participate in the 
market opening process described in Rule 4704(b), which begins at 9:25 
a.m., eliminating the risk of X Orders automatically executing against 
a stale quote during that process. Nasdaq believes that that change was 
necessary and sufficient to address quickly the harmful unintended 
consequence described above and to preserve a fair and orderly opening 
of trading in Nadsaq. 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.
---------------------------------------------------------------------------

    \8\ See Release No. 34-50640, supra note 6.
---------------------------------------------------------------------------

    Nasdaq proposes to extend the pilot through April 30, 2005, while 
the Commission considers Nasdaq's proposed permanent solution to this 
issue. On January 25, 2005, Nasdaq filed a proposal to make three 
changes to the opening process: (1) Applying the Market Opening Process 
at 8 a.m. rather than 9:25 as currently approved; (2) extending the 
availability of Total Day and Total Immediate or Cancel Orders to 8 
a.m. from 9:25, and adding the availability of Total Good-till-Canceled 
Orders during the same period; and (3) establishing a system default 
that protects market participants from unexpected executions upon the 
opening of Nasdaq's execution functionality at 8 a.m.\9\ According to 
Nasdaq, 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.
---------------------------------------------------------------------------

    \9\ See SR-NASD-2005-009.
---------------------------------------------------------------------------

2. Statutory Basis
    Nasdaq believes that the proposed rule change, as amended, is 
consistent with the provisions of Section 15A of the Act,\10\ in 
general, and with Section 15A(b)(6) of the Act,\11\ 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, as amended, 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.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78o-3.
    \11\ 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

    Because the foregoing proposed rule change, as amended, 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, it 
has become effective pursuant to Section 19(b)(3)(A) of the Act \12\ 
and Rule 19b-4(f)(6) thereunder.\13\ Nasdaq has requested that the 
Commission waive the five-day pre-filing notice requirement and the 30-
day operative delay for ``non-controversial'' proposals, based upon a 
representation that the proposal is of the utmost importance to the 
fair and orderly operation of The Nasdaq Stock Market during the pre-
opening trading period. The Commission believes that waiver of

[[Page 9406]]

the five-day pre-filing requirement and the 30-day operative delay is 
consistent with the protection of investors and the public interest 
because it will allow Nasdaq to continue the pilot without 
interruption. For this reason, the Commission designates the proposal 
to be effective and operative upon filing with the Commission.\14\
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6).
    \14\ 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).
---------------------------------------------------------------------------

    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.

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-2005-017 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-2005-017. 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-2005-017 and should be submitted on or before March 
18, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
---------------------------------------------------------------------------

    \15\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E5-771 Filed 2-24-05; 8:45 am]
BILLING CODE 8010-01-P