[Federal Register Volume 70, Number 77 (Friday, April 22, 2005)]
[Notices]
[Pages 20955-20958]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-1913]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51522; File No. SR--NASD-2005-050]


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

April 11, 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 April 11, 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 are 
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 a proposed rule change to begin the pre-market 
trading session on a voluntary basis at 8 a.m. rather than 9:25 a.m. 
The text of the proposed rule change is set forth below. Proposed new 
language is in italics; proposed deletions are in [brackets].\5\
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    \5\ The proposed rule change is marked to show changes from the 
rule tet appearing in the NASD Manual available at http://www.nasd.com.
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* * * * *

4701. Definitions

    (a)--(rr) No Change.
    (ss) The term ``Total Day'' or ``X Order'' shall mean, (a) For 
orders in ITS 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 6:30 p.m. and for potential execution 
between market open (9:30 a.m.) and 6:30 p.m., after

[[Page 20956]]

which it shall be returned to the entering party.
    (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 p.m. and for 
execution between [9:25] 8 a.m. and 4 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) No Change.
    (uu) The term ``Total Immediate or Cancel'' or ``IOX Order'' shall 
mean,
    (a) For limit orders in ITS Securities so designated, that if after 
entry into the Nasdaq Market Center a marketable limit order (or 
unexecuted portion thereof) becomes non-marketable, the order (or 
unexecuted portion thereof) shall be canceled and returned to the 
entering participant. Such orders are available for potential execution 
between 9:30 a.m. and 6:30 p.m.
    (b) For limit orders in Nasdaq-listed securities so designated, 
that if after entry into the Nasdaq Market Center a marketable limit 
order (or unexecuted portion thereof) becomes non-marketable, the order 
(or unexecuted portion thereof) shall be canceled and returned to the 
entering participant. Such orders may be entered and are available for 
potential execution between [9:25] 8 a.m. and 4 p.m.
* * * * *

4704. Opening Process for Nasdaq-Listed Securities

    (a) No Change.
    (b) Trading Prior To Normal Market Hours. The system shall [open] 
process all eligible Quotes/Orders in Nasdaq-listed securities at 
[9:25] 8 a.m. in the following manner to prevent the creation of 
locked/crossed markets.
    (1) At [9:25] 8 a.m., the system shall open in time priority all 
eligible Quotes as stated in paragraph (5) below and all eligible 
Orders in accordance with Rule 4701(ss) and (uu) [in time priority]. 
Quotes/Orders whose limit price [does] would not lock or cross the book 
shall be added to the book in strict time priority. Quotes/Orders whose 
limit price would lock or cross the book shall be placed in an ``In 
Queue'' state except as provided in paragraph (4).
    (2) Next, the system shall begin processing the In Queue Quotes/
Orders in strict time priority against the best bid (ask) if the In 
Queue Quote/O[o]rder is a sell (buy) order. If an In Queue Quote/Order 
is not executable when it is next in time for execution, the system 
shall automatically add that Quote/Order to the book.
    (3) Once the process set forth in subparagraphs (1)-(2) is 
complete, the system shall begin processing Quotes and X and IOX Orders 
in accordance with their entry parameters.
    (4) Between 8 a.m. and 9:25 a.m., the system shall open Quotes in 
accordance with the entry parameters set by each Nasdaq Quoting Market 
Participant provided that Quotes that would lock/cross the market will 
be rejected or executed in accordance with the Nasdaq Quoting Market 
Participant's instructions. At 9:25 a.m., the system shall open all 
remaining unopened Quotes in accordance with each firm's instructions.
    (5) Nasdaq Quoting Market Participants may instruct Nasdaq to open 
their Quotes as follows:
    (A) At the last price and size entered by the participant during 
the previous trading day, either including or excluding reserve size;
    (B) At a price and size entered by the participant between 7:30 
a.m. and 9:24:59 a.m.; or
    (C) At the quotation limits for Nasdaq systems, currently $.01 
(bid) and $2,000 (ask).
    ([4]6) All trades executed prior to 9:30 shall be automatically 
appended with the ``.T'' modifier.
    ([5]7) Notwithstanding subparagraphs (1) through (5), if a Nasdaq 
Quoting Market Participant has entered a Locking/Crossing Quote/Order 
into the system that would become subject to the automated processing 
described above, the system shall, before sending the order to any 
other Quoting Market Participant or Order Entry Firm, first attempt to 
match off the order against the locking/crossing Nasdaq Quoting Market 
Participant's own Quote/Order if that participant's Quote/Order is at 
the highest bid or lowest offer, as appropriate. A Nasdaq Quoting 
Market Participant may avoid this automatic matching through the use of 
anti-internalization qualifier as set forth in Rule 
4710(b)(1)(B)(ii)(a). Order Entry Firms that enter locking/crossing 
Quotes/Orders shall have those Quotes/Orders processed as set forth in 
subparagraphs (1) through ([4]3), unless they voluntarily select a 
``Y'' AIQ Value as provided for in Rule 4710(b)(1)(B)(ii)(a).
    (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 proposes to make available on a voluntary basis a pre-market 
trading session of the execution service of the Nasdaq Market Center at 
8 a.m. rather than at 9:25 a.m. As described below, Nasdaq would open 
the trading session at 8 a.m. using the unlocking/uncrossing process 
that it currently uses at 9:25 a.m. All extended hours orders and all 
quotations so designated by a Quoting Market Participant would be 
eligible for execution during the pre-market trading session and 
quotations and orders would participate precisely as they do today. 
Trades that occur before 9:30 a.m. would continue to receive a trade 
report modifier denoting execution during extended trading hours, as 
they do today.
    As it does today, Nasdaq would begin the voluntary pre-market 
trading session at 7:30 a.m. by making the system available for 
displaying quotations and orders but not for execution. As they do 
today, firms would continue to have three options for determining the 
price at which their carryover quotes would be 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 a.m. and before 9:25 a.m.; 
or (3) the quote limits for Nasdaq, currently $.01 (bid) and $2,000 
(ask).
    Beginning at 7:30 a.m. until 8 a.m., Nasdaq would display all 
quotations and eligible orders remaining in the system from the 
previous night. Market participants would have the ability to update 
their quotes beginning at 7:30 a.m. and to instruct Nasdaq regarding 
the display of that updated quote. For example, a market participant 
would be able, at any time after 7:30 a.m., to enter a quote update and 
to instruct Nasdaq to open that quote immediately. If the update were 
to be received before 8 a.m., the quotation would be opened

[[Page 20957]]

and executable when the execution functionality became available at 8 
a.m. If the quote open update were to be received between 8 a.m. and 
9:25 a.m. the quote would be opened upon the receipt of the quote 
update. At 9:25 a.m. all quotations would be made available for 
automatic executions.
    Also at 7:30 a.m., market participants would be able to begin 
voluntarily submitting extended and regular hours orders. To facilitate 
orderly trading beginning at 8 a.m., Nasdaq would make Total Day Orders 
(``X Orders''), as described in Rule 4701(ss), and Total Immediate or 
Cancel (``IOX Orders''), as described in Rule 4701(uu), available for 
execution at 8 a.m. rather than at 9:25 a.m. Extended hours orders 
would receive a time stamp for purposes of determining time priority 
and would be displayed but not executed.
    At 8 a.m., Nasdaq would open the execution functionality of the 
Nasdaq Market Center. In preparation for that opening, Nasdaq would 
construct an unlocked inside in each security by applying the 
unlocking/uncrossing process described in Rule 4704(b), which it 
currently applies at 9:25 a.m. In that process, Nasdaq would clear the 
existing quotation display and ``wake up'' the quotations of market 
participants that have instructed Nasdaq to open their quotations 
between 7:30 a.m. and 8 a.m. Quotations that have not been opened 
between 7:30 a.m. and 8 a.m. would not be displayed and would not 
participate in the 8 a.m. opening process. Participating quotations 
would be processed in order of time priority and placed on the Nasdaq 
book, provided, however, that quotations that would lock or cross the 
market would be rejected. Immediately upon completion of the 8 a.m. 
unlocking/uncrossing process, all quotations that have been opened 
voluntarily and all eligible orders that have been submitted 
voluntarily would be subject to automatic execution.
    At 9:25 a.m., Nasdaq would ``wake up'' all remaining un-opened 
quotations and introduce them to the Nasdaq book as it does today. A 
quotation might remain unopened at 9:25 a.m. in two circumstances: If a 
market participant has entered a quotation update but has not 
instructed Nasdaq to open the quotation or if the participant has 
entered no update at all. In the first case, at 9:25 a.m., Nasdaq would 
open the quotation at the price and size specified by the participant. 
In the second case, Nasdaq would open the quotation based on the 
participant's instructions. Quotations that would lock or cross the 
inside would automatically be rejected.
    It is important to note that the parameters governing the entry of 
Market-on-Open and Opening Imbalance Only Orders, as well as all 
parameters governing the Nasdaq Opening Cross would remain the same as 
today, including dissemination of Opening Cross information and the 
processing of the Opening Cross itself.
    Nasdaq believes that these changes are consistent with the Act and 
would improve the fairness and orderliness of Nasdaq's pre-open trading 
environment. Having quotes opened voluntarily and executable upon entry 
would improve the accuracy of Nasdaq's pre-market trading data. Today, 
because quotations are not executable, the market can appear locked or 
crossed during the pre-market session. In addition, Nasdaq believes 
that making quotations and orders available for execution would improve 
both the transparency and price discovery provided by those quotations 
and orders. Nasdaq further notes that several other market centers are 
open for pre-market trading at this time and therefore Nasdaq's 
proposal would enhance competition for quotation and execution 
services.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A of the Act,\6\ in general, and with 
Section 15A(b)(6) of the Act,\7\ in particular, in that Section 
15A(b)(6) requires 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 extend fair and orderly trading 
of Nasdaq stocks on Nasdaq during an increasingly active period of the 
trading day, prevent the occurrence of locked and crossed markets 
before the start of normal market hours, and preserve price discovery 
and transparency that is vital to an effective opening of trading.
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    \6\ 15 U.S.C. 78o-3.
    \7\ 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, it 
has become effective pursuant to Section 19(b)(3)(A) of the Act \8\ and 
Rule 19b-4(f)(6) thereunder.\9\ Nasdaq has requested that the 
Commission waive 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 the 30-day operative delay is consistent with the 
protection of investors and the public interest because it would allow 
Nasdaq immediately to implement the proposed rule change which should 
improve transparency in the pre-opening trading period. For this 
reason, the Commission designates the proposal to be effective and 
operative upon filing with the Commission.\10\
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    \8\ 15 U.S.C. 78s(b)(3)(A).
    \9\ 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.
    \10\ 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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    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,

[[Page 20958]]

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-2005-050 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-2005-050. 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-2005-050 and should be submitted on or before May 
13, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-1913 Filed 4-21-05; 8:45 am]
BILLING CODE 8010-01-P