[Federal Register Volume 71, Number 133 (Wednesday, July 12, 2006)]
[Notices]
[Pages 39382-39383]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-10923]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54101; File No. SR-NASD-2005-140]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Approving a Proposed Rule Change and Amendments 
No. 1 and 2 Regarding the Nasdaq Crossing Network

July 5, 2006.

I. Introduction

    On December 2, 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''), pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (`` Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to establish the Nasdaq Crossing 
Network. On February 28, 2006, Nasdaq filed Amendment No. 1 to the 
proposed rule change.\3\ On April 24, 2006, Nasdaq filed Amendment No. 
2 to the proposed rule change.\4\ The proposed rule change, as amended, 
was published for comment in the Federal Register on May 5, 2006.\5\ 
The Commission received no comments on the proposal. This order 
approves the proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced and superseded the original filing 
in its entirety.
    \4\ In Amendment No. 2, Nasdaq made certain representations 
related to the applicability of Rule 11a2-2(T) under the Exchange 
Act and NASD IM-2110-2 (the ``Manning Rule'') to the proposed rule 
change. In addition, Nasdaq indicated its plan to request exemptive 
relief from Rule 10a-1 under the Exchange Act and NASD Rule 3350 
(``Short Sale Rule''), as well as from Rule 602 of Regulation NMS 
(``Quote Rule''). Nasdaq also made clarifying edits to the proposed 
rule change.
    \5\ See Securities Exchange Act Release No. 53745 (May 1, 2006), 
71 FR 26579 (SR-NASD-2005-140) (``Proposing Release'').
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II. Description

    Nasdaq proposes to establish the Nasdaq Crossing Network for 
Nasdaq-listed and certain exchange-listed securities. The Nasdaq 
Crossing Network would provide a process for executing orders at a 
uniform reference price at a randomly selected point in time during a 
one-minute trading window, commencing at designated times during the 
regular hours session and the after-hours session. The trading windows 
would begin at 11 a.m., 1 p.m., and 3 p.m. (ET) during the regular 
hours session and at 4:30 p.m. (ET) during the after-hours session. For 
the series of Nasdaq Reference Price Crosses (``RPCs'') that occur 
during regular trading hours, market participants would place orders to 
be executed at the midpoint of the National Best Bid and Offer 
(``NBBO''). During the after-hours crossing session, eligible orders 
would be executed at the Nasdaq Official Closing Price (``NOCP'') for 
Nasdaq-listed securities or the official closing price of the primary 
market for securities listed on the NYSE, Amex or a regional exchange 
(``Primary Market Close'').

Orders

    Orders entered into the Nasdaq Crossing Network would be either 
market or limit orders and would be designated by a time-in-force 
indicator.\6\ These orders would not be displayed and would be executed 
only during an RPC. In addition, RPC orders would be entered in round 
lots only; no mixed or odd lot execution amount would be permitted. 
Orders may not be cancelled or replaced during the time of the cross, 
but they may be cancelled or replaced at any time before the cross 
occurs. Also, RPC orders would be required to be available for 
automatic execution. The RPC would have no order delivery capability, 
and no special orders could be accommodated.
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    \6\ RPC orders would be marked with one of the following: (1) 
``NXT,'' which indicates that the order would participate in the 
next scheduled regular-hours cross, with unexecuted shares being 
immediately cancelled back to the market participant after that 
cross; (2) ``REG,'' which indicates that the order would participate 
in all remaining crosses during the trading day with unexecuted 
shares being immediately cancelled back to the market participant 
after the final regular hours cross; or (3) ``ALX,'' which indicates 
that the order would participate in all remaining crosses in the 
current day with unexecuted shares immediately cancelled back to the 
market participant after the after-hours cross.
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Nasdaq Reference Price Cross Priority and Reporting

    Upon initiation of the cross, available shares would be treated as 
if they were the same price and would be allocated on a pro-rata basis 
to eligible orders. Such shares would be allocated based on the 
original size of the order, not on the size of the remaining unexecuted 
portion of the order. If additional shares remain after the initial 
pro-rata allocation, those shares would continue to be allocated pro-
rata to eligible orders until a number of round lots remain that is 
less than the number of eligible orders. Any remaining shares would be 
allocated to the oldest eligible order.\7\
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    \7\ The Proposing Release provides an example that illustrates 
these priority principles. See supra note 5.
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    The executions would be reported to the market participants via 
Nasdaq Market Center execution reports as anonymous, single trades 
reflecting the aggregate shares executed. In addition, each execution 
would be reported to the Nasdaq Market Center trade reporting service 
for trade reporting, clearance and settlement.\8\ Trades from the 
regular hours cross would be disseminated the regular way, and trades 
from the post close cross would be disseminated with a ``.PRP'' sale 
condition modifier.
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    \8\ Nasdaq would submit each underlying trade to the National 
Securities Clearing Corporation for clearing. When Nasdaq becomes 
operational as a national securities exchange, these trades will be 
reported as ``covered sales'' of the exchange for the purposes of 
Section 31 of the Exchange Act. If the Crossing Network is launched 
before Nasdaq is operational as an exchange, the NASD will report 
these trades to NSCC for the purposes of Section 31 of the Exchange 
Act.
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Locked or Crossed Markets

    In the event of a crossed NBBO at the time of a RPC during the 
regular hours session, the RPC would be delayed and would execute based 
on the midpoint NBBO when the quote becomes uncrossed. If the quote 
remains crossed, however, for five minutes beyond when the RPC normally 
would have occurred, the RPC would be cancelled and orders that are not 
designated for any future RPCs would be returned to the market 
participants. In the event of a locked NBBO at the time of a RPC during 
the regular hours session, the RPC would execute at the lock price.

Reference Price Cross Circuit Breaker

    Nasdaq would establish a ``circuit breaker'' for RPCs that occur 
during the after-hours session to protect against unusual occurrences 
when the

[[Page 39383]]

consolidated last sale price varies significantly from the NOCP or the 
Primary Market Close, based on information that becomes available after 
the market close. If the post-close cross would not execute within a 
preset boundary (the ``Threshold Percentage''),\9\ the cross would not 
occur and be automatically cancelled by Nasdaq.
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    \9\ Initially, the Threshold Percentage would be set at ten 
percent, with a $0.50 difference between the NCOP or the Primary 
Market Close and the consolidated last sale price. Any changes to 
the Threshold Percentage would be made in advance of application and 
would be communicated to members. Nasdaq would publish any changes 
to the Threshold Percentage via its public NasdaqTrader Web site.
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III. Discussion

    The Commission finds that the proposed rule change is consistent 
with Section 15A of the Exchange Act \10 \and the rules and regulations 
thereunder.\11\ Specifically, the Commission finds the proposal to be 
consistent with Section 15A(b)(6) of the Exchange Act,\12\ which 
requires the NASD's rules to be designed, among other things, to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, and are not designed to permit unfair discrimination 
between customers, issuers, brokers, or dealers. The Nasdaq Crossing 
Network would provide market participants and investors with an 
additional mechanism for order execution. The Commission, in relying on 
Nasdaq's representation that participation in the RPCs would be 
voluntary and open to all Nasdaq market participants and would not 
result in any advantage to market participants that participate in RPCs 
over those market participants that do not choose to participate, 
believes that the Nasdaq Crossing Network is not designed to permit 
unfair discrimination between customers, issuers, brokers, or dealers.
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    \10\ 15 U.S.C. 78o-3.
    \11\ In approving this proposed rule change the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \12\ 15 U.S.C. 78o-3(b)(6).
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    Nasdaq has proposed to execute RPC orders at a predetermined 
reference price at a randomly selected point in time during a one-
minute trading window. The Commission notes that using the automated 
and random matching mechanism to execute an RPC cross should minimize 
the opportunity for manipulation. In addition, the Commission notes 
that, should Nasdaq desire to add more frequent crosses or to modify 
the time of the crosses in the future, it must submit a rule change to 
the Commission pursuant to 19(b) of the Exchange Act.\13\ Because RPC 
orders that are executed during the regular hours session would be 
executed at the midpoint of the NBBO, it is possible that a Nasdaq 
member would trade ahead of a held customer order by less than $0.01 
(i.e., $0.005). The Commission believes that such an event would 
trigger a Manning Rule obligation.\14 \
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    \13\ 15 U.S.C. 78s.
    \14\ See supra note 5.
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    The Commission believes that the RPC is reasonably designed to 
promote just and equitable principles of trade. The Commission notes 
that any transaction on the Crossing Network effected in non-Nasdaq 
listed securities would be subject to the relevant short sale 
restrictions until Nasdaq requests and receives appropriate relief.\15\ 
In addition, the Commission notes Nasdaq's representation that this 
proposed rule change will not alter the continued accuracy of the 
representations made by Nasdaq in the letter requesting interpretive 
guidance with respect to the application of Rule 11a2-2(T) under the 
Exchange Act that was submitted in connection with Nasdaq's application 
for registration as a national securities exchange.\16 \
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    \15\ Id.
    \16\ See letter to Nancy M. Morris, Secretary, Commission, and 
Elizabeth King, Associate Director, Division of Market Regulation, 
Commission, from Edward S. Knight, Executive Vice President and 
General Counsel, Nasdaq, dated January 12, 2006. The ``effect and 
execute'' rule provides exchange members with an exemption from the 
prohibition in Section 11(a) of the Exchange Act against a member of 
a national securities exchange effecting transactions on that 
exchange for its own account, the account of an associated person, 
or an account over which it or its associated person exercises 
discretion unless an exception applies. In reliance on Nasdaq's 
representations in its letter, the Commission concluded in its order 
approving Nasdaq's exchange registration application that Nasdaq 
Exchange members that enter orders into Nasdaq Execution Systems 
satisfy the requirements of Rule 11a2-2(T) under the Exchange Act. 
See Securities Exchange Act Release No. 53128 (January 13, 2006), 71 
FR 3550 (January 23, 2006) (File No. 10-131).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\17\ that the proposed rule change (SR-NASD-2005-140), as 
amended by Amendments No. 1 and 2, be, and it hereby is, approved.
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    \17\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18 \
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    \18\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E6-10923 Filed 7-11-06; 8:45 am]
BILLING CODE 8010-01-P