[Federal Register Volume 73, Number 166 (Tuesday, August 26, 2008)]
[Notices]
[Pages 50380-50381]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-19783]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58386; File No. SR-NASDAQ-2007-067]


Self-Regulatory Organizations; the NASDAQ Stock Market LLC; Order 
Granting Approval of Proposed Rule Change as Modified by Amendment No. 
1 To Establish an Imbalance Cross

August 19, 2008.

I. Introduction

    On July 18, 2007, The NASDAQ Stock Market LLC (``Nasdaq'') filed 
with the Securities and Exchange Commission (``Commission''), pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') 
\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to establish 
the ``Imbalance Cross'' on a pilot basis. The proposed rule change was 
published for comment in the Federal Register on April 8, 2008.\3\ No 
comments were received on the proposed rule change. On August 13, 2008, 
Nasdaq filed Amendment No. 1 to the proposed rule change to make 
certain technical, non-substantive modifications to the original rule 
filing. 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\ See Securities Exchange Act Release No. 57595 (April 1, 
2008), 73 FR 19118 (``Original Filing'').
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II. Description of the Proposal

    Nasdaq proposes to implement for a one-year pilot the Imbalance 
Cross, a system enhancement which will automatically suspend trading in 
Nasdaq-listed securities that are the subject of abrupt and significant 
intra-day price movements. The Imbalance Cross will be fully automated, 
be based on objective, quantitative criteria, and be triggered 
automatically when the execution price of a Nasdaq-listed security 
moves more than a fixed amount away from a pre-established ``triggering 
price'' for that security. The Triggering Price for each security will 
be the price of any execution by the System in that security within the 
previous 30 seconds. For each Nasdaq security, the System will 
continually compare the price of each execution against the prices of 
all executions in that security over the 30 seconds.
    As the System compares current executions against executions 
occurring in the previous 30 seconds, it will determine whether the 
current execution price is outside of a ``threshold range'' for that 
security. The Threshold Range for each security will be based upon the 
current execution price for that security and will vary by price. 
Specifically, for per-share execution prices of $1.75 or less, the 
Threshold Range will be 15 percent; for execution prices over $1.75 and 
up to $25, the Threshold Range will be 10 percent; for execution prices 
over $25 and up to $50, the Threshold Range will be five percent; and 
for execution prices over $50, the Threshold Range will be three 
percent.
    If the execution price of a trade in a Nasdaq security exceeds the 
Threshold Range from the Triggering Price, the System will 
automatically trigger the Imbalance Cross.\4\ When that occurs, the 
System will cease executing trades in that security for a 60-second 
``Display Only Period.'' During that 60-second Display Only Period, the 
System will maintain all current quotes and orders and continue to 
accept new quotes and orders in that Security. The System will 
disseminate an Order Imbalance Indicator every 5 seconds.
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    \4\ For example, for a security trading at $50.00, if a trade 
occurs at $42.50 or below or 57.50 or above it will trigger the 
Imbalance Cross.
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    Unlike a trading halt pursuant to Nasdaq Rule 4120, the Imbalance 
Cross will not be considered a regulatory halt and, therefore, it will 
not trigger a marketwide trading halt under Section X of the Nasdaq UTP 
Plan. As a result, other markets will be permitted to continue trading 
a Nasdaq stock that is undergoing a Market Re-Opening on Nasdaq. During 
the Imbalance Cross, Nasdaq's quotations will be marked ``non-firm,'' 
signaling to other markets that quotes and orders routed to Nasdaq

[[Page 50381]]

will not be executed during this re-opening process.
    At the conclusion of the 60-second Display Only Period, the System 
will automatically re-open the market by executing the Nasdaq Halt 
Cross as set forth in Rule 4753(b)(2)-(4) as it does today for 
securities subject to a trading halt pursuant to Rule 4120. Unlike 
securities subject to a trading halt under Nasdaq Rule 4120, securities 
subject to an Imbalance Cross will automatically re-open at the end of 
the 60-second Display Only Period; the 60-second period will not be 
subject to further extensions.
    The Imbalance Cross price will result in a single price opening; 
the price will be set by the Nasdaq Halt Cross. The Nasdaq Halt Cross 
will operate in the same manner as the Halt Cross operates when trading 
resumes following a trading halt initiated pursuant to Nasdaq Rule 4120 
with one exception. Quotes and orders residing on the Nasdaq book 
during the Imbalance Cross will be subject to the same priorities and 
same execution algorithm that applies during the standard Halt Cross. 
However, unlike the standard Halt Cross, Nasdaq proposes to ``bound'' 
the Imbalance Cross price as it does the Nasdaq Closing Cross.\5\ As 
already exists for the Nasdaq Closing Cross, Nasdaq will establish a 
benchmark price and a threshold range beyond which the Imbalance Cross 
price cannot move.
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    \5\ See Nasdaq Rule 4754(b)(2)(E) (Nasdaq Closing Cross).
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III. Discussion and Commission Findings

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange \6\ and, in particular, the requirements of Section 6 of the 
Act.\7\ Specifically, the Commission finds that the proposed rule 
change is consistent with Section 6(b)(5) of the Act,\8\ which 
requires, among other things, that the rules of a national securities 
exchange be designed 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, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest.
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    \6\ In approving this proposed rule change the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \7\ 15 U.S.C. 78f.
    \8\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposal to create the Imbalance 
Cross, which would systematically suspend trading in Nasdaq-listed 
securities that are the subject of abrupt and significant intra-day 
price movements, will promote fair and orderly markets and the 
protection of investors.
    The proposed Imbalance Cross would complement existing Nasdaq rules 
that are designed to protect the integrity of the market. Specifically, 
Nasdaq Rule 4120 \9\ authorizes Nasdaq Regulation to halt trading in a 
security based upon news or an emergency in the market. In addition, 
Nasdaq Regulation also has the ability under Nasdaq Rule 11890 to break 
trades if the trades meet the definition of clearly erroneous 
transactions.\10\ The Commission notes that the Imbalance Cross shares 
characteristics with trading halts initiated pursuant to Nasdaq Rule 
4120 as well as with the evaluation of potential clearly erroneous 
trades pursuant to Nasdaq Rule 11890. The Threshold Ranges for the 
Imbalance Cross generally correspond to the thresholds established for 
clearly erroneous trades under Nasdaq IM-11890-4 with the exception of 
executions priced under $1.75 which will be subject to a 
straightforward 15 percent threshold. The Display Only Period is 
similar to the Display Only Period provided before the opening of a 
security subject to a trading halt initiated pursuant to Rule 4120. In 
addition, the dissemination of an Order Imbalance Indicator every 5 
seconds is similar to the manner of reopening of securities that are 
the subject of a trading halt.
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    \9\ For a detailed description of the Nasdaq Halt Cross, see 
Securities Exchange Act Release No. 53488 (March 15, 2006), 71 FR 
14272 (March 21, 2006) (notice of filing of SR-NASD-2006-015).
    \10\ For a detailed description of the adjudication of potential 
clearly erroneous trades, see Securities Exchange Act Release No. 
54854 (December 1, 2006), 71 FR 71208 (December 8, 2006) (notice of 
SR-NASDAQ-2006-046).
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    The Commission believes that, as presently constituted and under 
current market conditions, Nasdaq's Imbalance Cross trade qualifies for 
the single-priced reopening exception under Rule 611(b)(3) of Reg. 
NMS.\11\ Nasdaq's Imbalance Cross will operate pursuant to written 
rules and procedures. When an Imbalance Cross is triggered in 
accordance with such rules, Nasdaq will call a formal trading halt 
during which time Nasdaq systems will be prohibited from executing 
orders. Members, however, may continue to enter quotes and orders, 
which will be queued during the 60-second Display Only Period. At the 
conclusion of the Display Only Period, the queued orders will be 
executed at a single price, pursuant to the rules governing the 
Imbalance Cross. Given the transparent and formalized process, the 
opportunity offered to all members to participate in the Imbalance 
Cross, and the infrequency with which Nasdaq anticipates the Imbalance 
Cross would be triggered,\12\ the Commission believes that the 
exception from the Order Protection Rule for single-priced reopenings 
applies with regard to the Imbalance Cross process.
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    \11\ 17 CFR 242.611(b)(3).
    \12\ Nasdaq has provided the Commission data that indicates that 
the Imbalance Cross should be triggered in only 0.001% of executions 
and, on average, in less than one percent of the securities traded 
on any given day. Because of the expected infrequency of occurrence, 
the Commission believes that there would be little opportunity to 
abuse the Imbalance Cross functionality simply to avoid compliance 
with the Order Protection Rule.
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    The Commission approves the proposal to establish the Imbalance 
Cross as a one-year pilot for an initial 100 Nasdaq-listed securities. 
Nasdaq will file a proposed rule change if it decides to expand the 
pilot or implement the pilot on a permanent basis.

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular Section 6 of the Act and the rules and regulations 
thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-NASDAQ-2007-067), as 
modified by Amendment No. 1, be and hereby is, approved.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
Florence E. Harmon,
Acting Secretary.
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    \13\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E8-19783 Filed 8-25-08; 8:45 am]
BILLING CODE 8010-01-P