[Federal Register Volume 76, Number 42 (Thursday, March 3, 2011)]
[Notices]
[Pages 11832-11834]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-4722]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63968; File No. SR-NASDAQ-2011-030]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Adopt New Rule 4763 To Implement the Amendments to Regulation SHO

February 25, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on February 22, 2011, The NASDAQ Stock Market LLC (``NASDAQ'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been substantially prepared by 
the Exchange. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange, pursuant to Section 19(b)(1) of the Act \3\ and Rule 
19b-4 \4\ thereunder, proposes to adopt new Rule 4763 as a written 
policy or procedure to implement the amendments to Rules 200(g) and 201 
of Regulation SHO.\5\
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    \3\ 15 U.S.C. 78s(b)(1).
    \4\ 17 CFR 240.19b-4.
    \5\ 17 CFR 242.200(g); 17 CFR 242.201. See Securities Exchange 
Act Release No. 61595 (Feb. 26, 2010), 75 FR 11232 (Mar. 10, 2010) 
(``Adopting Release'') (amending Rules 201 and 200 of Regulation SHO 
to adopt a short sale price test restriction and ``short exempt'' 
marking requirement). See also Securities Exchange Act Release No. 
63247 (Nov. 4, 2010), 75 FR 68702 (Nov. 9, 2010) (extending the 
compliance date of the amendments to Rules 201 and 200 of Regulation 
SHO until February 28, 2011).
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    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaq.cchwallstreet.com/NASDAQ/Filings/, at the 
principal office of the Exchange, and at the Commission's Public 
Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange 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 
Exchange 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
    On February 26, 2010, the Commission adopted amendments to Rules 
200(g) and 201 of Regulation SHO.\6\ The amendments became effective on 
May 10, 2010, and compliance is required by February 28, 2011.\7\ The 
amendments to Rule 201 of Regulation SHO require trading centers \8\ 
such as NASDAQ to establish, maintain, and enforce certain written 
policies and procedures reasonably designed to comply with the rule.\9\ 
NASDAQ is proposing to adopt new Rule 4763 as a written policy and 
procedure to implement the amendments to Rules 200(g) and 201 of 
Regulation SHO.
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    \6\ See supra note 5.
    \7\ Id.
    \8\ Rule 201(a)(9) states the term ``trading center'' will have 
the same meaning as in Rule 600(b)(78). 17 CFR 242.201(a)(9). Rule 
600(b)(78) of Regulation NMS defines a ``trading center'' as ``a 
national securities exchange or national securities association that 
operates an SRO trading facility, an alternative trading system, an 
exchange market maker, an OTC market maker, or any other broker or 
dealer that executes orders internally by trading as principal or 
crossing orders as agent.'' 17 CFR 242.600(b)(78).
    \9\ See 17 CFR 242.201(b). The amendments to Rule 200(g) of 
Regulation SHO provide a ``short exempt'' marking requirement. See 
17 CFR 242.200(g).
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    Proposed Rule 4763(a) defines the terms ``covered security,'' 
``listing market,'' and ``national best bid'' as having the same 
meaning as such terms have in Rule 201 of Regulation SHO.\10\
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    \10\ See Rule 201(a) of Regulation SHO. The System will utilize 
the national best bid from the systems information processor. Rule 
201(a)(1) defines ``covered security'' to mean any ``NMS stock'' as 
defined under Rule 600(b)(47) of Regulation NMS. 17 CFR 
242.201(a)(1). Rule 600(b)(47) of Regulation NMS defines an ``NMS 
stock'' as ``any NMS security other than an option.'' 17 CFR 
242.600(b)(47). Rule 600(b)(46) of Regulation NMS defines an ``NMS 
security'' as ``any security or class of securities for which 
transaction reports are collected, processed, and made available 
pursuant to an effective transaction reporting plan, or an effective 
national market system plan for reporting transactions in listed 
options.'' 17 CFR 242.600(b)(46).
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    Under Proposed Rule 4763(b), entitled ``Short Sale Price Test,'' 
the System \11\ will not execute or display a short sale order with 
respect to a covered security at a price that is less than or equal to 
the current national best bid if the price of that security decreases 
by 10% or more from the security's closing price on the listing market 
as of the end of

[[Page 11833]]

regular trading hours on the prior day (``Trigger Price'').\12\ For 
covered securities for which NASDAQ is the listing market, the NASDAQ 
Official Closing Price (``NOCP'') for each security is established by 
the NASDAQ Closing Cross pursuant to procedures set forth in Rule 
4754.\13\
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    \11\ See NASDAQ Rule 4751(a). The term ``Nasdaq Market Center'' 
or ``System'' shall mean the automated system for order execution 
and trade reporting owned and operated by NASDAQ.
    \12\ See Rule 201(b)(1)(i) of Regulation SHO. Such execution or 
display needs to be in compliance with applicable rules concerning 
minimum pricing increments. See 17 CFR 242.612.
    \13\ See NASDAQ Rule 4754. The NASDAQ Closing Cross will begin 
at 4 p.m. EST. The process begins at 3:50 p.m. EST, when NASDAQ 
begins to electronically disseminate order imbalance indicator 
messages every 5 seconds, to which participants may send orders in 
response. This occurs until 4 p.m. EST when the NASDAQ Closing Cross 
is executed by bringing together all of NASDAQ's order books at a 
single price which maximizes the number of shares of eligible 
interest that can be executed.
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    Under Proposed Rule 4763(c), Determination of Trigger Price, NASDAQ 
will continuously compare each execution by the System with the NOCP 
\14\ and alert the single plan processor \15\ when a Trigger Price has 
been reached.\16\ The single plan processor will then disseminate a 
notice to market participants in accordance with procedures established 
by the single plan processor.\17\ When the single plan processor 
disseminates such notice, NASDAQ will systematically apply the short 
sale price test restriction for short sale orders in the covered 
security in the manner described in Proposed Rule 4763(b).
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    \14\ Under Proposed Rule 4763(c)(2), if a covered security did 
not trade on NASDAQ on the prior trading day (due to a trading halt, 
trading suspension, or otherwise), NASDAQ's determination of the 
Trigger Price shall be based on the last sale price on the Exchange 
for that security on the most recent day on which the security 
traded. See also Division of Trading and Markets: Responses to 
Frequently Asked Questions Concerning Rule 201 of Regulation SHO, 
Q&A No. 3.1
    \15\ See 17 CFR 242.201(a)(6).
    \16\ See Rule 201(b)(3) of Regulation SHO. See Division of 
Trading and Markets: Responses to Frequently Asked Questions 
Concerning Rule 201 of Regulation SHO, Q&A No. 1.1 (explaining 
calculation of the Trigger Price).
    \17\ See NASDAQ UTP Vendor Alert 2010-9 (July 15, 2010), 
available at http://www.nasdaqtrader.com/TraderNews.aspx?id=uva2010-009.
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    Under Proposed Rule 4763(d), Duration of Short Sale Price Test, 
once triggered, the short sale price test restriction shall remain in 
effect until the next trading day when a national best bid for the 
covered security is calculated and disseminated on a current and 
continuing basis by a plan processor pursuant to an effective national 
market system,\18\ as provided for in Regulation SHO Rule 201(b)(1)(ii) 
(the ``Short Sale Period''). There are two exceptions in the proposed 
rule.\19\ First, if the Exchange determines pursuant to Proposed Rule 
4763(d)(1) that the short sale price test restriction for a covered 
security was triggered because of a clearly erroneous execution,\20\ 
NASDAQ may lift the short sale price test restriction before the Short 
Sale Period ends for covered securities for which the Exchange is the 
listing market.\21\ Second, if NASDAQ determines pursuant to Proposed 
Rule 4763(d)(2) that the prior day's closing price for a covered 
security is incorrect in the System and resulted in an incorrect 
determination of the Trigger Price, the Exchange may correct the prior 
day's NOCP and lift the short sale price test restriction before the 
Short Sale Period ends.
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    \18\ See 17 CFR 242.201(b)(1)(ii). See also Division of Trading 
and Markets: Responses to Frequently Asked Questions Concerning Rule 
201 of Regulation SHO, Q&A No. 2.1.
    \19\ If the price of a covered security declines intra-day by at 
least 10% on a day on which the security is already subject to the 
short sale price test restriction of Rule 201, the restriction will 
be re-triggered and, therefore, will continue in effect for the 
remainder of that day and the following day. See Adopting Release, 
75 FR at 11253, n. 290. In addition, Rule 201 does not place any 
limit on the frequency or number of times the circuit breaker can be 
re-triggered with respect to a particular stock. See Division of 
Trading and Markets: Responses to Frequently Asked Questions 
Concerning Rule 201 of Regulation SHO, Q&A No. 2.2.
    \20\ See NASDAQ Rule 4762 which cross-references NASDAQ Rule 
11890 for the standard of determining when a trade is ``clearly 
erroneous.'' The terms of a transaction executed on NASDAQ are 
``clearly erroneous'' when there is an obvious error in any term, 
such as price, number of shares or other unit of trading, or 
identification of the security. A transaction made in clearly 
erroneous error and cancelled by both parties or determined by 
NASDAQ to be clearly erroneous will be removed from the consolidated 
tape.
    \21\ See 17 CFR 242.201(a)(3).
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    Under Proposed Rule 4763(e), Re-pricing of Orders during Short Sale 
Period, during a Short Sale Period, short sale orders that are limited 
to the current national best bid or lower and short sale market orders 
will be re-priced by the System one minimum allowable price increment 
above the current national best bid (``Permitted Price''). To reflect 
declines in the national best bid, the Exchange will continue to re-
price a short sale order at the lowest Permitted Price down to the 
order's original limit price, or if a market order, until the order is 
filled. Non-displayed orders between the NASDAQ bid and offer at the 
time of receipt will also be re-priced upward to a Permitted Price to 
correspond with a rise in the national best bid. During the Short Sale 
Period, immediate or cancel (``IOC'') orders requiring that all or part 
of the order be executed immediately will be executed to the extent 
possible at a Permitted Price and higher and then cancelled, and will 
not be re-priced. Inter-market sweep orders not marked ``short exempt'' 
will be handled in the same manner as IOC orders.
    Also during the Short Sale Period, Limit-on-Open and Market-on-Open 
Orders defined in NASDAQ Rule 4752(a)(3) and (a)(4) and Limit-on-Close 
and Market-on-Close Orders defined in NASDAQ Rule 4754(a)(4) and (a)(5) 
shall be re-priced as described above unless the spread between the 
national best bid and offer is $0.01.\22\ In that case, such orders 
shall be converted to Mid-Point Peg Orders defined in NASDAQ Rule 
4751(f)(4). Once converted, such orders will be priced at the midpoint 
of the national best bid and offer and may execute in sub-pennies if 
necessary to obtain a midpoint price.\23\ Converting and re-pricing on-
open and on-close orders will facilitate that such orders are permitted 
to execute in the critical opening and closing crosses. As noted in the 
Adopting Release, the ``short sale price test restrictions of Rule 201 
will accommodate matching systems that execute trades at an 
independently-derived price because such systems are designed so that 
matches occur above the current national best bid.'' \24\
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    \22\ In the event of a locked market, the short sale on-open or 
on-close orders will be re-priced one minimum allowable price 
increment above the current national best bid.
    \23\ Re-pricing of orders, including conversion to midpoint 
orders in the case of on-open and on-close orders, occurs 
simultaneously with the execution of the opening and closing 
crosses. NASDAQ's system takes a snapshot of the orders on the book 
and the current national best bid, validates for compliance with 
Rule 201 of Regulation SHO, and simultaneously executes all orders 
that are available for execution at the crossing price.
    \24\ See Adopting Release, 75 FR 11232, at fn. 242-244 and 
accompanying text.
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    Pursuant to Proposed Rule 4763(f), Execution of Permissible Orders 
during the Short Sale Period, during the Short Sale Period, the System 
will execute and display a short sale order without regard to whether 
the order is at a Permitted Price or higher if, at the time of initial 
display of the short sale order, the order was at a price above the 
then current national best bid. This determination is consistent with 
Rule 201(b)(1)(iii)(A) of Regulation SHO. Short sale orders that are 
entered into the System prior to the Short Sale Period but are not 
displayed will be re-priced as described in Proposed Rule 4763(e) as 
set forth above.
    Finally, under Proposed Rule 4763(g), Short Exempt Orders, during 
the Short Sale Period, the System will execute and display orders 
marked ``short exempt'' without regard to whether the

[[Page 11834]]

order is at a Permitted Price or higher.\25\ The System will accept 
orders marked ``short exempt'' at any time when the System is open for 
order entry regardless of whether the short sale price test has been 
triggered in the covered security. NASDAQ member firms marking orders 
``short exempt'' in reliance on Rule 201(c) or 201(d) are responsible 
for ensuring that any such orders meet the criteria of these provisions 
and are accurately marked as ``short exempt.'' \26\
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    \25\ See 17 CFR 242.201(b)(1)(iii)(B).
    \26\ See Rules 200(g)(2), 201(c) and 201(d) of Regulation SHO. 
See also Division of Trading and Markets: Responses to Frequently 
Asked Questions Concerning Rule 201 of Regulation SHO, Q&A Nos. 4.2, 
5.4 and 5.5.
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2. Statutory Basis
    The statutory basis for the proposed rule change is Section 6(b)(5) 
of the Act,\27\ which requires, among other things, the rules of an 
exchange to promote just and equitable principles of trade, and, in 
general, to protect investors and the public interest. The proposed 
rule change also is designed to support the principles of Section 
11A(a)(1) of the Act \28\ in that it seeks to assure fair competition 
among brokers and dealers and among exchange markets. The Exchange 
believes that the proposed rule meets these requirements in that it 
implements rules adopted by the Commission in Regulation SHO under the 
Act.
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    \27\ 15 U.S.C. 78f(b)(5).
    \28\ 15 U.S.C. 78k-1(a)(1).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition 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

    No written comments were either solicited or received.

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 after the date of the filing, or such 
shorter time as the Commission may designate, it has become effective 
pursuant to 19(b)(3)(A) of the Act \29\ and Rule 19b-4(f)(6) \30\ 
thereunder.
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    \29\ 15 U.S.C. 78s(b)(3)(A).
    \30\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) \31\ normally 
may not become operative prior to 30 days after the date of filing.\32\ 
However, Rule 19b-4(f)(6)(iii) \33\ permits the Commission to designate 
a shorter time if such action is consistent with the protection of 
investors and the public interest. NASDAQ has requested that the 
Commission waive the 30-day operative delay so that it may implement 
the change no later than February 28, 2011 to coincide with the 
compliance date for the amendments to Rules 200(g) and 201 of 
Regulation SHO. The Commission believes that waiver of the operative 
delay is consistent with the protection of investors and the public 
interest because the proposed rule change, among other things, 
implements the amendments to Rules 200(g) and 201 of Regulation SHO 
which have a February 28, 2011 compliance date.\34\ For this reason, 
the Commission designates the proposed rule change to be operative upon 
filing with the Commission.\35\
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    \31\ Id.
    \32\ 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-
4(f)(6)(iii) requires that a self-regulatory organization submit to 
the Commission 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, or such shorter time as designated by 
the Commission. The Exchange has satisfied this requirement.
    \33\ Id.
    \34\ See supra note 5.
    \35\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule change'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 summarily may temporarily suspend 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. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.

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-NASDAQ-2011-030 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2011-030. 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 Web site viewing and printing in 
the Commission's Public Reference Room, 100 F Street, NE., Washington, 
DC 20549, on official business days between the hours of 10 a.m. and 3 
p.m. Copies of the filing also will be available for inspection and 
copying at the principal office of the Exchange.
    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-NASDAQ-2011-
030 and should be submitted on or before March 24, 2011.


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\36\

Cathy H. Ahn,
Deputy Secretary.
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    \36\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2011-4722 Filed 3-2-11; 8:45 am]
BILLING CODE 8011-01-P