[Federal Register Volume 65, Number 112 (Friday, June 9, 2000)]
[Notices]
[Pages 36747-36749]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-14596]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-42896; File No. SR-NASD-00-18]
Self-Regulatory Organizations; Order Granting Accelerated
Approval of Proposed Rule Change by the National Association of
Securities Dealers, Inc. Relating to the Entry of Locking/Crossing
Quotations Prior to the Nasdaq Market Opening
June 2, 2000.
Introduction
On April 13, 2000, the National Association of Securities Dealers,
Inc. (``NASD'' or ``Association''), through its wholly-owned
subsidiary, the Nasdaq Stock Market, Inc. (``Nasdaq''), filed with the
Securities and Exchange Commission (``Commission''), pursuant to
Section 19(b)91) of the Securities Exchange Act of 1934 (``Act'' or
``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule
change relating to the entry of locking/crossing quotations prior to
the Nasdaq market opening. On April 18, 2000, the NASD submitted
Amendment No. 1 to the proposal. The proposed rule change and Amendment
No. 1 were published for comment in the Federal Register on May 10,
2000.\3\ The Commission received one comment regarding this
proposal.\4\ 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. 42754 (May 3, 2000),
65 FR 30167.
\4\ See letter from Cameron Smith, General Counsel, Island ECN,
to Jonathan Katz, Secretary, Commission, dated June 1, 2000.
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II. Description of the Proposal
Currently, under NASD Rule 4613(e) if a market participant locks/
crosses the market between 9:20 a.m. and 9:29:59 a.m. Eastern Time, the
market participant must send the market maker(s) or ECN(s) being
locked/crossed, a SelectNet message that has appended to it a
``TRD OR MOV'' administrative message (``Trade-or-Move Message'').\5\
The aggregate size of these Trade-or-Move Messages must be at least
5,000 shares. Thus, in order to lock/cross the market during this 10
minute period before the market opens, a market participant must send a
Trade-or-Move Message for 5,000 shares and be willing to trade at least
this amount. The party being locked or crossed must respond to the
Trade-or-Move Message within 30 seconds by trading with the incoming
message or moving its quotation to a price level that resolves the
locked/crossed market.\6\
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\5\ See Exchange Act Release No. 42400 (February 7, 2000), 65 FR
7407 (February 14, 2000) (order approving File No. SR-NASD-99-23 to
amend NASD Rule 4613(e)).
\6\ Id.
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Nasdaq proposes to amend NASD Rule 4613(e), to permit market
participants, when representing agency interests, to lock/cross the
market at the actual size of the agency order, instead of 5,000 shares
as currently required by rule. Under the proposal, if between 9:20 a.m.
and 9:29:59 a.m. a market participant receives an agency order that
would lock/cross the market, the market participant may lock/cross the
market and send a Trade-or-Move Message for the actual size of the
agency order, instead of 5,000 shares. \7\ (For purposes of the amended
rule, an agency order would not include an order for the account of a
market maker in the issue, but would include orders for individuals,
institutions, and broker-dealers who are not market makers in the
security at issue.) Market participants whose proprietary quotes lock/
cross the market between 9:20 and 9:29:59 a.m., would still be subject
to the 5,000 aggregate share size requirement for Trade-or-Move
Messages. Thus, if a market participant wishes to lock/cross the market
while acting as principal, the market participant must send an
aggregate of at least 5,000 shares through a Trade-or-Move Message to
the parties being locked/crossed.
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\7\ This requirement does not apply when the market maker is
holding agency interest where there is no understanding with the
customer to have its order displayed and/or executed prior to the
market's open, and the market maker otherwise is engaging in bona
fide market making activity during the pre-opening period.
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III. Commission's Findings and Order Granting Accelerated Approval
of Proposed Rule Change
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to the NASD. In particular, the
Commission finds that the proposal is consistent with the requirements
of Sections 15A(b)(6), 15A(b)(11), and 11A(a)(1)(C) of the Act.\8\
[[Page 36748]]
Section 15A(b)(6) \9\ requires that the rules of a registered national
securities association 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, and 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. Section 15A(b)(11) \10\
requires that the rules of a registered national securities association
be designed to produce fair and informative quotations, prevent
fictitious or misleading quotations, and to promote orderly procedures
for collection, distributing, and publishing quotations. In Section
11A(a)(1)(C),\11\ Congress found that it is in the public interest and
appropriate for the protection of investors and the maintenance of fair
and orderly markets to assure: (1) economically efficient execution of
securities transactions; (2) fair competition among brokers and
dealers; (3) the availability to brokers, dealers and investors of
information with respect to quotations and transactions in securities;
(4) the practicability of brokers executing investors' orders in the
best market; and (5) an opportunity for investors' orders to be
executed without the participation of a dealer.\12\
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\8\ 15 U.S.C. 78o-3(b)(6), 15 U.S.C. 78o-3(b)(11), and 15 U.S.C.
78k-1(a)(1)(C).
\9\ 15 U.S.C. 78o-3(b)(6).
\10\ 15 U.S.C. 78o-3(b)(11).
\11\ 15 U.S.C. 78k-1(a)(1)(C).
\12\ In approving the proposed rule change, the Commission has
considered the proposal's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
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Specifically, the Commission finds that the proposal is consistent
with Sections 15A(b)(6), 15A(b)(11), and 11A(1)(C) of the Act \13\
because it is designed to further reduce the frequency of pre-opening
locked and crossed markets, which should help to provide more
informative quotation information, facilitate price discovery, and
contribute to the maintenance of a fair and orderly market. The
proposal will require a market participant to send a Trade-or-Move
Message for agency orders that lock or cross the market between 9:20
and 9:29:59 a.m., for the actual size of the agency order, rather than
5,000 shares. Under the proposal, an agency order would not include an
order for the account of a market maker in the issue, but would include
orders for individuals, institutions, and broker-dealers who are not
market makers in the security at issue. The recipient of a Trade-or-
Move Message must respond to that message within 30 seconds of
receiving it.
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\13\ 15 U.S.C. 78o-3(b)(6), 15 U.S.C. 78o-(b)(11), and 15 U.S.C.
78k-1(a)(1)(C).
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The Commission believes that the Trade-or-Move Message requirement
for agency orders may reduce instances of pre-opening locked and
crossed markets by providing an effective mechanism for promptly
resolving any pre-opening locked or crossed markets that occur. In this
regard, the Commission notes that the recipient of a Trade-or-Move
Message must respond to the message within 30 seconds by either (1)
trading in full with the incoming Trade-or-Move Message; (2) declining
to trade with the incoming Trade-or-Move Message and moving its
quotation to a price level that unlocks or uncrosses the market; or (3)
trading with a portion of the incoming Trade-or-Move Message and moving
its quotation to a price level that unlocks or uncrosses the market. By
reducing instances of pre-opening locked and crossed markets, and
facilitating the prompt resolution of any pre-opening locked or crossed
markets that occur, the proposal should help to provide a more orderly
opening in Nasdaq securities, to the benefit of all market
participants.
The Commission believes, as it has concluded previously,\14\ that
continued locking and crossing of the market can negatively impact
market quality. By helping to reduce the frequency of pre-opening
locked and crossed markets, the Commission believes that the proposal
should improve market quality and enhance the production of fair and
orderly quotations. Accordingly, the Commission believes that the
proposal is designed to produce fair and informative quotations,
consistent with Section 15A(b)(11),\15\ and to remove impediments to
and perfect the mechanism of a free and open market and a national
markey system, consistent with Section 15A(b)(6).\16\
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\14\ See Securities Exchange Act Release No. 40455 (September
22, 1998), 63 FR 51978 (September 29, 1998) (order approving File
No. SR-NASD-98-01).
\15\ 15 U.S.C. 78o-3(b)(11).
\16\ 15 U.S.C. 78o-3(b)(6).
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In addition, the Commission finds good cause for approving the
proposed rule change prior to the thirtieth day after the date of
publication of notice thereof in the Federal Register. The Commission
believes that this proposal, which effectively creates an agency order
exception to NASD Rule 4613, could increase market liquidity and
transparency by allowing more customers to participate in Nasdaq's pre-
opening market.\17\ The Commission notes that this proposal is
responsive to concerns raised by certain ECN commenters SR-NASD-99-23
that NASD Rule 4613(e) would disproportionately impact ECNs and limit
the participation of ECNs, retail investors, and small broker-dealers
in the pre-opening market.\18\ The Commission believes that the
amendments to NASD Rule 4613(e), which would permit agency orders for
quotes of less than 5,000 shares to be appended to a Trade-or-Move
Message, should help allay the concerns of ECNs with regard to the
application of NASD Rule 4613(e).
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\17\ As noted above, the Commission received one comment letter
regarding the proposal. The commenter argued that market
participants receiving Trade-or-Move Messages would be able to
monitor the market so as to selectively execute orders only when
market conditions are favorable. The commenter also noted that is
not technologically equipped, at present, to implement the proposal.
The commenter recommended that Nasdaq address the problem of pre-
opening locked and crossed markets by requiring market participants
to open firm, pre-opening quotations. See note 4, above.
In response to similar comments on NASD-99-23, the NASD stated
that an ECN with an order of less than 5,000 shares that would lock
or cross the market could (1) attempt to match the order internally
with the order of another subscriber; (2) attempt to fill the order
by sending a Select Net message to the market participant(s) it
would lock or cross; or (3) wait to accumulate the 5,000 shares and
then send a Trade-or-Move Message. in addition, an ECN whose
subscriber entered a locking or crossing quotation between 9:20 a.m.
and 9:29:59 a.m. could require its subscriber to comply with the
Trade-or-Move Message requirement. Nasdaq also noted that an ECN
with a pre-opening order that locked or crossed the market could
wait until the opening of the market before sending a SelectNet
message to the market participants it would lock or cross. See note
5, above.
\18\ See note 4, above.
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Finally, as the Commission noted in approving NASD-99-23,\19\ under
this proposal ECNs can still handle orders that lock or cross markets
in the pre-opening in alternative ways. Specificaly, an ECN could (1)
reject a locking or crossing order, just as ECNs reject locking or
crossing orders during normal trading hours; or (2) trade with the
incoming Trade-or-Move Message up to the size of its subscriber's order
and decline the remainder of the Trade-or-Move Message.
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\19\ Id.
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IV. Conclusion
For the reasons discussed above, the Commission finds that the
proposal is consistent with the Act and the rules and regulations
thereunder applicable to a national securities association.
It is Therefore Ordered, pursuant to Section 19(b)(2) of the
Act,\20\ that the
[[Page 36749]]
proposed rule change (SR-NASD-00-18) be and hereby is approved.
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\20\ 15 U.S.C. 78s(b)(2).
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-14596 Filed 6-8-00; 8:45 am]
BILLING CODE 8010-01-M