[Federal Register Volume 65, Number 110 (Wednesday, June 7, 2000)]
[Notices]
[Pages 36202-36203]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-14281]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42871; File No. SR-NASD-00-21]


Self-Regulatory Organization; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc. Relating to Trade-Reporting of Average-Price 
Trades

May 31, 2000.
    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 May 17, 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'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by Nasdaq. On May 17, 2000, Nasdaq submitted Amendment No. 1 to the 
proposed rule change. \3\ 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\ Nasdaq originally filed the proposal on April 14, 2000, 
pursuant to Section 19(b)(2) of the Act. 15 U.S.C. 78s(b)(2). On May 
17, 2000, Nasdaq submitted a letter from Robert E. Aber, Senior Vice 
President and General Counsel, Nasdaq, to Alton Harvey, Division of 
Market Regulation, Commission, amending the proposal (``Amendment 
No. 1''). In Amendment No. 1, Nasdaq requested that the Commission 
consider the proposal under Section 19(b)(3)(A) of the Act. 15 
U.S.C. 78s(b)(3)(A). Because Nasdaq amended the proposal to file it 
under Section 19(b)(3)(A) of the Act, the Commission considers the 
proposal re-filed as of the date of the amendment. Therefore, the 
date of the amendment is deemed the date of the filing of the 
proposal.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Nasdaq proposes to amend NASD Rule 6420, Transaction Reporting, to 
require all transactions in exchange-listed securities that are 
executed on a weighted average basis, or effected based on other 
special pricing formulae, to be reported with a special indicator. 
Proposed deletions are in brackets.
* * * * *

Rule 6420. Transaction Reporting

    (a)(1)-(5) No Change.
    (6) All members shall report [agency cross] transactions at prices 
based on average-weighting or other special pricing formulae unrelated 
to the current or closing price of the security on the primary market 
to Nasdaq using a special indicator, as designated by the Association.
    (b)-(e) 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
    The NASD proposes to amend NASD Rule 6420, Transaction Reporting, 
to require all transactions in exchange-listed securities executed in 
the over-the-counter market and done on a weighted average or other 
special-pricing basis to be reported with a .W trade modifier.
    NASD Rule 6420 sets out NASD member reporting obligations for 
transactions in exchange-listed securities effected in the over-the-
counter market (i.e, third market transaction). NASD Rule 6420(a)(6) 
requires members to append a special indicator (.W) to a trade report 
when effecting agency crosses at prices based on average-weighting or 
other special pricing formulae unrelated to the current or closing 
price of the security. The NASD adopted this rule in 1994,\4\ in part, 
because these weighted-average trades were being effected in the third 
market at a price that did not relate to the closing price on the 
primary exchanges, but such trades affected the reporting of the last 
sale in the exchange listed security to the media and vendors. Pursuant 
to Rule 6420, these weighted average or special pricing formulae 
trades, when reported with the .W modifier, do not affect the last sale 
price.
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    \4\ See Securities Exchange Act Release No. 29632 (August 30, 
1991), 56 FR 46022 (September 9, 1991) (order approving File No. SR-
NASD-91-37).
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    According to the NASD, when adopted, the scope of Rule 6420(a)(6) 
was limited to agency cross trades effected on a weighted average basis 
or other special pricing formulae because a majority of the trades at 
the time were being effected on an agency cross basis. Since 1991, the 
market has changed in many ways. In particular, the NASD recently 
amended a number of its rules to allow certain systems, including the 
Automated Confirmation and Transaction System (``ACT''), to stay open 
until 6:30 p.m. Eastern Time \5\ to facilitate after-hours trading.\6\ 
As part of this initiative, the NASD amended Rule 6420 to require 
members to report within 90 seconds transactions effected between 9:30 
a.m. and 6:30 p.m. Prior to this change, the 90 second trade-reporting 
requirement applied to transactions effected between 9:30 a.m. and 5:15 
p.m. and transaction effected between 5:15 and 6:30 p.m. were not 
subject to 90 second trade reporting requirements; rather, such 
transactions were reported the next day (i.e., T+1) on an ``as of'' 
basis.
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    \5\ All times mentioned in this proposal are Eastern Standard 
times.
    \6\ See Securities Exchange Act Release No. 42003 (October 13, 
1999), 64 FR 56554 (October 20, 1999) (order approving File No. SR-
NASD-99-57 on a pilot basis).
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    One effect of this rule change has been to subject transactions 
that previously were reported on an ``as of'' basis T+1--because they 
were effected between 5:15 p.m. and 6:30 p.m.--to 90 second trade 
reporting requirements. Recently, the NASD has learned that a sizable 
number of trades effected during the 5:15 p.m. and 6:30 p.m. time 
period are volume-weighted transactions, which are effected on a 
principal or riskless principal basis. These volume-weighted trades are 
often effected at a price unrelated to the close (or if effected during 
the trading day, the last sale) on the primary exchange. Because these 
trades are not executed as agency crosses and thus not subject to the 
.W reporting requirement in Rule 6420(a)(6), they are reported to the 
tape without a modifier and they affect the reporting to the media and 
vendors of the last sale in the exchanged-listed security. As such, 
there is the potential for disorderly markets when the security opens 
the next day on the primary exchange at a price that, although related 
to the last sale on the primary exchange, is unrelated to the last 
reported price that was effected on a weighted average basis on the 
previous day prior to 6:30 p.m. As a short-term method of alleviating 
confusion before this rule change could be proposed, the NASD requested 
that NASD members report these weighted average trades effected between 
4:00 and 6:30 p.m. on an ``as of'' basis, T+1.
    The NASD proposes to amend NASD Rule 6420 to require all 
transactions, not

[[Page 36203]]

just agency crosses, in exchange-listed securities that are based on a 
weighted average or other special pricing formulae, to be reported with 
the .W modifier.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
Section 15A(b)(6) \7\of the Act. Among other things, Section 15A(b)(6) 
requires that the rules of a 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, 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. In addition, 
Nasdaq believes that the proposed rule change furthers the objective 
set forth in Section 11A(a)(1)(C)(iii) \8\of the Act by ensuring the 
availability to brokers, dealers and investors of information with 
respect to quotations for and transactions in securities. Nasdaq 
believes that reporting transactions in exchange-listed securities that 
are marked with a special indicator to identify their unique pricing 
formulae is appropriate for regulatory purposes and will reduce 
investor confusion with regard to these transactions.
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    \7\ 15 U.S.C. 78o-3(b)(6).
    \8\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will 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

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Because the foregoing proposed rule change: (1) Does not 
significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) does not become operative for 30 days from May 17, 2000, the 
date on which it was filed and, since the Exchange provided the 
Commission with written notice of its intent to file the proposed rule 
change at least five business days prior to the filing date,\9\ the 
proposed rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \10\ and subparagraph (f)(6) of Rule 19b-4 
thereunder.\11\
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    \9\ The Commission notes that Nasdaq gave the Commission notice 
of its intent to file the proposed rule change through its original 
filing of the proposal pursuant to Section 19(b)(2) of the Act on 
April 14, 2000.
    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6).
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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, including whether the proposed rule 
is consistent with the Act. Person making written submissions should 
file six copies thereof with the Secretary, Securities and Exchange 
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-0609. 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 will also be 
available for inspection and copying at the principal office of the 
NASD. All submissions should refer to File No. SR-NASD-00-21 and should 
be submitted by June 28, 2000.


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-14281 Filed 6-6-00; 8:45 am]
BILLING CODE 8010-01-M