[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<Register> 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