Federal Register / Vol. 62, No. 152 / Thursday, August 7, 1997 / Notices 42613

1 15 U.S.C. 78s(b)(1). 2 15 U.S.C. § 78o-3.

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–38885; File No. SR–NASD–

97–48]

Self-Regulatory Organizations; Notice

of Filing of and Order Granting

Accelerated Approval to a Proposed

Rule Change by the National

Association of Securities Dealers, Inc.

Relating to the Adjustment of Open

Orders

July 30, 1997.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’),1 notice is hereby given that on

July 8, 1997, the NASD Regulation, Inc.

(‘‘NASD Regulation’’) filed with the

Securities and Exchange Commission

(‘‘Commission’’) the proposed rule

change as described in Items I and II

below, which Items have been prepared

by the self-regulatory organization. The

Commission is publishing this notice to

solicit comments from interested

persons to grant accelerated approval to

the proposal rule change.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

NASD Regulation is proposing is

amend Rule 3220 of the National

Association of Securities Dealers, Inc.

(‘‘NASD’’ or ‘‘Association’’) to permit

members to adjust the price of open

orders as a result of dividends,

payments, or distributions in a manner

consistent with their ability to quote

prices generally. Below is the text of the

proposed rule change. Proposed new

language is in italics; proposed

deletions are in brackets.

Rule 3220. Adjustment of Open Orders

(a) A member holding an open order

from a customer or another broker/

dealer shall, prior to executing or

permitting the order to be executed,

reduce, increase or adjust the price and/

or number of shares of such order by an

amount equal to the dividend, payment

or distribution, on the day that the

security is quoted ex-dividend, exrights, ex-distribution or ex-interest,

except where a cash dividend or

distribution is less than one cent ($.01),

as follows:

(1) In the case of a cash dividend or

distribution, the price of the order shall

be reduced by subtracting the dollar

amount of the dividend or distribution

from the price of the order and rounding

the result to the next lower [1⁄8 of a

dollar] minimum quotation variation

used in the primary market, provided

that if there is more than one minimum

quotation variation in the primary

market, then the greater of the

variations shall be used (e.g., if a market

has minimum quotation variations of

1⁄16 or 1⁄32 of a dollar, depending on the

price of the security, then the

adjustment to open orders shall be in

increments of 1⁄16 of a dollar);

(2) In the case of a stock dividend or

split, the price of the order shall be

reduced by rounding the dollar value of

the stock dividend or split to the next

higher [1⁄8 of a dollar] minimum

quotation variation used in the primary

market as specified in paragraph (a)(1)

and subtracting that amount from the

price of the order; provided further, that

the size of the order shall be increased

by (A) multiplying the size of the

original order by the numerator of the

ratio of the dividend or split, (B)

dividing the result by the denominator

of the ratio of the dividend or split, and

(C) rounding the result to the next lower

round lot; and

* * * * *

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

self-regulatory organization 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 III below.

The self-regulatory organization 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 proposed rule change is a

technical amendment to NASD Rule

3220 of the Conduct Rules of the NASD

that is necessary to permit members to

adjust the price of open orders as a

result of dividends, payments, or

distributions by a consistent, minimum

quotation variation. Current NASD Rule

3320 permits adjustments to the price of

open orders in 1⁄8 of a dollar increments

only. Recently, The Nasdaq Stock

Market (‘‘Nasdaq’’), the American Stock

Exchange (‘‘Amex’’), and the New York

Stock Exchange (‘‘NYSE’’) reduced the

minimum quotation variation to 1⁄16 of

a dollar or less. The proposed rule

change is necessary to permit greater

consistency between the prices at which

securities may be quoted and the price

adjustments that may be made to open

orders. Moreover, in light of the fact that

Nasdaq recently requested comment

concerning the effects of decimal

pricing and the NYSE recently

announced that it would commence

quoting listed securities in decimals by

the year 2000, NASD Regulation’s

proposed amendment to NASD Rule

3220 anticipates even smaller quotation

variations. Specifically, the proposed

rule change specifies that adjustments to

the price of open orders may be made

to the next lower (or higher) minimum

quotation variation used in the primary

market for the security. The term

‘‘primary market’’ for purposes of Rule

3220 would be The Nasdaq Stock

Market for Nasdaq-listed securities, the

NYSE for NYSE-listed securities, the

Amex for Amex-listed securities, and for

securities listed solely on other markets,

the market on which the majority of

trading takes place. The proposed rule

change also provides that in situations

where there is more than one minimum

quotation variation used in a primary

market, the greater minimum quotation

variation should be used. NASD

Regulation believes that having only one

minimum variation by which to adjust

all open orders provides members with

a greater ease of administration than a

system in which open orders on the

same primary market may be adjusted

by different variations. For example,

Nasdaq securities whose bid is $10 or

more are quoted with minimum

variations of 1⁄16 of a dollar, whereas

securities whose bid is below $10 may

be quoted with minimum variations of

1⁄32 of a dollar. Rather than have

members adjust the price of open orders

by 1⁄16 or 1⁄32 of a dollar depending on

the bid price of the security, the

proposed rule change would have

members adjust all open orders by

increments of 1⁄16 of a dollar.

2. Statutory Basis

NASD Regulation believes the

proposed rule change is consistent with

the provisions of Section 15A(b)(6) of

the Act in that the proposed rule change

is designed to promote just and

equitable principles of trade, remove

impediments to and perfect the

mechanism of a free and open market

and a national market system, and

protect investors and the public

interest.2

B. Self-Regulatory Organization’s

Statement on Burden on Competition

NASD Regulation believes the

proposed rule change will impose no
42614 Federal Register / Vol. 62, No. 152 / Thursday, August 7, 1997 / Notices

3 15 U.S.C. § 78o–3. In approving this rule change,

the Commission notes that it has considered the

proposal’s impact on efficiency, competition, and

capital formation, consistent with Section 3 of the

Act. Id. § 78c(f).

4Securities Exchange Act Release Nos. 38571

(May 5, 1997), 62 FR 25682 (May 9, 1997)

(approving an Amex proposal to reduce the

minimum trading increment from 1⁄8 to 1⁄16); 38678

(May 27, 1997), 62 FR 30363 (June 6, 1997)

(approving a proposed rule change by the NASD to

reduce the minimum quotation increment from 1⁄8

to 1⁄16); 38744 (June 18, 1997), 62 FR 34334 (June

25, 1997) (approving an NYSE proposal to reduce

the minimum trading increment from 1⁄8 to 1⁄16).

5For example, both the NYSE and the Chicago

Stock Exchange (‘‘CHX’’) require their specialists to

utilize the increment in which bids (offers) are

made when adjusting open orders for securities

quoted ‘‘ex-.’’ See CHX Article XX, Rule 35 and

NYSE Rule 118.21.

6For example, two parties may enter orders to

buy the same security for $9, but one order is

placed with a CHX specialist and the other is

placed with a Nasdaq market maker. Assume

further that the issuer declares a $0.15 dividend.

The CHX order would be rounded down by 5⁄32 to

$827⁄32 ($8,84375, the closest applicable minimum

trading variation) whereas the Nasdaq market maker

would round its $9 order down by 3⁄16 to 813⁄16

($8.8125, the closest applicable variation based on

Nasdaq’s largest variation, notwithstanding that

Nasdaq allows securities under $10 to be quoted in

1⁄32s). The end result is that the CHX order will

obtain price priority over an order that it was on

parity with before the security was quoted ‘‘ex-.’’

Moreover, this shift in priority is not the result of

a conscience decision by a customer to relinquish

priority but rather is attributable to the fact that the

adjustment technique utilized by Nasdaq is

inconsistent with other markets.

7 15 U.S.C. § 78s(b)(2).

8 id

9 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s (b)(1).

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

NASD Regulation has neither

solicited nor received written

comments.

Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street NW.,

Washington, DC 20549. 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 at

the Commission’s Public Reference

Room, 450 Fifth Street NW.,

Washington, DC 20549. Also, copies of

such filing will be available for

inspection and copying at the principal

office of the NASD. All submissions

should refer to File No. SR–NASD–97–

48 and should be submitted by August

28, 1997.

IV. Commission’s Findings and Order

Granting Accelerated Approval of the

Proposed Rule Change

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. In particular, the proposed

rule change satisfies the requirements of

Section 15A of the Act.3

Recently, there has been a movement

within the securities industry to reduce

the minimum trading and quotation

increments imposed by the various selfregulatory organizations. As noted

previously, the Amex, Nasdaq, and the

NYSE have recently reduced their

minimum increments.4 The proposed

rule change modifies the NASD’s rule

regarding the adjustment of open orders

so that it can accommodate this

transition to finer increments. This

should promote greater consistency

between the prices at which securities

may be quoted and the price

adjustments made to open orders in

securities quoted ‘‘ex-.’’

The Commission notes, however, that

the NASD’s proposed use of the greatest

minimum variation for adjusting open

orders, rather than the minimum

variation applicable to the particular

security, is inconsistent with the

practices employed by other markets.5

This disparity could result in orders for

the same security at the same price in

different markets being rounded

differently and, thus, could shift the

priority among orders that were

formerly on parity.6

Nevertheless, the method chosen by

NASD Regulation comports with the

Act. By permitting NASD members to

apply the same increment to all open

orders for securities quoted ‘‘ex-,’’ the

proposal should facilitate the ability of

NASD members to quickly adjust such

orders.

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. NASD members have

already begun quoting stocks in

increments finer than an eighth. The

proposed rule change facilitates the

NASD’s transition to finer increments.

Requiring NASD members to utilize

eighths when adjusting open orders for

securities quoted ‘‘ex-’’ until the full

statutory review period has elapsed

would unnecessarily inhibit the NASD’s

transition to finer increments.

Therefore, the Commission believes it is

consistent with Section 19(b)(2) of the

Act to grant accelerated approval to the

proposed rule change.7

V. Conclusion

It is Therefore Ordered, pursuant to

Section 19(b)(2) of the Act,8 that the

proposed rule change (SR–NASD–97–

48) is hereby approved on an

accelerated basis.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.9

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–20750 Filed 8–6–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–38890) ; File No. SR–

Philadep–97–03]

Self-Regulatory Organizations;

Philadelphia Depository Trust

Company; Notice of Filing and Order

Granting Accelerated Approval on a

Temporary Basis of a Proposed Rule

Change to Appoint the Canadian

Depository for Securities Limited as a

Correspondent Depository

July 30, 1997.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’),1 notice is hereby given that on

April 18, 1997, the Philadelphia

Depository Trust Company (‘‘Philadep’’)

filed with the Securities and Exchange

Commission (‘‘Commission’’) and on

April 24, 1997, filed an amendment to

the proposed rule change as described

in Items I and II below, which Items

have been prepared primarily by

Philadep. The Commission is

publishing this notice and order to

solicit comments from interested

persons and to grant accelerated

approval of the proposed rule change

through October 31, 1997.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The purpose of the proposed rule

change is to extend temporary approval

of the appointment of The Canadian