[Federal Register Volume 62, Number 152 (Thursday, August 7, 1997)]
[Notices]
[Pages 42613-42614]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-20750]



[[Page 42613]]

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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.
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    \1\ 15 U.S.C. 78s(b)(1).
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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, ex-
rights, 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\
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    \2\ 15 U.S.C. Sec. 78o-3.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD Regulation believes the proposed rule change will impose no

[[Page 42614]]

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. Sec. 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\
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    \3\ 15 U.S.C. Sec. 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. Sec. 78c(f).
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    Recently, there has been a movement within the securities industry 
to reduce the minimum trading and quotation increments imposed by the 
various self-regulatory 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-.''
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    \4\ Securities 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\).
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    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\
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    \5\ For 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.
    \6\ For 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 $8\27/32\ ($8,84375, the closest applicable 
minimum trading variation) whereas the Nasdaq market maker would 
round its $9 order down by \3/16\ to 8\13/16\ ($8.8125, the closest 
applicable variation based on Nasdaq's largest variation, 
notwithstanding that Nasdaq allows securities under $10 to be quoted 
in \1/32\s). 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.
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    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\
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    \7\ 15 U.S.C. Sec. 78s(b)(2).
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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.
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    \8\ id

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-20750 Filed 8-6-97; 8:45 am]
BILLING CODE 8010-01-M