Document ID: SEC-2005-0454-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2005-12-29T05:00Z

[Federal Register: December 29, 2005 (Volume 70, Number 249)]
[Notices]               
[Page 77225-77228]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29de05-111]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53017; File No. SR-NASD-2005-150]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change To Modify Nasdaq's Minimum Pricing Increment Rules

December 22, 2005.
    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 December 22, 2005, the National Association of Securities Dealers, 
Inc. (``NASD''), through its 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. Nasdaq filed 
this proposal pursuant to section 19(b)(3)(A) of the Act \3\ and Rule 
19b-4(f)(6) thereunder,\4\ therefore making the proposed rule change 
effective immediately upon filing. Nasdaq intends for this rule change 
to become operative on January 31, 2006. 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\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    Nasdaq proposes to modify NASD Rules 4613, 4701, 4710, 4901, 4904, 
and 6330 to align Nasdaq's rules on minimum pricing increments with the 
corresponding provisions in the Commission's Regulation NMS.
    The text of the proposed rule change is below. Proposed new 
language is in italics; proposed deletions are in brackets.
* * * * *

4613. Character of Quotations

    (a) Quotation Requirements and Obligations
    (1) Two-Sided Quote Obligation. For each security in which a 
member is registered as a market maker, the member shall be willing 
to buy and sell such security for its own account on a continuous 
basis and shall enter and maintain a two-sided quotation 
(``Principal Quote''), which is attributed to the market maker by a 
special maker participant identifier (``MPID'') and is displayed in 
the Nasdaq Quotation Montage at all times, subject to the procedures 
for excused withdrawal set forth in Rule 4619.
    (A) No change
    (B) Minimum Price Variation [for Decimal-based Quotations]--The 
minimum quotation increment for Nasdaq National Market and Capital 
Market securities [authorized for decimal pricing] shall be $0.01 
for quotations priced at or above $1.00 per share and $0.0001 for 
quotations priced below $1.00 per share; provided, however, that if 
the Securities and Exchange Commission (``SEC'') permits, with 
respect to any security, the display, rank or acceptance of 
quotations priced at or above $1.00 per share in an increment 
smaller than $0.01, then the minimum quotation increment for such a 
security shall be the minimum permitted by the SEC or $0.0001, 
whichever is greater. Quotations failing to meet this standard shall 
be rejected.
    (2) and (3) No change
    (b) through (e) No change
    * * *

4701. Definitions

    Unless stated otherwise, the terms described below shall have 
the following meaning:
    (a) through (ll) No change
    (mm) The term ``Pegged'' shall mean, for priced limit orders so 
designated, that after entry into the Nasdaq Market Center, the 
price of the order is automatically adjusted by the Nasdaq Market 
Center in response to changes in either the Nasdaq Market Center 
inside bid or offer or the national best bid or offer, as 
appropriate. A Nasdaq Market Center Participant may enter either a 
Regular Pegged Order or a Reverse Pegged Order.
    A Nasdaq Market Center Participant entering a Regular Pegged 
Order may specify that the price of the order will deviate from 
either the Nasdaq inside quote on the same side of the market or the 
national best bid or offer on the same side of the market by an 
offset amount of $0 to $0.99. A Nasdaq Market Center Participant 
entering a Reverse Pegged Order may specify that the price of the 
order will deviate from either the Nasdaq inside quote on the contra 
side of the market or the national best bid or offer on the contra 
side of the market by an offset amount of $0.01 to $0.99. The market 
participant entering a Pegged Order may (but is not required to) 
specify a cap price, to define a price at which pegging of the order 
will stop and the order will be permanently converted into an 
unpegged limit order. Pegged Orders shall not be available for ITS 
Securities. Pegged orders shall not be eligible for routing as set 
out in Rule 4714. Offset amounts for Pegged Orders are priced in 
$0.01 increments. However, if at any time an offset amount specified 
by a Nasdaq Market Center Participant does not result in an offer or 
a bid that is fully compliant with the minimum price variation 
provisions of Rule 4613, then, for an offer, the applicable offset 
amount will be the smallest amount that results in a compliant order 
and is greater than the specified offset amount, and, for a bid, the 
applicable offset amount will be the largest amount that results in 
a compliant order and is smaller than the specified offset amount.
    (nn) The term ``Discretionary'' shall mean,

[[Page 77226]]

    (1) for priced limit orders in Nasdaq listed securities so 
designated, an order that when entered into the Nasdaq Market Center 
has both a displayed bid or offer price, as well as a non-displayed 
discretionary price range in which the participant is also willing 
to buy or sell, if necessary. The displayed price may be fixed or 
may be pegged to deviate from the Nasdaq inside quote or the 
national best bid or offer on the same side of the market by an 
offset amount of $0 to $0.99. The pegging of the Discretionary Order 
may be capped in the same manner as that of a Pegged Order. The 
discretionary price range of a Discretionary Order that is pegged 
will be adjusted to follow the pegged displayed price. Discretionary 
price ranges (and offset amounts, if any) for Discretionary Orders 
are priced in $0.01 increments. Compliance with the minimum price 
variation provisions of Rule 4613 in connection with range 
adjustments and pegging in Discretionary Orders will be ensured in 
the same manner as for Pegged Orders. Discretionary Orders for 
Nasdaq listed securities shall be eligible for routing as set out in 
Rule 4714.
    (2) No change
    (oo) through (vv) No change
    * * *

4710. Participant Obligations in the Nasdaq Market Center

    (a) No change
    (b) Non-Directed Orders
    (1) through (4) No change
    (5) If a Nasdaq Market Maker's Attributable Quote/Order is 
reduced to less than a round-lot amount on one side of the market 
due to Nasdaq Market Center executions, the Nasdaq Market Center 
will close the Market Maker's quote in the Nasdaq Market Center on 
that side of the market, and the Nasdaq Market Maker will be 
permitted a grace period of 30 seconds within which to take action 
to restore its Attributable Quote/Order, if the market maker has not 
authorized use of the AQR functionality or does not otherwise have 
an Attributable Quote/Order on both sides of the market in the 
system. A Nasdaq Market Maker that fails to transmit an Attributable 
Quote/Order in a security within the allotted time will have the 
exhausted side of its quotation restored by the system at a price 
$0.01 inferior to the lowest displayed bid price or the highest 
displayed offer price in that security as appropriate. If all bids 
and/or offers are exhausted so that there are no longer any Quote/
Orders displayed on the bid and/or offer side of the market, the 
system will refresh a market maker's exhausted bid or offer quote to 
a normal unit of trading priced $0.01 inferior to the lesser of 
either: a) the last valid displayed inside bid/offer in the security 
before all such bids/offers were exhausted; or b) the market maker's 
last displayed bid/offer before exhaustion. If the resulting bid/
offer quote would create a locked or crossed market, the Nasdaq 
Market Center will instead re-open the exhausted market maker's bid/
offer quote at a price $0.01 inferior to the unexhausted inside bid/
offer in that security. If at any time an offer derived pursuant to 
this paragraph would not be fully compliant with the minimum price 
variation provisions of Rule 4613, then the system will create an 
offer that is priced higher than the non-compliant offer by the 
smallest amount necessary to make such an offer compliant with Rule 
4613. If at any time this automatic quote restoration process would 
result in the creation of a bid/offer of less than $0.01, the system 
will refresh that bid/offer to a price of $0.01. Except as provided 
in subparagraph (b)(6) of this rule, a Nasdaq Market Maker that 
withdraws from a security may not re-register in the system as a 
market maker in that security for twenty (20) business days.
    (6) through (8) No change
    (c) through (e) No change
    * * *

4901. Definitions

    Unless stated otherwise, the terms described below shall have 
the following meaning:
    (a) through (q) No change
    (r) The term ``Pegged'' shall mean, for priced limit orders so 
designated, that after entry into the System, the price of the order 
is automatically adjusted by the System in response to changes in 
the Nasdaq inside bid or offer (for Nasdaq-listed securities) or the 
national best bid or offer (for ITS securities), as appropriate. The 
Participant entering a Pegged Order can specify that order's price 
will either equal the inside quote or improves the inside quote by 
an amount set by the entering party on the same side of the market 
(a ``Regular Pegged Order'') or offset the inside quote on the 
contra side of the market by an amount (the ``Offset Amount'') set 
by the Participant (e.g., $0.01 less than the inside offer or $0.02 
more than the inside bid) (a ``Reverse Pegged Order''). The 
Participant entering a Pegged Order may (but is not required to) 
specify a limit price, to define a price at which pegging of the 
order will stop and the order will be permanently converted into an 
un-pegged limit order at limit price. This order type is available 
for Nasdaq-listed and Exchange-listed securities. Offset amounts for 
Pegged Orders are priced in $0.01 increments. However, if at any 
time an offset amount specified by a Participant does not result in 
an offer or a bid that is fully compliant with the minimum price 
variation provisions of Rule 4904, then, for an offer, the 
applicable offset amount will be the smallest amount that results in 
a compliant order and is greater than the specified offset amount, 
and, for a bid, the applicable offset amount will be the largest 
amount that results in a compliant order and is smaller than the 
specified offset amount.
    (s) through (w) No change
    * * *

4904. Entry and Display of Orders

    (a) No change
    (b) Display of Orders--The System will display orders submitted 
to the System as follows:
    (1) and (2) No change
    (3) Minimum Price Variation--The minimum quotation increment for 
System Securities shall be $0.01 for quotations priced at or above 
$1.00 per share and $0.0001 for quotations priced below $1.00 per 
share; provided, however, that if the Securities and Exchange 
Commission (``SEC'') permits, with respect to any security, the 
display, rank or acceptance of quotations priced at or above $1.00 
per share in an increment smaller than $0.01, then the minimum 
quotation increment for such a security shall be the minimum 
permitted by the SEC or $0.0001, whichever is greater. Quotations 
failing to meet this standard shall be rejected.
    (4) Exceptions--The following exceptions shall apply to the 
display parameters set forth in paragraphs (1) and (2) above:
    (A) No change
    (B) [Minimum Increments and Rounding--The minimum trading 
increment for System quotations priced $1.00 and above is $.01. For 
quotations priced below $1.00 the minimum increment is $.0001.
    (i) For System display purposes, quotations in sub-penny 
increments $1.00 and above will be rounded down (for bids) or up 
(for offers) by the System to the nearest $.01 increment. Orders so 
rounded shall have no superior execution priority compared to orders 
previously submitted at the relevant $.01 increment.
    (ii) For Nasdaq Market Center display purposes, any quotations 
in sub-penny increments shall be rounded down (for bids) and up (for 
offers) to the nearest $.01 increment. Sub-penny quotations that are 
rounded for display purposes shall be executed at their actual 
price, rather than the rounded price at which they are displayed.
    (C)] Reserve Size--Reserve Size shall not be displayed in the 
System, but shall be accessible as described in Rule 4905.
    [(D)] (C) Discretionary & Hunter Orders--Hunter Orders, and the 
discretionary portion of Discretionary Orders shall be available for 
execution only upon the appearance of contra-side marketable trading 
interest, and shall be executed pursuant to Rule 4905.
    * * *

6330. Obligations of CQS Market Makers

    (a) through (c) No change
    (d) Minimum Price Variation [for Decimal-based Quotations]
    (1) The minimum quotation increment [for securities authorized 
for decimal pricing as part of the SEC-approved Decimals 
Implementation Plan for the Equities and Options Markets] shall be 
$0.01 for quotations priced at or above $1.00 per share and $0.0001 
for quotations priced below $1.00 per share; provided, however, that 
if the Securities and Exchange Commission (``SEC'') permits, with 
respect to any security, the display, rank or acceptance of 
quotations priced at or above $1.00 per share in an increment 
smaller than $0.01, then the minimum quotation increment for such a 
security shall be the minimum permitted by the SEC or $0.0001, 
whichever is greater. Quotations failing to meet this standard shall 
be rejected.
    (2) When a quotation properly (not in violation of paragraph (1) 
above) priced in an increment of less than $0.01 is routed for 
execution via the ITS System to a market that does not accept 
quotations in increments of less than $0.01, such a quotation is 
rounded down (for bids) or up (for offers) to the nearest $0.01 
increment.
* * * * *

[[Page 77227]]

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 purpose of this change is to align Nasdaq's rules with Rule 612 
of the Commission's Regulation NMS.\5\ Consistent with that rule, 
neither Nasdaq nor Nasdaq's Brut facility will accept sub-penny quotes 
\6\ priced at $1.00 or above, except for sub-penny quotes in securities 
for which sub-penny quoting is authorized by the Commission at higher 
price levels. For quotes priced below $1.00 (and for quotes in 
securities exempted by the Commission), Nasdaq and Brut \7\ will accept 
sub-penny quotes but only in increments of at least $0.0001, as 
specified in Rule 612.
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    \5\ 17 CFR 242.612.
    \6\ In this filing, ``quote'' or ``quotation'' is used to denote 
both quotations and orders.
    \7\ This filing does not contain any changes to the rules of the 
INET System. If any such changes are necessary, they will be made in 
a separate filing at a later date.
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    The proposed rule language also clarifies how Nasdaq will handle 
several special situations that will arise in implementing Rule 612. 
First, if a proper sub-penny quote submitted to Nasdaq is routed via 
the ITS System to a different market for execution, and such market 
does not accept sub-penny orders, then such quote will be rounded up 
(for offers) or down (for bids) to the nearest one cent increment. 
However, Nasdaq notes that any market routing an order to any facility 
of Nasdaq must be prepared to accept a sub-penny execution even if such 
market itself does not accept sub-penny orders. A proper execution 
priced in an increment of less than a cent would remain valid even if 
the sending market failed to meet its responsibilities in this regard 
(and the sending market would then have to assume full responsibility 
for any resulting losses and other harm).
    Second, for pegged and discretionary orders, the new rule language 
clarifies that participants must continue to specify the offset amounts 
and the discretionary price ranges in whole cents. This will remain the 
case even when the stock can be properly priced in sub-penny 
increments.
    Third, in the case of pegged or discretionary orders, when changes 
in the underlying price being ``pegged'' would result in a sub-penny 
order priced over $1.00, the rule language provides that the ``offset'' 
amount be deemed slightly higher (for offers) or lower (for bids) than 
specified by the market participant, as necessary to create a compliant 
quote. For example, if the offset amount specified by a market 
participant for a pegged offer is $0.01 and the national best offer is 
$0.995, this would result in a pegged offer of $1.005, which would 
violate Rule 612. The proposed rule states that in this situation 
Nasdaq should deem the offset amount to be higher than specified by the 
smallest amount necessary to produce a quote priced in whole cents. 
Therefore, in this example, under the proposed rule the offset amount 
would be deemed $0.015, producing a pegged offer of $1.01. In the case 
of discretionary orders, this same logic and approach will apply in 
determining the discretionary price range vis-[agrave]-vis the 
displayed price and in determining the offset amount if the displayed 
price is ``pegged'' to the national best bid or offer. In each case, 
the discretionary price range limit amount and the offset amount will 
be deemed higher (for offers) or lower (for bids) by the smallest 
amount necessary to produce a Rule 612-compliant quote.
    Fourth, the same approach will be used when automatically 
refreshing the quotes of a market participant that has authorized the 
use of the Auto Quote Refresh (``AQR'') functionality. NASD Rule 
4710(b)(5) describes the algorithm used to determine AQR pricing, and 
it could result in a sub-penny offer priced over $1.00 (generally, if 
the stock is trading in sub-penny increments just below the $1 
threshold). In such a situation, the AQR-generated offer price will be 
adjusted upwards to the next whole penny.
    Nasdaq notes that while it generally (subject to any security-
specific exemptions the Commission may grant) will not accept sub-penny 
quotes priced above $1.00, it will, consistent with Rule 612, still 
permit trade executions at such prices. For example, trades in sub-
penny increments priced above $1.00 could be produced in Nasdaq's 
Opening Cross or Closing Cross. Nasdaq will permit such trades to 
proceed. At the same time, Nasdaq notes that, because of technological 
limitations, trades will never be executed in increments below $0.0001, 
but will always be rounded up to the nearest $0.0001 increment. Such a 
situation could arise, for example, in the Opening or Closing Cross if 
the bids and offers for a stock are priced below $1.00 in $0.0001 
increments. Under such a scenario, the system would round the execution 
price up to the next $0.0001 increment.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A of the Act,\8\ in general and with 
Section 15A(b)(6) of the Act,\9\ in particular, in that it is designed 
to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market. 
Specifically, the proposal aligns Nasdaq's rules on sub-penny trading 
with the Commission's Regulation NMS.
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    \8\ 15 U.S.C. 78o-3.
    \9\ 15 U.S.C. 78o-3(b)(6).
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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

    This proposal has become effective pursuant to section 19(b)(3)(A) 
of the Act \10\ and subparagraph (f)(6) of Rule 19b-4 thereunder \11\ 
because the proposal: (1) Does not significantly affect the protection 
of investors or the public interest, (2) does not impose any 
significant burden on competition, and (3) by its terms does not become 
operative for 30 days after the date of this filing, or such shorter 
time as the Commission may designate, if consistent with the protection 
of investors and the public interest.\12\

[[Page 77228]]

Nasdaq intends for this rule change to become operative on January 31, 
2006.
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6).
    \12\ Pursuant to Rule 19b-4(f)(6)(iii) of the Act, a proposed 
rule change does not become operative for 30 days after the date of 
its filing, or such shorter time as the Commission may designate if 
consistent with the protection of investors and the public interest, 
provided that the self-regulatory organization has given the 
Commission written notice of its intent to file the proposed rule 
change, along with a brief description and text of the proposed rule 
change, at least five business days prior to the date of filing of 
the proposed rule change, or such shorter time as designated by the 
Commission. Nasdaq complied with the five day pre-filing 
requirement.
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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 
change, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-NASD-2005-150 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.

All submissions should refer to File Number SR-NASD-2005-150. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). 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 also will be available for inspection and copying at the 
principal office of the NASD. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly.
    All submissions should refer to File Number SR-NASD-2005-150 and 
should be submitted on or before January 19, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
 [FR Doc. E5-8069 Filed 12-28-05; 8:45 am]

BILLING CODE 8010-01-P