[Federal Register: March 21, 2006 (Volume 71, Number 54)]
[Notices]
[Page 14272-14275]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21mr06-130]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-53488; File No. SR-NASD-2006-015]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Notice of Filing of Proposed Rule Change and Amendment
Nos. 1 and 2 Thereto To Establish the Nasdaq Halt Cross
March 15, 2006.
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 January 31, 2006, 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. On February
16, 2006, Nasdaq filed Amendment No. 1 to the proposed rule change. On
March 6, 2006, Nasdaq filed Amendment No. 2 to the proposed rule
change. The Commission is publishing this notice to solicit comments on
the proposed rule change, as amended, from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Nasdaq proposes to improve the opening process for Nasdaq
securities that are the subject of a trading halt initiated pursuant to
NASD Rule 4120(a). The text of the proposed rule change is available on
Nasdaq's Web site, http://www.nasdaq.com, at Nasdaq's principal office,
and at the Commission's Public Reference Room.
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 proposal. 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.
[[Page 14273]]
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
3. Purpose
Nasdaq is proposing to establish an opening cross for the trading
of Nasdaq-listed securities that have been the subject of a trading
halt initiated pursuant to NASD Rule 4120(a)(1), (4), (5), (6), or (7)
(``Halt Cross'').\3\ The Halt Cross will integrate quotes and orders
that are entered prior to the resumption of trading in a halted stock,
create an unlocked inside bid and offer in the Nasdaq Market Center,
and facilitate an orderly process for opening trading at the time
specified by Nasdaq pursuant to NASD Rule 4120.
---------------------------------------------------------------------------
\3\ The Halt Cross will not be used to open the market following
a trading halt initiated under NASD Rule 4120(a)(2) or (3), which
apply only to securities governed by the Consolidated Quotation
System national market system plan.
---------------------------------------------------------------------------
The Current Process
Currently, Nasdaq opens the trading of Nasdaq stocks that have been
the subject of a trading halt using the process described in NASD Rule
4704(c), which also governs stocks that are not designated to
participate in the Opening Cross. For halted securities, that process
has three components: (1) The Halt Period; (2) the Quotation Only
Period; and (3) Trade Resumption. During the Halt Period, the entry of
quotations and orders into Nasdaq systems is prohibited. When Nasdaq
MarketWatch determines pursuant to NASD Rule 4120 that trading should
resume, a message is sent to market participants establishing a 15-
minute Quotation Only Period where quotes and orders can be entered
into Nasdaq systems but no executions occur. When the Quotation Only
Period ends, another message is sent to market participants signaling
the resumption of trading, and the opening process described in NASD
Rule 4704(c) occurs. The current process executes quotes and orders
that would lock or cross the market in a fair and orderly manner and
creates an unlocked and uncrossed bid and offer for the opening of
trading. Nasdaq has determined, however, that the process can be
improved.
The New Process
Of the three components described above, only the Halt Period will
remain as it is today. The Quotation Only Period will remain at 15
minutes for Initial Public Offerings (``IPOs'') but will be shortened
from 15 minutes to 5 minutes for all other halts. The Quotation Only
Period will also be modified to provide for: (1) The dissemination of
the net Order Imbalance Indicator (``NOII'') containing the same data
elements currently disseminated prior to the Opening and Closing
Crosses; (2) an ``Imbalance Detection Process;'' and (3) an Imbalance
Delay. Nasdaq will modify Trade Resumption to provide for a processing
of the Halt Cross and for the addition of a delay of between zero and
15 seconds (randomly selected) to minimize potential gaming behavior by
market participants during Trade Resumption. The new process will be
codified in proposed NASD Rule 4703, and language in NASD Rule 4704(c)
describing the current process will be removed. Each of these
modifications will be described in more detail below.
The Net Order Imbalance Indicator. Nasdaq proposes to disseminate
the NOII prior to the Halt Cross, just as it does prior to the Opening
and Closing Crosses. The NOII for the Halt Cross will contain the same
data elements, reflecting the current state of the market leading into
the Cross: (1) The Inside Match Price, which is the price at which the
maximum number of shares of eligible quotes and orders would be paired;
(2) the number of shares represented by eligible quotes and orders that
are paired at the Inside Match Price; (3) the number of shares in any
imbalance at the Inside Match Price; and (4) the buy/sell direction of
that imbalance at the Inside Match Price.
In order to increase efficiency, Nasdaq will maintain the same
programming format for the NOII distributed during the Halt Cross as
distributed during the Opening and Closing Cross. To maintain that
uniformity, Nasdaq will disseminate an indicative clearing price range
at which the Halt Cross would occur if the Halt Cross were to occur at
that time. The two indicative prices in that range and the inside match
price will, however, each be identical values because, in the absence
of order types unique to the IPO and Halt Cross, the inside match price
and indicative price range will each be calculated based upon the same
order set, resulting in the same price output. The NOII for the Halt
Cross will be disseminated every five seconds throughout the Quotation
Only Period.
The NOII disseminated prior to the Halt Cross will differ in
several ways from those disseminated prior to the Opening and Closing
Crosses. First, the Halt Cross NOII will be based on different order
types. The NOII for the Opening and Closing Crosses includes
information about On Open and On Close order types, in addition to
quotations and regular and extended hours orders for each time in force
(Total Day, Day, Good-till-Canceled, and Immediate or Cancel). The NOII
for the Halt Cross will include quotations, regular hours orders, and
extended hours orders but not On Open or On Close orders. This
difference is necessary because Nasdaq has determined not to support On
Open and On Close order types in the middle of the trading day when the
Halt Cross will occur. In Nasdaq's view, On Open and On Close Orders
are impractical for an IPO or other halt where quoting and trading can
resume at variable times and, thereby, could increase the potential of
confusion or gaming behavior.
Second, the NOII for the Halt Cross will disseminate the same value
for the Inside Match Price, Near Indicative Clearing Price and Far
Indicative Clearing Price. This is based, in part, on the fact that,
unlike during the opening and closing, during a halt, there is no firm
inside quotation and the inside can be locked or crossed. For both the
open and close, the Nasdaq inside is subject to automatic execution
which provides a reliable price upon which to base an inside match
calculation. In addition, the Halt Cross does not include On Open and
On Close orders. On Open and On Close orders are available to absorb
liquidity during the Opening and Closing Crosses and do affect the Near
and Far Indicative Clearing Price data elements prior to the Opening
and Closing Crosses. Due to these differences, Nasdaq concluded that
calculating the Near and Far Indicative Clearing Prices could create
ambiguous data. Nasdaq proposes to disseminate the Near and Far
Indicative Clearing Price fields with identical values to the inside
match price in order to avoid requiring market participants to re-
program their systems to accept a different NOII.
Third, the Inside Match Price (and thus the Near and Far Indicative
Clearing Prices) will be calculated using the following algorithm.
First, the system will determine the price(s) that maximizes the number
of shares paired. If more than one such price exists, the system will
select the price that minimizes the imbalance of shares unpaired, and
does not leave unexecuted shares at a superior price. If more than one
price satisfies both conditions, the next tie breaker will depend on
whether the Halt Cross is for an IPO or another halt. For an IPO halt,
if more than one such price satisfies the above conditions, the system
will select the price that minimizes the distance from the Issuer's IPO
price, which is found in the previous day's close field.
[[Page 14274]]
For any other halt, if the stock has already been opened for that day
and more than one price satisfies the above conditions, the system will
select the price that minimizes the distance from the last Nasdaq
Market Center execution prior to the halt. If the security has not been
opened for that day yet and more than one such price exists, the system
will select the price that minimizes the distance from the previous
Nasdaq Official Closing Price.
Imbalance Detection and Delay Periods. In order to facilitate the
orderly opening of a security in which trading is halted, Nasdaq
proposes to establish an Imbalance Detection Process that would measure
an imbalance against a specified threshold, and to establish an
Imbalance Delay if a liquidity imbalance exceeds that threshold. The
Imbalance Detection Process and Imbalance Delay Period will be based
upon the data contained in the NOII, which, as stated earlier, will be
disseminated every five seconds throughout the Quotation Only Period of
15 minutes for IPOs and 5 minutes for all other halts. Specifically,
Nasdaq will compare the Inside Match Price from the third to last NOII
(T-15 seconds to the Halt Cross) with that of the NOII immediately
prior to the cross (T-1 second) and determine whether the change in
price exceeds a predetermined price or percentage variance threshold.
The threshold will be set initially at 10 percent or fifty cents,
whichever is higher. Nasdaq will monitor the threshold and adjust it
from time to time upon reasonable notice to market participants.
If the price or percent variance yielded by the Imbalance Detection
Process is within the threshold, trading will resume on schedule. If,
however, the price or percent variance exceeds the threshold, Nasdaq
will delay the Trade Resumption by 5 minutes in the case of IPOs and by
1 minute in the case of all other halts. For IPOs, the Imbalance
Detection Process will be repeated at the end of the Imbalance Delay
Period and a second delay ordered if the price change still exceeds the
threshold. A third delay will be called if the price change exceeds the
threshold at the end of the second Imbalance Delay Period. At the end
of the third Imbalance Delay Period the Imbalance Detection Process
will not be repeated and trading will resume. For all halts other than
IPOs, there can be only a single one-minute Imbalance Delay. At the end
of the one-minute Imbalance Delay, Trade Resumption will occur. Each
time Nasdaq systems impose an Imbalance Delay, Nasdaq will issue a
Delay Notification to Nasdaq market participants.
Trade Resumption and Halt Cross. When the Quotation Only Period
ends, whether or not followed by one or more Imbalance Delays, Nasdaq
will send market participants the Trade Resumption message. In order to
discourage gaming by market participants, Nasdaq will program the
system to add a random delay of between zero and 15 seconds prior to
issuing the Trade Resumption notification. When the Trade Resumption
notification has been set, the system will conduct the Halt Cross.
The algorithm for the Halt Cross is similar to the Opening and
Closing Crosses. First, the system will determine the price that
maximizes the number of shares executed. If more than one such price
satisfies that condition, the system will select the price that
minimizes the imbalance of shares unexecuted and does not leave
unexecuted shares at a superior price. If more than one price satisfies
that condition also, the second tie breaker will depend on whether the
cross is for an IPO or another halt. For an IPO, if more than one price
satisfies the above conditions, the system will select the price that
minimizes the distance from the Issuer's IPO price, which is found in
the previous day's close field. For any other halt, if the security has
already been opened for that day and more than one price satisfies the
above conditions, the system will select the price that minimizes the
distance from the last Nasdaq Market Center execution prior to the
halt. If the security has not been opened for that day and more than
one such price satisfies the above conditions, the system will select
the price that minimizes the distance from the previous Nasdaq Official
Closing Price.
The system will execute all orders in strict price/time priority
starting with the displayed quotation size and then the reserve
quotation size at the most aggressive price level, and then moving to
successive price levels. All orders that are executable will be
executed at the Halt Cross price. As with the Opening and Closing
Crosses, only orders and quotations that are subject to automatic
execution will participate in the Halt Cross.
For IPOs and for other halts where a security has not previously
opened during the trading day, the Halt Cross execution will be
reported to Nasdaq's trade reporting system with SIZE as the contra
party on both sides of the trade, and then transmitted to the
consolidated tape. The Halt Cross price and the associated paired
volume will then be disseminated via the UTP Trade Data Feed (``UTDF'')
as a bulk print and on the Nasdaq Index Dissemination Service
(``NIDS'') and the Nasdaq Application Program Interface as the Nasdaq
Official Opening Price (``NOOP''). For halts where a security has
already opened during the trading day, the Halt Cross will be reported
to Nasdaq's trade reporting system as a single trade, but it will not
be identified as a bulk print and will not be disseminated as the NOOP.
When the Halt Cross is complete, the execution functionality of the
Nasdaq Market Center will open for regular trading.
If there is insufficient trading interest to perform the Halt Cross
as described above, trading will resume via the modified opening
process (``MOP'') that is currently used to open Nasdaq stocks where no
Opening Cross occurs as set forth in NASD Rule 4704(c). The MOP has
several steps, each of which occurs in strict time priority. First,
limit orders in the system that have a time-in-force of Day or GTC will
wake-up. Of those, orders whose limit price does not lock or cross the
book will be added to the book. Orders whose limit price does lock or
cross the book will be placed in an ``In Queue'' state in strict time
priority. Second, reverse Pegged orders will wake up. If the price
created by the reverse Pegged order does not lock or cross the book,
the order will be placed on the book. If the price created by the
reverse Pegged order would lock or cross the book, the order will be
placed in ``In Queue'' status. Third, regular Pegged orders will wake
up in strict time priority. Since these orders can only join the
current highest bid or lowest offer price level, they will simply add
depth to the book at that price. The In Queue orders also include
market and IOC and IOX orders in strict time priority.
At this point, all eligible orders that would not lock or cross the
market will be on the Nasdaq Market Center book, and all other eligible
orders will be In Queue. The system will then process the ``In Queue''
orders, including market orders, in strict time priority order
regardless of order type. IOC and IOX orders that are not executable
will be canceled as is currently done. Orders with a time in force of
DAY and GTC that are not executable will be added to the book in strict
time priority. Once this process is complete, the system will begin
processing the input queue as normal.
Where no Halt Cross occurs, the NOOP value will be the first Nasdaq
Market Center execution following trade resumption unless the security
has already traded during normal market hours on that trading day. That
price will be disseminated via the NIDS and
[[Page 14275]]
UTDF, and Nasdaq feeds. When resuming trading after a halt where the
issue has already traded during normal market hours on that trading
day, NOOP computation will be suppressed.
2. Statutory Basis
Nasdaq believes that the proposed rule change is consistent with
the provisions of section 15A of the Act,\4\ in general, and with
section 15A(b)(6) of the Act,\5\ in particular, in that section
15A(b)(6) requires the NASD's rules to be designed, among other things,
to protect investors and the public interest. Nasdaq's current proposal
is consistent with the NASD's obligations under these provisions of the
Act because it will result in a more orderly opening for stocks that
are the subject of a trading halt initiated under NASD Rule 4120. The
proposed rule change will prevent the occurrence of locked and crossed
markets in halted securities and will preserve price discovery and
transparency that is vital to an effective opening of trading.
---------------------------------------------------------------------------
\4\ 15 U.S.C. 78o-3.
\5\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
Nasdaq believes that the proposed rule change would impose no
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
Nasdaq did not solicit or receive any written comments with respect
to the proposal.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Nasdaq consents, the Commission will:
A. By order approve such proposed rule change, or
B. Institute proceedings to determine whether the proposed rule
change should be disapproved.\6\
---------------------------------------------------------------------------
\6\ Nasdaq requested that the Commission grant accelerated
approval of the proposed rule change. The Commission will consider
granting accelerated approval after the end of the comment period.
---------------------------------------------------------------------------
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change 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-2006-015 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASD-2006-015. 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 Nasdaq. 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-2006-015 and should be submitted on or before April
11, 2006.
---------------------------------------------------------------------------
\7\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\7\
Nancy M. Morris,
Secretary.
[FR Doc. E6-4058 Filed 3-20-06; 8:45 am]
BILLING CODE 8010-01-P