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”), and Rule 19b-4 thereunder, 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. The Commission received one comment regarding this proposal. This order approves the proposed rule change, as amended.
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® message that has appended to it a “TRD OR MOV” administrative message (“Trade-or-Move Message”). 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.
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.  (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.
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. Start Printed Page 36748Section 15A(b)(6)  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)  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), 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.
Specifically, the Commission finds that the proposal is consistent with Sections 15A(b)(6), 15A(b)(11), and 11A(1)(C) of the Act  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.
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, 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), 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).
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. 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. 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).
Finally, as the Commission noted in approving NASD-99-23, 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.
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, that the Start Printed Page 36749proposed rule change (SR-NASD-00-18) be and hereby is approved.Start Signature
For the Commission by the Division of Market Regulation, pursuant to delegated authority.
Margaret H. McFarland,
4. See letter from Cameron Smith, General Counsel, Island ECN, to Jonathan Katz, Secretary, Commission, dated June 1, 2000.Back to Citation
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)).Back to Citation
6. Id.Back to Citation
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.Back to Citation
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).Back to Citation
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).Back to Citation
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.Back to Citation
18. See note 4, above.Back to Citation
19. Id.Back to Citation
[FR Doc. 00-14596 Filed 6-8-00; 8:45 am]
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