

[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]                         

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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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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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.
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    \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.
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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.
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    \4\ 15 U.S.C. 78o-3.
    \5\ 15 U.S.C. 78o-3(b)(6).
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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\
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    \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.
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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.
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    \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
