

[Federal Register: May 5, 2006 (Volume 71, Number 87)]
[Notices]               
[Page 26579-26582]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05my06-142]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53745; File No. SR-NASD-2005-140]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change Regarding the 
Nasdaq Crossing Network

May 1, 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 December 2, 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. On February 
28, 2006, Nasdaq filed Amendment No. 1 to the proposed rule change.\3\ 
On April 24, 2006, Nasdaq filed Amendment No. 2 to the proposed rule 
change.\4\ 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.
    \3\ Amendment No. 1 replaced and superseded the original filing 
in its entirety.
    \4\ In Amendment No. 2, Nasdaq made certain representations 
related to the applicability of Rule 11a2-2(T) under the Act and the 
``Manning Rule'' to the proposed rule change. In addition, Nasdaq 
indicated its plan to request exemptive relief from Rule 10a-1 under 
the Exchange Act and NASD Rule 3350 (``Short Sale Rule''), as well 
as from Rule 602 of Regulation NMS (``Quote Rule''). Nasdaq also 
made clarifying edits to the proposed rule change.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to establish the Nasdaq Crossing Network for Nasdaq 
listed and certain exchange listed securities. The text of the proposed 
rule change is below. Proposed new language is in italics.\5\
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    \5\ 5 Changes are marked to the rule text that appears in the 
electronic NASD Manual found at http://www.nasd.com. Prior to the 

date when The Nasdaq Stock Market LLC (``Nasdaq LLC'') commences 
operations, Nasdaq LLC will file a conforming change to the rules of 
Nasdaq LLC approved in Securities Exchange Act Release No. 53128 
(January 13, 2006).
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* * * * *

4716. Nasdaq Crossing Network

    (a) Definitions. For the purposes of this rule the term:
    (1) ``Nasdaq Reference Price Cross'' shall mean the process for 
executing orders at a predetermined reference price at a randomly 
selected point in time during a one minute trading window beginning at 
11:00 a.m., 1:00 p.m. and 3:00 p.m. during the regular hours session 
and at 4:30 p.m. during the after hours session.
    (2) ``Nasdaq Reference Price Cross eligible securities'' shall mean 
Nasdaq-listed securities and securities listed on the New York Stock 
Exchange, the American Stock Exchange or a regional exchange.
    (3)(A) ``Reference Price Cross Order'' or ``RPC'' shall mean a 
market or limit order to buy or sell in Nasdaq Reference Price eligible 
securities that may be executed only during a Nasdaq Reference Price 
Cross. RPC orders shall not be displayed and must be designated with a 
time-in-force value to participate either:
    (i) In the next scheduled regular hours cross with unexecuted 
shares being immediately canceled back to the market participant after 
that cross (NXT);
    (ii) In all remaining crosses during the trading day with 
unexecuted shares being immediately canceled back to the market 
participant after the final regular hours cross (REG); or
    (iii) In all remaining crosses in the current day with unexecuted 
shares immediately canceled back to the market participant after the 
after hours cross (ALX).
    (B) Starting at 7:30 a.m. Eastern Time until the time of the last 
after hours session Reference Price Cross, participants may enter, 
cancel or correct RPC orders, but such orders shall not be available 
for execution until the next eligible Reference Price Cross. RPC orders 
must be entered in round lots with a minimum size of one round lot and 
may designate a minimum acceptable execution quantity. All RPC orders 
must be available for automatic execution.

(b) Processing of Nasdaq Reference Price Cross

    (1) Each Nasdaq Reference Price Cross shall occur during the 
regular hours session or the after hours session window commencing at 
such times as may be designated by Nasdaq upon prior notice to market 
participants.

[[Page 26580]]

    (2) Nasdaq Reference Price Crosses that occur during the regular 
hours session shall be executed at the midpoint of the national best 
bid and offer, trade reported without identifying the contra party, and 
disseminated via the consolidated tape.
    (3) Nasdaq Reference Price Crosses that occur during the after 
hours session shall execute at the Nasdaq Official Closing Price for 
Nasdaq-listed securities or at the official closing price of the 
primary market for securities listed on the New York Stock Exchange, 
the American Stock Exchange or a regional exchange, shall be trade 
reported without identifying the contra party, and disseminated via the 
consolidated tape.
    (4) RPC orders will be allocated on a pro-rata basis, such that 
shares will be allocated pro-rata in round lots to eligible orders 
based on the original size of the order. If additional shares remain 
after the initial pro-rata allocation, those shares will continue to be 
allocated pro-rata to eligible orders until a number of round lots 
remain that is less than the number of eligible orders. Any remaining 
shares will be allocated to the oldest eligible order. If the 
allocation to an eligible order would be less than the minimum 
acceptable execution quantity for that order, the order shall not be 
eligible for execution in that cross.
    (5) If the reference price described in subparagraph (3) above is 
outside the benchmarks established by Nasdaq by a threshold amount at 
the time an after hours cross is scheduled to occur, the Nasdaq 
Reference Price Cross shall not occur for that security. Nasdaq 
management shall set and modify such benchmarks and thresholds from 
time to time upon prior notice to market participants.
    (6) If the national best bid and offer is crossed at the time of a 
Reference Price Cross during the regular hours session, the cross shall 
be delayed for up to five minutes beyond the time the Reference Price 
Cross was scheduled to occur and shall execute at the midpoint of the 
national best bid and offer when the quote becomes uncrossed. In the 
event the quote remains crossed beyond five minutes after the time of 
the scheduled Reference Price Cross, the cross will not occur and 
unexecuted NXT orders shall be returned to market participants.
    (7) If the national best bid and offer is locked at the time of a 
Reference Price Cross during the regular hours session, the cross shall 
execute at the lock price.
    (8) If trading in a security is halted for regulatory or other 
reasons at the time a cross is scheduled to occur, the cross will not 
occur and all unexecuted NXT orders shall be returned to market 
participants.

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
    Nasdaq proposes to extend the success of Nasdaq's Opening and 
Closing Cross matching functionality,\6\ which has been widely accepted 
in the industry, with the introduction of the Nasdaq Crossing Network. 
The Nasdaq Crossing Network would provide a new execution option to 
market participants trading in Nasdaq-listed securities and securities 
listed on the New York Stock Exchange (``NYSE''), the American Stock 
Exchange (``Amex'') or a regional exchange. During the regular hours 
session, a series of Nasdaq Reference Price Crosses would allow market 
participants to place orders to be executed at the midpoint of the 
National Best Bid and Offer (``NBBO''). An additional cross would take 
place after the close of the trading day and eligible orders would be 
executed at the Nasdaq Official Closing Price (``NOCP'') for Nasdaq-
listed securities or the official closing price of the primary market 
for securities listed on the NYSE, Amex or a regional exchange 
(``Primary Market Close''). Initially, the Nasdaq Reference Price 
Crosses would commence at 11 a.m., 1 p.m., 3 p.m. and 4:30 p.m. 
(Eastern Time or ``ET''). Orders would be designated for one or more 
Nasdaq Reference Price Crosses with a time-in-force indicator.
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    \6\ See Securities Exchange Act Release Nos. 50405 (September 
16, 2004), 69 FR 57118 (September 23, 2004) (SR-NASD-2004-071) and 
49406 (March 11, 2004), 69 FR 12879 (March 18, 2004) (SR-NASD-2003-
173), respectively.
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    While the Opening and Closing Crosses act as price discovery 
facilities, the purpose of the Nasdaq Crossing Network would be to 
provide market participants and investors with an accurate single 
trading price at specific times during the trading day, resulting in an 
enhanced ability to execute block trades quickly and anonymously, while 
minimizing market impact and associated price movements.\7\ The 
Reference Price Crosses are designed to occur at an externally derived 
price and in accordance with a predetermined algorithm. Participation 
in the Reference Price Crosses would be voluntary and would not result 
in any advantage to market participants over those market participants 
that do not choose to participate.
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    \7\ In connection with Nasdaq's application for registration as 
a national securities exchange, Nasdaq submitted a letter to 
Commission Staff (``Rule 11a2-2(T) Letter'') requesting interpretive 
guidance with respect to the application of Exchange Act Rule 11a2-
2(T) (known as the ``effect and execute'' rule) to transactions 
effected through the Nasdaq Market Center, Brut or Inet 
(collectively ``Nasdaq Execution Systems''). See Letter to Nancy M. 
Morris, Secretary, Commission, and Elizabeth King, Associate 
Director, Division of Market Regulation, Commission, from Edward S. 
Knight, Executive Vice President and General Counsel, Nasdaq, dated 
January 12, 2006. The ``effect and execute'' rule provides exchange 
members with an exemption from the Section 11(a) prohibition against 
a member of a national securities exchange effecting transactions on 
that exchange for its own account, the account of an associated 
person, or an account over which it or its associated person 
exercises discretion unless an exception applies. In reliance on 
Nasdaq's representations in its letter, the Commission concluded in 
its order approving Nasdaq's exchange registration application that 
Nasdaq Exchange members that enter orders into Nasdaq Execution 
Systems satisfy the requirements of Exchange Act Rule 11a2-2(T). See 
Exchange Act Release No. 53128 (January 13, 2006), 71 FR 3550 
(January 23, 2006) (File No. 10-131). Nasdaq represents that the 
proposed rule change will not change the continued accuracy of the 
representations made by Nasdaq in the Rule 11a2-2(T) Letter.
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    Orders. Market participants would be able to enter orders in the 
Nasdaq Market Center for participation in the Reference Price Crosses 
without restriction from the session open at 7:30 a.m. until the post-
close cross is initiated. Orders would be able to be submitted as 
existing market or limit order types and would be designated by the 
firm upon entry with a time-in-force indicator as follows: (i) 
participate in the next scheduled regular hours cross with unexecuted 
shares being immediately canceled back to the user after that cross 
(NXT), (ii) participate in all of the regular hours crosses (i.e., 11 
a.m., 1 p.m. or 3 p.m. ET) with unexecuted shares being immediately 
canceled back to the user following the last regular hours cross (REG) 
or (iii) participate in all crosses for the current day (i.e., 11 a.m., 
1 p.m., 3 p.m. and 4:30 p.m. ET) with unexecuted shares immediately 
canceled back to the user following the after hours cross (AHX).\8\

[[Page 26581]]

Orders that are designated for one or more Reference Price Crosses 
would not be displayed.
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    \8\ Until such time as an exemption or other relief is granted, 
short sale orders that participate in the Nasdaq Reference Price 
Crosses must comply with applicable short sale rules. Nasdaq intends 
to propose a rule change to the NASD's short sale rule, NASD Rule 
3350, and to submit to the Commission a request for exemptive relief 
from the Short Sale Rule to permit short sales of certain securities 
at the midpoint of the NBBO effected during the Reference Price 
Crosses. In addition, Nasdaq plans to submit to the Commission a 
request for exemptive relief from the Quote Rule.
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    Orders would be required to be entered in round lots with a minimum 
of one round lot and may designate a minimum acceptable quantity 
(``MAQ'') for execution. No mixed or odd lot execution amount would be 
permitted. Orders may not be canceled or replaced during the time of 
the cross, but may at any other time, including periods when trading in 
the applicable security is halted. Like Nasdaq Opening and Closing 
Cross orders, Reference Price Cross orders would be required to be 
available for automatic execution. The Reference Price Cross would have 
no order delivery capability and no special orders would be 
accommodated. Both automatic execution and order delivery participants, 
however, would be able to enter eligible orders into the Nasdaq Market 
Center to participate in the Reference Price Cross, so long as the 
orders are available for automatic execution.
    Automatic execution. Like closing and opening cross orders, 
crossing network orders would be required to be available for automatic 
execution. The cross would have no order delivery capability and no 
special orders could be accommodated. The only eligible order types 
would be limit orders or market orders. Although there would be no 
order delivery capability, both automatic execution and order delivery 
participants would be able to enter eligible orders into the Nasdaq 
Market Center so long as the orders are available for auto execution.
    Nasdaq Reference Price Crosses. The Nasdaq Reference Price Crosses 
initially would commence at 11 a.m., 1 p.m., 3 p.m. and 4:30 p.m. ET. 
In order to minimize the opportunity for manipulation, Nasdaq would 
execute the cross through an automated and random matching mechanism at 
a randomly selected time during the predetermined one minute cross 
trading window. All eligible orders for the trading day crosses would 
be executed in accordance with a predetermined algorithm at the NBBO 
midpoint on a pro-rata basis and at the NOCP or Primary Market Close, 
as applicable, for post-close cross executions.
    Upon initiation of the cross, available shares would be treated as 
if they were the same price and would be allocated on a pro rata basis 
to eligible orders. In order to prevent orders that participate in more 
than one cross from being disadvantaged with regard to their execution 
priority based on diminishing size, shares would be allocated based on 
the original size of the order, not on the value of the remaining 
unexecuted shares. If additional shares remain after the initial pro-
rata allocation, those shares would continue to be allocated pro-rata 
to eligible orders until a number of round lots remain that is less 
than the number of eligible orders. Any remaining shares would be 
allocated to the oldest eligible order. In addition, in the case of an 
order that has designated a MAQ, if the pro rata allocation would be 
less than the MAQ, the order would not be eligible for execution in 
that cross.
    For example, assume the following orders are received in the 
following sequence:

------------------------------------------------------------------------
                Orders                           Liquidity pool
------------------------------------------------------------------------
1. Sell 10,000@MKT..................  Buy 10,000@MKT..

2. Sell 10,000@MKT..................  Sell 32,000@MKT..

3. Buy 10,000@MKT..................  .................................
4. Sell 10,000@MKT.................  .................................
5. Sell 10,000@MKT (where 2,000        .................................
 unexecuted shares remain from a
 prior cross where 8,000 shares of
 the order were executed).
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    Based on these orders and the available liquidity pool, the cross 
would operate as if there are 10,000 shares to buy and 32,000 shares to 
sell with the algorithm allocating 2,500 shares to each sell order. 
Although order 5 consists of only 2,000 unexecuted shares, it 
receives an allocation (2,500 shares) based on the original size of the 
order (10,000 shares). Since order 5 can only execute 2,000 
shares, the remaining 500 shares are allocated to the other orders pro 
rata. After each order is allocated an additional 100 shares, the 
remaining 200 shares are allocated to the oldest eligible order. The 
executions resulting from this cross would be as follows:




Order 1................................  2,800 shares.
Order 2................................  2,600 shares.
Order 3................................  10,000 shares.
Order 4................................  2,600 shares.
Order 5................................  2,000 shares.


    The executions would be reported to the market participants via 
Nasdaq Market Center execution reports as a single trade reflecting the 
aggregate shares executed. In order to reduce information leakage that 
could lead to adverse price movements, executions would be reported as 
anonymous trades, without identifying a contra party. Each execution 
would be reported to the Nasdaq Market Center trade reporting service 
for trade reporting, clearance and settlement.\9\ Trades from the 
regular hours cross would be disseminated the regular way, and trades 
from the post close cross would be disseminated with a .PRP sale 
condition modifier. In the event that a Reference Price Cross order 
that executes at the midpoint of the NBBO results in a Nasdaq member 
trading ahead of a held customer order by less than $0.01 (i.e., 
$0.005), Nasdaq believes that a Manning obligation would be triggered 
under NASD IM-2110-2, Rule on Trading Ahead of Customer Limit Order 
(known as the ``Manning Rule''). Under this rule, a firm cannot trade 
ahead of a held customer limit order without executing the customer 
order unless it trades at a price that is at least $0.01 better than 
the customer limit order price.
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    \9\ Nasdaq will submit each underlying trade to the National 
Securities Clearing Corporation for clearing. When Nasdaq is 
operational as a national securities exchange, these trades will be 
reported as ``covered sales'' of the exchange for the purposes of 
Section 31 of the Act. If the Reference Price Crossing Network is 
launched before Nasdaq is operational as an exchange, these trades 
will be reported by the NASD for the purposes of Section 31 of the 
Act.
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    If based on usage and demand, Nasdaq desires to add more frequent 
crosses or to modify the time of the crosses in the future, it would 
submit a rule change to the Commission. Nasdaq would publish the 
information about any changes via its public NasdaqTrader Web site.
    Reference Price Cross Circuit Breaker. As it did with the Nasdaq 
Opening Cross and Nasdaq Closing Cross, Nasdaq would establish a 
circuit breaker for Nasdaq Reference Price Crosses that occur during 
the after hours session. The circuit breaker would protect against 
unusual occurrences when the market has moved significantly from the 
NOCP or the Primary Market Close based on information that becomes 
available after the market close. In this situation, Nasdaq may decide 
to cancel the cross rather than execute the cross at a price that no 
longer reflects the sentiment of the marketplace.
    If the post-close cross would not execute within a preset boundary 
(``Threshold Percentage'') of the consolidated last sale price of the 
security, the cross would not take place. Initially, the Threshold 
Percentage would be set at ten percent, with a $0.50 minimum spread. 
Thus, if the difference

[[Page 26582]]

between the NOCP or Primary Market Close, as applicable, and the 
consolidated last sale price of the security would be ten percent or 
more, but not less than the minimum value of $0.50, then the cross 
would be canceled.
    As in the case of the Nasdaq Opening and Closing Crosses, Nasdaq 
believes that market conditions and experience with the Nasdaq 
Reference Price Crosses may require Nasdaq to adjust the Threshold 
Percentage at a future point in time. Any changes to the Threshold 
Percentage would be made in advance and communicated to members. Nasdaq 
would publish any changes to the Threshold Percentage via its public 
NasdaqTrader Web site.
    In addition, if trading in a security is halted at the time a cross 
is scheduled to occur, the cross would be canceled and orders that are 
not designated for any future crosses would be returned to the market 
participants.
    Locked or Crossed Markets. In the event of a crossed NBBO at the 
time of a Reference Price Cross during the regular hours session, the 
cross would be delayed and would execute based on the midpoint NBBO 
when the quote becomes uncrossed. If the quote remains crossed, 
however, for five minutes beyond when the cross normally would have 
occurred, the cross would be canceled and orders that are not 
designated for any future crosses would be returned to the market 
participants. In the event of a locked NBBO at the time of a Reference 
Price Cross during the regular hours session, the cross would execute 
at the lock price.
2. Statutory Basis
    Nasdaq believes that the proposed rule change, as amended, is 
consistent with the provisions of Section 15A of the Act,\10\ in 
general, and with Section 15A(b)(6) of the Act,\11\ in particular, 
which requires the NASD's rules to be designed, among other things, to 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities. Nasdaq believes that the 
proposed rule change is consistent with these requirements in that the 
changes are designed to expand the types of crossing products available 
to members and to provide additional tools for facilitating 
transactions.
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    \10\ 15 U.S.C. 78o-3.
    \11\ 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

    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 NASD consents, the Commission will:
    (A) By order approve such proposed rule change, as amended, or
    (B) Institute proceedings to determine whether the proposed rule 
change, as amended, should be disapproved.

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-2005-140 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.
    All submissions should refer to File Number SR-NASD-2005-140. 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 Nasdaq's 
principal office. 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-2005-140 and should be submitted on or before May 26, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary
 [FR Doc. E6-6806 Filed 5-4-06; 8:45 am]

BILLING CODE 8010-01-P
