

[Federal Register: October 19, 2006 (Volume 71, Number 202)]
[Notices]               
[Page 61816-61819]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19oc06-140]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54601; File No. SR-NASDAQ-2006-037]

 
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Order Granting Accelerated Approval of Proposed 
Rule Change To Modify NASDAQ Rules 3350 and 4755

October 13, 2006.
    Pursuant to section 19(b)(1) under the Securities Exchange Act of 
1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on September 27, 2006, The NASDAQ Stock Market LLC (``Nasdaq''), 
filed with the Securities and Exchange Commission (``Commission'' or 
``SEC'') the proposed rule change as described in Items I, and II 
below, which Items have been prepared by Nasdaq. On October 12, 2006, 
Nasdaq filed Amendment No. 1 to the proposed rule change.\3\ Nasdaq has 
requested that this proposal, as amended, be approved on an accelerated 
basis by October 16, 2006 to coincide with the launch of Nasdaq's new 
Single Book execution system. The Commission is publishing this notice 
to solicit comments on the proposed rule change, as amended, from 
interested persons. In addition, the Commission is granting accelerated 
approval of the proposed rule change, as amended.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, which supplemented the original filing, 
Nasdaq made certain technical and clarifying changes following 
discussions with Commission staff.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to modify Nasdaq Rule 3350(a) to establish the 
national best bid rather than the Nasdaq best bid, as the basis for 
determining compliance with Nasdaq Rule 3350(a).
    Nasdaq also proposes to amend Nasdaq Rule 4755(a)(2) to clearly 
describe the test that Nasdaq's Single Book execution system will use 
to validate for compliance with applicable short sale rules for all 
securities that trade through the system.
    The text of the proposed rule change, as amended, is below. 
Proposed new language is italicized; proposed deletions are in 
brackets.\4\
---------------------------------------------------------------------------

    \4\ Changes are marked to the rule text that appears in the 
electronic NASDAQ Manual found at http://www.nasdaqtrader.com.

---------------------------------------------------------------------------

* * * * *
3350 Short Sale Rule
    (a) With respect to trades executed on Nasdaq, no member shall 
effect a short sale for the account of a customer or for its own 
account in a Nasdaq Global Market security at or below the current best 
(inside) bid displayed in the [Nasdaq Market Center] National Market 
System when the current best (inside) bid is below the preceding best 
(inside) bid in the security. For purposes of this rule, the term 
``customer'' includes a non-member broker-dealer.
    (b)-(l) No Change.
* * * * *
4755. Order Entry Parameters
(a) System Orders
    (1) No Change.

[[Page 61817]]

    (2) Short Sale Compliance-System orders to sell short shall not be 
executed if the execution of such an order would violate any applicable 
short sale regulation of the SEC or Nasdaq. For Nasdaq securities, the 
System shall validate for short sale compliance using a bid tick based 
upon changes to the national best bid and offer disseminated pursuant 
to an effective transaction reporting plan. For NYSE and Amex 
securities, the System shall validate for short sale compliance based 
upon changes to the consolidated last sale disseminated pursuant to an 
effective transaction reporting plan.
    (3)-(4) No Change.
* * * * *

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, as 
amended, and discussed any comments it received on the proposed rule 
change, as amended. The text of these statements may be examined at the 
places specified in Item III 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 modify Rule 3350(a) and Rule 4755(a)(2) to state 
that short sale compliance for Nasdaq securities will be based upon 
changes to the national best bid and offer (``NBBO'') as is currently 
the case in the INET system, as opposed to changes in the Nasdaq best 
bid as is currently the case in the Nasdaq Market Center.
    Background. Nasdaq states that section 10(a) of the Act gives the 
Commission plenary authority to regulate short sales of securities 
registered on a national securities exchange, as needed to protect 
investors. Nasdaq notes that although the Commission has regulated 
short sales since 1938, that regulation has been limited to short sales 
of exchange-listed securities. Nasdaq states that in 1992, Nasdaq, 
believing that short-sale regulation was important to the orderly 
operation of securities markets, proposed a short sale rule for trading 
of Nasdaq National Market securities that incorporated the protections 
provided by SEC Rule 10a-1. Nasdaq notes that on June 29, 1994, the SEC 
approved the NASD's short sale rule applicable to short sales in Nasdaq 
Global Market securities.\5\ Nasdaq states that in its January 13, 
2006, order approving Nasdaq's registration as a national securities 
exchange, the Commission granted Nasdaq an exemption from Rule 10a-1 to 
permit the application of Nasdaq Rule 3350 (the ``Nasdaq Rule'') rather 
than SEC Rule 10a-1 to the trading of Nasdaq-listed securities on 
Nasdaq.\6\ Nasdaq notes, however, that SEC Rule 10a-1 continues to 
apply to the trading of securities listed on other national securities 
exchanges.
---------------------------------------------------------------------------

    \5\ Formerly referred to as ``Nasdaq National Market'' 
securities. See Securities Exchange Act Release No. 54071 (June 29, 
2006); 71 FR 38922 (July 10, 2006) (approving name change).
    \6\ Securities Exchange Act Release No. 53128 (January 13, 
2006).
---------------------------------------------------------------------------

    Nasdaq states that the Nasdaq Rule employs a ``bid'' test rather 
than a tick test because Nasdaq trades are not necessarily reported to 
the tape in chronological order. Nasdaq notes that, currently, its 
short sale rule prohibits short sales at or below the inside bid when 
the current inside bid is below the previous inside bid. Nasdaq notes 
that it calculates the inside bid from all market makers in the 
security and disseminates symbols to denote whether the current inside 
bid is an ``up-bid'' or a ``down-bid.'' In addition, Nasdaq notes that 
to effect a ``legal'' short sale on a down-bid, the short sale must be 
executed at a price at least $.01 above the current inside bid. Nasdaq 
states that the Nasdaq Rule is in effect from 9:30 a.m. until 4 p.m. 
each trading day. Also, Nasdaq notes that from the time the Nasdaq Rule 
was implemented until December of 2002, Nasdaq utilized the NBBO to 
calculate the bid tick used to determine short sale compliance.
    Nasdaq states that in December of 2002, Nasdaq modified the method 
it used to calculate the last bid by having it refer to the ``Nasdaq 
Inside'' which is comprised of quotations from all participants in the 
Nasdaq Market Center (known then as SuperMontage), rather than 
referring to the NBBO.\7\ Nasdaq notes that it currently calculates and 
applies the Nasdaq-based bid tick indicator to all Nasdaq Market Center 
trades. With respect to trades executed outside Nasdaq execution 
systems and reported to Nasdaq, however, Nasdaq states that Nasdaq 
participants have been permitted to validate for short sale compliance 
by reference either to the NBBO-based bid tick or to the Nasdaq-based 
bid tick, provided that each firm selects and applies a single bid tick 
indicator for all such trades executed by that firm.
---------------------------------------------------------------------------

    \7\ See Securities Exchange Act Release No. 46999 (December 13, 
2002); 67 FR 78534 (December 24, 2002).
---------------------------------------------------------------------------

    Nasdaq notes that it elected to apply the Nasdaq-based bid tick 
because at that time the NBBO was regularly different from the best bid 
that was reasonably accessible to many market participants. Nasdaq 
states that this would occur when a market that was relatively 
inaccessible, such as a manual, floor-based market with no electronic 
linkages, submitted a bid to the network processor that became part of 
the NBBO. When that bid created a down arrow for the NBBO-based bid 
tick, Nasdaq participants would be precluded from executing short 
sales, absent an exemption. Nasdaq notes that this was true even where 
Nasdaq participants could not access the other market and even though 
that market did not itself impose a bid-based short sale restriction. 
In that case, Nasdaq states that the Nasdaq participant could not 
execute a short sale on Nasdaq due to the downward bid tick, nor could 
it execute the sale on the inaccessible market due to the absence of a 
linkage with that market. Nasdaq notes that at the same time, Nasdaq's 
execution system could be forced to halt processing while the 
inaccessible market set the NBBO. Nasdaq believed that this situation 
was inequitable and that the appropriate outcome was to establish a bid 
tick based upon quotes that were accessible through Nasdaq systems.
    Rationale for Proposal. Nasdaq states that its rationale for using 
the Nasdaq-based bid tick rather than the NBBO-based bid tick for short 
sale compliance is less powerful today, and there are countervailing 
interests today that did not exist in 2002. Nasdaq states that as 
Nasdaq and the rest of the industry approach the implementation of 
Regulation NMS, the NBBO has assumed, and will continue to assume, 
increased importance, and participants will modify their systems to 
utilize the NBBO for a variety of trading, routing, and compliance 
purposes. Nasdaq notes that the majority of Nasdaq members are using 
the NBBO-based bid tick rather than the Nasdaq-based bid tick, and it 
is expected that more firms will do so as they program their systems to 
comply with Regulation NMS. Thus, Nasdaq states that to maintain its 
use of the Nasdaq-based bid tick would, at this point in time, fly in 
the face of overwhelming regulatory and industry momentum.
    Nasdaq believes that due to the relative activity on Nasdaq's 
systems, it will be far more disruptive for Nasdaq to apply the Nasdaq-
based bid tick than

[[Page 61818]]

to apply the NBBO-based bid tick. Nasdaq states that the INET system 
currently uses the NBBO-based bid tick, and it accounts for 
approximately 32 percent of consolidated trading in Nasdaq securities, 
whereas the Nasdaq Market Center accounts for approximately 11 percent 
market share in Nasdaq securities. Therefore, Nasdaq believes it will 
be less disruptive to continue using the NBBO-based bid tick employed 
by current INET users.
    In addition, Nasdaq notes that the NASD recently announced that all 
NASD members that execute short sales in the over-the-counter market 
must utilize the NBBO-based bid tick no later than November 3, 2006. 
Thus, Nasdaq states that since the vast majority of Nasdaq members are 
also NASD members that trade over-the-counter, Nasdaq members are 
already on notice that their systems must use the NBBO-based bid tick 
for short sale compliance by November 3. Nasdaq states that by moving 
to the NBBO-based bid tick, Nasdaq will be creating uniformity among 
joint NASD/Nasdaq members that trade Nasdaq securities on Nasdaq and in 
the over-the-counter markets. In addition, Nasdaq notes that this 
coincides almost exactly with the final roll-out of Nasdaq's new Single 
Book execution system. Nasdaq states that it would be more disruptive 
to require Nasdaq to continue to apply the Nasdaq-based bid tick during 
the roll-out of the Single Book execution system.
    Nasdaq is also proposing to amend Rule 4755(a)(2) to clearly 
describe the test that Nasdaq's Single Book execution system will use 
to validate for compliance with applicable short sale rules for all 
securities that trade through the system. Nasdaq states that for 
Nasdaq-listed securities, the rule states that the system will use a 
bid tick based upon the NBBO. For NYSE- and Amex-listed securities, the 
system will use a tick based upon changes to the last sale reported 
pursuant to an effective transaction reporting plan for those 
securities.
2. Statutory Basis
    Nasdaq believes that the proposed rule change, as amended, is 
consistent with the provisions of section 6 of the Act,\8\ in general, 
and with section 6(b)(5) of the Act,\9\ in particular, in that it is 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, remove impediments to a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78f.
    \9\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change, as amended, 
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. 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-NASDAQ-2006-037 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-NASDAQ-2006-037. 
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 Section, 100 F Street, 
NE., Washington, DC 20549. 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-NASDAQ-2006-037 and should 
be submitted on or before November 9, 2006.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    After careful consideration, the Commission finds that modification 
of the method used to calculate the bid tick indicator to determine the 
permissibility of a short sale and the clarification regarding which 
short sale price test Nasdaq's Single Book execution system will use to 
validate for compliance for short sales traded through the system are 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\10\ In particular, the Commission finds that the proposed 
rule change, as amended, is consistent with the requirements of section 
6(b)(5) of the Act,\11\ which requires, among other things, that 
Nasdaq's rules be designed to promote just and equitable principles of 
trade, 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.
---------------------------------------------------------------------------

    \10\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \11\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Nasdaq has requested that the Commission find good cause for 
approving the proposed rule change, as amended, prior to the 30th day 
after publication of notice thereof in the Federal Register. Nasdaq has 
confirmed to the Commission that it would be more disruptive to market 
participants to continue to determine the permissibility of a short 
sale based on the Nasdaq-based bid tick rather than on the NBBO-based 
bid tick following implementation of Nasdaq's Single Book execution 
system. In addition, Nasdaq has stated that it does not believe that 
firms will face compliance issues, from a systems perspective or 
otherwise, if Nasdaq's Single Book execution system validates for short 
sale compliance based on the NBBO-based bid tick rather than on the 
Nasdaq-based bid tick. Thus, the Commission finds good cause exists, 
consistent with sections 6(b)(5)

[[Page 61819]]

and 19(b)(2) of the Act,\12\ to approve the proposed rule change, as 
amended, on an accelerated basis, prior to the 30th day after the date 
of publication of the notice of filing thereof in the Federal Register.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78f(b)(5); 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the Act 
that the proposed rule change (SR-NASDAQ-2006-037) is approved on an 
accelerated basis.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
---------------------------------------------------------------------------

    \13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Lynn Taylor,
Assistant Secretary.
 [FR Doc. E6-17441 Filed 10-18-06; 8:45 am]

BILLING CODE 8011-01-P
