
[Federal Register: March 26, 2008 (Volume 73, Number 59)]
[Notices]               
[Page 16082-16084]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26mr08-132]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57537; File No. SR-NASDAQ-2008-021]

 
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
To Modify the Processing of Orders That Peg to the Midpoint Between the 
National Best Bid and Best Offer

March 20, 2008.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on March 19, 2008, The NASDAQ Stock Market LLC (``Nasdaq'' or the 
``Exchange'') 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 substantially prepared by Nasdaq. 
Nasdaq has designated the proposed rule change as constituting a non-
controversial rule change under Rule 19b-4(f)(6) under the Act,\3\ 
which renders the proposed rule change effective upon filing with the 
Commission. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq is amending Rule 4751(f) to modify the processing of orders 
that peg to the midpoint between the national best bid and best offer 
(``NBBO''). Nasdaq proposes to implement the proposed rule change 
immediately following the conclusion of the 30-day operative delay 
period. The text of the proposed rule change is available on Nasdaq's 
Web site: (http://www.complinet.com/nasdaq), at the principal office of 
Nasdaq, 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 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 modify the rule language pertaining to pegged 
orders to enable orders that peg to the midpoint of the national best 
bid and best offer (``Midpoint Pegged Orders'') to execute in sub-penny 
increments when the inside spread is an odd number of pennies. Nasdaq's 
current pegging functionality does not display, rank, or execute 
Midpoint Pegged Orders in sub-penny increments. In light of the recent 
approval of a proposed rule change by NYSEArca relating to its Mid-
Point Passive Liquidity (``MPL'') Order, Nasdaq is proposing to modify 
its processing of Midpoint Pegged Orders to resemble the processing of 
MPL Orders on NYSEArca.\4\
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    \4\ See Securities Exchange Act Release No. 56072 (July 13, 
2007), 72 FR 39867 (July 20, 2007) (SR-NYSEArca-2007-061) (Notice of 
Filing and Immediate Effectiveness of MPL Order).
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    The following examples illustrate how the proposed rule change 
would operate (note that the price of the order updates in response to 
changes in the best bid and best offer, excluding the order's own 
impact on the best bid or best offer):

Current Processing

     The best bid on Nasdaq is $20.00 and the best offer is 
$20.03.
     The price of the Midpoint Peg Order to buy will be $20.01. 
The true midpoint would be $20.015, but to avoid pricing the order in a 
sub-penny increment the bid is rounded down. However, if the order 
instead were a sell order, the offer would be rounded up.
     The best offer updates to $20.02.
     The price of the Midpoint Peg Order remains $20.01.

Proposed Processing

    Scenario 1:
     The best bid on Nasdaq is $20.00 and the best offer is 
$20.03.
     The price of the Midpoint Peg Order to buy will be 
$20.015.
     The best offer updates to $20.02.
     The price of the Midpoint Peg Order will change to $20.01.
    Scenario 2: the market is as follows:

------------------------------------------------------------------------
                   Bid                                 Offer
------------------------------------------------------------------------
11.00 Nasdaq............................  10.00 NYSE
------------------------------------------------------------------------

     A Midpoint Peg Order to sell is entered into NASDAQ.
     The order is priced at 10.50.
     The order is marketable against the Nasdaq buy order and 
will execute at 11.00, the price of the buy order on the Nasdaq book.
     If the Nasdaq 11.00 bid had instructions to route, at the 
time of the cross, it would have routed to NYSE for execution.
    Scenario 3: the market is as follows:

------------------------------------------------------------------------
                   Bid                                 Offer
------------------------------------------------------------------------
11.00 CHX................................  10.00 NYSE
9.00 Nasdaq..............................  12.00 Nasdaq
------------------------------------------------------------------------

     A Midpoint Peg Order to buy is entered into Nasdaq.
     The order is priced at 10.50, the midpoint of the NBBO.
     The order is not executable on Nasdaq.
     If the order has instructions to route, it will be routed 
to NYSE for execution.
     If the order does not have instructions to route, it will 
be posted to the NASDAQ book at 10.50 non-display.
    With respect to Regulation NMS, a Midpoint Pegged Order would be 
ranked in time priority for the purposes of execution as long as the 
midpoint is within the limit range of the order. A Midpoint Pegged 
Order will no longer be displayed, whereas Nasdaq currently displays 
Midpoint Pegged Orders in penny increments.\5\ A Midpoint Pegged Order 
would be executed in sub-pennies if necessary to attain a midpoint 
price. In addition, the execution of a Midpoint Pegged Order would not 
result in a trade-through of a Protected Quotation. A Midpoint Pegged 
Order would execute against orders on the Nasdaq book or against 
incoming orders, including other Midpoint Pegged Orders. If the NBBO is 
locked, the Midpoint Pegged Order would be executed at the locked 
market price.
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    \5\ On Nasdaq, Non-Displayed Orders, such as the Midpoint Pegged 
Order as proposed, always receive lower execution priority than 
similarly priced Displayed Orders regardless of time of entry.
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    If the NBBO is crossed, the Nasdaq system would continue to accept 
and process Midpoint Pegged Orders.

[[Page 16083]]

However, they generally would not execute against other Midpoint Pegged 
Orders during a crossed market because they are already marketable 
against interest on other automated trading centers that are creating 
the crossed market or marketable against better priced interest on 
Nasdaq. If Nasdaq's best quote is not part of the crossed NBBO and a 
Midpoint Pegged Order to buy (sell) has instructions to route, the 
Nasdaq system would route it to an automated trading center that is 
displaying a better priced order to sell (buy). Thus, there would not 
be an execution against an inferior sell (buy) order on Nasdaq. If 
Nasdaq's best quote is not part of the crossed NBBO and a Midpont 
Pegged Order to buy (sell) does not have instructions to route, the 
Nasdaq system would execute it against a marketable sell (buy) order on 
Nasdaq, even though a better priced sell (buy) order is being displayed 
by an automated trading center. If it were not marketable on the Nasdaq 
book, it would post undisplayed to the book. If the automated NBBO is 
crossed, a Midpoint Pegged Order to buy and a Midpoint Pegged Order to 
sell would execute against each other on the Nasdaq system only if both 
orders had instructions not to route, and neither order had previously 
executed against marketable interest on the Nasdaq book. As a result, 
the execution of a Midpoint Pegged Order during a crossed market would 
not implicate the duty of best execution any differently than other 
orders entered into or executed by the Nasdaq system. As examples 2 and 
3 above show, if the order has instructions to route, it would be 
routed away without implication for best execution. If there is no 
routing instruction, the order would either execute or post to the 
Nasdaq book.
    Nasdaq believes that the implementation of the proposed rule change 
modifying will enhance order execution opportunities on Nasdaq. The 
Exchange believes that the proposed order type will allow for 
additional opportunities for liquidity providers, especially 
institutions, to passively interact with interest in the Nasdaq book.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of section 6 of the Act,\6\ in general, and with section 
6(b)(5) of the Act,\7\ in particular, in that the proposal is 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, 
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. Nasdaq believes this 
proposal is consistent with Rule 612 of Regulation NMS under the Act, 
including the guidance provided in question number two of Division of 
Market Regulation: Responses to Frequently Asked Questions Concerning 
Rule 612 (Minimum Pricing Increment) of Regulation NMS.
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    \6\ 15 U.S.C. 78f.
    \7\ 15 U.S.C. 78f(b)(5).
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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. To the contrary, Nasdaq's 
processing of orders pegged to the midpoint of the NBBO is designed to 
compete with orders already approved and in use at other national 
securities exchanges, enhancing competition between the exchanges.

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

    Because the foregoing proposed rule change: (1) Does not 
significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) by its terms does not become operative for 30 days after the 
date of this filing, or such shorter time as the Commission may 
designate if consistent with the protection of investors and the public 
interest, the proposed rule change has become effective pursuant to 
section 19(b)(3)(A) of the Act \8\ and Rule 19b-4(f)(6) thereunder.\9\
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    \8\ 15 U.S.C. 78s(b)(3)(A).
    \9\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires that a self-regulatory organization submit to the 
Commission written notice of its intent to file the proposed rule 
change, along with a brief description and text of the proposed rule 
change, at least five business days prior to the date of filing of 
the proposed rule change, or such shorter time as designated by the 
Commission. The Exchange has satisfied the five-day pre-filing 
notice requirement.
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    At any time within 60 days of the filing of such proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

III. 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 No. SR-NASDAQ-2008-021 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-NASDAQ-2008-021. 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, 100 F Street, 
NE., Washington, DC 20549, on official business days between the hours 
of 10 a.m. and 3 p.m. 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

[[Page 16084]]

submissions should refer to File Number SR-NASDAQ-2008-021 and should 
be submitted on or before April 16, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-6123 Filed 3-25-08; 8:45 am]

BILLING CODE 8011-01-P
