
[Federal Register: August 7, 2008 (Volume 73, Number 153)]
[Notices]               
[Page 46129-46132]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07au08-124]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58275; File No. SR-NASDAQ-2008-025]

 
 Self-Regulatory Organizations; the NASDAQ Stock Market LLC; 
Notice of Filing of a Proposed Rule Change, and Amendment No. 2 
Thereto, Relating to the Establishment of the Equity Value Indicator 
Cross

July 31, 2008.
    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 March 20, 2008, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``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 the 
Exchange. On July 23, 2008, Nasdaq filed Amendment No. 1 to the 
proposed rule change. On July 30, 2008, Nasdaq withdrew Amendment No. 1 
and filed Amendment No. 2 to the proposed rule change. Amendment No. 2 
replaces the original filing in its entirety. 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 is proposing to establish a crossing mechanism for EVI 
securities, which is designed to allow issuers of employee stock 
options a market-based way of measuring the cost of such options. The 
text of the proposed rule change is below. Proposed new language is 
italicized; deletions are bracketed.\3\
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    \3\ Changes are marked to the rules of The NASDAQ Stock Market 
LLC found at http://nasdaq.complinet.com.
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* * * * *
    6300. [RESERVED] Nasdaq Equity Value Indicator Cross
    (a) Definitions. For the purposes of this rule the term:
    (1) ``Imbalance'' shall mean the amount of Eligible Interest that 
may not be matched with other orders at a particular price at any given 
time.
    (2) ``Order Imbalance Indicator'' shall mean a message disseminated 
by electronic means containing information about Eligible Interest and 
the price at which such interest would execute at the time of 
dissemination. The Order Imbalance Indicator shall disseminate the 
following information:
    (A) ``Current Reference Price'' shall mean the highest price at 
which the maximum amount of Eligible Interest can be paired.
    (B) the amount of Eligible Interest that is paired at the Current 
Reference Price;
    (C) the size of any Imbalance at the Current Reference Price; and
    (D) the buy/sell direction of any Imbalance.
    (3) ``Nasdaq EVI Cross'' shall mean the process for determining the 
price at which Eligible Interest shall be executed. All prices referred 
to in this rule shall be in minimum increments of one penny.
    (4) ``Eligible Interest'' shall mean any priced order that may be 
entered into the system for the EVI Cross.
    (5) ``EVI'' shall mean any Equity Value Indicator Tracking Security 
which is issued for the purpose of generating a market-based value of 
employee stock options for purposes of FASB Statement of Financial 
Accounting Standards No. 123(R), Share-Based Payment. The number of 
EVIs made available via the EVI Cross, the limit price, if any, of the 
EVIs, and the terms of the EVIs shall be determined by the EVI issuer 
which shall make that information available to the public at the 
earliest time practicable.
    (b) Processing of Nasdaq EVI Cross.
    (1) (A) No later than 4:00 p.m. EST on the day of the scheduled EVI 
Cross, a Nasdaq member authorized to act for the EVI Issuer shall 
direct in writing that Nasdaq enter into the System a single sell order 
with the quantity and limit price if any of EVI Eligible Interest. The 
sell order may not be modified after 4 p.m. and may be cancelled after 
4:00 p.m. only in connection with a cancellation of the EVI Cross as 
set forth in subsection (c) below.
    (B) Beginning at 8 a.m. and continuing until 4:59:59 p.m. Nasdaq 
members may enter buy orders into the System. Except as provided below, 
once entered, buy orders may be cancelled but may not be modified.
    (C) The EVI Cross shall occur at 5 p.m. EST. in the manner set 
forth below unless the time of execution is extended. The time of 
execution of the EVI Cross shall be extended only if the Current 
Reference Price of the EVI security changes by 1 percent or more 
between 4:59 p.m. and 5 p.m, in which case the time of the EVI Cross 
will be extended by 2 minutes. The time of execution of the EVI Cross 
shall be extended for an additional 2 minutes if the Current Reference 
Price of the EVI Security changes by 1 percent or more in the final 
minute of a two-minute

[[Page 46130]]

extension. The time of execution of the EVI Cross shall be extended no 
more than 30 times. If the time of execution of the EVI Cross has been 
extended 10 times, order cancellation will be prohibited.
    (2) At 4 p.m. and continuing through the execution of the EVI 
Cross, Nasdaq shall disseminate by electronic means an Order Imbalance 
Indicator every minute for the first 45 minutes and every 15 seconds 
thereafter.
    (3) The Nasdaq EVI Cross shall occur at the highest price that 
maximizes the amount of Eligible Interest to be executed.
    (4) If the Nasdaq EVI Cross price is selected and less than all 
Eligible Interest that is available would be executed, all Eligible 
Interest shall be executed at the Nasdaq EVI Cross price in price/time 
priority.
    (5) All Eligible Interest executed in the Nasdaq EVI Cross shall be 
executed at the Nasdaq EVI Cross price, trade reported to the National 
Securities Clearing Corporation and disseminated via a data feed.
    (c) The EVI Cross shall be cancelled if:
    (i) The issuer determines prior to 4:45 p.m. on the date scheduled 
for the EVI Cross to cancel its participation; or
    (ii) The common stock of the issuer is in a halted state at 4:45 
p.m. on the date scheduled for the EVI Cross.
    (d) The issuer of an EVI Security shall become eligible to 
participate in the NASDAQ EVI Cross by paying a fee as follows:
    (i) Two percent of the total value of the EVI offering up to a 
maximum of $10,000,000 of total value, plus
    (ii) One and one half percent of the total value of the EVI 
offering above $10,000,000 of total value, and
    (iii) The maximum fee shall be $1,500,000.
    This fee shall be refunded if no EVI Cross is executed. This fee 
shall include all processing of the EVI Cross, including order entry, 
order execution, imbalance information dissemination, and transmission 
to the appropriate clearing agency. Nasdaq members not issuing 
securities shall pay no fees to participate in the NASDAQ EVI Cross.
* * * * *
The text of the proposed rule change is also available at Nasdaq, the 
Commission's Public Reference Room, and 
www.nasdaqomx.cchwallstreet.com.

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 is proposing to establish a crossing mechanism for EVI 
securities, which is designed to allow issuers of employee stock 
options a market-based way of measuring the cost of such options. In 
this filing, Nasdaq is seeking Commission approval under Section 19(b) 
of the Act only for its proposed rules relating to the EVI cross. The 
registration of any particular EVI securities with the Commission is 
the responsibility of the issuer and would be subject to separate 
review by the Commission and its Division of Corporation Finance.\4\ 
Similarly, the extent to which an issuer may use a price derived from a 
particular EVI crossing auction to measure the cost of employee stock 
options may be subject to separate review by the Commission and its 
staff.
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    \4\ Nasdaq anticipates that each EVI tracking security will 
entitle the holder to specified payments upon the exercise of stock 
options comprising a reference pool of stock options that have been 
previously granted to employees by the issuer. The securities will 
represent a payment obligation of the issuer, but will not represent 
any direct ownership interest in the issuing company or in any of 
the reference pool stock options. The specific features of the 
securities, including how payments are calculated, maturity dates 
and form of payment, will be determined by each issuer. The price 
and allocation of the securities for each issuance will be 
determined by the results of the auction. The issuer will make 
available to the public the terms and features of its EVI tracking 
security.
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    The EVI Cross is a market pricing mechanism modeled on Nasdaq's 
industry leading crossing technology currently used for the Nasdaq 
Opening and Closing Crosses, the Nasdaq Crossing Network, and the 
Nasdaq IPO and Halt Crosses, set forth in Nasdaq Rules 4752, 4753, 
4754, and 4770. As a facility of Nasdaq,\5\ the EVI Cross will utilize 
the existing technology network that links more than 100,000 market 
participants with NASDAQ and provide broad access for investors to 
participate in price discovery for EVI instruments. The EVI Cross will 
provide price discovery, equal access, and fair executions at a single 
price that is fully reflective of market demand for EVI instruments. 
The EVI Cross will be the appropriate mechanism to determine a fair 
market price for EVI instruments which issuers may utilize to determine 
their options expense.
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    \5\ Nasdaq does not currently expect that EVI securities will be 
listed on Nasdaq or any other national securities exchange. In the 
event an EVI issuer desires to list its EVIs on Nasdaq or another 
exchange, the issuer will be required to meet applicable listing 
requirements. In the event no such requirements exist, the exchange 
would be required to file a proposed rule change under Section 19(b) 
seeking approval of appropriate listing requirements.
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    Like Nasdaq's current crosses, the EVI Cross will have three 
elements: (1) A defined order entry period, (2) information 
dissemination, and (3) a single price execution according to a fixed 
algorithm. For the EVI Cross, order entry will begin at 8 a.m. and end 
at 5 p.m. EST on date of issuance, typically the first trading day 
following an options grant date. Nasdaq members will access the EVI 
Cross system through existing interfaces for order entry, although the 
EVI Cross system will be entirely separate from the Nasdaq Market 
Center execution system (the Single Book). The EVIs available for sale 
in the EVI Cross will be entered into the System in a single sell 
order. A Nasdaq member authorized to act on behalf of the EVI Issuer 
shall direct Nasdaq to enter the single sell order into the System, 
including the quantity of EVIs and the limit price, if any. Once 
entered, the sell order cannot be modified after 4 p.m. and my [sic] be 
cancelled after 4 p.m. only in connection with a cancellation of the 
EVI Cross as set forth in subsection (c) of Rule 6300. All buy orders 
must be for a fixed price and size; all EVIs will be offered by the 
issuer for sale on identical terms to individual bidders. Entered buy 
orders can be cancelled until 5 p.m, and no executions will occur prior 
to the auction close.
    As with Nasdaq's current crosses, Nasdaq will facilitate price 
discovery for the EVI Cross. First, Nasdaq will facilitate price 
discovery prior to the start of the EVI Cross. As set forth in the 
proposed rule, Nasdaq will require issuers to make available to the 
public at the earliest possible time information regarding the number 
of EVIs made available via the EVI Cross, the reserve price, if any, of 
the EVIs, and the terms and conditions of the EVIs. This

[[Page 46131]]

requirement will reinforce the issuers' inherent interest in attracting 
the maximum number of bidders to the EVI Cross by providing potential 
bidders with the information they need to determine their willingness 
to participate and the price and size of their orders.
    In addition, Nasdaq will facilitate price discovery by 
disseminating indicative auction price information via the Order 
Imbalance Indicator which is available on NASDAQTrader.com and as a 
data feed. Indicative price information includes: (1) The Current 
Reference Price, an indicative auction price at which all EVI 
instruments would be sold based on current bids; (2) paired units, the 
number of units matched for execution at the Current Reference Price; 
and (3) the Imbalance, the total imbalance and the size of executable 
units at the Current Reference Price. Indicative information will be 
disseminated starting at 4 p.m. once per minute for the first 45 
minutes, and every 15 seconds thereafter.
    Disseminating indicative information will help both issuers and 
purchasers. It will assist issuers by informing them whether the EVI 
Cross is likely to culminate in a successful auction. Indicative 
information will enable the issuer to determine that the EVI Cross is 
unlikely to succeed due to, for example, insufficient buying interest, 
market volatility, or buying interest below the issuer's reserve price. 
Thus, issuers can use the indicative information to exercise their 
option under the proposed rule to cancel the EVI Cross any time prior 
to 4:45 p.m. Indicative information assists buyers by enabling them to 
gauge the level of buying interest and the likely outcome of the EVI 
Cross. Thus, buyers can use indicative information to exercise their 
options under the rule to enter or cancel orders in the EVI Cross. 
Nasdaq understands that the transparency created by the dissemination 
of indicative information has been a major factor in the success of 
Nasdaq's Opening, Closing, and Intra-Day Crosses.
    To protect against volatility, Nasdaq will extend the quote-only 
period if a price change greater than one percent occurs between 4:59 
p.m. and 5 p.m. In that case, Nasdaq will extend the quote-only period 
by two minutes. If during the final minute of a two-minute extension, a 
price change greater than one percent occurs, the quote-only period 
will be extended for an additional two minutes. If the quote-only 
period is extended more than 10 times, members will be prohibited from 
canceling orders. There will be no more than 30 extensions of the 
quote-only period.
    The EVI Cross will occur at 5 p.m. Eastern Time or at such time 
that the quote-only period ends, as described above. The EVI Cross will 
occur at the highest price that maximizes the amount of Eligible 
Interest to be executed. Final auction information disseminated to all 
participants and all executions will clear through National Securities 
Clearing Corporation.
    Nasdaq has unique technology and expertise in creating liquid 
markets and efficient price discovery. The EVI Cross will utilize the 
existing technology network that links more than 100,000 market 
participants with NASDAQ and provides broad access for investors to 
participate in price discovery of an options valuation security. Market 
data vendors and participants will have access to imbalance information 
for the EVI Cross by purchasing the Net Order Imbalance Indicator data 
feed which is available on the Nasdaq TotalView data feed and also 
through the Nasdaq Workstation and Nasdaq Data Store at the current 
filed fee.\6\ As with other NASDAQ trading platforms, the EVI Cross 
will provide an open process in which all investors have the ability to 
enter orders and participate in price discovery. The EVI Cross 
mechanism will be regulated by FINRA and NASDAQ.
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    \6\ See Nasdaq Rule 7023.
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Fees Applicable to the EVI Cross

    Nasdaq will assess a single fee for the EVI Cross equal to a 
percentage of the total value of the issuance of the EVI Security up to 
a maximum of $1,500,000. This cost will be borne by the issuer of the 
EVI instrument and will cover the entire cost of the processing of the 
EVI Cross, including the entry and execution of orders, the 
dissemination of indicative information, and the transmission of 
execution information to cross participants and to NSCC. The fee will 
be based upon the total value of the EVI offering, regardless of 
whether all EVIs in the offering are executed in the EVI Cross, except 
that the fee shall be refunded if no EVI Cross occurs.
    Nasdaq members will pay no fees to participate in the EVI Cross by 
entering orders and having them executed. Although members will be 
required to establish a new port for connectivity to access the EVI 
Cross, there will be no fee assessed for that port.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\7\ in general, and with Section 
6(b)(5) of the Act,\8\ 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 supports the goals of the Exchange Act by creating a new, 
efficient, liquid, and transparent market for interested investors. The 
proposed functionality is completely voluntary with respect to all 
potential participants, including issuers, members, and customers. 
Nasdaq believes that the proposed fee is fair, reasonable and non-
discriminatory, in that it must remain responsive to competitive market 
forces.
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    \7\ 15 U.S.C. 78f.
    \8\ 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, as amended. To the contrary, by 
offering an innovative new product, Nasdaq is demonstrating the proper 
functioning of the competitive framework established under the Exchange 
Act and administered by the Commission.

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 self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or

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    (B) Institute proceedings to determine whether the proposed rule 
change 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 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-2008-025 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2008-025. 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 the filing also will be available for 
inspection and copying at the principal office of the Exchange. 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-2008-025 and should 
be submitted on or before August 28, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
 [FR Doc. E8-18155 Filed 8-6-08; 8:45 am]

BILLING CODE 8010-01-P
