
[Federal Register: November 6, 2009 (Volume 74, Number 214)]
[Notices]               
[Page 57544-57546]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06no09-109]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60905; File No. SR-NASDAQ-2009-093]

 
Self-Regulatory Organizations; the NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change to 
Modify the Opening of Trading on the NASDAQ Options Market

October 30, 2009.
    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 October 26, 2009, The NASDAQ Stock Market LLC (``Nasdaq'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule change as described in Items I, II, and III, below, 
which Items have been prepared by Nasdaq. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq is filing a proposal for the NASDAQ Options Market (``NOM'' 
or ``Exchange'') to modify Chapter VI, Section 8 of the Exchange's 
rules, dealing with the Nasdaq Opening Cross. The Exchange proposes to 
implement this change on or about November 23, 2009.
    The text of the proposed rule change is available from Nasdaq's Web 
site at http://nasdaq.cchwallstreet.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, the Exchange 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. The Exchange 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 Chapter VI, Section 8 of the rules 
governing NOM, and in particular governing the opening of trading in 
that market. Since NOM was launched on March 31, 2008, Nasdaq has 
monitored the operation of the market to identify instances where 
market efficiency can be enhanced.\3\ Nasdaq believes that the opening 
of the market, while currently quite effective, can be further 
enhanced.
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    \3\ For instance, in May 2008 Nasdaq filed a proposed rule 
change to enhance its opening process by (1) delaying the Opening 
Cross in the event that after the execution of the Opening Cross the 
NOM best bid and offer would be outside certain pre-determined 
threshold amounts, and (2) delaying the opening of trading if after 
the opening print the NOM best bid and offer would be outside the 
same pre-determined threshold amounts in instances where there is 
insufficient interest available to initiate the Opening Cross. See 
Securities Exchange Act Release No. 57822 (May 15, 2008), 73 FR 
29800 (May 22, 2008) (SR-NASDAQ-2008-045). In June 2008 Nasdaq filed 
a proposed rule change to allow the opening of trading in those 
instances where trading interest at the National Best Bid and Offer 
(``NBBO''), which includes the non-firm Nasdaq Best Bid and Offer 
(Nasdaq BBO), is within the currently authorized trading thresholds. 
See Securities Exchange Act Release No. 57977 (June 17, 2008), 73 FR 
35429 (June 23, 2008) (SR-NASDAQ-2008-052).
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    Currently, pursuant to Chapter VI, Section 8(b) of NOM's rules, the 
Nasdaq Opening Cross occurs at 9:30 a.m., unless the Opening Cross is 
delayed pursuant to Section 8(b)(5) of Chapter VI in order to avoid 
opening at a price that is away from the prevailing market. Pursuant to 
that provision, the opening is delayed if the Nasdaq BBO after 
execution of the opening print would be wider than pre-determined 
authorized trading thresholds. In the event that no Opening Cross 
occurs due to insufficient interest, Nasdaq systematically delays the 
opening of trading if the NBBO (which includes the non-firm Nasdaq BBO) 
is wider than certain spread requirements set from time to time by 
Nasdaq management. Thus, both the NBBO and the Nasdaq BBO are currently 
analyzed by NOM when determining to open trading, in order to ensure 
opening the market in an orderly fashion. If a delay occurs pursuant to 
Section 8(b)(5) of Chapter VI, the Opening Cross (and thus regular 
market trading) does not commence until such time as it is determined 
that the width requirements can be met.\4\
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    \4\ Except for executions arising from the Opening Cross, 
executions are only permitted if they will not result in a trade-
through violation of the NBBO as described in Chapter VI, Sec. 
7(b)(3)(C) of the NOM rules.
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    The Exchange is proposing to alter its methodology for opening 
trading by deleting the delay provisions of Section 8(b)(5) of Chapter 
VI, and instead requiring certain other preconditions to be met. 
Additionally, Section 8(b)(2)(A) of Chapter VI would be amended to 
require the Nasdaq Opening Cross to occur at the price that maximizes 
the number of contracts of Eligible Interest \5\ in NOM to be executed 
at or within the NBBO.
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    \5\ ``Eligible Interest'' is defined in Section 8(a)(1) [sic] of 
Chapter VI as any quotation or any order that may be entered into 
the system and designated with a time-in-force of IOC, DAY, GTC, or 
EXPR.
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    In order to improve the opening process on NOM by streamlining the 
opening timeline and providing further price protection to orders 
received prior to market open, Nasdaq is proposing to revise Section 
8(b) of Chapter VI to permit the Opening Cross to occur at or after 
9:30 if there is no Imbalance,\6\ if the dissemination of a quote or 
trade by the Market for the Underlying Security \7\ has occurred (or, 
in the case of index options, the Exchange has received the opening 
price of the underlying index) and if a certain number (as the Exchange 
may determine from time to time) of other options exchanges have 
disseminated a firm quote on the Options Price Reporting Authority 
(``OPRA''). If all the conditions specified

[[Page 57545]]

in Section 8(b) of Chapter VI have been met except that there is an 
Imbalance, Section 8(b)(5) would require one additional Order Imbalance 
Indicator message to be disseminated, after which the Opening Cross 
would occur, executing the maximum number of contracts. Any remaining 
Imbalance that is not executable in the Opening Cross would be 
canceled.
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    \6\ ``Imbalance'' is defined in Section 8(a)(1) of Chapter VI as 
the number of contracts of Eligible Interest that may not be matched 
with other order contracts at a particular price at any given time.
    \7\ New Section 8(a)(5) of Chapter VI would define ``Market for 
the Underlying Security'' as meaning either the primary listing 
market, the primary volume market (defined as the market with the 
most liquidity in that underlying security for the previous two 
calendar months), or the first market to open the underlying 
security, as determined by the Exchange on an issue-by-issue basis 
and announced to the membership on the Exchange's Web site.
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    By amending the NOM rules as explained above, Nasdaq accomplishes 
two main objectives. First, relying on a quote or trade of the 
underlying asset upon which a particular option is based aligns the NOM 
rules with accepted practices on various other options exchanges.\8\ 
Second, waiting for the dissemination of firm quotes from other options 
exchanges allows NOM to build an NBBO upon which it can bound the 
Opening Cross. This adds an additional layer of protection to customers 
entering orders into the market and assists in creating an orderly 
opening to trading.\9\
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    \8\ See, e.g., Section (j) of NASDAQ OMX PHLX Rule 1017, 
Openings in Options, and Chicago Board Options Exchange Chapter VI, 
Rule 6.2B, Hybrid Opening System (``HOSS''), Section (b).
    \9\ NASDAQ OMX PHLX has a similar process in which it considers 
the NBBO before executing. See NASDAQ PHLX Rule 1017(l)(ii)(C).
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    Proposed Section 8(c) of Chapter VI governs situations in which the 
requisite number of firm quotes have not been disseminated for an 
option by other options exchanges. No Opening Cross will occur if firm 
quotes are not disseminated for an option by the predetermined number 
of options exchanges by a specific time during the day that the 
Exchange determines. In that case, provided dissemination of a quote or 
trade by the Market for the Underlying Security has occurred (or, in 
the case of index options, the Exchange has received the opening price 
of the underlying index), the option will open for trading. However, if 
there is interest in the Opening Cross, the option will not open for 
trading in that option until the orders that would be executed in the 
Opening Cross are resolved through the cancellation or modification of 
the orders by the entering party or parties.
    In connection with the Opening Cross, pursuant to Section 8(b)(1) 
of Chapter VI Nasdaq disseminates an Order Imbalance Indicator 
beginning at 9:25 a.m. The Order Imbalance Indicator for the Opening 
Cross includes, among other information, a Current Reference Price, 
which generally is the single price at which the maximum number of 
contracts of Eligible Interest can be paired. Section 8(a)(2)(A)(i) of 
Chapter VI is proposed to be amended so that the definition of 
``Current Reference Price'' is limited to the single price at which the 
maximum number of contracts of Eligible Interest can be paired at or 
within the NBBO. The Exchange believes that limiting the opening 
execution price to be at or within the NBBO will provide customers with 
prices that are more aligned with prices available across the national 
option exchange system. If there is more than one such price, Sections 
8(a)(2)(A)(ii)--(iv) provide certain ``tie-breaker'' rules to determine 
the Current Reference Price. The ``tie-breaker'' rule of Section 
8(a)(2)(A)(iv) is proposed to be amended such that the Current 
Reference Price provided for in that rule would be the price that is 
closest to the midpoint of the NBBO (as opposed to the current rule 
which would result in the price that is closest to the midpoint price 
of the interest available in NOM the time of the Opening Cross).
    Finally, references to the ``Nasdaq Opening/Halt Cross'' are being 
replaced in Chapter VI, Section 8 with references to the ``Nasdaq 
Opening Cross''. This housekeeping change is necessary to reflect that 
following a trading halt, trading resumes as specified in Chapter V, 
Section 4 (Resumption of Trading After a Halt) rather than as specified 
in Chapter VI, Section 8.\10\
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    \10\ When Nasdaq first proposed its options trading rules, it 
planned to resume trading by operating a ``Halt Cross,'' which it 
originally described in Chapter VI, Section 8. Nasdaq later amended 
the proposed rules to remove the Halt Cross and to make clear that 
trading after a halt would ``resume'' rather than ``open.'' See 
Securities Exchange Act Release Nos. 57478 (March 12, 2008), 73 FR 
14521 (March 18, 2008) (SR-NASDAQ-2007-004 and SR-NASDAQ-2007-080) 
(approval order regarding NOM Rules including Chapters III and XIV).
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \11\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \12\ in particular, in that it is 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. Nasdaq believes that the proposal is consistent with this 
standard because the proposed rule change is designed to improve 
execution quality at the critical opening of the market. By waiting for 
the Market for the Underlying Security to be open, liquidity providers 
on the Exchange will have better information on which to base their 
quotes and will thus provide better markets for investor orders. 
Additionally, the Exchange believes that limiting the opening execution 
price to be at or within the NBBO will provide customers with prices 
that are better aligned with the national option exchange system.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition 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

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The Exchange believes that the foregoing proposed rule change 
effects a change in an existing order-entry or trading system pursuant 
to Section 19(b)(3)(A) \13\ of the Act, and Rule 19b-4(f)(5) \14\ 
thereunder, which renders the proposal effective upon filing with the 
Commission. The Exchange believes that the proposed rule change effects 
a change in an existing order-entry or trading system that does not 
significantly affect the protection of investors or the public 
interest, does not impose any significant burden on competition, and 
does not have the effect of limiting the access to or availability of 
the system. Specifically, the proposed rule change will benefit the 
protection of investors and the public interest by enhancing market 
quality and protecting investors and market participants from 
executions that are away from the prevailing market. The proposed rule 
change does not place a burden on competition but rather enhances 
competition among the markets. The proposed rule change does not limit 
access to or availability of the system. To the contrary, Nasdaq 
believes that the proposed rule change will prompt additional market 
participants to utilize the system at the opening of trading. NOM's 
participants will not need to make systems changes relating to the 
changes proposed by NOM in this proposed rule change.
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    \13\ 15 U.S.C.78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(5).
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    At any time within 60 days of the filing of the 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

[[Page 57546]]

interest, for the protection of investors, or otherwise in furtherance 
of the purposes of the Act.

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-2009-093 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2009-093. 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-2009-093 and 
should be submitted on or before November 27, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-26748 Filed 11-5-09; 8:45 am]

BILLING CODE 8011-01-P
