
[Federal Register Volume 79, Number 174 (Tuesday, September 9, 2014)]
[Notices]
[Pages 53500-53503]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-21356]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72961; File No. SR-NASDAQ-2014-081]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change Relating to Proposed Changes 
to NASDAQ Rule 4120(c) To Modify the Parameters for Releasing 
Securities for Trading Upon the Termination of a Trading Halt in a 
Security That is the Subject of an Initial Public Offering

September 3, 2014.
    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 August 20, 2014, The NASDAQ Stock Market LLC (``NASDAQ'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in 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 the 
Substance of the Proposed Rule Change

    NASDAQ proposes to amend NASDAQ Rule 4120(c) to modify the 
parameters for releasing securities for trading upon the termination of 
a trading halt in a security that is the subject of an initial public 
offering.
    The text of the proposed rule change is available 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, NASDAQ included statements 
concerning the purpose of, and basis for, 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.

[[Page 53501]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend Rule 4120(c) to strengthen 
safeguards against unexpected volatility with respect to the price 
established by the NASDAQ Halt Cross for a security that is the subject 
of an IPO (the ``IPO Halt Cross'' or the ``Cross''). In 2013, NASDAQ 
adopted a new process for releasing IPO securities.\3\ The changes were 
adopted to improve the IPO release process by increasing NASDAQ's 
flexibility to commence trading when appropriate. To this end, NASDAQ 
eliminated the former rule requirement that limited the number of 
extensions of the period prior to launch--the Display Only Period--to 
six five-minute periods. NASDAQ instead adopted a two-phase process 
under which the initial 15-minute Display Only Period is followed by a 
``Pre-Launch Period'' that is not of a fixed duration. Under the 
current rule, the Pre-Launch Period will continue until (1) NASDAQ 
receives notice from the underwriter of the IPO that the security is 
ready to trade and there is no ``order imbalance'' in the security, in 
which case the security is released for trading; or (2) the 
underwriter, with concurrence of NASDAQ, determines to postpone and 
reschedule the IPO. Every five seconds during the Display Only Period 
and the Pre-Launch Period, NASDAQ disseminates the Current Reference 
Price, an indication of the price at which the IPO Halt Cross would 
execute if it occurred at that time.
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    \3\ Securities Exchange Act Release No. 69897 (July 1, 2013), 78 
FR 40782 (July 8, 2013) (SR-NASDAQ-2013-092). See also Securities 
Exchange Act Release No. 70911 (November 21, 2013), 78 FR 71011 
(November 27, 2013) (SR-NASDAQ-2013-143) (adopting additional 
refinements to process for IPO securities).
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    The requirement regarding the absence of an order imbalance was 
designed to ensure that the expected price of the security is 
reasonably stable and that trading interest is balanced at the time 
trading commences. There are currently several conditions under which 
an order imbalance in an IPO security will be considered to exist:
     The Current Reference Price disseminated immediately prior 
to commencing the release of the IPO for trading during the Pre-Launch 
Period and any of the three preceding Current Reference Prices differ 
by more than the greater of 5 percent or 50 cents;
     upon completion of the Cross calculation, the calculated 
price at which the security would be released for trading and any of 
the three preceding Current Reference Prices disseminated immediately 
prior to the initiation of the Cross calculation differ by more than 
the greater of 5 percent or 50 cents; or
     all market orders will not be executed in the Cross.
    These restrictions are designed to prevent circumstances where a 
misunderstanding by the underwriter as to the state of the order book 
risks launching trading at a time of material volatility in the book 
for the security. Order imbalances are calculated by the IPO Halt Cross 
system, which automatically prevents launch of a halted security when 
an order imbalance exists.
    NASDAQ is proposing to enable the underwriter to provide even 
greater protection against volatility in an IPO security by replacing 
the current system for comparing against prior Current Reference Prices 
with a system under which the expected price of the IPO Halt Cross will 
be displayed to the underwriter, who will then select price bands to 
ensure that the actual calculated price at which the IPO Halt Cross 
would occur does not deviate from the expected price by more than the 
selected amounts. Such price deviations are possible because market 
participants may continue to enter and cancel orders during the period 
between the display of the expected price to the underwriter and the 
commencement of the Cross calculation, a period of up to five seconds 
in duration.\4\ Although the current system has generally done a good 
job of protecting against unexpected changes in the pricing of an IPO 
Halt Cross by ensuring that the Current Reference Price has been stable 
and the final calculated price is not significantly different from 
preceding Current Reference Prices, the proposed change would introduce 
the opportunity for underwriters to set tighter limits at their 
discretion based on the characteristics of and expectations for each 
IPO.
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    \4\ Cancellations received following the commencement of the 
Cross calculation are blocked, and orders received thereafter are 
not Cross-eligible. See In the Matter of The NASDAQ Stock Market LLC 
and NASDAQ Execution Services, LLC, Securities Exchange Act Release 
No. 69655 (May 29, 2013), at ]65.
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    Under the proposed modified system, the Pre-Launch Period will end 
and the security will be released for trading when the following 
conditions are all met:
     NASDAQ receives notice from the underwriter of the IPO 
that the security is ready to trade. The NASDAQ system will calculate 
the Current Reference Price at that time (the ``Expected Price'') and 
display it to the underwriter. If the underwriter then approves 
proceeding, the NASDAQ system will conduct the following validation 
checks:
     The NASDAQ system must determine that all market orders 
will be executed in the cross; \5\
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    \5\ This requirement is not being modified from the requirement 
of the current rule with respect to market orders, but the wording 
is being modified to make it clearer. The intent of the restriction 
is to ensure that if a market participant enters an order offering 
to buy or sell in the IPO Halt Cross at any price, the Cross should 
not occur unless all such orders can be executed.
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     the security passes a new price validation test, which 
will replace the current system for comparison against recent Current 
Reference Prices.
    For purposes of applying the price validation test, the underwriter 
must select price bands prior to the conclusion of the Pre-Launch 
Period.\6\ The System will then compare the Expected Price with the 
actual price calculated by the Cross. If the actual price calculated by 
the Cross differs from the Expected Price by an amount in excess of the 
price band selected by the underwriter, the security will not be 
released for trading and the Pre-Launch Period will continue. The 
underwriter must select an upper price band (i.e., an amount by which 
the actual price may not exceed the Expected Price) and a lower price 
band (i.e., an amount by which the actual price may not be lower than 
the Expected Price). If a security does not pass the price validation 
test, the underwriter may, but is not required to, select different 
price bands before recommencing the process to release the security for 
trading.
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    \6\ The underwriter can select the price bands at any time 
during the Display Only Period or Pre-Launch Period, and can modify 
them at any time prior to the conclusion of the Pre-Launch Period.
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    For example, assume that the Expected Price for the IPO Halt Cross 
shown to the underwriter was $32 per share, and the underwriter 
selected an upper price band of $0.10 and a lower price band of $0.05. 
In that case, the actual price calculated by the system for the Cross 
could not be higher than $32.10 nor lower than $31.95.
    As is currently the case, the failure to satisfy any of the 
conditions for completion of the IPO Cross results in a delay of the 
release for trading of the IPO, and a continuation of the Pre-Launch 
Period, until all conditions have been satisfied. Thus, if the price 
validation is not satisfied, the Pre-Launch Period would continue 
seamlessly, with members able to continue to enter or cancel orders. 
The security would then repeat the process for release until such time 
as the

[[Page 53502]]

conditions required for launch were satisfied. Thus, the underwriter 
would again have to determine that it believes the security is ready to 
trade, the underwriter would be shown the applicable Expected Price, 
and the security would launch if all market orders would be executed 
and the price validation was satisfied. As noted above, the underwriter 
would be able to select different price bands for each attempt to 
launch the security. Thus, an underwriter might select an upper and a 
lower band of $0 initially, such that the security would not launch 
unless the calculated price equaled the Expected Price. If the security 
did not pass the validation check, however, the underwriter could 
subsequently choose to widen the price bands to allow the IPO to 
proceed at a price that might vary from the Expected Price. As is also 
currently the case, the underwriter, with concurrence of NASDAQ, may 
determine at any point during the IPO Halt Cross process up through the 
conclusion of the Pre-Launch Period to postpone and reschedule the 
IPO.\7\
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    \7\ NASDAQ is modifying the applicable language slightly to make 
it clear that the authority to cancel and reschedule extends to the 
conclusion of the Pre-Launch Period.
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    The price bands available for selection shall be in such 
increments, and at such price points, as may be established from time 
to time by NASDAQ. The initial available price bands will range from $0 
to $0.50, with increments of $0.01. Thus, the underwriter may select a 
price band of $0 (i.e., no change from the Expected Price is 
permitted), $0.01, $0.02, or any other $0.01 increment up to $0.50. The 
underwriter may select different price bands above and below the 
Expected Price. NASDAQ reserves the right to stipulate wider increments 
(such as $0.05) or price bands that include certain price points but 
exclude others (for example, increments of $0.01 up to $0.10, and 
increments of $0.05 thereafter). In selecting available price bands and 
increments, NASDAQ will consider input from underwriters and other 
market participants and the results of past usage of price bands to 
adopt price bands and increments that promote efficiency in the 
initiation of trading and protect investors and the public interest. 
NASDAQ will notify member organizations and the public of changes in 
available price band or increments through a notice that is widely 
disseminated at least one week in advance of the change. However, 
NASDAQ will not (in the absence of the submission of a proposed rule 
change) allow bands wider than $0.50. Thus, bands will not be wider 
than the bands that currently govern the comparison between the Cross 
price and previous Current Reference Prices.
    In addition to the foregoing changes, NASDAQ is also proposing to 
reorganize provisions of Rule 4120 relating to the process for ending a 
trading halt of securities other than IPO securities. NASDAQ is not 
making substantive modifications to these rules, however.
2. Statutory Basis
    The Exchange believes that the proposed rule change 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 
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 
transaction 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. The proposed 
rule change promotes these goals by strengthening protection against 
unexpected volatility in the pricing of an IPO security. While the 
current rule provides protection against volatility by providing that 
the final price of an IPO security calculated by the IPO Halt Cross may 
not deviate from the most recent three indicative prices by more than 
five percent or $0.50, there nevertheless exists the possibility that 
deviations within these bands will occur. The proposed change is 
designed to protect the underwriter and other market participants from 
the IPO Halt Cross occurring at a price that deviates unexpectedly from 
the prices previously disclosed through the Current Reference Price by 
providing the underwriter the authority to set tighter limits based on 
the characteristics of and expectations for each IPO. NASDAQ believes 
that enhancing and strengthening the process in this manner will 
protect investors as it will serve to minimize unexpected price 
deviations and avoid confusion among market participants.
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    \8\ 15 U.S.C. 78f.
    \9\ 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 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, as amended. 
Specifically, the change will not affect the ability of market 
participants to participate fully in the IPO Halt Crosses. Rather, the 
change is designed to promote stability and reduce volatility in the 
pricing of the IPO Halt Cross, and therefore does not impose any 
restriction on competition.

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 45 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 Exchange consents, the Commission shall: (a) by order approve 
or disapprove such proposed rule change, or (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 email to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2014-081 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-2014-081. This 
file number should be included on the subject line if email 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

[[Page 53503]]

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 Web site viewing and printing in the Commission's Public 
Reference Room, 100 F Street NE., Washington, DC 20549, on official 
business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of 
such filing also will be available for inspection and copying at the 
principal offices 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-2014-081, and should be submitted on or before 
September 30, 2014.
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    \10\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-21356 Filed 9-8-14; 8:45 am]
BILLING CODE 8011-01-P


