
[Federal Register Volume 79, Number 207 (Monday, October 27, 2014)]
[Notices]
[Pages 63981-63982]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-25435]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73399; File No. SR-NASDAQ-2014-081]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Approving a Proposed Rule Change Related 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

October 21, 2014.

I. Introduction

    On August 20, 2014, The NASDAQ Stock Market LLC (``NASDAQ'' or the 
``Exchange'') filed with the Securities and Exchange Commission (the 
``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change relating to its initial public offering (``IPO'') 
process. The proposed rule change was published for comment in the 
Federal Register on September 9, 2014.\3\ The Commission received no 
comments on the proposal. This order approves the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 72961 (September 3, 
2014), 79 FR 53500 (``Notice'').
---------------------------------------------------------------------------

II. Description of the Proposal

    The Exchange 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 IPO (the ``IPO 
Halt Cross'' or the ``Cross'').\4\ Currently, NASDAQ Rule 4120(c)(7)(B) 
governs the launch of trading of IPO securities approved for listing on 
the Exchange.\5\ NASDAQ Rule 4120(c)(7)(B) provides a two-phase process 
in which there is a 15 minute Display Only Period in which market 
participants may enter quotes and orders in that IPO security in the 
NASDAQ systems, which is then followed by a ``Pre-Launch Period'' that 
is not of a fixed duration.\6\ According to the Exchange, the Pre-
Launch Period continues until: (1) NASDAQ receives notice from the 
underwriter of the IPO that the security is ready to trade and there is 
no ``order imbalance'' \7\ 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. The Exchange 
states that it disseminates the ``Current Reference Price,'' which is 
an indication of the price at which the IPO Halt Cross would execute if 
it occurred at that time, every five seconds during the Display Only 
Period and the Pre-Launch Period.\8\
---------------------------------------------------------------------------

    \4\ See id.
    \5\ See Securities Exchange Act Release No. 69897 (July 1, 
2013), 78 FR 40782, 40783 (July 8, 2013).
    \6\ See Notice, supra note 3, at 53501.
    \7\ See id.
    \8\ See id. According to the Exchange, under the current rule, 
an ``order imbalance'' in an IPO security exists if: (1) 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; (2) 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 (3) all market orders will not be executed in the 
Cross. See id.; and NASDAQ Rule 4120(c)(7)(C).
---------------------------------------------------------------------------

    The Exchange proposes to replace its current process with a 
procedure under which the ``Expected Price'' \9\ 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.\10\ According to the Exchange, price deviations 
between the Expected Price and the actual calculated price of the Cross 
can occur 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.\11\
---------------------------------------------------------------------------

    \9\ The ``Expected Price,'' according to the Exchange, is the 
Current Reference Price displayed to the underwriter after the 
Exchange receives notice from the underwriter that the security is 
ready to trade. See Notice, supra note 3, at 53501, and Proposed 
NASDAQ Rule 4120(c)(8)(A)(i).
    \10\ See Notice, supra note 3, at 53501. The Exchange is also 
proposing to reorganize certain provisions of NASDAQ Rule 4120 
relating to the process for ending a trading halt of securities 
other than IPO securities, but is not making substantive 
modifications to these rules. See id.
    \11\ See id.
---------------------------------------------------------------------------

    Under the proposal, the process for determining the end of the Pre-
Launch Period and when the IPO security will be released for trading 
will be as follows: (1) NASDAQ receives notice from the underwriter of 
the IPO that the security is ready to trade; (2) the NASDAQ system will 
then calculate the Current Reference Price and display it to the 
underwriter (i.e., the Expected Price); (3) the underwriter agrees to 
go forward; (4) the NASDAQ system determines that all market orders 
will be executed in the cross; and (5) the

[[Page 63982]]

NASDAQ system determines that the security satisfies a ``price 
validation test,'' as described below.\12\
---------------------------------------------------------------------------

    \12\ See id.
---------------------------------------------------------------------------

    Under the proposal, prior to the conclusion of the Pre-Launch 
Period,\13\ the underwriter will select price bands \14\ and, as noted 
above, the system will then compare the Expected Price with the actual 
price calculated by the Cross.\15\ 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.\16\ Under 
the proposal, if a security does not satisfy 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.\17\
---------------------------------------------------------------------------

    \13\ The underwriter can select the price bands at any time 
during the Display Only Period or the Pre-Launch Period, and may 
modify them at any time prior to the Pre-Launch Period. See id. at 
n.6.
    \14\ Specifically, the underwriter will 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). The Exchange 
notes that the underwriter may select different price bands above 
and below the Expected Price. See id.
    \15\ See Notice, supra note 3, at 53501.
    \16\ See id.
    \17\ See id. at 53502.
---------------------------------------------------------------------------

    According to the proposal, the available price bands the 
underwriter may select for the price validation test will include 
increments and price points established by the Exchange, which may be 
modified by the Exchange from time to time.\18\ Under the proposal, the 
initial available price bands will range from $0 to $0.50, with 
increments of $0.01.\19\ Under the proposal, the Exchange 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).\20\
---------------------------------------------------------------------------

    \18\ See id.
    \19\ See id. Under the proposal, an underwriter may select a 
price band of $0.00 (i.e., no change from the Expected Price would 
be permitted). See id.
    \20\ See Notice, supra note 3, at 53502. The Exchange states 
that it 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. See 
id.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\21\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\22\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, 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.
---------------------------------------------------------------------------

    \21\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \22\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    As noted above, the proposal is designed to offer an additional 
safeguard against an unexpected deviation between the Expected Price 
and the actual price of the Cross by providing the underwriter with the 
authority to set price bands based on the characteristics of and 
expectations for each IPO. The Exchange represents that such price 
deviations can occur because market participants may continue to enter 
and cancel orders during the period of up to five seconds between the 
display of the Expected Price to the underwriter and the commencement 
of the Cross calculation.\23\ The Commission notes that, 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.\24\ The Commission believes that the proposed rule 
change is designed to protect investors and the public interest by 
limiting unexpected volatility in the pricing of an IPO security at the 
conclusion of the Pre-Launch Period.
---------------------------------------------------------------------------

    \23\ See supra note 11 and accompanying text.
    \24\ See supra note 16 and accompanying text.
---------------------------------------------------------------------------

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\25\ that the proposed rule change (SR-NASDAQ-2014-081) is 
approved.
---------------------------------------------------------------------------

    \25\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
---------------------------------------------------------------------------

    \26\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-25435 Filed 10-24-14; 8:45 am]
BILLING CODE 8011-01-P


