[Federal Register Volume 64, Number 19 (Friday, January 29, 1999)]
[Notices]
[Pages 4729-4730]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-2104]
[[Page 4729]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40968; File No. SR-NASD-98-98]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the National
Association of Securities Dealers, Inc. Relating to the Pre-Trading
Quotation Period for Initial Public Offerings
January 22, 1999.
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 December 23, 1998, the National Association of Securities Dealers,
Inc. (``NASD''), through its wholly-owned subsidiary, the Nasdaq Stock
Market, Inc. (``Nasdaq''), filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I and II below, which Items have been prepared by Nasdaq. The
Commission is publishing this notice and order to solicit comments on
the proposed rule change from interested persons and to grant
accelerated approval of the proposed rule change.
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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
The NASD, through its wholly-owned subsidiary Nasdaq, is proposing
to revise its practices concerning market maker quotations in Nasdaq
securities that are being quoted for the first time after an initial
public offering (``IPO''). Under the proposal, the pre-opening period
for the initial display of market maker quotes will be extended to 15
minutes prior to the commencement of trading to permit the development
of orderly quotations, with provision for a single additional fifteen
minute extension of the pre-opening period of the market is locked or
crossed at the conclusion of the first fifteen minute period.
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 III 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
In 1994, Nasdaq established a five minute quotation-only time
period for market makers to enter and adjust their first quotations for
securities newly released for trading in its market.\3\ This period,
similar to the daily pre-opening display of quotations allowed for
Nasdaq securities already trading in the secondary market,\4\ was
created to facilitate the opening of trading for IPOs and replaced the
previous practice of only allowing immediate and simultaneous initial
quotation and trading of Nasdaq IPO securities.
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\3\ See Securities Exchange Act Release No. 34254 (June 24,
1994), 59 FR 33808 (June 30, 1994). When an IPO is first authorized
for inclusion in Nasdaq, the system displays the time of day when
quoting in the issue may begin and the time of day when trading in
that issue may begin. Specifically, when a new security is released
for trading, the window for quotations has been set to allow market
makers a period of five minutes to enter and adjust their quotations
prior to the commencement of trading.
\4\ Nasdaq has represented that its practices of providing a
pre-trading, quotation-only period for IPO securities is related to
Nasdaq Rule 4120, ``Trading Halts,'' and Nasdaq Rule 4613,
``Character of Quotations.'' Nasdaq stated that this practice, like
the objectives in Nasdaq Rule 4120, is designed to ensure that
markets are not open for trading when unusual circumstances may
prevent such markets from remaining fair and orderly. Nasdaq also
stated that its current practice is similar to Nasdaq Rule 4613(c)
and (e) in that market maker quotations are required to be
reasonably related to the prevailing market, and market makers are
prohibited from locking or crossing markets. Telephone conversation
between Michael L. Loftus, Attorney, Division of Market Regulation,
Commission; Robert E. Aber, Senior Vice President and General
Counsel; and Thomas P. Moran, Senior Attorney, Office of General
Counsel, Nasdaq (Jan. 22, 1999).
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Recently, significant increased volatility has been observed in the
opening of IPOs for secondary market trading on Nasdaq. This volatility
appears to be the result of many converging factors, including the
recent popularity of internet-related stocks, an increase in the influx
of retail orders through on-line trading linkages, investor perceptions
and expectations as well as other technological and economic factors.
Nasdaq believes this excessive volatility has inhibited the smooth
functioning of the Nasdaq market during the initial trading of these
IPOs to the detriment of all market participants, including public
investors.
In response, Nasdaq proposes to extend the current five minute pre-
trading quotation period for all IPOs to fifteen minutes, with the
potential for a single, further extension of an additional fifteen
minute pre-trade quotation period if the issue is locked or crossed at
the conclusion of the first fifteen minute period.\5\ Nasdaq believes
that these extended time periods will allow the market participants to
better digest and respond to market price indications before an IPO is
released for trading and thus provide better information upon which to
make trading decisions. Nasdaq also believes that its proposal provides
a modicum of opportunity in volatile, fast-paced markets to review and
react to dramatic market movements that may manifest themselves in
pricing anomalies. While this proposal represents an initial response,
Nasdaq notes that it will continue to monitor and review trading
activity and market practices with a view towards developing additional
proposals to further mitigate excessive volatility in all areas of
Nasdaq trading.
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\5\ Nasdaq's MarketWatch Department will determine whether an
additional fifteen minute quotation-only period is necessary before
trading in an IPO security may begin. The determination of
MarketWatch will be based solely upon whether a market is locked or
crossed to such an extent that releasing the IPO security for
trading would be detrimental to the market or investors. Although
MarketWatch will closely monitor pre-trading quotation activity
during the entire fifteen minute period, the determination of
MarketWatch will be predicated on the status of the market at the
expiration of the initial fifteen minute period. Telephone
conversation between Michael L. Loftus, Attorney, Division of Market
Regulation, Commission; Robert E. Aber, Senior Vice President and
General Counsel; and Thomas P. Moran, Senior Attorney, Office of
General Counsel, Nasdaq (Jan. 22, 1999).
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2. Statutory Basis
Nasdaq believes that the proposed rule change is consistent with
the provisions of Sections 15A(b)(6) and 15A(b)(11) \6\ of the Act in
that the proposal is designed to facilitate transactions in securities
as well as produce fair and informative quotations and prevent
fictitious or misleading quotations.
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\6\ 15 U.S.C. 78o-3(b)(6) and 78o-3(b)(11).
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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.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received from Members, Participants, or Others
Nasdaq did not solicit or receive written comments with respect to
the proposed rule change.
[[Page 4730]]
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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of the submissions, 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 persons, 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 Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such filing will also be available
for inspection and copying at the principal office of the NASD. All
submissions should refer to File No. SR-NASD-98-98 and should be
submitted by February 19, 1999.
IV. Commission's Findings and Order Granting Accelerated Approval
of Proposed Rule Change
The Commission has carefully reviewed Nasdaq's proposed rule change
and believes the proposal is consistent with the requirements of
Section 15A(b) of the Act \7\ and the rules and regulations thereunder
applicable to a national securities association. Specifically, the
Commission believes the proposal is consistent with Sections 15A(b)(6)
and 15A(b)(11) of the Act \8\ which require, among other things, that a
national securities association's rules be designed to promote just and
equitable principles of trade, remove impediments to and perfect the
mechanism of a free and open market and a national market system,
facilitate transactions in securities, produce fair and informative
quotations, prevent fictitious or misleading quotations, and promote
orderly procedures for collecting, distributing, and publishing
quotations.\9\
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\7\ 15 U.S.C. 78o-3(b).
\8\ 15 U.S.C. 78o-3(b)(6) and 78o-3(b)(11).
\9\ In approving this proposed rule change, the Commission has
considered the proposal's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
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Under current Nasdaq practice, market makers are permitted to enter
and adjust their first quotations for IPO securities during a pre-
trading, quotation-only time period that lasts five minutes. Nasdaq
created this quotation-only time period to facilitate the opening of
trading for IPOs. Previously, when an IPO was authorized for trading on
Nasdaq, market makers were permitted to immediately and simultaneously
enter quotations and trade on the subject security.\10\
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\10\See Securities Exchange Act Release No. 34254 (June 24,
1994), 59 FR 33808 (June 30, 1994).
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The Commission recognizes that it may be difficult at times to
accurately gauge interest in an IPO, and that as a result, the opening
of secondary market trading for Nasdaq IPO securities may be subject to
increased volatility. As Nasdaq notes, such excessive volatility could
impede the smooth functioning of the Nasdaq market during the initial
trading of IPOs to the detriment of all market participants, including
public investors.
The Nasdaq proposal was designed to address the increased
volatility associated with the opening of IPOs for secondary market
trading on Nasdaq. The proposal would extend the current five minute
pre-trading quotation period for all IPOs to fifteen minutes, and
provide the potential for an additional fifteen minute pre-trade
quotation period if an IPO issue was locked or crossed at the
conclusion of the first fifteen minute period. The Commission believes
that this additional time should assist market participants in gauging
the likely interest in an IPO and adjusting their quotes accordingly.
Pursuant to Section 19(b)(2) of the Act,\11\ the Commission finds
good cause for approving the proposed rule change prior to the
thirtieth day after the date of publication of notice of filing in the
Federal Register. The Commission recognizes that increased investor
demand for the securities of high-technology companies, especially
those offered through IPOs, may be contributing to greater volatility
of Nasdaq securities. The Commission believes it is important that
before trading in an IPO security commences, Nasdaq market makers be
provided sufficient time to determine an appropriate opening price that
accurately reflects market interest in the IPO security. Setting a more
accurate opening price for an IPO could help to reduce volatility in
those securities as trading begins.
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\11\ 15 U.S.C. 78s(b)(2).
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The Commission further believes that the availability of an
additional fifteen minute quotation-only time period is an appropriate
response to those instances where the market may be locked or crossed
at the conclusion of the first fifteen minute period. Finally, the
Commission notes that the proposal to extend the pre-trading quotation
period represents one element of Nasdaq's response to excessive
volatility, and encourages Nasdaq to continue to develop additional
proposals as part of its ongoing review of trading activity and Nasdaq
market practices.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\12\ that the proposed rule change, SR-NASD-98-98, is hereby
approved on an accelerated basis.
\12\ Id.
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-2104 Filed 1-28-99; 8:45 am]
BILLING CODE 8010-01-M
