01-5249. Self-Regulatory Organizations; Order Granting Accelerated Approval of Proposed Rule Change by the National Association of Securities Dealers, Inc. Requiring Conversion to Decimals of Open Fractional Orders in Nasdaq Securities

February 26, 2001.

I. Introduction

On January 29, 2001, the National Association of Securities Dealers, Inc. (“NASD”), through its subsidiary, the Nasdaq Stock Market, Inc. (“Nasdaq”), filed with the Securities and Exchange Commission (“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 that would require all open orders priced in fractions in NASD member firms' systems on the evening before that security is to commence quoting in decimals to be converted to decimals. Notice of the proposed rule change appeared in the Federal Register on February 6, 2001.^[3] The Commission received no comments on the proposed rule change. This order grants accelerated approval of the proposed rule change.

II. Description of the Proposal

Pursuant to the Decimals Implementation Plan for the Equities and Options Markets (“Implementation Plan”), which was submitted to the Commission on July 24, 2000, the NASD is to fully convert the Nasdaq market to decimal pricing no later than April 9, 2001. Before full implementation, Nasdaq will begin a decimal pricing pilot program for 10-15 Nasdaq issues on March 12, 2001, and add a second decimal phase-in of approximately 100+ additional Nasdaq securities on March 26, 2001.

Nasdaq's proposal would adopt a mandatory conversion rule for all open orders in Nasdaq securities that are priced in fractions and reside in the internal systems of NASD member firms on the evening prior to the first day a particular security commences quoting in decimals. Under the proposal, all open orders, including those with price qualifiers such as “Do Not Reduce” (“DNR”) and “Do Not Increase” (“DNI”), priced in fractions that reside in a firm's internal system on the evening before the start of decimal pricing, will be converted as follows: (1) The price of all open Buy Orders (including “Good-til-Canceled” (“GTC”), “Good-til-Executed” (“GTX”), and Buy Stop and Buy Stop Limits) priced in fractions will be converted to their decimal equivalent and “rounded down” to the nearest $0.01; and (2) the price of all open Sell Orders (GTC, GTX, Sell Stop and Sell Stop Limits) priced in fractions will be converted to their decimal equivalent and “rounded up” to the nearest $0.01. Examples of fractional buy and sell conversions were provided in the notice for SR-NASD-01-10.^[4]

Under the proposal, market participants would be free to accept decimal-priced orders for any number of values beyond the decimal point as they deem appropriate after the conversion to decimals. Nasdaq will continue to require that firms round orders to two decimal places before submitting them to Nasdaq for display in the quote montage. Likewise, the Automated Confirmation Transaction Service (“ACT”) will only accept trade reports up to six places beyond the decimal point and disseminate decimal priced transaction reports to four decimal points to the tape.

III. Discussion

The Commission has reviewed carefully the proposed rule change, and finds that it is consistent with the Act and the rules and regulations promulgated thereunder.^[5] Specifically, the Commission finds that approval of the proposed rule change is consistent with section 15A(b)(6) ^[6] of the Act, in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and 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 Commission believes that uniform open fractional order conversion methodology may aid in structuring an orderly transition from fractional to decimal pricing. The Commission finds that Nasdaq's proposal is narrowly tailored to require only the conversion of open fractional orders that reside in the internal systems of NASD member firms on the evening prior to the first day a particular security commences quoting in decimals. After the conversion, market participants will be free to accept orders priced in decimals for any number of values beyond the decimal point. The Commission believes Nasdaq's approach is reasonable, and that requiring such conversion may help to reduce investor confusion, reduce discrepancies in reconciliation, and in general, provide for a more orderly transition to decimal pricing.

The Commission finds good cause for approving the proposed rule change prior to the 30th date after the date of publication of notice of the filing in the Federal Register. Notice of the proposal indicated that the Commission would consider granting accelerated approval of the proposed rule change after a 15-day comment period.^[7] The Commission received no comments on the proposal. Given the absence of comments, and Nasdaq's resolve to begin decimal pricing in certain Nasdaq securities on March 12, 2001, the Commission finds good cause to approve the proposal on an accelerated basis to ensure adequate notice of the rule in advance of March 12, 2001.

IV. Conclusion

For the above reasons, the Commission finds that the proposed rule change is consistent with the provisions of the Act, in general, and with section 15A(b)(6),^[8] in particular.

It is Therefore Ordered, pursuant to section 19(b)(2) of the Act,^[9] that the proposed rule change (SR-NASD-01-10), be and hereby is approved.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.^[10]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  17 CFR 240.19b-4.

3.  See Securities Exchange Act Release No. 43906 (January 30, 2001), 66 FR 9115 (February 6, 2001).

4.  Securities Exchange Act Release No. 43906 (January 30, 2001), 66 FR 9115 (February 6, 2001).

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

6.  15 U.S.C. 78o-3(b)(6).

7.  See Securities Exchange Act Release No. 43906 (January 30, 2001), 66 FR 9115 (February 6, 2001).

8.  15 U.S.C. 78o-3(b)(6)

9.  15 U.S.C. 78s(b)(2).

10.  17 CFR 200.30-3(a)(12).