E5-1913. Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Regarding the Nasdaq Opening Process for Nasdaq-Listed Stocks

April 11, 2005.

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 April 11, 2005, 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”) the proposed rule change as described in Items I are II below, which Items have been prepared by Nasdaq. Nasdaq has designated the proposed rule change as “non-controversial” under Section 19(b)(3)(A) of the Act ^[3] and Rule 19b-4(f)(6) thereunder,^[4] which renders the proposed rule change effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

Nasdaq is filing a proposed rule change to begin the pre-market trading session on a voluntary basis at 8 a.m. rather than 9:25 a.m. The text of the proposed rule change is set forth below. Proposed new language is in italics; proposed deletions are in [brackets].^[5]

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4701. Definitions

(a)—(rr) No Change.

(ss) The term “Total Day” or “X Order” shall mean, (a) For orders in ITS Securities so designated, that if after entry into the Nasdaq Market Center, the order is not fully executed, the order (or unexecuted portion thereof) shall remain available for potential display between 7:30 a.m. and 6:30 p.m. and for potential execution between market open (9:30 a.m.) and 6:30 p.m., after which it shall be returned to the entering party.

(b) For orders in Nasdaq-listed securities so designated, that if after entry into the Nasdaq Market Center, the order is not fully executed, the order (or unexecuted portion thereof) shall remain available for potential display between 7:30 a.m. and 4 p.m. and for execution between [9:25] 8 a.m. and 4 p.m., after which it shall be returned to the entering party. [X Orders entered prior to 9:25 a.m. will be rejected back to the entering party.]

(tt) No Change.

(uu) The term “Total Immediate or Cancel” or “IOX Order” shall mean,

(a) For limit orders in ITS Securities so designated, that if after entry into the Nasdaq Market Center a marketable limit order (or unexecuted portion thereof) becomes non-marketable, the order (or unexecuted portion thereof) shall be canceled and returned to the entering participant. Such orders are available for potential execution between 9:30 a.m. and 6:30 p.m.

(b) For limit orders in Nasdaq-listed securities so designated, that if after entry into the Nasdaq Market Center a marketable limit order (or unexecuted portion thereof) becomes non-marketable, the order (or unexecuted portion thereof) shall be canceled and returned to the entering participant. Such orders may be entered and are available for potential execution between [9:25] 8 a.m. and 4 p.m.

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4704. Opening Process for Nasdaq-Listed Securities

(a) No Change.

(b) Trading Prior To Normal Market Hours. The system shall [open] process all eligible Quotes/Orders in Nasdaq-listed securities at [9:25] 8 a.m. in the following manner to prevent the creation of locked/crossed markets.

(1) At [9:25] 8 a.m., the system shall open in time priority all eligible Quotes as stated in paragraph (5) below and all eligible Orders in accordance with Rule 4701(ss) and (uu) [in time priority]. Quotes/Orders whose limit price [does] would not lock or cross the book shall be added to the book in strict time priority. Quotes/Orders whose limit price would lock or cross the book shall be placed in an “In Queue” state except as provided in paragraph (4).

(2) Next, the system shall begin processing the In Queue Quotes/Orders in strict time priority against the best bid (ask) if the In Queue Quote/O[o]rder is a sell (buy) order. If an In Queue Quote/Order is not executable when it is next in time for execution, the system shall automatically add that Quote/Order to the book.

(3) Once the process set forth in subparagraphs (1)-(2) is complete, the system shall begin processing Quotes and X and IOX Orders in accordance with their entry parameters.

(4) Between 8 a.m. and 9:25 a.m., the system shall open Quotes in accordance with the entry parameters set by each Nasdaq Quoting Market Participant provided that Quotes that would lock/cross the market will be rejected or executed in accordance with the Nasdaq Quoting Market Participant's instructions. At 9:25 a.m., the system shall open all remaining unopened Quotes in accordance with each firm's instructions.

(5) Nasdaq Quoting Market Participants may instruct Nasdaq to open their Quotes as follows:

(A) At the last price and size entered by the participant during the previous trading day, either including or excluding reserve size;

(B) At a price and size entered by the participant between 7:30 a.m. and 9:24:59 a.m.; or

(C) At the quotation limits for Nasdaq systems, currently $.01 (bid) and $2,000 (ask).

([4]6) All trades executed prior to 9:30 shall be automatically appended with the “.T” modifier.

([5]7) Notwithstanding subparagraphs (1) through (5), if a Nasdaq Quoting Market Participant has entered a Locking/Crossing Quote/Order into the system that would become subject to the automated processing described above, the system shall, before sending the order to any other Quoting Market Participant or Order Entry Firm, first attempt to match off the order against the locking/crossing Nasdaq Quoting Market Participant's own Quote/Order if that participant's Quote/Order is at the highest bid or lowest offer, as appropriate. A Nasdaq Quoting Market Participant may avoid this automatic matching through the use of anti-internalization qualifier as set forth in Rule 4710(b)(1)(B)(ii)(a). Order Entry Firms that enter locking/crossing Quotes/Orders shall have those Quotes/Orders processed as set forth in subparagraphs (1) through ([4]3), unless they voluntarily select a “Y” AIQ Value as provided for in Rule 4710(b)(1)(B)(ii)(a).

(c)-(d) No Change.

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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 IV 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

Nasdaq proposes to make available on a voluntary basis a pre-market trading session of the execution service of the Nasdaq Market Center at 8 a.m. rather than at 9:25 a.m. As described below, Nasdaq would open the trading session at 8 a.m. using the unlocking/uncrossing process that it currently uses at 9:25 a.m. All extended hours orders and all quotations so designated by a Quoting Market Participant would be eligible for execution during the pre-market trading session and quotations and orders would participate precisely as they do today. Trades that occur before 9:30 a.m. would continue to receive a trade report modifier denoting execution during extended trading hours, as they do today.

As it does today, Nasdaq would begin the voluntary pre-market trading session at 7:30 a.m. by making the system available for displaying quotations and orders but not for execution. As they do today, firms would continue to have three options for determining the price at which their carryover quotes would be opened at 9:25: (1) The last quotation price entered during the previous day; (2) the last quotation price the firm enters after 7:30 a.m. and before 9:25 a.m.; or (3) the quote limits for Nasdaq, currently $.01 (bid) and $2,000 (ask).

Beginning at 7:30 a.m. until 8 a.m., Nasdaq would display all quotations and eligible orders remaining in the system from the previous night. Market participants would have the ability to update their quotes beginning at 7:30 a.m. and to instruct Nasdaq regarding the display of that updated quote. For example, a market participant would be able, at any time after 7:30 a.m., to enter a quote update and to instruct Nasdaq to open that quote immediately. If the update were to be received before 8 a.m., the quotation would be opened and executable when the execution functionality became available at 8 a.m. If the quote open update were to be received between 8 a.m. and 9:25 a.m. the quote would be opened upon the receipt of the quote update. At 9:25 a.m. all quotations would be made available for automatic executions.

Also at 7:30 a.m., market participants would be able to begin voluntarily submitting extended and regular hours orders. To facilitate orderly trading beginning at 8 a.m., Nasdaq would make Total Day Orders (“X Orders”), as described in Rule 4701(ss), and Total Immediate or Cancel (“IOX Orders”), as described in Rule 4701(uu), available for execution at 8 a.m. rather than at 9:25 a.m. Extended hours orders would receive a time stamp for purposes of determining time priority and would be displayed but not executed.

At 8 a.m., Nasdaq would open the execution functionality of the Nasdaq Market Center. In preparation for that opening, Nasdaq would construct an unlocked inside in each security by applying the unlocking/uncrossing process described in Rule 4704(b), which it currently applies at 9:25 a.m. In that process, Nasdaq would clear the existing quotation display and “wake up” the quotations of market participants that have instructed Nasdaq to open their quotations between 7:30 a.m. and 8 a.m. Quotations that have not been opened between 7:30 a.m. and 8 a.m. would not be displayed and would not participate in the 8 a.m. opening process. Participating quotations would be processed in order of time priority and placed on the Nasdaq book, provided, however, that quotations that would lock or cross the market would be rejected. Immediately upon completion of the 8 a.m. unlocking/uncrossing process, all quotations that have been opened voluntarily and all eligible orders that have been submitted voluntarily would be subject to automatic execution.

At 9:25 a.m., Nasdaq would “wake up” all remaining un-opened quotations and introduce them to the Nasdaq book as it does today. A quotation might remain unopened at 9:25 a.m. in two circumstances: If a market participant has entered a quotation update but has not instructed Nasdaq to open the quotation or if the participant has entered no update at all. In the first case, at 9:25 a.m., Nasdaq would open the quotation at the price and size specified by the participant. In the second case, Nasdaq would open the quotation based on the participant's instructions. Quotations that would lock or cross the inside would automatically be rejected.

It is important to note that the parameters governing the entry of Market-on-Open and Opening Imbalance Only Orders, as well as all parameters governing the Nasdaq Opening Cross would remain the same as today, including dissemination of Opening Cross information and the processing of the Opening Cross itself.

Nasdaq believes that these changes are consistent with the Act and would improve the fairness and orderliness of Nasdaq's pre-open trading environment. Having quotes opened voluntarily and executable upon entry would improve the accuracy of Nasdaq's pre-market trading data. Today, because quotations are not executable, the market can appear locked or crossed during the pre-market session. In addition, Nasdaq believes that making quotations and orders available for execution would improve both the transparency and price discovery provided by those quotations and orders. Nasdaq further notes that several other market centers are open for pre-market trading at this time and therefore Nasdaq's proposal would enhance competition for quotation and execution services.

2. Statutory Basis

Nasdaq believes that the proposed rule change is consistent with the provisions of Section 15A of the Act,^[6] in general, and with Section 15A(b)(6) of the Act,^[7] in particular, in that Section 15A(b)(6) requires that the NASD's rules be designed to protect investors and the public interest. Nasdaq believes that its current proposal is consistent with the NASD's obligations under these provisions of the Act because it would extend fair and orderly trading of Nasdaq stocks on Nasdaq during an increasingly active period of the trading day, prevent the occurrence of locked and crossed markets before the start of normal market hours, and preserve price discovery and transparency that is vital to an effective opening of trading.

B. Self-Regulatory Organization's Statement on Burden on Competition

Nasdaq does not believe that the proposed rule change would 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 neither solicited nor received written comments with respect to the proposed rule change.

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

Because the foregoing proposed rule change does not:

(i) Significantly affect the protection of investors or the public interest;

(ii) Impose any significant burden on competition; and

(iii) Become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, if consistent with the protection of investors and the public interest, it has become effective pursuant to Section 19(b)(3)(A) of the Act ^[8] and Rule 19b-4(f)(6) thereunder.^[9] Nasdaq has requested that the Commission waive the 30-day operative delay for “non-controversial” proposals, based upon a representation that the proposal is of the utmost importance to the fair and orderly operation of The Nasdaq Stock Market during the pre-opening trading period. The Commission believes that waiver of the 30-day operative delay is consistent with the protection of investors and the public interest because it would allow Nasdaq immediately to implement the proposed rule change which should improve transparency in the pre-opening trading period. For this reason, the Commission designates the proposal to be effective and operative upon filing with the Commission.^[10]

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 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 [e-mail]. Please include File Number SR-NASD-2005-050 on the subject line.

Paper Comments

• Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609.

All submissions should refer to File Number SR-NASD-2005-050. 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. Copies of such filing also will be available for inspection and copying at the principal office of the NASD. 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-NASD-2005-050 and should be submitted on or before May 13, 2005.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.^[11]

Jill M. Peterson,

Assistant Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  17 CFR 240.19b-4.

3.  15 U.S.C. 78s(b)(3)(A).

4.  17 CFR 240.19b-4(f)(6).

5.  The proposed rule change is marked to show changes from the rule tet appearing in the NASD Manual available at http://www.nasd.com.

6.  15 U.S.C. 78 o-3.

7.  15 U.S.C. 78 o-3(b)(6).

8.   15 U.S.C. 78s(b)(3)(A).

9.   17 CFR 240.19b-4(f)(6). The Commission notes that Nasdaq provided written notice of its intent to file the proposed rule change, along with a brief description and text of the proposed rule change at least five business days prior to the date of filing of the proposed rule change.

10.   For purposes only of waiving the 30-day operative delay of the proposed rule change, the Commission considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

11.  17 CFR 200.30-3(a)(12).