[Federal Register Volume 62, Number 106 (Tuesday, June 3, 1997)]
[Notices]
[Pages 30363-30364]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-14413]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38678; File No. SR-NASD-97-27]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Order Granting Approval to Proposed Rule Change To
Decrease the Minimum Quotation Increment for Certain Securities Listed
and Traded on The Nasdaq Stock Market to \1/16\th of $1.00
May 27, 1997.
I. Introduction
On April 17, 1997, the National Association of Securities Dealers,
Inc. (``NASD'' or ``Association'') submitted to the Securities and
Exchange Commission (``SEC'' or ``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 to modify The Nasdaq Stock
Market's (``Nasdaq'') automated quotation system to permit Nasdaq
securities whose bid is $10 or higher to be quoted in increments as
small as one-sixteenth of a dollar.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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The proposed rule change was published for comment in the Federal
Register on April 25, 1997.\3\ After the comment period expired, the
Commission received a number of comment letters.\4\ This order approves
the proposal.
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\3\ Securities Exchange Act Release No 38531 (Apr. 21, 1997), 62
FR 20233 (Apr. 25, 1997).
\4\ As of May 22, 1997, the Commission received 111 comment
letters. These letters, as well as any others received after this
order, may be found in the Commission's Public Reference Room in
File No. SR-NASD-97-27.
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II. Description
Presently, Nasdaq's automated quotation system is configured so
that a market maker or electronic communications network (``ECN'') can
only enter a quote for a particular security in an increment of \1/8\
of $1 if the market maker's bid price in that security is equal to or
greater than $10. If a market maker's bid is less than $10, it may
enter quotes in increments of \1/32\ of $1. Nasdaq proposes to modify a
system parameter in its automated quotation system to enable market
makers and ECNs to enter quotations in sixteenths for Nasdaq securities
when their bid price is equal to or greater than $10.
Nasdaq believes allowing Nasdaq market makers and investors to
display their trading interest in these securities in sixteenths will
enhance the transparency of the Nasdaq market, provide investors with a
greater opportunity to receive better execution prices, facilitate
greater quote competition, promote the price discovery process,
contribute to narrower spreads, and enhance the capital formation
process. Moreover, Nasdaq believes the proposed rule change is wholly
consistent with, and in furtherance of, the important investor
protection goals underlying the Order Execution Rules.\5\ Customer
limit orders and orders entered into ECNs priced in sixteenths are
currently rounded to the nearest eighth for public display.\6\ The
proposal would allow all such orders to be publicly displayed at their
actual price. By displaying these orders at their actual prices, Nasdaq
believes the already substantial benefits provided by implementation of
the Order Execution rules will be commensurately increased. Nasdaq also
believes it is appropriate to reduce the minimum quotation increment
for these securities in light of the SEC's decision to modify the
phase-in schedule of the Order Execution Rules.\7\
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\5\ On August 28, 1996, the Commission adopted Rule 11Ac1-4, the
``Limit Order Display Rule,'' and amendments to Rule 11Ac1-1, the
``ECN Rule,'' to require over-the-counter (``OTC'') market makers
and exchange specialists to display certain customer limit orders,
and to publicly disseminate the best prices that the OTC market
maker or exchange specialist has placed in certain ECNs, or to
comply indirectly with the ECN Amendment by using an ECN that
furnishes the best market maker and specialist prices therein to the
public quotation system (collectively, the ``Order Execution Rules''
or the ``Rules''). See Securities Exchange Act Release No. 37619A
(Sept. 6, 1996), 61 FR 48290 (Sept. 12, 996).
\6\ In particular, orders to buy (sell) are rounded down (up) to
the nearest eighth.
\7\ See Securities Exchange Act Release No. 38490 (Apr. 9,
1997), 62 FR 18514 (Apr. 16, 1997) (announcing the revised phase-in
schedule, providing exemptive relief to accommodate the new
schedule, and providing exemptive relief from compliance with the 1%
requirement of the Quote Rule with respect to non-19c-3 securities.)
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III. Summary of Comments
As of May 22, 1997, the Commission received 111 comment letters
concerning the proposed rule change.\8\
[[Page 30364]]
All of the commenters supported the proposal. In expressing their
support, the commenters stated that reducing the minimum quotation
increment would improve market transparency by allowing a more complete
display of the buying and selling interest in the affected securities.
In general, they maintained that this would facilitate quote
competition which would reduce spreads and, in turn, provide investors
with better prices. Furthermore, they explained that this would
increase investors' confidence in the market and, thus, would encourage
greater participation and increase liquidity. Several commenters also
addressed the issue of pricing stocks in decimals.\9\
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\8\ See letters to Jonathan G. Katz, Secretary, SEC, from Daniel
J. Balber, dated May 12, 1997, Stephen S. Baldente, undated, Adam
Bandel, undated, Laurence Bag, undated, Sayan Bhattacharyya, dated
May 14, 1997, Jessica Brooks, dated May 16, 1997, Michael Broudo,
dated May 14, 1997, John Bucci, dated May 15, 1997, David M. Burns,
dated May 16, 1997, Matthew H. Carlson, dated May 12, 1997, Cornel
Catrrina, dated May 14, 1997, Donald Cherry, dated May 12, 1997,
Mark Chin, dated May 13, 1997, Robert Chung, dated May 15, 1997,
Charles Cianfrani Jr., dated May 12, 1997, Richard D. Connell,
undated, Henry Davar, dated May 15, 1997, Michael Di Domenico, dated
May 15, 1997, Omar Divina, dated May 13, 1997, Patrick G. Dolan,
dated May 13, 1997, Michael Eisner, dated May 12, 1997, David
Filibertro, undated, Douglas Y. Finn, dated May 16, 1997, Campbell
Foster, undated, James W. Frame, undated, Aaron Francis, dated May
12, 1997, Louis C. Galli, dated May 14, 1997, John Geisler, dated
May 13, 1997, Nicolas Gentin, dated May 10, 1997, James R. Gibbs,
dated May 12, 1997, Michael S. Gleeson, dated May 16, 1997, Jason B.
Gold, dated May 11, 1997, J. Michael Gostigan, dated May 14, 1997,
Kurt J. Hellmers, dated May 16, 1997, Anthony J. Hernandez, dated
May 14, 1997, Bryan Hollander, undated, Hirokazu Iwasa, dated May
14, 1997, Greg Honan, dated May 14, 1997, Patrick Hsieh, dated May
13, 1997, Scott S. Ignall, undated, Marina Kaneti, dated May 10,
1997, Matthew Kansler, dated May 13, 1997, Andrew Kashdan, undated,
Gene Keyser, dated May 12, 1997, Devon B. Kitchens, dated May 13,
1997, Jason Klarreich, dated May 15, 1997, Michael D. Klug, dated
May 16, 1997, Stephen M. Kovacs, dated May 14, 1997, Seth C. Koppel,
dated May 13, 1997, David D. Kuang, dated May 13, 1997, Gabriel
Levin, dated May 9, 1997, Eben Light, undated, Robert Lindauer,
undated, Louis Liu, undated, Jamie Maltese, undated, Andrew A.
Mancuso III, dated May 15, 1997, Daniel Mandell, dated May 16, 1997,
Richard Marble, undated, James Maroney, dated May 14, 1997, John F.
McEnroe III, dated May 15, 1997, Gordon McDonald, dated May 14,
1997, Kevin McGrory, dated May 13, 1997, John P. McMullan, dated May
12, 1997, Robert Meurer, dated May 13, 1997, Winston Meyer, dated
March 11, 1997, Jeffrey L. Miller, undated, Marcus Motroni, undated,
Kenneth Nadan, dated April 24, 1997, Paul Naden, dated April 24,
1997, Seth Nemeroff, dated May 13, 1997, Michael O'Buachalla, dated
April [sic] 17, 1997, Michael O'Reilly, dated May 15, 1997, Randall
Oser, dated May 12, 1997, Christopher M. Owens, dated May 13, 1997,
M. Yousuf Paracha, dated May 13, 1997, Tausif Paracha, undated, John
Parente, undated, Mike Parsons, dated May 12, 1997, Ilian P. Petrov,
dated May 13, 1997, Antonio J. Cecin, Managing Director and Director
of Equity Trading, Piper Jaffray, Inc., dated May 16, 1997, Dario J.
Pompeo, undated, Reid Richman, undated, Joel Rebhun, undated, Marcie
D. Rebhun, undated, Tami Beth Rock, dated May 12, 1997, Noah
Roffman, dated May 18, 1997, Jason Rosen, dated May 12, 1997, David
G. Rosenberg, dated May 14, 1997, Paul R. Rudd, dated May 15, 1997,
Shahriar Saadullah, dated May 13, 1997, Kevin J. Sanbeg, dated May
12, 1997, Patrick S. Schultz, dated May 10, 1997, Cary S. Segall,
dated May 16, 1997, Gil Shapiro, dated May 12, 1997, Hiro Shinohara,
dated May 12, 1997, Daniel Sherwood, dated May 11, 1997, Joseph
Socolof, dated May 13, 1997, Drew Sohn, dated May 15, 1997, Alphonse
Soued, dated May 15, 1997, Feral Talib, undated, Mark Tashea, dated
May 13, 1997, Howard Teitelman, dated May 10, 1997, Alexis
Theofilactidis, dated May 12, 1997, Michael E. Tobin, undated, Nancy
Tom, dated May 15, 1997, Tai Truong, dated May 13, 1997, Abbott
Wang, dated May 16, 1997, Oliver Wang, dated May 13, 1997, Alan
Weber, dated May 14, 1997, Timothy Whelan, dated May 12, 1997,
Timothy J. Wilson, dated May 15, 1997.
\9\See letters to Jonathan G. Katz, Secretary, SEC, from Sayan
Bhattacharyya, dated May 14, 1997 (stating that decimalization is a
very good idea), Robert Chung, dated May 15, 1997 (encouraging the
SEC to study the feasibility of a decimal pricing system), Michael
S. Gleeson, dated May 16, 1997 (recommending the use of decimals as
a means to add further transparency and liquidity to the market),
Hirokazu Iwasa, dated May 14, 1997 (encouraging Nasdaq to adopt
decimals), Andrew Kashdan, undated (awaiting consideration of
decimal quotes to further increase efficiency), Eben Light, undated
(anticipating the NASD's study), Richard Marble, undated (supporting
the idea of decimalization), Winston Meyer, dated March 11, 1997
(stating that decimals should vastly improve the pricing mechanism),
Paul Naden, dated April 24, 1997 (supporting decimalization of stock
prices), Michael O'Buachalla, dated April [sic] 17, 1997 (same), M.
Yousuf Paracha, dated May 13, 1997 (categorizing the proposal as an
intermediate step towards trading in decimals), Shahriar Saadullah,
dated May 13, 1997 (encouraging the NASD to pursue the idea of
decimal pricing), Cary S. Segall, dated May 16, 1997 (categorizing
the proposal as an intermediate step towards trading in decimals),
Gil Shapiro, dated May 12, 1997 (same), Alexis Theofilactidis, dated
May 12, 1997 (encouraging a further move to a decimal pricing
system), Michael E. Tobin, undated (categorizing the proposal as the
first step towards the ultimate goal of decimalization), Timothy
Whelan, dated May 12, 1997 (encouraging the adoption of decimals).
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IV. Discussion
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 and, in
particular, with Sections 11A and 15A of the Act.\10\
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\10\ 15 U.S.C. Secs. 78k-1, 78o-3
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The Commission believes the quality of the market for the affected
Nasdaq securities \11\ will likely be enhanced by allowing a minimum
quotation increment of a sixteenth, rather than an eighth.\12\
Decreasing the minimum quotation increment should help to produce more
accurate pricing of such securities and can result in tighter
quotations. In addition, if the quoted markets are improved by reducing
the minimum quotation increment, the change could result in added
benefits to the market such as reduced transaction costs.\13\
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\11\ Nasdaq noted in its proposal that, as of March 31, 1997,
there were 2,714 Nasdaq securities (43.2% of all Nasdaq securities)
priced equal to or greater than $10. These securities represent 90%
of the capitalization of the Nasdaq market and 68.6% of the share
volume in Nasdaq. Nasdaq also noted that 98.7% of all trades in
Nasdaq securities priced equal to or greater than $10 occur in
increments equal to or greater than a sixteenth and 98.5% of all
share volume in such securities occurs in increments equal to or
larger than sixteenth.
\12\ A study that analyzed the reduction in the minimum tick
size from \1/8\ to \1/16\ for securities listed on the American
Stock Exchange priced between $1.00 and $5.00 found that, in
general, the spreads for those securities decreased significantly
while trading activity and market depth was relatively unaffected.
See Hee-Joon Ahn, Charles Q. Chao, and Hyuk Choe, Tick Size, Spread,
and Volume, 5 J. Fin Intermediation 2 (1996).
\13\ The rule change is consistent with the recommendation of
the Division of Market Regulation (``Division'') in its Market 2000
Study, in which the Division noted that the \1/8\ minimum variation
can cause artificially wide spreads and hinder quote competition by
preventing offers to buy or sell at prices inside the prevailing
quote. See SEC, Division of Market Regulation, Market 2000: An
Examination of Current Equity Market Developments 18-19 (Jan. 1994).
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Furthermore, this change in the minimum increment will compliment
the Order Execution Rules.\14\ Currently, customer limit orders and
orders entered into ECNs priced in sixteenths are rounded to the
nearest eight for public display.\15\ The proposed change will allow
such orders to be publicly displayed at their actual price, thus
allowing a more complete display of the buying and selling interest in
Nasdaq securities, giving these orders greater visibility, and
facilitating quote competition. Moreover, the enhanced transparency
will improve access to the best available prices.
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\14\ See supra note 5.
\15\ In particular, orders to buy (sell) are rounded down (up)
to the nearest eight.
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\16\ that the proposed rule change (SR-NASD-97-27) is approved.
\16\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-14413 Filed 6-2-97; 8:45 am]
BILLING CODE 8010-01-M
