[Federal Register Volume 62, Number 170 (Wednesday, September 3, 1997)]
[Notices]
[Pages 46535-46537]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-23342]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38975; File No. SR-NASD-97-59]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by National Association of Securities Dealers, Inc. Relating to
the Short Sale Rule
August 26, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 \2\ thereunder, notice is hereby given
that on August 14, 1997, the National Association of Securities
Dealers, Inc. (``NASD'' or ``Association'') filed with the Securities
and Exchange Commission (``Commission'' or ``SEC'') the proposed rule
change as described in Items I, II, and III below, which Items have
been prepared by the NASD. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. Sec. 78s(b)(1)(1994).
\2\ 17 CFR 240.19b-4(1997).
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[[Page 46536]]
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The NASD is proposing to amend Rule IM-3350 to provide that a
``legal'' short sale must be effected at a price equal to or greater
than the offer price when the inside spread is less than \1/16\. Below
is the text of the proposed rule change. Proposed new language is in
italics; proposed deletions are in brackets.
IM-3350 Short Sale Rule
(a) No Change.
(b)(1) Rule 3350 requires that no member shall effect a short sale
for the account of a customer or for its own account in a Nasdaq
National Market security at or below the current best (inside) bid when
the current best (inside) bid as displayed by The Nasdaq Stock Market
is below the preceding best (inside) bid in the security. The
Association has determined that in order to effect a ``legal'' short
sale when the current best bid is lower than the preceding best bid the
short sale must be executed at a price of at least \1/16\ point above
the current inside bid when the current inside spread is \1/16\ point
or greater. The last sale report for such a trade would, therefore, be
above the inside bid by at least \1/16\ of a point. If the current
spread is less than \1/16\ of a point, however, the short sale must be
executed at a price equal to or greater than the current inside offer
price.
(2) Moreover, the Association believes that requiring short sales
to be a minimum increment of \1/16\ point above the bid when the
current spread is \1/16\ or greater and equal to or greater than the
offer when the current spread is less than \1/16\ ensures that
transactions are not effected at prices inconsistent with the
underlying purpose of the Rule. It would be inconsistent with Rule 3350
for a member or customer to cause the inside spread for an issue to
narrow when the current best bid is lower than the preceding best bid
(e.g., lowering its offer to create an inside spread less than \1/16\)
for the purpose of facilitating the execution of a short sale at a
price less than \1/16\ above the inside bid.
II. Self-Regulatory Organization's Statement of the Purpose of and
Statutory Basis for the Proposed Rule Change
In its filing with the Commission, the NASD 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. The NASD has prepared summaries, set forth in sections
A, B and C below, of the most significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for the Proposed Rule Change
The NASD's short sale rule \3\ prohibits member firms from
effecting short sales \4\ at or below the current bid as disseminated
by Nasdaq whenever that bid is lower than the previous inside bid.\5\
The rule currently provides that a short sale is a ``legal'' short sale
in a ``down'' bid situation if it is effected at a price at least \1/
16\ above the inside bid (``Minimum Increment Rule''). The Minimum
Increment Rule was implemented to ensure that short sales were not
effected at prices so close to the inside bid during down markets that
the short sales were inconsistent with the underlying purposes of the
short sale rule (i.e. to prohibit market destabilizing and abusive
short sales in declining markets).
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\3\ The short sale rule was originally adopted in June of 1994
for Nasdaq National Market securities on a pilot basis with a
termination date of March 5, 1996. Securities Exchange Act Release
No. 34277 (June 29, 1994), 59 FR 34885 (July 7, 1994) [File No. SR-
NASD-92-12]. The pilot was subsequently extended through October 1,
1997. Securities Exchange Act Release No. 37917 (November 1, 1996),
61 FR 57934 (November 8, 1996) [File No. SR-NASD-96-41]; See also
Securities Exchange Act Release No. 36171 (August 30, 1995), 60 FR
46651 (September 7, 1995) [File No. SR-NASD-95-35]; Securities
Exchange Act Release No. 37492 (July 29, 1996), 61 FR 40693 (August
5, 1996) [File No. SR-NASD-96-30]; Securities Exchange Act Release
No. 37917 (November 1, 1996), 61 FR 57934 (November 8, 1996) [File
No. SR-NASD-96-41]. On August 8, 1997, the NASD submitted a proposed
rule change (SR-NASD-97-58) to the Commission to implement the short
sale rule on a permanent basis.
\4\ A short sale is a sale of a security which the seller does
not own or any sale which is consummated by the delivery of a
security borrowed by, or for the account of, the seller. To
determine whether a sale is a short sale, members must adhere to the
definition of a ``short sale'' contained in Securities Exchange Act
Rule 3b-3, 17 CFR 240.3b-3, which rule is incorporated into Nasdaq's
short sale rule as NASD Rule 3350(k)(1).
\5\ Nasdaq calculates the inside bid or best bid from all market
makers in the security (including bids on behalf of exchanges
trading Nasdaq securities on an unlisted trading privileges basis),
and disseminates symbols to denote whether the current inside bid is
an ``up bid'' or a ``down bid.'' Specifically, an ``up bid'' is
denoted by a green ``up'' arrow and ``down bid'' is denoted by a red
``down'' arrow. Accordingly, absent an exemption from the rule, a
member cannot effect a short sale at or below the inside bid for a
security in its proprietary account or a customer's account if there
is a red arrow next to the security's symbol on the screen.
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Now that all Nasdaq stocks can potentially trade with a \1/16\
spread or less, due to, among other things, the new SEC Order Handling
Rules, and in light of the movement toward smaller minimum quotation
variations generally, consideration was given to modifying the Minimum
Increment Rule for stocks with an inside spread less than \1/16\.
Accordingly, the NASD is proposing an amendment to the Minimum
Increment Rule to provide that a ``legal'' short sale must be effected
at a price equal to or greater than the offer price when the inside
spread is less than \1/16\. There would be no change to the current
definition for stocks with a spread of \1/16\ or greater. For example,
if the inside market for ABCD is 10\1/14\-10\5/16\, a legal short sale
in a down market would have to be effected at a price to or greater
than 10\5/16\ (i.e., \1/16\ above the current inside bid). However, if
the inside market is 5\1/32\-5\2/32\, a legal short sale in a down
market could be effected at a price equal to the inside offer 5\2/32\.
In addition, to help ensure that market participants do not adjust
their quotations to circumvent the short sale rule, the NASD is
proposing an amendment to the Minimum Increment Rule to provide that a
market maker or customer could not bring about or cause the inside
spread for a stock to narrow in a declining market (e.g., lowering its
offer to create an inside spread less than \1/16\) for the purpose of
facilitating the execution of a short sale at a price less than \1/16\
above the inside bid.
The NASD believes that the proposed rule change is consistent with
the provisions of Section 15A(b)(6) of the Act.\6\ Section 15A(b)(6)
requires that the rules of a national securities association be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, and to remove impediments to and perfect
the mechanism of a free and open market. Given the existence of the
short sale rule, the proposed rule change is necessary to preserve the
short sale rule's underlying purpose and effect when the inside spread
is less than \1/16\.
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\6\ 15 U.S.C. Sec. 78o(b)(6) (1994).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The NASD 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, as amended.
[[Page 46537]]
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the NASD consents, the Commission will:
(A) By order approve such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. People 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 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. Sec. 552, will be available for inspection and copying in
the Commission's Public Reference Room. Copies of the filing will also
be available for inspection and copying at the NASD's principal
offices. All submissions should refer to File No. SR-NASD-97-59 and
should be submitted by September 24, 1997.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\7\
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\7\ 17 CFR 200.30-3(a)(12) (1997).
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[FR Doc. 97-23342 Filed 9-2-97; 8:45 am]
BILLING CODE 8010-01-M
