[Federal Register: December 29, 2005 (Volume 70, Number 249)]
[Notices]
[Page 77225-77228]
[DOCID:fr29de05-111]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53017; File No. SR-NASD-2005-150]

Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed
Rule Change To Modify Nasdaq's Minimum Pricing Increment Rules

December 22, 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 December 22, 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, II,
and III below, which Items have been prepared by Nasdaq. Nasdaq filed
this proposal pursuant to section 19(b)(3)(A) of the Act \3\ and Rule
19b-4(f)(6) thereunder,\4\ therefore making the proposed rule change
effective immediately upon filing. Nasdaq intends for this rule change
to become operative on January 31, 2006. 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. 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).
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change

    Nasdaq proposes to modify NASD Rules 4613, 4701, 4710, 4901, 4904,
and 6330 to align Nasdaq's rules on minimum pricing increments with the
corresponding provisions in the Commission's Regulation NMS.
    The text of the proposed rule change is below. Proposed new
language is in italics; proposed deletions are in brackets.
* * * * *

4613. Character of Quotations

    (a) Quotation Requirements and Obligations
    (1) Two-Sided Quote Obligation. For each security in which a
member is registered as a market maker, the member shall be willing
to buy and sell such security for its own account on a continuous
basis and shall enter and maintain a two-sided quotation
(``Principal Quote''), which is attributed to the market maker by a
special maker participant identifier (``MPID'') and is displayed in
the Nasdaq Quotation Montage at all times, subject to the procedures
for excused withdrawal set forth in Rule 4619.
    (A) No change
    (B) Minimum Price Variation [for Decimal-based Quotations]--The
minimum quotation increment for Nasdaq National Market and Capital
Market securities [authorized for decimal pricing] shall be $0.01
for quotations priced at or above $1.00 per share and $0.0001 for
quotations priced below $1.00 per share; provided, however, that if
the Securities and Exchange Commission (``SEC'') permits, with
respect to any security, the display, rank or acceptance of
quotations priced at or above $1.00 per share in an increment
smaller than $0.01, then the minimum quotation increment for such a
security shall be the minimum permitted by the SEC or $0.0001,
whichever is greater. Quotations failing to meet this standard shall
be rejected.
    (2) and (3) No change
    (b) through (e) No change
    * * *

4701. Definitions

    Unless stated otherwise, the terms described below shall have
the following meaning:
    (a) through (ll) No change
    (mm) The term ``Pegged'' shall mean, for priced limit orders so
designated, that after entry into the Nasdaq Market Center, the
price of the order is automatically adjusted by the Nasdaq Market
Center in response to changes in either the Nasdaq Market Center
inside bid or offer or the national best bid or offer, as
appropriate. A Nasdaq Market Center Participant may enter either a
Regular Pegged Order or a Reverse Pegged Order.
    A Nasdaq Market Center Participant entering a Regular Pegged
Order may specify that the price of the order will deviate from
either the Nasdaq inside quote on the same side of the market or the
national best bid or offer on the same side of the market by an
offset amount of $0 to $0.99. A Nasdaq Market Center Participant
entering a Reverse Pegged Order may specify that the price of the
order will deviate from either the Nasdaq inside quote on the contra
side of the market or the national best bid or offer on the contra
side of the market by an offset amount of $0.01 to $0.99. The market
participant entering a Pegged Order may (but is not required to)
specify a cap price, to define a price at which pegging of the order
will stop and the order will be permanently converted into an
unpegged limit order. Pegged Orders shall not be available for ITS
Securities. Pegged orders shall not be eligible for routing as set
out in Rule 4714. Offset amounts for Pegged Orders are priced in
$0.01 increments. However, if at any time an offset amount specified
by a Nasdaq Market Center Participant does not result in an offer or
a bid that is fully compliant with the minimum price variation
provisions of Rule 4613, then, for an offer, the applicable offset
amount will be the smallest amount that results in a compliant order
and is greater than the specified offset amount, and, for a bid, the
applicable offset amount will be the largest amount that results in
a compliant order and is smaller than the specified offset amount.
    (nn) The term ``Discretionary'' shall mean,

    (1) for priced limit orders in Nasdaq listed securities so
designated, an order that when entered into the Nasdaq Market Center
has both a displayed bid or offer price, as well as a non-displayed
discretionary price range in which the participant is also willing
to buy or sell, if necessary. The displayed price may be fixed or
may be pegged to deviate from the Nasdaq inside quote or the
national best bid or offer on the same side of the market by an
offset amount of $0 to $0.99. The pegging of the Discretionary Order
may be capped in the same manner as that of a Pegged Order. The
discretionary price range of a Discretionary Order that is pegged
will be adjusted to follow the pegged displayed price. Discretionary
price ranges (and offset amounts, if any) for Discretionary Orders
are priced in $0.01 increments. Compliance with the minimum price
variation provisions of Rule 4613 in connection with range
adjustments and pegging in Discretionary Orders will be ensured in
the same manner as for Pegged Orders. Discretionary Orders for
Nasdaq listed securities shall be eligible for routing as set out in
Rule 4714.
    (2) No change
    (oo) through (vv) No change
    * * *

4710. Participant Obligations in the Nasdaq Market Center

    (a) No change
    (b) Non-Directed Orders
    (1) through (4) No change
    (5) If a Nasdaq Market Maker's Attributable Quote/Order is
reduced to less than a round-lot amount on one side of the market
due to Nasdaq Market Center executions, the Nasdaq Market Center
will close the Market Maker's quote in the Nasdaq Market Center on
that side of the market, and the Nasdaq Market Maker will be
permitted a grace period of 30 seconds within which to take action
to restore its Attributable Quote/Order, if the market maker has not
authorized use of the AQR functionality or does not otherwise have
an Attributable Quote/Order on both sides of the market in the
system. A Nasdaq Market Maker that fails to transmit an Attributable
Quote/Order in a security within the allotted time will have the
exhausted side of its quotation restored by the system at a price
$0.01 inferior to the lowest displayed bid price or the highest
displayed offer price in that security as appropriate. If all bids
and/or offers are exhausted so that there are no longer any Quote/
Orders displayed on the bid and/or offer side of the market, the
system will refresh a market maker's exhausted bid or offer quote to
a normal unit of trading priced $0.01 inferior to the lesser of
either: a) the last valid displayed inside bid/offer in the security
before all such bids/offers were exhausted; or b) the market maker's
last displayed bid/offer before exhaustion. If the resulting bid/
offer quote would create a locked or crossed market, the Nasdaq
Market Center will instead re-open the exhausted market maker's bid/
offer quote at a price $0.01 inferior to the unexhausted inside bid/
offer in that security. If at any time an offer derived pursuant to
this paragraph would not be fully compliant with the minimum price
variation provisions of Rule 4613, then the system will create an
offer that is priced higher than the non-compliant offer by the
smallest amount necessary to make such an offer compliant with Rule
4613. If at any time this automatic quote restoration process would
result in the creation of a bid/offer of less than $0.01, the system
will refresh that bid/offer to a price of $0.01. Except as provided
in subparagraph (b)(6) of this rule, a Nasdaq Market Maker that
withdraws from a security may not re-register in the system as a
market maker in that security for twenty (20) business days.
    (6) through (8) No change
    (c) through (e) No change
    * * *

4901. Definitions

    Unless stated otherwise, the terms described below shall have
the following meaning:
    (a) through (q) No change
    (r) The term ``Pegged'' shall mean, for priced limit orders so
designated, that after entry into the System, the price of the order
is automatically adjusted by the System in response to changes in
the Nasdaq inside bid or offer (for Nasdaq-listed securities) or the
national best bid or offer (for ITS securities), as appropriate. The
Participant entering a Pegged Order can specify that order's price
will either equal the inside quote or improves the inside quote by
an amount set by the entering party on the same side of the market
(a ``Regular Pegged Order'') or offset the inside quote on the
contra side of the market by an amount (the ``Offset Amount'') set
by the Participant (e.g., $0.01 less than the inside offer or $0.02
more than the inside bid) (a ``Reverse Pegged Order''). The
Participant entering a Pegged Order may (but is not required to)
specify a limit price, to define a price at which pegging of the
order will stop and the order will be permanently converted into an
un-pegged limit order at limit price. This order type is available
for Nasdaq-listed and Exchange-listed securities. Offset amounts for
Pegged Orders are priced in $0.01 increments. However, if at any
time an offset amount specified by a Participant does not result in
an offer or a bid that is fully compliant with the minimum price
variation provisions of Rule 4904, then, for an offer, the
applicable offset amount will be the smallest amount that results in
a compliant order and is greater than the specified offset amount,
and, for a bid, the applicable offset amount will be the largest
amount that results in a compliant order and is smaller than the
specified offset amount.
    (s) through (w) No change
    * * *

4904. Entry and Display of Orders

    (a) No change
    (b) Display of Orders--The System will display orders submitted
to the System as follows:
    (1) and (2) No change
    (3) Minimum Price Variation--The minimum quotation increment for
System Securities shall be $0.01 for quotations priced at or above
$1.00 per share and $0.0001 for quotations priced below $1.00 per
share; provided, however, that if the Securities and Exchange
Commission (``SEC'') permits, with respect to any security, the
display, rank or acceptance of quotations priced at or above $1.00
per share in an increment smaller than $0.01, then the minimum
quotation increment for such a security shall be the minimum
permitted by the SEC or $0.0001, whichever is greater. Quotations
failing to meet this standard shall be rejected.
    (4) Exceptions--The following exceptions shall apply to the
display parameters set forth in paragraphs (1) and (2) above:
    (A) No change
    (B) [Minimum Increments and Rounding--The minimum trading
increment for System quotations priced $1.00 and above is $.01. For
quotations priced below $1.00 the minimum increment is $.0001.
    (i) For System display purposes, quotations in sub-penny
increments $1.00 and above will be rounded down (for bids) or up
(for offers) by the System to the nearest $.01 increment. Orders so
rounded shall have no superior execution priority compared to orders
previously submitted at the relevant $.01 increment.
    (ii) For Nasdaq Market Center display purposes, any quotations
in sub-penny increments shall be rounded down (for bids) and up (for
offers) to the nearest $.01 increment. Sub-penny quotations that are
rounded for display purposes shall be executed at their actual
price, rather than the rounded price at which they are displayed.
    (C)] Reserve Size--Reserve Size shall not be displayed in the
System, but shall be accessible as described in Rule 4905.
    [(D)] (C) Discretionary & Hunter Orders--Hunter Orders, and the
discretionary portion of Discretionary Orders shall be available for
execution only upon the appearance of contra-side marketable trading
interest, and shall be executed pursuant to Rule 4905.
    * * *

6330. Obligations of CQS Market Makers

    (a) through (c) No change
    (d) Minimum Price Variation [for Decimal-based Quotations]
    (1) The minimum quotation increment [for securities authorized
for decimal pricing as part of the SEC-approved Decimals
Implementation Plan for the Equities and Options Markets] shall be
$0.01 for quotations priced at or above $1.00 per share and $0.0001
for quotations priced below $1.00 per share; provided, however, that
if the Securities and Exchange Commission (``SEC'') permits, with
respect to any security, the display, rank or acceptance of
quotations priced at or above $1.00 per share in an increment
smaller than $0.01, then the minimum quotation increment for such a
security shall be the minimum permitted by the SEC or $0.0001,
whichever is greater. Quotations failing to meet this standard shall
be rejected.
    (2) When a quotation properly (not in violation of paragraph (1)
above) priced in an increment of less than $0.01 is routed for
execution via the ITS System to a market that does not accept
quotations in increments of less than $0.01, such a quotation is
rounded down (for bids) or up (for offers) to the nearest $0.01
increment.
* * * * *

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
    The purpose of this change is to align Nasdaq's rules with Rule 612
of the Commission's Regulation NMS.\5\ Consistent with that rule,
neither Nasdaq nor Nasdaq's Brut facility will accept sub-penny quotes
\6\ priced at $1.00 or above, except for sub-penny quotes in securities
for which sub-penny quoting is authorized by the Commission at higher
price levels. For quotes priced below $1.00 (and for quotes in
securities exempted by the Commission), Nasdaq and Brut \7\ will accept
sub-penny quotes but only in increments of at least $0.0001, as
specified in Rule 612.
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    \5\ 17 CFR 242.612.
    \6\ In this filing, ``quote'' or ``quotation'' is used to denote
both quotations and orders.
    \7\ This filing does not contain any changes to the rules of the
INET System. If any such changes are necessary, they will be made in
a separate filing at a later date.
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    The proposed rule language also clarifies how Nasdaq will handle
several special situations that will arise in implementing Rule 612.
First, if a proper sub-penny quote submitted to Nasdaq is routed via
the ITS System to a different market for execution, and such market
does not accept sub-penny orders, then such quote will be rounded up
(for offers) or down (for bids) to the nearest one cent increment.
However, Nasdaq notes that any market routing an order to any facility
of Nasdaq must be prepared to accept a sub-penny execution even if such
market itself does not accept sub-penny orders. A proper execution
priced in an increment of less than a cent would remain valid even if
the sending market failed to meet its responsibilities in this regard
(and the sending market would then have to assume full responsibility
for any resulting losses and other harm).
    Second, for pegged and discretionary orders, the new rule language
clarifies that participants must continue to specify the offset amounts
and the discretionary price ranges in whole cents. This will remain the
case even when the stock can be properly priced in sub-penny
increments.
    Third, in the case of pegged or discretionary orders, when changes
in the underlying price being ``pegged'' would result in a sub-penny
order priced over $1.00, the rule language provides that the ``offset''
amount be deemed slightly higher (for offers) or lower (for bids) than
specified by the market participant, as necessary to create a compliant
quote. For example, if the offset amount specified by a market
participant for a pegged offer is $0.01 and the national best offer is
$0.995, this would result in a pegged offer of $1.005, which would
violate Rule 612. The proposed rule states that in this situation
Nasdaq should deem the offset amount to be higher than specified by the
smallest amount necessary to produce a quote priced in whole cents.
Therefore, in this example, under the proposed rule the offset amount
would be deemed $0.015, producing a pegged offer of $1.01. In the case
of discretionary orders, this same logic and approach will apply in
determining the discretionary price range vis-[agrave]-vis the
displayed price and in determining the offset amount if the displayed
price is ``pegged'' to the national best bid or offer. In each case,
the discretionary price range limit amount and the offset amount will
be deemed higher (for offers) or lower (for bids) by the smallest
amount necessary to produce a Rule 612-compliant quote.
    Fourth, the same approach will be used when automatically
refreshing the quotes of a market participant that has authorized the
use of the Auto Quote Refresh (``AQR'') functionality. NASD Rule
4710(b)(5) describes the algorithm used to determine AQR pricing, and
it could result in a sub-penny offer priced over $1.00 (generally, if
the stock is trading in sub-penny increments just below the $1
threshold). In such a situation, the AQR-generated offer price will be
adjusted upwards to the next whole penny.
    Nasdaq notes that while it generally (subject to any security-
specific exemptions the Commission may grant) will not accept sub-penny
quotes priced above $1.00, it will, consistent with Rule 612, still
permit trade executions at such prices. For example, trades in sub-
penny increments priced above $1.00 could be produced in Nasdaq's
Opening Cross or Closing Cross. Nasdaq will permit such trades to
proceed. At the same time, Nasdaq notes that, because of technological
limitations, trades will never be executed in increments below $0.0001,
but will always be rounded up to the nearest $0.0001 increment. Such a
situation could arise, for example, in the Opening or Closing Cross if
the bids and offers for a stock are priced below $1.00 in $0.0001
increments. Under such a scenario, the system would round the execution
price up to the next $0.0001 increment.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with
the provisions of Section 15A of the Act,\8\ in general and with
Section 15A(b)(6) of the Act,\9\ in particular, in that it is designed
to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market.
Specifically, the proposal aligns Nasdaq's rules on sub-penny trading
with the Commission's Regulation NMS.
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    \8\ 15 U.S.C. 78o-3.
    \9\ 15 U.S.C. 78o-3(b)(6).
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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

    Written comments were neither solicited nor received.

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

    This proposal has become effective pursuant to section 19(b)(3)(A)
of the Act \10\ and subparagraph (f)(6) of Rule 19b-4 thereunder \11\
because the proposal: (1) Does not significantly affect the protection
of investors or the public interest, (2) does not impose any
significant burden on competition, and (3) by its terms does not become
operative for 30 days after the date of this filing, or such shorter
time as the Commission may designate, if consistent with the protection
of investors and the public interest.\12\

Nasdaq intends for this rule change to become operative on January 31,
2006.
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6).
    \12\ Pursuant to Rule 19b-4(f)(6)(iii) of the Act, a proposed
rule change does not become operative for 30 days after the date of
its filing, or such shorter time as the Commission may designate if
consistent with the protection of investors and the public interest,
provided that the self-regulatory organization has given the
Commission 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, or such shorter time as designated by the
Commission. Nasdaq complied with the five day pre-filing
requirement.
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    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, as amended, 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<EMAIL_ADDRESS>Please include

File Number SR-NASD-2005-150 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, Station Place, 100 F
Street, NE., Washington, DC 20549-9303.

All submissions should refer to File Number SR-NASD-2005-150. 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-2005-150 and
should be submitted on or before January 19, 2006.

    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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Jonathan G. Katz,
Secretary.
 [FR Doc. E5-8069 Filed 12-28-05; 8:45 am]

BILLING CODE 8010-01-P