SECURITIES AND EXCHANGE COMMISSION
(Release No. 34-50375; File No. S7-24-89)
September 14, 2004
Joint Industry Plan; Order Granting Approval of Amendment No. 13C to the Joint Self-Regulatory Organization Plan Governing the Collection, Consolidation and Dissemination of Quotation and Transaction Information for Nasdaq-Listed Securities Traded on Exchanges on an Unlisted Trading Privileges Basis; Submitted by the Pacific Exchange, Inc., the National Association of Securities Dealers, Inc., the American Stock Exchange LLC, the Boston Stock Exchange, Inc., the Chicago Stock Exchange, Inc., the Cincinnati Stock Exchange, Inc., and the Philadelphia Stock Exchange, Inc.
On April 22, 2004, the Pacific Exchange, Inc. ("PCX"), on behalf of itself and the National Association of Securities Dealers, Inc. ("NASD"), the American Stock Exchange LLC ("Amex"), the Boston Stock Exchange, Inc. ("BSE"), the Chicago Stock Exchange, Inc. ("CHX"), the Cincinnati Stock Exchange, Inc. ("CSE"),10 and the Philadelphia Stock Exchange, Inc. ("PHLX") (hereinafter referred to as "Participants"),2 as members of the Operating Committee3 of the Plan submitted to the Securities and Exchange Commission ("Commission") a proposal to amend the Plan ("Amendment 13C") pursuant to Rule 11Aa3-24 and Rule 11Aa3-15 under the Securities Exchange Act of 1934 ("Act"). Amendment 13C6 reflects several changes unanimously adopted by the Committee. On May 7, 2004, the Commission summarily put into effect Amendment 13C upon publication in the Federal Register on a temporary basis not to exceed 120 days.7 Amendment 13C was published for comment in the Federal Register on May 18, 2004.8 The Commission received no comment letters on Amendment 13C. This order approves the changes made in Amendment 13C on a permanent basis.
II. Plan Background
The Plan governs the collection, consolidation, and dissemination of quotation and transaction information for The Nasdaq Stock Market, Inc. ("Nasdaq") National Market ("NNM") and Nasdaq SmallCap securities listed on Nasdaq or traded on an exchange pursuant to unlisted trading privileges ("UTP").9 The Plan provides for the collection from Plan Participants and the consolidation and dissemination to vendors, subscribers, and others of quotation and transaction information in "eligible securities."10
The Commission originally approved the Plan on a pilot basis on June 26, 1990.11 The parties did not begin trading until July 12, 1993, accordingly, the pilot period commenced on July 12, 1993. The Plan has since been in operation on an extended pilot basis.12
III. Description and Purpose of the Amendment
As a result of aberrant pricing in trading of shares on December 5, 2003, the Division of Market Regulation ("Division") requested the Participants to provide better coordination among the self-regulatory organization ("SRO") trading markets concerning SRO trading halts.13 The NASD, acting through its subsidiary, Nasdaq, proposed Amendment 13C to address changes to the Plan related to the coordination of instituting and lifting SRO trading halts. Amendment 13C to the Plan reflects changes to the regulatory halt section that were unanimously approved by the Operating Committee. The following is a summary of the changes to the Plan made in Amendment 13C.
Section III.T. of the Plan provides for the definition of Regulatory Halt. Amendment 13C added to the definition of Regulatory Halt an "Extraordinary Market Regulatory Halt," which is a trading halt due to extraordinary market activity as a result of system misuse or malfunction as further described in a Section X.E.1. of the Plan.
Section X of the Plan previously provided that the Primary Market14 declared Regulatory Halts. Amendment 13C replaced Primary Market with "Listing Market," which is defined as the Participant's Market on which a security is listed. In the case of dual listings, the Listing Market is the Participant's Market on which the Eligible Security is listed, which also has the highest number of the average of reported transactions and reported share volume for the preceding 12-month period as determined at the beginning of each calendar quarter.
Amendment 13C clarified that "Participant" for purposes of Section X includes Nasdaq despite the fact that Nasdaq is not currently a signatory to the Plan.
Amendment 13C added Section X.E., which established communication procedures to coordinate communication among Plan Participants in the instance of a trading halt. Specifically, Amendment 13C introduced the use of the "Hoot-n-Holler" for communicating real-time information among Participants. Furthermore, the Amendment requires continuous monitoring of the Hoot-n-Holler by all Participants during market hours. The procedures in the instance of a Participant(s) experiencing extraordinary market activity in an Eligible Security include:
best efforts to provide immediate notification over the Hoot-n-Holler system;
best efforts to determine the source of the extraordinary market activity;
best efforts by the Participant(s) in determining whether to prevent, and actually preventing, quotes from a direct or indirect market participant from being transmitted to the Processor;
if the problem is not rectified, the Participant(s) will cease transmitting quotes to the Processor in the affected security; and
if within five minutes the problem is not rectified from the initial notification over the Hoot-n-Holler, or if decided earlier through unanimous approval from all Participants actively trading the affected security, the Listing Market based on facts and circumstances may declare over the Hoot-n-Holler an Extraordinary Market Regulatory Halt.
Amendment 13C amended the Plan to add Section X.F. to clarify procedures for the resumption of trading after a Regulatory Halt. This includes a requirement that all Participants will use best efforts to indicate their intentions with respect to canceling or modifying trades within fifteen minutes of the declaration of the halt. Furthermore, the Amendment clarified that Participants will disseminate information regarding canceled or modified trades as soon as possible before the resumption of trading. Lastly, the Listing Market will notify Participants over the Hoot-n-Holler when trading may resume.
IV. Discussion and Commission Findings
The Commission previously determined, pursuant to Rule 11Aa3-2(c)(4) under the Act,15 to summarily put into effect the amendments detailed above in Amendment 13C on a temporary basis not to exceed 120 days beyond May 18, 2004. After careful consideration of Amendment 13C to the Plan, the Commission finds that approving Amendment 13C on a permanent basis is consistent with the requirements of the Act and the rules and regulations thereunder, and, in particular, Section 11A(a)(1)16 of the Act and Rules 11Aa3-1 and 11Aa3-2(c)(2) thereunder.17 Section 11A of the Act directs the Commission to facilitate the development of a national market system for securities, "having due regard for the public interest, the protection of investors, and the maintenance of fair and orderly markets," and cites as an objective of that system the "fair competition . . . between exchange markets and markets other than exchange markets."18 Rule 11Aa3-2(c)(2) requires the Commission to approve a plan or amendment "if it finds that such plan or amendment is necessary or appropriate in the public interest, for the protection of investors, and the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanisms of, a national market system, or otherwise in furtherance of the purposes of the Act."19
The Commission finds that approving Amendment 13C is appropriate in the public interest and otherwise in furtherance of the purposes of the Act. The Commission believes that the changes made in Amendment 13C enhance investor protection, further the maintenance of fair and orderly markets, and remove impediments to, and perfect the mechanisms of, a national market system by: 1) improving the coordination among SROs when instituting and lifting trading halts; 2) making necessary changes to the terms and definitions contained within the Plan related to trading halts; 3) establishing clear procedures to coordinate communication among Plan Participants before and during the instance of a trading halt; and 4) clarifying procedures for the resumption of trading after a trading halt.
IT IS THEREFORE ORDERED, pursuant to Section 11A of the Act20 and paragraph (c)(2) of Rule 11Aa3-221 thereunder, that Amendment 13C to the Plan be, and hereby is, approved.
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.22
Margaret H. McFarland