[Federal Register Volume 79, Number 174 (Tuesday, September 9, 2014)]
[Notices]
[Pages 53500-53503]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-21356]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72961; File No. SR-NASDAQ-2014-081]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing of Proposed Rule Change Relating to Proposed Changes
to NASDAQ Rule 4120(c) To Modify the Parameters for Releasing
Securities for Trading Upon the Termination of a Trading Halt in a
Security That is the Subject of an Initial Public Offering
September 3, 2014.
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 August 20, 2014, The NASDAQ Stock Market LLC (``NASDAQ'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in in Items I,
II, and III below, which Items have been prepared by NASDAQ. 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.
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
NASDAQ proposes to amend NASDAQ Rule 4120(c) to modify the
parameters for releasing securities for trading upon the termination of
a trading halt in a security that is the subject of an initial public
offering.
The text of the proposed rule change is available at http://nasdaq.cchwallstreet.com/, at NASDAQ's principal office, and at the
Commission's Public Reference Room.
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. 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.
[[Page 53501]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Rule 4120(c) to strengthen
safeguards against unexpected volatility with respect to the price
established by the NASDAQ Halt Cross for a security that is the subject
of an IPO (the ``IPO Halt Cross'' or the ``Cross''). In 2013, NASDAQ
adopted a new process for releasing IPO securities.\3\ The changes were
adopted to improve the IPO release process by increasing NASDAQ's
flexibility to commence trading when appropriate. To this end, NASDAQ
eliminated the former rule requirement that limited the number of
extensions of the period prior to launch--the Display Only Period--to
six five-minute periods. NASDAQ instead adopted a two-phase process
under which the initial 15-minute Display Only Period is followed by a
``Pre-Launch Period'' that is not of a fixed duration. Under the
current rule, the Pre-Launch Period will continue until (1) NASDAQ
receives notice from the underwriter of the IPO that the security is
ready to trade and there is no ``order imbalance'' in the security, in
which case the security is released for trading; or (2) the
underwriter, with concurrence of NASDAQ, determines to postpone and
reschedule the IPO. Every five seconds during the Display Only Period
and the Pre-Launch Period, NASDAQ disseminates the Current Reference
Price, an indication of the price at which the IPO Halt Cross would
execute if it occurred at that time.
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\3\ Securities Exchange Act Release No. 69897 (July 1, 2013), 78
FR 40782 (July 8, 2013) (SR-NASDAQ-2013-092). See also Securities
Exchange Act Release No. 70911 (November 21, 2013), 78 FR 71011
(November 27, 2013) (SR-NASDAQ-2013-143) (adopting additional
refinements to process for IPO securities).
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The requirement regarding the absence of an order imbalance was
designed to ensure that the expected price of the security is
reasonably stable and that trading interest is balanced at the time
trading commences. There are currently several conditions under which
an order imbalance in an IPO security will be considered to exist:
The Current Reference Price disseminated immediately prior
to commencing the release of the IPO for trading during the Pre-Launch
Period and any of the three preceding Current Reference Prices differ
by more than the greater of 5 percent or 50 cents;
upon completion of the Cross calculation, the calculated
price at which the security would be released for trading and any of
the three preceding Current Reference Prices disseminated immediately
prior to the initiation of the Cross calculation differ by more than
the greater of 5 percent or 50 cents; or
all market orders will not be executed in the Cross.
These restrictions are designed to prevent circumstances where a
misunderstanding by the underwriter as to the state of the order book
risks launching trading at a time of material volatility in the book
for the security. Order imbalances are calculated by the IPO Halt Cross
system, which automatically prevents launch of a halted security when
an order imbalance exists.
NASDAQ is proposing to enable the underwriter to provide even
greater protection against volatility in an IPO security by replacing
the current system for comparing against prior Current Reference Prices
with a system under which the expected price of the IPO Halt Cross will
be displayed to the underwriter, who will then select price bands to
ensure that the actual calculated price at which the IPO Halt Cross
would occur does not deviate from the expected price by more than the
selected amounts. Such price deviations are possible because market
participants may continue to enter and cancel orders during the period
between the display of the expected price to the underwriter and the
commencement of the Cross calculation, a period of up to five seconds
in duration.\4\ Although the current system has generally done a good
job of protecting against unexpected changes in the pricing of an IPO
Halt Cross by ensuring that the Current Reference Price has been stable
and the final calculated price is not significantly different from
preceding Current Reference Prices, the proposed change would introduce
the opportunity for underwriters to set tighter limits at their
discretion based on the characteristics of and expectations for each
IPO.
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\4\ Cancellations received following the commencement of the
Cross calculation are blocked, and orders received thereafter are
not Cross-eligible. See In the Matter of The NASDAQ Stock Market LLC
and NASDAQ Execution Services, LLC, Securities Exchange Act Release
No. 69655 (May 29, 2013), at ]65.
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Under the proposed modified system, the Pre-Launch Period will end
and the security will be released for trading when the following
conditions are all met:
NASDAQ receives notice from the underwriter of the IPO
that the security is ready to trade. The NASDAQ system will calculate
the Current Reference Price at that time (the ``Expected Price'') and
display it to the underwriter. If the underwriter then approves
proceeding, the NASDAQ system will conduct the following validation
checks:
The NASDAQ system must determine that all market orders
will be executed in the cross; \5\
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\5\ This requirement is not being modified from the requirement
of the current rule with respect to market orders, but the wording
is being modified to make it clearer. The intent of the restriction
is to ensure that if a market participant enters an order offering
to buy or sell in the IPO Halt Cross at any price, the Cross should
not occur unless all such orders can be executed.
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the security passes a new price validation test, which
will replace the current system for comparison against recent Current
Reference Prices.
For purposes of applying the price validation test, the underwriter
must select price bands prior to the conclusion of the Pre-Launch
Period.\6\ The System will then compare the Expected Price with the
actual price calculated by the Cross. If the actual price calculated by
the Cross differs from the Expected Price by an amount in excess of the
price band selected by the underwriter, the security will not be
released for trading and the Pre-Launch Period will continue. The
underwriter must select an upper price band (i.e., an amount by which
the actual price may not exceed the Expected Price) and a lower price
band (i.e., an amount by which the actual price may not be lower than
the Expected Price). If a security does not pass the price validation
test, the underwriter may, but is not required to, select different
price bands before recommencing the process to release the security for
trading.
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\6\ The underwriter can select the price bands at any time
during the Display Only Period or Pre-Launch Period, and can modify
them at any time prior to the conclusion of the Pre-Launch Period.
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For example, assume that the Expected Price for the IPO Halt Cross
shown to the underwriter was $32 per share, and the underwriter
selected an upper price band of $0.10 and a lower price band of $0.05.
In that case, the actual price calculated by the system for the Cross
could not be higher than $32.10 nor lower than $31.95.
As is currently the case, the failure to satisfy any of the
conditions for completion of the IPO Cross results in a delay of the
release for trading of the IPO, and a continuation of the Pre-Launch
Period, until all conditions have been satisfied. Thus, if the price
validation is not satisfied, the Pre-Launch Period would continue
seamlessly, with members able to continue to enter or cancel orders.
The security would then repeat the process for release until such time
as the
[[Page 53502]]
conditions required for launch were satisfied. Thus, the underwriter
would again have to determine that it believes the security is ready to
trade, the underwriter would be shown the applicable Expected Price,
and the security would launch if all market orders would be executed
and the price validation was satisfied. As noted above, the underwriter
would be able to select different price bands for each attempt to
launch the security. Thus, an underwriter might select an upper and a
lower band of $0 initially, such that the security would not launch
unless the calculated price equaled the Expected Price. If the security
did not pass the validation check, however, the underwriter could
subsequently choose to widen the price bands to allow the IPO to
proceed at a price that might vary from the Expected Price. As is also
currently the case, the underwriter, with concurrence of NASDAQ, may
determine at any point during the IPO Halt Cross process up through the
conclusion of the Pre-Launch Period to postpone and reschedule the
IPO.\7\
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\7\ NASDAQ is modifying the applicable language slightly to make
it clear that the authority to cancel and reschedule extends to the
conclusion of the Pre-Launch Period.
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The price bands available for selection shall be in such
increments, and at such price points, as may be established from time
to time by NASDAQ. The initial available price bands will range from $0
to $0.50, with increments of $0.01. Thus, the underwriter may select a
price band of $0 (i.e., no change from the Expected Price is
permitted), $0.01, $0.02, or any other $0.01 increment up to $0.50. The
underwriter may select different price bands above and below the
Expected Price. NASDAQ reserves the right to stipulate wider increments
(such as $0.05) or price bands that include certain price points but
exclude others (for example, increments of $0.01 up to $0.10, and
increments of $0.05 thereafter). In selecting available price bands and
increments, NASDAQ will consider input from underwriters and other
market participants and the results of past usage of price bands to
adopt price bands and increments that promote efficiency in the
initiation of trading and protect investors and the public interest.
NASDAQ will notify member organizations and the public of changes in
available price band or increments through a notice that is widely
disseminated at least one week in advance of the change. However,
NASDAQ will not (in the absence of the submission of a proposed rule
change) allow bands wider than $0.50. Thus, bands will not be wider
than the bands that currently govern the comparison between the Cross
price and previous Current Reference Prices.
In addition to the foregoing changes, NASDAQ is also proposing to
reorganize provisions of Rule 4120 relating to the process for ending a
trading halt of securities other than IPO securities. NASDAQ is not
making substantive modifications to these rules, however.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the provisions of Section 6 of the Act,\8\ in general, and with
Section 6(b)(5) of the Act,\9\ in particular, in that it is designed 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
transaction in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system and,
in general, to protect investors and the public interest. The proposed
rule change promotes these goals by strengthening protection against
unexpected volatility in the pricing of an IPO security. While the
current rule provides protection against volatility by providing that
the final price of an IPO security calculated by the IPO Halt Cross may
not deviate from the most recent three indicative prices by more than
five percent or $0.50, there nevertheless exists the possibility that
deviations within these bands will occur. The proposed change is
designed to protect the underwriter and other market participants from
the IPO Halt Cross occurring at a price that deviates unexpectedly from
the prices previously disclosed through the Current Reference Price by
providing the underwriter the authority to set tighter limits based on
the characteristics of and expectations for each IPO. NASDAQ believes
that enhancing and strengthening the process in this manner will
protect investors as it will serve to minimize unexpected price
deviations and avoid confusion among market participants.
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\8\ 15 U.S.C. 78f.
\9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange 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.
Specifically, the change will not affect the ability of market
participants to participate fully in the IPO Halt Crosses. Rather, the
change is designed to promote stability and reduce volatility in the
pricing of the IPO Halt Cross, and therefore does not impose any
restriction on competition.
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 45 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 Exchange consents, the Commission shall: (a) by order approve
or disapprove 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, 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 email to [email protected]. Please include
File Number SR-NASDAQ-2014-081 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2014-081. This
file number should be included on the subject line if email 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
[[Page 53503]]
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 Web site viewing and printing in the Commission's Public
Reference Room, 100 F Street NE., Washington, DC 20549, on official
business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of
such filing also will be available for inspection and copying at the
principal offices of the Exchange. 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-NASDAQ-2014-081, and should be submitted on or before
September 30, 2014.
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\10\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\10\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-21356 Filed 9-8-14; 8:45 am]
BILLING CODE 8011-01-P