[Federal Register Volume 79, Number 207 (Monday, October 27, 2014)]
[Notices]
[Pages 63981-63982]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-25435]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-73399; File No. SR-NASDAQ-2014-081]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order
Approving a Proposed Rule Change Related 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
October 21, 2014.
I. Introduction
On August 20, 2014, The NASDAQ Stock Market LLC (``NASDAQ'' or the
``Exchange'') filed with the Securities and Exchange Commission (the
``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 relating to its initial public offering (``IPO'')
process. The proposed rule change was published for comment in the
Federal Register on September 9, 2014.\3\ The Commission received no
comments on the proposal. This order approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 72961 (September 3,
2014), 79 FR 53500 (``Notice'').
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II. Description of the Proposal
The Exchange 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 IPO (the ``IPO
Halt Cross'' or the ``Cross'').\4\ Currently, NASDAQ Rule 4120(c)(7)(B)
governs the launch of trading of IPO securities approved for listing on
the Exchange.\5\ NASDAQ Rule 4120(c)(7)(B) provides a two-phase process
in which there is a 15 minute Display Only Period in which market
participants may enter quotes and orders in that IPO security in the
NASDAQ systems, which is then followed by a ``Pre-Launch Period'' that
is not of a fixed duration.\6\ According to the Exchange, the Pre-
Launch Period continues until: (1) NASDAQ receives notice from the
underwriter of the IPO that the security is ready to trade and there is
no ``order imbalance'' \7\ 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. The Exchange
states that it disseminates the ``Current Reference Price,'' which is
an indication of the price at which the IPO Halt Cross would execute if
it occurred at that time, every five seconds during the Display Only
Period and the Pre-Launch Period.\8\
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\4\ See id.
\5\ See Securities Exchange Act Release No. 69897 (July 1,
2013), 78 FR 40782, 40783 (July 8, 2013).
\6\ See Notice, supra note 3, at 53501.
\7\ See id.
\8\ See id. According to the Exchange, under the current rule,
an ``order imbalance'' in an IPO security exists if: (1) 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; (2) 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 (3) all market orders will not be executed in the
Cross. See id.; and NASDAQ Rule 4120(c)(7)(C).
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The Exchange proposes to replace its current process with a
procedure under which the ``Expected Price'' \9\ 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.\10\ According to the Exchange, price deviations
between the Expected Price and the actual calculated price of the Cross
can occur 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.\11\
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\9\ The ``Expected Price,'' according to the Exchange, is the
Current Reference Price displayed to the underwriter after the
Exchange receives notice from the underwriter that the security is
ready to trade. See Notice, supra note 3, at 53501, and Proposed
NASDAQ Rule 4120(c)(8)(A)(i).
\10\ See Notice, supra note 3, at 53501. The Exchange is also
proposing to reorganize certain provisions of NASDAQ Rule 4120
relating to the process for ending a trading halt of securities
other than IPO securities, but is not making substantive
modifications to these rules. See id.
\11\ See id.
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Under the proposal, the process for determining the end of the Pre-
Launch Period and when the IPO security will be released for trading
will be as follows: (1) NASDAQ receives notice from the underwriter of
the IPO that the security is ready to trade; (2) the NASDAQ system will
then calculate the Current Reference Price and display it to the
underwriter (i.e., the Expected Price); (3) the underwriter agrees to
go forward; (4) the NASDAQ system determines that all market orders
will be executed in the cross; and (5) the
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NASDAQ system determines that the security satisfies a ``price
validation test,'' as described below.\12\
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\12\ See id.
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Under the proposal, prior to the conclusion of the Pre-Launch
Period,\13\ the underwriter will select price bands \14\ and, as noted
above, the system will then compare the Expected Price with the actual
price calculated by the Cross.\15\ 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.\16\ Under
the proposal, if a security does not satisfy 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.\17\
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\13\ The underwriter can select the price bands at any time
during the Display Only Period or the Pre-Launch Period, and may
modify them at any time prior to the Pre-Launch Period. See id. at
n.6.
\14\ Specifically, the underwriter will 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). The Exchange
notes that the underwriter may select different price bands above
and below the Expected Price. See id.
\15\ See Notice, supra note 3, at 53501.
\16\ See id.
\17\ See id. at 53502.
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According to the proposal, the available price bands the
underwriter may select for the price validation test will include
increments and price points established by the Exchange, which may be
modified by the Exchange from time to time.\18\ Under the proposal, the
initial available price bands will range from $0 to $0.50, with
increments of $0.01.\19\ Under the proposal, the Exchange 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).\20\
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\18\ See id.
\19\ See id. Under the proposal, an underwriter may select a
price band of $0.00 (i.e., no change from the Expected Price would
be permitted). See id.
\20\ See Notice, supra note 3, at 53502. The Exchange states
that it 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. See
id.
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III. Discussion and Commission Findings
After careful review, 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.\21\ In particular, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act,\22\ which
requires, among other things, that the rules of a national securities
exchange be designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, 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.
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\21\ In approving this proposal, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\22\ 15 U.S.C. 78f(b)(5).
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As noted above, the proposal is designed to offer an additional
safeguard against an unexpected deviation between the Expected Price
and the actual price of the Cross by providing the underwriter with the
authority to set price bands based on the characteristics of and
expectations for each IPO. The Exchange represents that such price
deviations can occur because market participants may continue to enter
and cancel orders during the period of up to five seconds between the
display of the Expected Price to the underwriter and the commencement
of the Cross calculation.\23\ The Commission notes that, 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.\24\ The Commission believes that the proposed rule
change is designed to protect investors and the public interest by
limiting unexpected volatility in the pricing of an IPO security at the
conclusion of the Pre-Launch Period.
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\23\ See supra note 11 and accompanying text.
\24\ See supra note 16 and accompanying text.
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\25\ that the proposed rule change (SR-NASDAQ-2014-081) is
approved.
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\25\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\26\
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\26\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-25435 Filed 10-24-14; 8:45 am]
BILLING CODE 8011-01-P