Self-Regulatory Organizations; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change by the National Association of Securities Dealers, Inc. Relating to the Pre-Trading Quotation Period for Initial Public Offerings

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40968; File No. SR-NASD-98-98]

Self-Regulatory Organizations; Notice of Filing and Order

Granting Accelerated Approval of Proposed Rule Change by the National

Association of Securities Dealers, Inc. Relating to the Pre-Trading

Quotation Period for Initial Public Offerings

January 22, 1999.

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 23, 1998, the National Association of Securities Dealers,

Inc. (``NASD''), through its wholly-owned subsidiary, the Nasdaq Stock

Market, Inc. (``Nasdaq''), filed with the Securities and Exchange

Commission (``Commission'') the proposed rule change as described in

Items I and II below, which Items have been prepared by Nasdaq. The

Commission is publishing this notice and order to solicit comments on

the proposed rule change from interested persons and to grant

accelerated approval of the proposed rule change.

---------------------------------------------------------------------------

\1\ 15 U.S.C. 78s(b)(1).

\2\ 17 CFR 240.19b-4.

---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of

Substance of the Proposed Rule Change

The NASD, through its wholly-owned subsidiary Nasdaq, is proposing

to revise its practices concerning market maker quotations in Nasdaq

securities that are being quoted for the first time after an initial

public offering (``IPO''). Under the proposal, the pre-opening period

for the initial display of market maker quotes will be extended to 15

minutes prior to the commencement of trading to permit the development

of orderly quotations, with provision for a single additional fifteen

minute extension of the pre-opening period of the market is locked or

crossed at the conclusion of the first fifteen minute period.

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 III 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

In 1994, Nasdaq established a five minute quotation-only time

period for market makers to enter and adjust their first quotations for

securities newly released for trading in its market.\3\ This period,

similar to the daily pre-opening display of quotations allowed for

Nasdaq securities already trading in the secondary market,\4\ was

created to facilitate the opening of trading for IPOs and replaced the

previous practice of only allowing immediate and simultaneous initial

quotation and trading of Nasdaq IPO securities.

---------------------------------------------------------------------------

\3\ See Securities Exchange Act Release No. 34254 (June 24,

1994), 59 FR 33808 (June 30, 1994). When an IPO is first authorized

for inclusion in Nasdaq, the system displays the time of day when

quoting in the issue may begin and the time of day when trading in

that issue may begin. Specifically, when a new security is released

for trading, the window for quotations has been set to allow market

makers a period of five minutes to enter and adjust their quotations

prior to the commencement of trading.

\4\ Nasdaq has represented that its practices of providing a

pre-trading, quotation-only period for IPO securities is related to

Nasdaq Rule 4120, ``Trading Halts,'' and Nasdaq Rule 4613,

``Character of Quotations.'' Nasdaq stated that this practice, like

the objectives in Nasdaq Rule 4120, is designed to ensure that

markets are not open for trading when unusual circumstances may

prevent such markets from remaining fair and orderly. Nasdaq also

stated that its current practice is similar to Nasdaq Rule 4613(c)

and (e) in that market maker quotations are required to be

reasonably related to the prevailing market, and market makers are

prohibited from locking or crossing markets. Telephone conversation

between Michael L. Loftus, Attorney, Division of Market Regulation,

Commission; Robert E. Aber, Senior Vice President and General

Counsel; and Thomas P. Moran, Senior Attorney, Office of General

Counsel, Nasdaq (Jan. 22, 1999).

---------------------------------------------------------------------------

Recently, significant increased volatility has been observed in the

opening of IPOs for secondary market trading on Nasdaq. This volatility

appears to be the result of many converging factors, including the

recent popularity of internet-related stocks, an increase in the influx

of retail orders through on-line trading linkages, investor perceptions

and expectations as well as other technological and economic factors.

Nasdaq believes this excessive volatility has inhibited the smooth

functioning of the Nasdaq market during the initial trading of these

IPOs to the detriment of all market participants, including public

investors.

In response, Nasdaq proposes to extend the current five minute pre-

trading quotation period for all IPOs to fifteen minutes, with the

potential for a single, further extension of an additional fifteen

minute pre-trade quotation period if the issue is locked or crossed at

the conclusion of the first fifteen minute period.\5\ Nasdaq believes

that these extended time periods will allow the market participants to

better digest and respond to market price indications before an IPO is

released for trading and thus provide better information upon which to

make trading decisions. Nasdaq also believes that its proposal provides

a modicum of opportunity in volatile, fast-paced markets to review and

react to dramatic market movements that may manifest themselves in

pricing anomalies. While this proposal represents an initial response,

Nasdaq notes that it will continue to monitor and review trading

activity and market practices with a view towards developing additional

proposals to further mitigate excessive volatility in all areas of

Nasdaq trading.

---------------------------------------------------------------------------

\5\ Nasdaq's MarketWatch Department will determine whether an

additional fifteen minute quotation-only period is necessary before

trading in an IPO security may begin. The determination of

MarketWatch will be based solely upon whether a market is locked or

crossed to such an extent that releasing the IPO security for

trading would be detrimental to the market or investors. Although

MarketWatch will closely monitor pre-trading quotation activity

during the entire fifteen minute period, the determination of

MarketWatch will be predicated on the status of the market at the

expiration of the initial fifteen minute period. Telephone

conversation between Michael L. Loftus, Attorney, Division of Market

Regulation, Commission; Robert E. Aber, Senior Vice President and

General Counsel; and Thomas P. Moran, Senior Attorney, Office of

General Counsel, Nasdaq (Jan. 22, 1999).

---------------------------------------------------------------------------

2. Statutory Basis

Nasdaq believes that the proposed rule change is consistent with

the provisions of Sections 15A(b)(6) and 15A(b)(11) \6\ of the Act in

that the proposal is designed to facilitate transactions in securities

as well as produce fair and informative quotations and prevent

fictitious or misleading quotations.

---------------------------------------------------------------------------

\6\ 15 U.S.C. 78o-3(b)(6) and 78o-3(b)(11).

---------------------------------------------------------------------------

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

Nasdaq did not solicit or receive written comments with respect to

the proposed rule change.

[[Page 4730]]

III. 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. Persons 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 submissions, 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 persons, 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 Section, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Copies of such filing will also be available

for inspection and copying at the principal office of the NASD. All

submissions should refer to File No. SR-NASD-98-98 and should be

submitted by February 19, 1999.

IV. Commission's Findings and Order Granting Accelerated Approval

of Proposed Rule Change

The Commission has carefully reviewed Nasdaq's proposed rule change

and believes the proposal is consistent with the requirements of

Section 15A(b) of the Act \7\ and the rules and regulations thereunder

applicable to a national securities association. Specifically, the

Commission believes the proposal is consistent with Sections 15A(b)(6)

and 15A(b)(11) of the Act \8\ which require, among other things, that a

national securities association's rules be designed to promote just and

equitable principles of trade, remove impediments to and perfect the

mechanism of a free and open market and a national market system,

facilitate transactions in securities, produce fair and informative

quotations, prevent fictitious or misleading quotations, and promote

orderly procedures for collecting, distributing, and publishing

quotations.\9\

---------------------------------------------------------------------------

\7\ 15 U.S.C. 78o-3(b).

\8\ 15 U.S.C. 78o-3(b)(6) and 78o-3(b)(11).

\9\ In approving this proposed rule change, the Commission has

considered the proposal's impact on efficiency, competition, and

capital formation. 15 U.S.C. 78c(f).

---------------------------------------------------------------------------

Under current Nasdaq practice, market makers are permitted to enter

and adjust their first quotations for IPO securities during a pre-

trading, quotation-only time period that lasts five minutes. Nasdaq

created this quotation-only time period to facilitate the opening of

trading for IPOs. Previously, when an IPO was authorized for trading on

Nasdaq, market makers were permitted to immediately and simultaneously

enter quotations and trade on the subject security.\10\

---------------------------------------------------------------------------

\10\See Securities Exchange Act Release No. 34254 (June 24,

1994), 59 FR 33808 (June 30, 1994).

---------------------------------------------------------------------------

The Commission recognizes that it may be difficult at times to

accurately gauge interest in an IPO, and that as a result, the opening

of secondary market trading for Nasdaq IPO securities may be subject to

increased volatility. As Nasdaq notes, such excessive volatility could

impede the smooth functioning of the Nasdaq market during the initial

trading of IPOs to the detriment of all market participants, including

public investors.

The Nasdaq proposal was designed to address the increased

volatility associated with the opening of IPOs for secondary market

trading on Nasdaq. The proposal would extend the current five minute

pre-trading quotation period for all IPOs to fifteen minutes, and

provide the potential for an additional fifteen minute pre-trade

quotation period if an IPO issue was locked or crossed at the

conclusion of the first fifteen minute period. The Commission believes

that this additional time should assist market participants in gauging

the likely interest in an IPO and adjusting their quotes accordingly.

Pursuant to Section 19(b)(2) of the Act,\11\ the Commission finds

good cause for approving the proposed rule change prior to the

thirtieth day after the date of publication of notice of filing in the

Federal Register. The Commission recognizes that increased investor

demand for the securities of high-technology companies, especially

those offered through IPOs, may be contributing to greater volatility

of Nasdaq securities. The Commission believes it is important that

before trading in an IPO security commences, Nasdaq market makers be

provided sufficient time to determine an appropriate opening price that

accurately reflects market interest in the IPO security. Setting a more

accurate opening price for an IPO could help to reduce volatility in

those securities as trading begins.

---------------------------------------------------------------------------

\11\ 15 U.S.C. 78s(b)(2).

---------------------------------------------------------------------------

The Commission further believes that the availability of an

additional fifteen minute quotation-only time period is an appropriate

response to those instances where the market may be locked or crossed

at the conclusion of the first fifteen minute period. Finally, the

Commission notes that the proposal to extend the pre-trading quotation

period represents one element of Nasdaq's response to excessive

volatility, and encourages Nasdaq to continue to develop additional

proposals as part of its ongoing review of trading activity and Nasdaq

market practices.

V. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) of the

Act,\12\ that the proposed rule change, SR-NASD-98-98, is hereby

approved on an accelerated basis.

\12\ Id.

---------------------------------------------------------------------------

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\13\

---------------------------------------------------------------------------

\13\ 17 CFR 200.30-3(a)(12).

---------------------------------------------------------------------------

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 99-2104 Filed 1-28-99; 8:45 am]

BILLING CODE 8010-01-M