1 Securities Exchange Act Release No. 41473 (June 2, 1999), 64 FR 31335 (June 10, 1999). Comments on this proposal are
due to the SEC no later than July 1, 1999.
2 All times referred to in this memo are Eastern Time.
1
[11073]
June 24, 1999
TO: EQUITY MARKETS ADVISORY COMMITTEE No. 23-99
RE: NASD FILES PROPOSED RULE CHANGE RELATING TO LOCKED AND
CROSSED MARKETS
______________________________________________________________________________
The National Association of Securities Dealers, Inc. ("NASD"), through its wholly-owned
subsidiary, The Nasdaq Stock Market, Inc. ("Nasdaq"), has filed with the Securities and Exchange
Commission ("SEC") a proposed rule change (attached) to alter the obligations regarding locked and
crossed markets that occur prior to the market's open.1
Currently, NASD rules provide that if a market participant enters a quote at or after 9:25 a.m.2
that would lock/cross the market on the open, the locking/crossing market participant must take action
when the market opens, but in no case later than 9:30:30 a.m., to unlock/uncross the market. The
proposed rule change states that, under the current rule, however, locks/crosses still occur at the open
because the passively locked/crossed market participant may not respond immediately to the action
taken by the locking/crossing market participant. To address these and other concerns with locked and
crossed markets, Nasdaq is proposing several amendments to its rules.
In general, the proposed amendments provide that if a market participant is a party to a
locked/crossed market prior to the open, beginning at 9:20 a.m., the market participant has the right to
send the other parties to the lock/cross a SelectNet message (“Trade-or-Move Message”), to which the
receiving market participant(s) must respond within 30 seconds by either: (1) trading with the message
for the full size of the message; or (2) moving its quotation to a price level that unlocks or uncrosses the
market.
Locks/Crosses Occurring At or After 9:20 a.m. and Before 9:30 a.m.
If a market participant locks/crosses the market between 9:20 a.m. and 9:29:59 a.m., the market
participant would be required to send, prior to or immediately after entering a locking/crossing
quotation, a Trade-or-Move Message(s) that was for at least an aggregate size of 5,000 shares to the party
or parties that the market participant is locking/crossing.
The receiving market participant will then be required to trade in full with the incoming message within
30 seconds or move its quote out of the way within 30 seconds.
3 The proposed rule change states that Nasdaq believes that the 9:20 a.m. benchmark establishes a reasonable point in time
for when market participants should be actively monitoring their quotes, responding to incoming Trade-or-Move Messages,
and monitoring prospectively for whether they are the actively locking/crossing market participants in the market and
therefore required to send out a Trade-or-Move Message for at least an aggregate
of 5,000 shares.
2
If the receiving market participant trades in full with the message, the market participant may
maintain its locked/crossed quotes and not move if it wishes to trade more shares. Thereafter, any party
to the lock/cross would have the right, but not the obligation,
to send a Trade-or-Move Message to any other party to the lock/cross, and any party to the lock/cross
that receives a Trade-or-Move Message would then have the obligation to trade or move within 30
seconds.
Locks/Crosses Prior to 9:20 a.m.
For locks/crosses that occur prior to 9:20 a.m., any party to a lock/cross would have the right,
but not the obligation, beginning at 9:20 a.m., to send a Trade-or-Move Message of any size to any party
to the lock/cross. Any party to the lock/cross that receives a Trade-or-Move Message would have the
obligation, beginning at 9:20 a.m., to trade or move within 30 seconds. Unlike locks/crosses that occur
at or after 9:20 a.m., however, there is no requirement that the locking/crossing market participant send
a specific number of shares to the parties to the lock/cross. According to the proposed rule change, the
rationale for this distinction is that it is often difficult to determine which party actively locked/crossed
the market in the period prior to 9:20 a.m. because market participants often do not actively monitor
their quotes prior to that time. The proposed rule change also states that this is the reason why, under
the proposed rule, the obligations and rights of the parties to the lock/cross do not start until 9:20 a.m.3
Ari Burstein
Assistant Counsel
Attachment