[17691]
June 21, 2004
TO: EQUITY MARKETS ADVISORY COMMITTEE No. 30-04
RE: NASDAQ PROPOSED RULE CHANGE RELATING TO NEW OPENING PROCESS
The Securities and Exchange Commission has published for comment a proposed rule
change filed by The Nasdaq Stock Market that would establish a new opening process for
Nasdaq securities.1 Specifically, the proposed rule change would modify the pre-market hours
trading environment for all Nasdaq securities, create the Nasdaq Opening Cross for Nasdaq’s
most active stocks, and create a Modified Opening Process for Nasdaq-listed securities that do
not participate in the Nasdaq Opening Cross. The most significant aspects of the proposed rule
change are summarized below.
I. The Modified Pre-Open Trading Environment
The modified pre-opening environment would have three components: (1) elimination
of the current “Trade-or-Move” process; (2) creation of pre-opening eligible orders; and (3)
opening quotations and pre-opening eligible orders at 9:25 a.m. rather than 9:29:30 a.m. This
modified pre-opening process would apply to all Nasdaq-listed securities.
The Release notes that since Nasdaq implemented an automated unlocking and
uncrossing process that ensures an unlocked market at or shortly after 9:29:30 a.m., the primary
function of the Trade-or-Move process has been reduced to maintaining unlocked markets prior
to 9:29:30 a.m. The proposal would move this automated unlocking process from 9:29:30 a.m. to
9:25 a.m. and would eliminate the Trade-or Move process entirely.
The proposed rule change also would create new extended-hours (X) orders available
for execution prior to the market open and throughout the trading day. These orders would
begin executing at 9:25 a.m. through a rather detailed “wake up” process. Finally, the proposed
rule change would modify the time-in-force for certain types of orders (i.e., DAY, Immediate or
Cancel, and Good-till-Cancel orders) to make those order types ineligible for preopening
processing. Those orders would still be available for entry prior to market opening but would
not be available for execution until 9:30 a.m.
1 Securities Exchange Act Release No. 49842 (June 9, 2004) (“Release”). The Release can be found on the SEC’s
website at http://www.sec.gov/rules/sro/nasd/34-49842.pdf.
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II. The NASDAQ Opening Cross
Under the proposal, certain Nasdaq-listed stocks would be designated to participate in
the Nasdaq Opening Cross.2 The Nasdaq Opening Cross would have three components: (1) the
creation of opening order types; (2) the dissemination of an order imbalance indicator via
Nasdaq proprietary data feeds; and (3) opening cross processing in the Nasdaq Market Center
at 9:30 a.m., which would create a single representative price that would be the Nasdaq Official
Opening Price.
The Release notes that the Opening Cross would begin with market participants
entering “On-Open” and “Opening Imbalance Only” (“OIO”) order types in the Nasdaq Market
Center. These orders would only be accepted for stocks eligible for participation in the Opening
Cross process. The On-Open Orders would not be displayed in the quotation montage or
disseminated via any Nasdaq data feeds and would only execute at the price determined by the
Opening Cross. In order to add sufficient liquidity to the market at and prior to the open,
Nasdaq would enable market participants to enter OIO orders, which would be priced as limit
orders and would not be displayed or disseminated. OIO orders would provide supplemental
liquidity and would execute only on the Opening Cross against any imbalance, similar to
imbalance only orders on the Nasdaq Closing Cross. OIO orders priced more aggressively than
the Nasdaq Market Center Inside ask (bid) before the open would be re-priced to the ask (bid)
prior to execution of the Opening Cross.
Beginning at 9:28 a.m., Nasdaq would begin disseminating an opening order imbalance
indicator on one or more Nasdaq proprietary data feeds.3 According to the Release, the order
imbalance indicator would be disseminated to give participants insight into the state of the
book and the opening cross if it were to take place at that time and “add transparency to the
market and encourage market participants to add liquidity to the market prior to the open.”
In the opening process, the opening book and the Nasdaq Market Center continuous
book would be brought together to create a single Nasdaq Opening Cross, which would occur
at 9:30 a.m. Nasdaq opening prices would be distributed to the consolidated tape immediately
after the Opening Cross. Following the Opening Cross, regular market hours trading would
proceed as it does today.
III. The Modified Opening Process
The Release notes that for those Nasdaq securities that do not participate in the Nasdaq
Opening Cross, Nasdaq has developed an improved procedure to ensure that all stocks open
with an unlocked inside market. Similar to the process that Nasdaq applies at 9:29:30 a.m. to
clear locks and crosses, the improved process would “wake up” orders that are eligible for
2 Upon initial implementation, Nasdaq plans to apply the opening cross process to securities included in the Nasdaq
100 Index, the S&P 500 Index, and the Nasdaq Biotech Index. According to the Release, Nasdaq would have the
authority to apply the Opening Cross to any and all Nasdaq NMS securities.
3 Similar to the closing order imbalance indicator, the opening imbalance information would include several pieces of
information regarding the cross: (1) the near indicative clearing price (the crossing price at which orders in the
opening book and Nasdaq Market Center continuous book would clear against each other); (2) the far indicative
clearing price (the crossing price at which orders in the opening book would clear against each other); (3) the current
inside match price; (4) the number of paired shares; and (5) the imbalance quantity.
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execution beginning at 9:30 a.m., and process them in an orderly fashion to prevent the creation
of locks and crosses. The process would have several steps, each of which occur in strict time
priority.
Jane G. Heinrichs
Assistant Counsel