Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change To Exempt All Securities Included in the NASDAQ-100 Index From the Price Test Set Forth in NASDAQ Rule 3350(a), 55042-55044 [E6-15572]

Download as PDF 55042 Federal Register / Vol. 71, No. 182 / Wednesday, September 20, 2006 / Notices number should be included on the subject line if e-mail 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 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 inspection and copying in the Commission’s Public Reference Room. Copies of the filing also will be available for inspection and copying at the principal office 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–CHX–2005–06 and should be submitted on or before October 11, 2006. V. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,50 that the proposed rule change (SR–CBOE–2005– 06), as amended, is approved. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.51 Nancy M. Morris, Secretary. [FR Doc. E6–15588 Filed 9–19–06; 8:45 am] BILLING CODE 8010–01–P (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on August 21, 2006, The NASDAQ Stock Market LLC (‘‘Nasdaq’’), filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described 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. In addition, the Commission is granting accelerated approval of the proposed rule change. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change Nasdaq has submitted a proposed rule change to exempt all securities included in the Nasdaq-100 Index from the price test set forth in NASDAQ Rule 3350(a). The text of the proposed rule change is below. Proposed new language is italicized. 3350 Short Sale Rule 3 (a)–(b) No Change. (c)(1)–(9) No Change. (10) Sales of securities included in the Nasdaq 100 Index. (d)–(l) No Change. * * * * * 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. SECURITIES AND EXCHANGE COMMISSION [Release No. 34–54435; File No. SR– NASDAQ–2006–031] A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose jlentini on PROD1PC65 with NOTICES Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change To Exempt All Securities Included in the NASDAQ-100 Index From the Price Test Set Forth in NASDAQ Rule 3350(a) Nasdaq is proposing to amend Rule 3350(c) to create an exemption from the short sale rule for securities included in the Nasdaq-100 Index. The National Association of Securities Dealers, Inc. (‘‘NASD’’), on behalf of Nasdaq, filed a similar proposal on June 15, 2006, SR– NASD–2006–076. On August 1, 2006, September 13, 2006. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 50 15 51 17 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). VerDate Aug<31>2005 17:40 Sep 19, 2006 Jkt 205001 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 Following discussions with Jeffrey Davis, Associate General Counsel, Nasdaq, Commission staff made technical changes to the proposed rule text. 2 17 PO 00000 Frm 00067 Fmt 4703 Sfmt 4703 Nasdaq began operating as a national securities exchange.4 Therefore, Nasdaq is filing this proposal as a national securities exchange. The previous filing, SR–NASD–2006–076, was published for notice and comment and no comments were received.5 The NASDAQ-100 Index. First introduced in 1985, the Nasdaq-100 Index was created to track the performance of the largest non-financial companies listed on The Nasdaq Stock Market, Inc. Nasdaq states that the Nasdaq-100 Index Tracking Stock, also known as ‘‘QQQ,’’ is the most actively traded ETF and the most actively traded listed equity security in the U.S. by average daily share trading volume. As of the end of the fourth quarter of 2005, QQQ traded an average of 90.4 million shares per day. Nasdaq notes that QQQ has grown significantly since its inception: From $14.5 million in assets at the start to $20.3 billion in assets as of December 31, 2005, and from 300,000 total shares outstanding to 501.95 million at the end of the fourth quarter of 2005. Nasdaq states that in addition to the QQQ, nearly 150 licensees have contracted with Nasdaq to use the Nasdaq-100 and other Nasdaq indices as benchmarks for the issuing and trading of their global financial products. Nasdaq also states that these third-party underwritten products, such as equitylinked notes, index warrants, certificates of deposits, leveraged products and basket securities, were sold in 32 countries and amounted to $157.05 billion in underlying notional value as of December 31, 2005. Further, Nasdaq notes that a total of 33 domestic and international mutual funds use this barometer index as a benchmark as well. Nasdaq notes that, as a result, the Nasdaq-100 stocks are highly liquid. For 4 The Commission approved Nasdaq’s application to register as a national securities exchange on January 13, 2006. See Securities Exchange Act Release No. 53128 (January 13, 2006), 71 FR 3550 (January 23, 2006). On June 30, 2006, the Commission issued an order modifying the conditions for the operation of Nasdaq as a national securities exchange. The Commission’s order enabled Nasdaq to begin operating as an exchange for securities listed on The NASDAQ Stock Market LLC and reported to the Joint Self-Regulatory Organization Plan Governing The Collecting, Consolidation and Dissemination of Quotation and Transaction Information for Nasdaq-Listed Securities Traded on Exchanges on an Unlisted Trading Privileges Basis. See Securities Exchange Act Release No. 54085 (June 30, 2006), 71 FR 38910 (July 10, 2006); See also Securities Exchange Act Release No. 54241 (July 31, 2006), 71 FR 45246 (August 8, 2006). 5 The NASD has filed an amendment to SR– NASD–2006–076 to propose a rule change to NASD Rule 5100 (formerly, NASD Rule 3350) that would, if approved, exempt all securities included in the Nasdaq-100 Index from the NASD’s price test. E:\FR\FM\20SEN1.SGM 20SEN1 jlentini on PROD1PC65 with NOTICES Federal Register / Vol. 71, No. 182 / Wednesday, September 20, 2006 / Notices the month of April 2006, the average daily volume for that group of securities was over 880 million shares. The average daily volume of an individual Nasdaq-100 security was over 8.8 million shares and the mean daily trading value of those securities was over 3.4 million shares. The Regulation SHO Pilot. Nasdaq notes that on June 23, 2004, the Commission approved new and amended short sale regulations in Regulation SHO under the Act. In addition, Nasdaq notes that on July 28, 2004, the Commission issued an order creating a one year Pilot (‘‘Pilot’’) suspending the provisions of Rule 10a– 1(a) under the Act and any short sale price test of any exchange or national securities association for short sales of certain securities. The Pilot was created pursuant to Rule 202T of Regulation SHO, which established procedures to allow the Commission to temporarily suspend short sale price tests so that the Commission could study the effectiveness of short sale price tests. Nasdaq also notes that on April 20, 2006, the Commission issued an order extending the termination date of the Pilot to August 6, 2007, the date on which temporary Rule 202T expires. Nasdaq notes that the Pilot exempts a selected list of securities from short sale price test restrictions of SEC Rule 10a– 1 and the rules of self regulatory organizations, including Nasdaq Rule 3350. In addition, Nasdaq states that of the roughly 1000 such securities, roughly 47 percent are listed on Nasdaq and, of those, 24 currently are included in the Nasdaq-100 Index. Rationale for Proposed Exemption. Nasdaq believes that the proposed exemption is consistent with the goals of short sale regulation because the stocks included in the Nasdaq-100 Index are highly liquid and not implicated by the objectives of the short sale rule. In addition, Nasdaq states that Congressional and Commission objectives included allowing relatively unrestricted short selling in an advancing market, preventing short selling at successively lower prices; and preventing short sellers from accelerating a declining market by exhausting all remaining bids at one price level. Thus, Nasdaq believes that given the highly liquid nature of securities listed in the Nasdaq-100 Index, the proposed exemption poses no risk to investors. Nasdaq believes that this conclusion is supported by the results of the Regulation SHO Pilot to date. Nasdaq asserts that numerous academics have used the implementation of Regulation SHO as a natural experiment to study VerDate Aug<31>2005 17:40 Sep 19, 2006 Jkt 205001 the effects of price-test exemptions on various measures of market quality and trading behavior. Nasdaq asserts that a recurring finding among these studies is that there is no indication that the pilot increased short-sale volume or volatility, decreased returns, or sacrificed market efficiency. In addition, Nasdaq states that the results also show that bid test rules had little-to-no effect on market quality or trading behavior for Nasdaq pilot stocks. Nasdaq believes that this finding is consistent with the ability of short-sellers to circumvent Nasdaq’s bid test rule by routing orders to markets without short-sale restrictions. Given the highly liquid nature of Nasdaq-100 securities and the absence of a material impact from the removal of price-based short sale restrictions on 24 of those securities, Nasdaq believes it would benefit investors to exempt the remaining stocks in the Nasdaq-100 Index. As Nasdaq describes above, Nasdaq believes that the Nasdaq-100 Index serves as the basis for billions of dollars of assets and trading in the basket of securities that make up the index. Nasdaq believes that the disparity of regulatory treatment between Nasdaq-100 securities that are included in the Pilot and those that are not is inefficient and potentially harmful to investors. In addition, Nasdaq believes that the proposed exemption will also remove the disparity in short sale regulation that currently exists between markets. Nasdaq states that as opposed to the Nasdaq, which has voluntarily adopted a short sale rule for Nasdaq securities, several exchanges that trade Nasdaq securities do so with no short sale regulation, encouraging market participants to route short sale orders to their markets to avoid any regulatory restriction. As a result, Nasdaq believes that the level of regulatory protection an investor receives depends almost entirely on the market to which the investor’s order is routed. Nasdaq asserts that this disparity harms customers on all markets by forcing traders to choose between bypassing limit orders posted on Nasdaq, delaying executing those orders, or declining to execute. Nasdaq believes that the proposed exemption is designed to help to alleviate these issues. 2. Statutory Basis Nasdaq believes that the proposed rule change is consistent with the provisions of Section 6 of the Act, in general, and with Section 6(b)(5) of the Act, in particular, in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and PO 00000 Frm 00068 Fmt 4703 Sfmt 4703 55043 equitable principles of trade, remove impediments to a free and open market and a national market system, and, in general, to protect investors and the public interest. 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, as amended. 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. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change, as amended, 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 e-mail to rulecomments@sec.gov. Please include File Number SR–NASDAQ–2006–031 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, Station Place, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–NASDAQ–2006–031. This file number should be included on the subject line if e-mail 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 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 inspection and copying in the Commission’s Public Reference Section, 100 F Street, NE., Washington, E:\FR\FM\20SEN1.SGM 20SEN1 55044 Federal Register / Vol. 71, No. 182 / Wednesday, September 20, 2006 / Notices DC 20549–1090. Copies of such filing also will be available for inspection and copying at the principal office of Nasdaq. 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–2006–031 and should be submitted on or before October 11, 2006. IV. Commission’s Findings and Order Granting Accelerated Approval of Proposed Rule Change After careful consideration, the Commission finds that the proposed rule change is consistent with the requirements of the Act 6 and the rules and regulations thereunder applicable to a national securities exchange.7 In particular, the Commission finds that the proposed rule change, as amended, is consistent with the requirements of Section 6(b)(5) of the Exchange Act,8 which requires, among other things, that the Exchange’s rules be designed 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. Nasdaq Rule 3350 prohibits short sales in Nasdaq Global Market securities at or below the current best (inside) bid displayed in the Nasdaq Market Center when the current best (inside) bid is below the previous best (inside) bid in the security (the ‘‘bid test’’). Nasdaq Rule 3350 is inapplicable to National Capital Market securities. The proposed rule change amends Nasdaq Rule 3350(c) to exempt from its price test securities included in the Nasdaq-100 Index. The Commission is currently conducting the Pilot to study and evaluate the overall effectiveness and necessity of short sale prices tests.9 On 6 15 U.S.C. 78f. approving this proposed rule change, the Commission notes that it has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 8 15 U.S.C. 78f(b)(5). 9 See Securities Exchange Act Release No. 50104 (July 28, 2004), 69 FR 48032 (August 6, 2004) (‘‘First Pilot Order’’). The Pilot suspended price tests for the following: (1) Short sales in the securities identified in Appendix A to the First Pilot Order; (2) short sales in the securities included in the Russell 1000 index effected between 4:15 p.m. EST and the open of the effective transaction reporting plan of the Consolidated Tape Association (‘‘consolidated tape’’) on the following day; and (3) short sales in any security not included in paragraphs (1) and (2) effected in the period between the close of the consolidated tape and the open of the consolidated tape on the following day. jlentini on PROD1PC65 with NOTICES 7 In VerDate Aug<31>2005 17:40 Sep 19, 2006 Jkt 205001 April 20, 2006, we extended the Pilot in order to maintain the status quo for price tests of Pilot securities while we complete our analysis of the results of the Pilot and conduct any additional rulemaking that we determine may be warranted.10 We have not reached any conclusions regarding price tests. However, we believe that this proposed rule change is consistent with the statute. In accordance with Section 6(b) of the Act, the proposed amendment is designed to remove impediments to and perfect the mechanism of a free and open market and a national market system. In addition, the proposed amendment does not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. Nasdaq securities are currently not subject to any price test when traded on other exchanges. Currently, Nasdaq and the NASD (for Nasdaq securities traded over the counter and reported to a NASD facility) are the only markets required to apply a price test to Nasdaq securities. Thus, Nasdaq believes it is at a competitive disadvantage with regard to these securities as market participants may make order routing decisions based on this disparity. In addition, we note that the stocks included in the Nasdaq100 Index are highly liquid and less likely to be subject to manipulation than less liquid stocks. Nasdaq has requested that the Commission find good cause for approving the proposed rule change prior to the 30th day after publication of notice thereof in the Federal Register. The Commission notes that a substantially similar rule filing, SR– NASD–2006–076, that would have exempted all securities included in the Nasdaq-100 Index from the price test in former NASD Rule 3350, was previously filed by NASD on June 15, 2006, through its subsidiary, The Nasdaq Stock Market, Inc., prior to Nasdaq commencing operations as a national securities exchange.11 SR–NASD–2006– 076 was published for comment in the Federal Register on June 22, 2006. The Commission received no comments on the proposal. Accordingly, the Commission finds good cause exists, consistent with Sections 6(b)(5) and 19(b)(2) of the Act,12 to approve the proposed rule change on an accelerated basis, prior to the 30th day after the date 10 See Order Extending Term of Short Sale Pilot, Release No. 34–53684 (April 20, 2006), 71 FR 24765 (April 26, 2006). 11 See also, supra n. 4. 12 15 U.S.C. 78f(b)(5); 15 U.S.C. 78s(b)(2). PO 00000 Frm 00069 Fmt 4703 Sfmt 4703 of publication of the notice of filing thereof in the Federal Register. V. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act that the proposed rule change (SR–NASDAQ– 2006–031) is approved on an accelerated basis. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.13 Nancy M. Morris, Secretary. [FR Doc. E6–15572 Filed 9–19–06; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–54438; File No. SR– NYSEArca–2006–43] Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change and Amendment Nos. 1 and 2 Thereto Relating to Fees for Tracking Orders Submitted and Executed on NYSE Arca, Inc., Regulatory Filing and Registration Fees for Equity Trading Permit Holders, and Drop Copy Processing Fees for Certain Trades in Listed and Nasdaq Securities September 13, 2006. 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 June 30, 2006, NYSE Arca, Inc. (‘‘NYSE Arca’’ or ‘‘Exchange’’), through its wholly owned subsidiary NYSE Arca Equities, Inc. (‘‘NYSE Arca Equities’’), filed with the Securities and Exchange Commission (‘‘Commission’’ or ‘‘SEC’’) the proposed rule change as described in Items I, II and III below, which Items have been prepared by NYSE Arca Equities. On August 16, 2006, the Exchange amended the proposed rule change.3 On September 8, 2006, the Exchange again amended the proposed rule change.4 The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons. 13 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Amendment No. 1. 4 See Amendment No. 2. 1 15 E:\FR\FM\20SEN1.SGM 20SEN1

Agencies

[Federal Register Volume 71, Number 182 (Wednesday, September 20, 2006)]
[Notices]
[Pages 55042-55044]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-15572]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54435; File No. SR-NASDAQ-2006-031]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Order Granting Accelerated Approval of Proposed 
Rule Change To Exempt All Securities Included in the NASDAQ-100 Index 
From the Price Test Set Forth in NASDAQ Rule 3350(a)

September 13, 2006.
    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 21, 2006, The NASDAQ Stock Market LLC (``Nasdaq''), filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described 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. In addition, the Commission is granting 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

    Nasdaq has submitted a proposed rule change to exempt all 
securities included in the Nasdaq-100 Index from the price test set 
forth in NASDAQ Rule 3350(a). The text of the proposed rule change is 
below. Proposed new language is italicized.
    3350 Short Sale Rule \3\
---------------------------------------------------------------------------

    \3\ Following discussions with Jeffrey Davis, Associate General 
Counsel, Nasdaq, Commission staff made technical changes to the 
proposed rule text.
---------------------------------------------------------------------------

    (a)-(b) No Change.
    (c)(1)-(9) No Change.
    (10) Sales of securities included in the Nasdaq 100 Index.
    (d)-(l) No Change.
* * * * *

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
    Nasdaq is proposing to amend Rule 3350(c) to create an exemption 
from the short sale rule for securities included in the Nasdaq-100 
Index. The National Association of Securities Dealers, Inc. (``NASD''), 
on behalf of Nasdaq, filed a similar proposal on June 15, 2006, SR-
NASD-2006-076. On August 1, 2006, Nasdaq began operating as a national 
securities exchange.\4\ Therefore, Nasdaq is filing this proposal as a 
national securities exchange. The previous filing, SR-NASD-2006-076, 
was published for notice and comment and no comments were received.\5\
---------------------------------------------------------------------------

    \4\ The Commission approved Nasdaq's application to register as 
a national securities exchange on January 13, 2006. See Securities 
Exchange Act Release No. 53128 (January 13, 2006), 71 FR 3550 
(January 23, 2006). On June 30, 2006, the Commission issued an order 
modifying the conditions for the operation of Nasdaq as a national 
securities exchange. The Commission's order enabled Nasdaq to begin 
operating as an exchange for securities listed on The NASDAQ Stock 
Market LLC and reported to the Joint Self-Regulatory Organization 
Plan Governing The Collecting, Consolidation and Dissemination of 
Quotation and Transaction Information for Nasdaq-Listed Securities 
Traded on Exchanges on an Unlisted Trading Privileges Basis. See 
Securities Exchange Act Release No. 54085 (June 30, 2006), 71 FR 
38910 (July 10, 2006); See also Securities Exchange Act Release No. 
54241 (July 31, 2006), 71 FR 45246 (August 8, 2006).
    \5\ The NASD has filed an amendment to SR-NASD-2006-076 to 
propose a rule change to NASD Rule 5100 (formerly, NASD Rule 3350) 
that would, if approved, exempt all securities included in the 
Nasdaq-100 Index from the NASD's price test.
---------------------------------------------------------------------------

    The NASDAQ-100 Index. First introduced in 1985, the Nasdaq-100 
Index was created to track the performance of the largest non-financial 
companies listed on The Nasdaq Stock Market, Inc. Nasdaq states that 
the Nasdaq-100 Index Tracking Stock, also known as ``QQQ,'' is the most 
actively traded ETF and the most actively traded listed equity security 
in the U.S. by average daily share trading volume. As of the end of the 
fourth quarter of 2005, QQQ traded an average of 90.4 million shares 
per day. Nasdaq notes that QQQ has grown significantly since its 
inception: From $14.5 million in assets at the start to $20.3 billion 
in assets as of December 31, 2005, and from 300,000 total shares 
outstanding to 501.95 million at the end of the fourth quarter of 2005.
    Nasdaq states that in addition to the QQQ, nearly 150 licensees 
have contracted with Nasdaq to use the Nasdaq-100 and other Nasdaq 
indices as benchmarks for the issuing and trading of their global 
financial products. Nasdaq also states that these third-party 
underwritten products, such as equity-linked notes, index warrants, 
certificates of deposits, leveraged products and basket securities, 
were sold in 32 countries and amounted to $157.05 billion in underlying 
notional value as of December 31, 2005. Further, Nasdaq notes that a 
total of 33 domestic and international mutual funds use this barometer 
index as a benchmark as well.
    Nasdaq notes that, as a result, the Nasdaq-100 stocks are highly 
liquid. For

[[Page 55043]]

the month of April 2006, the average daily volume for that group of 
securities was over 880 million shares. The average daily volume of an 
individual Nasdaq-100 security was over 8.8 million shares and the mean 
daily trading value of those securities was over 3.4 million shares.
    The Regulation SHO Pilot. Nasdaq notes that on June 23, 2004, the 
Commission approved new and amended short sale regulations in 
Regulation SHO under the Act. In addition, Nasdaq notes that on July 
28, 2004, the Commission issued an order creating a one year Pilot 
(``Pilot'') suspending the provisions of Rule 10a-1(a) under the Act 
and any short sale price test of any exchange or national securities 
association for short sales of certain securities. The Pilot was 
created pursuant to Rule 202T of Regulation SHO, which established 
procedures to allow the Commission to temporarily suspend short sale 
price tests so that the Commission could study the effectiveness of 
short sale price tests. Nasdaq also notes that on April 20, 2006, the 
Commission issued an order extending the termination date of the Pilot 
to August 6, 2007, the date on which temporary Rule 202T expires.
    Nasdaq notes that the Pilot exempts a selected list of securities 
from short sale price test restrictions of SEC Rule 10a-1 and the rules 
of self regulatory organizations, including Nasdaq Rule 3350. In 
addition, Nasdaq states that of the roughly 1000 such securities, 
roughly 47 percent are listed on Nasdaq and, of those, 24 currently are 
included in the Nasdaq-100 Index.
    Rationale for Proposed Exemption. Nasdaq believes that the proposed 
exemption is consistent with the goals of short sale regulation because 
the stocks included in the Nasdaq-100 Index are highly liquid and not 
implicated by the objectives of the short sale rule. In addition, 
Nasdaq states that Congressional and Commission objectives included 
allowing relatively unrestricted short selling in an advancing market, 
preventing short selling at successively lower prices; and preventing 
short sellers from accelerating a declining market by exhausting all 
remaining bids at one price level. Thus, Nasdaq believes that given the 
highly liquid nature of securities listed in the Nasdaq-100 Index, the 
proposed exemption poses no risk to investors.
    Nasdaq believes that this conclusion is supported by the results of 
the Regulation SHO Pilot to date. Nasdaq asserts that numerous 
academics have used the implementation of Regulation SHO as a natural 
experiment to study the effects of price-test exemptions on various 
measures of market quality and trading behavior. Nasdaq asserts that a 
recurring finding among these studies is that there is no indication 
that the pilot increased short-sale volume or volatility, decreased 
returns, or sacrificed market efficiency. In addition, Nasdaq states 
that the results also show that bid test rules had little-to-no effect 
on market quality or trading behavior for Nasdaq pilot stocks. Nasdaq 
believes that this finding is consistent with the ability of short-
sellers to circumvent Nasdaq's bid test rule by routing orders to 
markets without short-sale restrictions.
    Given the highly liquid nature of Nasdaq-100 securities and the 
absence of a material impact from the removal of price-based short sale 
restrictions on 24 of those securities, Nasdaq believes it would 
benefit investors to exempt the remaining stocks in the Nasdaq-100 
Index. As Nasdaq describes above, Nasdaq believes that the Nasdaq-100 
Index serves as the basis for billions of dollars of assets and trading 
in the basket of securities that make up the index. Nasdaq believes 
that the disparity of regulatory treatment between Nasdaq-100 
securities that are included in the Pilot and those that are not is 
inefficient and potentially harmful to investors.
    In addition, Nasdaq believes that the proposed exemption will also 
remove the disparity in short sale regulation that currently exists 
between markets. Nasdaq states that as opposed to the Nasdaq, which has 
voluntarily adopted a short sale rule for Nasdaq securities, several 
exchanges that trade Nasdaq securities do so with no short sale 
regulation, encouraging market participants to route short sale orders 
to their markets to avoid any regulatory restriction. As a result, 
Nasdaq believes that the level of regulatory protection an investor 
receives depends almost entirely on the market to which the investor's 
order is routed. Nasdaq asserts that this disparity harms customers on 
all markets by forcing traders to choose between bypassing limit orders 
posted on Nasdaq, delaying executing those orders, or declining to 
execute. Nasdaq believes that the proposed exemption is designed to 
help to alleviate these issues.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act, in general, and with Section 
6(b)(5) of the Act, in particular, in that it is designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, remove impediments to a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest.

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, as amended.

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. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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 e-mail to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2006-031 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2006-031. This 
file number should be included on the subject line if e-mail 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 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 inspection 
and copying in the Commission's Public Reference Section, 100 F Street, 
NE., Washington,

[[Page 55044]]

DC 20549-1090. Copies of such filing also will be available for 
inspection and copying at the principal office of Nasdaq. 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-2006-031 and should 
be submitted on or before October 11, 2006.

 IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act \6\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.\7\ In particular, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of Section 
6(b)(5) of the Exchange Act,\8\ which requires, among other things, 
that the Exchange's rules be designed 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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    \6\ 15 U.S.C. 78f.
    \7\ In approving this proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b)(5).
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    Nasdaq Rule 3350 prohibits short sales in Nasdaq Global Market 
securities at or below the current best (inside) bid displayed in the 
Nasdaq Market Center when the current best (inside) bid is below the 
previous best (inside) bid in the security (the ``bid test''). Nasdaq 
Rule 3350 is inapplicable to National Capital Market securities. The 
proposed rule change amends Nasdaq Rule 3350(c) to exempt from its 
price test securities included in the Nasdaq-100 Index.
    The Commission is currently conducting the Pilot to study and 
evaluate the overall effectiveness and necessity of short sale prices 
tests.\9\ On April 20, 2006, we extended the Pilot in order to maintain 
the status quo for price tests of Pilot securities while we complete 
our analysis of the results of the Pilot and conduct any additional 
rulemaking that we determine may be warranted.\10\
    We have not reached any conclusions regarding price tests. However, 
we believe that this proposed rule change is consistent with the 
statute. In accordance with Section 6(b) of the Act, the proposed 
amendment is designed to remove impediments to and perfect the 
mechanism of a free and open market and a national market system. In 
addition, the proposed amendment does not impose any burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Act. Nasdaq securities are currently not subject to any price 
test when traded on other exchanges. Currently, Nasdaq and the NASD 
(for Nasdaq securities traded over the counter and reported to a NASD 
facility) are the only markets required to apply a price test to Nasdaq 
securities. Thus, Nasdaq believes it is at a competitive disadvantage 
with regard to these securities as market participants may make order 
routing decisions based on this disparity. In addition, we note that 
the stocks included in the Nasdaq-100 Index are highly liquid and less 
likely to be subject to manipulation than less liquid stocks.
    Nasdaq has requested that the Commission find good cause for 
approving the proposed rule change prior to the 30th day after 
publication of notice thereof in the Federal Register. The Commission 
notes that a substantially similar rule filing, SR-NASD-2006-076, that 
would have exempted all securities included in the Nasdaq-100 Index 
from the price test in former NASD Rule 3350, was previously filed by 
NASD on June 15, 2006, through its subsidiary, The Nasdaq Stock Market, 
Inc., prior to Nasdaq commencing operations as a national securities 
exchange.\11\ SR-NASD-2006-076 was published for comment in the Federal 
Register on June 22, 2006. The Commission received no comments on the 
proposal. Accordingly, the Commission finds good cause exists, 
consistent with Sections 6(b)(5) and 19(b)(2) of the Act,\12\ to 
approve the proposed rule change on an accelerated basis, prior to the 
30th day after the date of publication of the notice of filing thereof 
in the Federal Register.
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    \9\ See Securities Exchange Act Release No. 50104 (July 28, 
2004), 69 FR 48032 (August 6, 2004) (``First Pilot Order''). The 
Pilot suspended price tests for the following: (1) Short sales in 
the securities identified in Appendix A to the First Pilot Order; 
(2) short sales in the securities included in the Russell 1000 index 
effected between 4:15 p.m. EST and the open of the effective 
transaction reporting plan of the Consolidated Tape Association 
(``consolidated tape'') on the following day; and (3) short sales in 
any security not included in paragraphs (1) and (2) effected in the 
period between the close of the consolidated tape and the open of 
the consolidated tape on the following day.
    \10\ See Order Extending Term of Short Sale Pilot, Release No. 
34-53684 (April 20, 2006), 71 FR 24765 (April 26, 2006).
    \11\ See also, supra n. 4.
    \12\ 15 U.S.C. 78f(b)(5); 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
that the proposed rule change (SR-NASDAQ-2006-031) is approved on an 
accelerated basis.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-15572 Filed 9-19-06; 8:45 am]
BILLING CODE 8010-01-P