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93-83 SEC Approves New Trade Reporting Requirements for Pre-Opening Transactions And Convertible Debt Transactions

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Executive Summary

Beginning December 20, 1993, members will be required to submit to the NASD trade reports of transactions in convertible debt securities listed on Nasdaq within 90 seconds after execution. Also on December 20, 1993, members executing trades between 9 and 9:30 a.m., Eastern Time (ET) in Nasdaq and over-the-counter (OTC) securities not listed on Nasdaq will be required to report those transactions within 90 seconds after execution to the NASD through the Automated Confirmation Transaction (ACTSM) service, utilizing the after-hours or ".T" symbol. The Securities and Exchange Commission (SEC) has approved both of these rule changes, which appear in Schedule D to the By-Laws. The text of the rules follows the discussion below.

Background and Description of Amendments

The SEC has approved a new Part XIII to Schedule D to the By-Laws to require real-time trade reporting for convertible bonds listed on Nasdaq. Specifically, the requirements call for members to report all transactions in convertible debt securities for surveillance purposes within 90 seconds after execution, using the same reporting protocols as those for Nasdaq equity securities. The new rules also provide that only those transactions for 99 bonds or less will be disseminated real-time to the public starting in April 1994. The NASD is simultaneously eliminating the requirement for end-of-day volume reporting currently required for market makers in convertible debt securities.

Market makers trading convertible bonds now report end-of-day volume and last-sale information into the ACT service, which will be designated as the vehicle for trade-by-trade transaction reporting for convertible debt. The time frames for reporting will be identical to those for equity securities, within 90 seconds after execution. The rules also specify which party to a transaction is required to report (in most transactions, the market maker registered in the bond in Nasdaq is the reporting party) and provide reporting policies, such as reporting transactions at the selling or purchasing price, irrespective of markups, markdowns, or commissions. These requirements parallel those currently in place for Nasdaq equity securities.

For members that trade infrequently, the NASD will make the ACT service desk available for trade reporting purposes. The NASD operates the ACT service desk to facilitate members that average fewer than five trades a day and that do not have Nasdaq Workstation® equipment. Therefore, the ACT service desk will also be made available to members that average five or fewer bond trades a day.

In implementing real-time reporting for Nasdaq convertible debt securities, the NASD carefully evaluated its effect on the membership. The NASD recognizes that increased transparency in the relatively illiquid convertible bond market could have significant costs in terms of liquidity and dealer participation in such a market. Accordingly, the NASD will disseminate on a real-time basis beginning in April 1994 only the retail or "odd lot" transactions, defined in the rules as transactions of 99 bonds or less. With this limited dissemination of information, the NASD believes that the potential negative impact on liquidity caused by real-time dissemination of all transaction prices and volumes will be mitigated, and the public will be better served by seeing intra-day transactional data. Accordingly, the NASD believes that the extension of trade reporting to convertible debt securities listed on Nasdaq and the dissemination of the retail-type trade reports will not result in an adverse impact on the liquidity of those securities because of the limited amount of market-sensitive information that will be made available to the public on a real-time basis.

The SEC has also approved amendments to Schedule D of the NASD By-Laws and the Rules of Practice and Procedure for the Automated Confirmation Transaction service to require trade reporting for transactions in Nasdaq securities and OTC securities not listed on Nasdaq between the hours of 9 and 9:30 a.m., ET. Under the new rule, members must append ".T" to trade reports submitted between 9 and 9:30 a.m., ET, because these trades occur outside normal market hours.

The new rules require members to input the details of reportable transactions from 9 to 9:30 a.m., ET, into ACT to facilitate trade reporting, comparison, and vendor dissemination. Pre-opening transactions in SelectNetSM during the 9 to 9:30 a.m., ET, session are already being processed and disseminated, and ACT will now be used to capture reports of trades executed outside of SelectNet during that time period. The changes mandate reporting of such trades through ACT within 90 seconds of execution. This requirement also reduces the use of Form T for reporting transactional data to the NASD and ensures that all trades in Nasdaq and OTC securities occurring between 9 and 9:30 a.m., ET, are fully integrated into the NASD's audit trail file.

The reporting requirements are effective December 20, 1993.

Questions regarding this Notice may be directed to Market Surveillance at (301) 590-6080 or to Beth E. Weimer, Associate General Counsel, at (202) 7286998.

Text of New Rules

(Note: New language is underlined; deletions are in brackets.)

SCHEDULE D

PART V

REQUIREMENTS APPLICABLE TO NASDAQ MARKET MAKERS

Sec. 5 Reports

[(a) Daily. A market maker shall report to the Automated Confirmation Transaction service each business day between 4:10 p.m. and 5:00 p.m. Eastern Time its daily volume, which shall be determined by the larger of total aggregated purchases or sales relating to convertible debt securities in which it is registered as a Nasdaq market maker. If a market maker has not executed transactions in a convertible debt security in which it is registered as a market maker on that business day, no report on that security need be submitted.

Daily volume reports shall be entered via the Automated Confirmation Transaction service. In cases of equipment malfunction or failure, volume reports shall be telephoned to Nasdaq Operations-Members.

A market maker shall also report to the Automated Confirmation Transaction service each business day all other data relating to convertible debt securities quoted in the Nasdaq system as the Association shall require.
(b) Monthly. A market maker shall report monthly to the Automated Confirmation Transaction service such data on securities quoted in the Nasdaq system as the Association shall require.]
[(c) Other.] A market maker shall make such [other] reports to the Association as may be prescribed from time to time by the Association.

PART X

REPORTING TRANSACTIONS IN NASDAQ NATIONAL MARKET SYSTEM DESIGNATED SECURITIES

Sec. 2 Transaction Reporting

(a) When and How Transactions are Reported

* * * * *
(4) Last sale reports of transactions in designated securities executed between 9:00 a.m. and 9:30 a.m. Eastern Time shall be transmitted through ACT within 90 seconds after execution and shall be designated as ".T" trades to denote their execution outside normal market hours. Additionally, last sale reports of transactions in designated securities executed between the hours of 4:00 p.m. and 5:15 p.m. Eastern Time shall be transmitted through ACT within 90 seconds after execution; trades executed and reported after 4:00 p.m. Eastern Time shall be designated as ".T" trades to denote their execution outside normal market hours. Transactions not reported within 90 seconds must include the time of execution on the trade report.
(5) All members shall report weekly to the Market Operations Department in New York City, on a form designated by the Board of Governors, last sale reports of transactions in designated securities executed outside the hours of [9:30] 9:00 a.m. and 5:15 p.m. Eastern Time.

* * * * *

PART XI

REPORTING TRANSACTIONS IN NASDAQ SMALLCAPSM SECURITIES

Sec. 2 Transaction Reporting

(a) When and How Transactions are Reported

* * * * *
(4) Last sale reports of transactions in designated securities executed between 9:00 a.m. and 9:30 a.m. Eastern Time shall be transmitted through ACT within 90 seconds after execution and shall be designated as ".T" trades to denote their execution outside normal market hours. Additionally, last sale reports of transactions in designated securities executed between the hours of 4:00 p.m. and 5:15 p.m. Eastern Time shall be transmitted through ACT within 90 seconds after execution; trades executed and reported after 4:00 p.m. Eastern Time shall be designated as ".T" trades to denote their execution outside normal market hours. Transactions not reported within 90 seconds must include the time of execution on the trade report.
(5) All members shall report weekly to the Market Operations Department in New York City, on a form designated by the Board of Governors, last sale reports of transactions in designated securities executed outside the hours of [9:30] 9:00 a.m. and 5:15 p.m. Eastern Time.

* * * * *

PART XII

REPORTING TRANSACTIONS IN OVER-THE-COUNTER EQUITY SECURITIES

Sec. 2 Transaction Reporting

(a) When and How Transactions are Reported

* * * * *
(3) Last sale reports of transactions in OTC Equity Securities executed between 9:00 a.m. and 9:30 a.m. Eastern Time shall be transmitted through ACT within 90 seconds after execution and shall be designated as ".T" trades to denote their execution outside normal market hours. Last sale reports of transactions in OTC Equity Securities executed between the hours of 4:00 p.m. and 5:15 p.m. Eastern Time shall also be transmitted through ACT within 90 seconds after execution; trades executed and reported after 4:00 p.m. Eastern Time shall be designated as ".T" trades to denote their execution outside normal market hours.
(4) All members shall report weekly to the Market Operations Department in New York City, on a form designated by the Board of Governors, last sale reports of transactions in OTC Equity Securities executed outside the hours of [9:30] 9:00 a.m. and 5:15 p.m. Eastern Time.

PART XIII

REPORTING TRANSACTIONS IN NASDAQ CONVERTIBLE DEBT SECURITIES

This Part has been adopted pursuant to Article VII of the Corporation's By-Laws and sets forth the applicable reporting requirements for transactions in convertible bonds that are listed on Nasdaq ("designated securities"). Members shall utilize the Automated Confirmation Transaction Service ("ACT") for transaction reporting.

Sec. 1 Definitions

(a) Terms used in this Part shall have the same meaning as those defined in the Association's By-Laws and Rules of Fair Practice, unless otherwise specified herein.
(b) "Automated Confirmation Transaction Service" is the service that, among other things, accommodates reporting and dissemination of last sale reports in designated securities.
(c) "Registered Reporting MarketMaker" means a member of the Association that is registered as a Nasdaq market maker in a particular designated security. A member is a Registered Reporting Market Maker in only those designated securities for which it is registered as a Nasdaq market maker. A member shall cease being a Registered Reporting Market Maker in a designated security when it has withdrawn or voluntarily terminated its quotations in that security or when its quotations have been suspended or terminated by action of the Corporation.
(d) "Non-Registered Reporting Member" means a member of the Association that is not a Registered Reporting Market Maker.

Sec. 2 Transaction Reporting

(a) When and How Transactions are Reported
(1) Registered Reporting Market Makers shall, within 90 seconds after execution, transmit through ACT last sale reports of transactions in designated securities executed during normal market hours. Transactions not reported within 90 seconds after execution shall be designated as late and such trade reports must include the time of execution.
(2) Non-Registered Reporting Members shall, within 90 seconds after execution, transmit through ACT or the ACT service desk (if qualified pursuant to Part VIII of Schedule D to the By-Laws), or if ACT is unavailable due to system or transmission failure, by telephone to the Market Operations Department in New York City, last sale reports of transactions in designated securities executed during normal market hours. Transactions not reported within 90 seconds after execution shall be designated as late and such trade reports must include the time of execution.
(3) Non-Registered Reporting Members shall report weekly to the Nasdaq Operations Department in New York City, on a form designated by the Board of Governors, last sale reports of transactions in designated securities which are not required by paragraph (2) to be reported within 90 seconds after execution.
(4) Last sale reports of transactions in designated securities executed between 9:00 a.m. and 9:30 a.m. Eastern Time shall be transmitted though ACT within 90 seconds after execution and shall be designated as ".T" trades to denote their execution outside normal market hours. Additionally, last sale reports of transactions in designated securities executed between the hours of 4:00 p.m. and 5:15 p.m. Eastern Time shall be transmitted through the ACT system within 90 seconds after execution; trades reported after 4:00 p.m. Eastern Time shall be designated as ".T" trades to denote their execution outside normal market hours. Transactions not reported within 90 seconds must include the time of execution on the trade report.
(5) All members shall report weekly to the Market Operations Department in New York City, on a form designated by the Board of Governors, last sale reports of transactions in designated securities executed outside the hours of 9:00 a.m. and 5:15 p.m. Eastern Time.
(6) All trade tickets for transactions in eligible securities shall be time-stamped at the time of execution.
(7) A pattern or practice of late reporting without exceptional circumstances may be considered conduct inconsistent with high standards of commercial honor and just and equitable principals of trade, in violation of Article III, Section 1 of the Rules of Fair Practice.
(b) Which Party Reports Transaction
(1) In transactions between two Registered Reporting Market Makers, only the member representing the sell side shall report.
(2) In transactions between a Registered Reporting Market Maker and a Non-Registered Reporting Member, only the Registered Reporting Market Maker shall report.
(3) In transactions between two Non-Registered Reporting Members, only the Member representing the sell side shall report.
(4) In transactions between a member and a customer, the member shall report.
(c) Information To Be Reported

Each last sale report shall contain the following information:
(1) Nasdaq symbol of the designated security;
(2) Number of bonds;
(3) Price of the transaction as required by paragraph (d) below;
(4) A symbol indicating whether the transaction is a buy, sell, or cross;
(5) The time of execution if the trade is reported more than 90 seconds after execution.
(d) Procedures for Reporting Price and Volume*

Members that are required to report pursuant to paragraph (b) above shall transmit last sale reports for all purchases and sales in designated securities in the following manner:
(1) For agency transactions, report the number of bonds and the price excluding the commission charged.
(2) For dual agency transactions, report the number of bonds only once, and report the price excluding the commission charged.
(3) For principal transactions, except as provided below, report each purchase and sale transaction separately and report the number of bonds and the price. For principal transactions that are executed at a price which includes a mark-up, mark-down or service charge, the price reported shall exclude the mark-up, markdown or service charge. Such reported price shall be reasonably related to the prevailing market, taking into consideration all relevant circumstances including, but not limited to, market conditions with respect to the bond, the number of bonds involved in the transaction, the published bids and offers with size at the time of the execution (including the reporting firm's own quotation), the cost of execution and the expenses involved in clearing the transaction. Exception: A "riskless" principal transaction in which a member that is not a market maker in the security after having received from a customer an order to buy, purchases the bond as principal from another member or customer to satisfy the order to buy or, after having received from a customer an order to sell, sells the bond as principal to another member or customer to satisfy the order to sell, shall be reported as one transaction in the same manner as an agency transaction, excluding the mark-up or mark-down.
(e) Transactions Not Required To Be Reported The following types of transactions shall not be reported:
(1) transactions which are part of a primary distribution by an issuer;
(2) transactions made in reliance on Section 4(2) of the Securities Act of 1933;
(3) transactions where the buyer and seller have agreed to trade at a price substantially unrelated to the current market for the bond, e.g., to enable the seller to make a gift;
(4) purchases or sales of bonds effected upon the exercise of an option pursuant to the terms thereof or the exercise of any other right to acquire bonds at a pre established consideration unrelated to the current market.
(f) Dissemination of Transaction Reports

The Association will collect and process trade reports on all transactions in convertible bonds listed on Nasdaq for surveillance purposes. On a real-time basis, the Association will disseminate to members and the public through the Nasdaq system and through securities information processors transactions in convertible debt listed on Nasdaq equalling 99 bonds or less.

• • • Interpretation of the Board of Governors

The Association seeks to emphasize the obligations of members to report transactions in designated securities within 90 seconds after execution. All transactions in designated securities not reported within 90 seconds after execution shall be reported as late, and the Association routinely monitors members' compliance with the 90 second requirement. If the Association finds a pattern or practice of unexcused late reporting, that is, repeated reports of executions in designated securities after 90 seconds without reasonable justification or exceptional circumstances, the member may be found to be in violation of Article III, Section 1 of the Association's Rules of Fair Practice. Exceptional circumstances will be determined on a case by case basis and may include conditions such as extreme volatility in a designated security, or in the market as a whole. Timely reporting of all transactions in designated securities is necessary and appropriate for the fair and orderly operation of the Association's marketplace, and the Association will view noncompliance as a rule violation.

* For examples of reporting procedures, refer to Part XII of this Schedule, "Reporting Transactions in Nasdaq National Market System Securities."


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