Notice to Members 00-42
NASD Regulation, Inc. Reiterates the Obligation of Member Firms to Comply with Trading Rules, Particularly Immediately Prior to the Close on Expiration Fridays and Index Rebalancing Days
As more derivative instruments overlay securities listed on The Nasdaq Stock Market and more Nasdaq-listed securities are included in broad-based and narrow-based stock indexes, the amount of trading activity on Nasdaq attributable to and associated with derivative trading strategies and indexation strategies has likewise increased. Accordingly, because these "order surges" may cause market makers to act in a manner that contributes to short-term price volatility, it is critically important that NASD members adhere to all trading rules that are designed to keep Nasdaq securities at their equilibrium price levels. Specifically, during times of heavy volume, it is essential that member firms comply with the NASD’s locked and crossed market rule, respond to liability SelectNet orders in conformance with the Securities and Exchange Commission’s firm quote rule, and report their trades in a timely and accurate manner. In addition, while this Notice focuses primarily on regulatory requirements at the close of trading on Expiration Fridays and index rebalancing days, these same regulatory requirements apply equally throughout the entire trading day.
Failure to adhere to the locked and crossed market rule, coupled with failure to respond to SelectNet liability orders and other trading activity, could constitute manipulative conduct in violation of SEC and NASD anti-fraud provisions (SEC Rule 10b-5 and NASD Rule 2120), as well as a violation of the locked and crossed markets rule, firm quote rule, and just and equitable principles of trade. In addition to subjecting member firms to potential disciplinary action, such activity could also subject individual traders to potential disciplinary action.
Questions regarding this Notice may be directed to the Legal Section, Market Regulation, NASD Regulation, at (301) 590-6410; or the Office of General Counsel, The Nasdaq Stock Market, at (202) 728-8294