In 2023, as a corollary to revised listing standards related to notification and disclosure of reverse stock splits, Nasdaq adopted a rule change providing for a new regulatory halt procedure specific to the pre-market trading and opening of a Nasdaq-listed security undergoing a reverse stock split. Pointing to an increased volume of reverse splits, Nasdaq believed that the proposed amendment would help to better detect errors that might result from “market participants’ processing of the reverse stock split, including incorrect adjustment or entry of orders” before trading in the stock begins. (See this PubCo post.) Although, according to the NYSE, it has not experienced the same increased volume of reverse stock splits, it has now proposed to follow suit by amending Rule 123D (Halts in Trading) to “set forth specific requirements for halting and resuming trading in a security that is subject to a reverse stock split.” The proposed rule change has become effective under Rule 19b-4(f)(6).
If the NYSE is not experiencing the same type of increase in volume, why propose a rule change? According to the release, the NYSE proposed to adopt changes similar to Nasdaq’s “at the request of market participants who say that they would benefit from a consistent approach across exchanges with respect to regulatory halt rules around reverse stock splits.” The NYSE “believes that harmonizing its rules with Nasdaq’s in this area would enhance investor protection and maintain fair and orderly markets by minimizing the chance that market participants might make erroneous trades in a security because they were unaware that it had undergone a reverse stock split.” The NYSE also contends that the “change would help reduce the potential for market participants’ misunderstanding of the impact on the value of the issuer’ securities resulting from investors’ lack of advance knowledge of the reverse stock split, as well as errors resulting in a material effect on the market resulting from market participants’ processing of the reverse stock split, including incorrect adjustment or entry of orders.”
Under current rules, the NYSE “processes reverse stock splits overnight, with the security available for trading on other markets at 4:00 a.m. on a split-adjusted basis.” Recently, however, the NYSE stated that some market participants have “expressed concerns with allowing trading on an adjusted basis during those early trading sessions, noting that it is not optimal because system errors or problems with orders may go unnoticed for a period of time when a security that has undergone a reverse stock split opens for trading with the other thousands of securities. These errors have the potential to adversely affect investors, market participants, and the issuer.”
To address all of these issues, the NYSE proposed to amend Rule 123D to add new subparagraph (f) stating that, in the event of a reverse stock split, the NYSE “will halt trading in a security for which the Exchange is the Primary Listing Market before the end of post-market trading on other markets on the day immediately before the market effective date of a reverse stock split. Trading in the security will resume with a Trading Halt Auction starting at 9:30 a.m., at the start of the Exchange’s Core Trading Session, on the effective date of the reverse stock split.” The trading halt would be mandatory. According to the NYSE, the change was “modeled on the recently-approved Nasdaq rule.” The release indicates that the NYSE expects to “initiate the halt at 7:50 p.m., prior to the end of post-market trading on other markets at 8:00 p.m. on the day immediately before the split is effective.” The NYSE believes that these changes to the procedure “would give sufficient time for investors to review their orders and the quotes for the security and allow market participants to ensure that their systems have properly adjusted for the reverse stock split.”
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