Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Regarding Guidance for Adjudicating Clearly Erroneous Transactions Under Rule 11890, 71208-71213 [E6-20806]
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Federal Register / Vol. 71, No. 236 / Friday, December 8, 2006 / Notices
Electronic Comments
applicable to the other securities
transactions currently processed
through the Canadian-Link Service.
Statutory Basis for the Proposed Rule
Change
Section 17A(a)(3)(F) of the Act
requires that the rules of a registered
clearing agency be designed to promote
the prompt and accurate clearance and
settlement of securities transactions and
to assure the safeguarding of securities
and funds which are in its possession or
control or for which it is responsible.
The proposed enhancement to the
Canadian-Link Service should promote
the prompt and accurate clearance and
settlement of cross-border securities
transactions between DTC Participants
and CDS Participants and between DTC
Participants and other DTC Participants
in a secure, efficient, and regulated
environment.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
DTC does not believe that the
proposed rule change will impose any
burden on competition.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments relating to the
proposed rule change have been
solicited or received by DTC from
members, participants, or other persons.
DTC will notify the Commission of any
written comments it receives.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within thirty five days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
ninety days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
(a) By order approve the proposed
rule change or,
(b) Institute proceedings to determine
whether the proposed rule change
should be disapproved.
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IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
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19:05 Dec 07, 2006
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• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–DTC–2006–15 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–54854; File No. SR–
NASDAQ–2006–046]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change Regarding
Guidance for Adjudicating Clearly
Erroneous Transactions Under Rule
11890
December 1, 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 November
All submissions should refer to File
7, 2006, The NASDAQ Stock Market
Number SR–DTC–2006–15. This file
LLC (‘‘Nasdaq’’), filed with the
number should be included on the
Securities and Exchange Commission
subject line if e-mail is used. To help the
(‘‘Commission’’) the proposed rule
Commission process and review your
change as described in Items I and II
comments more efficiently, please use
below, which Items have been prepared
only one method. The Commission will by Nasdaq. Nasdaq filed the proposal as
post all comments on the Commission’s a ‘‘non-controversial’’ rule change
Internet Web site (https://www.sec.gov/
pursuant to Section 19(b)(3)(A) of the
rules/sro.shtml). Copies of the
Act,3 and Rule 19b–4(f)(6) thereunder,4
submission, all subsequent
which renders the proposal effective
amendments, all written statements
upon filing with the Commission. The
with respect to the proposed rule
Commission is publishing this notice to
change that are filed with the
solicit comments on the proposed rule
Commission, and all written
change from interested persons.
communications relating to the
I. Self-Regulatory Organization’s
proposed rule change between the
Statement of the Terms of Substance of
Commission and any person, other than
the Proposed Rule Change
those that may be withheld from the
Nasdaq is providing guidance
public in accordance with the
regarding factors it generally considers
provisions of 5 U.S.C. 552, will be
in adjudicating clearly erroneous
available for inspection and copying in
transactions under Nasdaq Rule 11890.
the Commission’s Public Reference
The text of the proposed rule change
Room. Copies of the filing also will be
is below. Proposed new language is in
available for inspection and copying at
italics.
the principal office of DTC. All
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comments received will be posted
without change; the Commission does
IM–11890–4. Clearly Erroneous
not edit personal identifying
Transaction Guidance for Filings under
Rule 11890(a) and Single Stock Events
information from submissions. You
under Rule 11890(b)
should submit only information that
you wish to make available publicly. All
Nasdaq is providing the following
submissions should refer to File
guidance on how it generally considers:
Number SR–DTC–2006–15 and should
• All complaints filed by market
be submitted on or before December 29, participants under Rule 11890(a); and
• Many events involving a single
2006.
security considered on Nasdaq’s own
For the Commission, by the Division of
motion pursuant to Rule 11890(b).
Market Regulation, pursuant to delegated
Nasdaq generally considers a
4
authority.
transaction to be clearly erroneous when
Florence E. Harmon,
the print is substantially inconsistent
Deputy Secretary.
with the market price at the time of
[FR Doc. E6–20868 Filed 12–7–06; 8:45 am]
execution. In making such a
determination, Nasdaq takes into
BILLING CODE 8011–01–P
account the circumstances at the time of
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A).
4 17 CFR 240.19b–4(f)(6).
2 17
4 17
PO 00000
CFR 200.30–3(a)(12).
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Federal Register / Vol. 71, No. 236 / Friday, December 8, 2006 / Notices
the transaction, the maintenance of a
fair and orderly market, and the
protection of investors and the public
interest. Participants in Nasdaq are
responsible for ensuring that the
appropriate price and type of order are
entered into Nasdaq’s systems. Simple
assertion by a firm that it made a
mistake in entering an order or a quote,
or that it failed to pay attention or to
update a quote, may not be sufficient to
establish that a transaction was clearly
erroneous.
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Numerical factors for review
Nasdaq primarily considers the
execution price of a trade in
determining whether it is clearly
erroneous.
Execution price
Range away from reference price
$1.75 and under .......................................................................................
Equal to or greater than the minimum threshold required for adjudication under Rule 11890(a)(2)(C)(ii).
10%
5%
3%
Over $1.75 and up to $25 ........................................................................
Over $25 and up to $50 ...........................................................................
Over $50 ...................................................................................................
Nasdaq uses different Reference
Prices based on the time of the trade
and the listing venue of the security in
order to establish an appropriate
comparison point. These Reference
Prices are detailed below. In unusual
circumstances, however, Nasdaq may
use a different Reference Price.
Time of trade and listing venue
Reference price
Nasdaq-listed securities for trades executed between 9:30 am and 4
pm Eastern Time (‘‘Regular Session’’).
Non-Nasdaq-listed securities for trades executed during Regular Session and after primary market has posted first two-sided quote.
Non-Nasdaq-listed securities for trades executed during Regular Session and before primary market has posted first two-sided quote.
The best bid (best offer) (‘‘BBO’’) in Nasdaq at the time of execution of
first share of the disputed order.
The national BBO at the time of execution of first share of the disputed
order.
The national BBO at the time of execution of first share of the disputed
order. If national BBO does not appear substantially related to market, Nasdaq may consider other Reference Prices including the
opening trade, indication of interest and first two-sided quote in the
primary market (which may occur after the execution) and the closing price for the prior Regular Session for the security’s primary market.
Closing price of security for the last Regular Session on the security’s
primary market.
Nasdaq-listed and non-Nasdaq-listed securities for trades executed
after 4 pm and before 9:30 am Eastern Time.
Additional Factors
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In occasional circumstances, Nasdaq
may consider additional factors in
determining whether a transaction is
clearly erroneous. These include:
• Material news released for the
security
• Suspicious trading activity
• System malfunctions or disruptions
• Locked or crossed markets
• Trading in the security was recently
halted/resumed
• The security is an initial public
offering
• Volume and volatility for the
security
• Stock-split, reorganization or other
corporate action.
• Validity of consolidated tape trades
and quotes and Nasdaq BBO
comparison to national BBO.
• General volatility of market
conditions.
• Reason for the error.
Additional Information Concerning Rule
11890(b)
Nasdaq may on its own motion review
transactions in any security in the event
of:
• A disruption or malfunction in the
use or operation of any quotation,
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execution, communication, or trade
reporting system owned or operated by
Nasdaq and approved by the SEC;
• Extraordinary market conditions or
other circumstances in which the
nullification or modification of
transactions may be necessary for the
maintenance of a fair and orderly
market or the protection of investors
and the public interest.
Consequently, Rule 11890(b) is focused
on systemic problems that involve large
numbers of parties or trades, or market
conditions where it would not be in the
best interests of the market to proceed
under the processes set forth in Rule
11890(a). Sometimes events involving a
single security will meet the standards
of Rule 11890(b). However, market
participants should not assume that
Rule 11890(b) will be available where,
for example, they failed to file a
complaint within the time periods
specified in Rule 11890(a). The rule
could be available, however, in cases
where a trade not eligible for
adjudication under Rule 11890(a)
nevertheless could present systemic
risks if permitted to stand.
The guidance set forth in IM–11890–
4 applies to many events involving a
single security adjudicated pursuant to
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Rule 11890(b). However, Nasdaq may
apply the guidance set forth in IM
11890–5 to some events involving a
single security, such as some situations
where trading activity occurs in multiple
market centers and Nasdaq is acting in
consultation with other markets.
IM–11890–5. Clearly Erroneous
Transaction Guidance for Multi-Stock
Events Under Rule 11890(b)
Nasdaq is providing the following
guidance on how it generally considers
multi-stock events adjudicated on
Nasdaq’s own motion pursuant to Rule
11890(b).
Nasdaq generally considers a
transaction to be clearly erroneous when
the print is substantially inconsistent
with the market price at the time of
execution. In making such a
determination, Nasdaq takes into
account the circumstances at the time of
the transaction, the maintenance of a
fair and orderly market, and the
protection of investors and the public
interest. Participants in Nasdaq are
responsible for ensuring that the
appropriate price and type of order are
entered into Nasdaq’s systems. Simple
assertion by a firm that it made a
mistake in entering an order or a quote,
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or that it failed to pay attention or to
update a quote, may not be sufficient to
establish that a transaction was clearly
erroneous.
Nasdaq may on its own motion review
transactions in any security in the event
of:
• A disruption or malfunction in the
use or operation of any quotation,
execution, communication, or trade
reporting system owned or operated by
Nasdaq and approved by the SEC; or
• Extraordinary market conditions or
other circumstances in which the
nullification or modification of
transactions may be necessary for the
maintenance of a fair and orderly
market or the protection of investors
and the public interest.
Consequently, Rule 11890(b) is focused
on systemic problems that involve large
numbers of parties or trades, or market
conditions where it would not be in the
best interests of the market to proceed
under the processes set forth in Rule
11890(a). Even in cases involving
multiple securities, however, market
participants should not assume that
Rule 11890(b) will be available where,
for example, they failed to file a
complaint within the time periods
specified in Rule 11890(a). The rule
could be available, however, in cases
where a trade not eligible for
adjudication under Rule 11890(a)
nevertheless could present systemic
risks if permitted to stand. The
determination of whether to adjudicate
an event under Rule 11890(b) is made
by Nasdaq in its sole discretion
pursuant to the terms of the rule.
Numerical Factors for Review
Nasdaq primarily considers the
execution prices of the trades in
question in determining whether trades
should be nullified in a multi-stock
event pursuant to Rule 11890(b).
Generally all trades more than 10%
away from the Reference Price would be
clearly erroneous.
NASDAQ uses different Reference
Prices based on time of the trade in
order to establish an appropriate
comparison point. These Reference
Prices are detailed below. In unusual
circumstances, however, Nasdaq may
use a different Reference Price.
Time of trade
Reference price
All trades executed after the opening of trading during regular market
hours and until the end of regular market hours.
For Nasdaq-listed securities, the best bid (best offer) (‘‘BBO’’) in
Nasdaq at the time of execution of first share of the disputed order.
For Non-Nasdaq-listed securities, the national BBO at the time of execution of first share of the disputed order.
The closing price of the security for regular market hours on the security’s primary market.
All securities for trades executed:
• after 4 p.m., Eastern Time (ET)
• before 9:30 a.m., ET
• during the market opening process for regular market hours
In occasional circumstances, Nasdaq
may consider additional factors in
determining whether the transactions
are clearly erroneous. These include:
• Material news released for
individual securities
• Suspicious trading activity
Nasdaq may also apply the guidance set
forth in IM 11890–5 to some events
involving a single security, such as some
situations where trading activity occurs
in multiple market centers and Nasdaq
is acting in consultation with other
markets.
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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 IV below. Nasdaq has prepared
summaries, set forth in Sections A, B,
and C below, of the most significant
aspects of such statements.
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Nasdaq is adopting Interpretive
Material under Nasdaq Rule 11890 to
provide guidance with regard to its
consideration of transactions that may
be clearly erroneous. Paragraph (a) of
Nasdaq Rule 11890 allows market
participants to petition Nasdaq to
nullify or modify trades that they allege
to be clearly erroneous. Paragraph (b)
allows Nasdaq to nullify or modify
trades on its own motion in the event
of a disruption or malfunction in the use
or operation of Nasdaq systems or
extraordinary market conditions or
other circumstances in which the
nullification or modification of
transactions may be necessary for the
maintenance of a fair and orderly
market or the protection of investors
and the public interest. Nasdaq is
providing one set of Interpretive
Material relating to Nasdaq Rule
11890(a) and many events involving a
single stock under Rule 11890(b), and a
second set of Interpretive Material
relating to events involving multiple
stocks under Nasdaq Rule 11890(b). In
each case, the Interpretive Material is
intended to provide market participants
with insights into the factors generally
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considered by Nasdaq in determining
whether to nullify or modify trades
under the rule.5
At its basic level, Nasdaq Rule 11890
is intended to allow Nasdaq to
adjudicate disputes between firms as to
the status of a trade, with a goal of
preventing unjust enrichment of one
market participant at the expense of
another in circumstances where the
terms of a trade are clearly out of line
with objective market conditions for a
security. Thus, Nasdaq Rule 11890(a)
allows the party that believes it made a
significant error to petition for an
adjudication, and in appropriate
circumstances, to be relieved of the
obligation to settle the trade. The rule
may not be used as an insurance policy
against trades that merely lose money,
however. Accordingly, the NASD’s
5 The Interpretive Material includes language
relating to trades in non-Nasdaq securities.
Although Nasdaq is not yet operative as an
exchange in these securities, Nasdaq is filing this
language in anticipation of an operational date for
these securities in the near future. Because Nasdaq’s
parent company, The Nasdaq Stock Market, Inc.
(‘‘Nasdaq Inc.’’), currently trades non-Nasdaq
securities pursuant to authority delegated by the
National Association of Securities Dealers, Inc.
(‘‘NASD’’) and administers NASD Rule 11890 with
respect to these securities pursuant to that
delegation, Nasdaq Inc. is also filing a version of the
Interpretive Material as an NASD Rule. See SR–
NASD–2006–123 (November 7, 2006).
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Federal Register / Vol. 71, No. 236 / Friday, December 8, 2006 / Notices
predecessor rule was amended in 2005 6
to establish a conclusive presumption
that a trade is not eligible for review
under Nasdaq Rule 11890(a) unless its
price deviates from the inside market for
the security by an amount in excess of
certain bright-line numerical thresholds.
This aspect of the rule reflects the view
that it is preferable to promote market
certainty and accountability by market
participants by allowing all trades close
to the inside market to stand, even if a
particular trade may arguably have been
caused by a market participant error.
Nevertheless, in an environment of
continual increases in the scope and
speed of electronic trading, Nasdaq Rule
11890(b) provides an important
safeguard against market disruptions
caused by trader errors or system
malfunctions that result in executions
affecting multiple market participants
and/or securities. Thus, Nasdaq Rule
11890(b) mitigates systemic risk by
providing a mechanism to break
erroneous trades that may have a serious
detrimental effect on one or more
market participants. Nasdaq Rule
11890(b) has been used both with
respect to events affecting a single stock,
as where an erroneous order causes a
large number of trades involving
multiple market participants to execute,
and events affecting multiple stocks, as
where a system malfunction results in a
more widespread problem. Because of
its focus on system malfunctions and
overall market integrity, market
participants should not assume that
Nasdaq Rule 11890(b) will be used
where, for example, they failed to file a
complaint within the time periods
specified in Nasdaq Rule 11890(a).
However, the rule could be available in
cases where a trade not eligible for
adjudication under Nasdaq Rule
11890(a) nevertheless could present
systemic risks if permitted to stand.
Thus, for example, if a firm’s erroneous
trades had the potential to cause a firm’s
insolvency but its petition was
untimely, Nasdaq might consider using
Nasdaq Rule 11890(b)(ii) to prevent the
insolvency.7
Thus, under both parts of the rule,
Nasdaq strives to strike a balance
between certainty and flexibility, to
ensure that (i) similar situations are
addressed in a similar manner, (ii)
market participants do not attempt to
use the rule to attain unfair advantage,
and (iii) the rule is not written or
construed in a way that may prevent
action necessary to protect market
quality or prevent systemic problems
and thereby maintain a fair and orderly
market and protect investors and the
public interest. With these
considerations in mind, Nasdaq believes
that the Interpretive Material allows
market participants to achieve a better
understanding of Nasdaq’s application
of the rule without limiting its
adaptability. In effect, the Interpretive
Material describes Nasdaq’s
understanding of the precedents that
have emerged through years of
adjudications under the rule; as with
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judicial precedents, they serve as a
guide to future cases without
constricting adaptability to new or
unique fact patterns.
Both sets of Interpretive Material
reflect that Nasdaq generally considers a
transaction to be clearly erroneous when
the print is substantially inconsistent
with the market price at the time of
execution. In making such a
determination, Nasdaq takes into
account the circumstances at the time of
the transaction, the maintenance of a
fair and orderly market, and the
protection of investors and the public
interest. The Interpretive Material also
stresses that participants in Nasdaq are
responsible for ensuring that the
appropriate price and type of order are
entered into Nasdaq’s systems. Simple
assertion by a firm that it made a
mistake in entering an order or a quote,
or that it failed to pay attention or to
update a quote, may not be sufficient to
establish that a transaction was clearly
erroneous.
IM–11890–4 concerns all complaints
filed by market participants under
Nasdaq Rule 11890(a), as well as many
events involving a single security
considered on Nasdaq’s own motion
pursuant to Nasdaq Rule 11890(b).
Nasdaq primarily considers the
execution price of a trade in
determining whether it is clearly
erroneous. Specifically, Nasdaq
generally uses the following
guidelines: 8
Execution price
Range away from reference price
$1.75 and under .......................................................................................
Equal to or greater than the minimum threshold required for adjudication under Rule 11890(a)(2)(C)(ii).
10 percent.
5 percent.
3 percent.
Over $1.75 and up to $25 ........................................................................
Over $25 and up to $50 ...........................................................................
Over $50 ...................................................................................................
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Thus, the degree of deviation from a
specified reference price needed for a
trade to be declared clearly erroneous
depends on the execution price:
securities trading at lower prices require
a higher percentage deviation before
they will be considered clearly
erroneous, since the normal daily
trading ranges for these securities
generally involve larger percentage
movements. In the case of securities
priced at $1.75 or below, a trade will
generally be considered clearly
erroneous if it is eligible for
adjudication at all under the minimum
thresholds under Nasdaq Rule
11890(a)(2)(C)(ii), since these thresholds
require significant percentage deviation
before a low-priced trade is eligible.
Nasdaq uses different Reference
Prices based on time of the trade and the
listing venue of the security in order to
establish an appropriate comparison
point. These Reference Prices are
detailed below. In unusual
circumstances, however, Nasdaq may
use a Reference Price not specifically
described in the Interpretive Material.
For example, in a case where material
news about a security was released after
market close for the security and a trade
occurring after 4 p.m. and before
9:30 a.m. is at issue, it may be more
appropriate to use a Reference Price
derived from after-hours trading activity
than to use the closing price of the
security. Similarly, in the case of several
large orders that execute at multiple
prices, a Reference Price based on a
weighted average of the BBO at relevant
times may be more appropriate than a
Reference Price based solely on the BBO
6 See Securities Exchange Act Release No. 52141
(July 27, 2005), 70 FR 44709 (August 3, 2005) (SR–
NASD–2004–009).
7 As is the case in all instances where a firm’s
erroneous trades raise questions as to the adequacy
of its internal controls, Nasdaq would also refer the
firm for investigation by the NASD in its capacity
as Nasdaq’s regulatory services provider.
8 Nasdaq stated that at all execution prices, the
guidelines are equal to or greater than the minimum
threshold required for adjudication under Rule
11890(a)(2)(C)(ii). Telephone conversation by and
between John Yetter, Senior Associate General
Counsel, Nasdaq, and Terri Evans, Special Counsel
and David Hsu, Special Counsel, Division of Market
Regulation, Commission, on November 17, 2006.
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Federal Register / Vol. 71, No. 236 / Friday, December 8, 2006 / Notices
immediately prior to the execution of
the first share of the order.
Time of trade and listing venue
Reference price
Nasdaq-listed securities for trades executed between 9:30 a.m. and 4
p.m. Eastern Time (‘‘Regular Session’’).
Non-Nasdaq-listed securities for trades executed during Regular Session and after primary market has posted first two-sided quote.
Non-Nasdaq-listed securities for trades executed during Regular Session and before primary market has posted first two-sided quote.
The best bid (best offer) (‘‘BBO’’) in Nasdaq at the time of execution of
first share of the disputed order.
The national BBO at the time of execution of first share of the disputed
order.
The national BBO at the time of execution of first share of the disputed
order. If national BBO does not appear substantially related to market, Nasdaq may consider other Reference Prices including the
opening trade, indication of interest and first two-sided quote in the
primary market (which may occur after the execution) and the closing price for the prior Regular Session for the security’s primary market.
Closing price of security for the last Regular Session on the security’s
primary market.
Nasdaq-listed and non-Nasdaq-listed securities for trades executed
after 4 p.m. and before 9:30 a.m. Eastern Time.
In occasional circumstances, Nasdaq
may consider additional factors in
determining whether a transaction is
clearly erroneous. These include:
• Material news released for the
security.
• Suspicious trading activity.
• System malfunctions or
disruptions.
• Locked or crossed markets.
• Trading in the security was recently
halted/resumed.
• The security is an initial public
offering.
• Volume and volatility for the
security.
• Stock-split, reorganization or other
corporate action.
• Validity of consolidated tape trades
and quotes and Nasdaq BBO
comparison to national BBO.
• General volatility of market
conditions.
• Reason for the error.
IM–11890–5 concerns multi-stock
events adjudicated on Nasdaq’s own
motion pursuant to Nasdaq Rule
11890(b). In such cases, Nasdaq
primarily considers the numerical
factors of the execution prices in
determining whether trades should be
nullified. Generally all trades more than
10% away from the Reference Price
would be clearly erroneous.9
Nasdaq uses different Reference
Prices based on time of the trade in
order to establish an appropriate
comparison point. These Reference
Prices are detailed below. In unusual
circumstances, however, Nasdaq may
use a different Reference Price.
Time of trade
Reference price
All trades executed after the opening of trading during regular market
hours and until the end of regular market hours.
For Nasdaq-listed securities, the best bid (best offer) (‘‘BBO’’) in
Nasdaq at the time of execution of first share of the disputed order.
For Non-Nasdaq-listed securities, the national BBO at the time of execution of first share of the disputed order.
The closing price of the security for regular market hours on the security’s primary market.
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All securities for trades executed:
• after 4 p.m., Eastern Time (ET)
• before 9:30 a.m., ET
• during the market opening process for regular market hours
In occasional circumstances, Nasdaq
may consider additional factors in
determining whether the transactions in
a multi-stock event are clearly
erroneous, including material news
released for individual securities or
suspicious trading activity.
The guidance set forth in IM–11890–
4 will apply to many events involving
a single security adjudicated pursuant to
Nasdaq Rule 11890(b). However, Nasdaq
may apply the guidance set forth in IM–
11890–5 to some events involving a
single security, such as some situations
where trading activity occurs in
multiple market centers and Nasdaq is
acting in consultation with other
markets.
2. Statutory Basis
9 Nasdaq generally uses 10% threshold in these
cases, in contrast to the sliding scale of percentages
described in IM–11890–4, because multi-stock
events adjudicated under Rule 11890(b) generally
require coordination with other venues trading the
stock in order to ensure consistent treatment of
trades across all venues affected by the event.
Nasdaq has found that the 10% threshold is
VerDate Aug<31>2005
19:05 Dec 07, 2006
Jkt 211001
Nasdaq believes that the proposed
rule change is consistent with the
provisions of Section 6 of the Act,10 in
general, and with Section 6(b)(5) of the
Act,11 in particular, in that it is designed
to prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to remove
impediments to a free and open market
and a national market system, and, in
general, to protect investors and the
public interest. The Interpretive
Materials will promote market
participants’ understanding of Nasdaq’s
application of Nasdaq Rule 11890,
thereby promoting greater certainty and
accountability.
PO 00000
Frm 00093
Fmt 4703
Sfmt 4703
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.
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.
generally used by other venues and therefore
facilitates a coordinated and timely response.
10 15 U.S.C. 78f.
11 15 U.S.C. 78f(b)(5).
E:\FR\FM\08DEN1.SGM
08DEN1
Federal Register / Vol. 71, No. 236 / Friday, December 8, 2006 / Notices
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing proposed rule change is
subject to Section 19(b)(3)(A)(iii) of the
Act 12 and Rule 19b–4(f)(6) thereunder 13
because the proposal: (i) Does not
significantly affect the protection of
investors or the public interest; (ii) does
not impose any significant burden on
competition; and (iii) does not become
operative prior to 30 days after the date
of filing or such shorter time as the
Commission may designate if consistent
with the protection of investors and the
public interest; provided that the selfregulatory organization has given the
Commission notice of its intent to file
the proposed rule change, along with a
brief description and text of the
proposed rule change, at least five
business days prior to the date of filing
of the proposed rule change, or such
shorter time as designated by the
Commission.
Nasdaq provided the Commission
with written notice of its intent to file
this proposed rule change at least five
business days prior to the date of filing
the proposed rule change. Nasdaq has
requested that the Commission waive
the 30-day operative delay. The
Commission believes that waiving the
30-day operative delay is consistent
with the protection of investors and the
public interest because the filing
promotes market participants’
understanding of Nasdaq’s application
of Nasdaq Rule 11890, thereby
promoting greater certainty with regard
to the administration of the rule. For
these reasons, the Commission
designates the proposal to be effective
upon filing with the Commission.14
At any time within 60 days of the
filing of the proposed rule change, the
Commission may summarily abrogate
such rule change if it appears to the
Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Act.15
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
12 15
sroberts on PROD1PC70 with NOTICES
VerDate Aug<31>2005
19:05 Dec 07, 2006
Jkt 211001
Comments may be submitted by any of
the following methods:
SECURITIES AND EXCHANGE
COMMISSION
Electronic Comments
[Release No. 34–54857; File No. SR–NASD–
2006–101]
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–NASDAQ–2006–046 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.
Self-Regulatory Organizations;
National Association of Securities
Dealers, Inc.; Notice of Filing of
Proposed Rule Change and
Amendment No. 1 Thereto To Provide
for the Payment of a $200 Honorarium
Per Case for Each Arbitrator Who
Considers Contested Motions for the
Issuance of Subpoenas
December 1, 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
All submissions should refer to File
23, 2006, the National Association of
Number SR–NASDAQ–2006–046. This
Securities Dealers, Inc. (‘‘NASD’’) filed
with the Securities and Exchange
file number should be included on the
subject line if e-mail is used. To help the Commission (‘‘Commission’’) the
proposed rule change as described in
Commission process and review your
Items I, II, and III below, which Items
comments more efficiently, please use
only one method. The Commission will have been prepared by NASD. On
post all comments on the Commission’s November 13, 2006, NASD filed
Amendment No. 1 to the proposed rule
Internet Web site (https://www.sec.gov/
change.3 The Commission is publishing
rules/sro.shtml). Copies of the
this notice to solicit comments on the
submission, all subsequent
proposed rule change, as amended, from
amendments, all written statements
interested persons.
with respect to the proposed rule
change that are filed with the
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
Commission, and all written
the Proposed Rule Change
communications relating to the
proposed rule change between the
NASD is proposing to provide for the
Commission and any person, other than payment of a $200 honorarium per case
those that may be withheld from the
for each arbitrator who considers
public in accordance with the
contested motions for the issuance of
provisions of 5 U.S.C. 552, will be
subpoenas. Below is the text of the
available for inspection and copying in
proposed rule change.4 Proposed new
the Commission’s Public Reference
language is in italics.
Room. Copies of such filing also will be *
*
*
*
*
available for inspection and copying at
IM–10104. Arbitrators’ Honorarium
the principal office of the Nasdaq. All
(a)–(e) No change
comments received will be posted
(f) Payment for Deciding Contested
without change; the Commission does
Subpoena Requests Without a Hearing
not edit personal identifying
Session
information from submissions. You
(1) The honorarium for deciding one
should submit only information that
you wish to make available publicly. All or more contested motions requesting
the issuance of a subpoena without a
submissions should refer to File
hearing session shall be $200. The
Number SR–NASDAQ–2006–046 and
should be submitted on or before
December 29, 2006.
U.S.C. 78s(b)(3)(A)(iii).
CFR 240.19b–4(f)(6).
14 For purposes only of waiving the operative
delay for this proposal, the Commission has
considered the proposed rule’s impact on
efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
15 See Section 19(b)(3)(C) of the Act, 15 U.S.C.
78s(b)(3)(C).
13 17
71213
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.16
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E6–20806 Filed 12–7–06; 8:45 am]
BILLING CODE 8011–01–P
16 17
PO 00000
CFR 200.30–3(a)(12).
Frm 00094
Fmt 4703
Sfmt 4703
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 In Amendment No. 1, NASD clarified provisions
to the proposed rule change.
4 If the Commission approves the pending
revisions to the NASD Code of Arbitration
Procedure for Customer Disputes, the rules
proposed in this filing will be renumbered as
appropriate; see Securities Exchange Act Release
No. 51856 (June 15, 2005) (SR–NASD–2003–158),
70 FR 36442 (June 23, 2005); and the NASD Code
of Arbitration Procedure for Industry Disputes; see
Securities Exchange Act Release No. 51857 (June
15, 2005) (SR–NASD–2004–011), 70 FR 36430 (June
23, 2005).
2 17
E:\FR\FM\08DEN1.SGM
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]]>Agencies
[Federal Register Volume 71, Number 236 (Friday, December 8, 2006)]
[Notices]
[Pages 71208-71213]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-20806]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-54854; File No. SR-NASDAQ-2006-046]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change
Regarding Guidance for Adjudicating Clearly Erroneous Transactions
Under Rule 11890
December 1, 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 November 7, 2006, The NASDAQ Stock Market LLC (``Nasdaq''), filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by Nasdaq. Nasdaq filed the proposal as a ``non-
controversial'' rule change pursuant to Section 19(b)(3)(A) of the
Act,\3\ and Rule 19b-4(f)(6) thereunder,\4\ which renders the proposal
effective upon filing with the Commission. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Nasdaq is providing guidance regarding factors it generally
considers in adjudicating clearly erroneous transactions under Nasdaq
Rule 11890.
The text of the proposed rule change is below. Proposed new
language is in italics.
* * * * *
IM-11890-4. Clearly Erroneous Transaction Guidance for Filings under
Rule 11890(a) and Single Stock Events under Rule 11890(b)
Nasdaq is providing the following guidance on how it generally
considers:
All complaints filed by market participants under Rule
11890(a); and
Many events involving a single security considered on
Nasdaq's own motion pursuant to Rule 11890(b).
Nasdaq generally considers a transaction to be clearly erroneous
when the print is substantially inconsistent with the market price at
the time of execution. In making such a determination, Nasdaq takes
into account the circumstances at the time of
[[Page 71209]]
the transaction, the maintenance of a fair and orderly market, and the
protection of investors and the public interest. Participants in Nasdaq
are responsible for ensuring that the appropriate price and type of
order are entered into Nasdaq's systems. Simple assertion by a firm
that it made a mistake in entering an order or a quote, or that it
failed to pay attention or to update a quote, may not be sufficient to
establish that a transaction was clearly erroneous.
Numerical factors for review
Nasdaq primarily considers the execution price of a trade in
determining whether it is clearly erroneous.
------------------------------------------------------------------------
Execution price Range away from reference price
------------------------------------------------------------------------
$1.75 and under........................ Equal to or greater than the
minimum threshold required for
adjudication under Rule
11890(a)(2)(C)(ii).
Over $1.75 and up to $25............... 10%
Over $25 and up to $50................. 5%
Over $50............................... 3%
------------------------------------------------------------------------
Nasdaq uses different Reference Prices based on the time of the
trade and the listing venue of the security in order to establish an
appropriate comparison point. These Reference Prices are detailed
below. In unusual circumstances, however, Nasdaq may use a different
Reference Price.
------------------------------------------------------------------------
Time of trade and listing venue Reference price
------------------------------------------------------------------------
Nasdaq-listed securities for trades The best bid (best offer)
executed between 9:30 am and 4 pm (``BBO'') in Nasdaq at the
Eastern Time (``Regular Session''). time of execution of first
share of the disputed order.
Non-Nasdaq-listed securities for trades The national BBO at the time of
executed during Regular Session and execution of first share of
after primary market has posted first the disputed order.
two-sided quote.
Non-Nasdaq-listed securities for trades The national BBO at the time of
executed during Regular Session and execution of first share of
before primary market has posted first the disputed order. If
two-sided quote. national BBO does not appear
substantially related to
market, Nasdaq may consider
other Reference Prices
including the opening trade,
indication of interest and
first two-sided quote in the
primary market (which may
occur after the execution) and
the closing price for the
prior Regular Session for the
security's primary market.
Nasdaq-listed and non-Nasdaq-listed Closing price of security for
securities for trades executed after 4 the last Regular Session on
pm and before 9:30 am Eastern Time. the security's primary market.
------------------------------------------------------------------------
Additional Factors
In occasional circumstances, Nasdaq may consider additional factors
in determining whether a transaction is clearly erroneous. These
include:
Material news released for the security
Suspicious trading activity
System malfunctions or disruptions
Locked or crossed markets
Trading in the security was recently halted/resumed
The security is an initial public offering
Volume and volatility for the security
Stock-split, reorganization or other corporate action.
Validity of consolidated tape trades and quotes and Nasdaq
BBO comparison to national BBO.
General volatility of market conditions.
Reason for the error.
Additional Information Concerning Rule 11890(b)
Nasdaq may on its own motion review transactions in any security in
the event of:
A disruption or malfunction in the use or operation of any
quotation, execution, communication, or trade reporting system owned or
operated by Nasdaq and approved by the SEC;
Extraordinary market conditions or other circumstances in
which the nullification or modification of transactions may be
necessary for the maintenance of a fair and orderly market or the
protection of investors and the public interest.
Consequently, Rule 11890(b) is focused on systemic problems that
involve large numbers of parties or trades, or market conditions where
it would not be in the best interests of the market to proceed under
the processes set forth in Rule 11890(a). Sometimes events involving a
single security will meet the standards of Rule 11890(b). However,
market participants should not assume that Rule 11890(b) will be
available where, for example, they failed to file a complaint within
the time periods specified in Rule 11890(a). The rule could be
available, however, in cases where a trade not eligible for
adjudication under Rule 11890(a) nevertheless could present systemic
risks if permitted to stand.
The guidance set forth in IM-11890-4 applies to many events
involving a single security adjudicated pursuant to Rule 11890(b).
However, Nasdaq may apply the guidance set forth in IM 11890-5 to some
events involving a single security, such as some situations where
trading activity occurs in multiple market centers and Nasdaq is acting
in consultation with other markets.
IM-11890-5. Clearly Erroneous Transaction Guidance for Multi-Stock
Events Under Rule 11890(b)
Nasdaq is providing the following guidance on how it generally
considers multi-stock events adjudicated on Nasdaq's own motion
pursuant to Rule 11890(b).
Nasdaq generally considers a transaction to be clearly erroneous
when the print is substantially inconsistent with the market price at
the time of execution. In making such a determination, Nasdaq takes
into account the circumstances at the time of the transaction, the
maintenance of a fair and orderly market, and the protection of
investors and the public interest. Participants in Nasdaq are
responsible for ensuring that the appropriate price and type of order
are entered into Nasdaq's systems. Simple assertion by a firm that it
made a mistake in entering an order or a quote,
[[Page 71210]]
or that it failed to pay attention or to update a quote, may not be
sufficient to establish that a transaction was clearly erroneous.
Nasdaq may on its own motion review transactions in any security in
the event of:
A disruption or malfunction in the use or operation of any
quotation, execution, communication, or trade reporting system owned or
operated by Nasdaq and approved by the SEC; or
Extraordinary market conditions or other circumstances in
which the nullification or modification of transactions may be
necessary for the maintenance of a fair and orderly market or the
protection of investors and the public interest.
Consequently, Rule 11890(b) is focused on systemic problems that
involve large numbers of parties or trades, or market conditions where
it would not be in the best interests of the market to proceed under
the processes set forth in Rule 11890(a). Even in cases involving
multiple securities, however, market participants should not assume
that Rule 11890(b) will be available where, for example, they failed to
file a complaint within the time periods specified in Rule 11890(a).
The rule could be available, however, in cases where a trade not
eligible for adjudication under Rule 11890(a) nevertheless could
present systemic risks if permitted to stand. The determination of
whether to adjudicate an event under Rule 11890(b) is made by Nasdaq in
its sole discretion pursuant to the terms of the rule.
Numerical Factors for Review
Nasdaq primarily considers the execution prices of the trades in
question in determining whether trades should be nullified in a multi-
stock event pursuant to Rule 11890(b). Generally all trades more than
10% away from the Reference Price would be clearly erroneous.
NASDAQ uses different Reference Prices based on time of the trade
in order to establish an appropriate comparison point. These Reference
Prices are detailed below. In unusual circumstances, however, Nasdaq
may use a different Reference Price.
------------------------------------------------------------------------
Time of trade Reference price
------------------------------------------------------------------------
All trades executed after the opening For Nasdaq-listed securities,
of trading during regular market hours the best bid (best offer)
and until the end of regular market (``BBO'') in Nasdaq at the
hours. time of execution of first
share of the disputed order.
For Non-Nasdaq-listed
securities, the national BBO
at the time of execution of
first share of the disputed
order.
All securities for trades executed: The closing price of the
after 4 p.m., Eastern Time security for regular market
(ET). hours on the security's
before 9:30 a.m., ET.......... primary market.
during the market opening
process for regular market hours.
------------------------------------------------------------------------
In occasional circumstances, Nasdaq may consider additional factors
in determining whether the transactions are clearly erroneous. These
include:
Material news released for individual securities
Suspicious trading activity
Nasdaq may also apply the guidance set forth in IM 11890-5 to some
events involving a single security, such as some situations where
trading activity occurs in multiple market centers and Nasdaq is acting
in consultation with other markets.
* * * * *
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 IV 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 adopting Interpretive Material under Nasdaq Rule 11890 to
provide guidance with regard to its consideration of transactions that
may be clearly erroneous. Paragraph (a) of Nasdaq Rule 11890 allows
market participants to petition Nasdaq to nullify or modify trades that
they allege to be clearly erroneous. Paragraph (b) allows Nasdaq to
nullify or modify trades on its own motion in the event of a disruption
or malfunction in the use or operation of Nasdaq systems or
extraordinary market conditions or other circumstances in which the
nullification or modification of transactions may be necessary for the
maintenance of a fair and orderly market or the protection of investors
and the public interest. Nasdaq is providing one set of Interpretive
Material relating to Nasdaq Rule 11890(a) and many events involving a
single stock under Rule 11890(b), and a second set of Interpretive
Material relating to events involving multiple stocks under Nasdaq Rule
11890(b). In each case, the Interpretive Material is intended to
provide market participants with insights into the factors generally
considered by Nasdaq in determining whether to nullify or modify trades
under the rule.\5\
---------------------------------------------------------------------------
\5\ The Interpretive Material includes language relating to
trades in non-Nasdaq securities. Although Nasdaq is not yet
operative as an exchange in these securities, Nasdaq is filing this
language in anticipation of an operational date for these securities
in the near future. Because Nasdaq's parent company, The Nasdaq
Stock Market, Inc. (``Nasdaq Inc.''), currently trades non-Nasdaq
securities pursuant to authority delegated by the National
Association of Securities Dealers, Inc. (``NASD'') and administers
NASD Rule 11890 with respect to these securities pursuant to that
delegation, Nasdaq Inc. is also filing a version of the Interpretive
Material as an NASD Rule. See SR-NASD-2006-123 (November 7, 2006).
---------------------------------------------------------------------------
At its basic level, Nasdaq Rule 11890 is intended to allow Nasdaq
to adjudicate disputes between firms as to the status of a trade, with
a goal of preventing unjust enrichment of one market participant at the
expense of another in circumstances where the terms of a trade are
clearly out of line with objective market conditions for a security.
Thus, Nasdaq Rule 11890(a) allows the party that believes it made a
significant error to petition for an adjudication, and in appropriate
circumstances, to be relieved of the obligation to settle the trade.
The rule may not be used as an insurance policy against trades that
merely lose money, however. Accordingly, the NASD's
[[Page 71211]]
predecessor rule was amended in 2005 \6\ to establish a conclusive
presumption that a trade is not eligible for review under Nasdaq Rule
11890(a) unless its price deviates from the inside market for the
security by an amount in excess of certain bright-line numerical
thresholds. This aspect of the rule reflects the view that it is
preferable to promote market certainty and accountability by market
participants by allowing all trades close to the inside market to
stand, even if a particular trade may arguably have been caused by a
market participant error.
---------------------------------------------------------------------------
\6\ See Securities Exchange Act Release No. 52141 (July 27,
2005), 70 FR 44709 (August 3, 2005) (SR-NASD-2004-009).
---------------------------------------------------------------------------
Nevertheless, in an environment of continual increases in the scope
and speed of electronic trading, Nasdaq Rule 11890(b) provides an
important safeguard against market disruptions caused by trader errors
or system malfunctions that result in executions affecting multiple
market participants and/or securities. Thus, Nasdaq Rule 11890(b)
mitigates systemic risk by providing a mechanism to break erroneous
trades that may have a serious detrimental effect on one or more market
participants. Nasdaq Rule 11890(b) has been used both with respect to
events affecting a single stock, as where an erroneous order causes a
large number of trades involving multiple market participants to
execute, and events affecting multiple stocks, as where a system
malfunction results in a more widespread problem. Because of its focus
on system malfunctions and overall market integrity, market
participants should not assume that Nasdaq Rule 11890(b) will be used
where, for example, they failed to file a complaint within the time
periods specified in Nasdaq Rule 11890(a). However, the rule could be
available in cases where a trade not eligible for adjudication under
Nasdaq Rule 11890(a) nevertheless could present systemic risks if
permitted to stand. Thus, for example, if a firm's erroneous trades had
the potential to cause a firm's insolvency but its petition was
untimely, Nasdaq might consider using Nasdaq Rule 11890(b)(ii) to
prevent the insolvency.\7\
---------------------------------------------------------------------------
\7\ As is the case in all instances where a firm's erroneous
trades raise questions as to the adequacy of its internal controls,
Nasdaq would also refer the firm for investigation by the NASD in
its capacity as Nasdaq's regulatory services provider.
---------------------------------------------------------------------------
Thus, under both parts of the rule, Nasdaq strives to strike a
balance between certainty and flexibility, to ensure that (i) similar
situations are addressed in a similar manner, (ii) market participants
do not attempt to use the rule to attain unfair advantage, and (iii)
the rule is not written or construed in a way that may prevent action
necessary to protect market quality or prevent systemic problems and
thereby maintain a fair and orderly market and protect investors and
the public interest. With these considerations in mind, Nasdaq believes
that the Interpretive Material allows market participants to achieve a
better understanding of Nasdaq's application of the rule without
limiting its adaptability. In effect, the Interpretive Material
describes Nasdaq's understanding of the precedents that have emerged
through years of adjudications under the rule; as with judicial
precedents, they serve as a guide to future cases without constricting
adaptability to new or unique fact patterns.
Both sets of Interpretive Material reflect that Nasdaq generally
considers a transaction to be clearly erroneous when the print is
substantially inconsistent with the market price at the time of
execution. In making such a determination, Nasdaq takes into account
the circumstances at the time of the transaction, the maintenance of a
fair and orderly market, and the protection of investors and the public
interest. The Interpretive Material also stresses that participants in
Nasdaq are responsible for ensuring that the appropriate price and type
of order are entered into Nasdaq's systems. Simple assertion by a firm
that it made a mistake in entering an order or a quote, or that it
failed to pay attention or to update a quote, may not be sufficient to
establish that a transaction was clearly erroneous.
IM-11890-4 concerns all complaints filed by market participants
under Nasdaq Rule 11890(a), as well as many events involving a single
security considered on Nasdaq's own motion pursuant to Nasdaq Rule
11890(b). Nasdaq primarily considers the execution price of a trade in
determining whether it is clearly erroneous. Specifically, Nasdaq
generally uses the following guidelines: \8\
---------------------------------------------------------------------------
\8\ Nasdaq stated that at all execution prices, the guidelines
are equal to or greater than the minimum threshold required for
adjudication under Rule 11890(a)(2)(C)(ii). Telephone conversation
by and between John Yetter, Senior Associate General Counsel,
Nasdaq, and Terri Evans, Special Counsel and David Hsu, Special
Counsel, Division of Market Regulation, Commission, on November 17,
2006.
------------------------------------------------------------------------
Execution price Range away from reference price
------------------------------------------------------------------------
$1.75 and under........................ Equal to or greater than the
minimum threshold required for
adjudication under Rule
11890(a)(2)(C)(ii).
Over $1.75 and up to $25............... 10 percent.
Over $25 and up to $50................. 5 percent.
Over $50............................... 3 percent.
------------------------------------------------------------------------
Thus, the degree of deviation from a specified reference price
needed for a trade to be declared clearly erroneous depends on the
execution price: securities trading at lower prices require a higher
percentage deviation before they will be considered clearly erroneous,
since the normal daily trading ranges for these securities generally
involve larger percentage movements. In the case of securities priced
at $1.75 or below, a trade will generally be considered clearly
erroneous if it is eligible for adjudication at all under the minimum
thresholds under Nasdaq Rule 11890(a)(2)(C)(ii), since these thresholds
require significant percentage deviation before a low-priced trade is
eligible.
Nasdaq uses different Reference Prices based on time of the trade
and the listing venue of the security in order to establish an
appropriate comparison point. These Reference Prices are detailed
below. In unusual circumstances, however, Nasdaq may use a Reference
Price not specifically described in the Interpretive Material. For
example, in a case where material news about a security was released
after market close for the security and a trade occurring after 4 p.m.
and before 9:30 a.m. is at issue, it may be more appropriate to use a
Reference Price derived from after-hours trading activity than to use
the closing price of the security. Similarly, in the case of several
large orders that execute at multiple prices, a Reference Price based
on a weighted average of the BBO at relevant times may be more
appropriate than a Reference Price based solely on the BBO
[[Page 71212]]
immediately prior to the execution of the first share of the order.
------------------------------------------------------------------------
Time of trade and listing venue Reference price
------------------------------------------------------------------------
Nasdaq-listed securities for trades The best bid (best offer)
executed between 9:30 a.m. and 4 p.m. (``BBO'') in Nasdaq at the
Eastern Time (``Regular Session''). time of execution of first
share of the disputed order.
Non-Nasdaq-listed securities for trades The national BBO at the time of
executed during Regular Session and execution of first share of
after primary market has posted first the disputed order.
two-sided quote.
Non-Nasdaq-listed securities for trades The national BBO at the time of
executed during Regular Session and execution of first share of
before primary market has posted first the disputed order. If
two-sided quote. national BBO does not appear
substantially related to
market, Nasdaq may consider
other Reference Prices
including the opening trade,
indication of interest and
first two-sided quote in the
primary market (which may
occur after the execution) and
the closing price for the
prior Regular Session for the
security's primary market.
Nasdaq-listed and non-Nasdaq-listed Closing price of security for
securities for trades executed after 4 the last Regular Session on
p.m. and before 9:30 a.m. Eastern Time. the security's primary market.
------------------------------------------------------------------------
In occasional circumstances, Nasdaq may consider additional factors
in determining whether a transaction is clearly erroneous. These
include:
Material news released for the security.
Suspicious trading activity.
System malfunctions or disruptions.
Locked or crossed markets.
Trading in the security was recently halted/resumed.
The security is an initial public offering.
Volume and volatility for the security.
Stock-split, reorganization or other corporate action.
Validity of consolidated tape trades and quotes and Nasdaq
BBO comparison to national BBO.
General volatility of market conditions.
Reason for the error.
IM-11890-5 concerns multi-stock events adjudicated on Nasdaq's own
motion pursuant to Nasdaq Rule 11890(b). In such cases, Nasdaq
primarily considers the numerical factors of the execution prices in
determining whether trades should be nullified. Generally all trades
more than 10% away from the Reference Price would be clearly
erroneous.\9\
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\9\ Nasdaq generally uses 10% threshold in these cases, in
contrast to the sliding scale of percentages described in IM-11890-
4, because multi-stock events adjudicated under Rule 11890(b)
generally require coordination with other venues trading the stock
in order to ensure consistent treatment of trades across all venues
affected by the event. Nasdaq has found that the 10% threshold is
generally used by other venues and therefore facilitates a
coordinated and timely response.
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Nasdaq uses different Reference Prices based on time of the trade
in order to establish an appropriate comparison point. These Reference
Prices are detailed below. In unusual circumstances, however, Nasdaq
may use a different Reference Price.
------------------------------------------------------------------------
Time of trade Reference price
------------------------------------------------------------------------
All trades executed after the opening For Nasdaq-listed securities,
of trading during regular market hours the best bid (best offer)
and until the end of regular market (``BBO'') in Nasdaq at the
hours. time of execution of first
share of the disputed order.
For Non-Nasdaq-listed
securities, the national BBO
at the time of execution of
first share of the disputed
order.
All securities for trades executed: The closing price of the
after 4 p.m., Eastern Time security for regular market
(ET) hours on the security's
before 9:30 a.m., ET primary market.
during the market opening
process for regular market hours
------------------------------------------------------------------------
In occasional circumstances, Nasdaq may consider additional factors
in determining whether the transactions in a multi-stock event are
clearly erroneous, including material news released for individual
securities or suspicious trading activity.
The guidance set forth in IM-11890-4 will apply to many events
involving a single security adjudicated pursuant to Nasdaq Rule
11890(b). However, Nasdaq may apply the guidance set forth in IM-11890-
5 to some events involving a single security, such as some situations
where trading activity occurs in multiple market centers and Nasdaq is
acting in consultation with other markets.
2. Statutory Basis
Nasdaq believes that the proposed rule change is consistent with
the provisions of Section 6 of the Act,\10\ in general, and with
Section 6(b)(5) of the Act,\11\ in particular, in that it is designed
to prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, to remove impediments to a free
and open market and a national market system, and, in general, to
protect investors and the public interest. The Interpretive Materials
will promote market participants' understanding of Nasdaq's application
of Nasdaq Rule 11890, thereby promoting greater certainty and
accountability.
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\10\ 15 U.S.C. 78f.
\11\ 15 U.S.C. 78f(b)(5).
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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.
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.
[[Page 71213]]
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing proposed rule change is subject to Section
19(b)(3)(A)(iii) of the Act \12\ and Rule 19b-4(f)(6) thereunder \13\
because the proposal: (i) Does not significantly affect the protection
of investors or the public interest; (ii) does not impose any
significant burden on competition; and (iii) does not become operative
prior to 30 days after the date of filing or such shorter time as the
Commission may designate if consistent with the protection of investors
and the public interest; provided that the self-regulatory organization
has given the Commission notice of its intent to file the proposed rule
change, along with a brief description and text of the proposed rule
change, at least five business days prior to the date of filing of the
proposed rule change, or such shorter time as designated by the
Commission.
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\12\ 15 U.S.C. 78s(b)(3)(A)(iii).
\13\ 17 CFR 240.19b-4(f)(6).
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Nasdaq provided the Commission with written notice of its intent to
file this proposed rule change at least five business days prior to the
date of filing the proposed rule change. Nasdaq has requested that the
Commission waive the 30-day operative delay. The Commission believes
that waiving the 30-day operative delay is consistent with the
protection of investors and the public interest because the filing
promotes market participants' understanding of Nasdaq's application of
Nasdaq Rule 11890, thereby promoting greater certainty with regard to
the administration of the rule. For these reasons, the Commission
designates the proposal to be effective upon filing with the
Commission.\14\
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\14\ For purposes only of waiving the operative delay for this
proposal, the Commission has considered the proposed rule's impact
on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission may summarily abrogate such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Act.\15\
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\15\ See Section 19(b)(3)(C) of the Act, 15 U.S.C. 78s(b)(3)(C).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-NASDAQ-2006-046 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-2006-046. 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 (https://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 such
filing also will be available for inspection and copying at the
principal office of the 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-2006-046 and should be submitted on or before
December 29, 2006.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E6-20806 Filed 12-7-06; 8:45 am]
BILLING CODE 8011-01-P
