Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change and Amendment No. 1 Regarding Guidance for Adjudicating Clearly Erroneous Transactions Under NASD Rule 11890, 71600-71605 [E6-20965]
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Federal Register / Vol. 71, No. 237 / Monday, December 11, 2006 / Notices
particular, in that it is designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, and, in
general, to protect investors and the
public interest.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The proposed rule change does not
impose 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
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the proposed rule change
does not: (1) Significantly affect the
protection of investors or the public
interest; (2) impose any significant
burden on competition; and (3) have the
effect of limiting the access to or
availability of an existing order entry or
trading system of the Exchange, the
foregoing rule change has become
effective immediately pursuant to
Section 19(b)(3)(A)(iii) of the Act10 and
Rule 19b–4(f)(5) 11 thereunder. At any
time within 60 days of the filing of such
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 the furtherance of the purposes of the
Act.
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:
Paper Comments
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File No.
SR–Amex–2006–111. 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 Exchange. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File No.
SR–Amex–2006–111 and should be
submitted on or before January 2, 2007.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.12
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E6–20966 Filed 12–8–06; 8:45 am]
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U.S.C. 78s(b)(3)(A)(iii).
CFR 240.19b–4(f)(5).
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15:15 Dec 08, 2006
December 5, 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 National Association of
Securities Dealers, Inc. (‘‘NASD’’),
through its subsidiary, The Nasdaq
Stock Market, Inc. (‘‘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. On November
30, 2006, Nasdaq filed Amendment No.
1.3 Nasdaq filed the proposal as a ‘‘noncontroversial’’ rule change pursuant to
Section 19(b)(3)(A) of the Act,4 and Rule
19b–4(f)(6) thereunder,5 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.
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 NASD Rule 11890.
The text of the proposed rule change
is below. Proposed new language is in
italics.
*
*
*
*
*
Nasdaq is providing the following
guidance on how it generally considers:
• All complaints filed by market
participants under Rule 11890(a); and
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Amendment No. 1 replaced the text of the
original filing in its entirety in order to make
several clarifying edits to the rule text and the
description thereof.
4 15 U.S.C. 78s(b)(3)(A).
5 17 CFR 240.19b–4(f)(6).
2 17
12 17
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Self-Regulatory Organizations;
National Association of Securities
Dealers, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change and Amendment No. 1
Regarding Guidance for Adjudicating
Clearly Erroneous Transactions Under
NASD Rule 11890
IM–11890–4. Clearly Erroneous
Transaction Guidance for Filings Under
Rule 11890(a) and Single Stock Events
Under Rule 11890(b)(1)
• Use the Commission’s Internet
comment form at https://www.sec.gov/
rules/sro.shtml; or
• Send an e-mail to rulecomments@sec.gov. Please include File
No. SR–Amex–2006–111 on the subject
line.
11 17
[Release No. 34–54873; File No. SR–NASD–
2006–123]
BILLING CODE 8011–01–P
Electronic Comments
10 15
SECURITIES AND EXCHANGE
COMMISSION
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CFR 200.30–3(a)(12).
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Federal Register / Vol. 71, No. 237 / Monday, December 11, 2006 / Notices
• Many events involving a single
security considered on Nasdaq’s own
motion pursuant to Rule 11890(b)(1).
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,
or that it failed to pay attention or to
71601
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).
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 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
Reference price
Non-Nasdaq-listed securities for trades executed between 9:30 am and
4 pm Eastern Time (‘‘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 national BBO at the time of execution of first share of the disputed
order.
Non-Nasdaq-listed securities for trades executed after 4 pm and before
9:30 am Eastern Time.
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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)(1)
Nasdaq may on its own motion review
transactions in any security in the event
of:
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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.
• 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)(1) 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)(1).
However, market participants should
not assume that Rule 11890(b)(1) 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)
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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)(1). 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–11890–4 applies solely to
transactions in non-Nasdaq exchange
listed securities with respect to which
Nasdaq exercises regulatory authority
on behalf of NASD. Accordingly, IM–
11890–4 will expire when Nasdaq is no
longer exercising such regulatory
authority.
IM–11890–5. Clearly Erroneous
Transaction Guidance for Multi-Stock
Events Under Rule 11890(b)(1)
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)(1).
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Federal Register / Vol. 71, No. 237 / Monday, December 11, 2006 / Notices
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,
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)(1) 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)(1) 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)(1) 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)(1).
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.
All securities for trades executed:
• after 4:00 p.m., Eastern Time (ET).
• before 9:30 a.m., ET.
• during the market opening process for regular market hours.
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.
mstockstill on PROD1PC61 with NOTICES
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 markets.
IM–11890–5 applies solely to
transactions in non-Nasdaq exchange
listed securities with respect to which
Nasdaq exercises regulatory authority
on behalf of NASD. Accordingly, IM–
11890–5 will expire when Nasdaq is no
longer exercising such regulatory
authority.
*
*
*
*
*
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
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15:41 Dec 08, 2006
Jkt 211001
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 NASD Rule 11890 to
provide guidance with regard to its
consideration of transactions that may
be clearly erroneous. Paragraph (a) of
NASD Rule 11890 allows market
participants to petition Nasdaq to
nullify or modify trades in non-Nasdaq
exchange-listed securities that they
allege to be clearly erroneous. Paragraph
(b)(1) 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
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providing one set of Interpretive
Material relating to NASD Rule 11890(a)
and many events involving a single
stock under NASD Rule 11890(b)(1),
and a second set of Interpretive Material
relating to events involving multiple
stocks under NASD Rule 11890(b)(1). 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.6
At its basic level, NASD Rule 11890
is intended to allow Nasdaq to
adjudicate disputes between firms as to
the status of a trade, with a goal of
6 The Interpretive Material relates solely to trades
in non-Nasdaq exchange-listed securities, with
respect to which Nasdaq continues to exercise
regulatory authority on behalf of NASD. Thus, the
trades subject to Nasdaq’s authority under Rule
11890(a) include transactions executed through the
ITS/CAES System and Nasdaq’s Inet facility
(‘‘System Trades’’), and trades subject to Nasdaq’s
authority under Rule 11890(b)(1) include both
System Trades and over-the-counter trades in nonNasdaq exchange-listed securities reported to the
ACT System operated by Nasdaq. By its terms, the
Interpretive Material will expire when Nasdaq is no
longer exercising regulatory authority on behalf of
NASD. The NASDAQ Stock Market LLC is also
filing a version of the Interpretive Material as a
Nasdaq Exchange Rule. See SR–NASDAQ–2006–
046 (November 7, 2006).
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Federal Register / Vol. 71, No. 237 / Monday, December 11, 2006 / Notices
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, NASD 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 rule was
amended in 2005 7 to establish a
conclusive presumption that a trade is
not eligible for review under NASD 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, NASD Rule
11890(b)(1) 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, NASD Rule
11890(b)(1) mitigates systemic risk by
providing a mechanism to break
erroneous trades that may have a serious
detrimental effect on one or more
market participants. NASD Rule
11890(b)(1) 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
NASD Rule 11890(b)(1) will be used
where, for example, they failed to file a
complaint within the time periods
specified in NASD Rule 11890(a).
However, the rule could be available in
cases where a trade not eligible for
adjudication under NASD 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
NASD Rule 11890(b)(1)(ii) to prevent
the insolvency.8
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
71603
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
NASD Rule 11890(a), as well as many
events involving a single security
considered on Nasdaq’s own motion
pursuant to NASD Rule 11890(b)(1).
Nasdaq primarily considers the
execution price of a trade in
determining whether it is clearly
erroneous. Specifically, Nasdaq
generally uses the following guidelines:
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%.
mstockstill on PROD1PC61 with NOTICES
Over $1.75 and up to $25 ........................................................................
Over $25 and up to $50 ...........................................................................
Over $50 ...................................................................................................
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 NASD Rule
11890(a)(2)(C)(ii), since these thresholds
require significant percentage deviation
before a low-priced trade is eligible.
Thus, in all cases, the threshold under
which a trade will generally be
considered clearly erroneous is equal to
or greater than the eligibility threshold
under Rule 11890(a)(2)(C)(ii).
Nasdaq uses different Reference
Prices based on time of the trade 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
7 Securities Exchange Act Release No. 52141 (July
27, 2005), 70 FR 44709 (August 3, 2005) (SR–
NASD–2004–009).
8 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.
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15:15 Dec 08, 2006
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Federal Register / Vol. 71, No. 237 / Monday, December 11, 2006 / Notices
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 immediately
prior to the execution of the first share
of the order.
Time of trade
Reference price
Non-Nasdaq-listed securities for trades executed between 9:30 a.m.
and 4 p.m. Eastern Time (‘‘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 national BBO at the time of execution of first share of the disputed
order.
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
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.
• 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 NASD Rule
11890(b)(1). 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.
Reference price
All trades executed after the opening of trading during regular market
hours and until the end of regular market hours.
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.
mstockstill on PROD1PC61 with NOTICES
Time of trade
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.
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
NASD Rule 11890(b)(1). 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
15:41 Dec 08, 2006
Jkt 211001
Nasdaq believes that the proposed
rule change is consistent with the
provisions of Section 15A of the Act,10
in general, and with Section 15A(b)(6)
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 Material will promote
market participants’ understanding of
Nasdaq’s application of NASD Rule
11890, thereby promoting greater
certainty and accountability.
PO 00000
Frm 00102
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. 78o–3.
11 15 U.S.C. 78o–3(b)(6).
E:\FR\FM\11DEN1.SGM
11DEN1
Federal Register / Vol. 71, No. 237 / Monday, December 11, 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 NASD 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
12 15
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). For purposes of calculating the 60-day
abrogation period, the Commission considers the
proposed rule change, as amended, to have been
filed on November 30, 2006, when Amendment No.
1 was filed.
mstockstill on PROD1PC61 with NOTICES
13 17
VerDate Aug<31>2005
15:15 Dec 08, 2006
Jkt 211001
71605
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:
SECURITIES AND EXCHANGE
COMMISSION
Electronic Comments
Self-Regulatory Organizations;
Philadelphia Stock Exchange, Inc.;
Notice of Filing of Proposed Rule
Change Relating to Performance
Evaluations for Streaming Quote
Traders and Remote Streaming Quote
Traders
• 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–NASD–2006–123 on the
subject line.
[Release No. 34–54859; File No. SR–Phlx–
2006–51]
December 1, 2006.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
• Send paper comments in triplicate
notice is hereby given that on November
to Nancy M. Morris, Secretary,
22, 2006, the Philadelphia Stock
Securities and Exchange Commission,
Exchange, Inc. (‘‘Phlx’’ or ‘‘Exchange’’)
Station Place, 100 F Street, NE.,
filed with the Securities and Exchange
Washington, DC 20549–1090.
Commission (‘‘Commission’’) the
proposed rule change as described in
All submissions should refer to File
Items I, II, and III, below, which Items
Number SR–NASD–2006–123. This file
have been substantially prepared by the
number should be included on the
Phlx. The Commission is publishing
subject line if e-mail is used. To help the
this notice to solicit comments on the
Commission process and review your
proposed rule change from interested
comments more efficiently, please use
persons.
only one method. The Commission will
post all comments on the Commission’s I. Self-Regulatory Organization’s
Internet Web site (https://www.sec.gov/
Statement of the Terms of Substance of
rules/sro.shtml). Copies of the
the Proposed Rule Change
submission, all subsequent
The Phlx, pursuant to Section 19(b)(1)
amendments, all written statements
of the Act 3 and Rule 19b–4 thereunder,4
with respect to the proposed rule
proposes to adopt Phlx Rule 510, SQT
change that are filed with the
and RSQT Performance Evaluation, to
Commission, and all written
establish performance requirements for
communications relating to the
Streaming Quote Traders (‘‘SQTs’’) 5 and
proposed rule change between the
Remote Streaming Quote Traders
Commission and any person, other than (‘‘RSQTs’’).6 The text of the proposed
those that may be withheld from the
rule change is available on the Phlx’s
public in accordance with the
provisions of 5 U.S.C. 552, will be
1 15 U.S.C. 78s(b)(1).
available for inspection and copying in
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(1).
the Commission’s Public Reference
4 17 CFR 240.19b–4.
Room. Copies of such filing also will be
5 An SQT is an Exchange Registered Options
available for inspection and copying at
Trader (‘‘ROT’’) who has received permission from
the principal office of the NASD. All
the Exchange to generate and submit option
comments received will be posted
quotations electronically through an electronic
without change; the Commission does
interface with AUTOM via an Exchange approved
proprietary electronic quoting device in eligible
not edit personal identifying
options to which such SQT is assigned. See Phlx
information from submissions. You
Rule 1014(b)(ii)(A). AUTOM is the Exchange’s
should submit only information that
electronic order delivery, routing, execution and
you wish to make available publicly. All reporting system, which provides for the automatic
entry and routing of equity option and index option
submissions should refer to File
orders to the Exchange trading floor. Orders
Number SR–NASD–2006–123 and
delivered through AUTOM may be executed
should be submitted on or before
manually, or certain orders are eligible for
January 2, 2007.
AUTOM’s automatic execution features, AUTO–X,
Paper Comments
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.16
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E6–20965 Filed 12–8–06; 8:45 am]
BILLING CODE 8011–01–P
16 17
PO 00000
CFR 200.30–3(a)(12).
Frm 00103
Fmt 4703
Sfmt 4703
Book Sweep and Book Match. AUTOM is today
more commonly referred to as Phlx XL. See
Securities Exchange Act Release No. 50100 (July 27,
2004), 69 FR 46612 (August 3, 2004) (SR–Phlx–
2003–59) and Phlx Rule 1080.
6 An RSQT is a participant in Phlx XL who has
received permission from the Exchange to trade in
options for his own account, and to generate and
submit option quotations electronically from off the
floor of the Exchange through AUTOM in eligible
options to which such RSQT has been assigned. See
Phlx Rule 1014(b)(ii)(B).
E:\FR\FM\11DEN1.SGM
11DEN1
]]>Agencies
[Federal Register Volume 71, Number 237 (Monday, December 11, 2006)]
[Notices]
[Pages 71600-71605]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-20965]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-54873; File No. SR-NASD-2006-123]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed
Rule Change and Amendment No. 1 Regarding Guidance for Adjudicating
Clearly Erroneous Transactions Under NASD Rule 11890
December 5, 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 National Association of Securities Dealers,
Inc. (``NASD''), through its subsidiary, The Nasdaq Stock Market, Inc.
(``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. On November 30,
2006, Nasdaq filed Amendment No. 1.\3\ Nasdaq filed the proposal as a
``non-controversial'' rule change pursuant to Section 19(b)(3)(A) of
the Act,\4\ and Rule 19b-4(f)(6) thereunder,\5\ 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\ Amendment No. 1 replaced the text of the original filing in
its entirety in order to make several clarifying edits to the rule
text and the description thereof.
\4\ 15 U.S.C. 78s(b)(3)(A).
\5\ 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 NASD
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)(1)
Nasdaq is providing the following guidance on how it generally
considers:
All complaints filed by market participants under Rule
11890(a); and
[[Page 71601]]
Many events involving a single security considered on
Nasdaq's own motion pursuant to Rule 11890(b)(1).
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, 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 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 Reference price
------------------------------------------------------------------------
Non-Nasdaq-listed securities for trades The national BBO at the time of
executed between 9:30 am and 4 pm execution of first share of
Eastern Time (``Regular Session'') and the disputed order.
after primary market has posted first
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.
Non-Nasdaq-listed securities for trades Closing price of security for
executed after 4 pm and before 9:30 am the last Regular Session on
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)(1)
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)(1) 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)(1). However,
market participants should not assume that Rule 11890(b)(1) 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)(1).
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-11890-4 applies solely to transactions in non-Nasdaq exchange
listed securities with respect to which Nasdaq exercises regulatory
authority on behalf of NASD. Accordingly, IM-11890-4 will expire when
Nasdaq is no longer exercising such regulatory authority.
IM-11890-5. Clearly Erroneous Transaction Guidance for Multi-Stock
Events Under Rule 11890(b)(1)
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)(1).
[[Page 71602]]
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, 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)(1) 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)(1) 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)(1) 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)(1). 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 The national BBO at the time of
of trading during regular market hours execution of first share of
and until the end of regular market the disputed order.
hours.
All securities for trades executed: The closing price of the
after 4:00 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 markets.
IM-11890-5 applies solely to transactions in non-Nasdaq exchange
listed securities with respect to which Nasdaq exercises regulatory
authority on behalf of NASD. Accordingly, IM-11890-5 will expire when
Nasdaq is no longer exercising such regulatory authority.
* * * * *
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 NASD Rule 11890 to
provide guidance with regard to its consideration of transactions that
may be clearly erroneous. Paragraph (a) of NASD Rule 11890 allows
market participants to petition Nasdaq to nullify or modify trades in
non-Nasdaq exchange-listed securities that they allege to be clearly
erroneous. Paragraph (b)(1) 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 NASD Rule
11890(a) and many events involving a single stock under NASD Rule
11890(b)(1), and a second set of Interpretive Material relating to
events involving multiple stocks under NASD Rule 11890(b)(1). 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.\6\
---------------------------------------------------------------------------
\6\ The Interpretive Material relates solely to trades in non-
Nasdaq exchange-listed securities, with respect to which Nasdaq
continues to exercise regulatory authority on behalf of NASD. Thus,
the trades subject to Nasdaq's authority under Rule 11890(a) include
transactions executed through the ITS/CAES System and Nasdaq's Inet
facility (``System Trades''), and trades subject to Nasdaq's
authority under Rule 11890(b)(1) include both System Trades and
over-the-counter trades in non-Nasdaq exchange-listed securities
reported to the ACT System operated by Nasdaq. By its terms, the
Interpretive Material will expire when Nasdaq is no longer
exercising regulatory authority on behalf of NASD. The NASDAQ Stock
Market LLC is also filing a version of the Interpretive Material as
a Nasdaq Exchange Rule. See SR-NASDAQ-2006-046 (November 7, 2006).
---------------------------------------------------------------------------
At its basic level, NASD Rule 11890 is intended to allow Nasdaq to
adjudicate disputes between firms as to the status of a trade, with a
goal of
[[Page 71603]]
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, NASD
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 rule was amended in 2005
\7\ to establish a conclusive presumption that a trade is not eligible
for review under NASD 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.
---------------------------------------------------------------------------
\7\ 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, NASD Rule 11890(b)(1) 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, NASD Rule 11890(b)(1)
mitigates systemic risk by providing a mechanism to break erroneous
trades that may have a serious detrimental effect on one or more market
participants. NASD Rule 11890(b)(1) 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 NASD Rule 11890(b)(1) will be used
where, for example, they failed to file a complaint within the time
periods specified in NASD Rule 11890(a). However, the rule could be
available in cases where a trade not eligible for adjudication under
NASD 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 NASD Rule 11890(b)(1)(ii) to
prevent the insolvency.\8\
---------------------------------------------------------------------------
\8\ 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.
---------------------------------------------------------------------------
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 NASD Rule 11890(a), as well as many events involving a single
security considered on Nasdaq's own motion pursuant to NASD Rule
11890(b)(1). Nasdaq primarily considers the execution price of a trade
in determining whether it is clearly erroneous. Specifically, Nasdaq
generally uses the following guidelines:
------------------------------------------------------------------------
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%.
------------------------------------------------------------------------
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 NASD Rule 11890(a)(2)(C)(ii), since these thresholds
require significant percentage deviation before a low-priced trade is
eligible. Thus, in all cases, the threshold under which a trade will
generally be considered clearly erroneous is equal to or greater than
the eligibility threshold under Rule 11890(a)(2)(C)(ii).
Nasdaq uses different Reference Prices based on time of the trade
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
[[Page 71604]]
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 immediately
prior to the execution of the first share of the order.
------------------------------------------------------------------------
Time of trade Reference price
------------------------------------------------------------------------
Non-Nasdaq-listed securities for trades The national BBO at the time of
executed between 9:30 a.m. and 4 p.m. execution of first share of
Eastern Time (``Regular Session'') and the disputed order.
after primary market has posted first
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.
Non-Nasdaq-listed securities for trades Closing price of security for
executed after 4 p.m. and before 9:30 the last Regular Session on
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 NASD Rule 11890(b)(1). 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 The national BBO at the time of
of trading during regular market hours execution of first share of
and until the end of regular market the disputed order.
hours.
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 NASD Rule
11890(b)(1). 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 15A of the Act,\10\ in general, and with
Section 15A(b)(6) 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 Material
will promote market participants' understanding of Nasdaq's application
of NASD Rule 11890, thereby promoting greater certainty and
accountability.
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\10\ 15 U.S.C. 78o-3.
\11\ 15 U.S.C. 78o-3(b)(6).
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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 71605]]
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
NASD 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).
For purposes of calculating the 60-day abrogation period, the
Commission considers the proposed rule change, as amended, to have
been filed on November 30, 2006, when Amendment No. 1 was filed.
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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-NASD-2006-123 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-NASD-2006-123. 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 NASD. 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-NASD-2006-123 and should be submitted on or before
January 2, 2007.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\16\
Florence E. Harmon,
Deputy Secretary.
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\16\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E6-20965 Filed 12-8-06; 8:45 am]
BILLING CODE 8011-01-P
