Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing of Proposed Rule Change as Modified by Amendment No. 2 to Amend Nasdaq's “Clearly Erroneous” Rule, 35279-35288 [E7-12426]

Download as PDF Federal Register / Vol. 72, No. 123 / Wednesday, June 27, 2007 / Notices Global Market, Nasdaq does not believe that this change would result in any adverse impact on liquidity or on investors. Further, Nasdaq notes that the revised requirements exceed the requirements set forth in Rule 3a51– 1(a)(2) under the Act.9 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 the proposal is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. Nasdaq believes the proposed change would continue to maintain appropriate minimum liquidity requirements for companies seeking to list on the Nasdaq Global Select Market, while also recognizing changes in the market that allow such liquidity with fewer shareholders. 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, as amended. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received from Members, Participants, or Others jlentini on PROD1PC65 with NOTICES III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Because the foregoing proposed rule change does not: (i) Significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) by its terms, become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest, it has become effective CFR 240.3a51–1(a)(2) (excluding from the term ‘‘penny stock’’ certain securities). 10 15 U.S.C. 78f. 11 15 U.S.C. 78f(b)(5). VerDate Aug<31>2005 15:50 Jun 26, 2007 Jkt 211001 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 Written comments were neither solicited nor received. 9 17 pursuant to Section 19(b)(3)(A) of the Act 12 and Rule 19b-4(f)(6) thereunder.13 A proposed rule change filed under Rule 19b–4(f)(6) normally may not become operative prior to 30 days after the date of filing. However, Rule 19b– 4(f)(6)(iii) 14 permits the Commission to designate a shorter time if such action is consistent with the protection of investors and the public interest. Nasdaq has requested that the Commission waive the 30-day operative delay. The Commission believes that waiver of the 30-day operative delay is consistent with the protection of investors and the public interest. Specifically, the Commission believes that the proposal would allow Nasdaq to have similar holder requirements as other exchanges and the Nasdaq Global Market.15 Accordingly, the Commission designates the proposal to be effective and operative upon filing with the Commission.16 At any time within 60 days of the filing of the amended proposed rule change, the Commission may summarily abrogate such proposed 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.17 • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–NASDAQ–2007–050 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, 12 15 U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(6). 14 17 CFR 240.19b–4(f)(6)(iii). 15 See note 7 supra and accompanying text. 16 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. See 15 U.S.C. 78c(f). 17 15 U.S.C. 78s(b)(3)(C). For purposes of calculating the 60-day period within which the Commission may summarily abrogate the proposal, the Commission considers the period to commence on June 19, 2007, the date on which Nasdaq submitted Amendment No. 1. 13 17 PO 00000 Frm 00065 Fmt 4703 Sfmt 4703 35279 Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–NASDAQ–2007–050. 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 (http://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, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. 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 Number SR–NASDAQ–2007–050 and should be submitted on or before July 18, 2007. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.18 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–12392 Filed 6–26–07; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–55937; File No. SR– ASDAQ–2007–001] Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing of Proposed Rule Change as Modified by Amendment No. 2 to Amend Nasdaq’s ‘‘Clearly Erroneous’’ Rule June 21, 2007. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 18 17 E:\FR\FM\27JNN1.SGM CFR 200.30–3(a)(12). 27JNN1 35280 Federal Register / Vol. 72, No. 123 / Wednesday, June 27, 2007 / Notices (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on January 22, 2007, The NASDAQ Stock Market LLC (‘‘Nasdaq’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been substantially prepared by Nasdaq. On June 1, 2007, Nasdaq filed Amendment No. 1 to the proposed rule change.3 On June 12, 2007, Nasdaq filed Amendment No. 2 to the proposed rule change.4 The Commission is publishing this notice to solicit comments on the proposed rule change, as modified by Amendment No. 2, from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change Nasdaq proposes to clarify the applicability of Nasdaq Rule 11890 to transactions resulting from unauthorized or manipulative trading activity. Nasdaq will implement the proposed rule change immediately upon approval by the Commission. The text of the proposed rule change is below. Proposed new language is italicized; proposed deletions are in brackets. * * * * * jlentini on PROD1PC65 with NOTICES 11890. Clearly Erroneous Transactions (a) Authority to Review Transactions Pursuant to Complaint of Market Participant (1) Scope of Authority (A) Subject to the limitations described in paragraph (a)(2)[(C)](D) below, [officers] officials of Nasdaq designated by its President shall, pursuant to the procedures set forth in paragraph (a)(2) below, have the authority to review any transaction arising out of the use or operation of any execution or communication system owned or operated by Nasdaq and approved by the Commission[, including transactions entered into by a member of a national securities exchange with unlisted trading privileges in Nasdaq-listed securities (a ‘‘UTP Exchange’’) through such a system]; provided, however, that the parties to the transaction must be readily identifiable by Nasdaq through its systems. A Nasdaq [officer] official shall review transactions with a view toward maintaining a fair and orderly market and the protection of investors 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 Amendment No. 1 replaced the proposed rule change in its entirety. Nasdaq withdrew Amendment No. 1 on June 14, 2007. 4 Amendment No. 2 replaced the proposed rule change in its entirety. VerDate Aug<31>2005 15:50 Jun 26, 2007 Jkt 211001 and the public interest. Based upon this review, the [officer] official shall decline to act upon a disputed transaction if [the officer] he or she believes that the transaction under dispute is not clearly erroneous. If the [officer] official determines the transaction in dispute is clearly erroneous, however, he or she shall declare that the transaction is null and void or modify one or more terms of the transaction. When adjusting the terms of a transaction, the Nasdaq [officer] official shall seek to adjust the price and/or size of the transaction to achieve an equitable rectification of the error that would place the parties to a transaction in the same position, or as close as possible to the same position, as they would have been in had the error not occurred. For the purposes of this Rule, the terms of a transaction are clearly erroneous if: (i) the transaction is eligible for review under the Rule, and [if] (ii) either a. there is an obvious error in any term, such as price, number of shares or other unit of trading, or identification of the security, or b. the person seeking review of the transaction has represented that it resulted from an order submitted by a person that was not authorized to submit that order into Nasdaq or from an account used for the purpose of effecting a manipulation of the market for the security. (2) Procedures for Reviewing Transactions (A) Except as provided in paragraph (a)(2)(B), [A]any member[, member of a UTP Exchange,] or person associated with a[ny such] member that seeks to have a transaction reviewed pursuant to paragraph (a)(1) hereof shall submit a written complaint to Nasdaq MarketWatch in accordance with the following time parameters: (i) for transactions occurring at or after 9:30 a.m.[, Eastern Time], but prior to 10:00 a.m.[, Eastern Time], complaints must be received by Nasdaq by 10:30 a.m.[, Eastern Time]; and (ii) for transactions occurring at any other time [prior to 9:30 a.m., Eastern Time and at or after 10:00 a.m., Eastern Time], complaints must be received by Nasdaq within thirty minutes of execution time. (B) In the case of an Outlier Transaction, a member or person associated with a member that seeks to have a transaction reviewed pursuant to paragraph (a)(1) hereof shall submit a written complaint to Nasdaq MarketWatch in accordance with the following time parameters: (i) for transactions occurring at or after 9:30 a.m. but prior to 10:00 a.m., PO 00000 Frm 00066 Fmt 4703 Sfmt 4703 complaints must be received by Nasdaq by 11:30 a.m.; (ii) for transactions occurring prior to 9:30 a.m. or between 10:00 a.m. and the close of the Regular Session, complaints must be received by Nasdaq within ninety minutes of execution time; and (iii) for transactions occurring after the close of the Regular Session, complaints must be received by Nasdaq prior to 9:30 a.m. the next trading day. [(B)](C) Once a complaint has been received in accord with paragraph (a)(2)(A) or (B) above, the complainant shall have up to thirty (30) minutes, or such longer period as specified by Nasdaq staff, to submit any supporting written information concerning the complaint necessary for a determination under paragraph (a)(1). Such supporting information must include the approximate time of transaction(s), security symbol, number of shares, price(s), contra broker(s) if the transactions are not anonymous, Nasdaq system used to execute the transactions, and the factual basis for believing that the trade is clearly erroneous [the reason the review is being sought]. If Nasdaq receives a complaint that does not contain all of the required supporting information, Nasdaq shall immediately notify the filer that the complaint is deficient. [(C)](D) Following the expiration of the period for submission of supporting material, a Nasdaq [officer] official shall determine whether the complaint is eligible for review. A complaint shall not be eligible for review under paragraph (a) unless: (i) the complainant has provided all of the supporting information required under paragraph (a)(2)[(B)](C), and (ii) For trades in Nasdaq securities executed during the Regular Session [between 9:30 a.m. and 4:00 p.m. Eastern Time], or trades in non-Nasdaq securities executed during the Regular Session after [between the time when] the [p]Primary [m]Market for the security first posts an executable twoside quote [for its regular market trading session and 4:00 p.m. Eastern Time], the price of a transaction to buy (sell) that is the subject of the complaint is greater than (less than) the [best offer (best bid)] Inside Price by an amount that equals or exceeds the minimum threshold set forth below: Inside price $0–$0.99 ........... $1.00–$4.99 ...... $5.00–$14.99 .... E:\FR\FM\27JNN1.SGM 27JNN1 Minimum threshold $0.02 + (0.10 × Inside Price) $0.12 + (0.07 × (Inside Price¥$1.00)) $0.40 + (0.06 × (Inside Price¥$5.00)) Federal Register / Vol. 72, No. 123 / Wednesday, June 27, 2007 / Notices Inside price Minimum threshold jlentini on PROD1PC65 with NOTICES $15 or more ...... $1.00 [For a transaction to buy (sell) a Nasdaq security, the inside price shall be the best offer (best bid) in Nasdaq at the time that the first share of the order that resulted in the disputed transaction was executed, and for a transaction to buy (sell) a non-Nasdaq security, the inside price shall be the national best offer (best bid) at the time that the first share of the order that resulted in the disputed transaction was executed. A ‘‘Nasdaq security’’ means a security for which transaction reports are disseminated under the Nasdaq UTP Plan, and a ‘‘non-Nasdaq security’’ means a security for which transaction reports are disseminated under the Consolidated Tape Association Plan. The ‘‘primary market’’ for a non-Nasdaq Security is the market designated as the primary market under the Consolidated Tape Association Plan.] [(D)](E) If a complaint is determined to be eligible for review, the counterparty to the trade shall be notified of the complaint via telephone or other method permitted by paragraph (d) by Nasdaq staff and shall have up to thirty (30) minutes, or such longer period as specified by Nasdaq staff, to submit any supporting written information concerning the complaint necessary for a determination under paragraph (a)(1). Either party to a disputed trade may request the written information provided by the other party pursuant to paragraph (a)(2). [(E)](F) Notwithstanding paragraphs (a)(2)[(B)](C) and [(D)](E) above, once a party to a disputed trade communicates that it does not intend to submit any further information concerning a complaint, the party may not thereafter provide additional information unless requested to do so by Nasdaq staff. If both parties to a disputed trade indicate that they have no further information to provide concerning the complaint before their respective thirty-minute information submission period has elapsed, then the matter may be immediately presented to a Nasdaq [officer] official for a determination pursuant to paragraph (a)(1) above. [(F)](G) Each member[, member of a UTP Exchange,] or person associated with a[ny such] member involved in the transaction shall provide Nasdaq with any information that it requests in order to resolve the matter on a timely basis notwithstanding the time parameters set forth in paragraphs (a)(2)[(B)](C) and [(D)](E) above. [(G)](H) Once a party has applied to Nasdaq for review and the transaction VerDate Aug<31>2005 15:50 Jun 26, 2007 Jkt 211001 has been determined to be eligible for review, the transaction shall be reviewed and a determination rendered, unless (i) both parties to the transaction agree to withdraw the application for review prior to the time a decision is rendered pursuant to paragraph (a)(1), or (ii) the complainant withdraws its application for review prior to the notification of counterparties pursuant to paragraph (a)(2)[(D)](E). (b) Procedures for Reviewing Transactions on Nasdaq’s Own Motion. In the event of (i) 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 Commission, or (ii) 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, the President of Nasdaq or any Executive Vice President designated by the President may, on his or her own motion, review any transaction arising out of or reported through any such quotation, execution, communication, or trade reporting system[, including transactions entered into by a member of a UTP Exchange through the use or operation of such a system, but excluding transactions that are entered into through, or reported to, a UTP Exchange]. A Nasdaq officer acting pursuant to this subsection may declare any such transaction null and void or modify the terms of any such transaction if the officer determines that (i) the transaction is clearly erroneous, or (ii) such actions are necessary for the maintenance of a fair and orderly market or the protection of investors and the public interest; provided, however, that the officer [must] shall take action pursuant to this subsection [within thirty (30) minutes of] as soon as possible after detection of the transaction except in the event of extraordinary circumstances, in which event the officer must take action by [3:00 p.m.,]9:30 a.m. [Eastern Time,] on the next trading day following the date of the transaction at issue. (c) Review by the Market Operations Review Committee (‘‘MORC’’) (1) Subject to the limitations described in paragraph (c)(2), a member[, member of a UTP Exchange,] or person associated with a[ny such] member may appeal a determination made under paragraph (a) to the MORC. A member[, member of a UTP Exchange,] or person associated with a[ny such] member may appeal a determination made under paragraph (b) PO 00000 Frm 00067 Fmt 4703 Sfmt 4703 35281 to the MORC unless the officer making the determination also determines that the number of the affected transactions is such that immediate finality is necessary to maintain a fair and orderly market and to protect investors and the public interest. An appeal must be made in writing, and must be received by Nasdaq within thirty (30) minutes after the person making the appeal is given the notification of the determination being appealed, except that if Nasdaq notifies the parties of action taken pursuant to paragraph (b) after 4:00 p.m., the appeal must be received by Nasdaq by 9:30 a.m. the next trading day. Once a written appeal has been received, the counterparty to the trade that is the subject of the appeal will be notified of the appeal and both parties shall be able to submit any additional supporting written information up until the time the appeal is considered by the MORC. Either party to a disputed trade may request the written information provided by the other party during the appeal process. An appeal to the MORC shall not operate as a stay of the determination being appealed, and the scope of the appeal shall be limited to trades which the person making the appeal is a party. Subject to the limitations described in paragraph (c)(2), once a party has appealed a determination to the MORC, the determination shall be reviewed and a decision rendered, unless (i) both parties to the transaction agree to withdraw the appeal prior to the time a decision is rendered by the MORC, or (ii) the party filing the appeal withdraws its appeal prior to the notification of counterparties under this paragraph (c)(1). Upon consideration of the record, and after such hearings as it may in its discretion order, the MORC, pursuant to the standards set forth in this rule, shall affirm, modify, reverse, or remand the determination. (2) If a Nasdaq [officer] official determines under paragraph (a)(2)[(C)](D) that a transaction is not eligible for review, a party appealing such determination must allege in its appeal a mistake of material fact upon which it believes the [officer’s] official’s determination was based. If the MORC concludes that an appeal of such a determination does not allege a mistake of material fact, the determination shall become final and binding. If the MORC concludes that an appeal of such a determination alleges a mistake of material fact, Nasdaq shall notify the counterparty to the transaction and the determination shall be reviewed by the MORC as provided under paragraph (c)(1). If the MORC then finds that the E:\FR\FM\27JNN1.SGM 27JNN1 jlentini on PROD1PC65 with NOTICES 35282 Federal Register / Vol. 72, No. 123 / Wednesday, June 27, 2007 / Notices determination was based on a mistake of material fact, the MORC shall remand the matter for adjudication under paragraph (a); otherwise, the determination shall become final and binding. (3) The decision of the MORC pursuant to an appeal, or a determination by a Nasdaq [officer] official that is not appealed, shall be final and binding upon all parties and shall constitute final Nasdaq action on the matter in issue. Any determination by a Nasdaq [officer] official pursuant to paragraph (a) or (b) or any decision by the MORC pursuant to paragraph (c) shall be rendered without prejudice as to the rights of the parties to the transaction to submit their dispute to arbitration. (4) The party initiating the appeal shall be assessed a $500.00 fee if the MORC upholds the decision of the Nasdaq [officer] official. In addition, in instances where Nasdaq, on behalf of a member, requests a determination by another market center that a transaction is clearly erroneous, Nasdaq will pass any resulting charges through to the relevant member. (d) Communications (1) All materials submitted to Nasdaq or the MORC pursuant to this Rule shall be submitted within the time parameters specified herein via such telecommunications procedures as Nasdaq may announce from time to time in a[n] Notice to Members or Head Trader Alert. Materials shall be deemed received at the time indicated by the telecommunications equipment (e.g., facsimile machine or computer) receiving the materials. Nasdaq, in its sole and absolute discretion, reserves the right to reject or accept any material that is not received within the time parameters specified herein. All times stated in this rule and related Interpretive Material are Eastern Time. (2) Nasdaq shall provide affected parties with prompt notice of determinations under this Rule via facsimile machine, electronic mail, or telephone (including voicemail); provided, however, that if an officer nullifies or modifies a large number of transactions pursuant to paragraph (b), Nasdaq may instead provide notice to parties via Nasdaq telecommunications protocols, a press release, or any other method reasonably expected to provide rapid notice to many market participants. (e) Definitions For purposes of this Rule and related Interpretive Material: (1) ‘‘Inside Price’’ means: (A) for a transaction to buy (sell) a Nasdaq security, the best offer (best bid) VerDate Aug<31>2005 15:50 Jun 26, 2007 Jkt 211001 in Nasdaq at the time that the first share of an order or the first share of a series of orders that resulted in disputed transactions was executed, and (B) for a transaction to buy (sell) a non-Nasdaq security, the national best offer (best bid) at the time that the first share of an order or the first share of a series of orders that resulted in the disputed transactions was executed. (2) ‘‘Nasdaq security’’ means a security for which transaction reports are disseminated under the Nasdaq UTP Plan. (3) ‘‘Non-Nasdaq security’’ means a security for which transaction reports are disseminated under the Consolidated Tape Association Plan. (4) ‘‘Outlier Transaction’’ means a transaction that: (A) is executed at a price that meets the following parameters: (i) in the case of a transaction for a Nasdaq security executed during the Regular Session, the price is 50% or more away from the Inside Price; (ii) in the case of a transaction for a non-Nasdaq security executed during the Regular Session after the Primary Market has posted its first two-sided quote, the price is 50% or more away from the Inside Price; (iii) in the case of a transaction for a Nasdaq security or non-Nasdaq security executed outside of the Regular Session, or a non-Nasdaq security executed during the Regular Session before the Primary Market has posted its first twosided quote, the price is 50% or more away from the closing price of the security in the most recent Regular Session; and (B) the loss value of all transactions at issue in the complaint exceeds $10,000. The loss value is measured by multiplying the number of shares by the difference between the execution price and price with which the execution price is compared under paragraph (e)(4)(A). (5) ‘‘Primary Market’’ means: (A) for a Nasdaq security, the Nasdaq Market Center, and (B) for a non-Nasdaq Security, the market designated as the primary market under the Consolidated Tape Association Plan. (6) ‘‘Regular Session’’ means the primary trading session for a particular security on its Primary Market, which is generally 9:30 a.m. through 4:00 or 4:15 p.m. IM–11890–1. Refusal to Abide by Rulings of a Nasdaq [Officer] Official or the MORC It shall be considered conduct inconsistent with just and equitable principles of trade for any member to PO 00000 Frm 00068 Fmt 4703 Sfmt 4703 refuse to take any action that is necessary to effectuate a final decision of a Nasdaq [officer] official or the MORC under Rule 11890. IM–11890–2. Review by Panels of the MORC For purposes of Rule 11890 and other Nasdaq Rules that permit review of Nasdaq decisions by the MORC, a decision of the MORC may be rendered by a panel of the MORC. In the case of a review of a determination by a Nasdaq [officer] official under Rule 11890(a)(2)[(C)](D) that a transaction is not eligible for review (including a review of the sufficiency of allegations contained in an appeal regarding such a determination), the panel may consist of one or more members of the MORC, provided that no more than 50 percent of the members of any panel are directly engaged in market making activity or employed by a member whose revenues from market making activity exceed ten percent of its total revenues. In all other cases, the panel shall consist of three or more members of the MORC, provided that no more than 50 percent of the members of any panel are directly engaged in market making activity or employed by a member firm whose revenues from market making activity exceed ten percent of its total revenues. IM–11890–3. Application of Rule 11890(a)(2)[(C)](D) The following example is intended to assist market participants in understanding the minimum price deviation thresholds in paragraph (a)(2)[(C)](D) and their effect on the eligibility of transactions for review under Rule 11890. ABCD, a Nasdaq [listed] security, has an [i]Inside [market]Price of (bid) $12.00–$12.05 (ask). Market Maker A (MMA) enters a market order to buy 10,000 shares, although it had intended a market order for 1,000 shares. The size of the order is such that the order ‘sweeps’ the Nasdaq Market Center order file, which reflects 1,000 shares of liquidity offered at each of ten prices ranging from $12.05 to $12.95. Executions occur, moving through the depth of file, as follows: Trade #1—1000 maining). Trade #2—1000 maining). Trade #3—1000 maining). Trade #4—1000 maining). Trade #5—1000 maining). Trade #6—1000 maining). E:\FR\FM\27JNN1.SGM 27JNN1 shares @ $12.05 (9000 reshares @ $12.10 (8000 reshares @ $12.15 (7000 reshares @ $12.25 (6000 reshares @ $12.35 (5000 reshares @ $12.45 (4000 re- Federal Register / Vol. 72, No. 123 / Wednesday, June 27, 2007 / Notices Trade #7—1000 shares @ $12.55 (3000 remaining). Trade #8—1000 shares @ $12.65 (2000 remaining). Trade #9—1000 shares @ $12.90 (1000 remaining). Trade #10—1000 shares @ $12.95 (complete). IM–11890–4. Clearly Erroneous Transaction Guidance for Filings under Rule 11890(a) and Single Stock Events under Rule 11890(b) The inside offer at the time the first share of the order was executed is $12.05, so the minimum price deviation threshold is determined using the following formula: $0.40 + (0.06 × (Inside Price¥$5.00)) = $0.40 + (0.06 × ($12.05¥$5.00)) = $0.82. Thus, to be eligible for review, a transaction must be at a price that is at least $0.82 higher than the original best offer price (i.e., $12.05 + $0.82 = $12.87). MMA could petition for review of trades #9 and #10, priced at $12.90 and $12.95 respectively, but trades #1 through #8 would not be eligible for review. The sole basis for an appeal to the MORC of the determination that trades #1 through #8 are not eligible for review would be an assertion of a mistake of material fact. For example, an appeal could be based upon an assertion that the Nasdaq [officer] official had made an arithmetical error in determining the Nasdaq is providing the following guidance on how it [generally] considers: • all complaints filed by market participants under Rule 11890(a); and • [many] most 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 that existed at the time of execution of the first share of one or a series of orders that resulted in disputed transactions. Nasdaq would not consider a trade clearly erroneous, and therefore would not break or modify it, if it was priced within a range of the preceding market price, as described in detail below. In making such a determination, Nasdaq takes into account the circumstances at the time of minimum price deviation threshold, or had erred in determining the applicable [inside price] Inside Price. 35283 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, and breaks trades that are more than a specified percentage away from a Reference Price that is indicative of prior market conditions. The range away from a Reference Price beyond which trades may be broken is referred to as the Numerical Threshold. As a corollary to this policy, Nasdaq does not break trades that are at the Numerical Threshold or between the Reference Price and the Numerical Threshold, as set forth in the chart below. Execution Price [Range Away from Reference Price] Numerical Threshold—Regular Session Numerical Threshold—Outside Regular Session $0.20 and under ................................................. The minimum threshold required for adjudication under Rule 11890(a)(2)(D)(ii). Over $0.20 and up to $1.75 [and under] ........... [Equal to or greater than t]The minimum threshold required for adjudication under Rule 11890(a)(2)[(C)](D)(ii). 10% .................................................................. 5% .................................................................... 3% .................................................................... The minimum threshold that would be required for adjudication under Rule 11890(a)(2)(D)(ii) if it were applicable outside of the Regular Session 20% 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. 20% 10% 6% [In unusual circumstances, however, Nasdaq may use a different Reference Price.] Reference Price Nasdaq[-listed] securities during [for trades executed between 9:30 am and 4:00 pm Eastern Time (‘‘]Regular Session[’’)]. Non-Nasdaq[-listed] securities for trades executed during Regular Session and after [p]Primary [m]Market has posted first twosided quote. Non-Nasdaq[-listed] securities for trades executed during Regular Session and before [p]Primary [m]Market has posted first twosided quote. jlentini on PROD1PC65 with NOTICES Time of Trade and Listing Venue Inside Price [The best bid (best offer) (‘‘BBO’’) in Nasdaq at the time of execution of first share of the disputed order] Nasdaq[-listed] securities and non-Nasdaq[-listed] securities outside of Regular Session [for trades executed after 4:00 pm and before 9:30 am Eastern Time]. VerDate Aug<31>2005 15:50 Jun 26, 2007 Jkt 211001 Inside Price [The national BBO at the time of execution of first share of the disputed order] Inside Price [The national BBO at the time of execution of first share of the disputed order]. If [national BBO]the Inside Price does not appear substantially related to the market, Nasdaq may consider other Reference Prices including the opening trade, indication of interest and first two-sided quote in the [p]Primary [m]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 [p]Primary [m]Market. If the closing price does not appear substantially related to the market, Nasdaq may consider other References Prices, including the prices of other trades in the trading session or the Inside Price. PO 00000 Frm 00069 Fmt 4703 Sfmt 4703 E:\FR\FM\27JNN1.SGM 27JNN1 35284 Federal Register / Vol. 72, No. 123 / Wednesday, June 27, 2007 / Notices In unusual circumstances, Nasdaq may use a different Reference Price in determining which trades to break. For example, in the case of several large orders that execute at multiple prices, a Reference Price based on a weighted average of the best bid (best offer) (‘‘BBO’’) at relevant times may be used rather than a Reference Price based solely on the Inside Price. It may also be necessary to use a higher Numerical Threshold if, after market participants have been alerted to the existence of erroneous activity, the price of the security returns toward its prior trading range but continues to trade beyond the price at which trades would normally be broken. Nasdaq also may use different Numerical Thresholds in events that involve other markets in an effort to coordinate a Numerical Threshold that is consistent across markets. Finally, Nasdaq could break or adjust all trades in a security if a pervasive mistake resulted in trading that should not have occurred. For example, trades in a security that was incorrectly authorized for trading prior to the date of its actual initial public offering would all be broken. Similarly, if Nasdaq systems executed orders in the Nasdaq opening cross or closing cross at a price that was inconsistent with the rules governing the operation of the crosses, either due to a Nasdaq system error or because an underlying erroneous order resulted in an erroneous opening or closing price, Nasdaq may break or adjust all of the affected trades. jlentini on PROD1PC65 with NOTICES Additional Factors In occasional circumstances, Nasdaq may consider additional factors in determining whether a transaction is clearly erroneous (provided the applicable Numerical Threshold is exceeded). 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 VerDate Aug<31>2005 15:50 Jun 26, 2007 Jkt 211001 Suspicious Trading Activity As reflected in Rule 11890(a)(1)(A), Nasdaq may determine that a transaction is clearly erroneous if the person seeking review has represented that it resulted from an order submitted by a person that was not authorized to submit that order into Nasdaq or from an account used for the purpose of effecting a manipulation of the market for the security. Nasdaq may adjudicate such transactions under Rule 11890(a), or may address them under Rule 11890(b) if their effect on the market is such that nullification or modification of a large number of transactions may be necessary for the maintenance of a fair and orderly market or the protection of investors and the public interest. While an assertion of suspicious trading activity may provide the basis for reviewing transactions, it does not provide a basis for altering the application of the factors used in determining whether to nullify or modify trades. Thus, the minimum price threshold required for adjudication under Rule 11890(a)(2)(D)(ii) would be applicable in the case of unauthorized or manipulative transactions being adjudicated under Rule 11890(a). Moreover, Nasdaq would apply the Numerical Thresholds described above in determining which trades to break. For example, if the best offer in a security during the Regular Session was $20 prior to the execution of the first share of a series of unauthorized buy orders that executed at prices ranging from $20 to $30, the usual Numerical Threshold would be 10%, or $22.00, and trades above that price could be broken. 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 PO 00000 Frm 00070 Fmt 4703 Sfmt 4703 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 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 that existed at the time of execution of the first share of one or a series of orders that resulted in disputed transactions. Nasdaq would not consider a trade clearly erroneous, and therefore would not break or modify it, if it was priced within a range of the preceding market price, as described in detail below. 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 E:\FR\FM\27JNN1.SGM 27JNN1 Federal Register / Vol. 72, No. 123 / Wednesday, June 27, 2007 / Notices 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 35285 clearly erroneous.] The range away from a Reference Price beyond which trades may be broken is referred to as the Numerical Threshold, and is 10% (except in the circumstances described below). As a corollary to this policy, Nasdaq does not break trades that are at the Numerical Threshold or between the Reference Price and the Numerical Threshold. 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 during the Regular Session after the market opening process [of trading during regular market hours and until the end of regular market hours] Inside Price [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 the Regular Session [regular market hours] on the security’s [primary market]Primary Market. If the closing price does not appear substantially related to the market, Nasdaq may consider other References Prices, including the prices of other trades in the trading session or the Inside Price. jlentini on PROD1PC65 with NOTICES All securities for trades executed: I outside of the Regular Session I after 4:00 p.m., Eastern Time (ET) I before 9:30 a.m., ET] I during the market opening process [for regular market hours] In unusual circumstances, however, Nasdaq may use a different Reference Price in determining which trades to break. For example, in the case of several large orders that execute at multiple prices, a Reference Price based on a weighted average of the best bid (best offer) (‘‘BBO’’) at relevant times may be used rather than a Reference Price based solely on the Inside Price. It may also be necessary to use a higher Numerical Threshold if, after market participants have been alerted to the existence of erroneous activity, the price of the security returns toward its prior trading range but continues to trade beyond the price at which trades would normally be broken. Nasdaq also may use different Numerical Thresholds in events that involve other markets in order to coordinate a Numerical Threshold that is consistent across markets. Finally, Nasdaq could break or adjust all trades in a security if a pervasive mistake resulted in trading that should not have occurred. For example, trades in a security that was incorrectly authorized for trading prior to the date of its actual initial public offering would all be broken. Similarly, if Nasdaq systems executed orders in the Nasdaq opening cross or closing cross at a price that was inconsistent with the rules governing the operation of the crosses, either due to a Nasdaq system error or VerDate Aug<31>2005 15:50 Jun 26, 2007 Jkt 211001 because an underlying erroneous order resulted in an erroneous opening or closing price, Nasdaq may break or adjust all of the affected trades. In occasional circumstances, Nasdaq may consider additional factors in determining whether the transactions are clearly erroneous (provided the applicable Numerical Threshold is exceeded). These include: I Material news released for individual securities I 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. Suspicious Trading Activity As reflected in Rule 11890(a)(1)(A), Nasdaq may determine that a transaction is clearly erroneous if the person seeking review has represented that it resulted from an order submitted by a person that was not authorized to submit that order into Nasdaq or from an account used for the purpose of effecting a manipulation of the market for the security. Nasdaq may adjudicate such transactions under Rule 11890(b) if their effect on the market is such that nullification or modification of a large number of transactions may be necessary for the maintenance of a fair PO 00000 Frm 00071 Fmt 4703 Sfmt 4703 and orderly market or the protection of investors and the public interest. While an assertion of suspicious trading activity may provide the basis for reviewing transactions, it does not provide a basis for altering the application of the factors used in determining whether to nullify or modify trades. Thus, Nasdaq would apply the Numerical Thresholds described above in determining which trades to break. For example, if the best offer in a security during the Regular Session was $20 prior to the execution of the first share of a series of unauthorized buy orders that executed at prices ranging from $20 to $30, the usual Numerical Threshold would be 10%, or $22.00, and trades above that price could be broken. * * * * * 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, E:\FR\FM\27JNN1.SGM 27JNN1 35286 Federal Register / Vol. 72, No. 123 / Wednesday, June 27, 2007 / Notices 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 Application of Rule 11890 to Suspicious Trading Activity jlentini on PROD1PC65 with NOTICES Nasdaq is amending Rule 11890, which covers the breaking or adjusting of trades determined to be clearly erroneous, to clarify the scope of its application to unauthorized and/or manipulative trading activity that could disrupt fair and orderly markets. In recent months, financial regulators have become aware of market manipulation schemes in which criminals manipulate stock prices by illegally gaining access to legitimate accounts.5 Accordingly, Nasdaq is proposing to amend the definition of ‘‘clearly erroneous,’’ which currently refers to an obvious error in any term of a transaction, to make it clear that unauthorized trading activity fits within the definition. However, Nasdaq believes that the rule should not be drafted in a manner that makes an artificial distinction between manipulative activity undertaken through ‘‘hijacked’’ accounts and similar manipulations effected through accounts where an individual is technically authorized to enter orders but may take other measures to conceal identity. In short, Nasdaq believes that the scope of Rule 11890 should be broad enough to allow an appropriate response to any form of unauthorized or manipulative trading activity, including ‘‘cyber attacks’’ on the infrastructure of the financial system by terrorist organizations or attempts to manipulate stock prices by illegally gaining access to legitimate accounts or opening new accounts using false information.6 The rule change further provides that although suspicious trading activity may provide a basis for determining a trade to be clearly erroneous, it would not provide a basis for altering the application of price-based numerical factors in determining whether to break particular trades. As described in SR– 5 See, e.g., SEC Litigation Release No. 20037 (March 12, 2007). 6 Clay Wilson, Congressional Research Service, Computer Attack and Cyber Terrorism: Vulnerabilities and Policy Issues for Congress (April 1, 2005); Jeffrey Garten, Markets’ resilience to terror is no reason to relax, Financial Times (September 11, 2006); Financial Services Sector Coordinating Council, Protecting the U.S. Critical Financial Infrastructure: An Agenda for 2005 (2005). VerDate Aug<31>2005 15:50 Jun 26, 2007 Jkt 211001 NASDAQ–2006–046,7 Nasdaq primarily considers the execution price of a trade in determining whether it is clearly erroneous, and breaks trades that are more than a specified percentage away from a Reference Price that is indicative of prior market conditions. The range away from a Reference Price beyond which trades may be broken, expressed as a percentage or minimum deviation, is referred to as the Numerical Threshold.8 Thus, Nasdaq would apply the numerical factors described in IM– 11890–4 and IM–11890–5 in determining which trades to break.9 For example, if the best offer in a security during a market’s Regular Session 10 was $20 prior to the execution of the first share of a series of unauthorized buy orders that executed at prices ranging from $20 to $30, the usual Numerical Threshold would be 10%, or $22.00, and higher-priced trades could be broken. Similarly, the minimum price threshold required for adjudication under Rule 11890(a)(2)(D)(ii) would be applicable in the case of unauthorized or manipulative transactions being adjudicated under Rule 11890(a). Nasdaq believes that it is important to allow transactions priced close to the inside market or other reference price to stand, even if the transactions directly resulted from a mistake, system error or account intrusion. This ensures that market participants have economic incentives to develop and maintain internal controls with a goal of preventing erroneous trading activity. It should also be noted that Nasdaq refers market participants for investigation by the NASD in its capacity as Nasdaq’s regulatory services provider in all 7 Securities Exchange Act Release No. 54854 (December 1, 2006), 71 FR 71208, 71211 (December 8, 2006) (SR–NASDAQ–2006–046). 8 As a corollary to its policy, Nasdaq does not break trades that are at the Numerical Threshold or between the Reference Price and the Numerical Threshold. 9 IM–11890–4 provides guidance on how Nasdaq considers: (1) all complaints filed by market participants under Rule 11890(a) and (2) most events involving a single security considered on Nasdaq’s own motion pursuant to Rule 11890(b). IM–11890–5 provides guidance on the remaining events involving a single security considered on Nasdaq’s own motion pursuant to Rule 11890(b), such as some situations where trading activity occurs in multiple market centers and Nasdaq is acting in consultation with other markets. IM– 11890–5 also provides guidance on how Nasdaq considers multi-stock events adjudicated on Nasdaq’s own motion pursuant to Rule 11890(b). Telephone conversation by and between John Yetter, Senior Associate General Counsel, Nasdaq, and David Hsu, Special Counsel, Division of Market Regulation, Commission, on June 20, 2007. 10 The proposed rule change adds the defined term ‘‘Regular Session’’ to the rule, and defines it as ‘‘the primary trading session for a particular security on its Primary Market, which is generally 9:30 a.m. through 4:00 or 4:15 p.m. PO 00000 Frm 00072 Fmt 4703 Sfmt 4703 circumstances where a firm’s erroneous trades raise questions as to the adequacy of its computer systems and internal controls. Nasdaq believes that enhanced controls by brokerage firms may play an important role in reducing the incidence of account intrusions, as well as system and human errors.11 Numerical Thresholds The proposed rule change also amends IM–11890–4 and –5 to provide some additional guidance regarding the application of price-based factors under Rule 11890. The Reference Price generally used under Rule 11890 is the best bid/best offer (‘‘BBO’’) in Nasdaq, or the national BBO, for trading during the Regular Session, and the closing price on a stock’s primary market for late and early trading. As described in SR–NASDAQ–2006–046,12 however, Nasdaq may use a different Reference Price in unusual circumstances. Thus, 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, Nasdaq may use a Reference Price derived from after-hours trading activity rather than 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 used rather than a Reference Price based solely on the BBO immediately prior to the execution of the first share of the order. Nasdaq believes that it would enhance the clarity of the Interpretive Material to add these examples from the prior filing directly to the text. Nasdaq also proposes to amend the Interpretive Material to add examples of cases where Nasdaq may apply alternative Numerical Thresholds in determining which trades to break. For example, it may be necessary to use a higher Numerical Threshold if, after market participants have been alerted to the 11 Nasdaq maintains records of each clearly erroneous complaint that it receives. This file includes: the filer’s written complaint as required by Rule 11890(a)(2), any further written correspondence or notes of oral communications made by the Nasdaq MarketWatch analyst, any relevant screen shots or other market information retained by the analysts, and a record of the decisions by the Nasdaq official and the Market Operations Review Committee, if the official’s decision is appealed. In the event of an account intrusion, Nasdaq requires written confirmation from the filer that the erroneous trade resulted from an account intrusion unless provided in the filer’s original written complaint. Nasdaq refers all clearly erroneous complaints that raise regulatory concerns, including all cases alleging account intrusion, to NASD on a timely basis and also provides NASD with information on all complaints on a monthly basis. 12 See supra note 7. E:\FR\FM\27JNN1.SGM 27JNN1 jlentini on PROD1PC65 with NOTICES Federal Register / Vol. 72, No. 123 / Wednesday, June 27, 2007 / Notices existence of erroneous activity, the price of a security returns toward its prior trading range but continues to trade beyond the price at which trades would normally be broken. Nasdaq also may use different Numerical Thresholds in events that involve other markets in order to coordinate a break point that is consistent across markets. For example, if the bulk of trades in a stock not listed on Nasdaq occurred in the stock’s primary market, Nasdaq would generally seek to reach a result consistent with the primary market. Finally, the amended Interpretive Material provides that Nasdaq could break or modify all trades in a security if a pervasive mistake resulted in trading that should not have occurred. For example, trades in a security that was incorrectly authorized for trading prior to the date of its actual initial public offering would all be broken. Similarly, if Nasdaq systems executed orders in the Nasdaq opening cross or closing cross at a price that was inconsistent with the rules governing the operation of the crosses, either due to a Nasdaq system error or because an underlying erroneous order resulted in an erroneous opening or closing price, Nasdaq may break or adjust all of the affected trades. Nasdaq is also amending the Numerical Thresholds under IM– 11890–4 for trading outside the Regular Session, to establish wider ranges within which trades are permitted to stand. The change reflects the diminished depth of the market during after hours and pre-market trading sessions; market participants trading during these sessions must accept the fact that orders are more likely to exhaust liquidity available at the inside price than is the case during the Regular Session. Accordingly, Nasdaq believes that the Numerical Thresholds should be doubled during these times. For example, a trade at $40 per share could be broken if more than 10% away from the Reference Price during the Regular Session, but could not be broken during the pre-market or after hours sessions unless it was more than 20% away from the Reference Price. Nasdaq is also amending the language of Rule 11890(a)(2)(B) to make it clear that persons seeking review of transactions must present a factual basis for believing that the trade is clearly erroneous. Nasdaq cannot, within the context of an adjudication that must be conducted within a short period of time, determine all of the factual circumstances associated with a particular trade or set of trades. Thus, for example, if a trader files for adjudication and states that he VerDate Aug<31>2005 15:50 Jun 26, 2007 Jkt 211001 mistakenly entered an order for 400,000 shares rather than the intended order size of 4,000, Nasdaq cannot, on a realtime basis, determine whether this is accurate. Nevertheless, Nasdaq believes that it is generally incumbent on persons seeking review actually to allege a human or system error, rather than merely stating that the order was ‘‘filled away’’ or at ‘‘a bad price.’’ 13 Requiring the statement of a factual basis also allows NASD to evaluate, after the fact, whether a particular market participant is abusing the clearly erroneous process or employing poor internal controls. Individuals and firms found to have misled Nasdaq about the cause of the alleged error would be subject to disciplinary action for misleading a self-regulatory organization. Other Changes Nasdaq is amending the time limits for market participants to file for an adjudication under Rule 11890(a) in cases where the price of the transaction at issue is more than 50% away from the applicable inside price (or the closing price, for trading outside the Regular Session or before the primary market has posted its first two-sided quote), provided that the value of the transactions at issue is more than $10,000.14 If these criteria are met, the transaction is defined as an ‘‘Outlier Transaction,’’ and the parties to the trade are given an extra hour to petition for review if the trade occurred during the Regular Session or during premarket hours, or until 9:30 a.m. the next trading day if the trade occurred after hours. The reason for the change is to provide greater assurance that trades that are egregiously out of line with prevailing market prices are not 13 Nasdaq notes, however, that several circumstances exist in which price itself may provide a conclusive basis for determining that an error occurred. For example, if a market participant entered an order in a non-Nasdaq security for execution after 9:30 a.m., but the primary market delayed its opening in the security until a later time, an execution may occur at a price substantially unrelated to the primary market’s opening price of the security. Similarly, an execution of an order for an exchange-traded fund at a price that is substantially out-of-line with the intraday indicative value for the fund may provide prima facie evidence of an error. There have also been circumstances in which an employee of a member firm notices an execution at a price a substantial percentage (i.e., well in excess of 10%) away from the best bid/best offer, is unable to contact the responsible trader to obtain an explanation, and files for a nullification of the trade based solely on its price. 14 Measured by multiplying the number of shares at issue in the trades by the difference between the execution price and price with which the execution price is compared under the rule. PO 00000 Frm 00073 Fmt 4703 Sfmt 4703 35287 permitted to stand, provided that the dollar value of the trades is significant. Nasdaq is also making several minor procedural modifications to the rule. First, Nasdaq is amending the language of Rule 11890(a)(2)(E) to allow Nasdaq to notify the counterparty to a trade about an erroneous event by telephone or other means consistent with the communications provisions of Rule 11890(d). While Nasdaq currently intends to continue notifying counterparties by telephone, the proposed change would give Nasdaq the flexibility to incorporate more electronic communications in the future. Pursuant to Rule 11890(d), any change to the method of communication must be announced by Nasdaq in a Notice to Members or Head Trader Alert. Second, Nasdaq is amending Rule 11890(b) to replace a statement that Nasdaq should, except in extraordinary circumstances, take action under the subsection within thirty (30) minutes of detection of an erroneous transaction, with a statement that Nasdaq should act as soon as possible. Time is always of the essence when determinations must be made under the rule, but as a practical matter, many events adjudicated under Rule 11890(b) involve coordination between multiple market centers, and the time required to gather and evaluate information needed to make a determination is often in excess of 30 minutes. Accordingly, Nasdaq is amending the rule to provide that a determination must be made as soon as possible, except in extraordinary circumstances, in which case the outside time limit for a determination under the paragraph (b) will be 9:30 a.m. the next trading day (rather than 3 p.m., as currently provided). Third, Nasdaq is amending Rule 11890 and the Interpretative Material in several places to replace the word ‘‘officer’’ with the word ‘‘official.’’ The intent of this change is to allow adjudications under Rule 11890(a) to be made by any duly designated Nasdaq employee, rather than limiting that authority to persons that are officers of Nasdaq within the meaning of its limited liability company agreement (e.g., persons with the title of Vice President or President). The change will broaden the scope of persons permitted to adjudicate claims under the Rule, thereby allowing more efficient adjudications. All persons designated under the Rule will have appropriate background in market structure and the requirements of the Rule; designated persons are likely to be employees of Nasdaq’s MarketWatch regulatory unit. Nasdaq is not, however, modifying Rule E:\FR\FM\27JNN1.SGM 27JNN1 35288 Federal Register / Vol. 72, No. 123 / Wednesday, June 27, 2007 / Notices 11890(b), which requires decisions to break or modify trades on Nasdaq’s own motion to be made by senior officers only. Consistent with current practice, all adjudications under 11890(a) and (b) will continue to be made on a ‘‘nonames basis’’ (i.e., the adjudicator does not know the identities of the market participants that will be affected by the decision). Finally, Nasdaq is amending the rule to add a consolidated paragraph of definitions of terms used in the rule and to delete obsolete references to transactions entered into by a member of a national securities exchange with unlisted trading privileges in Nasdaq securities. Although Nasdaq’s former SuperMontage system allowed other exchanges to enter orders directly, the current Nasdaq Market Center does not retain this functionality. Rather, other exchanges and their members can access Nasdaq through broker-dealers that are members of Nasdaq, including brokerdealers owned by exchanges. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action 2. Statutory Basis • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–NASDAQ–2007–001 on the subject line. Nasdaq believes that the proposed rule change is consistent with the provisions of Section 6 of the Act,15 in general, and with Section 6(b)(5) of the Act,16 in particular, in that the proposal is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. 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. jlentini on PROD1PC65 with NOTICES 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. 15 15 16 15 U.S.C. 78f. U.S.C. 78f(b)(5). VerDate Aug<31>2005 15:50 Jun 26, 2007 Jkt 211001 Within 35 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 90 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 Nasdaq 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. 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 Copies of such filing also will be available for inspection and copying at the principal office of 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–2007–001 and should be submitted on or before July 18, 2007. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.17 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–12426 Filed 6–26–07; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–55932; File No. SR– NYSEArca–2007–54] Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Establish Position and Exercise Limits for Options on the KBW Bank Index June 20, 2007. 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 June 13, to Nancy M. Morris, Secretary, 2007, NYSE Arca, Inc. (‘‘NYSE Arca’’ or Securities and Exchange Commission, ‘‘Exchange’’) filed with the Securities 100 F Street, NE., Washington, DC and Exchange Commission 20549–1090. (‘‘Commission’’) the proposed rule All submissions should refer to File change as described in Items I and II Number SR–NASDAQ–2007–001. This below, which Items have been file number should be included on the subject line if e-mail is used. To help the substantially prepared by the Exchange. The Exchange has designated the Commission process and review your proposed rule change as ‘‘noncomments more efficiently, please use only one method. The Commission will controversial’’ under Section 3 post all comments on the Commission’s 19(b)(3)(A)(iii) of the Act and Rule 19b–4(f)(6) thereunder,4 which renders Internet Web site (http://www.sec.gov/ the proposal effective upon filing with rules/sro.shtml). Copies of the the Commission. The Commission is submission, all subsequent publishing this notice to solicit amendments, all written statements comments on the proposed rule change with respect to the proposed rule from interested persons. change that are filed with the Paper Comments 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, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. PO 00000 Frm 00074 Fmt 4703 Sfmt 4703 I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change NYSE Arca proposes to amend NYSE Arca Rule 5.16 in order to increase the position and exercise limits for options 17 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A)(iii). 4 17 CFR 240.19b–4(f)(6). 1 15 E:\FR\FM\27JNN1.SGM 27JNN1

Agencies

[Federal Register Volume 72, Number 123 (Wednesday, June 27, 2007)]
[Notices]
[Pages 35279-35288]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-12426]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55937; File No. SR-ASDAQ-2007-001]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change as Modified by Amendment No. 2 
to Amend Nasdaq's ``Clearly Erroneous'' Rule

June 21, 2007.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 35280]]

(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on January 22, 2007, The NASDAQ Stock Market LLC (``Nasdaq'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been substantially prepared by Nasdaq. On June 1, 2007, 
Nasdaq filed Amendment No. 1 to the proposed rule change.\3\ On June 
12, 2007, Nasdaq filed Amendment No. 2 to the proposed rule change.\4\ 
The Commission is publishing this notice to solicit comments on the 
proposed rule change, as modified by Amendment No. 2, from interested 
persons.
---------------------------------------------------------------------------

    \1\ 5 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced the proposed rule change in its 
entirety. Nasdaq withdrew Amendment No. 1 on June 14, 2007.
    \4\ Amendment No. 2 replaced the proposed rule change in its 
entirety.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to clarify the applicability of Nasdaq Rule 11890 
to transactions resulting from unauthorized or manipulative trading 
activity. Nasdaq will implement the proposed rule change immediately 
upon approval by the Commission.
    The text of the proposed rule change is below. Proposed new 
language is italicized; proposed deletions are in brackets.
* * * * *

11890. Clearly Erroneous Transactions

    (a) Authority to Review Transactions Pursuant to Complaint of 
Market Participant
    (1) Scope of Authority
    (A) Subject to the limitations described in paragraph 
(a)(2)[(C)](D) below, [officers] officials of Nasdaq designated by its 
President shall, pursuant to the procedures set forth in paragraph 
(a)(2) below, have the authority to review any transaction arising out 
of the use or operation of any execution or communication system owned 
or operated by Nasdaq and approved by the Commission[, including 
transactions entered into by a member of a national securities exchange 
with unlisted trading privileges in Nasdaq-listed securities (a ``UTP 
Exchange'') through such a system]; provided, however, that the parties 
to the transaction must be readily identifiable by Nasdaq through its 
systems. A Nasdaq [officer] official shall review transactions with a 
view toward maintaining a fair and orderly market and the protection of 
investors and the public interest. Based upon this review, the 
[officer] official shall decline to act upon a disputed transaction if 
[the officer] he or she believes that the transaction under dispute is 
not clearly erroneous. If the [officer] official determines the 
transaction in dispute is clearly erroneous, however, he or she shall 
declare that the transaction is null and void or modify one or more 
terms of the transaction. When adjusting the terms of a transaction, 
the Nasdaq [officer] official shall seek to adjust the price and/or 
size of the transaction to achieve an equitable rectification of the 
error that would place the parties to a transaction in the same 
position, or as close as possible to the same position, as they would 
have been in had the error not occurred. For the purposes of this Rule, 
the terms of a transaction are clearly erroneous if:
    (i) the transaction is eligible for review under the Rule, and [if]
    (ii) either
    a. there is an obvious error in any term, such as price, number of 
shares or other unit of trading, or identification of the security, or
    b. the person seeking review of the transaction has represented 
that it resulted from an order submitted by a person that was not 
authorized to submit that order into Nasdaq or from an account used for 
the purpose of effecting a manipulation of the market for the security.
    (2) Procedures for Reviewing Transactions
    (A) Except as provided in paragraph (a)(2)(B), [A]any member[, 
member of a UTP Exchange,] or person associated with a[ny such] member 
that seeks to have a transaction reviewed pursuant to paragraph (a)(1) 
hereof shall submit a written complaint to Nasdaq MarketWatch in 
accordance with the following time parameters:
    (i) for transactions occurring at or after 9:30 a.m.[, Eastern 
Time], but prior to 10:00 a.m.[, Eastern Time], complaints must be 
received by Nasdaq by 10:30 a.m.[, Eastern Time]; and
    (ii) for transactions occurring at any other time [prior to 9:30 
a.m., Eastern Time and at or after 10:00 a.m., Eastern Time], 
complaints must be received by Nasdaq within thirty minutes of 
execution time.
    (B) In the case of an Outlier Transaction, a member or person 
associated with a member that seeks to have a transaction reviewed 
pursuant to paragraph (a)(1) hereof shall submit a written complaint to 
Nasdaq MarketWatch in accordance with the following time parameters:
    (i) for transactions occurring at or after 9:30 a.m. but prior to 
10:00 a.m., complaints must be received by Nasdaq by 11:30 a.m.; 
    (ii) for transactions occurring prior to 9:30 a.m. or between 10:00 
a.m. and the close of the Regular Session, complaints must be received 
by Nasdaq within ninety minutes of execution time; and 
    (iii) for transactions occurring after the close of the Regular 
Session, complaints must be received by Nasdaq prior to 9:30 a.m. the 
next trading day.
    [(B)](C) Once a complaint has been received in accord with 
paragraph (a)(2)(A) or (B) above, the complainant shall have up to 
thirty (30) minutes, or such longer period as specified by Nasdaq 
staff, to submit any supporting written information concerning the 
complaint necessary for a determination under paragraph (a)(1). Such 
supporting information must include the approximate time of 
transaction(s), security symbol, number of shares, price(s), contra 
broker(s) if the transactions are not anonymous, Nasdaq system used to 
execute the transactions, and the factual basis for believing that the 
trade is clearly erroneous [the reason the review is being sought]. If 
Nasdaq receives a complaint that does not contain all of the required 
supporting information, Nasdaq shall immediately notify the filer that 
the complaint is deficient.
    [(C)](D) Following the expiration of the period for submission of 
supporting material, a Nasdaq [officer] official shall determine 
whether the complaint is eligible for review. A complaint shall not be 
eligible for review under paragraph (a) unless:
    (i) the complainant has provided all of the supporting information 
required under paragraph (a)(2)[(B)](C), and
    (ii) For trades in Nasdaq securities executed during the Regular 
Session [between 9:30 a.m. and 4:00 p.m. Eastern Time], or trades in 
non-Nasdaq securities executed during the Regular Session after 
[between the time when] the [p]Primary [m]Market for the security first 
posts an executable two-side quote [for its regular market trading 
session and 4:00 p.m. Eastern Time], the price of a transaction to buy 
(sell) that is the subject of the complaint is greater than (less than) 
the [best offer (best bid)] Inside Price by an amount that equals or 
exceeds the minimum threshold set forth below:

------------------------------------------------------------------------
             Inside price                       Minimum threshold
------------------------------------------------------------------------
$0-$0.99..............................  $0.02 + (0.10 x Inside Price)
$1.00-$4.99...........................  $0.12 + (0.07 x (Inside Price-
                                         $1.00))
$5.00-$14.99..........................  $0.40 + (0.06 x (Inside Price-
                                         $5.00))

[[Page 35281]]

 
$15 or more...........................  $1.00
------------------------------------------------------------------------

    [For a transaction to buy (sell) a Nasdaq security, the inside 
price shall be the best offer (best bid) in Nasdaq at the time that the 
first share of the order that resulted in the disputed transaction was 
executed, and for a transaction to buy (sell) a non-Nasdaq security, 
the inside price shall be the national best offer (best bid) at the 
time that the first share of the order that resulted in the disputed 
transaction was executed. A ``Nasdaq security'' means a security for 
which transaction reports are disseminated under the Nasdaq UTP Plan, 
and a ``non-Nasdaq security'' means a security for which transaction 
reports are disseminated under the Consolidated Tape Association Plan. 
The ``primary market'' for a non-Nasdaq Security is the market 
designated as the primary market under the Consolidated Tape 
Association Plan.]
    [(D)](E) If a complaint is determined to be eligible for review, 
the counterparty to the trade shall be notified of the complaint via 
telephone or other method permitted by paragraph (d) by Nasdaq staff 
and shall have up to thirty (30) minutes, or such longer period as 
specified by Nasdaq staff, to submit any supporting written information 
concerning the complaint necessary for a determination under paragraph 
(a)(1). Either party to a disputed trade may request the written 
information provided by the other party pursuant to paragraph (a)(2).
    [(E)](F) Notwithstanding paragraphs (a)(2)[(B)](C) and [(D)](E) 
above, once a party to a disputed trade communicates that it does not 
intend to submit any further information concerning a complaint, the 
party may not thereafter provide additional information unless 
requested to do so by Nasdaq staff. If both parties to a disputed trade 
indicate that they have no further information to provide concerning 
the complaint before their respective thirty-minute information 
submission period has elapsed, then the matter may be immediately 
presented to a Nasdaq [officer] official for a determination pursuant 
to paragraph (a)(1) above.
    [(F)](G) Each member[, member of a UTP Exchange,] or person 
associated with a[ny such] member involved in the transaction shall 
provide Nasdaq with any information that it requests in order to 
resolve the matter on a timely basis notwithstanding the time 
parameters set forth in paragraphs (a)(2)[(B)](C) and [(D)](E) above.
    [(G)](H) Once a party has applied to Nasdaq for review and the 
transaction has been determined to be eligible for review, the 
transaction shall be reviewed and a determination rendered, unless (i) 
both parties to the transaction agree to withdraw the application for 
review prior to the time a decision is rendered pursuant to paragraph 
(a)(1), or (ii) the complainant withdraws its application for review 
prior to the notification of counterparties pursuant to paragraph 
(a)(2)[(D)](E).
    (b) Procedures for Reviewing Transactions on Nasdaq's Own Motion.
    In the event of (i) 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 
Commission, or (ii) 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, the 
President of Nasdaq or any Executive Vice President designated by the 
President may, on his or her own motion, review any transaction arising 
out of or reported through any such quotation, execution, 
communication, or trade reporting system[, including transactions 
entered into by a member of a UTP Exchange through the use or operation 
of such a system, but excluding transactions that are entered into 
through, or reported to, a UTP Exchange]. A Nasdaq officer acting 
pursuant to this subsection may declare any such transaction null and 
void or modify the terms of any such transaction if the officer 
determines that (i) the transaction is clearly erroneous, or (ii) such 
actions are necessary for the maintenance of a fair and orderly market 
or the protection of investors and the public interest; provided, 
however, that the officer [must] shall take action pursuant to this 
subsection [within thirty (30) minutes of] as soon as possible after 
detection of the transaction except in the event of extraordinary 
circumstances, in which event the officer must take action by [3:00 
p.m.,]9:30 a.m. [Eastern Time,] on the next trading day following the 
date of the transaction at issue.
    (c) Review by the Market Operations Review Committee (``MORC'')
    (1) Subject to the limitations described in paragraph (c)(2), a 
member[, member of a UTP Exchange,] or person associated with a[ny 
such] member may appeal a determination made under paragraph (a) to the 
MORC. A member[, member of a UTP Exchange,] or person associated with 
a[ny such] member may appeal a determination made under paragraph (b) 
to the MORC unless the officer making the determination also determines 
that the number of the affected transactions is such that immediate 
finality is necessary to maintain a fair and orderly market and to 
protect investors and the public interest. An appeal must be made in 
writing, and must be received by Nasdaq within thirty (30) minutes 
after the person making the appeal is given the notification of the 
determination being appealed, except that if Nasdaq notifies the 
parties of action taken pursuant to paragraph (b) after 4:00 p.m., the 
appeal must be received by Nasdaq by 9:30 a.m. the next trading day. 
Once a written appeal has been received, the counterparty to the trade 
that is the subject of the appeal will be notified of the appeal and 
both parties shall be able to submit any additional supporting written 
information up until the time the appeal is considered by the MORC. 
Either party to a disputed trade may request the written information 
provided by the other party during the appeal process. An appeal to the 
MORC shall not operate as a stay of the determination being appealed, 
and the scope of the appeal shall be limited to trades which the person 
making the appeal is a party. Subject to the limitations described in 
paragraph (c)(2), once a party has appealed a determination to the 
MORC, the determination shall be reviewed and a decision rendered, 
unless (i) both parties to the transaction agree to withdraw the appeal 
prior to the time a decision is rendered by the MORC, or (ii) the party 
filing the appeal withdraws its appeal prior to the notification of 
counterparties under this paragraph (c)(1). Upon consideration of the 
record, and after such hearings as it may in its discretion order, the 
MORC, pursuant to the standards set forth in this rule, shall affirm, 
modify, reverse, or remand the determination.
    (2) If a Nasdaq [officer] official determines under paragraph 
(a)(2)[(C)](D) that a transaction is not eligible for review, a party 
appealing such determination must allege in its appeal a mistake of 
material fact upon which it believes the [officer's] official's 
determination was based. If the MORC concludes that an appeal of such a 
determination does not allege a mistake of material fact, the 
determination shall become final and binding. If the MORC concludes 
that an appeal of such a determination alleges a mistake of material 
fact, Nasdaq shall notify the counterparty to the transaction and the 
determination shall be reviewed by the MORC as provided under paragraph 
(c)(1). If the MORC then finds that the

[[Page 35282]]

determination was based on a mistake of material fact, the MORC shall 
remand the matter for adjudication under paragraph (a); otherwise, the 
determination shall become final and binding.
    (3) The decision of the MORC pursuant to an appeal, or a 
determination by a Nasdaq [officer] official that is not appealed, 
shall be final and binding upon all parties and shall constitute final 
Nasdaq action on the matter in issue. Any determination by a Nasdaq 
[officer] official pursuant to paragraph (a) or (b) or any decision by 
the MORC pursuant to paragraph (c) shall be rendered without prejudice 
as to the rights of the parties to the transaction to submit their 
dispute to arbitration.
    (4) The party initiating the appeal shall be assessed a $500.00 fee 
if the MORC upholds the decision of the Nasdaq [officer] official. In 
addition, in instances where Nasdaq, on behalf of a member, requests a 
determination by another market center that a transaction is clearly 
erroneous, Nasdaq will pass any resulting charges through to the 
relevant member.
    (d) Communications
    (1) All materials submitted to Nasdaq or the MORC pursuant to this 
Rule shall be submitted within the time parameters specified herein via 
such telecommunications procedures as Nasdaq may announce from time to 
time in a[n] Notice to Members or Head Trader Alert. Materials shall be 
deemed received at the time indicated by the telecommunications 
equipment (e.g., facsimile machine or computer) receiving the 
materials. Nasdaq, in its sole and absolute discretion, reserves the 
right to reject or accept any material that is not received within the 
time parameters specified herein. All times stated in this rule and 
related Interpretive Material are Eastern Time.
    (2) Nasdaq shall provide affected parties with prompt notice of 
determinations under this Rule via facsimile machine, electronic mail, 
or telephone (including voicemail); provided, however, that if an 
officer nullifies or modifies a large number of transactions pursuant 
to paragraph (b), Nasdaq may instead provide notice to parties via 
Nasdaq telecommunications protocols, a press release, or any other 
method reasonably expected to provide rapid notice to many market 
participants.
    (e) Definitions
    For purposes of this Rule and related Interpretive Material:
    (1) ``Inside Price'' means:
    (A) for a transaction to buy (sell) a Nasdaq security, the best 
offer (best bid) in Nasdaq at the time that the first share of an order 
or the first share of a series of orders that resulted in disputed 
transactions was executed, and
    (B) for a transaction to buy (sell) a non-Nasdaq security, the 
national best offer (best bid) at the time that the first share of an 
order or the first share of a series of orders that resulted in the 
disputed transactions was executed.
    (2) ``Nasdaq security'' means a security for which transaction 
reports are disseminated under the Nasdaq UTP Plan.
    (3) ``Non-Nasdaq security'' means a security for which transaction 
reports are disseminated under the Consolidated Tape Association Plan.
    (4) ``Outlier Transaction'' means a transaction that:
    (A) is executed at a price that meets the following parameters:
    (i) in the case of a transaction for a Nasdaq security executed 
during the Regular Session, the price is 50% or more away from the 
Inside Price;
    (ii) in the case of a transaction for a non-Nasdaq security 
executed during the Regular Session after the Primary Market has posted 
its first two-sided quote, the price is 50% or more away from the 
Inside Price;
    (iii) in the case of a transaction for a Nasdaq security or non-
Nasdaq security executed outside of the Regular Session, or a non-
Nasdaq security executed during the Regular Session before the Primary 
Market has posted its first two-sided quote, the price is 50% or more 
away from the closing price of the security in the most recent Regular 
Session; and
    (B) the loss value of all transactions at issue in the complaint 
exceeds $10,000. The loss value is measured by multiplying the number 
of shares by the difference between the execution price and price with 
which the execution price is compared under paragraph (e)(4)(A).
    (5) ``Primary Market'' means:
    (A) for a Nasdaq security, the Nasdaq Market Center, and
    (B) for a non-Nasdaq Security, the market designated as the primary 
market under the Consolidated Tape Association Plan.
    (6) ``Regular Session'' means the primary trading session for a 
particular security on its Primary Market, which is generally 9:30 a.m. 
through 4:00 or 4:15 p.m.

IM-11890-1. Refusal to Abide by Rulings of a Nasdaq [Officer] Official 
or the MORC

    It shall be considered conduct inconsistent with just and equitable 
principles of trade for any member to refuse to take any action that is 
necessary to effectuate a final decision of a Nasdaq [officer] official 
or the MORC under Rule 11890.

IM-11890-2. Review by Panels of the MORC

    For purposes of Rule 11890 and other Nasdaq Rules that permit 
review of Nasdaq decisions by the MORC, a decision of the MORC may be 
rendered by a panel of the MORC. In the case of a review of a 
determination by a Nasdaq [officer] official under Rule 
11890(a)(2)[(C)](D) that a transaction is not eligible for review 
(including a review of the sufficiency of allegations contained in an 
appeal regarding such a determination), the panel may consist of one or 
more members of the MORC, provided that no more than 50 percent of the 
members of any panel are directly engaged in market making activity or 
employed by a member whose revenues from market making activity exceed 
ten percent of its total revenues. In all other cases, the panel shall 
consist of three or more members of the MORC, provided that no more 
than 50 percent of the members of any panel are directly engaged in 
market making activity or employed by a member firm whose revenues from 
market making activity exceed ten percent of its total revenues.

IM-11890-3. Application of Rule 11890(a)(2)[(C)](D)

    The following example is intended to assist market participants in 
understanding the minimum price deviation thresholds in paragraph 
(a)(2)[(C)](D) and their effect on the eligibility of transactions for 
review under Rule 11890.
    ABCD, a Nasdaq [listed] security, has an [i]Inside [market]Price of 
(bid) $12.00-$12.05 (ask). Market Maker A (MMA) enters a market order 
to buy 10,000 shares, although it had intended a market order for 1,000 
shares. The size of the order is such that the order `sweeps' the 
Nasdaq Market Center order file, which reflects 1,000 shares of 
liquidity offered at each of ten prices ranging from $12.05 to $12.95. 
Executions occur, moving through the depth of file, as follows:

 
 
 
Trade 1--1000 shares @ $12.05 (9000 remaining).
Trade 2--1000 shares @ $12.10 (8000 remaining).
Trade 3--1000 shares @ $12.15 (7000 remaining).
Trade 4--1000 shares @ $12.25 (6000 remaining).
Trade 5--1000 shares @ $12.35 (5000 remaining).
Trade 6--1000 shares @ $12.45 (4000 remaining).

[[Page 35283]]

 
Trade 7--1000 shares @ $12.55 (3000 remaining).
Trade 8--1000 shares @ $12.65 (2000 remaining).
Trade 9--1000 shares @ $12.90 (1000 remaining).
Trade 10--1000 shares @ $12.95 (complete).
 

    The inside offer at the time the first share of the order was 
executed is $12.05, so the minimum price deviation threshold is 
determined using the following formula: $0.40 + (0.06 x (Inside Price-
$5.00)) = $0.40 + (0.06 x ($12.05-$5.00)) = $0.82. Thus, to be eligible 
for review, a transaction must be at a price that is at least $0.82 
higher than the original best offer price (i.e., $12.05 + $0.82 = 
$12.87). MMA could petition for review of trades 9 and 
10, priced at $12.90 and $12.95 respectively, but trades 
1 through 8 would not be eligible for review. The 
sole basis for an appeal to the MORC of the determination that trades 
1 through 8 are not eligible for review would be an 
assertion of a mistake of material fact. For example, an appeal could 
be based upon an assertion that the Nasdaq [officer] official had made 
an arithmetical error in determining the minimum price deviation 
threshold, or had erred in determining the applicable [inside price] 
Inside Price.

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] most 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 that 
existed at the time of execution of the first share of one or a series 
of orders that resulted in disputed transactions. Nasdaq would not 
consider a trade clearly erroneous, and therefore would not break or 
modify it, if it was priced within a range of the preceding market 
price, as described in detail below. 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,  and breaks trades that 
are more than a specified percentage away from a Reference Price that 
is indicative of prior market conditions. The range away from a 
Reference Price beyond which trades may be broken is referred to as the 
Numerical Threshold. As a corollary to this policy, Nasdaq does not 
break trades that are at the Numerical Threshold or between the 
Reference Price and the Numerical Threshold, as set forth in the chart 
below.

------------------------------------------------------------------------
                                [Range Away from
                                Reference Price]    Numerical Threshold--
       Execution Price        Numerical Threshold--    Outside Regular
                                 Regular Session           Session
 
------------------------------------------------------------------------
$0.20 and under.............  The minimum           The minimum
                               threshold required    threshold that
                               for adjudication      would be required
                               under Rule            for adjudication
                               11890(a)(2)(D)(ii).   under Rule
                                                     11890(a)(2)(D)(ii)
                                                     if it were
                                                     applicable outside
                                                     of the Regular
                                                     Session
Over $0.20 and up to $1.75    [Equal to or greater  20%
 [and under].                  than t]The minimum
                               threshold required
                               for adjudication
                               under Rule
                               11890(a)(2)[(C)](D)
                               (ii).
Over $1.75 and up to $25....  10%.................  20%
Over $25 and up to $50......  5%..................  10%
Over $50....................  3%..................  6%
------------------------------------------------------------------------

    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     Inside Price [The best bid (best offer)
 during [for trades executed    (``BBO'') in Nasdaq at the time of
 between 9:30 am and 4:00 pm    execution of first share of the disputed
 Eastern Time (``]Regular       order]
 Session['')].
Non-Nasdaq[-listed]            Inside Price [The national BBO at the
 securities for trades          time of execution of first share of the
 executed during Regular        disputed order]
 Session and after [p]Primary
 [m]Market has posted first
 two-sided quote.
Non-Nasdaq[-listed]            Inside Price [The national BBO at the
 securities for trades          time of execution of first share of the
 executed during Regular        disputed order]. If [national BBO]the
 Session and before             Inside Price does not appear
 [p]Primary [m]Market has       substantially related to the market,
 posted first two-sided quote.  Nasdaq may consider other Reference
                                Prices including the opening trade,
                                indication of interest and first two-
                                sided quote in the [p]Primary [m]Market
                                (which may occur after the execution)
                                and the closing price for the prior
                                Regular Session [for the security's
                                primary market].
Nasdaq[-listed] securities     Closing price of security for the last
 and non-Nasdaq[-listed]        Regular Session on the security's
 securities outside of          [p]Primary [m]Market. If the closing
 Regular Session [for trades    price does not appear substantially
 executed after 4:00 pm and     related to the market, Nasdaq may
 before 9:30 am Eastern Time].  consider other References Prices,
                                including the prices of other trades in
                                the trading session or the Inside Price.
------------------------------------------------------------------------


[[Page 35284]]

    In unusual circumstances, Nasdaq may use a different Reference 
Price in determining which trades to break. For example, in the case of 
several large orders that execute at multiple prices, a Reference Price 
based on a weighted average of the best bid (best offer) (``BBO'') at 
relevant times may be used rather than a Reference Price based solely 
on the Inside Price.
    It may also be necessary to use a higher Numerical Threshold if, 
after market participants have been alerted to the existence of 
erroneous activity, the price of the security returns toward its prior 
trading range but continues to trade beyond the price at which trades 
would normally be broken. Nasdaq also may use different Numerical 
Thresholds in events that involve other markets in an effort to 
coordinate a Numerical Threshold that is consistent across markets.
    Finally, Nasdaq could break or adjust all trades in a security if a 
pervasive mistake resulted in trading that should not have occurred. 
For example, trades in a security that was incorrectly authorized for 
trading prior to the date of its actual initial public offering would 
all be broken. Similarly, if Nasdaq systems executed orders in the 
Nasdaq opening cross or closing cross at a price that was inconsistent 
with the rules governing the operation of the crosses, either due to a 
Nasdaq system error or because an underlying erroneous order resulted 
in an erroneous opening or closing price, Nasdaq may break or adjust 
all of the affected trades.
Additional Factors
    In occasional circumstances, Nasdaq may consider additional factors 
in determining whether a transaction is clearly erroneous (provided the 
applicable Numerical Threshold is exceeded). 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

Suspicious Trading Activity

    As reflected in Rule 11890(a)(1)(A), Nasdaq may determine that a 
transaction is clearly erroneous if the person seeking review has 
represented that it resulted from an order submitted by a person that 
was not authorized to submit that order into Nasdaq or from an account 
used for the purpose of effecting a manipulation of the market for the 
security. Nasdaq may adjudicate such transactions under Rule 11890(a), 
or may address them under Rule 11890(b) if their effect on the market 
is such that nullification or modification of a large number of 
transactions may be necessary for the maintenance of a fair and orderly 
market or the protection of investors and the public interest.
    While an assertion of suspicious trading activity may provide the 
basis for reviewing transactions, it does not provide a basis for 
altering the application of the factors used in determining whether to 
nullify or modify trades. Thus, the minimum price threshold required 
for adjudication under Rule 11890(a)(2)(D)(ii) would be applicable in 
the case of unauthorized or manipulative transactions being adjudicated 
under Rule 11890(a). Moreover, Nasdaq would apply the Numerical 
Thresholds described above in determining which trades to break. For 
example, if the best offer in a security during the Regular Session was 
$20 prior to the execution of the first share of a series of 
unauthorized buy orders that executed at prices ranging from $20 to 
$30, the usual Numerical Threshold would be 10%, or $22.00, and trades 
above that price could be broken.
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

    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 that 
existed at the time of execution of the first share of one or a series 
of orders that resulted in disputed transactions. Nasdaq would not 
consider a trade clearly erroneous, and therefore would not break or 
modify it, if it was priced within a range of the preceding market 
price, as described in detail below. 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

[[Page 35285]]

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.] The 
range away from a Reference Price beyond which trades may be broken is 
referred to as the Numerical Threshold, and is 10% (except in the 
circumstances described below). As a corollary to this policy, Nasdaq 
does not break trades that are at the Numerical Threshold or between 
the Reference Price and the Numerical Threshold.
    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 during the Regular   Inside Price
 Session after the market opening        [For Nasdaq-listed securities,
 process [of trading during regular       the best bid (best offer)
 market hours and until the end of        (``BBO'') in Nasdaq at the
 regular market 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
[squf] outside of the Regular Session     security for the Regular
[squf] after 4:00 p.m., Eastern Time      Session [regular market hours]
 (ET)                                     on the security's [primary
[squf] before 9:30 a.m., ET]              market]Primary Market. If the
[squf] during the market opening          closing price does not appear
 process [for regular market hours]       substantially related to the
                                          market, Nasdaq may consider
                                          other References Prices,
                                          including the prices of other
                                          trades in the trading session
                                          or the Inside Price.
------------------------------------------------------------------------

    In unusual circumstances, however, Nasdaq may use a different 
Reference Price in determining which trades to break. For example, in 
the case of several large orders that execute at multiple prices, a 
Reference Price based on a weighted average of the best bid (best 
offer) (``BBO'') at relevant times may be used rather than a Reference 
Price based solely on the Inside Price.
    It may also be necessary to use a higher Numerical Threshold if, 
after market participants have been alerted to the existence of 
erroneous activity, the price of the security returns toward its prior 
trading range but continues to trade beyond the price at which trades 
would normally be broken. Nasdaq also may use different Numerical 
Thresholds in events that involve other markets in order to coordinate 
a Numerical Threshold that is consistent across markets.
    Finally, Nasdaq could break or adjust all trades in a security if a 
pervasive mistake resulted in trading that should not have occurred. 
For example, trades in a security that was incorrectly authorized for 
trading prior to the date of its actual initial public offering would 
all be broken. Similarly, if Nasdaq systems executed orders in the 
Nasdaq opening cross or closing cross at a price that was inconsistent 
with the rules governing the operation of the crosses, either due to a 
Nasdaq system error or because an underlying erroneous order resulted 
in an erroneous opening or closing price, Nasdaq may break or adjust 
all of the affected trades.
    In occasional circumstances, Nasdaq may consider additional factors 
in determining whether the transactions are clearly erroneous (provided 
the applicable Numerical Threshold is exceeded). These include:
    [squf] Material news released for individual securities
    [squf] 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.

Suspicious Trading Activity

    As reflected in Rule 11890(a)(1)(A), Nasdaq may determine that a 
transaction is clearly erroneous if the person seeking review has 
represented that it resulted from an order submitted by a person that 
was not authorized to submit that order into Nasdaq or from an account 
used for the purpose of effecting a manipulation of the market for the 
security. Nasdaq may adjudicate such transactions under Rule 11890(b) 
if their effect on the market is such that nullification or 
modification of a large number of transactions may be necessary for the 
maintenance of a fair and orderly market or the protection of investors 
and the public interest.
    While an assertion of suspicious trading activity may provide the 
basis for reviewing transactions, it does not provide a basis for 
altering the application of the factors used in determining whether to 
nullify or modify trades. Thus, Nasdaq would apply the Numerical 
Thresholds described above in determining which trades to break. For 
example, if the best offer in a security during the Regular Session was 
$20 prior to the execution of the first share of a series of 
unauthorized buy orders that executed at prices ranging from $20 to 
$30, the usual Numerical Threshold would be 10%, or $22.00, and trades 
above that price could be broken.
* * * * *

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,

[[Page 35286]]

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
Application of Rule 11890 to Suspicious Trading Activity
    Nasdaq is amending Rule 11890, which covers the breaking or 
adjusting of trades determined to be clearly erroneous, to clarify the 
scope of its application to unauthorized and/or manipulative trading 
activity that could disrupt fair and orderly markets. In recent months, 
financial regulators have become aware of market manipulation schemes 
in which criminals manipulate stock prices by illegally gaining access 
to legitimate accounts.\5\ Accordingly, Nasdaq is proposing to amend 
the definition of ``clearly erroneous,'' which currently refers to an 
obvious error in any term of a transaction, to make it clear that 
unauthorized trading activity fits within the definition. However, 
Nasdaq believes that the rule should not be drafted in a manner that 
makes an artificial distinction between manipulative activity 
undertaken through ``hijacked'' accounts and similar manipulations 
effected through accounts where an individual is technically authorized 
to enter orders but may take other measures to conceal identity. In 
short, Nasdaq believes that the scope of Rule 11890 should be broad 
enough to allow an appropriate response to any form of unauthorized or 
manipulative trading activity, including ``cyber attacks'' on the 
infrastructure of the financial system by terrorist organizations or 
attempts to manipulate stock prices by illegally gaining access to 
legitimate accounts or opening new accounts using false information.\6\
---------------------------------------------------------------------------

    \5\ See, e.g., SEC Litigation Release No. 20037 (March 12, 
2007).
    \6\ Clay Wilson, Congressional Research Service, Computer Attack 
and Cyber Terrorism: Vulnerabilities and Policy Issues for Congress 
(April 1, 2005); Jeffrey Garten, Markets' resilience to terror is no 
reason to relax, Financial Times (September 11, 2006); Financial 
Services Sector Coordinating Council, Protecting the U.S. Critical 
Financial Infrastructure: An Agenda for 2005 (2005).
---------------------------------------------------------------------------

    The rule change further provides that although suspicious trading 
activity may provide a basis for determining a trade to be clearly 
erroneous, it would not provide a basis for altering the application of 
price-based numerical factors in determining whether to break 
particular trades. As described in SR-NASDAQ-2006-046,\7\ Nasdaq 
primarily considers the execution price of a trade in determining 
whether it is clearly erroneous, and breaks trades that are more than a 
specified percentage away from a Reference Price that is indicative of 
prior market conditions. The range away from a Reference Price beyond 
which trades may be broken, expressed as a percentage or minimum 
deviation, is referred to as the Numerical Threshold.\8\ Thus, Nasdaq 
would apply the numerical factors described in IM-11890-4 and IM-11890-
5 in determining which trades to break.\9\ For example, if the best 
offer in a security during a market's Regular Session \10\ was $20 
prior to the execution of the first share of a series of unauthorized 
buy orders that executed at prices ranging from $20 to $30, the usual 
Numerical Threshold would be 10%, or $22.00, and higher-priced trades 
could be broken. Similarly, the minimum price threshold required for 
adjudication under Rule 11890(a)(2)(D)(ii) would be applicable in the 
case of unauthorized or manipulative transactions being adjudicated 
under Rule 11890(a).
---------------------------------------------------------------------------

    \7\ Securities Exchange Act Release No. 54854 (December 1, 
2006), 71 FR 71208, 71211 (December 8, 2006) (SR-NASDAQ-2006-046).
    \8\ As a corollary to its policy, Nasdaq does not break trades 
that are at the Numerical Threshold or between the Reference Price 
and the Numerical Threshold.
    \9\ IM-11890-4 provides guidance on how Nasdaq considers: (1) 
all complaints filed by market participants under Rule 11890(a) and 
(2) most events involving a single security considered on Nasdaq's 
own motion pursuant to Rule 11890(b). IM-11890-5 provides guidance 
on the remaining events involving a single security considered on 
Nasdaq's own motion pursuant to Rule 11890(b), such as some 
situations where trading activity occurs in multiple market centers 
and Nasdaq is acting in consultation with other markets. IM-11890-5 
also provides guidance on how Nasdaq considers multi-stock events 
adjudicated on Nasdaq's own motion pursuant to Rule 11890(b). 
Telephone conversation by and between John Yetter, Senior Associate 
General Counsel, Nasdaq, and David Hsu, Special Counsel, Division of 
Market Regulation, Commission, on June 20, 2007.
    \10\ The proposed rule change adds the defined term ``Regular 
Session'' to the rule, and defines it as ``the primary trading 
session for a particular security on its Primary Market, which is 
generally 9:30 a.m. through 4:00 or 4:15 p.m.
---------------------------------------------------------------------------

    Nasdaq believes that it is important to allow transactions priced 
close to the inside market or other reference price to stand, even if 
the transactions directly resulted from a mistake, system error or 
account intrusion. This ensures that market participants have economic 
incentives to develop and maintain internal controls with a goal of 
preventing erroneous trading activity. It should also be noted that 
Nasdaq refers market participants for investigation by the NASD in its 
capacity as Nasdaq's regulatory services provider in all circumstances 
where a firm's erroneous trades raise questions as to the adequacy of 
its computer systems and internal controls. Nasdaq believes that 
enhanced controls by brokerage firms may play an important role in 
reducing the incidence of account intrusions, as well as system and 
human errors.\11\
---------------------------------------------------------------------------

    \11\ Nasdaq maintains records of each clearly erroneous 
complaint that it receives. This file includes: the filer's written 
complaint as required by Rule 11890(a)(2), any further written 
correspondence or notes of oral communications made by the Nasdaq 
MarketWatch analyst, any relevant screen shots or other market 
information retained by the analysts, and a record of the decisions 
by the Nasdaq official and the Market Operations Review Committee, 
if the official's decision is appealed. In the event of an account 
intrusion, Nasdaq requires written confirmation from the filer that 
the erroneous trade resulted from an account intrusion unless 
provided in the filer's original written complaint. Nasdaq refers 
all clearly erroneous complaints that raise regulatory concerns, 
including all cases alleging account intrusion, to NASD on a timely 
basis and also provides NASD with information on all complaints on a 
monthly basis.
---------------------------------------------------------------------------

Numerical Thresholds
    The proposed rule change also amends IM-11890-4 and -5 to provide 
some additional guidance regarding the application of price-based 
factors under Rule 11890. The Reference Price generally used under Rule 
11890 is the best bid/best offer (``BBO'') in Nasdaq, or the national 
BBO, for trading during the Regular Session, and the closing price on a 
stock's primary market for late and early trading. As described in SR-
NASDAQ-2006-046,\12\ however, Nasdaq may use a different Reference 
Price in unusual circumstances. Thus, 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, Nasdaq 
may use a Reference Price derived from after-hours trading activity 
rather than 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 
used rather than a Reference Price based solely on the BBO immediately 
prior to the execution of the first share of the order. Nasdaq believes 
that it would enhance the clarity of the Interpretive Material to add 
these examples from the prior filing directly to the text. Nasdaq also 
proposes to amend the Interpretive Material to add examples of cases 
where Nasdaq may apply alternative Numerical Thresholds in determining 
which trades to break. For example, it may be necessary to use a higher 
Numerical Threshold if, after market participants have been alerted to 
the

[[Page 35287]]

existence of erroneous activity, the price of a security returns toward 
its prior trading range but continues to trade beyond the price at 
which trades would normally be broken. Nasdaq also may use different 
Numerical Thresholds in events that involve other markets in order to 
coordinate a break point that is consistent across markets. For 
example, if the bulk of trades in a stock not listed on Nasdaq occurred 
in the stock's primary market, Nasdaq would generally seek to reach a 
result consistent with the primary market.
---------------------------------------------------------------------------

    \12\ See supra note 7.
---------------------------------------------------------------------------

    Finally, the amended Interpretive Material provides that Nasdaq 
could break or modify all trades in a security if a pervasive mistake 
resulted in trading that should not have occurred. For example, trades 
in a security that was incorrectly authorized for trading prior to the 
date of its actual initial public offering would all be broken. 
Similarly, if Nasdaq systems executed orders in the Nasdaq opening 
cross or closing cross at a price that was inconsistent with the rules 
governing the operation of the crosses, either due to a Nasdaq system 
error or because an underlying erroneous order resulted in an erroneous 
opening or closing price, Nasdaq may break or adjust all of the 
affected trades.
    Nasdaq is also amending the Numerical Thresholds under IM-11890-4 
for trading outside the Regular Session, to establish wider ranges 
within which trades are permitted to stand. The change reflects the 
diminished depth of the market during after hours and pre-market 
trading sessions; market participants trading during these sessions 
must accept the fact that orders are more likely to exhaust liquidity 
available at the inside price than is the case during the Regular 
Session. Accordingly, Nasdaq believes that the Numerical Thresholds 
should be doubled during these times. For example, a trade at $40 per 
share could be broken if more than 10% away from the Reference Price 
during the Regular Session, but could not be broken during the pre-
market or after hours sessions unless it was more than 20% away from 
the Reference Price.
    Nasdaq is also amending the language of Rule 11890(a)(2)(B) to make 
it clear that persons seeking review of transactions must present a 
factual basis for believing that the trade is clearly erroneous. Nasdaq 
cannot, within the context of an adjudication that must be conducted 
within a short period of time, determine all of the factual 
circumstances associated with a particular trade or set of trades. 
Thus, for example, if a trader files for adjudication and states that 
he mistakenly entered an order for 400,000 shares rather than the 
intended order size of 4,000, Nasdaq cannot, on a real-time basis, 
determine whether this is accurate. Nevertheless, Nasdaq believes that 
it is generally incumbent on persons seeking review actually to allege 
a human or system error, rather than merely stating that the order was 
``filled away'' or at ``a bad price.'' \13\ Requiring the statement of 
a factual basis also allows NASD to evaluate, after the fact, whether a 
particular market participant is abusing the clearly erroneous process 
or employing poor internal controls. Individuals and firms found to 
have misled Nasdaq about the cause of the alleged error would be 
subject to disciplinary action for misleading a self-regulatory 
organization.
---------------------------------------------------------------------------

    \13\ Nasdaq notes, however, that several circumstances exist in 
which price itself may provide a conclusive basis for determining 
that an error occurred. For example, if a market participant entered 
an order in a non-Nasdaq security for execution after 9:30 a.m., but 
the primary market delayed its opening in the security until a later 
time, an execution may occur at a price substantially unrelated to 
the primary market's opening price of the security. Similarly, an 
execution of an order for an exchange-traded fund at a price that is 
substantially out-of-line with the intraday indicative value for the 
fund may provide prima facie evidence of an error. There have also 
been circumstances in which an employee of a member firm notices an 
execution at a price a substantial percentage (i.e., well in excess 
of 10%) away from the best bid/best offer, is unable to contact the 
responsible trader to obtain an explanation, and files for a 
nullification of the trade based solely on its price.
---------------------------------------------------------------------------

Other Changes
    Nasdaq is amending the time limits for market participants to file 
for an adjudication under Rule 11890(a) in cases where the price of the 
transaction at issue is more than 50% away from the applicable inside 
price (or the closing price, for trading outside the Regular Session or 
before the primary market has posted its first two-sided quote), 
provided that the value of the transactions at issue is more than 
$10,000.\14\ If these criteria are met, the transaction is defined as 
an ``Outlier Transaction,'' and the parties to the trade are given an 
extra hour to petition for review if the trade occurred during the 
Regular Session or during pre-market hours, or until 9:30 a.m. the next 
trading day if the trade occurred after hours. The reason for the 
change is to provide greater assurance that trades that are egregiously 
out of line with prevailing market prices are not permitted to stand, 
provided that the dollar value of the trades is significant.
---------------------------------------------------------------------------

    \14\ Measured by multiplying the number of shares at issue in 
the trades by the difference between the execution price and price 
with which the execution price is compared under the rule.
---------------------------------------------------------------------------

    Nasdaq is also making several minor procedural modifications to the 
rule. First, Nasdaq is amending the language of Rule 11890(a)(2)(E) to 
allow Nasdaq to notify the counterparty to a trade about an erroneous 
event by telephone or other means consistent with the communications 
provisions of Rule 11890(d). While Nasdaq currently intends to continue 
notifying counterparties by telephone, the proposed change would give 
Nasdaq the flexibility to incorporate more electronic communications in 
the future. Pursuant to Rule 11890(d), any change to the method of 
communication must be announced by Nasdaq in a Notice to Members or 
Head Trader Alert.
    Second, Nasdaq is amending Rule 11890(b) to replace a statement 
that Nasdaq should, except in extraordinary circumstances, take action 
under the subsection within thirty (30) minutes of detection of an 
erroneous transaction, with a statement that Nasdaq should act as soon 
as possible. Time is always of the essence when determinations must be 
made under the rule, but as a practical matter, many events adjudicated 
under Rule 11890(b) involve coordination between multiple market 
centers, and the time required to gather and evaluate information 
needed to make a determination is often in excess of 30 minutes. 
Accordingly, Nasdaq is amending the rule to provide that a 
determination must be made as soon as possible, except in extraordinary 
circumstances, in which case the outside time limit for a determination 
under the paragraph (b) will be 9:30 a.m. the next trading day (rather 
than 3 p.m., as currently provided).
    Third, Nasdaq is amending Rule 11890 and the Interpretative 
Material in several places to replace the word ``officer'' with the 
word ``official.'' The intent of this change is to allow adjudications 
under Rule 11890(a) to be made by any duly designated Nasdaq employee, 
rather than limiting that authority to persons that are officers of 
Nasdaq within the meaning of its limited liability company agreement 
(e.g., persons with the title of Vice President or President). The 
change will broaden the scope of persons permitted to adjudicate claims 
under the Rule, thereby allowing more efficient adjudications. All 
persons designated under the Rule will have appropriate background in 
market structure and the requirements of the Rule; designated persons 
are likely to be employees of Nasdaq's MarketWatch regulatory unit. 
Nasdaq is not, however, modifying Rule

[[Page 35288]]

11890(b), which requires decisions to break or modify trades on 
Nasdaq's own motion to be made by senior officers only. Consistent with 
current practice, all adjudications under 11890(a) and (b) will 
continue to be made on a ``no-names basis'' (i.e., the adjudicator does 
not know the identities of the market participants that will be 
affected by the decision).
    Finally, Nasdaq is amending the rule to add a consolidated 
paragraph of definitions of terms used in the rule and to delete 
obsolete references to transactions entered into by a member of a 
national securities exchange with unlisted trading privileges in Nasdaq 
securities. Although Nasdaq's former SuperMontage system allowed other 
exchanges to enter orders directly, the current Nasdaq Market Center 
does not retain this functionality. Rather, other exchanges and their 
members can access Nasdaq through broker-dealers that are members of 
Nasdaq, including broker-dealers owned by exchanges.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\15\ in general, and with 
Section 6(b)(5) of the Act,\16\ in particular, in that the proposal is 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78f.
    \16\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will result 
in any burden