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]
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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
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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).
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IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
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 (https://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
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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 (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for inspection and copying in
the Commission’s Public Reference
Room, 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
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CFR 200.30–3(a)(12).
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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.
*
*
*
*
*
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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.
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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.,
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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
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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
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$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
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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)
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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
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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)
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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
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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].
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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
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Sfmt 4703
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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
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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
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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
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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,
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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).
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15:50 Jun 26, 2007
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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.
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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.
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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
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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
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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 (https://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).
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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 (https://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\
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\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.
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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.
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\12\ See supra note 7.
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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.
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\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.
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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.
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\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.
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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.
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\15\ 15 U.S.C. 78f.
\16\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
Nasdaq does not believe that the proposed rule change will result
in any burden
