Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing of Proposed Rule Change To Amend Rule 4626-Limitation of Liability, 45706-45715 [2012-18704]
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Federal Register / Vol. 77, No. 148 / Wednesday, August 1, 2012 / Notices
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. Specifically, BX believes
ending the revenue sharing agreement
and eliminating the associated fee for a
product that customers have not chosen
to utilize is responsive to market
participants and eliminates confusion
about offered products.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange 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.
Specifically, the Exchange believes that
terminating the revenue sharing
agreement and deleting the associated
fee in the rulebook will not burden
competition since the latency
measurement tools are not currently
being used by any customers.
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.
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) become
operative for 30 days after the date of
the filing, or such shorter time as the
Commission may designate, it has
become effective pursuant to 19(b)(3)(A)
of the Act 7 and Rule 19b–4(f)(6)
thereunder.8
A proposed rule change filed under
Rule 19b–4(f)(6) 9 normally does not
become operative prior to 30 days after
the date of the filing. However, pursuant
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7 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6). Rule 19b–4(f)(6)
requires a self-regulatory organization to give the
Commission written notice of its intent to file the
proposed rule change at least five business days
prior to the date of filing of the proposed rule
change, or such shorter time as designated by the
Commission. The Exchange has satisfied this
requirement.
9 17 CFR 240.19b–4(f)(6).
8 17
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to Rule 19b–4(f)(6)(iii),10 the
Commission may designate a shorter
time if such action is consistent with the
protection of investors and the public
interest. The Exchange has requested
that the Commission waive the 30-day
operative delay and designate the
proposed rule change to become
operative upon filing to eliminate
confusion on the part of potential
customers regarding the availability of
the Correlix RaceTeam offering. The
Commission believes that waiving the
30-day operative delay is consistent
with the protection of investors and the
public interest. The Exchange represents
that there are no customers currently
using Correlix’s RaceTeam latency
measurement service. Therefore, the
Commission designates the proposed
rule change as operative upon filing
with the Commission.11
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
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 Web site viewing and
printing 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 the 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–BX–
2012–054 and should be submitted on
or before August 22, 2012.
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:
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.12
Kevin M. O’Neill,
Deputy Secretary.
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–BX–2012–054 on the
subject line.
SECURITIES AND EXCHANGE
COMMISSION
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–BX–2012–054. This file
number should be included on the
subject line if email is used. To help the
CFR 240.19b–4(f)(6)(iii).
purposes only of waiving the 30-day
operative delay, the Commission has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
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11 For
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[FR Doc. 2012–18754 Filed 7–31–12; 8:45 am]
BILLING CODE 8011–01–P
[Release No. 34–67507; File No. SR–
NASDAQ–2012–090]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Notice of
Filing of Proposed Rule Change To
Amend Rule 4626—Limitation of
Liability
July 26, 2012.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Exchange Act’’ or ‘‘Act’’),1 and Rule
19b–4 thereunder,2 notice is hereby
given that on July 23, 2012, The
NASDAQ Stock Market LLC (‘‘Nasdaq’’
or ‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’ or ‘‘SEC’’) the proposed
12 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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Federal Register / Vol. 77, No. 148 / Wednesday, August 1, 2012 / Notices
rule change as described in Items I and
II below, which Items have been
prepared by the Exchange.3 The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Rule 4626. The text of the proposed rule
change is available at https://
nasdaq.cchwallstreet.com, at
NASDAQ’s principal office, and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange 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. The
Exchange has prepared summaries, set
forth in Sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
I. Introduction
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The Proposal
Nasdaq is seeking the SEC’s approval
of a voluntary accommodation policy
for claims arising from system
difficulties that Nasdaq experienced
during the initial public offering (‘‘IPO’’)
of Facebook, Inc. (‘‘Facebook’’ or ‘‘FB’’)
on May 18, 2012. In the weeks since the
Facebook IPO, Nasdaq has reviewed the
events of May 18 with the goal of
proposing a fair and equitable
accommodation policy that is consistent
with the Exchange Act and Nasdaq’s
self-regulatory obligations. This
proposal reflects Nasdaq’s effort (i) to
identify the categories of investors and
members that Nasdaq’s system
difficulties caused objective, discernible
3 The Commission emphasizes that this notice
was solely prepared by Nasdaq. As with all selfregulatory organization rule filings, the
representations, views, and opinions contained in
the notice are those of Nasdaq. The Commission is
publishing the notice pursuant to the Exchange Act
and the rules thereunder. The Commission neither
makes any findings nor expresses any opinion with
respect to Nasdaq’s representations and
interpretations contained in this notice.
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harm, and the type and scope of such
harm, and (ii) to propose an objectively
reasonable and regulatorily balanced
plan for accommodating Exchange
members and their investor customers
for such harm. Nasdaq has undertaken
this effort notwithstanding the liability
protections afforded by its contractual
limitations of liability, common law
immunity, and Rule 4626—the rule that
Nasdaq proposes to modify.4
Rule 4626 limits the liability of
Nasdaq and its affiliates with respect to
any losses, damages, or other claims
arising out of the Nasdaq Market Center
or its use and provides for limited
accommodations under the conditions
specified in the rule.5 Subsection (b)(1)
provides that for the aggregate of all
claims made by market participants
related to the use of the Nasdaq Market
Center during a single calendar month,
Nasdaq’s payments under Rule 4626
shall not exceed the larger of $500,000
or the amount of the recovery obtained
by Nasdaq under any applicable
insurance policy. Subsection (b)(2)
states that for the aggregate of all claims
made by market participants related to
systems malfunctions or errors of the
Nasdaq Market Center concerning
locked/crossed compliance, trade
through protection, market maker
quoting, order protection, or firm quote
compliance, during a single calendar
month Nasdaq’s payments under Rule
4626 shall not exceed the larger of
$3,000,000 or the amount of the
recovery obtained by Nasdaq under any
applicable insurance policy.6
On May 18, 2012, Nasdaq experienced
system difficulties during the Nasdaq
Halt and Imbalance Cross Process (the
4 Rule 4626 was adopted on January 13, 2006 as
part of Nasdaq’s registration as a national securities
exchange. Securities Exchange Act Release No.
53128 (January 13, 2006), 71 FR 3550 (January 23,
2006) (File No. 10–131). The rule was amended in
Securities Exchange Act Release Nos. 54155 (July
14, 2006), 71 FR 41291 (July 20, 2006) (SR–
NASDAQ–2006–001); 60794 (October 6, 2009), 74
FR 52522 (October 13, 2009) (SR–NASDAQ–2009–
084); and 64365 (April 28, 2011), 76 FR 25384 (May
4, 2011) (SR–NASDAQ–2011–058).
5 Rule 4626(a) provides that except as set forth in
the accommodation portion of the rule, ‘‘Nasdaq
and its affiliates shall not be liable for any losses,
damages, or other claims arising out of the Nasdaq
Market Center or its use. Any losses, damages, or
other claims, related to a failure of the Nasdaq
Market Center to deliver, display, transmit, execute,
compare, submit for clearance and settlement,
adjust, retain priority for, or otherwise correctly
process an order, Quote/Order, message, or other
data entered into, or created by, the Nasdaq Market
Center shall be absorbed by the member, or the
member sponsoring the customer, that entered the
order, Quote/Order, message, or other data into the
Nasdaq Market Center.’’
6 Rule 4626 was amended in 2011 to the current
version. See Securities Exchange Act Release No.
64365 (April 28, 2011), 76 FR 25384 (May 4, 2011)
(SR–NASDAQ–2011–058) (notice of filing and
immediate effectiveness).
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45707
‘‘Cross’’) for the FB IPO. These
difficulties delayed the completion of
the Cross from 11:05 a.m. until 11:30
a.m. Based on its assessment of the
information available at the time,
Nasdaq concluded that the system
issues would not have any effects
beyond the delay itself. In an exercise of
its regulatory authority, Nasdaq
determined to proceed with the IPO at
11:30 a.m. rather than postpone it.
As a result of the system difficulties,
however, certain orders for FB stock that
were entered between 11:11:00 a.m. and
11:30:09 a.m. in the expectation of
participating in the Cross—and that
were not cancelled prior to 11:30:09—
either did not execute or executed after
1:50 p.m. at prices other than the $42.00
price established by the Cross. (Other
orders entered between 11:11:00 a.m.
and 11:30:09 a.m., including
cancellations, buy orders below $42.00,
and sell orders above $42.00, were
handled without incident.) System
issues also delayed the dissemination of
Cross transaction reports from
11:30 a.m. until 1:50 p.m. At 1:50 p.m.,
Nasdaq system difficulties were
completely resolved. Nasdaq’s analysis
indicates that only a small percentage of
the FB orders received by Nasdaq on
May 18 were directly affected by Nasdaq
system difficulties.
In the period between 11:30 a.m. and
1:50 p.m., although system issues had
prevented Nasdaq from disseminating
Cross transaction reports, Nasdaq
determined not to halt trading in FB
stock. Nasdaq believed that the system
issues would be resolved promptly.
Moreover, after 11:30 a.m. there was an
orderly, liquid, and deep market in FB
stock, with active trading on all markets.
Halting trading on a market-wide basis
in these circumstances would have been
unprecedented, and, in Nasdaq’s view,
unjustified. In any event, in Nasdaq’s
regulatory judgment, the conditions
after 11:30 a.m. did not warrant a halt
of trading.
As a result of these unique
circumstances, Nasdaq is proposing to
accommodate members for losses
attributable to the system difficulties on
May 18, 2012 in an amount not to
exceed $62 million. Nasdaq also
proposes standards for orders to qualify
for accommodation. For the reasons
explained below, Nasdaq proposes to
make accommodation payments in
respect of:
1. SELL Cross orders that were
submitted between 11:11 a.m. and 11:30
a.m. on May 18, 2012, that were priced
at $42.00 or less, and that did not
execute;
2. SELL Cross orders that were
submitted between 11:11 a.m. and 11:30
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a.m. on May 18, 2012, that were priced
at $42.00 or less, and that executed at
a price below $42.00;
3. BUY Cross orders priced at exactly
$42.00 and that were executed in the
Cross but not immediately confirmed;
and
4. BUY Cross orders priced above
$42.00 and that were executed in the
Cross but not immediately confirmed,
but only to the extent entered with
respect to a customer 7 that was
permitted by the member to cancel its
order prior to 1:50 p.m. and for which
a request to cancel the order was
submitted to Nasdaq by the member,
also prior to 1:50 p.m.8
The modifications proposed in this
rule change are not intended to and do
not affect the limitations of liability set
forth in Nasdaq’s agreements or SECsanctioned rules, or those limitations or
immunities that bar claims for damages
against Nasdaq as a matter of law.
Rather, as noted above, they reflect
Nasdaq’s determination to adopt a fair
and equitable accommodation policy
that takes into account the impacts of
Nasdaq’s system issues on the investing
public and members.
In the two sections that follow,
Nasdaq provides: (i) Background
information concerning Nasdaq’s IPO
process generally, the system difficulties
Nasdaq experienced with the Facebook
IPO process on May 18, 2012, and the
impacts that those system difficulties
had on certain orders; and (ii) Nasdaq’s
accommodation proposal, including the
standards to be applied to claims for
accommodation, the rationale for those
standards, the proposed procedure for
the submission and evaluation of
claims, and the proposed payment
process.
II. Background
The IPO Cross Process
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The Nasdaq Cross, which is set forth
in Nasdaq Rule 4753 (Nasdaq Halt and
Imbalance Crosses), was developed in
consultation with market participants
and is designed to provide fair
executions for investors to begin
secondary market trading in IPO shares.
The purposes of the Cross are set forth
in the filings with the Commission that
7 For purposes of the rule, unless stated
otherwise, the term ‘‘customer’’ shall be construed
to include any unaffiliated entity upon whose
behalf an order is entered, including any
unaffiliated broker or dealer.
8 All claims allegedly attributable to system errors
on May 18, 2012 not directly involving the FB IPO
Cross will continue to be evaluated and adjudicated
under Nasdaq Rule 4626(b)(1) using Nasdaq’s
existing processes and subject to Nasdaq’s existing
limitation of liability.
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implemented Rule 4753.9 In approving
the Cross, the Commission found that
the Cross process, as described in
Nasdaq’s filing seeking approval of the
Cross, ‘‘should provide useful
information to market participants and
increase transparency and order
interaction at the opening,’’ and ‘‘should
result in the public dissemination of
information that more accurately
reflects trading in a particular
security.’’ 10 The Commission
additionally concluded that the Cross,
as described in Nasdaq’s filing, is
consistent with the requirements of the
Act and the rules and regulations
thereunder generally, and particularly
with the requirement that rules be
designed to facilitate transactions in
securities and to remove impediments
to and perfect the mechanism of a free
and open market.11 The Commission
also found that the Cross, as described
in Nasdaq’s filing, was ‘‘based on the
Nasdaq opening cross, which the
Commission approved in a prior
filing.’’ 12
The Cross is an open and transparent
process that identifies a single price
based on supply and demand as
represented by orders submitted to the
Cross process. The Cross process is
integrated with the Nasdaq order book
to provide a smooth transition for orders
from the Cross to continuous trading.
In the Cross process, all members
have the ability to enter orders and
observe the evolution of the prospective
auction price through Nasdaq’s
dissemination of auction imbalance
information, and thereby to participate
in the price discovery process. Crosseligible shares determine the auction
price as the price nearest to the offering
price that will execute all market order
shares, all limit order shares with
superior prices to the auction price,13
and as many limit order shares as
possible with limit prices equal to the
auction price.14
9 See Securities Exchange Act Release Nos. 53488
(March 15, 2006), 71 FR 14272 (March 21, 2006)
(SR–NASD–2006–015); 54248 (July 31, 2006), 71 FR
44738 (August 7, 2006) (SR–NASDAQ–2006–019).
10 Securities Exchange Act Release No. 53687
(April 20, 2006), 71 FR 24878 (April 27, 2006) (SR–
NASD–2006–015).
11 Id.
12 Id. (citing Securities Exchange Act Release
50405 (September 16, 2004), 69 FR 57118
(September 23, 2004) (SR–NASD–2004–071).
13 An order with a superior price is, in the case
of a buy order, an order with a limit higher than
the auction price, and in the case of a sell order,
an order with a limit lower than the auction price.
14 The Cross algorithm sets the auction price by
determining the price that will maximize the
number of shares executed and, in the case of
multiple prices providing the same maximum
number of shares executed, selecting the price
nearest to the offering price consistent with all
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Nasdaq begins accepting Cross orders
at the system start time of 7:00 a.m.
During the interval between the system
start time and the start of the Displayonly period, orders can be entered or
cancelled freely, and information on
Cross orders is not publicly
disseminated. The Display-only period
begins 15 minutes prior to the
scheduled release time of the IPO. Once
the Display-only period begins, Nasdaq
disseminates indicative information
about the auction price and auction
volume via Net Order Imbalance
Indicator (‘‘NOII’’) messages on
Nasdaq’s public data feeds at fivesecond intervals.15 Members may enter
and cancel orders during the Displayonly period. As the effects of order entry
and cancellation are disseminated to the
public, participants may respond with
further order entry, modification, or
cancellation instructions. Over the
course of the Display-only period,
market participants develop an
understanding of the state of supply and
demand, changes in the indicative price
typically become smaller, and the
indicative volume typically increases.
The Display-only period can be
extended (up to six times) in fiveminute increments. During the
extension period, imbalance
information continues to be
disseminated and orders may be entered
or canceled. It is relatively common for
the Display-only period of an IPO to be
extended.
Once there are no further five-minute
extensions of the Display-only period,
the IPO Cross executes, the Nasdaq
official opening price is disseminated, a
bulk trade execution is sent to the
consolidated tape, and messages
confirming individual executions for
Cross-executed shares are sent to market
participants. In accordance with market
participants’ instructions, orders not
executed in the Cross are either
canceled or populate the Nasdaq
electronic order book.
Nasdaq believes that the benefits of
the Cross include optimizing an opening
price and allowing investors to cancel
their orders at the last possible moment
before a Cross is calculated. Moreover,
as the Commission found when it
approved the Cross, the Cross process,
as described in Nasdaq’s filing, was
designed as described above to promote
just and equitable principles of trade, 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
superior priced orders executing. See Rule
4753(b)(2).
15 See Rule 4753(b)(1).
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public interest in various ways.16 The
Commission further noted that ‘‘[i]n
approving the proposed rule change, the
Commission * * * considered its
impact on efficiency, competition, and
capital formation.’’ 17
The Facebook IPO Cross on May 18,
2012
At 10:45:00 a.m. on May 18, 2012 the
Display-only period for Facebook began,
with a scheduled release time of
11:00:00 a.m. The first NOII message
disseminating indicative information
about the upcoming IPO cross was
distributed at 10:45:05 a.m. with an
indicative price of $50.00 and indicative
volume of 4,461,419 shares. At
approximately 10:57:53 a.m., the
initially scheduled release time of
11:00:00 a.m. was extended to 11:05:00
a.m. There were no further extensions.
The NOII messages continued at 5second intervals until the last message
at 11:05:05 a.m. From 11:00:30 a.m.
onward, the NOII messages displayed an
indicative price of $42.00. The last NOII
message was distributed at 11:05:05 a.m.
with an indicative price of $42.00 and
indicative volume of 72,189,277 shares.
The Cross process in FB did not
operate as expected. At approximately
11:05:10 a.m., Nasdaq attempted to
conclude the quoting period, execute
the Cross and print the opening trade to
the tape. Initiating this procedure
instructed the Cross application to run
its final calculation to match buy and
sell interest and then print the opening
trade to the tape. As a protection to
ensure the integrity of the IPO process,
the system is designed to recalculate the
IPO auction if the matching engine’s
view of the auction book has changed
between the time of the final calculation
and the printing of the opening trade. In
other words, the system is designed to
ensure that cancellations submitted
while the Cross is calculating, and up
until the last moment before the Cross
is completed, are accounted for in the
Cross.
After the initial calculation of the
Cross was completed, but before the
opening trade was printed, additional
order modifications were received by
the system, changing the auction order
book. As designed, the system
recalculated the Cross to factor in the
new state of the book. Again, changes
were received before the system could
print the opening trade, which resulted
16 Securities Exchange Act Release No. 53687
(April 20, 2006), 71 FR 24878 (April 27, 2006) (SR–
NASD–2006–015) (finding the Cross consistent with
Section 15A of the Act, 15 U.S.C. 78o-3, in general,
and Section 15A(b)(6) of the Act, 15 U.S.C. 78o3(b)(6), in particular).
17 Id. at n.5 (citing 15 U.S.C. 78c(f)).
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in additional re-calculations. This
condition persisted, resulting in further
delay of the opening print.
Nasdaq continued to receive new
order, cancel, and replace messages, and
they were added to the Cross order
book. New order, cancel, and replace
messages received before approximately
11:11:00 a.m. were acknowledged and
incorporated into the Cross order book
in real time.
Upon concluding shortly before 11:30
a.m. that a system modification would
resolve all system issues, Nasdaq, in an
exercise of its market oversight
obligations, determined to proceed with
the IPO. At 11:30:09 a.m., Nasdaq
completed the Cross, printed
approximately 75.7 million shares at
$42.00 to the tape, and opened
continuous trading in Facebook.18
At the time Nasdaq implemented the
system modification, its expectation was
that substantially all Cross-eligible
orders received prior to the Cross would
participate in the Cross and that all
Cross transaction confirmation messages
would be disseminated immediately
thereafter. This turned out not to be the
case.
First, only orders received prior to
11:11:00 a.m. participated in the
11:30:09 a.m. Cross. Of the orders
entered between 11:11:00 a.m. and
11:30:09 a.m., some were cancelled by
members before the Cross.19 Others
were entered into the market at
11:30:09 a.m., and the remainder were
either cancelled or released into the
market at 1:50 p.m.20
Second, Cross transaction
confirmation messages were not
disseminated until 1:50 p.m. When
Nasdaq became aware of the fact that
confirmations were not being delivered,
Nasdaq determined not to suspend
trading in FB stock because at that time
price discovery was occurring in an
orderly fashion in the continuous
market. Indeed, active, deep, and liquid
trading was taking place in FB stock on
18 An initial calculation of the Cross was
attempted at approximately 11:05:09 a.m. Had that
calculation of the Cross completed, it still would
have resulted in an opening price of $42.00.
19 Cancellations received during that interval
were processed in real time, resulting in Nasdaq
assuming in its error account the cancelled buy and
sell positions. Nasdaq’s net error account position
was a short position of 3,070,430 shares. Using the
services of an unaffiliated third-party broker in
accordance with Nasdaq’s then-proposed, and since
approved Rule 4758(d), Nasdaq thereafter sold this
short position, resulting in an inadvertent gain of
approximately $10.8 million. This gain will be
returned in full to customers through the
accommodation proposal set forth in this filing.
20 Had all Cross-eligible orders, including those
entered between 11:11:00 a.m. and 11:30:09 a.m.,
participated in the Cross, the Cross would still have
taken place at $42.00.
PO 00000
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Fmt 4703
Sfmt 4703
45709
Nasdaq and trading in FB stock was
proceeding as well on ten other markets
and in over-the-counter trading.21
Nasdaq systems operated normally in
handling all of the FB orders entered
and executed after the Cross.
The circumstances described above
affected market participants differently
depending on the prices of their orders
and whether they were buyers or sellers.
In spite of the absence of confirmation
messages, Nasdaq believes that market
participants—based on all of the
information available at the time, their
experience with Nasdaq crosses, and
established trading priorities—would
reasonably have had certain
expectations for the execution or nonexecution of their orders. Nasdaq
printed approximately 75.7 million
shares at $42.00 to the tape at 11:30 a.m.
In addition, fair and orderly continuous
trading on other markets opened in
close proximity to the $42.00
established by the Cross, and the price
of FB moved in an orderly manner
above and below $42.00 throughout the
trading day, with more than 500 million
shares traded.22 The following analysis
reflects Nasdaq’s assessments as to
market participants’ reasonable
expectations and the nature of their
potential losses.
Accordingly, any buy or sell order
received up until 11:30:09 a.m. and
priced at a level at which it could not
be filled in a Cross with a publicly
disseminated price of $42.00 (i.e., a buy
order below $42.00 and a sell order
above $42.00) was not disadvantaged.
Market participants who submitted such
orders could not reasonably have
expected such orders to be executed.
Accordingly, those orders experienced
no loss attributable to the Nasdaq
system issues.23
21 See, e.g., Securities Exchange Act Release No.
22554 (October 23, 1985), 50 FR 43825 (October 29,
1985) (SR–NYSE–85–38) (stating that when
determining whether to halt trading, an exchange
must weigh against a potential reason for a halt ‘‘the
need to provide investors with a liquid market
within which to buy or sell securities whenever
they choose,’’ and that while decisions to halt or
delay trading ‘‘necessarily depend upon the
circumstances of each particular situation,’’ an
‘‘Exchange will in all cases be guided by its
intention to maintain a fair, orderly and continuous
market in its listed securities, insofar as reasonably
practicable under the circumstances’’).
22 As discussed herein, Nasdaq’s subsequent
analysis has confirmed that $42.00 was the
appropriate opening price.
23 Some orders inadvertently benefitted from
Nasdaq system issues. For example, buy orders that
were entered between 11:11 a.m. and 11:30 a.m.
and priced at $42.00 and above were not filled in
the Cross. Had these orders been executed in the
Cross or returned to customers at 11:30 a.m. instead
of being held until 1:50 p.m., they might have been
filled at prices at or above $42.00 as the price of
FB stock ran up to $45 immediately after 11:30 a.m.
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Conversely, sellers who entered
orders priced at $42.00 or less should
reasonably have expected that their
orders had been executed in the Cross.
Nasdaq had continuously indicated
through NOII messages the relative
proportion of buy and sell interests,
providing information as to the
likelihood of a buy or sell order being
executed. Such sellers whose orders
were received by Nasdaq before
11:11 a.m. had their orders executed in
the Cross, consistent with expectations
and previous market practice. Therefore,
they were not disadvantaged and
experienced no loss attributable to
Nasdaq system issues.
The analysis is different for market
participants who entered such orders
between 11:11 a.m. and 11:30 a.m.
Buyers who entered orders priced
higher than $42.00 during that interval
did not receive messages that their
orders had not executed in the Cross
until 1:50 p.m. Yet, they were precluded
from buying at their expected $42.00
price and instead bought at the lower
open market prices then available, if
their orders were executed at all.
Accordingly, these buyers also
experienced no loss attributable to the
Nasdaq system issues.
Sellers who entered orders priced at
$42.00 or less between 11:11 a.m. and
11:30 a.m. did not receive messages that
their orders had not been executed in
the Cross until 1:50 p.m. Such sell
orders did not execute at their expected
$42.00 price in the Cross, but instead
sold at the lower continuous market
prices available at or after 1:50, if they
executed at all. Thus, these market
participants experienced losses
reasonably attributable to the Nasdaq
system issues.
Market participants who entered
Cross-only eligible buy orders priced
exactly at $42.00 that executed in the
Cross but that were not confirmed until
1:50 p.m. could not have been sure
whether their orders had been executed
because the number of buy and sell
limit order shares priced at the clearing
price and wishing to be matched in the
Cross is never exactly equal.
Consequently, in the interval between
11:30 a.m. and 1:50 p.m., these buyers
may have purchased shares in the
continuous market, and upon receiving
Cross execution messages at 1:50 p.m.,
they may have experienced an
unexpected long position. The sale of
such an unexpected long position at a
The delay instead gave participants the opportunity
either to cancel their orders after 11:30 a.m., as
many did, or to execute at a lower price when the
cancellations and remaining non-cancelled orders
were released into the market at 1:50 p.m.
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Jkt 226001
lower price would have occasioned a
loss.
Buyers who entered orders priced
higher than $42.00, which they did not
subsequently cancel, should reasonably
have expected that their orders had been
executed in the Cross. As noted, Nasdaq
had continuously indicated through
NOII messages the relative proportion of
buy and sell interests, providing
information as to the likelihood of a buy
or sell order being executed. Such
buyers whose orders were received by
Nasdaq before 11:11 a.m. had their
orders executed in the Cross, consistent
with expectations and previous market
practice. Therefore, they were not
disadvantaged and experienced no loss
attributable to Nasdaq system issues.
Finally, there are market participants
who entered eligible buy orders for
customers that were priced above
$42.00 and that were executed in the
Cross but not confirmed until 1:50 p.m.,
but for which the customer requested
and received an out from the member
and for which the member submitted a
request to cancel the order to Nasdaq
prior to 1:50 p.m. When the member
received confirmation of the execution
of the customer’s order at 1:50 p.m., the
member held shares for which it no
longer had a recipient. Nasdaq believes
that members who took such actions
were reasonably attempting to assist
their own customers in responding to
the delayed dissemination of Cross
transaction reports, and that such
members further attempted to
communicate their actions to Nasdaq
through the submission of cancellations.
In this category, however, the outcome
was affected not only by Nasdaq system
issues, but also by the member’s
affirmative decision not to await the
dissemination of confirmations.
Accordingly, Nasdaq believes that a
portion of the associated losses should
be borne by the members. Thus, Nasdaq
is proposing an accommodation
equaling only 70% of the member’s
qualifying loss amount with respect to
this category.
III. Accommodation Proposal
Accommodation Standards
Nasdaq’s proposal is to provide
accommodation within a framework
that seeks to replicate what the expected
execution prices of orders would have
been had the Cross not experienced
unexpected and unprecedented
difficulties, limited by the expectation
that members would exercise reasonable
diligence to respond and mitigate losses
once made aware that their Cross orders
had not executed, or had executed at
unexpected prices. Thus, Nasdaq
PO 00000
Frm 00136
Fmt 4703
Sfmt 4703
proposes to make accommodation
payments in respect of:
(i) SELL Cross orders that were
submitted between 11:11 a.m. and 11:30
a.m. on May 18, 2012, that were priced
at $42.00 or less, and that did not
execute;
(ii) SELL Cross orders that were
submitted between 11:11 a.m. and 11:30
a.m. on May 18, 2012, that were priced
at $42.00 or less, and that executed at
a price below $42.00;
(iii) BUY Cross orders priced at
exactly $42.00 and that were executed
in the Cross but not immediately
confirmed; and
(iv) BUY Cross orders priced above
$42.00 and that were executed in the
Cross but not immediately confirmed,
but only to the extent entered with
respect to a customer that was permitted
by the member to cancel its order prior
to 1:50 p.m. and for which a request to
cancel the order was submitted to
Nasdaq by the member, also prior to
1:50 p.m.
These are the situations in which
Nasdaq has concluded that its systems
issues could have impacted market
participants’ reasonable expectations in
an objectively discernible manner. In
these situations, Nasdaq proposes to
offer as an accommodation the loss
differential for a qualified order—that is,
the difference between the price that
was reasonably expected and the
subsequent execution price actually
obtained, or the price available at the
point when the market participant could
have taken steps to mitigate its losses or
otherwise adjust its position.
As described above, Nasdaq believes
that it reasonably determined not to
suspend the IPO or halt trading in FB
stock, and Nasdaq’s FB-related systems
issues were fully resolved at 1:50 p.m.,
when Nasdaq disseminated all delayed
Cross execution confirmation messages.
At that point, Nasdaq believes that
member firms were in possession of all
the information needed to evaluate their
positions and obligations to customers,
and take steps accordingly.
Accordingly, for the orders described
in (i), (iii), and (iv) above, Nasdaq
proposes to establish a uniform
benchmark price of $40.527, the price at
which Nasdaq has concluded a
reasonably diligent member could have
obtained shares to mitigate any
unexpected losses or to liquidate
unanticipated positions coming out of
the Cross. Nasdaq calculated this price
using the volume-weighted average
price of FB stock during the first 45
minutes of trading after execution
reports were delivered to firms
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(i.e., 1:50 p.m. to 2:35 p.m.).24 Using
$40.527 as the uniform benchmark price
results in a maximum loss of $1.473 per
share per order.
For the orders described in (ii) above,
Nasdaq proposes to offer as an
accommodation the difference between
the price that was reasonably expected
(i.e., $42.00) and the execution price
actually obtained, because the
immediate execution of these orders
precluded a member from taking
reasonable actions to mitigate losses.
Nasdaq believes that this method
provides a reasonable time period for
firms to have taken actions to mitigate
losses after receiving the Cross
transaction reports, as well as a
reasonable maximum loss price
parameter for determining
accommodation payments. Additional
alleged losses incurred beyond that
benchmark price, regardless of their
cause, will remain the responsibility of
the member. If a member suffered a
lesser loss than that calculated based on
the foregoing method, based on the
difference between the expected
execution price of the order in the Cross
process establishing an opening print of
$42.00 and the actual execution price
received, the member shall not receive
more than the lesser actual loss suffered.
A member’s direct trading losses, as
calculated in accordance with these
parameters, are referred to in the
proposed rule as the ‘‘Member’s Share.’’
Alleged losses from other causes shall
not be considered eligible for
accommodation payments under the
proposed rule change. Thus, for
example, Nasdaq does not propose to
make accommodation payments in
respect of alleged losses attributable to:
orders received after the commencement
of continuous regular trading in FB;
individual member firm technology
issues or system failures, or member
firm operational issues or operational
failures; affirmative trading actions
taken by member firms on their own
behalf or to accommodate their
customers after the Cross, except as
otherwise provided in the proposed
rule; alleged or speculative lost trading
opportunities or alleged or speculative
lost business profits of any description;
non-marketable Cross orders for which,
based on their price, there was no
reasonable expectation that orders had
24 Trading firms typically process and determine
actions on trading messages within seconds or less.
Given the volume of messages at issue here and
Nasdaq’s delay in disseminating them, Nasdaq has
concluded that 45 minutes would have been ample
time for a reasonably diligent member to have
identified any unexpected customer losses or
unanticipated customer positions, and taken steps
to mitigate or liquidate them.
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Jkt 226001
been executed; and a member firm’s
failure to adequately and appropriately
mitigate losses or adjust trading
positions. Nasdaq is not asking any firm
to offset its claims under these criteria
with any economic gains experienced
because of the relevant system issues as
outlined at footnote 23.
Examples of how the accommodation
standards would apply are below.
Example 1: A member submitted an IPO
Cross order to SELL 1000 shares priced at
market (i.e., willing to sell at any price or
otherwise equivalent to $0.01) with a Time
in Force (TIF) of Immediate or Cancel (IOC),
entered at 11:15 a.m. Because the order was
priced lower than the opening price, it
should have been filled at $42.00 in the
Cross, but failed to execute because it was
entered after 11:11 a.m. Nasdaq transmitted
the order confirmation of the failure to the
member at 1:50 p.m., at which time the
member covered its position (i.e., sold the
1000 shares it had expected to sell in the
Cross) at a price of $41.15. Because the
member was able to sell its shares at a higher
price than the benchmark price Nasdaq has
established ($40.527), the member will be
accommodated for the difference between the
opening price and the covering execution’s
price. The amount of loss is 1000 × ($42.00$41.15) = $850.00.
Example 2: A member submitted an IPO
Cross order to SELL 1000 shares priced at
market with a TIF of IOC, entered at
11:15 a.m. Because the order was priced
lower than the opening price, it should have
been filled at $42.00 in the Cross, but failed
to execute because it was entered after 11:11
a.m. Nasdaq transmitted the order
confirmation message noting the failure to
execute to the member at 1:50 p.m., but the
member did not cover its position until later
in the day at an average price of $39.00.
Because the member’s covering execution
price was lower than the benchmark price
Nasdaq has established ($40.527), the
member will be accommodated for the
difference between the opening price and the
benchmark price. The amount of loss is 1000
× ($42.00-$40.527) = $1,473.00.
Example 3: A member submitted an IPO
Cross order to SELL 1000 shares priced at
market with a TIF of DAY, entered at 11:15
a.m. Because the order was priced lower than
the opening price, it should have been filled
at $42.00 in the Cross, but failed to execute
in the Cross because it was entered after
11:11 a.m. The order was entered into the
continuous book at 1:50 p.m., at which time
it executed at a price of $41.05. Nasdaq
transmitted the order confirmation message
to the member at 1:50 p.m. Because the order
executed at an inferior price to the opening
price, the member will be accommodated for
the difference between the opening price and
the actual execution price. The amount of
loss is 1000 × ($42.00-$41.05) = $950.00.
Example 4: A member submitted an IPO
Cross order to SELL 1000 shares priced at
market with a TIF of DAY, entered at 11:15
a.m. Because the order was priced lower than
the opening price, it should have been filled
at $42.00 in the Cross, but failed to execute
in the Cross because it was entered after
PO 00000
Frm 00137
Fmt 4703
Sfmt 4703
45711
11:11 a.m. The order was entered into the
continuous book at 1:50 p.m., at which time
it executed at a price of $40.00. Nasdaq
transmitted the order confirmation message
to the member at 1:50 p.m. Because the order
executed at an inferior price to the opening
price, the member will be accommodated for
the difference between the opening price and
the actual execution price. The amount of
loss is 1000 × ($42.00¥$40.00) = $2,000.00.
Example 5: A member submitted an IPO
Cross order to SELL 1000 shares priced at
market with a TIF of DAY, entered at 11:15
a.m. Because the order was priced lower than
the opening price, it should have been filled
at $42.00 in the Cross, but failed to execute
in the Cross because it was entered after
11:11 a.m. The member cancelled the order
at 12:30 p.m., after the Cross had taken place
at 11:30:09 a.m. but before the order was
delivered to the continuous book or a
confirmation message was delivered. The
order cancelled back to the member at 1:50
p.m. based on the request sent at 12:30 p.m.
Because the member’s order should have
been executed in the Cross, the fact that the
member cancelled the order at 12:30 p.m. is
not relevant for purposes of determining that
the order was directly disadvantaged, and the
member will be accommodated for the
difference between the opening price and the
benchmark price. The amount of loss is 1000
× ($42.00¥$40.527) = $1,473.00.
Example 6: A member submitted an IPO
Cross order to BUY 1000 shares priced at
$42.00 with a TIF of DAY, entered at 11:00
a.m. The order was filled at $42.00, but
because the order’s price was exactly the
opening price, the member could not have
reasonably known that the order was filled
until 1:50 p.m. As a result, the member
acquired an unexpected long position of 1000
shares that resulted in a loss when the
position was covered at a price of $40.15.
Because the member’s covering execution
price was worse than the benchmark price
Nasdaq has established ($40.527), the
member will be accommodated for the
difference between the opening price and the
benchmark price. The amount of loss is 1000
× ($42.00¥$40.527) = $1,473.00.
Example 7: A member submitted an IPO
Cross order to BUY 1000 shares at $42.00
with a TIF of IOC, entered at 11:15 a.m. The
order was not filled at $42.00 because it was
entered after 11:11 a.m., but because the
order’s price was exactly the opening price,
the member could not have reasonably
known that the order was not filled until 1:50
p.m. As a result, the member discovered it
unexpectedly lacked 1000 shares at 1:50 p.m.
At that time, the member could have
purchased shares at prices lower than the
opening price. Consequently, the member
was not directly disadvantaged by Nasdaq’s
system error and there is no loss amount.
Example 8: A member submitted an IPO
Cross order to BUY 1000 shares at $42.50
with a TIF of IOC, entered at 11:15 a.m. The
order was not filled at $42.00 because it was
entered after 11:11 a.m., but because the
order’s price was higher than the opening
price, the member should have expected the
order was filled until it received a
confirmation to the contrary at 1:50 p.m. As
a result, the member discovered it
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unexpectedly lacked 1000 shares at 1:50 p.m.
At that time, the member could have
purchased shares at prices lower than the
opening price. Consequently, the member
was not directly disadvantaged by Nasdaq’s
system error and there is no loss amount.
Example 9: A member submitted an IPO
Cross order for a customer to BUY 1000
shares at $42.50 with a TIF of IOC, entered
at 11:05 a.m. and a cancel request was
submitted by the member before 1:50 p.m. for
the order. The order was filled at $42.00 as
expected. Because it was priced higher than
the opening price, the member should have
expected that the order was filled, which was
confirmed electronically at 1:50 p.m. In light
of the confirmation delay, however, the
member received a request to cancel the
order from the customer prior to 1:50 p.m.,
accommodated that request by allowing the
customer to cancel the order, and sent a
cancellation request for the order to Nasdaq
before 1:50 p.m. When confirmation of the
customer’s order execution in the Cross was
received by the member at 1:50 p.m., the
member held a long position of shares for
which it no longer had a recipient. Although
the decision to accommodate the customer’s
cancellation request was exclusively that of
the member, Nasdaq has determined to
provide a limited accommodation amount
equaling 70% of the member’s loss up to
maximum loss amount of 0.70 × 1000 ×
($42.00¥$40.527) = $1,031.10.
Example 10: A member submitted an IPO
Cross order to BUY 1000 shares at $42.50
with a TIF of IOC, entered at 11:05 a.m. The
order was filled at $42.00 as expected.
Because it was priced higher than the
opening price, the member should have
expected that the order was filled, which was
confirmed electronically at 1:50 p.m. As a
result of the delay in confirmation, however,
the member purchased additional shares
before the confirmations arrived. This
resulted in an unintended long position of
1000 shares. Although the member incurred
a loss when covering the unintended
position, Nasdaq correctly executed the
member’s order and the member should have
expected the original IPO Cross order to be
filled because of its price. Consequently, the
member was not directly disadvantaged by
Nasdaq’s system error and there is no loss
amount.
Example 11: A member submitted an IPO
Cross order to BUY 1000 shares at $42.50
with a TIF of IOC, entered at 11:05 a.m. The
order was filled at $42.00 as expected.
Because it was priced higher than the
opening price, the member should have
expected that the order was filled, which was
confirmed electronically at 1:50 p.m. Later in
the day, the member sold the position at
$40.00. The member claims that it would
have been able to sell at a higher price if had
received the confirmation sooner. Nasdaq
correctly executed the member’s order. The
claim of loss is premised on an alleged or
speculative lost trading opportunity rather
than the actual failure by Nasdaq to process
an order correctly. Consequently, the member
was not directly disadvantaged by Nasdaq’s
system error and there is no loss amount.
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Procedure for Submission and
Evaluation of Claims
All members seeking accommodation
under this proposal will be required to
submit their claims to Nasdaq in writing
not later than seven days after the
approval of the proposed rule change by
the Commission. Such notice of
approval will be publicly posted by
Nasdaq on its Nasdaq Trader Web site
at https://www.nasdaqtrader.com and
provided directly to all member firms
via an Equity Trader Alert. All claims
that have been timely submitted will be
evaluated by the Financial Industry
Regulatory Authority (‘‘FINRA’’)
applying the accommodation standards
set forth herein. FINRA may request
such supplemental information as
FINRA deems necessary to assist
FINRA’s evaluation of the claims.
FINRA’s role will be limited to
measuring data against the benchmarks
established by this filing to ascertain the
eligibility and value of each member’s
claims under those benchmarks. FINRA
staff assessing the claims will not be
involved in providing regulatory
services to any Nasdaq market and they
will not have purchased Facebook stock
during Nasdaq’s IPO opening process or
currently own Facebook stock. In
addition, as discussed below, FINRA
will prepare a report for Nasdaq on its
analysis of the eligibility of claims that
will be provided to the public members
of FINRA’s Audit Committee.
Once it has completed its review,
FINRA shall provide to the Nasdaq
Board of Directors and the Board of
Directors of The NASDAQ OMX Group,
Inc., an analysis of the total value of
eligible claims submitted.25 Thereafter,
Nasdaq will file with the Commission a
rule proposal setting forth the amount of
eligible claims submitted and its
intention to pay such claims up to $62
million. In no event shall Nasdaq make
any payments on claims until the rule
proposal setting forth the amount of
eligible claims becomes effective and
final.
Payment Process
Nasdaq’s business and legal
relationships are with its members, not
its members’ customers. Nasdaq has no
contractual or other relationships with
its members’ customers, and generally
does not possess information about
interactions between a member and its
customer that may underlie members’
trading activity. Nevertheless, Nasdaq is
25 In accordance with the established policies of
these Boards, any directors with a financial interest
in the accommodation process will be expected to
recuse themselves from consideration of the
analysis.
PO 00000
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Fmt 4703
Sfmt 4703
mindful that member’s customers have
been impacted by the processing of
member orders in the FB Cross. Thus,
for example, to the extent that a member
order reflected a customer order, and
the member order was not executed in
the manner expected, the customer
order may not have been filled, or may
have been filled at an unexpected price.
Nasdaq is also aware of public reports
that some members experienced their
own system issues on May 18, 2012 that
were unrelated to Nasdaq’s system
issues, and that those members’ issues
may have had an impact on the
members’ customers. To the extent that
a member receiving accommodation
hereunder had customers that incurred
losses, Nasdaq believes that
accommodation payments received by
members from Nasdaq should be used
for the benefit of such customers.
Accordingly, Nasdaq proposes that all
accommodation payments proposed in
this filing be contingent upon a
member’s submission to Nasdaq, not
later than seven days after the effective
date of the rule proposal described
above detailing the amount of eligible
claims, of an attestation detailing:
(i) The amount of compensation,
accommodation, or other economic
benefit provided or to be provided by
the member to its customers (other than
customers that were brokers or dealers
trading for their own account) in respect
of trading in Facebook Inc. on May 18,
2012 (‘‘Customer Compensation’’), and
(ii) The extent to which the losses
reflected in the Member’s Share 26 were
incurred by the member trading for its
own account or for the account of a
customer that was a broker or dealer
trading for its own account (‘‘Covered
Proprietary Losses’’).
Failure to provide the required
documentation within the specified
time limit will void the member’s
eligibility to receive an accommodation
under the modified rule. Each member
shall be required to maintain books and
records that detail the nature and
amount Customer Compensation and
Covered Proprietary Losses. Nasdaq,
through FINRA, its regulatory services
provider, would expect to examine the
accuracy of member’s attestation at a
later date.
Accommodation payments under this
subsection will be made in two tranches
of priority, subject to the maximum total
payout of $62 million:
(i) First, if the member has provided
Customer Compensation, the member
will receive an amount equal to the
26 Defined specifically as a member’s direct
trading losses calculated in accordance with
paragraphs (b)(3)(A) and (B) of the proposed rule.
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lesser of the Member’s Share or the
amount of Customer Compensation. For
example, if a Member’s Share was $1
million, and the member had paid, or
had committed to pay, compensation to
its customers of at least $1 million, the
member’s expected accommodation
would be $1 million. On the other hand,
if the Member’s Share was $1 million,
but the member had paid, or committed
to pay, only $500,000 in compensation
to its customers, the member’s expected
accommodation in the first tranche
would be only $500,000. This approach
reflects Nasdaq’s belief that
accommodation with respect to
members’ trades on behalf of customers
(other than broker-dealers trading on a
proprietary basis) should be paid first,
and should be paid only to the extent of
the member’s own compensation to
customers.
(ii) Second, the member will receive
an amount with respect to Covered
Proprietary Losses; provided, however,
that the sum of payments to a member
under the rule shall not exceed the
Member’s Share. Although Nasdaq
recognizes that firms engaging in
proprietary trading may have incurred
losses, it believes that payments to them
should occur after payments with
respect to losses on behalf of customers.
If a member had both Covered
Proprietary Losses and losses associated
with customer business, it may receive
distributions under both tranches. For
example, if a Member’s Share was $1
million, the member had $300,000 in
Covered Proprietary Losses, and the
member had provided $300,000 in
Customer Compensation, the member’s
expected accommodation would be
$600,000 in total. Alternatively, if the
member had $300,000 in Covered
Proprietary Losses and had provided
$700,000 or more in Customer
Compensation, the member’s expected
accommodation would be $1 million.
In the event that the amounts
calculated under tranche (i) exceed $62
million, accommodation will be
prorated among members eligible to
receive accommodation under tranche
(i) based on the size of the amounts
payable under tranche (i). In the event
that tranche (i) is paid in full and the
amounts calculated under tranche (ii)
exceed the funds remaining from the
$62 million accommodation pool, such
funds will be prorated among members
eligible to receive accommodation
under tranche (ii) based on the size of
the amounts payable under tranche (ii).
If a member’s eligibility to receive funds
is voided for any reason under this rule,
and the funds payable to other members
must be prorated, the funds available to
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pay other members will be increased
accordingly.
Final payment of any accommodation
payment also will be conditioned on the
execution by the member firm of a
formal release of claims against Nasdaq
for losses associated with FB that are
related in any way to the Cross or other
errors, omissions, actions, or failures to
act on the part of Nasdaq on May 18,
2012. The release will be required not
later than fourteen days after the
effective date of the rule proposal
described above detailing the amount of
eligible claims. The purposes of
imposing the release requirement
notwithstanding the limitations of
liability and immunities, which apply
in any event pursuant to Nasdaq’s rules
and agreements and/or otherwise as a
matter of law, are to avoid the
disruption and expense of unnecessary
litigation in connection with the Cross
and to ensure equal treatment of all
claimants. Nasdaq further notes that the
program proposed herein is a voluntary
step taken by Nasdaq to provide a
substantial and unprecedented
accommodation to its members, and that
participation in the program is likewise
voluntary on the part of members.
Nasdaq believes that it would be
inequitable to approve Nasdaq’s
voluntary program without also
allowing it to establish conditions that
promote certainty and finality.27
IV. Solicitation of Comments
This proposed rule change is being
published for public comment. Nasdaq
will give due consideration to all
comments submitted during the
comment period, but notes that
comments advocating different
approaches should include a complete
exposition of potentially relevant
information, including any impacts that
the following, among other things, may
have had on alleged harms:
• Market participants’ own trading
decisions and strategies;
• Non-Nasdaq technology issues,
which Nasdaq understands affected
certain market participants on May 18,
2012;
• Obligations to customers or order
delivery firms;
• Regulatory obligations; and
• Market data issues.
Failure to provide adequate detail will
negatively impact Nasdaq’s ability to
respond to or otherwise evaluate a
comment.
27 Cf. Section 405(c)(3)(B)(i) of the Air
Transportation Safety and System Stabilization Act
(requiring release by persons receiving
compensation with respect to airline crashes on
September 11, 2001).
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Sfmt 4703
45713
2. Statutory Basis
Nasdaq believes that the
accommodation proposal is consistent
with Section 6(b) of the Exchange Act 28
in general, and furthers the objectives of
Section 6(b)(5) of the Act 29 in
particular, because the proposal is
designed to promote just and equitable
principles of trade, 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 that the proposal to
expand its accommodation policy in
this unique set of circumstances will
balance several important goals in
keeping with the foregoing statutory
objectives.
First, Nasdaq acknowledges that the
system issues that first came to light
during the FB IPO Cross had an impact
on certain of its members during the
period from 11:11 a.m. to 1:50 p.m. on
May 18, 2012. As a result, Nasdaq
believes that the public interest would
be served by an accommodation policy
that quantifies and provides
compensation for customer losses that
were directly attributable to those
system issues in an objectively
discernible manner. Specifically,
Nasdaq believes that the public interest
would be served by Nasdaq making
accommodation payments in respect of
the four specific categories of Cross
orders, listed above, for which Nasdaq
has concluded that its systems issues
could have impacted market
participants’ reasonable expectations in
an objectively discernible manner.
Nasdaq further believes that the public
interest would be served by Nasdaq
providing as an accommodation the loss
differential for a qualified order—that is,
the difference between the price that
was reasonably expected and the
subsequent execution price actually
obtained, or the price available at the
point when the market participant could
have taken steps to mitigate its losses or
28 15 U.S.C. 78f(b) (setting forth the prerequisites
for registration as a national securities exchange).
29 15 U.S.C. 78f(b)(5) (requiring that an
exchange’s rules be ‘‘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;
and not [be] designed to permit unfair
discrimination between customers, issuers, brokers,
or dealers, or to regulate by virtue of any authority
conferred by this chapter matters not related to the
purposes of this chapter or the administration of the
exchange’’).
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tkelley on DSK3SPTVN1PROD with NOTICES
otherwise adjust its position (in
situations when it was possible for the
market participant to take such steps).
Second, Nasdaq believes that it is
important to recognize the regulatory
policy objectives underlying Rule 4626
and ensure that they are not
compromised. Hundreds of billions of
dollars of securities transactions are
matched through the systems of Nasdaq
and other exchanges every day. Through
the operation of those systems,
exchanges provide invaluable services
in support of capital formation, price
discovery, and investor protection. If
exchanges could be called upon to bear
all costs associated with system
malfunctions and the varying reactions
of market participants taken in their
wake, the potential would exist for a
single catastrophic event to bankrupt
one or multiple exchanges, with
attendant consequences for investor
confidence and macroeconomic
stability. Alternatively, the cost of
providing exchange services would have
to rise dramatically for all investors to
cover this material and new risk.30 In
addition, exchanges would be less
inclined to implement innovative
systems 31 consistent with the goals of
Section 6(b)(5) of the Act.32
30 Trading costs in the United States are among
the lowest in the world, and thus a contributor to
economic growth. See, e.g., Michael S. Pagano,
Which Factors Influence Trading Costs in Global
Equity Markets?, The J. of Trading, Winter 2009, at
7; Ian Domowitz et al., Liquidity, Volatility, and
Equity Trading Costs Across Countries and Over
Time, 4 Int’l Fin. 221 (Summer 2001); Asli
¨¸
Demirguc-Kunt & Ross Levine, Bank-based and
Market-based Financial Systems: Cross-country
Comparisons 51 (The World Bank Working Paper
No. 2143, July 1999).
31 Securities Exchange Act Release No. 14777
(May 17, 1978) (SR–CBOE–78–14) (in proposing a
limitation on liability, CBOE explained that an
exchange ‘‘cannot proceed with innovative systems
and procedures for the execution, clearance, and
settlement of Exchange transactions * * * unless it
is protected against losses which might be incurred
by members as a result of their use of such
systems,’’ and further that ‘‘[t]o the extent [a
limitation of liability rule] enables the Exchange to
proceed with innovative systems, competition
should be enhanced’’); see also Securities Exchange
Act Release No. 58137 (July 10, 2008), 73 FR 41145
(July 17, 2008) (SR–NYSE–2008–55) (explaining
that exchange’s limitation of liability rule
encourages vendors to provide services to the
exchange, which results in faster and more
innovative products for order entry, execution, and
dissemination of market information).
32 15 U.S.C. 78f(b)(5) (requiring that an
exchange’s rules be ‘‘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;
and not [be] designed to permit unfair
discrimination between customers, issuers, brokers,
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Accordingly, the Commission has
recognized that it is consistent with the
purposes of the act for a self-regulatory
organization to limit its liability with
respect to the use of such facilities by
its members through rules such as Rule
4626.33
Moreover, if the potential for such
catastrophic losses existed, as noted
above, it would need to be reflected in
the fees charged by exchanges to market
participants in a manner that is not
currently the case, making trading more
expensive for all investors all the time.
Rather, as the Commission has
recognized, provisions such as Rule
4626 reflect the view that risks
associated with system malfunctions
should be allocated among all exchange
members, rather than being borne solely
by the exchange. Indeed, this view is
consistently reflected in the limitation
of liability rules common among United
States exchanges.34 And, this view is
reflected in Nasdaq’s proposal to
condition any accommodation payment
on the execution of a release of claims
against Nasdaq for FB-related losses
arising from the Cross, because this
condition is aimed at avoiding
unnecessary litigation and ensuring
equal treatment of all claimants.
The level of accommodation being
offered under this proposed rule change
is unprecedented in its size. Although
Nasdaq is voluntarily seeking in this
instance to provide accommodation up
to $62 million for losses associated with
the FB IPO Cross that were the direct
result of the system issues that came to
light on May 18, 2012, Nasdaq does not
believe that the purposes of the Act
related to the operation of the national
market system would be well served by
allocating to exchanges responsibility
for losses attributable to other factors,
such as the failure of members to
mitigate losses in a timely and
reasonable manner, or by effecting a
wholesale modification to the risk and
loss allocations underlying Rule 4626
and the similar rules of other exchanges
that reflect the exchanges’ exercise of
the regulatory authority and obligations
delegated to exchanges by the Act.35 In
or dealers, or to regulate by virtue of any authority
conferred by this chapter matters not related to the
purposes of this chapter or the administration of the
exchange’’).
33 See, e.g., BATS Exchange and BATS–Y
Exchange Rules 11.16; C2 Options Exchange Rule
6.42; CBOE Options Exchange Rule 6.7; CME Rule
578; EDGA and EDGX Rules 11.12; ISE Rule 705;
NASDAQ OMX PHLX Rule 3226; NASDAQ OMX
BX Rule 4626; NYSE Rules 17 and 18; NYSE MKT
Rule 905NY; NYSE Arca (Options) Rule 14.2; NYSE
Arca (Equity) Rule 13.2; One Chicago Rule 421.
34 Id.
35 As reflected in the proposed rule change,
however, Nasdaq does believe that the public
PO 00000
Frm 00140
Fmt 4703
Sfmt 4703
this regard, it bears noting that in light
of those regulatory duties, exchanges are
also immune from civil liability for
claims for damages caused by actions
taken in connection with the discharge
of their regulatory duties.36
Nasdaq further believes that,
consistent with Section 6(b)(5) of the
Act,37 its proposal will promote just and
equitable principles of trade and protect
investors and the public interest by
establishing a fair process through
which affected members may submit
claims for losses covered by the
modified accommodation policy.
Nasdaq believes that by establishing the
objective benchmarks set forth in this
filing, and allowing FINRA to act as a
neutral third party and measure data
against those benchmarks to ascertain
the value of each member’s claims
under those benchmarks, will enhance
the transparency of the process and
minimize the potential for conflicts of
interest. Nasdaq further believes that its
proposed process for distributing
accommodation payments will benefit
investors and promote the public
interest by providing incentives for
members to use accommodation funds
for the benefit of investors. Specifically,
Nasdaq believes that its proposal will
benefit investors and promote the public
interest by: (I) requiring a claimant to
submit to Nasdaq an attestation
detailing the compensation the member
has Provided or will provide to its
customers, and detailing the extent to
which the member incurred the losses
covered by the proposed
accommodation payment when trading
for its own account; and (ii) providing
for accommodation payments to be
made in tranches that prioritize
payments based on the extent to which
the claimant has compensated its
customers.
interest and the purposes of the Act related to the
operation of the national market system would be
well served by: (i) Providing that the first 45
minutes of trading after confirmation reports were
delivered to firms was a reasonable time period for
firms to have taken actions to mitigate losses, and
therefore is a reasonable period on which to base
the maximum loss price parameter for determining
accommodation payments; and (ii) providing an
accommodation of 70% of the qualifying loss
amount for the fourth category of orders for which
Nasdaq proposes to make accommodation
payments, given that the losses in that category
were affected not only by Nasdaq’s system issues
but also by the members’ affirmative decisions to
take actions with respect to customer orders rather
than await the dissemination of confirmation
reports.
36 See, e.g., DL Capital Group, LLC v. Nasdaq
Stock Market, Inc., 409 F.3d 93 (2d Cir. 2005);
Sparta Surgical Corp. v. NASD, 159 F.3d 1209 (9th
Cir. 1998).
37 15 U.S.C. 78f(b)(5).
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Federal Register / Vol. 77, No. 148 / Wednesday, August 1, 2012 / Notices
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 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 the self-regulatory
organization consents, the Commission
will:
(A) By order approve or disapprove
such 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:
tkelley on DSK3SPTVN1PROD with NOTICES
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml ); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–NASDAQ–2012–090 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–NASDAQ–2012–090. This
file number should be included on the
subject line if email 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
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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 Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
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–2012–090 and should be
submitted on or before August 22, 2012.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.38
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–18704 Filed 7–31–12; 8:45 am]
BILLING CODE 8011–01–P
DEPARTMENT OF TRANSPORTATION
Office of the Secretary
[Docket DOT–OST–2009–0116]
Application of Key Lime Air
Corporation for Commuter Authority
Department of Transportation.
ACTION: Notice of Order To Show Cause
(Order 2012–7–5); Docket DOT–OST–
2009–0116.
AGENCY:
The Department of
Transportation is directing all interested
persons to show cause why it should
not issue an order finding Key Lime Air
Corporation fit, willing, and able, and
awarding it a Commuter Air Carrier
Authorization.
DATES: Persons wishing to file
objections should do so no later than
August 6, 2012.
ADDRESSES: Objections and answers to
objections should be filed in Docket
DOT–OST–2009–0116 and addressed to
U.S. Department of Transportation,
Docket Operations, (M–30, Room W12–
140), 1200 New Jersey Avenue, SE.,
SUMMARY:
PO 00000
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CFR 200.30–3(a)(12).
Frm 00141
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45715
West Building Ground Floor,
Washington, DC 20590, and should be
served upon the parties listed in
Attachment A to the order.
FOR FURTHER INFORMATION CONTACT:
Vanessa R. Balgobin, Air Carrier Fitness
Division (X–56, Room W86–487), U.S.
Department of Transportation, 1200
New Jersey Avenue SE., Washington,
DC 20590, (202) 366–9721.
Dated: July 6, 2012.
Susan L. Kurland,
Assistant Secretary for Aviation and
International Affairs.
[FR Doc. 2012–18741 Filed 7–31–12; 8:45 am]
BILLING CODE P
DEPARTMENT OF TRANSPORTATION
Federal Motor Carrier Safety
Administration
Sunshine Act Meetings; Unified Carrier
Registration Plan Board of Directors
Federal Motor Carrier Safety
Administration (FMCSA), DOT.
TIME AND DATE: August 2, 2012, 12 noon
to 3 p.m., Eastern Daylight Time.
PLACE: This meeting will take place
telephonically. Any interested person
may call 877.820.7831, passcode,
908048 to participate in this meeting.
STATUS: Open to the public.
MATTERS TO BE CONSIDERED: The
Unified Carrier Registration Plan Board
of Directors (the Board) will continue its
work in developing and implementing
the Unified Carrier Registration Plan
and Agreement and to that end, may
consider matters properly before the
Board.
AGENCY:
Mr.
Avelino Gutierrez, Chair, Unified
Carrier Registration Board of Directors at
(505) 827–4565.
FOR FURTHER INFORMATION CONTACT:
Issued on: July 27, 2012.
Larry W. Minor,
Associate Administrator for Policy .
[FR Doc. 2012–18887 Filed 7–30–12; 4:15 pm]
BILLING CODE 4910–EX–P
DEPARTMENT OF TRANSPORTATION
Federal Railroad Administration
[Docket Number FRA–2003–15754]
Notice of Public Hearing: Reading Blue
Mountain and Northern Railroad
The Reading Blue Mountain and
Northern Railroad (RBMN) has
petitioned the Federal Railroad
Administration (FRA) seeking the
approval of the proposed
E:\FR\FM\01AUN1.SGM
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]]>Agencies
[Federal Register Volume 77, Number 148 (Wednesday, August 1, 2012)]
[Notices]
[Pages 45706-45715]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-18704]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67507; File No. SR-NASDAQ-2012-090]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing of Proposed Rule Change To Amend Rule 4626--Limitation
of Liability
July 26, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on July 23, 2012, The NASDAQ Stock Market LLC
(``Nasdaq'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'' or ``SEC'') the proposed
[[Page 45707]]
rule change as described in Items I and II below, which Items have been
prepared by the Exchange.\3\ The Commission is publishing this notice
to solicit comments on the proposed rule change from interested
persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ The Commission emphasizes that this notice was solely
prepared by Nasdaq. As with all self-regulatory organization rule
filings, the representations, views, and opinions contained in the
notice are those of Nasdaq. The Commission is publishing the notice
pursuant to the Exchange Act and the rules thereunder. The
Commission neither makes any findings nor expresses any opinion with
respect to Nasdaq's representations and interpretations contained in
this notice.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Rule 4626. The text of the proposed
rule change is available at https://nasdaq.cchwallstreet.com, at
NASDAQ's principal office, and at the Commission's Public Reference
Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange 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. The Exchange has prepared summaries, set forth in
Sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
I. Introduction
The Proposal
Nasdaq is seeking the SEC's approval of a voluntary accommodation
policy for claims arising from system difficulties that Nasdaq
experienced during the initial public offering (``IPO'') of Facebook,
Inc. (``Facebook'' or ``FB'') on May 18, 2012. In the weeks since the
Facebook IPO, Nasdaq has reviewed the events of May 18 with the goal of
proposing a fair and equitable accommodation policy that is consistent
with the Exchange Act and Nasdaq's self-regulatory obligations. This
proposal reflects Nasdaq's effort (i) to identify the categories of
investors and members that Nasdaq's system difficulties caused
objective, discernible harm, and the type and scope of such harm, and
(ii) to propose an objectively reasonable and regulatorily balanced
plan for accommodating Exchange members and their investor customers
for such harm. Nasdaq has undertaken this effort notwithstanding the
liability protections afforded by its contractual limitations of
liability, common law immunity, and Rule 4626--the rule that Nasdaq
proposes to modify.\4\
---------------------------------------------------------------------------
\4\ Rule 4626 was adopted on January 13, 2006 as part of
Nasdaq's registration as a national securities exchange. Securities
Exchange Act Release No. 53128 (January 13, 2006), 71 FR 3550
(January 23, 2006) (File No. 10-131). The rule was amended in
Securities Exchange Act Release Nos. 54155 (July 14, 2006), 71 FR
41291 (July 20, 2006) (SR-NASDAQ-2006-001); 60794 (October 6, 2009),
74 FR 52522 (October 13, 2009) (SR-NASDAQ-2009-084); and 64365
(April 28, 2011), 76 FR 25384 (May 4, 2011) (SR-NASDAQ-2011-058).
---------------------------------------------------------------------------
Rule 4626 limits the liability of Nasdaq and its affiliates with
respect to any losses, damages, or other claims arising out of the
Nasdaq Market Center or its use and provides for limited accommodations
under the conditions specified in the rule.\5\ Subsection (b)(1)
provides that for the aggregate of all claims made by market
participants related to the use of the Nasdaq Market Center during a
single calendar month, Nasdaq's payments under Rule 4626 shall not
exceed the larger of $500,000 or the amount of the recovery obtained by
Nasdaq under any applicable insurance policy. Subsection (b)(2) states
that for the aggregate of all claims made by market participants
related to systems malfunctions or errors of the Nasdaq Market Center
concerning locked/crossed compliance, trade through protection, market
maker quoting, order protection, or firm quote compliance, during a
single calendar month Nasdaq's payments under Rule 4626 shall not
exceed the larger of $3,000,000 or the amount of the recovery obtained
by Nasdaq under any applicable insurance policy.\6\
---------------------------------------------------------------------------
\5\ Rule 4626(a) provides that except as set forth in the
accommodation portion of the rule, ``Nasdaq and its affiliates shall
not be liable for any losses, damages, or other claims arising out
of the Nasdaq Market Center or its use. Any losses, damages, or
other claims, related to a failure of the Nasdaq Market Center to
deliver, display, transmit, execute, compare, submit for clearance
and settlement, adjust, retain priority for, or otherwise correctly
process an order, Quote/Order, message, or other data entered into,
or created by, the Nasdaq Market Center shall be absorbed by the
member, or the member sponsoring the customer, that entered the
order, Quote/Order, message, or other data into the Nasdaq Market
Center.''
\6\ Rule 4626 was amended in 2011 to the current version. See
Securities Exchange Act Release No. 64365 (April 28, 2011), 76 FR
25384 (May 4, 2011) (SR-NASDAQ-2011-058) (notice of filing and
immediate effectiveness).
---------------------------------------------------------------------------
On May 18, 2012, Nasdaq experienced system difficulties during the
Nasdaq Halt and Imbalance Cross Process (the ``Cross'') for the FB IPO.
These difficulties delayed the completion of the Cross from 11:05 a.m.
until 11:30 a.m. Based on its assessment of the information available
at the time, Nasdaq concluded that the system issues would not have any
effects beyond the delay itself. In an exercise of its regulatory
authority, Nasdaq determined to proceed with the IPO at 11:30 a.m.
rather than postpone it.
As a result of the system difficulties, however, certain orders for
FB stock that were entered between 11:11:00 a.m. and 11:30:09 a.m. in
the expectation of participating in the Cross--and that were not
cancelled prior to 11:30:09--either did not execute or executed after
1:50 p.m. at prices other than the $42.00 price established by the
Cross. (Other orders entered between 11:11:00 a.m. and 11:30:09 a.m.,
including cancellations, buy orders below $42.00, and sell orders above
$42.00, were handled without incident.) System issues also delayed the
dissemination of Cross transaction reports from 11:30 a.m. until 1:50
p.m. At 1:50 p.m., Nasdaq system difficulties were completely resolved.
Nasdaq's analysis indicates that only a small percentage of the FB
orders received by Nasdaq on May 18 were directly affected by Nasdaq
system difficulties.
In the period between 11:30 a.m. and 1:50 p.m., although system
issues had prevented Nasdaq from disseminating Cross transaction
reports, Nasdaq determined not to halt trading in FB stock. Nasdaq
believed that the system issues would be resolved promptly. Moreover,
after 11:30 a.m. there was an orderly, liquid, and deep market in FB
stock, with active trading on all markets. Halting trading on a market-
wide basis in these circumstances would have been unprecedented, and,
in Nasdaq's view, unjustified. In any event, in Nasdaq's regulatory
judgment, the conditions after 11:30 a.m. did not warrant a halt of
trading.
As a result of these unique circumstances, Nasdaq is proposing to
accommodate members for losses attributable to the system difficulties
on May 18, 2012 in an amount not to exceed $62 million. Nasdaq also
proposes standards for orders to qualify for accommodation. For the
reasons explained below, Nasdaq proposes to make accommodation payments
in respect of:
1. SELL Cross orders that were submitted between 11:11 a.m. and
11:30 a.m. on May 18, 2012, that were priced at $42.00 or less, and
that did not execute;
2. SELL Cross orders that were submitted between 11:11 a.m. and
11:30
[[Page 45708]]
a.m. on May 18, 2012, that were priced at $42.00 or less, and that
executed at a price below $42.00;
3. BUY Cross orders priced at exactly $42.00 and that were executed
in the Cross but not immediately confirmed; and
4. BUY Cross orders priced above $42.00 and that were executed in
the Cross but not immediately confirmed, but only to the extent entered
with respect to a customer \7\ that was permitted by the member to
cancel its order prior to 1:50 p.m. and for which a request to cancel
the order was submitted to Nasdaq by the member, also prior to 1:50
p.m.\8\
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\7\ For purposes of the rule, unless stated otherwise, the term
``customer'' shall be construed to include any unaffiliated entity
upon whose behalf an order is entered, including any unaffiliated
broker or dealer.
\8\ All claims allegedly attributable to system errors on May
18, 2012 not directly involving the FB IPO Cross will continue to be
evaluated and adjudicated under Nasdaq Rule 4626(b)(1) using
Nasdaq's existing processes and subject to Nasdaq's existing
limitation of liability.
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The modifications proposed in this rule change are not intended to
and do not affect the limitations of liability set forth in Nasdaq's
agreements or SEC-sanctioned rules, or those limitations or immunities
that bar claims for damages against Nasdaq as a matter of law. Rather,
as noted above, they reflect Nasdaq's determination to adopt a fair and
equitable accommodation policy that takes into account the impacts of
Nasdaq's system issues on the investing public and members.
In the two sections that follow, Nasdaq provides: (i) Background
information concerning Nasdaq's IPO process generally, the system
difficulties Nasdaq experienced with the Facebook IPO process on May
18, 2012, and the impacts that those system difficulties had on certain
orders; and (ii) Nasdaq's accommodation proposal, including the
standards to be applied to claims for accommodation, the rationale for
those standards, the proposed procedure for the submission and
evaluation of claims, and the proposed payment process.
II. Background
The IPO Cross Process
The Nasdaq Cross, which is set forth in Nasdaq Rule 4753 (Nasdaq
Halt and Imbalance Crosses), was developed in consultation with market
participants and is designed to provide fair executions for investors
to begin secondary market trading in IPO shares. The purposes of the
Cross are set forth in the filings with the Commission that implemented
Rule 4753.\9\ In approving the Cross, the Commission found that the
Cross process, as described in Nasdaq's filing seeking approval of the
Cross, ``should provide useful information to market participants and
increase transparency and order interaction at the opening,'' and
``should result in the public dissemination of information that more
accurately reflects trading in a particular security.'' \10\ The
Commission additionally concluded that the Cross, as described in
Nasdaq's filing, is consistent with the requirements of the Act and the
rules and regulations thereunder generally, and particularly with the
requirement that rules be designed to facilitate transactions in
securities and to remove impediments to and perfect the mechanism of a
free and open market.\11\ The Commission also found that the Cross, as
described in Nasdaq's filing, was ``based on the Nasdaq opening cross,
which the Commission approved in a prior filing.'' \12\
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\9\ See Securities Exchange Act Release Nos. 53488 (March 15,
2006), 71 FR 14272 (March 21, 2006) (SR-NASD-2006-015); 54248 (July
31, 2006), 71 FR 44738 (August 7, 2006) (SR-NASDAQ-2006-019).
\10\ Securities Exchange Act Release No. 53687 (April 20, 2006),
71 FR 24878 (April 27, 2006) (SR-NASD-2006-015).
\11\ Id.
\12\ Id. (citing Securities Exchange Act Release 50405
(September 16, 2004), 69 FR 57118 (September 23, 2004) (SR-NASD-
2004-071).
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The Cross is an open and transparent process that identifies a
single price based on supply and demand as represented by orders
submitted to the Cross process. The Cross process is integrated with
the Nasdaq order book to provide a smooth transition for orders from
the Cross to continuous trading.
In the Cross process, all members have the ability to enter orders
and observe the evolution of the prospective auction price through
Nasdaq's dissemination of auction imbalance information, and thereby to
participate in the price discovery process. Cross-eligible shares
determine the auction price as the price nearest to the offering price
that will execute all market order shares, all limit order shares with
superior prices to the auction price,\13\ and as many limit order
shares as possible with limit prices equal to the auction price.\14\
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\13\ An order with a superior price is, in the case of a buy
order, an order with a limit higher than the auction price, and in
the case of a sell order, an order with a limit lower than the
auction price.
\14\ The Cross algorithm sets the auction price by determining
the price that will maximize the number of shares executed and, in
the case of multiple prices providing the same maximum number of
shares executed, selecting the price nearest to the offering price
consistent with all superior priced orders executing. See Rule
4753(b)(2).
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Nasdaq begins accepting Cross orders at the system start time of
7:00 a.m. During the interval between the system start time and the
start of the Display-only period, orders can be entered or cancelled
freely, and information on Cross orders is not publicly disseminated.
The Display-only period begins 15 minutes prior to the scheduled
release time of the IPO. Once the Display-only period begins, Nasdaq
disseminates indicative information about the auction price and auction
volume via Net Order Imbalance Indicator (``NOII'') messages on
Nasdaq's public data feeds at five-second intervals.\15\ Members may
enter and cancel orders during the Display-only period. As the effects
of order entry and cancellation are disseminated to the public,
participants may respond with further order entry, modification, or
cancellation instructions. Over the course of the Display-only period,
market participants develop an understanding of the state of supply and
demand, changes in the indicative price typically become smaller, and
the indicative volume typically increases.
---------------------------------------------------------------------------
\15\ See Rule 4753(b)(1).
---------------------------------------------------------------------------
The Display-only period can be extended (up to six times) in five-
minute increments. During the extension period, imbalance information
continues to be disseminated and orders may be entered or canceled. It
is relatively common for the Display-only period of an IPO to be
extended.
Once there are no further five-minute extensions of the Display-
only period, the IPO Cross executes, the Nasdaq official opening price
is disseminated, a bulk trade execution is sent to the consolidated
tape, and messages confirming individual executions for Cross-executed
shares are sent to market participants. In accordance with market
participants' instructions, orders not executed in the Cross are either
canceled or populate the Nasdaq electronic order book.
Nasdaq believes that the benefits of the Cross include optimizing
an opening price and allowing investors to cancel their orders at the
last possible moment before a Cross is calculated. Moreover, as the
Commission found when it approved the Cross, the Cross process, as
described in Nasdaq's filing, was designed as described above to
promote just and equitable principles of trade, 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
[[Page 45709]]
public interest in various ways.\16\ The Commission further noted that
``[i]n approving the proposed rule change, the Commission * * *
considered its impact on efficiency, competition, and capital
formation.'' \17\
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\16\ Securities Exchange Act Release No. 53687 (April 20, 2006),
71 FR 24878 (April 27, 2006) (SR-NASD-2006-015) (finding the Cross
consistent with Section 15A of the Act, 15 U.S.C. 78o-3, in general,
and Section 15A(b)(6) of the Act, 15 U.S.C. 78o-3(b)(6), in
particular).
\17\ Id. at n.5 (citing 15 U.S.C. 78c(f)).
---------------------------------------------------------------------------
The Facebook IPO Cross on May 18, 2012
At 10:45:00 a.m. on May 18, 2012 the Display-only period for
Facebook began, with a scheduled release time of 11:00:00 a.m. The
first NOII message disseminating indicative information about the
upcoming IPO cross was distributed at 10:45:05 a.m. with an indicative
price of $50.00 and indicative volume of 4,461,419 shares. At
approximately 10:57:53 a.m., the initially scheduled release time of
11:00:00 a.m. was extended to 11:05:00 a.m. There were no further
extensions.
The NOII messages continued at 5-second intervals until the last
message at 11:05:05 a.m. From 11:00:30 a.m. onward, the NOII messages
displayed an indicative price of $42.00. The last NOII message was
distributed at 11:05:05 a.m. with an indicative price of $42.00 and
indicative volume of 72,189,277 shares.
The Cross process in FB did not operate as expected. At
approximately 11:05:10 a.m., Nasdaq attempted to conclude the quoting
period, execute the Cross and print the opening trade to the tape.
Initiating this procedure instructed the Cross application to run its
final calculation to match buy and sell interest and then print the
opening trade to the tape. As a protection to ensure the integrity of
the IPO process, the system is designed to recalculate the IPO auction
if the matching engine's view of the auction book has changed between
the time of the final calculation and the printing of the opening
trade. In other words, the system is designed to ensure that
cancellations submitted while the Cross is calculating, and up until
the last moment before the Cross is completed, are accounted for in the
Cross.
After the initial calculation of the Cross was completed, but
before the opening trade was printed, additional order modifications
were received by the system, changing the auction order book. As
designed, the system recalculated the Cross to factor in the new state
of the book. Again, changes were received before the system could print
the opening trade, which resulted in additional re-calculations. This
condition persisted, resulting in further delay of the opening print.
Nasdaq continued to receive new order, cancel, and replace
messages, and they were added to the Cross order book. New order,
cancel, and replace messages received before approximately 11:11:00
a.m. were acknowledged and incorporated into the Cross order book in
real time.
Upon concluding shortly before 11:30 a.m. that a system
modification would resolve all system issues, Nasdaq, in an exercise of
its market oversight obligations, determined to proceed with the IPO.
At 11:30:09 a.m., Nasdaq completed the Cross, printed approximately
75.7 million shares at $42.00 to the tape, and opened continuous
trading in Facebook.\18\
---------------------------------------------------------------------------
\18\ An initial calculation of the Cross was attempted at
approximately 11:05:09 a.m. Had that calculation of the Cross
completed, it still would have resulted in an opening price of
$42.00.
---------------------------------------------------------------------------
At the time Nasdaq implemented the system modification, its
expectation was that substantially all Cross-eligible orders received
prior to the Cross would participate in the Cross and that all Cross
transaction confirmation messages would be disseminated immediately
thereafter. This turned out not to be the case.
First, only orders received prior to 11:11:00 a.m. participated in
the 11:30:09 a.m. Cross. Of the orders entered between 11:11:00 a.m.
and 11:30:09 a.m., some were cancelled by members before the Cross.\19\
Others were entered into the market at 11:30:09 a.m., and the remainder
were either cancelled or released into the market at 1:50 p.m.\20\
---------------------------------------------------------------------------
\19\ Cancellations received during that interval were processed
in real time, resulting in Nasdaq assuming in its error account the
cancelled buy and sell positions. Nasdaq's net error account
position was a short position of 3,070,430 shares. Using the
services of an unaffiliated third-party broker in accordance with
Nasdaq's then-proposed, and since approved Rule 4758(d), Nasdaq
thereafter sold this short position, resulting in an inadvertent
gain of approximately $10.8 million. This gain will be returned in
full to customers through the accommodation proposal set forth in
this filing.
\20\ Had all Cross-eligible orders, including those entered
between 11:11:00 a.m. and 11:30:09 a.m., participated in the Cross,
the Cross would still have taken place at $42.00.
---------------------------------------------------------------------------
Second, Cross transaction confirmation messages were not
disseminated until 1:50 p.m. When Nasdaq became aware of the fact that
confirmations were not being delivered, Nasdaq determined not to
suspend trading in FB stock because at that time price discovery was
occurring in an orderly fashion in the continuous market. Indeed,
active, deep, and liquid trading was taking place in FB stock on Nasdaq
and trading in FB stock was proceeding as well on ten other markets and
in over-the-counter trading.\21\ Nasdaq systems operated normally in
handling all of the FB orders entered and executed after the Cross.
---------------------------------------------------------------------------
\21\ See, e.g., Securities Exchange Act Release No. 22554
(October 23, 1985), 50 FR 43825 (October 29, 1985) (SR-NYSE-85-38)
(stating that when determining whether to halt trading, an exchange
must weigh against a potential reason for a halt ``the need to
provide investors with a liquid market within which to buy or sell
securities whenever they choose,'' and that while decisions to halt
or delay trading ``necessarily depend upon the circumstances of each
particular situation,'' an ``Exchange will in all cases be guided by
its intention to maintain a fair, orderly and continuous market in
its listed securities, insofar as reasonably practicable under the
circumstances'').
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The circumstances described above affected market participants
differently depending on the prices of their orders and whether they
were buyers or sellers.
In spite of the absence of confirmation messages, Nasdaq believes
that market participants--based on all of the information available at
the time, their experience with Nasdaq crosses, and established trading
priorities--would reasonably have had certain expectations for the
execution or non-execution of their orders. Nasdaq printed
approximately 75.7 million shares at $42.00 to the tape at 11:30 a.m.
In addition, fair and orderly continuous trading on other markets
opened in close proximity to the $42.00 established by the Cross, and
the price of FB moved in an orderly manner above and below $42.00
throughout the trading day, with more than 500 million shares
traded.\22\ The following analysis reflects Nasdaq's assessments as to
market participants' reasonable expectations and the nature of their
potential losses.
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\22\ As discussed herein, Nasdaq's subsequent analysis has
confirmed that $42.00 was the appropriate opening price.
---------------------------------------------------------------------------
Accordingly, any buy or sell order received up until 11:30:09 a.m.
and priced at a level at which it could not be filled in a Cross with a
publicly disseminated price of $42.00 (i.e., a buy order below $42.00
and a sell order above $42.00) was not disadvantaged. Market
participants who submitted such orders could not reasonably have
expected such orders to be executed. Accordingly, those orders
experienced no loss attributable to the Nasdaq system issues.\23\
---------------------------------------------------------------------------
\23\ Some orders inadvertently benefitted from Nasdaq system
issues. For example, buy orders that were entered between 11:11 a.m.
and 11:30 a.m. and priced at $42.00 and above were not filled in the
Cross. Had these orders been executed in the Cross or returned to
customers at 11:30 a.m. instead of being held until 1:50 p.m., they
might have been filled at prices at or above $42.00 as the price of
FB stock ran up to $45 immediately after 11:30 a.m. The delay
instead gave participants the opportunity either to cancel their
orders after 11:30 a.m., as many did, or to execute at a lower price
when the cancellations and remaining non-cancelled orders were
released into the market at 1:50 p.m.
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[[Page 45710]]
Conversely, sellers who entered orders priced at $42.00 or less
should reasonably have expected that their orders had been executed in
the Cross. Nasdaq had continuously indicated through NOII messages the
relative proportion of buy and sell interests, providing information as
to the likelihood of a buy or sell order being executed. Such sellers
whose orders were received by Nasdaq before 11:11 a.m. had their orders
executed in the Cross, consistent with expectations and previous market
practice. Therefore, they were not disadvantaged and experienced no
loss attributable to Nasdaq system issues.
The analysis is different for market participants who entered such
orders between 11:11 a.m. and 11:30 a.m. Buyers who entered orders
priced higher than $42.00 during that interval did not receive messages
that their orders had not executed in the Cross until 1:50 p.m. Yet,
they were precluded from buying at their expected $42.00 price and
instead bought at the lower open market prices then available, if their
orders were executed at all. Accordingly, these buyers also experienced
no loss attributable to the Nasdaq system issues.
Sellers who entered orders priced at $42.00 or less between 11:11
a.m. and 11:30 a.m. did not receive messages that their orders had not
been executed in the Cross until 1:50 p.m. Such sell orders did not
execute at their expected $42.00 price in the Cross, but instead sold
at the lower continuous market prices available at or after 1:50, if
they executed at all. Thus, these market participants experienced
losses reasonably attributable to the Nasdaq system issues.
Market participants who entered Cross-only eligible buy orders
priced exactly at $42.00 that executed in the Cross but that were not
confirmed until 1:50 p.m. could not have been sure whether their orders
had been executed because the number of buy and sell limit order shares
priced at the clearing price and wishing to be matched in the Cross is
never exactly equal. Consequently, in the interval between 11:30 a.m.
and 1:50 p.m., these buyers may have purchased shares in the continuous
market, and upon receiving Cross execution messages at 1:50 p.m., they
may have experienced an unexpected long position. The sale of such an
unexpected long position at a lower price would have occasioned a loss.
Buyers who entered orders priced higher than $42.00, which they did
not subsequently cancel, should reasonably have expected that their
orders had been executed in the Cross. As noted, Nasdaq had
continuously indicated through NOII messages the relative proportion of
buy and sell interests, providing information as to the likelihood of a
buy or sell order being executed. Such buyers whose orders were
received by Nasdaq before 11:11 a.m. had their orders executed in the
Cross, consistent with expectations and previous market practice.
Therefore, they were not disadvantaged and experienced no loss
attributable to Nasdaq system issues.
Finally, there are market participants who entered eligible buy
orders for customers that were priced above $42.00 and that were
executed in the Cross but not confirmed until 1:50 p.m., but for which
the customer requested and received an out from the member and for
which the member submitted a request to cancel the order to Nasdaq
prior to 1:50 p.m. When the member received confirmation of the
execution of the customer's order at 1:50 p.m., the member held shares
for which it no longer had a recipient. Nasdaq believes that members
who took such actions were reasonably attempting to assist their own
customers in responding to the delayed dissemination of Cross
transaction reports, and that such members further attempted to
communicate their actions to Nasdaq through the submission of
cancellations. In this category, however, the outcome was affected not
only by Nasdaq system issues, but also by the member's affirmative
decision not to await the dissemination of confirmations. Accordingly,
Nasdaq believes that a portion of the associated losses should be borne
by the members. Thus, Nasdaq is proposing an accommodation equaling
only 70% of the member's qualifying loss amount with respect to this
category.
III. Accommodation Proposal
Accommodation Standards
Nasdaq's proposal is to provide accommodation within a framework
that seeks to replicate what the expected execution prices of orders
would have been had the Cross not experienced unexpected and
unprecedented difficulties, limited by the expectation that members
would exercise reasonable diligence to respond and mitigate losses once
made aware that their Cross orders had not executed, or had executed at
unexpected prices. Thus, Nasdaq proposes to make accommodation payments
in respect of:
(i) SELL Cross orders that were submitted between 11:11 a.m. and
11:30 a.m. on May 18, 2012, that were priced at $42.00 or less, and
that did not execute;
(ii) SELL Cross orders that were submitted between 11:11 a.m. and
11:30 a.m. on May 18, 2012, that were priced at $42.00 or less, and
that executed at a price below $42.00;
(iii) BUY Cross orders priced at exactly $42.00 and that were
executed in the Cross but not immediately confirmed; and
(iv) BUY Cross orders priced above $42.00 and that were executed in
the Cross but not immediately confirmed, but only to the extent entered
with respect to a customer that was permitted by the member to cancel
its order prior to 1:50 p.m. and for which a request to cancel the
order was submitted to Nasdaq by the member, also prior to 1:50 p.m.
These are the situations in which Nasdaq has concluded that its
systems issues could have impacted market participants' reasonable
expectations in an objectively discernible manner. In these situations,
Nasdaq proposes to offer as an accommodation the loss differential for
a qualified order--that is, the difference between the price that was
reasonably expected and the subsequent execution price actually
obtained, or the price available at the point when the market
participant could have taken steps to mitigate its losses or otherwise
adjust its position.
As described above, Nasdaq believes that it reasonably determined
not to suspend the IPO or halt trading in FB stock, and Nasdaq's FB-
related systems issues were fully resolved at 1:50 p.m., when Nasdaq
disseminated all delayed Cross execution confirmation messages. At that
point, Nasdaq believes that member firms were in possession of all the
information needed to evaluate their positions and obligations to
customers, and take steps accordingly.
Accordingly, for the orders described in (i), (iii), and (iv)
above, Nasdaq proposes to establish a uniform benchmark price of
$40.527, the price at which Nasdaq has concluded a reasonably diligent
member could have obtained shares to mitigate any unexpected losses or
to liquidate unanticipated positions coming out of the Cross. Nasdaq
calculated this price using the volume-weighted average price of FB
stock during the first 45 minutes of trading after execution reports
were delivered to firms
[[Page 45711]]
(i.e., 1:50 p.m. to 2:35 p.m.).\24\ Using $40.527 as the uniform
benchmark price results in a maximum loss of $1.473 per share per
order.
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\24\ Trading firms typically process and determine actions on
trading messages within seconds or less. Given the volume of
messages at issue here and Nasdaq's delay in disseminating them,
Nasdaq has concluded that 45 minutes would have been ample time for
a reasonably diligent member to have identified any unexpected
customer losses or unanticipated customer positions, and taken steps
to mitigate or liquidate them.
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For the orders described in (ii) above, Nasdaq proposes to offer as
an accommodation the difference between the price that was reasonably
expected (i.e., $42.00) and the execution price actually obtained,
because the immediate execution of these orders precluded a member from
taking reasonable actions to mitigate losses.
Nasdaq believes that this method provides a reasonable time period
for firms to have taken actions to mitigate losses after receiving the
Cross transaction reports, as well as a reasonable maximum loss price
parameter for determining accommodation payments. Additional alleged
losses incurred beyond that benchmark price, regardless of their cause,
will remain the responsibility of the member. If a member suffered a
lesser loss than that calculated based on the foregoing method, based
on the difference between the expected execution price of the order in
the Cross process establishing an opening print of $42.00 and the
actual execution price received, the member shall not receive more than
the lesser actual loss suffered. A member's direct trading losses, as
calculated in accordance with these parameters, are referred to in the
proposed rule as the ``Member's Share.''
Alleged losses from other causes shall not be considered eligible
for accommodation payments under the proposed rule change. Thus, for
example, Nasdaq does not propose to make accommodation payments in
respect of alleged losses attributable to: orders received after the
commencement of continuous regular trading in FB; individual member
firm technology issues or system failures, or member firm operational
issues or operational failures; affirmative trading actions taken by
member firms on their own behalf or to accommodate their customers
after the Cross, except as otherwise provided in the proposed rule;
alleged or speculative lost trading opportunities or alleged or
speculative lost business profits of any description; non-marketable
Cross orders for which, based on their price, there was no reasonable
expectation that orders had been executed; and a member firm's failure
to adequately and appropriately mitigate losses or adjust trading
positions. Nasdaq is not asking any firm to offset its claims under
these criteria with any economic gains experienced because of the
relevant system issues as outlined at footnote 23.
Examples of how the accommodation standards would apply are below.
Example 1: A member submitted an IPO Cross order to SELL 1000
shares priced at market (i.e., willing to sell at any price or
otherwise equivalent to $0.01) with a Time in Force (TIF) of
Immediate or Cancel (IOC), entered at 11:15 a.m. Because the order
was priced lower than the opening price, it should have been filled
at $42.00 in the Cross, but failed to execute because it was entered
after 11:11 a.m. Nasdaq transmitted the order confirmation of the
failure to the member at 1:50 p.m., at which time the member covered
its position (i.e., sold the 1000 shares it had expected to sell in
the Cross) at a price of $41.15. Because the member was able to sell
its shares at a higher price than the benchmark price Nasdaq has
established ($40.527), the member will be accommodated for the
difference between the opening price and the covering execution's
price. The amount of loss is 1000 x ($42.00-$41.15) = $850.00.
Example 2: A member submitted an IPO Cross order to SELL 1000
shares priced at market with a TIF of IOC, entered at 11:15 a.m.
Because the order was priced lower than the opening price, it should
have been filled at $42.00 in the Cross, but failed to execute
because it was entered after 11:11 a.m. Nasdaq transmitted the order
confirmation message noting the failure to execute to the member at
1:50 p.m., but the member did not cover its position until later in
the day at an average price of $39.00. Because the member's covering
execution price was lower than the benchmark price Nasdaq has
established ($40.527), the member will be accommodated for the
difference between the opening price and the benchmark price. The
amount of loss is 1000 x ($42.00-$40.527) = $1,473.00.
Example 3: A member submitted an IPO Cross order to SELL 1000
shares priced at market with a TIF of DAY, entered at 11:15 a.m.
Because the order was priced lower than the opening price, it should
have been filled at $42.00 in the Cross, but failed to execute in
the Cross because it was entered after 11:11 a.m. The order was
entered into the continuous book at 1:50 p.m., at which time it
executed at a price of $41.05. Nasdaq transmitted the order
confirmation message to the member at 1:50 p.m. Because the order
executed at an inferior price to the opening price, the member will
be accommodated for the difference between the opening price and the
actual execution price. The amount of loss is 1000 x ($42.00-$41.05)
= $950.00.
Example 4: A member submitted an IPO Cross order to SELL 1000
shares priced at market with a TIF of DAY, entered at 11:15 a.m.
Because the order was priced lower than the opening price, it should
have been filled at $42.00 in the Cross, but failed to execute in
the Cross because it was entered after 11:11 a.m. The order was
entered into the continuous book at 1:50 p.m., at which time it
executed at a price of $40.00. Nasdaq transmitted the order
confirmation message to the member at 1:50 p.m. Because the order
executed at an inferior price to the opening price, the member will
be accommodated for the difference between the opening price and the
actual execution price. The amount of loss is 1000 x ($42.00-$40.00)
= $2,000.00.
Example 5: A member submitted an IPO Cross order to SELL 1000
shares priced at market with a TIF of DAY, entered at 11:15 a.m.
Because the order was priced lower than the opening price, it should
have been filled at $42.00 in the Cross, but failed to execute in
the Cross because it was entered after 11:11 a.m. The member
cancelled the order at 12:30 p.m., after the Cross had taken place
at 11:30:09 a.m. but before the order was delivered to the
continuous book or a confirmation message was delivered. The order
cancelled back to the member at 1:50 p.m. based on the request sent
at 12:30 p.m. Because the member's order should have been executed
in the Cross, the fact that the member cancelled the order at 12:30
p.m. is not relevant for purposes of determining that the order was
directly disadvantaged, and the member will be accommodated for the
difference between the opening price and the benchmark price. The
amount of loss is 1000 x ($42.00-$40.527) = $1,473.00.
Example 6: A member submitted an IPO Cross order to BUY 1000
shares priced at $42.00 with a TIF of DAY, entered at 11:00 a.m. The
order was filled at $42.00, but because the order's price was
exactly the opening price, the member could not have reasonably
known that the order was filled until 1:50 p.m. As a result, the
member acquired an unexpected long position of 1000 shares that
resulted in a loss when the position was covered at a price of
$40.15. Because the member's covering execution price was worse than
the benchmark price Nasdaq has established ($40.527), the member
will be accommodated for the difference between the opening price
and the benchmark price. The amount of loss is 1000 x ($42.00-
$40.527) = $1,473.00.
Example 7: A member submitted an IPO Cross order to BUY 1000
shares at $42.00 with a TIF of IOC, entered at 11:15 a.m. The order
was not filled at $42.00 because it was entered after 11:11 a.m.,
but because the order's price was exactly the opening price, the
member could not have reasonably known that the order was not filled
until 1:50 p.m. As a result, the member discovered it unexpectedly
lacked 1000 shares at 1:50 p.m. At that time, the member could have
purchased shares at prices lower than the opening price.
Consequently, the member was not directly disadvantaged by Nasdaq's
system error and there is no loss amount.
Example 8: A member submitted an IPO Cross order to BUY 1000
shares at $42.50 with a TIF of IOC, entered at 11:15 a.m. The order
was not filled at $42.00 because it was entered after 11:11 a.m.,
but because the order's price was higher than the opening price, the
member should have expected the order was filled until it received a
confirmation to the contrary at 1:50 p.m. As a result, the member
discovered it
[[Page 45712]]
unexpectedly lacked 1000 shares at 1:50 p.m. At that time, the
member could have purchased shares at prices lower than the opening
price. Consequently, the member was not directly disadvantaged by
Nasdaq's system error and there is no loss amount.
Example 9: A member submitted an IPO Cross order for a customer
to BUY 1000 shares at $42.50 with a TIF of IOC, entered at 11:05
a.m. and a cancel request was submitted by the member before 1:50
p.m. for the order. The order was filled at $42.00 as expected.
Because it was priced higher than the opening price, the member
should have expected that the order was filled, which was confirmed
electronically at 1:50 p.m. In light of the confirmation delay,
however, the member received a request to cancel the order from the
customer prior to 1:50 p.m., accommodated that request by allowing
the customer to cancel the order, and sent a cancellation request
for the order to Nasdaq before 1:50 p.m. When confirmation of the
customer's order execution in the Cross was received by the member
at 1:50 p.m., the member held a long position of shares for which it
no longer had a recipient. Although the decision to accommodate the
customer's cancellation request was exclusively that of the member,
Nasdaq has determined to provide a limited accommodation amount
equaling 70% of the member's loss up to maximum loss amount of 0.70
x 1000 x ($42.00-$40.527) = $1,031.10.
Example 10: A member submitted an IPO Cross order to BUY 1000
shares at $42.50 with a TIF of IOC, entered at 11:05 a.m. The order
was filled at $42.00 as expected. Because it was priced higher than
the opening price, the member should have expected that the order
was filled, which was confirmed electronically at 1:50 p.m. As a
result of the delay in confirmation, however, the member purchased
additional shares before the confirmations arrived. This resulted in
an unintended long position of 1000 shares. Although the member
incurred a loss when covering the unintended position, Nasdaq
correctly executed the member's order and the member should have
expected the original IPO Cross order to be filled because of its
price. Consequently, the member was not directly disadvantaged by
Nasdaq's system error and there is no loss amount.
Example 11: A member submitted an IPO Cross order to BUY 1000
shares at $42.50 with a TIF of IOC, entered at 11:05 a.m. The order
was filled at $42.00 as expected. Because it was priced higher than
the opening price, the member should have expected that the order
was filled, which was confirmed electronically at 1:50 p.m. Later in
the day, the member sold the position at $40.00. The member claims
that it would have been able to sell at a higher price if had
received the confirmation sooner. Nasdaq correctly executed the
member's order. The claim of loss is premised on an alleged or
speculative lost trading opportunity rather than the actual failure
by Nasdaq to process an order correctly. Consequently, the member
was not directly disadvantaged by Nasdaq's system error and there is
no loss amount.
Procedure for Submission and Evaluation of Claims
All members seeking accommodation under this proposal will be
required to submit their claims to Nasdaq in writing not later than
seven days after the approval of the proposed rule change by the
Commission. Such notice of approval will be publicly posted by Nasdaq
on its Nasdaq Trader Web site at https://www.nasdaqtrader.com and
provided directly to all member firms via an Equity Trader Alert. All
claims that have been timely submitted will be evaluated by the
Financial Industry Regulatory Authority (``FINRA'') applying the
accommodation standards set forth herein. FINRA may request such
supplemental information as FINRA deems necessary to assist FINRA's
evaluation of the claims. FINRA's role will be limited to measuring
data against the benchmarks established by this filing to ascertain the
eligibility and value of each member's claims under those benchmarks.
FINRA staff assessing the claims will not be involved in providing
regulatory services to any Nasdaq market and they will not have
purchased Facebook stock during Nasdaq's IPO opening process or
currently own Facebook stock. In addition, as discussed below, FINRA
will prepare a report for Nasdaq on its analysis of the eligibility of
claims that will be provided to the public members of FINRA's Audit
Committee.
Once it has completed its review, FINRA shall provide to the Nasdaq
Board of Directors and the Board of Directors of The NASDAQ OMX Group,
Inc., an analysis of the total value of eligible claims submitted.\25\
Thereafter, Nasdaq will file with the Commission a rule proposal
setting forth the amount of eligible claims submitted and its intention
to pay such claims up to $62 million. In no event shall Nasdaq make any
payments on claims until the rule proposal setting forth the amount of
eligible claims becomes effective and final.
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\25\ In accordance with the established policies of these
Boards, any directors with a financial interest in the accommodation
process will be expected to recuse themselves from consideration of
the analysis.
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Payment Process
Nasdaq's business and legal relationships are with its members, not
its members' customers. Nasdaq has no contractual or other
relationships with its members' customers, and generally does not
possess information about interactions between a member and its
customer that may underlie members' trading activity. Nevertheless,
Nasdaq is mindful that member's customers have been impacted by the
processing of member orders in the FB Cross. Thus, for example, to the
extent that a member order reflected a customer order, and the member
order was not executed in the manner expected, the customer order may
not have been filled, or may have been filled at an unexpected price.
Nasdaq is also aware of public reports that some members experienced
their own system issues on May 18, 2012 that were unrelated to Nasdaq's
system issues, and that those members' issues may have had an impact on
the members' customers. To the extent that a member receiving
accommodation hereunder had customers that incurred losses, Nasdaq
believes that accommodation payments received by members from Nasdaq
should be used for the benefit of such customers.
Accordingly, Nasdaq proposes that all accommodation payments
proposed in this filing be contingent upon a member's submission to
Nasdaq, not later than seven days after the effective date of the rule
proposal described above detailing the amount of eligible claims, of an
attestation detailing:
(i) The amount of compensation, accommodation, or other economic
benefit provided or to be provided by the member to its customers
(other than customers that were brokers or dealers trading for their
own account) in respect of trading in Facebook Inc. on May 18, 2012
(``Customer Compensation''), and
(ii) The extent to which the losses reflected in the Member's Share
\26\ were incurred by the member trading for its own account or for the
account of a customer that was a broker or dealer trading for its own
account (``Covered Proprietary Losses'').
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\26\ Defined specifically as a member's direct trading losses
calculated in accordance with paragraphs (b)(3)(A) and (B) of the
proposed rule.
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Failure to provide the required documentation within the specified
time limit will void the member's eligibility to receive an
accommodation under the modified rule. Each member shall be required to
maintain books and records that detail the nature and amount Customer
Compensation and Covered Proprietary Losses. Nasdaq, through FINRA, its
regulatory services provider, would expect to examine the accuracy of
member's attestation at a later date.
Accommodation payments under this subsection will be made in two
tranches of priority, subject to the maximum total payout of $62
million:
(i) First, if the member has provided Customer Compensation, the
member will receive an amount equal to the
[[Page 45713]]
lesser of the Member's Share or the amount of Customer Compensation.
For example, if a Member's Share was $1 million, and the member had
paid, or had committed to pay, compensation to its customers of at
least $1 million, the member's expected accommodation would be $1
million. On the other hand, if the Member's Share was $1 million, but
the member had paid, or committed to pay, only $500,000 in compensation
to its customers, the member's expected accommodation in the first
tranche would be only $500,000. This approach reflects Nasdaq's belief
that accommodation with respect to members' trades on behalf of
customers (other than broker-dealers trading on a proprietary basis)
should be paid first, and should be paid only to the extent of the
member's own compensation to customers.
(ii) Second, the member will receive an amount with respect to
Covered Proprietary Losses; provided, however, that the sum of payments
to a member under the rule shall not exceed the Member's Share.
Although Nasdaq recognizes that firms engaging in proprietary trading
may have incurred losses, it believes that payments to them should
occur after payments with respect to losses on behalf of customers. If
a member had both Covered Proprietary Losses and losses associated with
customer business, it may receive distributions under both tranches.
For example, if a Member's Share was $1 million, the member had
$300,000 in Covered Proprietary Losses, and the member had provided
$300,000 in Customer Compensation, the member's expected accommodation
would be $600,000 in total. Alternatively, if the member had $300,000
in Covered Proprietary Losses and had provided $700,000 or more in
Customer Compensation, the member's expected accommodation would be $1
million.
In the event that the amounts calculated under tranche (i) exceed
$62 million, accommodation will be prorated among members eligible to
receive accommodation under tranche (i) based on the size of the
amounts payable under tranche (i). In the event that tranche (i) is
paid in full and the amounts calculated under tranche (ii) exceed the
funds remaining from the $62 million accommodation pool, such funds
will be prorated among members eligible to receive accommodation under
tranche (ii) based on the size of the amounts payable under tranche
(ii). If a member's eligibility to receive funds is voided for any
reason under this rule, and the funds payable to other members must be
prorated, the funds available to pay other members will be increased
accordingly.
Final payment of any accommodation payment also will be conditioned
on the execution by the member firm of a formal release of claims
against Nasdaq for losses associated with FB that are related in any
way to the Cross or other errors, omissions, actions, or failures to
act on the part of Nasdaq on May 18, 2012. The release will be required
not later than fourteen days after the effective date of the rule
proposal described above detailing the amount of eligible claims. The
purposes of imposing the release requirement notwithstanding the
limitations of liability and immunities, which apply in any event
pursuant to Nasdaq's rules and agreements and/or otherwise as a matter
of law, are to avoid the disruption and expense of unnecessary
litigation in connection with the Cross and to ensure equal treatment
of all claimants. Nasdaq further notes that the program proposed herein
is a voluntary step taken by Nasdaq to provide a substantial and
unprecedented accommodation to its members, and that participation in
the program is likewise voluntary on the part of members. Nasdaq
believes that it would be inequitable to approve Nasdaq's voluntary
program without also allowing it to establish conditions that promote
certainty and finality.\27\
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\27\ Cf. Section 405(c)(3)(B)(i) of the Air Transportation
Safety and System Stabilization Act (requiring release by persons
receiving compensation with respect to airline crashes on September
11, 2001).
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IV. Solicitation of Comments
This proposed rule change is being published for public comment.
Nasdaq will give due consideration to all comments submitted during the
comment period, but notes that comments advocating different approaches
should include a complete exposition of potentially relevant
information, including any impacts that the following, among other
things, may have had on alleged harms:
Market participants' own trading decisions and strategies;
Non-Nasdaq technology issues, which Nasdaq understands
affected certain market participants on May 18, 2012;
Obligations to customers or order delivery firms;
Regulatory obligations; and
Market data issues.
Failure to provide adequate detail will negatively impact Nasdaq's
ability to respond to or otherwise evaluate a comment.
2. Statutory Basis
Nasdaq believes that the accommodation proposal is consistent with
Section 6(b) of the Exchange Act \28\ in general, and furthers the
objectives of Section 6(b)(5) of the Act \29\ in particular, because
the proposal is designed to promote just and equitable principles of
trade, 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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\28\ 15 U.S.C. 78f(b) (setting forth the prerequisites for
registration as a national securities exchange).
\29\ 15 U.S.C. 78f(b)(5) (requiring that an exchange's rules be
``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; and not [be] designed to permit unfair
discrimination between customers, issuers, brokers, or dealers, or
to regulate by virtue of any authority conferred by this chapter
matters not related to the purposes of this chapter or the
administration of the exchange'').
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Nasdaq believes that the proposal to expand its accommodation
policy in this unique set of circumstances will balance several
important goals in keeping with the foregoing statutory objectives.
First, Nasdaq acknowledges that the system issues that first came
to light during the FB IPO Cross had an impact on certain of its
members during the period from 11:11 a.m. to 1:50 p.m. on May 18, 2012.
As a result, Nasdaq believes that the public interest would be served
by an accommodation policy that quantifies and provides compensation
for customer losses that were directly attributable to those system
issues in an objectively discernible manner. Specifically, Nasdaq
believes that the public interest would be served by Nasdaq making
accommodation payments in respect of the four specific categories of
Cross orders, listed above, for which Nasdaq has concluded that its
systems issues could have impacted market participants' reasonable
expectations in an objectively discernible manner. Nasdaq further
believes that the public interest would be served by Nasdaq providing
as an accommodation the loss differential for a qualified order--that
is, the difference between the price that was reasonably expected and
the subsequent execution price actually obtained, or the price
available at the point when the market participant could have taken
steps to mitigate its losses or
[[Page 45714]]
otherwise adjust its position (in situations when it was possible for
the market participant to take such steps).
Second, Nasdaq believes that it is important to recognize the
regulatory policy objectives underlying Rule 4626 and ensure that they
are not compromised. Hundreds of billions of dollars of securities
transactions are matched through the systems of Nasdaq and other
exchanges every day. Through the operation of those systems, exchanges
provide invaluable services in support of capital formation, price
discovery, and investor protection. If exchanges could be called upon
to bear all costs associated with system malfunctions and the varying
reactions of market participants taken in their wake, the potential
would exist for a single catastrophic event to bankrupt one or multiple
exchanges, with attendant consequences for investor confidence and
macroeconomic stability. Alternatively, the cost of providing exchange
services would have to rise dramatically for all investors to cover
this material and new risk.\30\ In addition, exchanges would be less
inclined to implement innovative systems \31\ consistent with the goals
of Section 6(b)(5) of the Act.\32\ Accordingly, the Commission has
recognized that it is consistent with the purposes of the act for a
self-regulatory organization to limit its liability with respect to the
use of such facilities by its members through rules such as Rule
4626.\33\
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\30\ Trading costs in the United States are among the lowest in
the world, and thus a contributor to economic growth. See, e.g.,
Michael S. Pagano, Which Factors Influence Trading Costs in Global
Equity Markets?, The J. of Trading, Winter 2009, at 7; Ian Domowitz
et al., Liquidity, Volatility, and Equity Trading Costs Across
Countries and Over Time, 4 Int'l Fin. 221 (Summer 2001); Asli
Demirg[uuml][ccedil]-Kunt & Ross Levine, Bank-based and Market-based
Financial Systems: Cross-country Comparisons 51 (The World Bank
Working Paper No. 2143, July 1999).
\31\ Securities Exchange Act Release No. 14777 (May 17, 1978)
(SR-CBOE-78-14) (in proposing a limitation on liability, CBOE
explained that an exchange ``cannot proceed with innovative systems
and procedures for the execution, clearance, and settlement of
Exchange transactions * * * unless it is protected against losses
which might be incurred by members as a result of their use of such
systems,'' and further that ``[t]o the extent [a limitation of
liability rule] enables the Exchange to proceed with innovative
systems, competition should be enhanced''); see also Securities
Exchange Act Release No. 58137 (July 10, 2008), 73 FR 41145 (July
17, 2008) (SR-NYSE-2008-55) (explaining that exchange's limitation
of liability rule encourages vendors to provide services to the
exchange, which results in faster and more innovative products for
order entry, execution, and dissemination of market information).
\32\ 15 U.S.C. 78f(b)(5) (requiring that an exchange's rules be
``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; and not [be] designed to permit unfair
discrimination between customers, issuers, brokers, or dealers, or
to regulate by virtue of any authority conferred by this chapter
matters not related to the purposes of this chapter or the
administration of the exchange'').
\33\ See, e.g., BATS Exchange and BATS-Y Exchange Rules 11.16;
C2 Options Exchange Rule 6.42; CBOE Options Exchange Rule 6.7; CME
Rule 578; EDGA and EDGX Rules 11.12; ISE Rule 705; NASDAQ OMX PHLX
Rule 3226; NASDAQ OMX BX Rule 4626; NYSE Rules 17 and 18; NYSE MKT
Rule 905NY; NYSE Arca (Options) Rule 14.2; NYSE Arca (Equity) Rule
13.2; One Chicago Rule 421.
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Moreover, if the potential for such catastrophic losses existed, as
noted above, it would need to be reflected in the fees charged by
exchanges to market participants in a manner that is not currently the
case, making trading more expensive for all investors all the time.
Rather, as the Commission has recognized, provisions such as Rule 4626
reflect the view that risks associated with system malfunctions should
be allocated among all exchange members, rather than being borne solely
by the exchange. Indeed, this view is consistently reflected in the
limitation of liability rules common among United States exchanges.\34\
And, this view is reflected in Nasdaq's proposal to condition any
accommodation payment on the execution of a release of claims against
Nasdaq for FB-related losses arising from the Cross, because this
condition is aimed at avoiding unnecessary litigation and ensuring
equal treatment of all claimants.
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\34\ Id.
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The level of accommodation being offered under this proposed rule
change is unprecedented in its size. Although Nasdaq is voluntarily
seeking in this instance to provide accommodation up to $62 million for
losses associated with the FB IPO Cross that were the direct result of
the system issues that came to light on May 18, 2012, Nasdaq does not
believe that the purposes of the Act related to the operation of the
national market system would be well served by allocating to exchanges
responsibility for losses attributable to other factors, such as the
failure of members to mitigate losses in a timely and reasonable
manner, or by effecting a wholesale modification to the risk and loss
allocations underlying Rule 4626 and the similar rules of other
exchanges that reflect the exchanges' exercise of the regulatory
authority and obligations delegated to exchanges by the Act.\35\ In
this regard, it bears noting that in light of those regulatory duties,
exchanges are also immune from civil liability for claims for damages
caused by actions taken in connection with the discharge of their
regulatory duties.\36\
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\35\ As reflected in the proposed rule change, however, Nasdaq
does believe that the public interest and the purposes of the Act
related to the operation of the national market system would be well
served by: (i) Providing that the first 45 minutes of trading after
confirmation reports were delivered to firms was a reasonable time
period for firms to have taken actions to mitigate losses, and
therefore is a reasonable period on which to base the maximum loss
price parameter for determining accommodation payments; and (ii)
providing an accommodation of 70% of the qualifying loss amount for
the fourth category of orders for which Nasdaq proposes to make
accommodation payments, given that the losses in that category were
affected not only by Nasdaq's system issues but also by the members'
affirmative decisions to take actions with respect to customer
orders rather than await the dissemination of confirmation reports.
\36\ See, e.g., DL Capital Group, LLC v. Nasdaq Stock Market,
Inc., 409 F.3d 93 (2d Cir. 2005); Sparta Surgical Corp. v. NASD, 159
F.3d 1209 (9th Cir. 1998).
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Nasdaq further believes that, consistent with Section 6(b)(5) of
the Act,\37\ its proposal will promote just and equitable principles of
trade and protect investors and the public interest by establishing a
fair process through which affected members may submit claims for
losses covered by the modified accommodation policy. Nasdaq believes
that by establishing the objective benchmarks set forth in this filing,
and allowing FINRA to act as a neutral third party and measure data
against those benchmarks to ascertain the value of each member's claims
under those benchmarks, will enhance the transparency of the process
and minimize the potential for conflicts of interest. Nasdaq further
believes that its proposed process for distributing accommodation
payments will benefit investors and promote the public interest by
providing incentives for members to use accommodation funds for the
benefit of investors. Specifically, Nasdaq believes that its proposal
will benefit investors and promote the public interest by: (I)
requiring a claimant to submit to Nasdaq an attestation detailing the
compensation the member has Provided or will provide to its customers,
and detailing the extent to which the member incurred the losses
covered by the proposed accommodation payment when trading for its own
account; and (ii) providing for accommodation payments to be made in
tranches that prioritize payments based on the extent to which the
claimant has compensated its customers.
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\37\ 15 U.S.C. 78f(b)(5).
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[[Page 45715]]
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 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 the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such 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
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml ); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-NASDAQ-2012-090 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2012-090. This
file number should be included on the subject line if email 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 Web site viewing and printing in
the Commission's Public Reference Room, 100 F Street, NE., Washington,
DC 20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the 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-2012-090 and should
be submitted on or before August 22, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\38\
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\38\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-18704 Filed 7-31-12; 8:45 am]
BILLING CODE 8011-01-P
