[Federal Register Volume 75, Number 123 (Monday, June 28, 2010)]
[Notices]
[Pages 36732-36736]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-15543]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62334; File No. SR-NASDAQ-2010-076]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing of a Proposed Rule Change, as Modified by Amendment
No. 1, To Amend NASDAQ Rule 11890 Governing Clearly Erroneous
Executions
June 21, 2010.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on June 17, 2010, The NASDAQ Stock Market LLC (the ``Exchange'' or
``Nasdaq'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been substantially prepared by the
Exchange. On June 18, 2010, the Exchange submitted Amendment No. 1 to
the proposed rule change. The Commission is publishing this notice to
solicit comments on the proposed rule change, as amended, from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange is filing with the Commission to amend NASDAQ Rule
11890, entitled Cleary Erroneous Transactions.
The text of the proposed rule change is available from Nasdaq's Web
site at http://nasdaq.cchwallstreet.com/Filings/, 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
[[Page 36733]]
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
NASDAQ is proposing modifications to its Rule 11890, entitled
Clearly Erroneous Transactions. First, NASDAQ proposes replacing
existing paragraph (C)(2) of Rule 11890, entitled ``Unusual
Circumstances and Joint Market Rulings'' with a new paragraph, entitled
``Multi-Stock Events Involving Twenty or More Securities.'' Second,
NASDAQ replacing existing paragraph (C)(4) of Rule 11890, entitled
``Numerical Guidelines Applicable to Volatile Market Opens'' with a new
paragraph, entitled ``Individual Stock Trading Pauses.'' Third, NASDAQ
is proposing changes to existing paragraph (b) of Rule 11890 to
eliminate the ability of NASDAQ to deviate from the Numerical
Guidelines contained in paragraph (C)(1) (other than under limited
circumstances set forth in paragraph (b)(i)) when deciding which
transactions will be reviewed by NASDAQ as potentially clearly
erroneous. Finally, NASDAQ proposes modifications to paragraphs (C)(1)
and (C)(3) of Rule 11890 consistent with the proposed changes to
paragraphs (C)(2) and (C)(4). As proposed, the provisions of paragraphs
(C), (c)(1), (b)(i), and (b)(ii) of Rule 11890 as amended pursuant to
this filing, would be in effect during a pilot period set to end on
December 10, 2010. If the pilot is not either extended or approved
permanent by December 10, 2010, the prior versions of paragraphs (C),
(c)(1), and (b) of Rule 11890 would be in effect.
NASDAQ is proposing the rule changes described below in
consultation with other markets and Commission staff to provide for
uniform treatment: (1) Of clearly erroneous execution reviews in Multi-
Stock Events involving twenty or more securities; and (2) in the event
transactions occur that result in the issuance of an individual stock
trading pause by the primary market and subsequent transactions that
occur before the trading pause is in effect on NASDAQ. NASDAQ has also
proposed additional changes to Rule 11890 that reduce the ability of
NASDAQ to deviate from the objective standards set forth in the Rule.
In addition, NASDAQ is modifying certain defined terms in the rule to
match definitions used by other exchanges in order to avoid the risk of
confusion. The proposed changes are described in further detail below.
Revised Paragraph (C)(2) Related to Multi-Stock Events Involving Twenty
or More Securities
NASDAQ proposes to eliminate the majority of existing paragraph
(C)(2), which provides flexibility to NASDAQ to use different Numerical
Guidelines or Reference Prices in various ``Unusual Circumstances.''
NASDAQ proposes to replace this paragraph with new language that would
apply to Multi-Stock Events involving twenty or more securities whose
executions occurred within a period of five minutes or less. The
revised paragraph would retain language making clear that during Multi-
Stock Events involving twenty or more securities the number of affected
transactions may be such that immediate finality is necessary to
maintain a fair and orderly market and to protect investors and the
public interest. Accordingly, in such circumstances, decisions made by
NASDAQ in consultation with other markets could not be appealed.
Further, as proposed, in connection with reviews of Multi-Stock Events
involving twenty or more securities, NASDAQ may use a Reference Price
other than consolidated last sale in its review of potentially clearly
erroneous executions. With the exception of those securities under
review that are subject to an individual stock trading pause as
described in proposed paragraph (C)(4), and to ensure consistent
application across market centers when proposed paragraph (C)(2) is
invoked, NASDAQ will promptly coordinate with the other market centers
to determine the appropriate review period, which may be greater than
the period of five minutes or less that triggered application of
proposed paragraph (C)(2), as well as select one or more specific
points in time prior to the transactions in question and use
transaction prices at or immediately prior to the one or more specific
points in time selected as the Reference Price. NASDAQ will nullify as
clearly erroneous all transactions that are at prices equal to or
greater than 30% away from the Reference Price in each affected
security during the review period selected by NASDAQ and other markets
consistent with the proposed paragraph (C)(2).
Because NASDAQ and other market centers are adopting a different
threshold and standards to handle large-scale market events, which
would include events occurring during times of high volatility at the
beginning of regular trading hours, NASDAQ proposes deletion of
paragraph (C)(4) (``Numerical Guidelines Applicable to Volatile Market
Opens'') of the existing rule. NASDAQ believes that this provision is
no longer necessary, and if maintained, could result in extremely high
Numerical Guidelines (up to 90%) in certain circumstances.
Revised Paragraph (C)(4) Related to Individual Stock Trading Pauses
NASDAQ and other primary listing markets for U.S. stocks recently
amended their rules so that they may, from time to time, issue a
trading pause for an individual security if the price of such security
moves 10% or more from a sale in a preceding five-minute period. In
this regard, NASDAQ recently amended its rules to pause trading in an
individual stock when the primary listing market for such stock issues
a trading pause triggered pursuant to Rule 4120(a)(11), as approved.\3\
As described above, NASDAQ is proposing to eliminate existing paragraph
(C)(4) (``Numerical Guidelines Applicable to Volatile Market Opens'').
NASDAQ proposes adopting a rule, numbered as (C)(4) following such
elimination, which will provide for uniform treatment of clearly
erroneous execution reviews in the event transactions occur that result
in the issuance of an individual stock trading pause by the primary
listing market and subsequent transactions that occur before the
trading pause is in effect on NASDAQ. The proposed rule change is
necessary to provide greater certainty of the clearly erroneous
Reference Price for transactions that trigger a trading pause (the
``Trigger Trade'') and subsequent transactions occurring between the
time of the Trigger Trade and the time the trading pause message is
received by NASDAQ from the single plan processor responsible for
consolidation and dissemination of information for the security and put
into effect on NASDAQ, especially under highly volatile and active
market conditions.
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\3\ See Securities Exchange Act Release No. 62252 (June 10,
2010), 75 FR 34186 (June 16, 2010) (SR-NASDAQ-2010-061).
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NASDAQ proposes to revise paragraph (C)(4) of NASDAQ Rule 11890 to
allow NASDAQ to use the price that triggered a trading pause in an
individual stock (the ``Trading Pause Trigger Price'') as the Reference
Price for clearly erroneous execution reviews of a Trigger Trade and
transactions that occur immediately after a Trigger Trade but before a
trading pause is in effect on NASDAQ. As proposed, the phrase
[[Page 36734]]
``Trading Pause Trigger Price'' shall mean the price that triggered a
trading pause in any Securities as defined in NASDAQ Rule 4120(a)(11).
The Trading Pause Trigger Price reflects a price calculated by the
primary listing market over a rolling five-minute period and may differ
from the execution price of a transaction that triggered a trading
pause. NASDAQ will rely on the primary listing market that issued an
individual stock trading pause to determine and communicate the Trading
Pause Trigger Price for such stock. NASDAQ proposes to make clear in
the text that the proposed standards in paragraph (C)(4) apply
regardless of whether the security at issue is part of a Multi-Stock
Event involving five or more securities as described in proposed
paragraphs (C)(1) and (C)(2).
As proposed, the Numerical Guidelines set forth in NASDAQ Rule
11890(C)(1), other than those Numerical Guidelines applicable to Multi-
Stock Events, would apply to reviews of Trigger Trades and subsequent
transactions. Nasdaq proposes to review, on its own motion pursuant to
paragraph (b)(ii) of the Rule, all transactions that trigger a trading
pause and subsequent transactions occurring before the trading pause is
in effect on NASDAQ. NASDAQ has proposed to limit such reviews to
reviews of transactions that executed at a price lower than the Trading
Pause Trigger Price in the event of a price decline and higher than the
Trading Pause Trigger Price in the event of a price rise. Because the
proposed rules for trading pauses would only apply within Regular
Trading Hours,\4\ an execution would be reviewed and nullified as
clearly erroneous if it exceeds the following thresholds:
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\4\ The term ``Regular Trading Hours'' is being renamed from
``Core Session'' in NASDAQ Rule 11890 (a)(2)(B) as the time between
9:30 a.m. and 4 p.m. Eastern Time. According to rules of the primary
listing markets, an individual stock trading pause can be issued
based on a Trigger Trade that occurs at any time between 9:45 a.m.
and 3:35 p.m. Eastern Time. See NASDAQ Rule 4120(a)(11), NYSE Rule
80C, and NYSE Arca Rule 7.11.
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Numerical guidelines (subject
transaction's % difference
Reference price or product from the trading pause trigger
price)
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Greater than $0.00 up to and including 10
$25.00.
Greater than $25.00 up to and including 5
$50.00.
Greater than $50.00.................... 3
Leveraged ETF/ETN securities........... Regular Trading Hours Numerical
Guidelines multiplied by the
leverage multiplier (i.e.,
2x).
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Revisions to Paragraph (b)
NASDAQ to be consistent with other exchanges is eliminating
paragraph (b) and adding new paragraphs (b)(i) and (b)(ii) to separate
the System Disruptions from Own Motion situations. Consistent with
other proposals made in this filing, NASDAQ proposes modifying
paragraph (b)(ii) to eliminate the ability of a Senior Official to
deviate from the Numerical Guidelines contained in the Rule other than
under very limited circumstances set forth in paragraph (C)(3).
New paragraph (b)(i) provides a Senior Official of NASDAQ the
ability on his or her own motion, to review and rule on executions that
result from ``any disruption or a malfunction in the operation of any
electronic communications and trading facilities of NASDAQ, or
extraordinary market conditions or other circumstances in which the
nullification of transactions may be necessary for the maintenance of a
fair and orderly market or the protection of investors and the public
interest exist.''
New paragraph (b)(ii) is similar to existing Rule 11890(b) and
covers other situations where NASDAQ may act on its own motion. Without
modification, the language ``extraordinary market conditions or other
circumstances* * *'' in current Rule 11890(b) would leave NASDAQ with
broad discretion to deviate from the Numerical Guidelines set forth in
paragraph (C)(1). Thus, NASDAQ proposes narrowing the scope of
paragraph (b) so that it only permits NASDAQ to nullify transactions
consistent with that paragraph (including at a lower Numerical
Guideline) if there is a disruption or malfunction in the use of
NASDAQ's system covered by proposed Rule 11890(b)(i).
For the same reason, NASDAQ proposes eliminating the words ``use
or'' from the language in paragraph (b) to make clear that the
provision only applies to a disruption or malfunction of the NASDAQ's
system (and not of an NASDAQ user's systems).
Paragraph (b)(ii) gives a Senior Official of NASDAQ the ability on
his or her own motion to review transactions as potentially clearly
erroneous. Consistent with the goal of achieving more objective and
standard results, NASDAQ proposes deleting language in existing
paragraph (b) that would allow NASDAQ to deviate from the Numerical
Guidelines contained in paragraph (C)(1). In addition, NASDAQ proposes
to make clear that any Senior Official reviewing transactions on his or
her own motion must follow the guidelines set forth in proposed
paragraph (C)(4), if applicable. Accordingly, NASDAQ proposes to modify
paragraph (b)(ii) to state that an officer must rely on paragraphs
(C)(1)-(4) of Rule 11890 when reviewing transactions on his or her own
motion.
Additional Conforming Revisions to Paragraphs (C)(1) and (C)(3)
Based on proposed paragraph (C)(2), NASDAQ has proposed certain
conforming changes to paragraphs (C)(1) and (C)(3) of the existing
Rule, as described below.
Under current NASDAQ Rule 11890, a transaction may be found to be
clearly erroneous only if the price of the transaction to buy (sell)
that is the subject of the complaint is greater than (less than) the
Reference Price by an amount that equals or exceeds the Numerical
Guidelines set forth in paragraph (C)(1) of the Rule. The ``Reference
Price'' is currently defined as ``the consolidated last sale
immediately prior to the execution(s) under review except for in
Unusual Circumstances as described in paragraph (C)(2)'' of NASDAQ Rule
11890. NASDAQ proposes modifying paragraph (C)(1) consistent with the
changes described above such that NASDAQ shall use the consolidated
last sale immediately prior to the execution(s) under review as the
Reference Price except for: (A) Multi-Stock Events involving twenty or
more securities, as described in proposed paragraph (C)(2); (B)
transactions not involving a Multi-Stock Event as described in proposed
paragraph (C)(2) that trigger a trading pause and subsequent
transactions, as described in proposed paragraph (C)(4), in which case
the Reference Price shall be determined in accordance with that
[[Page 36735]]
paragraph (C)(4); and (C) in other circumstances, such as, for example,
relevant news impacting a security or securities, periods of extreme
market volatility, sustained illiquidity, or widespread system issues,
where use of a different Reference Price is necessary for the
maintenance of a fair and orderly market and the protection of
investors and the public interest. NASDAQ also proposes modifying
paragraph (C)(1) to reduce uncertainty as to the applicability of the
Numerical Guidelines, by requiring a finding that an execution was
clearly erroneous if such execution exceeds the Numerical Guidelines,
subject only to the Additional Factors included n paragraph (C)(3).
Moreover, NASDAQ proposes revising the existing description for Multi-
Stock Events that is contained on the Numerical Guidelines chart to
make clear that different Numerical Guidelines apply for Multi-Stock
Events involving five or more, but less than twenty, securities whose
executions occurred within a period of five minutes or less. In
addition, NASDAQ proposes adding to the Numerical Guidelines chart a
row that contains the Numerical Guidelines (30%) for Multi-Stock Events
involving twenty or more securities whose executions occurred within a
period of five minutes or less.
NASDAQ proposes clarifying paragraph (C)(3) to make clear that the
additional factors set forth in that paragraph are not intended to
provide any discretion to an NASDAQ official to deviate from the
guidelines that apply to Multi-Stock Events or to transactions in
securities subject to individual stock trading pauses.
Finally, NASDAQ proposes amending paragraph (c)(1), related to
appeals of clearly erroneous execution decisions by NASDAQ, to preserve
non-appealability of all joint rulings between NASDAQ and one or more
other market centers. NASDAQ believes that certainty and consistency is
critical to reviews of related executions that span multiple market
centers. Accordingly, although NASDAQ has proposed deletion of such
language from existing paragraph (C)(3), NASDAQ proposes adding such
language back in to paragraph (c)(1) to make clear that joint market
rulings are not appealable.
2. Statutory Basis
Approval of the rule change proposed in this submission is
consistent with the requirements of the Act and the rules and
regulations thereunder that are applicable to a national securities
exchange, and, in particular, with the requirements of Section 6(b) of
the Act.\5\ In particular, the proposed change is consistent with
Section 6(b)(5) of the Act,\6\ because it would promote just and
equitable principles of trade, remove impediments to, and perfect the
mechanism of, a free and open market and a national market system, and,
in general, protect investors and the public interest. The proposed
rule change is also designed to support the principles of Section
11A(a)(1)\7\ of the Act in that it seeks to assure fair competition
among brokers and dealers and among exchange markets. The Exchange
believes that the proposed rule meets these requirements in that it
promotes transparency and uniformity across markets concerning reviews
of potentially clearly erroneous executions in various contexts,
including reviews in the context of a Multi-Stock Event involving
twenty or more securities and reviews resulting from a Trigger Trade
and any executions occurring immediately after a Trigger Trade but
before a trading pause is in effect on the Exchange. Further, the
Exchange believes that the proposed changes enhance the objectivity of
decisions made by the Exchange with respect to clearly erroneous
executions.
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\5\ 15 U.S.C. 78f(b).
\6\ 15 U.S.C. 78f(b)(5).
\7\ 15 U.S.C. 78k-1(a)(1).
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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.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
A. By order approve 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 (http://www.sec.gov/rules/sro.shtml); or
Send an e-mail to [email protected]. Please include
File No. SR-NASDAQ-2010-076 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 No. SR-NASDAQ-2010-076. This file
number should be included on the subject line if e-mail is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for 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 such filing also will be available for
inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File No. SR-NASDAQ-2010-076 and should be
submitted on or before July 19, 2010.
[[Page 36736]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\8\
Florence E. Harmon,
Deputy Secretary.
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\8\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2010-15543 Filed 6-25-10; 8:45 am]
BILLING CODE 8010-01-P