Document ID: SEC-2008-0470-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2008-03-26T04:00Z

[Federal Register: March 26, 2008 (Volume 73, Number 59)]
[Notices]               
[Page 16084-16086]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26mr08-133]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57534; File No. SR-NASDAQ-2008-015]

 
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change, 
and Amendment No. 1 Thereto, To Modify Fees Associated With Proceedings 
Under Rule 11890

March 20, 2008.
    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 February 29, 2008, The NASDAQ Stock Market LLC (``Nasdaq'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been substantially prepared by Nasdaq. On March 18, 2008, 
Nasdaq submitted Amendment No. 1 to the proposed rule change.\3\ Nasdaq 
filed the proposal pursuant to Section 19(b)(3)(A)(ii) of the Act \4\ 
and Rule 19b-4(f)(2) \5\ thereunder, as establishing or changing a due, 
fee, or other charges applicable to a member, which renders the 
proposed rule change effective upon filing with the Commission. 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.
    \3\ In Amendment No. 1, the Exchange made clarifying changes to 
the proposed rule text and the purpose section of the filing.
    \4\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \5\ 17 CFR 240.19b-4(f)(2).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to modify fees associated with proceedings under 
Rule 11890. Nasdaq will implement this rule change on March 3, 2008.
    The text of the proposed rule change is below. Proposed new 
language is italicized; proposed deletions are in brackets.\6\
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    \6\ Changes are marked to the rule text that appears in the 
electronic Nasdaq Manual found at http://nasdaq.complinet.com.
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11890. Clearly Erroneous Transactions
    (a)-(b) No change.
    (c) Review by the Market Operations Review Committee (``MORC'')
    (1)-(3) No change.
    [(4) The party initiating the appeal shall be assessed a $500.00 
fee if the MORC upholds the decision of the Nasdaq officer. In 
addition, in instances where Nasdaq, on behalf of a member, requests a 
determination by another market center that a transaction is clearly 
erroneous, Nasdaq will pass any resulting charges through to the 
relevant member.]
    (d) No change.
    (e) Fees
    (1) Filing Fees
    No fee shall be assessed to a member for filing two or fewer 
unsuccessful clearly erroneous complaints pursuant to paragraph (a)(2) 
during a calendar month. A member shall be assessed a fee of $250.00 
for each additional unsuccessful complaint filed thereafter during the 
calendar month. An unsuccessful complaint is one in which Nasdaq does 
not break any of the trades included in the complaint. Each security 
filed on is considered a separate complaint. In cases where the member 
files on multiple securities at the same time, Nasdaq calculates the 
fee separately for each security depending upon whether Nasdaq breaks 
any trades filed on by the member in that security. Adjustments or 
voluntary breaks negotiated by Nasdaq to trades executed at prices that 
meet the percentage thresholds in IM-11890-4 count as breaks by Nasdaq 
for purposes of this paragraph. A member is defined by each unique 
broker Web CRD Number. All MPIDs associated with that Web CRD Number 
shall be included when calculating the number of unsuccessful clearly 
erroneous complaints for that member during the calendar month. No fee 
pursuant to this paragraph (e)(1) shall be assessed for a complaint 
that is (A) successful, where the final decision by Nasdaq (including 
after appeal, if any) is to break at least one of the trades filed on 
by the member, (B) not timely filed under the parameters in paragraph 
(a)(2)(A), (C) withdrawn by the complainant within five (5) minutes of 
filing and before Nasdaq has performed any substantial work on the 
complaint, or (D) adjudicated by Nasdaq on its own motion under Rule 
11890(b).
    (2) Appeal Fees
    The party initiating an appeal shall be assessed a $500.00 fee if 
the MORC upholds the decision of the Nasdaq officer.
    (3) Fees Charged By Another Market Center
    In instances where Nasdaq, on behalf of a member, requests a 
determination by another market center that a transaction is clearly 
erroneous, Nasdaq will pass any resulting charges through to the 
relevant member.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, Nasdaq included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. Nasdaq has prepared summaries, set forth in Sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Nasdaq is amending Rule 11890, which covers the breaking of trades 
determined to be clearly erroneous, to add a new Rule 11890(e) that 
would consolidate Nasdaq's existing appeal fee, without substantive 
change, with a new fee of $250.00 for the filing of certain 
unsuccessful clearly erroneous adjudication complaints.
    Self-regulatory organizations like Nasdaq have authority to 
adjudicate trade disputes and break trades in appropriate circumstances 
to maintain a fair and orderly market. This authority is codified in 
Nasdaq Rule 11890. Nasdaq believes that this authority provides an 
important protection to the market by preventing trading errors and 
system problems from distorting the price discovery process. Rule 11890 
also provides a number of procedural steps intended to protect the 
integrity of the adjudicatory process.
    While these steps are a necessary part of the process, they require 
significant staff time to process each complaint. This benefits all 
market participants, including Nasdaq members. Despite this, Nasdaq 
historically has not charged members for this process.
    The costs to Nasdaq of providing this service to members have 
increased in recent years as the number of

[[Page 16085]]

complaints has increased. In 2005, 2006 and 2007, Nasdaq processed 841, 
3,859 and 5,676 complaints, respectively. In addition, the size and 
complexity of trading events have increased. There has been an increase 
in the number of large events (defined as 8 or more contraparties), 
from 81 such filings in 2005 to 394 in 2007. There also has been a 
significant increase in the number of complaints involving trades 
routed to or from other market centers, further increasing the 
complexity of processing filings. Discussions with other electronic 
market centers suggest that these markets also are receiving 
significantly more trade break requests.
    In order to increase transparency in the adjudication process, 
Nasdaq provided guidance in IM-11890-4 on which trades are likely to be 
considered clearly erroneous. This guidance focused on numerical 
thresholds below which trades would likely stand \7\ and above which 
trades would likely be broken.\8\ Despite this guidance, Nasdaq 
continues to receive a significant number of filings that do not meet 
the thresholds or have material news that seemed to affect the price of 
the security.\9\
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    \7\ As provided in the guidance, the circumstances in which 
trades below the thresholds could be broken are extremely limited. 
Trades in a stock subject to an initial public offering that execute 
prior to the opening of the offering are an example of trades that 
would be broken at prices below the threshold.
    \8\ The guidance also included factors Nasdaq would consider in 
deviating from these numerical thresholds, including material news, 
trading activity and reasons for the error.
    \9\ Nasdaq received 1,478 timely clearly erroneous complaints 
during 2007 where it declined to break any trades because the trades 
did not meet the guidance or parameters in the rule. This represents 
approximately 26% of the total complaints received that year.
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    Nasdaq considered the amount of effort incurred to process 
complaints in calculating the $250 filing fee. Rule 11890 outlines a 
number of procedural steps for processing complaints. Once MarketWatch 
receives a complaint, an analyst must complete the following steps:\10\
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    \10\ In certain circumstances where Nasdaq is processing a large 
number of complaints, the call out process may be streamlined in 
order to provide rapid decisions and market certainty as to which 
trades will stand.
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     Review the filing for completeness and call the filer to 
confirm the information, which must often be updated or revised;
     Confirm the trades at issue and the events surrounding the 
error;
     Call each of the contraparties and see if they are 
interested in an adjustment of the terms, or a mutual break of, the 
trade(s), which may require additional rounds of calls to relay the 
offer or further negotiate the settlement;
     Identify portions of the disputed trades that were routed 
to other markets and requesting adjudication by those markets;
     Present the information to the Nasdaq Officer for a 
decision;
     Notify the filer and contraparties of Nasdaq's decision on 
the complaint; and
     Assemble the required documentation for Nasdaq's records.

Nasdaq estimates that on average it takes 20-25 minutes to process a 
small complaint and may take up to an hour to process larger events 
under Rule 11890(a). Nasdaq is required to go through these steps even 
in cases where the guidance in IM-11890-4 makes it clear that all 
trades will stand.
    Under Nasdaq's proposal, the filing fee would only apply to 
unsuccessful clearly erroneous complaints, where Nasdaq does not break 
any of the trades filed on by the member. Adjustments or voluntary 
breaks negotiated by Nasdaq to trades executed at prices that meet the 
percentage thresholds in IM-11890-4 count as a break by Nasdaq for 
purposes of determining whether a complaint is successful. The fee 
would not apply to the first two unsuccessful complaints filed by the 
member during a calendar month. The $250 fee would only apply to any 
additional unsuccessful complaints filed by the member during that 
month. The fee is calculated on a per-security basis so that each 
security filed on is considered a separate complaint, even if there are 
multiple securities included in the firm's clearly erroneous filing. 
For example, if a firm files on trades in three securities and Nasdaq 
breaks trades in one of the three, Nasdaq would consider the firm to 
have filed two unsuccessful complaints and one successful complaint. 
Only the two unsuccessful complaints would be counted for purposes of 
the fee. The fee would apply to final decisions of Nasdaq. Therefore, 
if the Nasdaq officer refused to break trades and the Market Operations 
Review Committee (``MORC'') overturned the officer and broke at least 
some of the trades, no fee would be due with respect to that security 
and the complaint would not count towards the unsuccessful complaint 
calculation.\11\
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    \11\ The MORC is composed of independent persons who are not 
employees of Nasdaq and who have no economic interest in the trades 
or the assessment of the fee.
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    In calculating how many unsuccessful complaints a member had filed 
during the month, Nasdaq will look to the member's broker Web CRD 
Number.\12\ All Market Participant Identifiers (``MPIDs'') associated 
with that Web CRD Number shall be included in the calculation for that 
member. This removes any incentive for firms to request additional 
MPIDs solely to avoid paying the fee.
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    \12\ The Financial Industry Regulatory Authority (``FINRA'') 
maintains the Central Registration Depository (``CRD''). This data 
base includes information on more than half a million registered 
securities employees of member firms through the automated Web CRD 
system. Each member receives a unique Web CRD Number.
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    Nasdaq considered whether each complaint should be subject to the 
filing fee in light of the administrative costs associated with both 
successful and unsuccessful filings, but concluded that the fee should 
be limited to unsuccessful filers. Nasdaq believes that this 
application encourages appropriate use of clearly erroneous complaints 
by assessing costs on firms who do not properly consider the merits of 
their request. Instead of filing on any trading error, the filing fee 
may incentivize firms to consider carefully whether:
     The trades meet the thresholds set forth in IM-11890-4;
     the amount of money at risk merits filing a complaint;\13\ 
and
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    \13\ During December 2007, Nasdaq received 48 complaints for 
fewer than 100 shares, including six filings for fewer than 5 
shares.
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     an investment in system safeguards that might reduce 
trading errors.

Charging firms only for unsuccessful complaints is consistent with 
Nasdaq's existing appeal fee, which is assessed only on unsuccessful 
appeals. In addition, Nasdaq believes that exempting two unsuccessful 
complaints from the fee will assist members in close calls where news 
or other factors might result in Nasdaq not breaking trades that 
otherwise meet the numerical thresholds for trade breaks. Based on an 
analysis of complaint filings in December 2007, 13 members had more 
than two unsuccessful erroneous complaints.\14\
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    \14\ Nasdaq received complaints from an average of 98 members a 
month during 2007. Accordingly, a comparatively small number of 
members would be affected by the filing fee.
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    The proposed filing fee would not be assessed for a complaint that 
is:
     Successful, in that Nasdaq breaks at least one of the 
trades on which the member filed;
     filed late under the time parameters in Rule 
11890(a)(2)(A) and therefore rejected;
     withdrawn by the complainant within five (5) minutes of 
filing and before Nasdaq has performed any substantial work on the 
complaint; or

[[Page 16086]]

     adjudicated by Nasdaq under its motion pursuant to Rule 
11890(b) as part of a large market event.
    While Nasdaq may incur some cost in reviewing complaints for 
timeliness and prior to withdrawal, this exception will allow firms to 
withdraw or correct mistaken complaints without such filings counting 
towards their monthly allotment. While Nasdaq incurs considerable 
expense in processing clearly erroneous events under Rule 11890(b), 
such large systemic events often impact multiple filers and may not 
easily be billed to a particular party. Therefore, Nasdaq will continue 
to absorb costs related to Rule 11890(b) adjudications. Any filer with 
trades included in such events will not be charged and the filing will 
not count towards calculation of a member's unsuccessful complaints.
    Finally, the proposal reorganizes Rule 11890 to consolidate the 
fee-related provisions in one section, Rule 11890(e), titled ``Clearly 
Erroneous Fees.'' Nasdaq believes this will make it easier for readers 
to locate these provisions in the rule. No substantive change has been 
made to the existing fee for appeal of clearly erroneous decisions or 
the provisions enabling Nasdaq to pass through to members charges it is 
assessed by other markets for requesting erroneous review by that venue 
on behalf of members.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\15\ in general, and with 
Section 6(b)(4) of the Act,\16\ in particular, in that it provides for 
the equitable allocation of reasonable dues, fees, and other charges 
among its members and issuers and other persons using any facility or 
system which Nasdaq operates or controls. Nasdaq believes that the fees 
will be reasonably allocated to members that file unsuccessful 
complaints under Rule 11890, thereby allowing Nasdaq to recoup a 
portion of the costs associated with filings that lack merit.
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    \15\ 15 U.S.C. 78f.
    \16\ 15 U.S.C. 78f(b)(4).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing proposed rule change has become effective upon filing 
with the Commission pursuant to Section 19(b)(3)(A)(ii) of the Act \17\ 
and Rule 19b-4(f)(2) \18\ thereunder, because it establishes or changes 
a due, fee, or other charge applicable only to a member.
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    \17\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \18\ 17 CFR 240.19b-4(f)(2).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.\19\
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    \19\ See 15 U.S.C. 78s(b)(3)(C). For purposes of calculating the 
60-day period within which the Commission may summarily abrogate the 
proposed rule change under Section 19(b)(3)(C) of the Act, the 
Commission considers the period to commence on March 18, 2008, the 
date on which Nasdaq submitted Amendment No. 1.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2008-015 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2008-015. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/
rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Room, 100 F Street, 
NE., Washington, DC 20549, on official business days between the hours 
of 10 a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of Nasdaq. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NASDAQ-2008-015 and should 
be submitted on or before April 16, 2008.
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    \20\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-6127 Filed 3-25-08; 8:45 am]

BILLING CODE 8011-01-P