Document ID: SEC-2009-0207-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2009-02-13T05:00Z

[Federal Register: February 13, 2009 (Volume 74, Number 29)]
[Notices]               
[Page 7276-7278]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13fe09-89]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59370; File No. SR-NASDAQ-2008-101]

 
 Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Order Approving Proposed Rule Change To Adopt a Policy Relating to Its 
Treatment of Trade Reports That It Determines To Be Inconsistent With 
the Prevailing Market Retroactive to September 1, 2008

February 6, 2009.

I. Introduction

    On December 19, 2008, The NASDAQ Stock Market LLC (``Nasdaq'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
adopt a policy relating to its treatment of trade reports that it 
determines to be inconsistent with the prevailing market and to make 
such policy retroactive to September 1, 2008. The proposed rule change 
was published for comment in the Federal Register on January 2, 
2009.\3\ The Commission received no comments on the proposal. This 
order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 59149 (December 23, 
2008), 74 FR 155.
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II. Description of the Proposal

    Trades in listed securities occasionally occur at prices that 
deviate from prevailing market prices and those trades sometimes 
establish a high, low or last sale price for a security that does not 
reflect the true market for the security. Nasdaq seeks to address such 
instances of ``aberrant'' trades by adopting a policy that is 
substantially similar to a policy of the New York Stock Exchange 
(``NYSE'').\4\ On December 19, 2008, Nasdaq also filed a proposed rule 
change, which it designated as eligible for immediate effectiveness 
pursuant to Rule 19b-4(f)(6) under the Act,\5\ to adopt a policy 
relating to Nasdaq's treatment of trade reports that it determines to 
be inconsistent with the prevailing market.\6\ The policy proposed in 
the instant rule change is identical to the policy set forth in Release 
No. 34-59151, except that the instant proposal is retroactive to 
September 1, 2008.
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    \4\ See Securities Exchange Act Release No. 59064 (December 5, 
2008), 73 FR 76082 (December 15, 2008) (order approving SR-NYSE-
2008-91).
    \5\ 17 CFR 240.19b-4(f)(6).
    \6\ See Securities Exchange Act Release No. 59151 (December 23, 
2008), 74 FR 158 (January 2, 2009) (SR-NASDAQ-2008-100) (``Release 
No. 34-59151'').
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    The Exchange proposes that its policy in this regard shall be to 
contact the listing exchange (if Nasdaq is not the listing exchange) 
and other markets (in the case of executions that take place across 
multiple markets) to determine if any erroneous trade reports were 
filed. If Nasdaq determines the trade price of a trade through Nasdaq 
is inconsistent with the prevailing market for the security after 
considering the factors outlined herein, the Exchange may make the 
determination to append an indicator (an ``Aberrant Report Indicator'') 
to the trade.

[[Page 7277]]

    Nasdaq trades stocks listed on its own market and trades on an 
unlisted trading privilege (``UTP'') basis securities listed on other 
markets. Nasdaq operates the securities information processor 
(``SIP''), which processes trade and quote information for the Nasdaq 
UTP Plan (``Nasdaq SIP''). The Securities Industry Automation 
Corporation (``SIAC'') serves as the securities information processor 
for the CTA Plan and processes trade and quote information for trades 
in non-Nasdaq listed securities. The Nasdaq SIP and the Consolidated 
Tape Association (``CTA'') offer each participant in the Nasdaq UTP and 
CTA Plan the discretion to append to the Aberrant Report Indicator to a 
trade report to indicate that the market believes that the trade price 
in a trade executed on that market does not accurately reflect the 
prevailing market for the security.\7\
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    \7\ The CTA recommends that data recipients should exclude the 
price of any trade to which the Aberrant Report Indicator has been 
appended from any calculation of the high, low and last sale prices 
for the security.
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    During the course of surveillance by the Exchange or as a result of 
notification by another market, listed company or market participant, 
the Exchange may become aware of trade prices that do not accurately 
reflect the prevailing market for a security. In such a case, the 
Exchange proposes to adopt as policies that it:
    i. May determine to append an Aberrant Report Indicator to any 
trade report with respect to any trade executed on the Exchange that 
the Exchange determines to be inconsistent with the prevailing market; 
and
    ii. Shall discourage vendors and other data recipients from using 
prices to which the Exchange has appended the Aberrant Report Indicator 
in any calculation of the high, low or last sale price of a security.
    Nasdaq believes that retroactive application of its aberrant trade 
policy is warranted because of unprecedented market volatility and 
trade reporting issues that all market centers experienced beginning in 
September 2008. Therefore, the Exchange believes that it should be 
permitted to act retroactively to append the Aberrant Report Indicator 
to trades that do not accurately reflect the prevailing market for a 
security commencing as of September 1, 2008.
    The Exchange will urge vendors to disclose the exclusion from high, 
low or last sale price data of any trades with an Aberrant Report 
Indicator and exclude them from high, low or last sale price 
information that they disseminate and to provide to data users an 
explanation of the parameters used in the Exchange's aberrant trade 
policy. Upon initial adoption of the Aberrant Report Indicator, the 
Exchange will contact all of its listed companies via a Head Trader 
Alert to explain the aberrant trade policy and that the underlying 
trades remain valid and will clear. In the event the trade relates to a 
Nasdaq-listed security, Nasdaq's Market Intelligence Desk will inform 
the affected listed company that these are still valid trades in that 
they were executed and not unwound as in the case of a clearly 
erroneous trade.
    While SIAC, on behalf of the CTA Plan, and the Nasdaq SIP, on 
behalf of the Nasdaq UTP Plan, disseminate their own calculations of 
high, low and last sale prices, vendors and other data recipients--and 
not the Exchange--frequently determine their own methodology by which 
they wish to calculate high, low and last sale prices. Therefore, the 
Exchange represents that it will endeavor to explain to those vendors 
and other data recipients the deleterious effects that can result from 
including in the calculations a trade to which the Aberrant Report 
Indicator has been appended.
    In making the determination to append the Aberrant Report 
Indicator, the Exchange will consider all factors related to a trade, 
including, but not limited to, the following:
     Material news released for the security;
     Suspicious trading activity;
     System malfunctions or disruptions;
     Locked or crossed markets;
     A recent trading halt or resumption of trading in the 
security;
     Whether the security is in its initial public offering;
     Volume and volatility for the security;
     Whether the trade price represents a 52-week high or low 
for the security;
     Whether the trade price deviates significantly from recent 
trading patterns in the security;
     Whether the trade price reflects a stock-split, 
reorganization or other corporate action;
     The validity of consolidated tape trades and quotes in 
comparison to national best bids and offers; and
     The general volatility of market conditions.
    In determining whether trade prices are inconsistent with the 
prevailing market, the Exchange proposes that its policy shall be to 
follow the following general guidelines: The Exchange will review 
whether a trade price does not reflect the prevailing market for a 
security if the trade occurs during regular trading hours (i.e., 9:30 
a.m. to 4 p.m.) and occurs at a price that deviates from the 
``Reference Price'' by an amount that meets or exceeds the following 
thresholds:

------------------------------------------------------------------------
                                                             Numerical
                       Trade price                           threshold
                                                             (percent)
------------------------------------------------------------------------
Between $0 and $15.00...................................               7
Between $15.01 and $50.00...............................               5
In excess of $50.00.....................................               3
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    The ``Reference Price'' refers to (a) if the primary market for the 
security is open at the time of the trade, the national best bid or 
offer for the security, or (b) if the primary market for the security 
is not open at the time of the trade, the first executable quote or 
print for the security on the primary market after execution of the 
trade in question. However, if the circumstances suggest that a 
different Reference Price would be more appropriate, the Exchange will 
use the different Reference Price. For instance, if the national best 
bid and offer for the security are so wide apart as to fail to reflect 
the market for the security, the Exchange might use as the Reference 
Price a trade price or best bid or offer that was available prior to 
the trade in question.
    If Nasdaq determines that a trade price does not reflect the 
prevailing market for a security and the trade represented the last 
sale of the security on the Exchange during a trading session, the 
Exchange may also determine to remove that trade's designation as the 
last sale and the preceding last sale eligible trade would become the 
new last sale. Nasdaq may do so either on the day of the trade or at a 
later date, so as to provide reasonable time for the Exchange to 
conduct due diligence regarding the trade, including the consideration 
of input from markets and other market participants.
    The Exchange advises that it proposes to use the Aberrant Report 
Indicator in accordance with the guidelines set forth above and that it 
may apply the Aberrant Report Indicator on a retroactive basis 
commencing September 1, 2008.

III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange 
and, in particular,

[[Page 7278]]

with Section 6(b) of the Act \8\ and the rules and regulations 
thereunder. Specifically, the Commission finds that the proposed rule 
change is consistent with Section 6(b)(5) of the Act \9\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, 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, to protect investors and the public 
interest, and are not designed to permit unfair discrimination between 
customers, issuers, brokers or dealers.\10\
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ In approving this proposed rule change, 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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    The Commission believes that the Nasdaq's proposal to append an 
Aberrant Report Indicator to certain trade reports is a reasonable 
means to alert investors and others that the Nasdaq believes that the 
trade price for a trade executed in its market does not accurately 
reflect the prevailing market for the security. In addition, the 
Commission notes that Nasdaq will use objective numerical thresholds in 
determining whether a trade report is eligible to have an Aberrant 
Trade Indicator appended to it. The Commission further notes that the 
Nasdaq's appending the Aberrant Trade Indicator to a trade report has 
no effect on the validity of the underlying trade. The Commission 
previously found a similar proposal by the NYSE to be consistent with 
the Act.\11\ Finally, the Commission notes that the retroactive 
application of this proposal to September 1, 2008 is substantially 
similar to the retroactive period approved for the NYSE.\12\
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    \11\ See supra note 4.
    \12\ Id.
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    For the reasons set forth above, the Commission finds that the 
proposed rule change is consistent with the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-NASDAQ-2008-101) be, and 
hereby is, approved.
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    \13\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E9-3095 Filed 2-12-09; 8:45 am]

BILLING CODE 8011-01-P