Document ID: SEC-2008-1611-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The NASDAQ Stock Market LLC
Posted Date: 2008-11-28T05:00Z

[Federal Register: November 28, 2008 (Volume 73, Number 230)]
[Notices]               
[Page 72551-72554]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28no08-132]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58992; File No. SR-NASDAQ-2008-088]

 
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
Regarding Its Obvious Errors Rule and the Adoption of a Catastrophic 
Error Provision

November 21, 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 November 19, 2008, The NASDAQ Stock Market LLC (``Nasdaq'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared substantially by Nasdaq. 
Nasdaq has designated the proposed rule change as constituting a non-
controversial rule change under Rule 19b-4(f)(6) under the Act,\3\ 
which renders the proposal effective upon filing with the Commission. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 C.F.R. 240.19b-4(f)(6).

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[[Page 72552]]

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Pursuant to the provisions of Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \4\ and Rule 19b-4 thereunder,\5\ The 
NASDAQ Stock Market LLC (``Nasdaq'') is filing with the Securities and 
Exchange Commission (``Commission'') a proposal for the NASDAQ Options 
Market (``NOM'') to modify Chapter V, Section 6 (Obvious Errors) of it 
options rules to: (1) adopt a catastrophic error provision; and (2) 
change the notification period for obvious errors from 15 to 20 
minutes.
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    \4\ 15 U.S.C. 78s(b)(1).
    \5\ 17 CFR 240.19b-4.
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    The text of the proposed rule change is below. Proposed new 
language is in italics; 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://
nasdaqomx.cchwallstreet.com.
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* * * * *

Chapter V Regulation of Trading on NOM

    Sec. 1-5 No change.
    Sec. 6 Obvious Errors.
    (a) Nasdaq shall either nullify a transaction or adjust the 
execution price of a transaction that meets the standards provided in 
this Section.
    (b) Definition of Obvious Error. For purposes of this Section only, 
an Obvious Error will be deemed to have occurred when:
    (i) the execution price of a transaction is higher or lower than 
the Theoretical Price for the series by an amount equal to at least the 
amount shown below:

------------------------------------------------------------------------
                                                                Minimum
                      Theoretical price                          amount
------------------------------------------------------------------------
Below $2.....................................................        .25
$2 to $5.....................................................        .40
Above $5 to $10..............................................        .50
Above $10 to $20.............................................        .80
Above $20....................................................       1.00
------------------------------------------------------------------------

    (ii) the trade resulted in an execution price in a series that was, 
and for five seconds prior to the execution remained, quoted no bid and 
at least one strike price below (for calls) or above (for puts) in the 
same class were quoted no bid at the time of the erroneous execution 
(in which case the trade shall be nullified). For purposes of this 
subparagraph, bids and offers of the parties to the subject trade that 
are in any of the series in the same options class shall not be 
considered.
    (c) Definition of Theoretical Price. For purposes of this Section 
only, the Theoretical Price of an option series is,
    (i) If the series is traded on at least one other options exchange, 
the mid-point of the National Best Bid and Offer (``NBBO''), just prior 
to the transaction; or
    (ii) If there are no quotes for comparison purposes, as determined 
by MarketWatch as defined in Chapter I.
    (d) Obvious Error Procedure. If a party believes that it 
participated in a transaction that was the result of an Obvious Error, 
it must notify MarketWatch via written or electronic complaint within 
[15] 20 minutes of the execution. Absent unusual circumstances, Nasdaq 
will not grant relief under this Section unless notification is made 
within the prescribed periods of time. A designated employee in Nasdaq 
Regulation that is trained in the application of this rule (``Nasdaq 
Official'') shall administer the application of this Section.
    (e) Adjust or Bust. A Nasdaq Official will determine whether there 
was an Obvious Error as defined above. If it is determined that an 
Obvious Error has occurred, MarketWatch shall take one of the actions 
listed below. Upon taking final action, MarketWatch shall promptly 
notify both parties to the trade electronically or via telephone.
    (i) Where each party to the transaction is an Options Participant, 
the execution price of the transaction will be adjusted by the Nasdaq 
Official to the prices provided in subparagraphs (A) and (B) below 
unless both parties agree to adjust the transaction to a different 
price or agree to bust the trade within ten (10) minutes of being 
notified by MarketWatch of the Obvious Error.
    (A) Erroneous buy transactions will be adjusted to their 
Theoretical Price plus $.15 if the Theoretical Price is under $3, or 
plus $.30 if the Theoretical Price is at or above $3.
    (B) Erroneous sell transactions will be adjusted to their 
Theoretical Price minus $.15 if the Theoretical Price is under $3, or 
minus $.30 if the Theoretical Price is at or above $3.
    (ii) Where at least one party to the Obvious Error is not an 
Options Participant, the trade will be nullified unless both parties 
agree to an adjustment price for the transaction within 30 minutes of 
being notified by MarketWatch of the Obvious Error.
    (iii) Trades meeting the Obvious Errors definition in (b)(ii) above 
shall be nullified.
    (iv) Mutual Agreement. The determination as to whether a trade was 
automatically executed at an erroneous price may be made by mutual 
agreement of the affected parties to a particular transaction. A trade 
may be nullified or adjusted on the terms that all parties to a 
particular transaction agree.
    (f) Catastrophic Errors
    (i) Definition. For purposes of this Section only, a Catastrophic 
Error will be deemed to have occurred when the execution price of a 
transaction is higher or lower than the Theoretical Price for the 
series by an amount equal to at least the amount shown below:

------------------------------------------------------------------------
                                                                Minimum
                      Theoretical price                          amount
                                                                  ($)
------------------------------------------------------------------------
Below $2.....................................................          1
$2 to $5.....................................................          2
Above $5 to $10..............................................          5
Above $10 to $50.............................................         10
Above $50 to $100............................................         20
Above $100...................................................         30
------------------------------------------------------------------------

    (ii) Catastrophic Error Procedure. If a party believes that it 
participated in a transaction that qualifies as a Catastrophic Error, 
it must notify MarketWatch via a written or electronic complaint by 
8:30 am ET, on the first trading day following the execution. For 
transactions in an expiring options series that take place on an 
expiration day, a party must notify MarketWatch by 5:00 pm ET that same 
day.
    Nasdaq will not grant relief under this Section unless notification 
is made within the prescribed periods of time. Relief will not be 
granted if MarketWatch has previously rendered a decision with respect 
to the transaction in question pursuant to this Section. A Nasdaq 
Official, as defined in paragraph (d) above, shall administer the 
application of this Section.
    (iii) Adjust or Bust. A Nasdaq Official will determine whether 
there was a Catastrophic Error as defined above. If it is determined 
that a Catastrophic Error has occurred, whether or not each party to 
the transaction is an Options Participant, MarketWatch shall adjust the 
execution price of the transaction, unless both parties agree to adjust 
the transaction to a different price, to the theoretical price (i) plus 
the adjustment value provided below for erroneous buy transactions, and 
(ii) minus the adjustment value provided for erroneous sell 
transactions:

------------------------------------------------------------------------
                                                                Minimum
                      Theoretical price                          amount
                                                                  ($)
------------------------------------------------------------------------
Below $2.....................................................          1
$2 to $5.....................................................          2
Above $5 to $10..............................................          3
Above $10 to $50.............................................          5
Above $50 to $100............................................          7
Above $100...................................................         10
------------------------------------------------------------------------

[[Page 72553]]

Upon taking final action, MarketWatch shall promptly notify both 
parties to the trade electronically or via telephone.
    (g) Review by the Market Operations Review Committee (``MORC'')
    (i) A party to a transaction affected by a decision made under this 
section may appeal that decision to the MORC. An appeal must be made in 
writing, and must be received by Nasdaq within thirty (30) minutes 
after the person making the appeal is given the notification of the 
determination being appealed. The MORC may review any decision 
appealed, including whether a complaint was timely, whether an Obvious 
Error or Catastrophic Error occurred, whether the correct Theoretical 
Price was used, and whether an adjustment was made at the correct 
price.
    (ii) A MORC panel will be comprised minimally of representatives of 
one (1) member engaged in Market Making and two (2) industry 
representatives not engaged in Market Making. At no time should a 
review panel have more than 50% members engaged in Market Making.
    (iii) The MORC, pursuant to the standards set forth in this rule, 
shall affirm, modify, or reverse the determination.
    (iv) The decision of the MORC pursuant to an appeal, or a 
determination by a Nasdaq Official that is not appealed, shall be final 
and binding upon all parties and shall constitute final Nasdaq action 
on the matter in issue. Any determination by a Nasdaq Official or the 
MORC shall be rendered without prejudice as to the rights of the 
parties to the transaction to submit their dispute to arbitration.
    (v) The party initiating the appeal shall be assessed a $500.00 fee 
if the MORC upholds the decision of the Nasdaq Official. In addition, 
in instances where Nasdaq, on behalf of an Options Participant, 
requests a determination by another market center that a transaction is 
clearly erroneous, Nasdaq will pass any resulting charges through to 
the relevant Options Participant.
    Sec. 7-9 No change.
* * * * *

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 proposing to amend NOM's Obvious Errors Rule to adopt a 
catastrophic error provision to address egregious trading errors and 
thereby help NOM participants better manage their risk. The current 
rule governing obvious errors is being amended to define a catastrophic 
error and establish procedures for granting relief from trades that 
result from a Catastrophic Error, as defined therein. Specifically, 
similar to NOM's existing obvious error provision, the proposal defines 
a Catastrophic Error by comparing the execution price to the 
Theoretical Price; \7\ if they differ by the amount indicated in the 
chart in proposed new paragraph (f), the procedures for Catastrophic 
Errors in that paragraph can be invoked. Accordingly, the proposal sets 
forth objective criteria for determining when a catastrophic error has 
occurred. The proposed amounts for catastrophic errors are 
significantly higher than the amounts for obvious errors, which Nasdaq 
believes should limit the application of the catastrophic error 
provision to errors involving significant losses.
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    \7\ The current definition of Theoretical Price in paragraph (c) 
continues to apply.
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    If a party believes that it participated in a transaction that 
qualifies as a Catastrophic Error, it must notify MarketWatch via a 
written or electronic complaint by 8:30 a.m. ET, on the first trading 
day following the execution. For transactions in an expiring options 
series that take place on an expiration day, a party member must notify 
MarketWatch by 5 p.m. ET that same day. This is similar to the current 
obvious error rule, except the timeframes are increased to reflect the 
egregious nature of a catastrophic error; the proposed timeframes are 
the same as those of other exchanges.\8\
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    \8\ See e.g., ISE Rule 720(d)(1) and PHLX Rule 1092(f)(i).
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    A Nasdaq Official will determine whether there was a Catastrophic 
Error as defined above. If it is determined that a Catastrophic Error 
has occurred, whether or not each party to the transaction is an 
Options Participant, MarketWatch shall adjust the execution price of 
the transaction, unless both parties agree to adjust the transaction to 
a different price, to a price specified in the rule, which is identical 
to the rules of the other exchanges.\9\ The adjustment value is 
significantly higher for catastrophic errors than for obvious errors, 
in light of the egregious nature of the error.
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    \9\ See e.g., ISE Rule 720(d)(3) and PHLX Rule 1092(f)(iii).
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    Under the proposal, relief will not be granted if MarketWatch has 
previously rendered a decision with respect to the transaction in 
question pursuant to this Section. Catastrophic error decisions are 
appealable to the Market Operations Review Committee (``MORC'') 
pursuant to renumbered paragraph (g), just like obvious error 
decisions. Nasdaq believes that the proposal establishes a specific and 
objective process for catastrophic error handling.
    Lastly, Nasdaq proposes to change to notification period for 
obvious errors (as opposed to the proposed new catastrophic errors) 
from 15 to 20 minutes in order to afford participants additional time 
to enter a complaint under the obvious error procedure. The 20-minute 
notification period is the same as certain other options exchanges.\10\
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    \10\ See PHLX Rule 1092(e)(i) respecting member organizations 
entering orders from off the floor (the notification period for 
specialists and Registered Options Traders remains 15 minutes); see 
also ISE Rule 720(b)(1) respecting Electronic Access Members (market 
makers have five minutes) and similar provisions in NYSE Arca Rule 
6.87(a)(3)(A) and BSE Section 20(d)(i) [sic].
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2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\11\ in general, and with 
Section 6(b)(5) of the Act,\12\ in particular, in that it is designed 
to prevent fraudulent and manipulative acts and practices, 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, because it will allow a longer opportunity to seek 
relief from errors that result in large losses.
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    \11\ 15 U.S.C. 78f.
    \12\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

[[Page 72554]]

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. However, 
Nasdaq received one e-mail in support of the extension of the 
notification period for obvious errors to 20 minutes.

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 from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \13\ and Rule 19b-
4(f)(6) thereunder.\14\
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6). In addition, 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. 
Nasdaq has satisfied this requirement.
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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.
    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \15\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6) \16\ permits the Commission to 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. Nasdaq requests that 
the Commission waive the 30-day operative delay to immediately offer 
market participants on Nasdaq the same potential for relief that is 
available at other options exchanges for catastrophic errors. The 
Exchange argued that the proposed changes should serve to help market 
participants seek relief from egregious errors and better manage their 
risk. The Commission believes that waiving the 30-day operative delay 
\17\ is consistent with the protection of investors and the public 
interest. Given that the Exchange's proposed rule change is 
substantially similar to the rules of other exchanges previously 
approved by the Commission, the proposal does not appear to present any 
novel regulatory issues. Therefore, the Commission designates the 
proposal operative upon filing.
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    \15\ 17 CFR 240.19b-4(f)(6).
    \16\ 17 CFR 240.19b-4(f)(6).
    \17\ For 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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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-2008-088 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2008-088. 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 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 publicly available. All 
submissions should refer to File Number SR-NASDAQ-2008-088 and should 
be submitted on or before December 19, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-28219 Filed 11-26-08; 8:45 am]

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