Tuesday, September 29, 2009

Equity Regulatory Alert #2009 - 19
NASDAQ OMX Modifies Rules to Identify Clearly Erroneous Filings

***Please show this to your firm’s Compliance Officer***

What is changing?

Effective Monday, October 5, 2009, NASDAQ OMX^SM will modify its clearly erroneous process for The NASDAQ Stock Market^® and NASDAQ OMX BX^SM (BX^SM) with the following changes:

• Revised timing parameters for submitting complaints and appeals of decisions to be considered for clearly erroneous filings
• Revised required information for all eligible filings
• Revised numerical break thresholds and reference price
• New numerical break thresholds applicable to Volatile Market Opens
• Revised notification of counterparties and communications during periods of high volume of clearly erroneous requests

What is the new filing deadline?

Effective Monday, October 5, 2009, NASDAQ OMX will revise the timeframe parameters associated with submitting a complaint or appeal for a clearly erroneous filing decision to NASDAQ MarketWatch:

• All regular filings must be received within 30 minutes of the execution timestamp.
• In the case of an “Outlier Filing,” all filings must be received within 60 minutes of the execution timestamp.
• All appeals to clearly erroneous decisions must be received within 30 minutes after the notification of the determination being appealed.

What does NASDAQ OMX require in a clearly erroneous filing?

In order to be considered for review, NASDAQ OMX requires the following information to be included with the filing:

• Time of the transaction(s)
• Security symbol(s)
• Number of shares
• Price(s)
• Side (Bought, Sold or Both)
• Factual basis for believing that the trade is clearly erroneous

The assertion by a firm that a mistake was made in entering an order or a quote, or that the firm failed to pay attention to or update a quote, may not be sufficient enough to determine that a transaction was clearly erroneous. Additionally, the representation that a factual error was made in entering an order or quote must be verifiable if required to do so by NASDAQ OMX or the Financial Industry Regulatory Authority^TM (FINRA^TM).

How are clearly erroneous transactions identified?

NASDAQ OMX generally uses the Numerical Threshold of a trade when determining whether a transaction is clearly erroneous. A transaction executed 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 below. The execution time of the transaction under review determines whether the guidance threshold is Core Session or Opening and Late Trading Session (which occurs before and after the Core Session).

NASDAQ OMX does not normally break trades that are between the Reference Price and up to but not including the Numerical Threshold. Refer to the chart below for more details:

It may also be necessary to use a higher Numerical Guideline if, after market participants have been alerted to the existence of erroneous activity, the price of the security returns toward its prior trading range but continues to trade beyond the price at which trades would normally be broken. NASDAQ OMX also may use a different Reference Price and/or higher Numerical Guideline in events that involve other markets in an effort to coordinate a Reference Price and/or Numerical Guideline that is consistent across markets. In order to achieve consistent results across markets, when a ruling is made in conjunction with another market center, it may be determined that the number of affected transactions is such that immediate finality is necessary to maintain a fair and orderly market and to protect investors and the public interest.

A NASDAQ OMX official may also consider additional factors to determine whether an execution is clearly erroneous, including but not limited to system malfunctions or disruptions, volume and volatility for the security, derivative securities products that correspond to greater than 100% in the direction of a tracking index, news released for the security, whether trading in the security was recently halted/resumed, whether the security is an initial public offering (IPO), whether the security was subject to a stock-split, reorganization, or other corporate action, overall market conditions, Opening and Late Session executions, validity of the consolidated tapes trades and quotes, primary market indications, and executions inconsistent with the trading pattern in the stock. Each additional factor shall be considered with a view toward maintaining a fair and orderly market and the protection of investors and the public interest.

What are the Numerical Guidelines during a Volatile Market Open?

During a Volatile Market Open, NASDAQ OMX may expand the Numerical Guidelines applicable to transactions occurring between 9:30 a.m. and 10:00 a.m.* based on the disseminated value of the S & P 500 Futures at 9:15 a.m.:

• When the S & P 500 Futures are up or down 3%, or up to but not including 5% at 9:15 a.m., the Numerical Guidelines (calculated pursuant to Rule 11890 (C)(1)) are doubled for executions occurring between 9:30 a.m. and 10:00 a.m.
• When the S & P 500 Futures are up or down 5% or greater at 9:15 a.m., the Numerical Guidelines are tripled for executions occurring between 9:30 a.m. and 10:00 am.
  
  *(All Times Eastern)

How are Reference Prices determined?

The Reference Price will be equal to the Consolidated Last Sale immediately prior to the execution(s) under review except for in unusual circumstances, which may include periods of extreme market volatility, sustained illiquidity or widespread system issues. NASDAQ OMX may, with its discretion and with a view toward maintaining a fair and orderly market and to protect investors and the public interest, use a Reference Price other than the Consolidated Last Sale. Other Reference Prices may include the Consolidated Inside Price, the Consolidated Opening Price or the Consolidated Prior Close.

How is an Outlier Transaction determined?

An Outlier Transaction is executed at a price that meets the following parameters:

• Greater than three times the current Numerical Guidelines in effect at the time of execution, or
• Execution price breaches the 52-week high or 52-week low. In such cases, NASDAQ OMX may consider additional factors as outlined in Rule 11890(a)(2)(C)(3) in determining if the transaction qualifies for further review or if NASDAQ OMX shall decline to act.

How will counterparties be notified?

NASDAQ OMX will notify the counterparty to a trade upon receipt of a timely filed request for review that satisfies the numerical guidelines set forth within the Rule. This eliminates the requirement that counterparties be notified of every request for a ruling and instead requires notice only when a request is filed in a timely manner and satisfies the Numerical Guidelines. This change alleviates the burden on NASDAQ OMX of notifying the counterparties when a request for review does not merit a ruling to break the trades at issue.

In addition, notification may be by one of several means, including press release, system status email, web posting or any other method reasonably expected to provide rapid notice to many market participants. For example, NASDAQ OMX anticipates streamlining the notification process for counterparties when receiving a high volume of clearly erroneous filings. In such circumstances it might issue an electronic system status message indicating which trades were under review instead of more time consuming individual calls to each counterparty. This will benefit market participants by expediting notification that trades are under review and the decision with respect to particular trades.

Who should I contact for more information?

Questions regarding these matters may be directed to NASDAQ MarketWatch at +1 800 211 4953 or +1 301 978 8501. Also, please refer to the NASDAQ rules.

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