
[Federal Register: January 2, 2009 (Volume 74, Number 1)]
[Notices]               
[Page 155-158]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02ja09-63]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59149; File No. SR-NASDAQ-2008-101]

 
 Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of 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

December 23, 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 December 19, 2008, The NASDAQ Stock Market LLC (``Nasdaq'') 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 by Nasdaq. The Commission is publishing this notice 
and order 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.

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

    Nasdaq proposes that in conjunction with its previous filing to 
adopt a policy relating to its treatment of trade reports that it 
determines to be inconsistent with the prevailing market, to make such 
policy retroactive to September 1, 2008. The Exchange does not expect 
that the proposed rule change will have any direct effect, or 
significant indirect effect, on any other Exchange rule in effect at 
the time of this filing.

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. The 
text of these statements may be examined at the places specified in 
Item III below, and is set forth in Sections A, B, and C below.

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

1. Purpose
    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. This filing, which is 
substantially similar to the New York Stock Exchange's (``NYSE'') 
recent filing, seeks to address such instances of ``aberrant'' 
trades.\3\
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    \3\ See Securities Exchange Act Release No. 58736 (October 6, 
2008), 73 FR 60380 (October 10, 2008) (SR-NYSE-2008-91). The 
Exchange notes that these proposed policies relating to the 
Exchange's treatment of trade reports that it determines to be 
inconsistent with the prevailing market are substantially similar to 
the NYSE's proposed policies.
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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 not, or in the case of non-unlisted trading privilege trades, 
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.
    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.\4\
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    \4\ 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.
    The Exchange notes that although this filing is substantially 
similar to the NYSE's recent filing, the NYSE filing seeks retroactive 
application of their proposal to January 1, 2007.\5\ Nasdaq seeks 
retroactive application to September 1, 2008 for this proposal. This 
proposal applies the same guidelines and considers the same factors 
during the retroactive period as set forth in Nasdaq's companion 
filing,\6\ which is substantially identical to this one except 
applicable to trades following that filing's immediate effectiveness.
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    \5\ Supra note 3.
    \6\ See SR-NASDAQ-2008-100.
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    Retroactive application is warranted in this instance given the 
unprecedented market volatility and accurate trade reporting issues 
that all market centers experienced beginning in September 2008. 
Therefore, the Exchange proposes 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 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 shall 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 shall 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;

[[Page 157]]

     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)
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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 proposes to use the Aberrant Report Indicator in 
accordance with the guidelines set forth above. Where appropriate, the 
Exchange may apply the Aberrant Report Indicator to trades that were 
reported prior to the adoption of this policy.
2. Statutory Basis
    Nasdaq believes that the proposal is consistent with Section 6(b) 
of the Act,\7\ in general, and Section 6(b)(5) of the Act,\8\ in 
particular, in that it is designed to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to 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.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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    In particular, the Aberrant Report Indicator is consistent with the 
protection of investors and the public interest in that the Exchange 
will seek to ensure a proper understanding of the Aberrant Report 
Indicator among securities market participants by: (i) Urging vendors 
to disclose the exclusion from high, low or last sale price data of any 
aberrant trades excluded from high, low or last sale price information 
they disseminate and to provide to data users an explanation of the 
parameters used in the Exchange's aberrant trade policy; (ii) informing 
the affected listed company each time the Exchange or another market 
appends the Aberrant Report Indicator to a trade in a Nasdaq-listed 
stock; and (iii) reminding the users of the information that these are 
still valid trades in that they were executed and not unwound as in the 
case of a clearly erroneous trade.

B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will impose 
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

    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 the 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 rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2008-101 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, Station Place, 100 F Street, NE., Washington, 
DC 20549-9303.

All submissions should refer to File Number SR-NASDAQ-2008-101. 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 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 offices of Nasdaq. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only

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information that you wish to make available publicly.
    All submissions should refer to File Number SR-NASDAQ-2008-101 and 
should be submitted on or before January 23, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-31150 Filed 12-31-08; 8:45 am]

BILLING CODE 8011-01-P
