
[Federal Register Volume 77, Number 148 (Wednesday, August 1, 2012)]
[Notices]
[Pages 45706-45715]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-18704]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67507; File No. SR-NASDAQ-2012-090]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Amend Rule 4626--Limitation 
of Liability

July 26, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on July 23, 2012, The NASDAQ Stock Market LLC 
(``Nasdaq'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC'') the proposed

[[Page 45707]]

rule change as described in Items I and II below, which Items have been 
prepared by the Exchange.\3\ 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\ The Commission emphasizes that this notice was solely 
prepared by Nasdaq. As with all self-regulatory organization rule 
filings, the representations, views, and opinions contained in the 
notice are those of Nasdaq. The Commission is publishing the notice 
pursuant to the Exchange Act and the rules thereunder. The 
Commission neither makes any findings nor expresses any opinion with 
respect to Nasdaq's representations and interpretations contained in 
this notice.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 4626. The text of the proposed 
rule change is available at http://nasdaq.cchwallstreet.com, at 
NASDAQ's principal office, and at the Commission's Public Reference 
Room.

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

    In its filing with the Commission, the Exchange 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. The Exchange 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

I. Introduction

The Proposal

    Nasdaq is seeking the SEC's approval of a voluntary accommodation 
policy for claims arising from system difficulties that Nasdaq 
experienced during the initial public offering (``IPO'') of Facebook, 
Inc. (``Facebook'' or ``FB'') on May 18, 2012. In the weeks since the 
Facebook IPO, Nasdaq has reviewed the events of May 18 with the goal of 
proposing a fair and equitable accommodation policy that is consistent 
with the Exchange Act and Nasdaq's self-regulatory obligations. This 
proposal reflects Nasdaq's effort (i) to identify the categories of 
investors and members that Nasdaq's system difficulties caused 
objective, discernible harm, and the type and scope of such harm, and 
(ii) to propose an objectively reasonable and regulatorily balanced 
plan for accommodating Exchange members and their investor customers 
for such harm. Nasdaq has undertaken this effort notwithstanding the 
liability protections afforded by its contractual limitations of 
liability, common law immunity, and Rule 4626--the rule that Nasdaq 
proposes to modify.\4\
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    \4\ Rule 4626 was adopted on January 13, 2006 as part of 
Nasdaq's registration as a national securities exchange. Securities 
Exchange Act Release No. 53128 (January 13, 2006), 71 FR 3550 
(January 23, 2006) (File No. 10-131). The rule was amended in 
Securities Exchange Act Release Nos. 54155 (July 14, 2006), 71 FR 
41291 (July 20, 2006) (SR-NASDAQ-2006-001); 60794 (October 6, 2009), 
74 FR 52522 (October 13, 2009) (SR-NASDAQ-2009-084); and 64365 
(April 28, 2011), 76 FR 25384 (May 4, 2011) (SR-NASDAQ-2011-058).
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    Rule 4626 limits the liability of Nasdaq and its affiliates with 
respect to any losses, damages, or other claims arising out of the 
Nasdaq Market Center or its use and provides for limited accommodations 
under the conditions specified in the rule.\5\ Subsection (b)(1) 
provides that for the aggregate of all claims made by market 
participants related to the use of the Nasdaq Market Center during a 
single calendar month, Nasdaq's payments under Rule 4626 shall not 
exceed the larger of $500,000 or the amount of the recovery obtained by 
Nasdaq under any applicable insurance policy. Subsection (b)(2) states 
that for the aggregate of all claims made by market participants 
related to systems malfunctions or errors of the Nasdaq Market Center 
concerning locked/crossed compliance, trade through protection, market 
maker quoting, order protection, or firm quote compliance, during a 
single calendar month Nasdaq's payments under Rule 4626 shall not 
exceed the larger of $3,000,000 or the amount of the recovery obtained 
by Nasdaq under any applicable insurance policy.\6\
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    \5\ Rule 4626(a) provides that except as set forth in the 
accommodation portion of the rule, ``Nasdaq and its affiliates shall 
not be liable for any losses, damages, or other claims arising out 
of the Nasdaq Market Center or its use. Any losses, damages, or 
other claims, related to a failure of the Nasdaq Market Center to 
deliver, display, transmit, execute, compare, submit for clearance 
and settlement, adjust, retain priority for, or otherwise correctly 
process an order, Quote/Order, message, or other data entered into, 
or created by, the Nasdaq Market Center shall be absorbed by the 
member, or the member sponsoring the customer, that entered the 
order, Quote/Order, message, or other data into the Nasdaq Market 
Center.''
    \6\ Rule 4626 was amended in 2011 to the current version. See 
Securities Exchange Act Release No. 64365 (April 28, 2011), 76 FR 
25384 (May 4, 2011) (SR-NASDAQ-2011-058) (notice of filing and 
immediate effectiveness).
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    On May 18, 2012, Nasdaq experienced system difficulties during the 
Nasdaq Halt and Imbalance Cross Process (the ``Cross'') for the FB IPO. 
These difficulties delayed the completion of the Cross from 11:05 a.m. 
until 11:30 a.m. Based on its assessment of the information available 
at the time, Nasdaq concluded that the system issues would not have any 
effects beyond the delay itself. In an exercise of its regulatory 
authority, Nasdaq determined to proceed with the IPO at 11:30 a.m. 
rather than postpone it.
    As a result of the system difficulties, however, certain orders for 
FB stock that were entered between 11:11:00 a.m. and 11:30:09 a.m. in 
the expectation of participating in the Cross--and that were not 
cancelled prior to 11:30:09--either did not execute or executed after 
1:50 p.m. at prices other than the $42.00 price established by the 
Cross. (Other orders entered between 11:11:00 a.m. and 11:30:09 a.m., 
including cancellations, buy orders below $42.00, and sell orders above 
$42.00, were handled without incident.) System issues also delayed the 
dissemination of Cross transaction reports from 11:30 a.m. until 1:50 
p.m. At 1:50 p.m., Nasdaq system difficulties were completely resolved. 
Nasdaq's analysis indicates that only a small percentage of the FB 
orders received by Nasdaq on May 18 were directly affected by Nasdaq 
system difficulties.
    In the period between 11:30 a.m. and 1:50 p.m., although system 
issues had prevented Nasdaq from disseminating Cross transaction 
reports, Nasdaq determined not to halt trading in FB stock. Nasdaq 
believed that the system issues would be resolved promptly. Moreover, 
after 11:30 a.m. there was an orderly, liquid, and deep market in FB 
stock, with active trading on all markets. Halting trading on a market-
wide basis in these circumstances would have been unprecedented, and, 
in Nasdaq's view, unjustified. In any event, in Nasdaq's regulatory 
judgment, the conditions after 11:30 a.m. did not warrant a halt of 
trading.
    As a result of these unique circumstances, Nasdaq is proposing to 
accommodate members for losses attributable to the system difficulties 
on May 18, 2012 in an amount not to exceed $62 million. Nasdaq also 
proposes standards for orders to qualify for accommodation. For the 
reasons explained below, Nasdaq proposes to make accommodation payments 
in respect of:
    1. SELL Cross orders that were submitted between 11:11 a.m. and 
11:30 a.m. on May 18, 2012, that were priced at $42.00 or less, and 
that did not execute;
    2. SELL Cross orders that were submitted between 11:11 a.m. and 
11:30

[[Page 45708]]

a.m. on May 18, 2012, that were priced at $42.00 or less, and that 
executed at a price below $42.00;
    3. BUY Cross orders priced at exactly $42.00 and that were executed 
in the Cross but not immediately confirmed; and
    4. BUY Cross orders priced above $42.00 and that were executed in 
the Cross but not immediately confirmed, but only to the extent entered 
with respect to a customer \7\ that was permitted by the member to 
cancel its order prior to 1:50 p.m. and for which a request to cancel 
the order was submitted to Nasdaq by the member, also prior to 1:50 
p.m.\8\
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    \7\ For purposes of the rule, unless stated otherwise, the term 
``customer'' shall be construed to include any unaffiliated entity 
upon whose behalf an order is entered, including any unaffiliated 
broker or dealer.
    \8\ All claims allegedly attributable to system errors on May 
18, 2012 not directly involving the FB IPO Cross will continue to be 
evaluated and adjudicated under Nasdaq Rule 4626(b)(1) using 
Nasdaq's existing processes and subject to Nasdaq's existing 
limitation of liability.
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    The modifications proposed in this rule change are not intended to 
and do not affect the limitations of liability set forth in Nasdaq's 
agreements or SEC-sanctioned rules, or those limitations or immunities 
that bar claims for damages against Nasdaq as a matter of law. Rather, 
as noted above, they reflect Nasdaq's determination to adopt a fair and 
equitable accommodation policy that takes into account the impacts of 
Nasdaq's system issues on the investing public and members.
    In the two sections that follow, Nasdaq provides: (i) Background 
information concerning Nasdaq's IPO process generally, the system 
difficulties Nasdaq experienced with the Facebook IPO process on May 
18, 2012, and the impacts that those system difficulties had on certain 
orders; and (ii) Nasdaq's accommodation proposal, including the 
standards to be applied to claims for accommodation, the rationale for 
those standards, the proposed procedure for the submission and 
evaluation of claims, and the proposed payment process.

II. Background

The IPO Cross Process

    The Nasdaq Cross, which is set forth in Nasdaq Rule 4753 (Nasdaq 
Halt and Imbalance Crosses), was developed in consultation with market 
participants and is designed to provide fair executions for investors 
to begin secondary market trading in IPO shares. The purposes of the 
Cross are set forth in the filings with the Commission that implemented 
Rule 4753.\9\ In approving the Cross, the Commission found that the 
Cross process, as described in Nasdaq's filing seeking approval of the 
Cross, ``should provide useful information to market participants and 
increase transparency and order interaction at the opening,'' and 
``should result in the public dissemination of information that more 
accurately reflects trading in a particular security.'' \10\ The 
Commission additionally concluded that the Cross, as described in 
Nasdaq's filing, is consistent with the requirements of the Act and the 
rules and regulations thereunder generally, and particularly with the 
requirement that rules be designed to facilitate transactions in 
securities and to remove impediments to and perfect the mechanism of a 
free and open market.\11\ The Commission also found that the Cross, as 
described in Nasdaq's filing, was ``based on the Nasdaq opening cross, 
which the Commission approved in a prior filing.'' \12\
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    \9\ See Securities Exchange Act Release Nos. 53488 (March 15, 
2006), 71 FR 14272 (March 21, 2006) (SR-NASD-2006-015); 54248 (July 
31, 2006), 71 FR 44738 (August 7, 2006) (SR-NASDAQ-2006-019).
    \10\ Securities Exchange Act Release No. 53687 (April 20, 2006), 
71 FR 24878 (April 27, 2006) (SR-NASD-2006-015).
    \11\ Id.
    \12\ Id. (citing Securities Exchange Act Release 50405 
(September 16, 2004), 69 FR 57118 (September 23, 2004) (SR-NASD-
2004-071).
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    The Cross is an open and transparent process that identifies a 
single price based on supply and demand as represented by orders 
submitted to the Cross process. The Cross process is integrated with 
the Nasdaq order book to provide a smooth transition for orders from 
the Cross to continuous trading.
    In the Cross process, all members have the ability to enter orders 
and observe the evolution of the prospective auction price through 
Nasdaq's dissemination of auction imbalance information, and thereby to 
participate in the price discovery process. Cross-eligible shares 
determine the auction price as the price nearest to the offering price 
that will execute all market order shares, all limit order shares with 
superior prices to the auction price,\13\ and as many limit order 
shares as possible with limit prices equal to the auction price.\14\
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    \13\ An order with a superior price is, in the case of a buy 
order, an order with a limit higher than the auction price, and in 
the case of a sell order, an order with a limit lower than the 
auction price.
    \14\ The Cross algorithm sets the auction price by determining 
the price that will maximize the number of shares executed and, in 
the case of multiple prices providing the same maximum number of 
shares executed, selecting the price nearest to the offering price 
consistent with all superior priced orders executing. See Rule 
4753(b)(2).
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    Nasdaq begins accepting Cross orders at the system start time of 
7:00 a.m. During the interval between the system start time and the 
start of the Display-only period, orders can be entered or cancelled 
freely, and information on Cross orders is not publicly disseminated. 
The Display-only period begins 15 minutes prior to the scheduled 
release time of the IPO. Once the Display-only period begins, Nasdaq 
disseminates indicative information about the auction price and auction 
volume via Net Order Imbalance Indicator (``NOII'') messages on 
Nasdaq's public data feeds at five-second intervals.\15\ Members may 
enter and cancel orders during the Display-only period. As the effects 
of order entry and cancellation are disseminated to the public, 
participants may respond with further order entry, modification, or 
cancellation instructions. Over the course of the Display-only period, 
market participants develop an understanding of the state of supply and 
demand, changes in the indicative price typically become smaller, and 
the indicative volume typically increases.
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    \15\ See Rule 4753(b)(1).
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    The Display-only period can be extended (up to six times) in five-
minute increments. During the extension period, imbalance information 
continues to be disseminated and orders may be entered or canceled. It 
is relatively common for the Display-only period of an IPO to be 
extended.
    Once there are no further five-minute extensions of the Display-
only period, the IPO Cross executes, the Nasdaq official opening price 
is disseminated, a bulk trade execution is sent to the consolidated 
tape, and messages confirming individual executions for Cross-executed 
shares are sent to market participants. In accordance with market 
participants' instructions, orders not executed in the Cross are either 
canceled or populate the Nasdaq electronic order book.
    Nasdaq believes that the benefits of the Cross include optimizing 
an opening price and allowing investors to cancel their orders at the 
last possible moment before a Cross is calculated. Moreover, as the 
Commission found when it approved the Cross, the Cross process, as 
described in Nasdaq's filing, was designed as described above 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, and, in general, to protect investors and the

[[Page 45709]]

public interest in various ways.\16\ The Commission further noted that 
``[i]n approving the proposed rule change, the Commission * * * 
considered its impact on efficiency, competition, and capital 
formation.'' \17\
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    \16\ Securities Exchange Act Release No. 53687 (April 20, 2006), 
71 FR 24878 (April 27, 2006) (SR-NASD-2006-015) (finding the Cross 
consistent with Section 15A of the Act, 15 U.S.C. 78o-3, in general, 
and Section 15A(b)(6) of the Act, 15 U.S.C. 78o-3(b)(6), in 
particular).
    \17\ Id. at n.5 (citing 15 U.S.C. 78c(f)).
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The Facebook IPO Cross on May 18, 2012

    At 10:45:00 a.m. on May 18, 2012 the Display-only period for 
Facebook began, with a scheduled release time of 11:00:00 a.m. The 
first NOII message disseminating indicative information about the 
upcoming IPO cross was distributed at 10:45:05 a.m. with an indicative 
price of $50.00 and indicative volume of 4,461,419 shares. At 
approximately 10:57:53 a.m., the initially scheduled release time of 
11:00:00 a.m. was extended to 11:05:00 a.m. There were no further 
extensions.
    The NOII messages continued at 5-second intervals until the last 
message at 11:05:05 a.m. From 11:00:30 a.m. onward, the NOII messages 
displayed an indicative price of $42.00. The last NOII message was 
distributed at 11:05:05 a.m. with an indicative price of $42.00 and 
indicative volume of 72,189,277 shares.
    The Cross process in FB did not operate as expected. At 
approximately 11:05:10 a.m., Nasdaq attempted to conclude the quoting 
period, execute the Cross and print the opening trade to the tape. 
Initiating this procedure instructed the Cross application to run its 
final calculation to match buy and sell interest and then print the 
opening trade to the tape. As a protection to ensure the integrity of 
the IPO process, the system is designed to recalculate the IPO auction 
if the matching engine's view of the auction book has changed between 
the time of the final calculation and the printing of the opening 
trade. In other words, the system is designed to ensure that 
cancellations submitted while the Cross is calculating, and up until 
the last moment before the Cross is completed, are accounted for in the 
Cross.
    After the initial calculation of the Cross was completed, but 
before the opening trade was printed, additional order modifications 
were received by the system, changing the auction order book. As 
designed, the system recalculated the Cross to factor in the new state 
of the book. Again, changes were received before the system could print 
the opening trade, which resulted in additional re-calculations. This 
condition persisted, resulting in further delay of the opening print.
    Nasdaq continued to receive new order, cancel, and replace 
messages, and they were added to the Cross order book. New order, 
cancel, and replace messages received before approximately 11:11:00 
a.m. were acknowledged and incorporated into the Cross order book in 
real time.
    Upon concluding shortly before 11:30 a.m. that a system 
modification would resolve all system issues, Nasdaq, in an exercise of 
its market oversight obligations, determined to proceed with the IPO. 
At 11:30:09 a.m., Nasdaq completed the Cross, printed approximately 
75.7 million shares at $42.00 to the tape, and opened continuous 
trading in Facebook.\18\
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    \18\ An initial calculation of the Cross was attempted at 
approximately 11:05:09 a.m. Had that calculation of the Cross 
completed, it still would have resulted in an opening price of 
$42.00.
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    At the time Nasdaq implemented the system modification, its 
expectation was that substantially all Cross-eligible orders received 
prior to the Cross would participate in the Cross and that all Cross 
transaction confirmation messages would be disseminated immediately 
thereafter. This turned out not to be the case.
    First, only orders received prior to 11:11:00 a.m. participated in 
the 11:30:09 a.m. Cross. Of the orders entered between 11:11:00 a.m. 
and 11:30:09 a.m., some were cancelled by members before the Cross.\19\ 
Others were entered into the market at 11:30:09 a.m., and the remainder 
were either cancelled or released into the market at 1:50 p.m.\20\
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    \19\ Cancellations received during that interval were processed 
in real time, resulting in Nasdaq assuming in its error account the 
cancelled buy and sell positions. Nasdaq's net error account 
position was a short position of 3,070,430 shares. Using the 
services of an unaffiliated third-party broker in accordance with 
Nasdaq's then-proposed, and since approved Rule 4758(d), Nasdaq 
thereafter sold this short position, resulting in an inadvertent 
gain of approximately $10.8 million. This gain will be returned in 
full to customers through the accommodation proposal set forth in 
this filing.
    \20\ Had all Cross-eligible orders, including those entered 
between 11:11:00 a.m. and 11:30:09 a.m., participated in the Cross, 
the Cross would still have taken place at $42.00.
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    Second, Cross transaction confirmation messages were not 
disseminated until 1:50 p.m. When Nasdaq became aware of the fact that 
confirmations were not being delivered, Nasdaq determined not to 
suspend trading in FB stock because at that time price discovery was 
occurring in an orderly fashion in the continuous market. Indeed, 
active, deep, and liquid trading was taking place in FB stock on Nasdaq 
and trading in FB stock was proceeding as well on ten other markets and 
in over-the-counter trading.\21\ Nasdaq systems operated normally in 
handling all of the FB orders entered and executed after the Cross.
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    \21\ See, e.g., Securities Exchange Act Release No. 22554 
(October 23, 1985), 50 FR 43825 (October 29, 1985) (SR-NYSE-85-38) 
(stating that when determining whether to halt trading, an exchange 
must weigh against a potential reason for a halt ``the need to 
provide investors with a liquid market within which to buy or sell 
securities whenever they choose,'' and that while decisions to halt 
or delay trading ``necessarily depend upon the circumstances of each 
particular situation,'' an ``Exchange will in all cases be guided by 
its intention to maintain a fair, orderly and continuous market in 
its listed securities, insofar as reasonably practicable under the 
circumstances'').
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    The circumstances described above affected market participants 
differently depending on the prices of their orders and whether they 
were buyers or sellers.
    In spite of the absence of confirmation messages, Nasdaq believes 
that market participants--based on all of the information available at 
the time, their experience with Nasdaq crosses, and established trading 
priorities--would reasonably have had certain expectations for the 
execution or non-execution of their orders. Nasdaq printed 
approximately 75.7 million shares at $42.00 to the tape at 11:30 a.m. 
In addition, fair and orderly continuous trading on other markets 
opened in close proximity to the $42.00 established by the Cross, and 
the price of FB moved in an orderly manner above and below $42.00 
throughout the trading day, with more than 500 million shares 
traded.\22\ The following analysis reflects Nasdaq's assessments as to 
market participants' reasonable expectations and the nature of their 
potential losses.
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    \22\ As discussed herein, Nasdaq's subsequent analysis has 
confirmed that $42.00 was the appropriate opening price.
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    Accordingly, any buy or sell order received up until 11:30:09 a.m. 
and priced at a level at which it could not be filled in a Cross with a 
publicly disseminated price of $42.00 (i.e., a buy order below $42.00 
and a sell order above $42.00) was not disadvantaged. Market 
participants who submitted such orders could not reasonably have 
expected such orders to be executed. Accordingly, those orders 
experienced no loss attributable to the Nasdaq system issues.\23\
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    \23\ Some orders inadvertently benefitted from Nasdaq system 
issues. For example, buy orders that were entered between 11:11 a.m. 
and 11:30 a.m. and priced at $42.00 and above were not filled in the 
Cross. Had these orders been executed in the Cross or returned to 
customers at 11:30 a.m. instead of being held until 1:50 p.m., they 
might have been filled at prices at or above $42.00 as the price of 
FB stock ran up to $45 immediately after 11:30 a.m. The delay 
instead gave participants the opportunity either to cancel their 
orders after 11:30 a.m., as many did, or to execute at a lower price 
when the cancellations and remaining non-cancelled orders were 
released into the market at 1:50 p.m.

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[[Page 45710]]

    Conversely, sellers who entered orders priced at $42.00 or less 
should reasonably have expected that their orders had been executed in 
the Cross. Nasdaq had continuously indicated through NOII messages the 
relative proportion of buy and sell interests, providing information as 
to the likelihood of a buy or sell order being executed. Such sellers 
whose orders were received by Nasdaq before 11:11 a.m. had their orders 
executed in the Cross, consistent with expectations and previous market 
practice. Therefore, they were not disadvantaged and experienced no 
loss attributable to Nasdaq system issues.
    The analysis is different for market participants who entered such 
orders between 11:11 a.m. and 11:30 a.m. Buyers who entered orders 
priced higher than $42.00 during that interval did not receive messages 
that their orders had not executed in the Cross until 1:50 p.m. Yet, 
they were precluded from buying at their expected $42.00 price and 
instead bought at the lower open market prices then available, if their 
orders were executed at all. Accordingly, these buyers also experienced 
no loss attributable to the Nasdaq system issues.
    Sellers who entered orders priced at $42.00 or less between 11:11 
a.m. and 11:30 a.m. did not receive messages that their orders had not 
been executed in the Cross until 1:50 p.m. Such sell orders did not 
execute at their expected $42.00 price in the Cross, but instead sold 
at the lower continuous market prices available at or after 1:50, if 
they executed at all. Thus, these market participants experienced 
losses reasonably attributable to the Nasdaq system issues.
    Market participants who entered Cross-only eligible buy orders 
priced exactly at $42.00 that executed in the Cross but that were not 
confirmed until 1:50 p.m. could not have been sure whether their orders 
had been executed because the number of buy and sell limit order shares 
priced at the clearing price and wishing to be matched in the Cross is 
never exactly equal. Consequently, in the interval between 11:30 a.m. 
and 1:50 p.m., these buyers may have purchased shares in the continuous 
market, and upon receiving Cross execution messages at 1:50 p.m., they 
may have experienced an unexpected long position. The sale of such an 
unexpected long position at a lower price would have occasioned a loss.
    Buyers who entered orders priced higher than $42.00, which they did 
not subsequently cancel, should reasonably have expected that their 
orders had been executed in the Cross. As noted, Nasdaq had 
continuously indicated through NOII messages the relative proportion of 
buy and sell interests, providing information as to the likelihood of a 
buy or sell order being executed. Such buyers whose orders were 
received by Nasdaq before 11:11 a.m. had their orders executed in the 
Cross, consistent with expectations and previous market practice. 
Therefore, they were not disadvantaged and experienced no loss 
attributable to Nasdaq system issues.
    Finally, there are market participants who entered eligible buy 
orders for customers that were priced above $42.00 and that were 
executed in the Cross but not confirmed until 1:50 p.m., but for which 
the customer requested and received an out from the member and for 
which the member submitted a request to cancel the order to Nasdaq 
prior to 1:50 p.m. When the member received confirmation of the 
execution of the customer's order at 1:50 p.m., the member held shares 
for which it no longer had a recipient. Nasdaq believes that members 
who took such actions were reasonably attempting to assist their own 
customers in responding to the delayed dissemination of Cross 
transaction reports, and that such members further attempted to 
communicate their actions to Nasdaq through the submission of 
cancellations. In this category, however, the outcome was affected not 
only by Nasdaq system issues, but also by the member's affirmative 
decision not to await the dissemination of confirmations. Accordingly, 
Nasdaq believes that a portion of the associated losses should be borne 
by the members. Thus, Nasdaq is proposing an accommodation equaling 
only 70% of the member's qualifying loss amount with respect to this 
category.

III. Accommodation Proposal

Accommodation Standards

    Nasdaq's proposal is to provide accommodation within a framework 
that seeks to replicate what the expected execution prices of orders 
would have been had the Cross not experienced unexpected and 
unprecedented difficulties, limited by the expectation that members 
would exercise reasonable diligence to respond and mitigate losses once 
made aware that their Cross orders had not executed, or had executed at 
unexpected prices. Thus, Nasdaq proposes to make accommodation payments 
in respect of:
    (i) SELL Cross orders that were submitted between 11:11 a.m. and 
11:30 a.m. on May 18, 2012, that were priced at $42.00 or less, and 
that did not execute;
    (ii) SELL Cross orders that were submitted between 11:11 a.m. and 
11:30 a.m. on May 18, 2012, that were priced at $42.00 or less, and 
that executed at a price below $42.00;
    (iii) BUY Cross orders priced at exactly $42.00 and that were 
executed in the Cross but not immediately confirmed; and
    (iv) BUY Cross orders priced above $42.00 and that were executed in 
the Cross but not immediately confirmed, but only to the extent entered 
with respect to a customer that was permitted by the member to cancel 
its order prior to 1:50 p.m. and for which a request to cancel the 
order was submitted to Nasdaq by the member, also prior to 1:50 p.m.
    These are the situations in which Nasdaq has concluded that its 
systems issues could have impacted market participants' reasonable 
expectations in an objectively discernible manner. In these situations, 
Nasdaq proposes to offer as an accommodation the loss differential for 
a qualified order--that is, the difference between the price that was 
reasonably expected and the subsequent execution price actually 
obtained, or the price available at the point when the market 
participant could have taken steps to mitigate its losses or otherwise 
adjust its position.
    As described above, Nasdaq believes that it reasonably determined 
not to suspend the IPO or halt trading in FB stock, and Nasdaq's FB-
related systems issues were fully resolved at 1:50 p.m., when Nasdaq 
disseminated all delayed Cross execution confirmation messages. At that 
point, Nasdaq believes that member firms were in possession of all the 
information needed to evaluate their positions and obligations to 
customers, and take steps accordingly.
    Accordingly, for the orders described in (i), (iii), and (iv) 
above, Nasdaq proposes to establish a uniform benchmark price of 
$40.527, the price at which Nasdaq has concluded a reasonably diligent 
member could have obtained shares to mitigate any unexpected losses or 
to liquidate unanticipated positions coming out of the Cross. Nasdaq 
calculated this price using the volume-weighted average price of FB 
stock during the first 45 minutes of trading after execution reports 
were delivered to firms

[[Page 45711]]

(i.e., 1:50 p.m. to 2:35 p.m.).\24\ Using $40.527 as the uniform 
benchmark price results in a maximum loss of $1.473 per share per 
order.
---------------------------------------------------------------------------

    \24\ Trading firms typically process and determine actions on 
trading messages within seconds or less. Given the volume of 
messages at issue here and Nasdaq's delay in disseminating them, 
Nasdaq has concluded that 45 minutes would have been ample time for 
a reasonably diligent member to have identified any unexpected 
customer losses or unanticipated customer positions, and taken steps 
to mitigate or liquidate them.
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    For the orders described in (ii) above, Nasdaq proposes to offer as 
an accommodation the difference between the price that was reasonably 
expected (i.e., $42.00) and the execution price actually obtained, 
because the immediate execution of these orders precluded a member from 
taking reasonable actions to mitigate losses.
    Nasdaq believes that this method provides a reasonable time period 
for firms to have taken actions to mitigate losses after receiving the 
Cross transaction reports, as well as a reasonable maximum loss price 
parameter for determining accommodation payments. Additional alleged 
losses incurred beyond that benchmark price, regardless of their cause, 
will remain the responsibility of the member. If a member suffered a 
lesser loss than that calculated based on the foregoing method, based 
on the difference between the expected execution price of the order in 
the Cross process establishing an opening print of $42.00 and the 
actual execution price received, the member shall not receive more than 
the lesser actual loss suffered. A member's direct trading losses, as 
calculated in accordance with these parameters, are referred to in the 
proposed rule as the ``Member's Share.''
    Alleged losses from other causes shall not be considered eligible 
for accommodation payments under the proposed rule change. Thus, for 
example, Nasdaq does not propose to make accommodation payments in 
respect of alleged losses attributable to: orders received after the 
commencement of continuous regular trading in FB; individual member 
firm technology issues or system failures, or member firm operational 
issues or operational failures; affirmative trading actions taken by 
member firms on their own behalf or to accommodate their customers 
after the Cross, except as otherwise provided in the proposed rule; 
alleged or speculative lost trading opportunities or alleged or 
speculative lost business profits of any description; non-marketable 
Cross orders for which, based on their price, there was no reasonable 
expectation that orders had been executed; and a member firm's failure 
to adequately and appropriately mitigate losses or adjust trading 
positions. Nasdaq is not asking any firm to offset its claims under 
these criteria with any economic gains experienced because of the 
relevant system issues as outlined at footnote 23.
    Examples of how the accommodation standards would apply are below.

    Example 1:  A member submitted an IPO Cross order to SELL 1000 
shares priced at market (i.e., willing to sell at any price or 
otherwise equivalent to $0.01) with a Time in Force (TIF) of 
Immediate or Cancel (IOC), entered at 11:15 a.m. Because the order 
was priced lower than the opening price, it should have been filled 
at $42.00 in the Cross, but failed to execute because it was entered 
after 11:11 a.m. Nasdaq transmitted the order confirmation of the 
failure to the member at 1:50 p.m., at which time the member covered 
its position (i.e., sold the 1000 shares it had expected to sell in 
the Cross) at a price of $41.15. Because the member was able to sell 
its shares at a higher price than the benchmark price Nasdaq has 
established ($40.527), the member will be accommodated for the 
difference between the opening price and the covering execution's 
price. The amount of loss is 1000 x ($42.00-$41.15) = $850.00.
    Example 2:  A member submitted an IPO Cross order to SELL 1000 
shares priced at market with a TIF of IOC, entered at 11:15 a.m. 
Because the order was priced lower than the opening price, it should 
have been filled at $42.00 in the Cross, but failed to execute 
because it was entered after 11:11 a.m. Nasdaq transmitted the order 
confirmation message noting the failure to execute to the member at 
1:50 p.m., but the member did not cover its position until later in 
the day at an average price of $39.00. Because the member's covering 
execution price was lower than the benchmark price Nasdaq has 
established ($40.527), the member will be accommodated for the 
difference between the opening price and the benchmark price. The 
amount of loss is 1000 x ($42.00-$40.527) = $1,473.00.
    Example 3:  A member submitted an IPO Cross order to SELL 1000 
shares priced at market with a TIF of DAY, entered at 11:15 a.m. 
Because the order was priced lower than the opening price, it should 
have been filled at $42.00 in the Cross, but failed to execute in 
the Cross because it was entered after 11:11 a.m. The order was 
entered into the continuous book at 1:50 p.m., at which time it 
executed at a price of $41.05. Nasdaq transmitted the order 
confirmation message to the member at 1:50 p.m. Because the order 
executed at an inferior price to the opening price, the member will 
be accommodated for the difference between the opening price and the 
actual execution price. The amount of loss is 1000 x ($42.00-$41.05) 
= $950.00.
    Example 4:  A member submitted an IPO Cross order to SELL 1000 
shares priced at market with a TIF of DAY, entered at 11:15 a.m. 
Because the order was priced lower than the opening price, it should 
have been filled at $42.00 in the Cross, but failed to execute in 
the Cross because it was entered after 11:11 a.m. The order was 
entered into the continuous book at 1:50 p.m., at which time it 
executed at a price of $40.00. Nasdaq transmitted the order 
confirmation message to the member at 1:50 p.m. Because the order 
executed at an inferior price to the opening price, the member will 
be accommodated for the difference between the opening price and the 
actual execution price. The amount of loss is 1000 x ($42.00-$40.00) 
= $2,000.00.
    Example 5:  A member submitted an IPO Cross order to SELL 1000 
shares priced at market with a TIF of DAY, entered at 11:15 a.m. 
Because the order was priced lower than the opening price, it should 
have been filled at $42.00 in the Cross, but failed to execute in 
the Cross because it was entered after 11:11 a.m. The member 
cancelled the order at 12:30 p.m., after the Cross had taken place 
at 11:30:09 a.m. but before the order was delivered to the 
continuous book or a confirmation message was delivered. The order 
cancelled back to the member at 1:50 p.m. based on the request sent 
at 12:30 p.m. Because the member's order should have been executed 
in the Cross, the fact that the member cancelled the order at 12:30 
p.m. is not relevant for purposes of determining that the order was 
directly disadvantaged, and the member will be accommodated for the 
difference between the opening price and the benchmark price. The 
amount of loss is 1000 x ($42.00-$40.527) = $1,473.00.
    Example 6:  A member submitted an IPO Cross order to BUY 1000 
shares priced at $42.00 with a TIF of DAY, entered at 11:00 a.m. The 
order was filled at $42.00, but because the order's price was 
exactly the opening price, the member could not have reasonably 
known that the order was filled until 1:50 p.m. As a result, the 
member acquired an unexpected long position of 1000 shares that 
resulted in a loss when the position was covered at a price of 
$40.15. Because the member's covering execution price was worse than 
the benchmark price Nasdaq has established ($40.527), the member 
will be accommodated for the difference between the opening price 
and the benchmark price. The amount of loss is 1000 x ($42.00-
$40.527) = $1,473.00.
    Example 7:  A member submitted an IPO Cross order to BUY 1000 
shares at $42.00 with a TIF of IOC, entered at 11:15 a.m. The order 
was not filled at $42.00 because it was entered after 11:11 a.m., 
but because the order's price was exactly the opening price, the 
member could not have reasonably known that the order was not filled 
until 1:50 p.m. As a result, the member discovered it unexpectedly 
lacked 1000 shares at 1:50 p.m. At that time, the member could have 
purchased shares at prices lower than the opening price. 
Consequently, the member was not directly disadvantaged by Nasdaq's 
system error and there is no loss amount.
    Example 8:  A member submitted an IPO Cross order to BUY 1000 
shares at $42.50 with a TIF of IOC, entered at 11:15 a.m. The order 
was not filled at $42.00 because it was entered after 11:11 a.m., 
but because the order's price was higher than the opening price, the 
member should have expected the order was filled until it received a 
confirmation to the contrary at 1:50 p.m. As a result, the member 
discovered it

[[Page 45712]]

unexpectedly lacked 1000 shares at 1:50 p.m. At that time, the 
member could have purchased shares at prices lower than the opening 
price. Consequently, the member was not directly disadvantaged by 
Nasdaq's system error and there is no loss amount.
    Example 9:  A member submitted an IPO Cross order for a customer 
to BUY 1000 shares at $42.50 with a TIF of IOC, entered at 11:05 
a.m. and a cancel request was submitted by the member before 1:50 
p.m. for the order. The order was filled at $42.00 as expected. 
Because it was priced higher than the opening price, the member 
should have expected that the order was filled, which was confirmed 
electronically at 1:50 p.m. In light of the confirmation delay, 
however, the member received a request to cancel the order from the 
customer prior to 1:50 p.m., accommodated that request by allowing 
the customer to cancel the order, and sent a cancellation request 
for the order to Nasdaq before 1:50 p.m. When confirmation of the 
customer's order execution in the Cross was received by the member 
at 1:50 p.m., the member held a long position of shares for which it 
no longer had a recipient. Although the decision to accommodate the 
customer's cancellation request was exclusively that of the member, 
Nasdaq has determined to provide a limited accommodation amount 
equaling 70% of the member's loss up to maximum loss amount of 0.70 
x 1000 x ($42.00-$40.527) = $1,031.10.
    Example 10:  A member submitted an IPO Cross order to BUY 1000 
shares at $42.50 with a TIF of IOC, entered at 11:05 a.m. The order 
was filled at $42.00 as expected. Because it was priced higher than 
the opening price, the member should have expected that the order 
was filled, which was confirmed electronically at 1:50 p.m. As a 
result of the delay in confirmation, however, the member purchased 
additional shares before the confirmations arrived. This resulted in 
an unintended long position of 1000 shares. Although the member 
incurred a loss when covering the unintended position, Nasdaq 
correctly executed the member's order and the member should have 
expected the original IPO Cross order to be filled because of its 
price. Consequently, the member was not directly disadvantaged by 
Nasdaq's system error and there is no loss amount.
    Example 11:  A member submitted an IPO Cross order to BUY 1000 
shares at $42.50 with a TIF of IOC, entered at 11:05 a.m. The order 
was filled at $42.00 as expected. Because it was priced higher than 
the opening price, the member should have expected that the order 
was filled, which was confirmed electronically at 1:50 p.m. Later in 
the day, the member sold the position at $40.00. The member claims 
that it would have been able to sell at a higher price if had 
received the confirmation sooner. Nasdaq correctly executed the 
member's order. The claim of loss is premised on an alleged or 
speculative lost trading opportunity rather than the actual failure 
by Nasdaq to process an order correctly. Consequently, the member 
was not directly disadvantaged by Nasdaq's system error and there is 
no loss amount.

Procedure for Submission and Evaluation of Claims

    All members seeking accommodation under this proposal will be 
required to submit their claims to Nasdaq in writing not later than 
seven days after the approval of the proposed rule change by the 
Commission. Such notice of approval will be publicly posted by Nasdaq 
on its Nasdaq Trader Web site at http://www.nasdaqtrader.com and 
provided directly to all member firms via an Equity Trader Alert. All 
claims that have been timely submitted will be evaluated by the 
Financial Industry Regulatory Authority (``FINRA'') applying the 
accommodation standards set forth herein. FINRA may request such 
supplemental information as FINRA deems necessary to assist FINRA's 
evaluation of the claims. FINRA's role will be limited to measuring 
data against the benchmarks established by this filing to ascertain the 
eligibility and value of each member's claims under those benchmarks. 
FINRA staff assessing the claims will not be involved in providing 
regulatory services to any Nasdaq market and they will not have 
purchased Facebook stock during Nasdaq's IPO opening process or 
currently own Facebook stock. In addition, as discussed below, FINRA 
will prepare a report for Nasdaq on its analysis of the eligibility of 
claims that will be provided to the public members of FINRA's Audit 
Committee.
    Once it has completed its review, FINRA shall provide to the Nasdaq 
Board of Directors and the Board of Directors of The NASDAQ OMX Group, 
Inc., an analysis of the total value of eligible claims submitted.\25\ 
Thereafter, Nasdaq will file with the Commission a rule proposal 
setting forth the amount of eligible claims submitted and its intention 
to pay such claims up to $62 million. In no event shall Nasdaq make any 
payments on claims until the rule proposal setting forth the amount of 
eligible claims becomes effective and final.
---------------------------------------------------------------------------

    \25\ In accordance with the established policies of these 
Boards, any directors with a financial interest in the accommodation 
process will be expected to recuse themselves from consideration of 
the analysis.
---------------------------------------------------------------------------

Payment Process

    Nasdaq's business and legal relationships are with its members, not 
its members' customers. Nasdaq has no contractual or other 
relationships with its members' customers, and generally does not 
possess information about interactions between a member and its 
customer that may underlie members' trading activity. Nevertheless, 
Nasdaq is mindful that member's customers have been impacted by the 
processing of member orders in the FB Cross. Thus, for example, to the 
extent that a member order reflected a customer order, and the member 
order was not executed in the manner expected, the customer order may 
not have been filled, or may have been filled at an unexpected price. 
Nasdaq is also aware of public reports that some members experienced 
their own system issues on May 18, 2012 that were unrelated to Nasdaq's 
system issues, and that those members' issues may have had an impact on 
the members' customers. To the extent that a member receiving 
accommodation hereunder had customers that incurred losses, Nasdaq 
believes that accommodation payments received by members from Nasdaq 
should be used for the benefit of such customers.
    Accordingly, Nasdaq proposes that all accommodation payments 
proposed in this filing be contingent upon a member's submission to 
Nasdaq, not later than seven days after the effective date of the rule 
proposal described above detailing the amount of eligible claims, of an 
attestation detailing:
    (i) The amount of compensation, accommodation, or other economic 
benefit provided or to be provided by the member to its customers 
(other than customers that were brokers or dealers trading for their 
own account) in respect of trading in Facebook Inc. on May 18, 2012 
(``Customer Compensation''), and
    (ii) The extent to which the losses reflected in the Member's Share 
\26\ were incurred by the member trading for its own account or for the 
account of a customer that was a broker or dealer trading for its own 
account (``Covered Proprietary Losses'').
---------------------------------------------------------------------------

    \26\ Defined specifically as a member's direct trading losses 
calculated in accordance with paragraphs (b)(3)(A) and (B) of the 
proposed rule.
---------------------------------------------------------------------------

    Failure to provide the required documentation within the specified 
time limit will void the member's eligibility to receive an 
accommodation under the modified rule. Each member shall be required to 
maintain books and records that detail the nature and amount Customer 
Compensation and Covered Proprietary Losses. Nasdaq, through FINRA, its 
regulatory services provider, would expect to examine the accuracy of 
member's attestation at a later date.
    Accommodation payments under this subsection will be made in two 
tranches of priority, subject to the maximum total payout of $62 
million:
    (i) First, if the member has provided Customer Compensation, the 
member will receive an amount equal to the

[[Page 45713]]

lesser of the Member's Share or the amount of Customer Compensation. 
For example, if a Member's Share was $1 million, and the member had 
paid, or had committed to pay, compensation to its customers of at 
least $1 million, the member's expected accommodation would be $1 
million. On the other hand, if the Member's Share was $1 million, but 
the member had paid, or committed to pay, only $500,000 in compensation 
to its customers, the member's expected accommodation in the first 
tranche would be only $500,000. This approach reflects Nasdaq's belief 
that accommodation with respect to members' trades on behalf of 
customers (other than broker-dealers trading on a proprietary basis) 
should be paid first, and should be paid only to the extent of the 
member's own compensation to customers.
    (ii) Second, the member will receive an amount with respect to 
Covered Proprietary Losses; provided, however, that the sum of payments 
to a member under the rule shall not exceed the Member's Share. 
Although Nasdaq recognizes that firms engaging in proprietary trading 
may have incurred losses, it believes that payments to them should 
occur after payments with respect to losses on behalf of customers. If 
a member had both Covered Proprietary Losses and losses associated with 
customer business, it may receive distributions under both tranches. 
For example, if a Member's Share was $1 million, the member had 
$300,000 in Covered Proprietary Losses, and the member had provided 
$300,000 in Customer Compensation, the member's expected accommodation 
would be $600,000 in total. Alternatively, if the member had $300,000 
in Covered Proprietary Losses and had provided $700,000 or more in 
Customer Compensation, the member's expected accommodation would be $1 
million.
    In the event that the amounts calculated under tranche (i) exceed 
$62 million, accommodation will be prorated among members eligible to 
receive accommodation under tranche (i) based on the size of the 
amounts payable under tranche (i). In the event that tranche (i) is 
paid in full and the amounts calculated under tranche (ii) exceed the 
funds remaining from the $62 million accommodation pool, such funds 
will be prorated among members eligible to receive accommodation under 
tranche (ii) based on the size of the amounts payable under tranche 
(ii). If a member's eligibility to receive funds is voided for any 
reason under this rule, and the funds payable to other members must be 
prorated, the funds available to pay other members will be increased 
accordingly.
    Final payment of any accommodation payment also will be conditioned 
on the execution by the member firm of a formal release of claims 
against Nasdaq for losses associated with FB that are related in any 
way to the Cross or other errors, omissions, actions, or failures to 
act on the part of Nasdaq on May 18, 2012. The release will be required 
not later than fourteen days after the effective date of the rule 
proposal described above detailing the amount of eligible claims. The 
purposes of imposing the release requirement notwithstanding the 
limitations of liability and immunities, which apply in any event 
pursuant to Nasdaq's rules and agreements and/or otherwise as a matter 
of law, are to avoid the disruption and expense of unnecessary 
litigation in connection with the Cross and to ensure equal treatment 
of all claimants. Nasdaq further notes that the program proposed herein 
is a voluntary step taken by Nasdaq to provide a substantial and 
unprecedented accommodation to its members, and that participation in 
the program is likewise voluntary on the part of members. Nasdaq 
believes that it would be inequitable to approve Nasdaq's voluntary 
program without also allowing it to establish conditions that promote 
certainty and finality.\27\
---------------------------------------------------------------------------

    \27\ Cf. Section 405(c)(3)(B)(i) of the Air Transportation 
Safety and System Stabilization Act (requiring release by persons 
receiving compensation with respect to airline crashes on September 
11, 2001).
---------------------------------------------------------------------------

IV. Solicitation of Comments

    This proposed rule change is being published for public comment. 
Nasdaq will give due consideration to all comments submitted during the 
comment period, but notes that comments advocating different approaches 
should include a complete exposition of potentially relevant 
information, including any impacts that the following, among other 
things, may have had on alleged harms:
     Market participants' own trading decisions and strategies;
     Non-Nasdaq technology issues, which Nasdaq understands 
affected certain market participants on May 18, 2012;
     Obligations to customers or order delivery firms;
     Regulatory obligations; and
     Market data issues.
    Failure to provide adequate detail will negatively impact Nasdaq's 
ability to respond to or otherwise evaluate a comment.
2. Statutory Basis
    Nasdaq believes that the accommodation proposal is consistent with 
Section 6(b) of the Exchange Act \28\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act \29\ in particular, because 
the proposal is designed 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, and, in general to protect 
investors and the public interest.
---------------------------------------------------------------------------

    \28\ 15 U.S.C. 78f(b) (setting forth the prerequisites for 
registration as a national securities exchange).
    \29\ 15 U.S.C. 78f(b)(5) (requiring that an exchange's rules be 
``designed to prevent fraudulent and manipulative acts and 
practices, 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; and not [be] designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers, or 
to regulate by virtue of any authority conferred by this chapter 
matters not related to the purposes of this chapter or the 
administration of the exchange'').
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    Nasdaq believes that the proposal to expand its accommodation 
policy in this unique set of circumstances will balance several 
important goals in keeping with the foregoing statutory objectives.
    First, Nasdaq acknowledges that the system issues that first came 
to light during the FB IPO Cross had an impact on certain of its 
members during the period from 11:11 a.m. to 1:50 p.m. on May 18, 2012. 
As a result, Nasdaq believes that the public interest would be served 
by an accommodation policy that quantifies and provides compensation 
for customer losses that were directly attributable to those system 
issues in an objectively discernible manner. Specifically, Nasdaq 
believes that the public interest would be served by Nasdaq making 
accommodation payments in respect of the four specific categories of 
Cross orders, listed above, for which Nasdaq has concluded that its 
systems issues could have impacted market participants' reasonable 
expectations in an objectively discernible manner. Nasdaq further 
believes that the public interest would be served by Nasdaq providing 
as an accommodation the loss differential for a qualified order--that 
is, the difference between the price that was reasonably expected and 
the subsequent execution price actually obtained, or the price 
available at the point when the market participant could have taken 
steps to mitigate its losses or

[[Page 45714]]

otherwise adjust its position (in situations when it was possible for 
the market participant to take such steps).
    Second, Nasdaq believes that it is important to recognize the 
regulatory policy objectives underlying Rule 4626 and ensure that they 
are not compromised. Hundreds of billions of dollars of securities 
transactions are matched through the systems of Nasdaq and other 
exchanges every day. Through the operation of those systems, exchanges 
provide invaluable services in support of capital formation, price 
discovery, and investor protection. If exchanges could be called upon 
to bear all costs associated with system malfunctions and the varying 
reactions of market participants taken in their wake, the potential 
would exist for a single catastrophic event to bankrupt one or multiple 
exchanges, with attendant consequences for investor confidence and 
macroeconomic stability. Alternatively, the cost of providing exchange 
services would have to rise dramatically for all investors to cover 
this material and new risk.\30\ In addition, exchanges would be less 
inclined to implement innovative systems \31\ consistent with the goals 
of Section 6(b)(5) of the Act.\32\ Accordingly, the Commission has 
recognized that it is consistent with the purposes of the act for a 
self-regulatory organization to limit its liability with respect to the 
use of such facilities by its members through rules such as Rule 
4626.\33\
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    \30\ Trading costs in the United States are among the lowest in 
the world, and thus a contributor to economic growth. See, e.g., 
Michael S. Pagano, Which Factors Influence Trading Costs in Global 
Equity Markets?, The J. of Trading, Winter 2009, at 7; Ian Domowitz 
et al., Liquidity, Volatility, and Equity Trading Costs Across 
Countries and Over Time, 4 Int'l Fin. 221 (Summer 2001); Asli 
Demirg[uuml][ccedil]-Kunt & Ross Levine, Bank-based and Market-based 
Financial Systems: Cross-country Comparisons 51 (The World Bank 
Working Paper No. 2143, July 1999).
    \31\ Securities Exchange Act Release No. 14777 (May 17, 1978) 
(SR-CBOE-78-14) (in proposing a limitation on liability, CBOE 
explained that an exchange ``cannot proceed with innovative systems 
and procedures for the execution, clearance, and settlement of 
Exchange transactions * * * unless it is protected against losses 
which might be incurred by members as a result of their use of such 
systems,'' and further that ``[t]o the extent [a limitation of 
liability rule] enables the Exchange to proceed with innovative 
systems, competition should be enhanced''); see also Securities 
Exchange Act Release No. 58137 (July 10, 2008), 73 FR 41145 (July 
17, 2008) (SR-NYSE-2008-55) (explaining that exchange's limitation 
of liability rule encourages vendors to provide services to the 
exchange, which results in faster and more innovative products for 
order entry, execution, and dissemination of market information).
    \32\ 15 U.S.C. 78f(b)(5) (requiring that an exchange's rules be 
``designed to prevent fraudulent and manipulative acts and 
practices, 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; and not [be] designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers, or 
to regulate by virtue of any authority conferred by this chapter 
matters not related to the purposes of this chapter or the 
administration of the exchange'').
    \33\ See, e.g., BATS Exchange and BATS-Y Exchange Rules 11.16; 
C2 Options Exchange Rule 6.42; CBOE Options Exchange Rule 6.7; CME 
Rule 578; EDGA and EDGX Rules 11.12; ISE Rule 705; NASDAQ OMX PHLX 
Rule 3226; NASDAQ OMX BX Rule 4626; NYSE Rules 17 and 18; NYSE MKT 
Rule 905NY; NYSE Arca (Options) Rule 14.2; NYSE Arca (Equity) Rule 
13.2; One Chicago Rule 421.
---------------------------------------------------------------------------

    Moreover, if the potential for such catastrophic losses existed, as 
noted above, it would need to be reflected in the fees charged by 
exchanges to market participants in a manner that is not currently the 
case, making trading more expensive for all investors all the time. 
Rather, as the Commission has recognized, provisions such as Rule 4626 
reflect the view that risks associated with system malfunctions should 
be allocated among all exchange members, rather than being borne solely 
by the exchange. Indeed, this view is consistently reflected in the 
limitation of liability rules common among United States exchanges.\34\ 
And, this view is reflected in Nasdaq's proposal to condition any 
accommodation payment on the execution of a release of claims against 
Nasdaq for FB-related losses arising from the Cross, because this 
condition is aimed at avoiding unnecessary litigation and ensuring 
equal treatment of all claimants.
---------------------------------------------------------------------------

    \34\ Id.
---------------------------------------------------------------------------

    The level of accommodation being offered under this proposed rule 
change is unprecedented in its size. Although Nasdaq is voluntarily 
seeking in this instance to provide accommodation up to $62 million for 
losses associated with the FB IPO Cross that were the direct result of 
the system issues that came to light on May 18, 2012, Nasdaq does not 
believe that the purposes of the Act related to the operation of the 
national market system would be well served by allocating to exchanges 
responsibility for losses attributable to other factors, such as the 
failure of members to mitigate losses in a timely and reasonable 
manner, or by effecting a wholesale modification to the risk and loss 
allocations underlying Rule 4626 and the similar rules of other 
exchanges that reflect the exchanges' exercise of the regulatory 
authority and obligations delegated to exchanges by the Act.\35\ In 
this regard, it bears noting that in light of those regulatory duties, 
exchanges are also immune from civil liability for claims for damages 
caused by actions taken in connection with the discharge of their 
regulatory duties.\36\
---------------------------------------------------------------------------

    \35\ As reflected in the proposed rule change, however, Nasdaq 
does believe that the public interest and the purposes of the Act 
related to the operation of the national market system would be well 
served by: (i) Providing that the first 45 minutes of trading after 
confirmation reports were delivered to firms was a reasonable time 
period for firms to have taken actions to mitigate losses, and 
therefore is a reasonable period on which to base the maximum loss 
price parameter for determining accommodation payments; and (ii) 
providing an accommodation of 70% of the qualifying loss amount for 
the fourth category of orders for which Nasdaq proposes to make 
accommodation payments, given that the losses in that category were 
affected not only by Nasdaq's system issues but also by the members' 
affirmative decisions to take actions with respect to customer 
orders rather than await the dissemination of confirmation reports.
    \36\ See, e.g., DL Capital Group, LLC v. Nasdaq Stock Market, 
Inc., 409 F.3d 93 (2d Cir. 2005); Sparta Surgical Corp. v. NASD, 159 
F.3d 1209 (9th Cir. 1998).
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    Nasdaq further believes that, consistent with Section 6(b)(5) of 
the Act,\37\ its proposal will promote just and equitable principles of 
trade and protect investors and the public interest by establishing a 
fair process through which affected members may submit claims for 
losses covered by the modified accommodation policy. Nasdaq believes 
that by establishing the objective benchmarks set forth in this filing, 
and allowing FINRA to act as a neutral third party and measure data 
against those benchmarks to ascertain the value of each member's claims 
under those benchmarks, will enhance the transparency of the process 
and minimize the potential for conflicts of interest. Nasdaq further 
believes that its proposed process for distributing accommodation 
payments will benefit investors and promote the public interest by 
providing incentives for members to use accommodation funds for the 
benefit of investors. Specifically, Nasdaq believes that its proposal 
will benefit investors and promote the public interest by: (I) 
requiring a claimant to submit to Nasdaq an attestation detailing the 
compensation the member has Provided or will provide to its customers, 
and detailing the extent to which the member incurred the losses 
covered by the proposed accommodation payment when trading for its own 
account; and (ii) providing for accommodation payments to be made in 
tranches that prioritize payments based on the extent to which the 
claimant has compensated its customers.
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    \37\ 15 U.S.C. 78f(b)(5).

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[[Page 45715]]

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition 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 45 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 or disapprove such 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 email to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2012-090 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2012-090. This 
file number should be included on the subject line if email 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 Web site viewing and printing in 
the Commission's Public Reference Room, 100 F Street, NE., Washington, 
DC 20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the 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 available publicly. All 
submissions should refer to File Number SR-NASDAQ-2012-090 and should 
be submitted on or before August 22, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\38\
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    \38\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-18704 Filed 7-31-12; 8:45 am]
BILLING CODE 8011-01-P


