[Federal Register Volume 77, Number 100 (Wednesday, May 23, 2012)]
[Notices]
[Pages 30576-30579]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-12472]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67014; File No. SR-BX-2012-034]
Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of
Filing of Proposed Rule Change With Respect to the Authority of the
Exchange or NASDAQ Execution Services to Cancel Orders When a Technical
or System Issue Occurs and To Describe the Operation of an Error
Account
May 17, 2012.
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 May 11, 2012, NASDAQ OMX BX, Inc. (``BX'' or the ``Exchange'') filed
with the Securities and Exchange Commission (``Commission'') a proposed
rule change as described in Items I and II below, which Items have been
prepared by the Exchange. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
BX proposes a rule change with respect to the authority of the
Exchange or NASDAQ Execution Services (``NES'') to cancel orders when a
technical or system issue occurs and to describe the operation of an
error account for NES. BX will implement the proposed change upon
approval by the Commission. The text of the proposed rule change is
available at http://nasdaqomxbx.cchwallstreet.com/, at BX'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 self-regulatory organization
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 those 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 parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Rule 4758 by adding a new paragraph
(d) that addresses the authority of the Exchange or NES to cancel
orders when a technical or systems issue occurs and to describe the
operation of an error account for NES.\3\
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\3\ NES is a facility of the Exchange. Accordingly, under Rule
4758, the Exchange is responsible for filing with the Commission
rule changes and fees relating to NES's functions. In addition, the
Exchange is using the phrase ``NES or the Exchange'' in this rule
filing to reflect the fact that a decision to take action with
respect to orders affected by a technical or systems issue may be
made in the capacity of NES or the Exchange depending on where those
orders are located at the time of that decision.
From time to time, the Exchange also uses non-affiliate third-
party broker-dealers to provide outbound routing services (i.e.,
third-party Routing Brokers). In those cases, orders are submitted
to the third-party Routing Broker through NES, the third-party
Routing Broker routes the orders to the routing destination in its
name, and any executions are submitted for clearance and settlement
in the name of NES so that any resulting positions are delivered to
NES upon settlement. As described above, NES normally arranges for
any resulting securities positions to be delivered to the member
that submitted the corresponding order to the Exchange. If error
positions (as defined in proposed Rule 4758(d)(2)) result in
connection with the Exchange's use of a third-party Routing Broker
for outbound routing, and those positions are delivered to NES
through the clearance and settlement process, NES would be permitted
to resolve those positions in accordance with proposed Rule 4758(d).
If the third-party Routing Broker received error positions in
connection with its role as a routing broker for the Exchange, and
the error positions were not delivered to NES through the clearance
and settlement process, then the third-party Routing Broker would
resolve the error positions itself, and NES would not be permitted
to accept the error positions, as set forth in proposed Rule
4758(d)(2)(B).
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NES is the approved routing broker of the Exchange, subject to the
conditions listed in Rule 4758. The Exchange relies on NES to provide
outbound routing services from itself to routing destinations of NES
(``routing destinations'').\4\ When NES routes orders to a routing
destination, it does so by sending a corresponding order in its own
name to the routing destination. In the normal course, routed orders
that are executed at routing destinations are submitted for clearance
and settlement in the name of NES, and NES arranges for any resulting
securities positions to be delivered to the member that submitted the
corresponding order to the Exchange. From time to time, however, the
Exchange and NES encounter situations in which it becomes necessary to
cancel orders and resolve error positions.\5\
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\4\ The Exchange has authority to receive inbound routes of
equities orders by NES from The NASDAQ Stock Market (``NASDAQ'') and
the NASDAQ OMX PSX (``PSX'') facility of NASDAQ OMX PHLX. See
Securities Exchange Act Release Nos. 64090 (March 17, 2011), 76 FR
16462 (March 23, 2011) (SR-BX-2011-007); 65514 (October 7, 2011), 76
FR 63969 (October 14, 2011) (SR-BX-2011-066).
\5\ The examples described in this filing are not intended to be
exclusive. Proposed Rule 4758(d) would provide general authority for
the Exchange or NES to cancel orders in order to maintain fair and
orderly markets when technical and systems issues are occurring, and
Rule 4758(d) also would set forth the manner in which error
positions may be handled by the Exchange or NES. The proposed rule
change is not limited to addressing order cancellation or error
positions resulting only from the specific examples described in
this filing.
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Examples of Circumstances That May Lead to Canceled Orders
A technical or systems issue may arise at NES, a routing
destination, or the Exchange that may cause the Exchange or NES to take
steps to cancel orders if the Exchange or NES determines that such
action is necessary to maintain a fair and orderly market. The examples
set forth below describe some of the circumstances in which the
Exchange or NES may decide to cancel orders.
Example 1. If NES or a routing destination experiences a technical
or systems issue that results in NES not receiving responses to
immediate or cancel (``IOC'') orders that it sent to the routing
destination, and that issue is not
[[Page 30577]]
resolved in a timely manner, NES or the Exchange would seek to cancel
the routed orders affected by the issue.\6\ For instance, if NES
experiences a connectivity issue affecting the manner in which it sends
or receives order messages to or from routing destinations, it may be
unable to receive timely execution or cancellation reports from the
routing destinations, and NES or the Exchange may consequently seek to
cancel the affected routed orders. Once the decision is made to cancel
those routed orders, any cancellation that a member submitted to the
Exchange on its initial order during such a situation would be
honored.\7\
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\6\ In a normal situation (i.e., one in which a technical or
systems issue does not exist), NES should receive an immediate
response to an IOC order from a routing destination, and would pass
the resulting fill or cancellation on to the Exchange member. After
submitting an order that is routed to a routing destination, if a
member sends an instruction to cancel that order, the cancellation
is held by the Exchange until a response is received from the
routing destination. For instance, if the routing destination
executes that order, the execution would be passed on to the member
and the cancellation instruction would be disregarded.
\7\ If a member did not submit a cancellation to the Exchange,
however, that initial order would remain ``live'' and thus be
eligible for execution or posting on the Exchange, and neither the
Exchange nor NES would treat any execution of that initial order or
any subsequent routed order related to that initial order as an
error.
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Example 2. If the Exchange experiences a systems issue, the
Exchange may take steps to cancel all outstanding orders affected by
that issue and notify affected members of the cancellations. In those
cases, the Exchange would seek to cancel any routed orders related to
the members' initial orders.
Examples of Circumstances That May Lead to Error Positions
In some instances, the technical or systems issue at NES, a routing
destination, the Exchange, or a non-affiliate third party Routing
Broker may also result in NES acquiring an error position that it must
resolve. The examples set forth below describe some of the
circumstances in which error positions may arise.
Example A. Error positions may result from routed orders that the
Exchange or NES attempts to cancel but that are executed before the
routing destination receives the cancellation message or that are
executed because the routing destination is unable to process the
cancellation message. Using the situation described in Example 1 above,
assume that the Exchange seeks to cancel orders routed to a routing
destination because it is not receiving timely execution or
cancellation reports from the routing destination. In such a situation,
NES may still receive executions from the routing destination after
connectivity is restored, which it would not then allocate to members
because of the earlier decision to cancel the affected routed orders.
Instead, NES would post those positions into its error account and
resolve the positions in the manner described below.
Example B. Error positions may result from an order processing
issue at a routing destination. For instance, if a routing destination
experienced a systems problem that affects its order processing, it may
transmit back a message purporting to cancel a routed order, but then
subsequently submit an execution of that same order (i.e., a locked-in
trade) to The Depository Trust & Clearing Corporation (``DTCC'') for
clearance and settlement. In such a situation, the Exchange would not
then allocate the execution to the member because of the earlier
cancellation message from the routing destination. Instead, NES would
post those positions into its error account and resolve the positions
in the manner described below.
Example C. Error positions may result if NES receives an execution
report from a routing destination but does not receive clearing
instructions for the execution from the routing destination. For
instance, assume that a member sends the Exchange an order to buy 100
shares of ABC stock, which causes NES to send an order to a routing
destination that is subsequently executed, cleared, and closed out by
that routing destination, and the execution is ultimately communicated
back to that member. On the next trading day (T+1), if the routing
destination does not provide clearing instructions for that execution,
NES would still be responsible for settling that member's purchase, but
would be left with a short position in its error account.\8\ NES would
resolve the position in the manner described below.
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\8\ To the extent that NES incurred a loss in covering its short
position, it would submit a reimbursement claim to that routing
destination.
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Example D. Error positions may result from a technical or systems
issue that causes orders to be executed in the name of NES that are not
related to NES's function as the Exchange's routing broker and are not
related to any corresponding orders of members. As a result, NES would
not be able to assign any positions resulting from such an issue to
members. Instead, NES would post those positions into its error account
and resolve the positions in the manner described below.
Example E. Error positions may result from a technical or systems
issue through which the Exchange does not receive sufficient notice
that a member that has executed trades on the Exchange has lost the
ability to clear trades through DTCC. In such a situation, the Exchange
would not have valid clearing information, which would prevent the
trade from being automatically processed for clearance and settlement
on a locked-in basis. Accordingly, NES would assume that member's side
of the trades so that the counterparties can settle the trades. NES
would post those positions into its error account and resolve the
positions in the manner described below.
Example F. Error positions may result from a technical or systems
issue at the Exchange that does not involve routing of orders through
NES. For example, a situation may arise in which a posted quote/order
was validly cancelled but the system erroneously matched that quote/
order with an order that was seeking to access it. In such a situation,
NES would have to assume the side of the trade opposite the order
seeking to access the cancelled quote/order. NES would post the
position in its error account and resolve the position in the manner
described below.
In the circumstances described above, neither the Exchange nor NES
may learn about an error position until T+1, either: (1) during the
clearing process when a routing destination has submitted to DTCC a
transaction for clearance and settlement for which NES never received
an execution confirmation; or (2) when a routing destination does not
recognize a transaction submitted by NES to DTCC for clearance and
settlement. Moreover, the affected members' trade may not be nullified
absent express authority under Exchange rules.\9\
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\9\ See, e.g., Rule 11890 (regarding clearly erroneous
executions).
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Proposed Amendments to Rule 4758
The Exchange proposes to amend Rule 4758 to add new paragraph (d)
to address the cancellation of orders due to technical or systems
issues and the use of an error account by NES.
Specifically, under paragraph (d)(1) of the proposed rule, the
Exchange or NES would be expressly authorized to cancel orders as may
be necessary to maintain fair and orderly markets if a technical or
systems issue occurred at the Exchange, NES, or a routing
destination.\10\ The
[[Page 30578]]
Exchange or NES would be required to provide notice of the cancellation
to affected members as soon as practicable.
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\10\ Such a situation may not cause the Exchange to declare
self-help against the routing destination pursuant to Rule 611 of
Regulation NMS. If the Exchange or NES determines to cancel orders
routed to a routing destination under proposed Rule 4758(d), but
does not declare self-help against that routing destination, the
Exchange would continue to be subject to the trade-through
requirements in Rule 611 with respect to that routing destination.
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Paragraph (d)(2) of the proposed rule would permit NES to maintain
an error account for the purpose of addressing positions that result
from a technical or systems issue at NES, the Exchange, a routing
destination, or a non-affiliate third-party Routing Broker that affects
one or more orders (``error positions''). By definition, an error
position would not include any position that results from an order
submitted by a member to the Exchange that is executed on the Exchange
and automatically processed for clearance and settlement on a locked-in
basis. NES also would not be permitted to accept any positions in its
error account from an account of a member and could not permit any
member to transfer any positions from the member's account to NES's
error account under the proposed rule.\11\ However, if a technical or
systems issue results in the Exchange not having valid clearing
instructions for a member to a trade, NES may assume that member's side
of the trade so that the trade can be processed for clearance and
settlement on a locked-in basis.\12\
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\11\ The purpose of this provision is to clarify that NES may
address error positions under the proposed rule that are caused by a
technical or systems issue, but that NES may not accept from a
member positions that are delivered to the member through the
clearance and settlement process, even if those positions may have
been related to a technical or systems issue at NES, the Exchange, a
routing destination of NES, or a non-affiliate third-party Routing
Broker. This provision would not apply, however, to situations like
the one described in Example C in which NES incurred a short
position to settle a member's purchase, as the member did not yet
have a position in its account as a result of the purchase at the
time of NES's action (i.e., NES's action was necessary for the
purchase to settle into the member's account). Similarly, the
provision would not apply to situations like the one described in
Example F, where a system issue caused one member to receive an
execution for which there was not an available contraparty, in which
case action by NES would be necessary for the position to settle
into that member's account. Moreover, to the extent a member
receives locked-in positions in connection with a technical or
systems issue, that member may seek to rely on BX Rule 4626 if it
experiences a loss. That rule provides members with the ability to
file claims against the Exchange for ``losses directly resulting
from the [NASDAQ OMX BX Equities Market] System's actual failure to
correctly process an order, Quote/Order, message, or other data,
provided the NASDAQ OMX BX Equities Market has acknowledged receipt
of the order, Quote/Order, message, or data.''
\12\ See Example E above.
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Under paragraph (d)(3), in connection with a particular technical
or systems issue, NES or the Exchange would be permitted to either (i)
assign all resulting error positions to members, or (ii) have all
resulting error positions liquidated, as described below. Any
determination to assign or liquidate error positions, as well as any
resulting assignments, would be required to be made in a
nondiscriminatory fashion.
NES or the Exchange would be required to assign all error positions
resulting from a particular technical or systems issue to the
applicable members affected by that technical or systems issue if NES
or the Exchange:
Determined that it has accurate and sufficient information
(including valid clearing information) to assign the positions to all
of the applicable members affected by that technical or systems issue;
Determined that it has sufficient time pursuant to normal
clearance and settlement deadlines to evaluate the information
necessary to assign the positions to all of the applicable members
affected by that technical or systems issue; and
Had not determined to cancel all orders affected by that
technical or systems issue.
For example, a technical or systems issue of limited scope or
duration may occur at a routing destination, and the resulting trades
may be submitted for clearance and settlement by such routing
destination to DTCC. If there were a small number of trades, there may
be sufficient time to match positions with member orders and avoid
using the error account.
There may be scenarios, however, where NES determines that it is
unable to assign all error positions resulting from a particular
technical or systems issue to all of the affected members, or
determines to cancel all affected routed orders. For example, in some
cases, the volume of questionable executions and positions resulting
from a technical or systems issue might be such that the research
necessary to determine which members to assign those executions to
could be expected to extend past the normal settlement cycle for such
executions. Furthermore, if a routing destination experiences a
technical or systems issue after NES has transmitted IOC orders to it
that prevents NES from receiving responses to those orders, NES or the
Exchange may determine to cancel all routed orders affected by that
issue. In such a situation, NES or the Exchange would not pass on to
the members any executions on the routed orders received from the
routing destination.
The proposed rule also would require NES to liquidate error
positions as soon as practicable.\13\ In liquidating error positions,
NES would be required to provide complete time and price discretion for
the trading to liquidate the error positions to a third-party broker-
dealer and could not attempt to exercise any influence or control over
the timing or methods of trading to liquidate the error positions.\14\
NES also would be required to establish and enforce policies and
procedures reasonably designed to restrict the flow of confidential and
proprietary information between the third-party broker-dealer and NES/
the Exchange associated with the liquidation of the error positions.
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\13\ If NES determines in connection with a particular technical
or systems issue that some error positions can be assigned to some
affected members but other error positions cannot be assigned, NES
would be required under the proposed rule to liquidate all such
error positions (including those positions that could be assigned to
the affected members).
\14\ This provision is not intended to preclude NES from
providing the third-party broker with standing instructions with
respect to the manner in which it should handle all error account
transactions. For example, NES might instruct the broker to treat
all orders as ``not held'' and to attempt to minimize any market
impact on the price of the stock being traded.
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Under proposed paragraph (d)(4), NES and the Exchange would be
required to make and keep records to document all determinations to
treat positions as error positions and all determinations for the
assignment of error positions to members or the liquidation of error
positions, as well as records associated with the liquidation of error
positions through the third-party broker-dealer.
2. Statutory Basis
The proposed rule change is consistent with Section 6(b) \15\ of
the Securities Exchange Act of 1934 (the ``Act''), in general, and
furthers the objectives of Section 6(b)(5),\16\ in particular, in that
it is 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 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 it is not
designed to permit unfair discrimination among customers, brokers, or
dealers. The Exchange believes that this proposal is in keeping with
those principles since NES's or the Exchange's ability to cancel orders
during a technical and systems issue and to maintain an error account
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facilitates the smooth and efficient operations of the market.
Specifically, the Exchange believes that allowing NES or the Exchange
to cancel orders during a technical or systems issue would allow the
Exchange to maintain fair and orderly markets. Moreover, the Exchange
believes that allowing NES to assume error positions in an error
account and to liquidate those positions, subject to the conditions set
forth in the proposed amendments to Rule 4758, would be the least
disruptive means to correct these errors, except in cases where NES can
assign all such error positions to all affected members of the
Exchange. Overall, the proposed amendments are designed to ensure full
trade certainty for market participants and to avoid disrupting the
clearance and settlement process. The proposed amendments are also
designed to provide a consistent methodology for handling error
positions in a manner that does not discriminate among members. The
proposed amendments are also consistent with Section 6 of the Act
insofar as they would require NES to establish controls to restrict the
flow of any confidential information between the third-party broker and
NES/the Exchange associated with the liquidation of error positions.
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\15\ 15 U.S.C. 78f(b).
\16\ 15 U.S.C. 78f(b)(5).
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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 [email protected]. Please include
File Number SR-BX-2012-034 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-BX-2012-034. 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-BX-2012-034, and should be
submitted on or before June 13, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-12472 Filed 5-22-12; 8:45 am]
BILLING CODE 8011-01-P