[Federal Register Volume 77, Number 128 (Tuesday, July 3, 2012)]
[Notices]
[Pages 39543-39545]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-16220]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67281; File No. SR-NASDAQ-2012-057]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order
Approving a Proposed Rule Change With Respect to the Authority of
NASDAQ or NASDAQ Execution Services To Cancel Orders When a Technical
or Systems Issue Occurs and To Describe the Operation of an Error
Account
June 27, 2012.
I. Introduction
On April 30, 2012, The NASDAQ Stock Market LLC (``Exchange'' or
``NASDAQ'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to amend NASDAQ Equity Rule 4758 by adding a new
paragraph (d) that addresses the authority of NASDAQ or NASDAQ
Execution Services (``NES'') to cancel orders when a technical or
systems issue occurs and to describe the operation of an error account
for NES. The proposed rule change was published for comment in the
Federal Register on May 16, 2012.\3\ The Commission received no comment
letters regarding the proposed rule change. This order approves the
proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 66964 (May 10, 2012), 77
FR 28905 (May 16, 2012) (SR-NASDAQ-2012-057) (``Notice'').
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II. Description of the Proposal
NES, a broker-dealer that is a facility and an affiliate of NASDAQ,
provides outbound routing services from NASDAQ to other market centers
pursuant to NASDAQ rules.\4\ In its proposal, NASDAQ states that a
technical or systems issue may occur at NASDAQ, NES, or a routing
destination that causes NASDAQ or NES to cancel orders, if NASDAQ or
NES determines that such action is necessary to maintain a fair and
orderly market.\5\ NASDAQ also states that a technical or systems issue
that occurs at NASDAQ, NES, a routing destination, or a non-affiliate
third-party Routing Broker \6\ may result in NES acquiring an error
position that it must resolve.\7\
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\4\ See Notice, 77 FR at 28906, n.3 and accompanying text, and
text accompanying n.4. See also NASDAQ Equity Rule 4758.
NASDAQ also has authority to receive equities orders routed
inbound to NASDAQ by NES from NASDAQ OMX BX and the NASDAQ OMX PSX
of NASDAQ OMX PHLX on a pilot basis. See Notice, 77 FR at 28906,
n.4. See also Securities Exchange Act Release No. 65554 (October 13,
2011), 76 FR 65311 (October 20, 2011) (SR-NASDAQ-2011-142).
\5\ See Notice, 77 FR at 28906. For examples of some of the
circumstances in which NASDAQ or NES may decide to cancel orders,
see id.
\6\ NASDAQ states that, from time to time, it also uses non-
affiliate third-party broker-dealers to provide outbound routing
services. In its proposal, the Exchange refers to these broker-
dealers as ``third party Routing Brokers.'' See Notice, 77 FR at
28906, n.3.
\7\ See Notice, 77 FR at 28906. Specifically, NASDAQ Equity Rule
4758(d)(2) defines ``error positions'' as ``positions that result
from a technical or systems issue at Nasdaq Execution Services,
Nasdaq, a routing destination, or a non-affiliate third-party
Routing Broker that affects one or more orders.''
For examples of some of the circumstances that may lead to error
positions, see Notice, 77 FR at 28906-07.
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New paragraph (d) to NASDAQ Equity Rule 4758 provides NASDAQ or NES
with general authority to cancel orders to maintain fair and orderly
markets when a technical or systems issue occurs at NASDAQ, NES, or a
routing destination. It also provides authority for NES to maintain an
error account for the purpose of addressing, and sets forth the
procedures for resolving, error positions. Specifically, paragraph
(d)(1) of NASDAQ Equity Rule 4758 authorizes NASDAQ or NES to cancel
orders as either deems necessary to maintain fair and orderly markets
if a technical or systems issue occurs at NASDAQ, NES, or a routing
destination. NASDAQ or NES will be required to provide notice of the
cancellation to all affected members as soon as practicable.\8\
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\8\ See NASDAQ Equity Rule 4758(d)(1).
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Paragraph (d)(2) of NASDAQ Equity Rule 4758 will allow NES to
maintain an error account for the purpose of addressing error positions
that result from a technical or systems issue at NASDAQ, NES, a routing
destination, or a non-affiliate third-party Routing Broker.
For purposes of NASDAQ Equity Rule 4758(d), an error position will
not include any position that results from an order submitted by a
member to NASDAQ that is executed on NASDAQ and automatically processed
for clearance and settlement on a locked-in basis.\9\ NES will not be
permitted to (i) accept any positions in its error account from a
member's account or (ii) permit any member to transfer any positions
from the member's account to NES's error account.\10\ In other words,
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
NASDAQ, NES, a routing destination, or a non-affiliate third-party
Routing Broker.\11\ If a member receives locked-in positions in
connection with a technical or systems issue and experiences a loss in
unwinding those positions, that member may seek to rely on NASDAQ
Equity Rule 4626, which provides members with the ability to file
claims against NASDAQ ``for losses directly resulting from the [NASDAQ]
systems' actual failure to correctly process an order, Quote/Order,
message, or other data, provided the Nasdaq Market Center has
acknowledged receipt of the order, Quote/Order, message, or data.''
\12\ If, however, a technical or systems issue results in NASDAQ 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
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automatically processed for clearance and settlement on a locked-in
basis.\13\
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\9\ See NASDAQ Equity Rule 4758(d)(2)(A).
\10\ See NASDAQ Equity Rule 4758(d)(2)(B).
\11\ See Notice, 77 FR at 28907, n.11. This provision would not
apply if NES incurred a short position to settle a member's
purchase, as the member would not have had a position in its account
as a result of the purchase at the time of NES's action. Similarly,
if a systems issue occurs that causes one member to receive an
execution for which there is not an available counterparty, action
by NES would be required for the positions to settle into that
member's account. See id.
If error positions result in connection with NASDAQ'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. If, however, such
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 positions. See Notice, 77 FR at 28906, n.3.
\12\ See Notice, 77 FR at 28907, n.11.
\13\ See NASDAQ Equity Rule 4758(d)(2)(C).
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Paragraph (d)(3) of NASDAQ Equity Rule 4758 permits NASDAQ or NES,
in connection with a particular technical or systems issue, to either
(i) assign all resulting error positions to members or (ii) have all
resulting error positions liquidated. Any determination to assign or
liquidate error positions, as well as any resulting assignments, will
be made in a nondiscriminatory fashion.\14\
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\14\ See NASDAQ Equity Rule 4758(d)(3).
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NASDAQ and NES will be required to assign all error positions
resulting from a particular technical or systems issue to the members
affected by that technical or systems issue if NASDAQ or NES:
(i) Determines that it has accurate and sufficient information
(including valid clearing information) to assign the positions to all
of the members affected by that technical or systems issue;
(ii) Determines 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 members affected by
that technical or systems issue; and
(iii) Has not determined to cancel all orders affected by that
technical or systems issue in accordance with NASDAQ Equity Rule
4758(d)(1).\15\
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\15\ See NASDAQ Equity Rule 4758(d)(3)(A)(i)-(iii).
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If NASDAQ or NES is unable to assign all error positions resulting
from a particular technical or systems issue to all of the affected
members, or if NASDAQ or NES determines to cancel all orders affected
by the technical or systems issue, then NES will be required to
liquidate the error positions as soon as practicable.\16\ NES will be
required to provide complete time and price discretion for the trading
to liquidate the error positions to a third-party broker-dealer, and
would be prohibited from attempting to exercise any influence or
control over the timing or methods of such trading.\17\ Further, NES
will be required to establish and enforce policies and procedures that
are reasonably designed to restrict the flow of confidential and
proprietary information between the third-party broker-dealer, on one
hand, and NASDAQ and NES, on the other, associated with the liquidation
of the error positions.\18\
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\16\ See NASDAQ Equity Rule 4758(d)(3)(B).
\17\ See NASDAQ Equity Rule 4758(d)(3)(B)(i).
\18\ See NASDAQ Equity Rule 4758(d)(3)(B)(ii).
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Finally, paragraph (d)(4) of NASDAQ Equity Rule 4758 requires
NASDAQ and NES to make and keep records to document all determinations
to treat positions as error positions; all determinations to assign
error positions to members or to liquidate error positions; and the
liquidation of error positions through the third-party broker-dealer.
III. Discussion and Commission's Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of Section 6(b) of the Act
\19\ and the rules and regulations thereunder applicable to a national
securities exchange.\20\ In particular, the Commission finds that the
proposed rule change is consistent with Section 6(b)(5) of the Act,\21\
which requires, among other things, that the rules of a national
securities exchange 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 are not designed to permit unfair discrimination between
customers, issuers, brokers, or dealers. In addition, the Commission
believes the proposed rule change is consistent with Section
11A(a)(1)(C) of the Act \22\ in that it seeks to assure economically
efficient execution of securities transactions.
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\19\ 15 U.S.C. 78f(b).
\20\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\21\ 15 U.S.C. 78f(b)(5).
\22\ 15 U.S.C. 78k-1(a)(1)(C).
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The Commission recognizes that technical or systems issues may
occur, and believes that NASDAQ Equity Rule 4758, in allowing NASDAQ or
NES to cancel orders affected by technical or systems issues, should
provide a reasonably efficient means for NASDAQ to handle such orders,
and appears reasonably designed to permit NASDAQ to maintain fair and
orderly markets.\23\
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\23\ The Commission notes that NASDAQ states that the proposed
amendments to NASDAQ Equity Rule 4758 are designed to maintain fair
and orderly markets, ensure full trade certainty for market
participants, and avoid disrupting the clearance and settlement
process. See Notice, 77 FR at 28908. The Commission also notes that
NASDAQ states that a decision to cancel orders due to a technical or
systems issue is not equivalent to the Exchange declaring self-help
against a routing destination pursuant to Rule 611 of Regulation
NMS. See 17 CFR 242.611(b). See also Notice, 77 FR at 28907, n.10.
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The Commission also believes that allowing the Exchange to resolve
error positions through the use of an error account maintained by NES
pursuant to the procedures set forth in the rule, and as described
above, is consistent with the Act. The Commission notes that the rule
establishes criteria for determining which positions are error
positions,\24\ and that NASDAQ or NES, in connection with a particular
technical or systems issue, will be required to either (i) assign all
resulting error positions to members or (ii) have all resulting error
positions liquidated.\25\ Also, NASDAQ or NES will assign error
positions that result from a particular technical or systems issue to
members only if all such error positions can be assigned to all of the
members affected by that technical or systems issue.\26\ If NASDAQ or
NES cannot assign all error positions to all members, NES will
liquidate all of those error positions.\27\ In this regard, the
Commission believes that the new rule appears reasonably designed to
further just and equitable principles of trade and the protection of
investors and the public interest, and to help prevent unfair
discrimination, in that it should help assure the handling of error
positions will be based on clear and objective criteria, and that the
resolution of those positions will occur promptly through a transparent
process.
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\24\ See NASDAQ Equity Rule 4758(d)(2).
\25\ See NASDAQ Equity Rule 4758(d)(3).
\26\ See NASDAQ Equity Rule 4758(d)(3)(A).
\27\ See NASDAQ Equity Rule 4758(d)(3)(B).
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Additionally, the Commission notes that it has previously expressed
concern about the potential for unfair competition and conflicts of
interest between an exchange's self-regulatory obligations and its
commercial interest when the exchange is affiliated with one of its
members.\28\ The Commission is also concerned about the potential for
misuse of confidential and proprietary information. The Commission
believes that the requirement that NES provide complete time and price
discretion for the liquidation of error positions to a third-party
broker-dealer, including that NES not attempt to exercise any influence
or control over the timing or methods of such trading, combined with
the requirement that NASDAQ establish and enforce policies and
procedures that are reasonably designed to restrict the flow of
confidential and proprietary information to the third-party broker-
dealer liquidating such positions, should help mitigate the
Commission's concerns. In particular, the Commission
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believes that these requirements should help assure that none of
NASDAQ, NES, or the third-party broker-dealer is able to misuse
confidential or proprietary information obtained in connection with the
liquidation of error positions for its own benefit. The Commission also
notes that NASDAQ and NES would be required to make and keep records to
document all determinations to treat positions as error positions; all
determinations to assign error positions to members or liquidate error
positions; and the liquidation of error positions through the third-
party broker-dealer.\29\
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\28\ See, e.g., Securities Exchange Act Release No. 65455
(September 30, 2011), 76 FR 62119 (October 6, 2011) (SR-NYSEArca-
2011-61) at 62120, n.16 and accompanying text.
\29\ See NASDAQ Equity Rule 4758(d)(4).
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Finally, the Commission notes that the proposed procedures for
canceling orders and the handling of error positions are consistent
with procedures the Commission has approved for other exchanges.\30\
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\30\ See, e.g., Securities Exchange Act Release Nos. 66963 (May
10, 2012), 77 FR 28919 (May 16, 2012) (SR-NYSEArca-2012-22); 67010
(May 17, 2012), 77 FR 30564 (May 23, 2012) (SR-EDGX-2012-08); and
67011 (May 17, 2012), 77 FR 30562 (May 23, 2012) (SR-EDGA-2012-09).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\31\ that the proposed rule change (SR-NASDAQ-2012-057) be, and it
hereby is, approved.
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\31\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\32\
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\32\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-16220 Filed 7-2-12; 8:45 am]
BILLING CODE 8011-01-P