Notice2022-21068
Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Nasdaq Equity 11, Rule 11890
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
September 29, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
<html>
<head>
<title>Federal Register, Volume 87 Issue 188 (Thursday, September 29, 2022)</title>
</head>
<body><pre>
[Federal Register Volume 87, Number 188 (Thursday, September 29, 2022)]
[Notices]
[Pages 59150-59156]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-21068]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95902; File No. SR-NASDAQ-2022-052]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Amend Nasdaq Equity 11, Rule 11890
September 23, 2022.
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 September 20, 2022, The Nasdaq Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the 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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Nasdaq Equity 11, Rule 11890
(Clearly Erroneous Transactions).
The text of the proposed rule change is available on the Exchange's
website at <a href="https://listingcenter.nasdaq.com/rulebook/nasdaq/rules">https://listingcenter.nasdaq.com/rulebook/nasdaq/rules</a>, at
the principal office of the Exchange, 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
On September 1, 2022, the Commission approved the proposal of Cboe
BZX Exchange, Inc. (``Cboe BZX'') to (1) adopt on a permanent basis the
pilot program for clearly erroneous executions in Cboe BZX Rule 11.17
and (2) limit the circumstances where clearly erroneous review would
continue to be available during regular trading hours (i.e., Market
Hours) \3\ when the Limit Up-Limit Down (``LULD'') Plan to Address
Extraordinary Market Volatility (the ``LULD Plan'') \4\ already
provides similar protections for trades occurring at prices that may be
deemed erroneous.\5\
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Release No. 95658 (September 1,
2022) (SR-CboeBZX-2022-037).
\4\ See Securities Exchange Act Release No. 67091 (May 31,
2012), 77 FR 33498 (June 6, 2012).
\5\ The term ``Market Hours'' means the period of time beginning
at 9:30 a.m. ET and ending at 4:00 p.m. ET (or such earlier time as
may be designated by Nasdaq on a day when Nasdaq closes early). See
Equity 1, Section 1(a)(9). The Exchange will make conforming changes
throughout Rule 11890 to replace references to ``Regular Trading
Hours'' and ``Regular Market Session'' with ``Market Hours,'' which
is the correct defined term.
---------------------------------------------------------------------------
The Exchange now proposes to adopt the same changes in Equity 11,
Rule 11890 (Clearly Erroneous Transactions). The Exchange believes that
these changes are appropriate as the LULD Plan has been approved by the
Commission on a permanent basis,\6\ and in light of amendments to the
LULD Plan, including changes to the applicable Price Bands \7\ around
the open and close of trading.
---------------------------------------------------------------------------
\6\ See Securities Exchange Act Release No. 84843 (December 18,
2018), 83 FR 66464 (December 26, 2018) (``Notice''); 85623 (April
11, 2019), 84 FR 16086 (April 17, 2019) (File No. 4-631)
(``Amendment Eighteen'').
\7\ ``Price Bands'' refers to the term provided in Section V of
the LULD Plan.
---------------------------------------------------------------------------
Proposal To Make the Clearly Erroneous Pilot Permanent
On September 10, 2010, the Commission approved, on a pilot basis,
changes to Equity 11, Rule 11890 that, among other things: (i) provided
for uniform treatment of clearly erroneous execution reviews in multi-
[[Page 59151]]
stock events involving twenty or more securities; and (ii) reduced the
ability of the Exchange to deviate from the objective standards set
forth in the rule.\8\ In 2013, the Exchange adopted a provision
designed to address the operation of the LULD Plan.\9\ Finally, in
2014, the Exchange adopted two additional provisions providing that:
(i) a series of transactions in a particular security on one or more
trading days may be viewed as one event if all such transactions were
effected based on the same fundamentally incorrect or grossly
misinterpreted issuance information resulting in a severe valuation
error for all such transactions; and (ii) in the event of any
disruption or malfunction in the operation of the electronic
communications and trading facilities of an Exchange, another SRO, or
responsible single plan processor in connection with the transmittal or
receipt of a trading halt, an Officer, acting on his or her own motion,
shall nullify any transaction that occurs after a trading halt has been
declared by the primary listing market for a security and before such
trading halt has officially ended according to the primary listing
market.\10\ These changes are currently scheduled to operate for a
pilot period that would end at the close of business on October 20,
2022.\11\
---------------------------------------------------------------------------
\8\ See Securities Exchange Act Release No. 62886 (September 10,
2010), 75 FR 56613 (September 16, 2010) (SR-NASDAQ-2010-076).
\9\ See Securities Exchange Act Release No. 68819 (February 1,
2013), 78 FR 9438 (February 8, 2013) (SR-NASDAQ-2013-022).
\10\ See Securities Exchange Act Release No. 72434 (June 19,
2014), 79 FR 36110 (June 25, 2014) (SR-NASDAQ-2014-044).
\11\ See Securities Exchange Act Release No. 95329 (July 20,
2022), 87 FR 44455 (July 26, 2022) (SR-NASDAQ-2022-043).
---------------------------------------------------------------------------
When it originally approved the clearly erroneous pilot, the
Commission explained that the changes were ``being implemented on a
pilot basis so that the Commission and the Exchanges can monitor the
effects of the pilot on the markets and investors, and consider
appropriate adjustments, as necessary.'' \12\ In the 12 years since
that time, the Exchange and other national securities exchanges have
gained considerable experience in the operation of the rule, as amended
on a pilot basis. Based on that experience, the Exchange believes that
the program should be allowed to continue on a permanent basis so that
equities market participants and investors can benefit from the
increased certainty provided by the amended rule.
---------------------------------------------------------------------------
\12\ See Securities Exchange Act Release No. 62886 (September
10, 2010), 75 FR 56613 (September 16, 2010) (SR-NASDAQ-2010-076).
---------------------------------------------------------------------------
The clearly erroneous pilot was implemented following a severe
disruption in the U.S. equities markets on May 6, 2010 (``Flash
Crash'') to ``provide greater transparency and certainty to the process
of breaking trades.'' \13\ Largely, the pilot reduced the discretion of
the Exchange, other national securities exchanges, and Financial
Industry Regulatory Authority (``FINRA'') to deviate from the objective
standards in their respective rules when dealing with potentially
erroneous transactions. The pilot has thus helped afford greater
certainty to Members and investors about when trades will be deemed
erroneous pursuant to self-regulatory organization (``SRO'') rules and
has provided a more transparent process for conducting such reviews.
The Exchange proposes to make the current pilot permanent so that
market participants can continue to benefit from the increased
certainty afforded by the current rule.
---------------------------------------------------------------------------
\13\ Id.
---------------------------------------------------------------------------
Amendments to the Clearly Erroneous Rules
When the Participants to the LULD Plan filed to introduce the Limit
Up-Limit Down (``LULD'') mechanism, itself a response to the Flash
Crash, a handful of commenters noted the potential discordance between
the clearly erroneous rules and the Price Bands used to limit the price
at which trades would be permitted to be executed pursuant to the LULD
Plan. For example, two commenters requested that the clearly erroneous
rules be amended so the presumption would be that trades executed
within the Price Bands would not be subject to review.\14\ While the
Participants acknowledged that the potential to prevent clearly
erroneous executions would be a ``key benefit'' of the LULD Plan, the
Participants decided not to amend the clearly erroneous rules at that
time.\15\ In the years since, industry feedback has continued to
reflect a desire to eliminate the discordance between the LULD
mechanism and the clearly erroneous rules so that market participants
would have more certainty that trades executed with the Price Bands
would stand. For example, the Equity Market Structure Advisory
Committee (``EMSAC'') Market Quality Subcommittee included in its April
19, 2016 status report a preliminary recommendation that clearly
erroneous rules be amended to conform to the Price Bands--i.e., ``any
trade that takes place within the band would stand and not be broken
and trades outside the LU/LD bands would be eligible for the
consideration of the Clearly Erroneous rules.'' \16\
---------------------------------------------------------------------------
\14\ See Securities Exchange Act Release No. 67091 (May 31,
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631) (n. 33505).
\15\ Id.
\16\ See EMSAC Market Quality Subcommittee, Recommendations for
Rulemaking on Issues of Market Quality (November 29, 2016),
available at <a href="https://www.sec.gov/spotlight/emsac/emsac-recommendations-rulemaking-market-quality.pdf">https://www.sec.gov/spotlight/emsac/emsac-recommendations-rulemaking-market-quality.pdf</a>.
---------------------------------------------------------------------------
The Exchange believes that it is important for there to be some
mechanism to ensure that investors' orders are either not executed at
clearly erroneous prices or are subsequently busted as needed to
maintain a fair and orderly market. At the same time, the Exchange
believes that the LULD Plan, as amended, would provide sufficient
protection for trades executed during Market Hours. Indeed, the LULD
mechanism could be considered to offer superior protection as it
prevents potentially erroneous trades from being executed in the first
instance. After gaining experience with the LULD Plan, the Exchange now
believes that it is appropriate to largely eliminate clearly erroneous
review during Market Hours when Price Bands are in effect. Thus, as
proposed, trades executed within the Price Bands would stand, barring
one of a handful of identified scenarios where such review may still be
necessary for the protection of investors. The Exchange believes that
this change would be beneficial for the U.S. equities markets as it
would ensure that trades executed within the Price Bands are subject to
clearly erroneous review in only rare circumstances, resulting in
greater certainty for Members and investors.
The current LULD mechanism for addressing extraordinary market
volatility is available solely during Market Hours. Thus, trades during
the Exchange's Pre-Market \17\ or Post-Market Hours \18\ would not
benefit from this protection and could ultimately be executed at prices
that may be considered erroneous. For this reason, the Exchange
proposes that transactions executed during Pre-Market or Post-Market
Hours would continue to be reviewable as clearly erroneous.
[[Page 59152]]
Continued availability of the clearly erroneous rule during Pre- and
Post-Market Hours would therefore ensure that investors have
appropriate recourse when erroneous trades are executed outside of the
hours where similar protection can be provided by the LULD Plan.
Further, the proposal is designed to eliminate the potential
discordance between clearly erroneous review and LULD Price Bands,
which does not exist outside of Market Hours because the LULD Plan is
not in effect. Thus, the Exchange believes that it is appropriate to
continue to allow transactions to be eligible for clearly erroneous
review if executed outside of Market Hours.
---------------------------------------------------------------------------
\17\ The term ``Pre-Market Hours'' means the period of time
beginning at 4:00 a.m. ET and ending immediately prior to the
commencement of Market Hours. See Equity 1, Section 1(a)(9). The
Exchange will make conforming changes throughout Rule 11890 to
replace references to ``Pre-Opening Hours'' or ``Pre-Opening Hours
Trading Session'' with ``Pre-Market Hours,'' which is the correct
defined term.
\18\ The term ``Post-Market Hours'' means the period of time
beginning immediately after the end of Market Hours and ending at
8:00 p.m. ET. See Equity 1, Section 1(a)(9). The Exchange will make
conforming changes throughout Rule 11890 to replace references to
``After Hours'' or ``After Hours Trading Session'' with ``Post-
Market Hours,'' which is the correct defined term.
---------------------------------------------------------------------------
On the other hand, there would be much more limited potential to
request that a transaction be reviewed as potentially erroneous during
Market Hours. With the introduction of the LULD mechanism in 2013,
clearly erroneous trades are largely prevented by the requirement that
trades be executed within the Price Bands. In addition, in 2019,
Amendment Eighteen to the LULD Plan eliminated double-wide Price Bands:
(1) at the Open, and (2) at the Close for Tier 2 NMS Stocks 2 with a
Reference Price above $3.00.\19\ Due to these changes, the Exchange
believes that the Price Bands would provide sufficient protection to
investor orders such that clearly erroneous review would no longer be
necessary during Market Hours. As the Participants to the LULD Plan
explained in Amendment Eighteen: ``Broadly, the Limit Up-Limit Down
mechanism prevents trades from happening at prices where one party to
the trade would be considered `aggrieved,' and thus could be viewed as
an appropriate mechanism to supplant clearly erroneous rules.'' While
the Participants also expressed concern that the Price Bands might be
too wide to afford meaningful protection around the open and close of
trading, amendments to the LULD Plan adopted in Amendment Eighteen
narrowed Price Bands at these times in a manner that the Exchange
believes is sufficient to ensure that investors' orders would be
appropriately protected in the absence of clearly erroneous review. The
Exchange therefore believes that it is appropriate to rely on the LULD
mechanism as the primary means of preventing clearly erroneous trades
during Market Hours.
---------------------------------------------------------------------------
\19\ See Amendment Eighteen, supra note 6.
---------------------------------------------------------------------------
At the same time, the Exchange is cognizant that there may be
limited circumstances where clearly erroneous review may continue to be
appropriate, even during Market Hours. Thus, the Exchange proposes to
amend its clearly erroneous rules to enumerate the specific
circumstances where such review would remain available during the
course of Market Hours, as follows. All transactions that fall outside
of these specific enumerated exceptions would be ineligible for clearly
erroneous review.
First, pursuant to proposed subparagraph (C)(1)(i) of Rule
11890(a)(2), a transaction executed during Market Hours would continue
to be eligible for clearly erroneous review if the transaction is not
subject to the LULD Plan. In such case, the Numerical Guidelines set
forth in subparagraph (C)(2) of Rule 11890(a)(2) will be applicable to
such NMS Stock. While the majority of securities traded on the Exchange
would be subject to the LULD Plan, certain equity securities, such as
rights and warrants, are explicitly excluded from the provisions of the
LULD Plan and would therefore be eligible for clearly erroneous review
instead.\20\ Similarly, there are instances, such as the opening
auction on the primary listing market,\21\ where transactions are not
ordinarily subject to the LULD Plan, or circumstances where a
transaction that ordinarily would have been subject to the LULD Plan is
not--due, for example, to some issue with processing the Price Bands.
These transactions would continue to be eligible for clearly erroneous
review, effectively ensuring that such review remains available as a
backstop when the LULD Plan would not prevent executions from occurring
at erroneous prices in the first instance.
---------------------------------------------------------------------------
\20\ See Appendix A of the LULD Plan.
\21\ The initial Reference Price used to calculate Price Bands
is typically set by the Opening Price on the primary listing market.
See Section V(B) of the LULD Plan.
---------------------------------------------------------------------------
Second, investors would also continue to be able to request review
of transactions that resulted from certain systems issues pursuant to
proposed subparagraph (C)(1)(ii). This limited exception would help to
ensure that trades that should not have been executed would continue to
be subject to clearly erroneous review. Specifically, as proposed,
transactions executed during Market Hours would be eligible for clearly
erroneous review pursuant to proposed subparagraph (C)(1)(ii) if the
transaction is the result of an Exchange technology or systems issue
that results in the transaction occurring outside of the applicable
LULD Price Bands pursuant to Rule 11890(g), or is executed after the
primary listing market for the security declares a regulatory trading
halt, suspension, or pause pursuant to Rule 11890(i). A transaction
subject to review pursuant to this paragraph shall be found to be
clearly erroneous if the price of the transaction to buy (sell) that is
the subject of the complaint is greater than (less than) the Reference
Price, described in subparagraph (D) of this Rule, by an amount that
equals or exceeds the applicable Percentage Parameter defined in
Appendix A to the LULD Plan (``Percentage Parameters'').
Third, the Exchange proposes to narrowly allow for the review of
transactions during Market Hours when the Reference Price, described in
proposed subparagraph (D), is determined to be erroneous by an Officer
of the Exchange or senior level employee designee. Specifically, a
transaction executed during Market Hours would be eligible for clearly
erroneous review pursuant to proposed subparagraph (C)(1)(iii) of Rule
11890(a)(2) if the transaction involved, in the case of (1) a corporate
action or new issue or (2) a security that enters a Trading Pause
pursuant to the LULD Plan and resumes trading without an auction,\22\ a
Reference Price that is determined to be erroneous by an Officer of the
Exchange or senior level employee designee because it clearly deviated
from the theoretical value of the security. In such circumstances, the
Exchange may use a different Reference Price pursuant to proposed
subparagraph (D)(2) of this Rule. A transaction subject to review
pursuant to this paragraph shall be found to be clearly erroneous if
the price of the transaction to buy (sell) that is the subject of the
complaint is greater than (less than) the new Reference Price,
described in subparagraph (D)(2) below, by an amount that equals or
exceeds the applicable Numerical Guidelines or Percentage Parameters,
as applicable depending on whether the security is subject to the LULD
Plan. Specifically, the Percentage Parameters would apply to all
transactions except those in an NMS Stock that is not subject to the
LULD Plan, as described in subparagraph (C)(1)(i).
---------------------------------------------------------------------------
\22\ The Exchange notes that the ``resumption of trading without
an auction'' provision of the proposed rule text applies only to
securities that enter a Trading Pause pursuant to LULD and does not
apply to a corporate action or new issue.
---------------------------------------------------------------------------
In the context of a corporate action or a new issue, there may be
instances where the security's Reference Price is later determined by
the Exchange to be erroneous (e.g., because of a bad first trade for a
new issue), and subsequent LULD Price Bands are calculated from that
incorrect Reference Price. In determining whether the Reference Price
is erroneous in such instances, the
[[Page 59153]]
Exchange would generally look to see if such Reference Price clearly
deviated from the theoretical value of the security. In such cases, the
Exchange would consider a number of factors to determine a new
Reference Price that is based on the theoretical value of the security,
including but not limited to, the offering price of the new issue, the
ratio of the stock split applied to the prior day's closing price, the
theoretical price derived from the numerical terms of the corporate
action transaction such as the exchange ratio and spin-off terms, and
the prior day's closing price on the OTC market for an OTC up-
listing.\23\ In the foregoing instances, the theoretical value of the
security would be used as the new Reference Price when applying the
Percentage Parameters under the LULD Plan (or Numerical Guidelines if
the transaction is in an NMS Stock that is not subject to the LULD
Plan) to determine whether executions would be cancelled as clearly
erroneous.
---------------------------------------------------------------------------
\23\ Using transaction data reported to the FINRA OTC Reporting
Facility, FINRA disseminates via the Trade Data Dissemination
Service a final closing report for OTC equity securities for each
business day that includes, among other things, each security's
closing last sale price.
---------------------------------------------------------------------------
The following illustrate the proposed application of the rule in
the context of a corporate action or new issue:
Example 1
1. ABCD is subject to a corporate action, 1 for 10 reverse split, and
the previous day close was $5, but the new theoretical price based on
the terms of the corporate action is $50
2. The security opens at $5, with LULD bands at $4.50 x $5.50
3. The bands will be calculated correctly but the security is trading
at an erroneous price based on the valuation of the remaining
outstanding shares
4. The theoretical price of $50 would be used as the new Reference
Price when applying LULD bands to determine if executions would be
cancelled as clearly erroneous
Example 2
1. ABCD is subject to a corporate action, the company is doing a spin
off where a new issue will be listed, BCDE. ABCD trades at $50, and the
spinoff company is worth \1/5\ of ABCD
2. BCDE opens at $50 in the belief it is the same company as ABCD
3. The theoretical values of the two companies are ABCD $40 and BCDE
$10
4. BCDE would be deemed to have had an incorrect Reference Price and
the theoretical value of $10 would be used as the new Reference Price
when applying the LULD Bands to determine if executions would be
cancelled as clearly erroneous
Example 3
1. ABCD is an uplift from the OTC market, the prior days close on the
OTC market was $20
2. ABCD opens trading on the new listing exchange at $0.20 due to an
erroneous order entry
3. The new Reference Price to determine clearly erroneous executions
would be $20, the theoretical value of the stock from where it was last
traded
In the context of the rare situation in which a security that
enters a LULD Trading Pause and resumes trading without an auction
(i.e., reopens with quotations), the LULD Plan requires that the new
Reference Price in this instance be established by using the mid-point
of the best bid and offer (``BBO'') on the primary listing exchange at
the reopening time.\24\ This can result in a Reference Price and
subsequent LULD Price Band calculation that is significantly away from
the security's last traded or more relevant price, especially in less
liquid names. In such rare instances, the Exchange is proposing to use
a different Reference Price that is based on the prior LULD Band that
triggered the Trading Pause, rather than the midpoint of the BBO.
---------------------------------------------------------------------------
\24\ See LULD Plan, Section I(U) and V(C)(1).
---------------------------------------------------------------------------
The following example illustrates the proposed application of the
rule in the context of a security that reopens without an auction:
Example 4
1. ABCD stock is trading at $20, with LULD Bands at $18 x $22
2. An incoming buy order causes the stock to enter a Limit State
Trading Pause and then a Trading Pause at $22
3. During the Trading Pause, the buy order causing the Trading Pause is
cancelled
4. At the end of the 5-minute halt, there is no crossed interest for an
auction to occur, thus trading would resume on a quote
5. Upon resumption, a quote that was available prior to the Trading
Pause (e.g., a quote was resting on the book prior to the Trading
Pause), is widely set at $10 x $90
6. The Reference Price upon resumption is $50 (mid-point of BBO)
7. The SIP will use this Reference Price and publish LULD Bands of $45
x $55 (i.e., far away from BBO prior to the halt)
8. The bands will be calculated correctly, but the $50 Reference Price
is subsequently determined to be incorrect as the price clearly
deviated from where it previously traded prior to the Trading Pause
9. The new Reference Price would be $22 (i.e., the last effective Price
Band that was in a limit state before the Trading Pause), and the LULD
Bands would be applied to determine if the executions should be
cancelled as clearly erroneous
In all of the foregoing situations, investors would be left with no
remedy to request clearly erroneous review without the proposed
carveouts in subparagraph (C)(1)(iii) because the trades occurred
within the LULD Price Bands (albeit LULD Price Bands that were
calculated from an erroneous Reference Price). The Exchange believes
that removing the current ability for the Exchange to review in these
narrow circumstances would lessen investor protections.
Numerical Guidelines
Today, subparagraph (C)(1) defines the Numerical Guidelines that
are used to determine if a transaction is deemed clearly erroneous
during Market Hours, or during the Pre-Market and Post-Market Hours.
With respect to Market Hours, trades are generally deemed clearly
erroneous if the execution price differs from the Reference Price
(i.e., last sale) by 10% if the Reference Price is greater than $0.00
up to and including $25.00; 5% if the Reference Price is greater than
$25.00 up to and including $50.00; and 3% if the Reference Price is
greater than $50.00. Wider parameters are also used for reviews for
Multi-Stock Events, as described in subparagraph (C)(2). With respect
to transactions in Leveraged ETF/ETN securities executed during Market
Hours, Pre-Market and Post-Market Hours, trades are deemed clearly
erroneous if the execution price exceeds the Market Hours Numerical
Guidelines multiplied by the leverage multiplier.
Given the changes described in this proposed rule change, the
Exchange proposes to amend the way that the Numerical Guidelines are
applied during Market Hours in the handful of instances where clearly
erroneous review would continue to be available. Specifically during
Market Hours, the Exchange would continue to apply the Numerical
Guidelines, which would be relocated from subparagraph (C)(1) to
(C)(2)(i) under this proposal, to transactions eligible for review
pursuant proposed subparagraph (C)(1)(i) (i.e., transactions in NMS
Stocks that are not subject to the LULD Plan). In addition,
[[Page 59154]]
as applied to the circumstances described in proposed subparagraphs
(C)(1)(ii) and (iii), the Exchange would not apply the Numerical
Guidelines in proposed subparagraph (C)(2)(i) during Market Hours, and
would instead apply the Percentage Parameters used to calculate Price
Bands, as set forth in Appendix A to the LULD Plan. Without this
change, a transaction that would otherwise stand if Price Bands were
properly applied to the transaction may end up being subject to review
and deemed clearly erroneous solely due to the fact that the Price
Bands were not available due to a systems or other issue. The Exchange
believes that it makes more sense to instead base the Price Bands on
the same parameters as would otherwise determine whether the trade
would have been allowed to execute within the Price Bands. The Exchange
also proposes to modify the Numerical Guidelines applicable to
leveraged ETF/ETN securities during Market Hours. As noted above, the
Numerical Guidelines will only be applicable to transactions eligible
for review pursuant subparagraph (C)(1)(i) (i.e., to NMS Stocks that
are not subject to the LULD Plan). As leveraged ETF/ETN securities are
subject to LULD and thus the Percentage Parameters will be applicable
during Market Hours, the Exchange proposes to eliminate the Numerical
Guidelines for leveraged ETF/ETN securities traded during Market Hours.
However, as no Price Bands are available outside of Market Hours, the
Exchange proposes to keep the existing Numerical Guidelines in place
for transactions in leveraged ETF/ETN securities that occur during Pre-
Market and Post-Market Hours.
The Exchange also proposes to move existing subparagraphs (C)(2)
(Multi-Stock Events Involving Twenty or More Securities) and (C)(3)
(Additional Factors) as proposed subparagraphs (C)(2)(ii) and
(C)(2)(iii), respectively, and also proposes to make clear that Multi-
Stock Events and Additional Factors will only be subject to clearly
erroneous review if those NMS Stocks are not subject to the LULD Plan
or occur during the Pre-Market or Post-Market Hours. The Exchange
proposes to make similar changes to existing subparagraph (A)(iii)
(Outlier Transactions) to make clear that such transactions will only
be subject to clearly erroneous review if those NMS Stocks are not
subject to the LULD Plan or occur during Pre-Market or Post-Market
Hours. Further, given the proposal to move existing subparagraphs
(C)(2) and (C)(3) to subparagraphs (C)(2)(ii) and (C)(2)(iii),
respectively, the Exchange also proposes to amend applicable rule
references throughout subparagraph (C)(2)(i). Further, the Exchange
proposes to update applicable rule references in subparagraph (A)(iii)
based on the above-described structural changes to the Rule. Finally,
the Exchange proposes to renumber existing subparagraph (C)(4) to
subparagraph (C)(3) and update the cross cites therein to ``paragraphs
(C)(1)-(C)(3)'' to ``subparagraphs (C)(1)-(C)(2).'' \25\
---------------------------------------------------------------------------
\25\ The Exchange will make a related change to update the cross
cite within current paragraph (b)(ii).
---------------------------------------------------------------------------
Reference Price
As proposed, the Reference Price used would continue to be based on
last sale and would be memorialized in proposed subparagraph (D).
Continuing to use the last sale as the Reference Price is necessary for
operational efficiency as it may not be possible to perform a timely
clearly erroneous review if doing so required computing the arithmetic
mean price of eligible reported transactions over the past five
minutes, as contemplated by the LULD Plan. While this means that there
would still be some differences between the Price Bands and the clearly
erroneous parameters, the Exchange believes that this difference is
reasonable in light of the need to ensure timely review if clearly
erroneous rules are invoked. The Exchange also proposes to allow for an
alternate Reference Price to be used as prescribed in proposed
subparagraphs (D)(1), (2), and (3). Specifically, the Reference Price
may be a value other than the consolidated last sale immediately prior
to the execution(s) under review (1) in the case of Multi-Stock Events
involving twenty or more securities, as described in subparagraph
(C)(2)(ii) above, (2) in the case of an erroneous Reference Price, as
described in subparagraph (C)(1)(iii) above,\26\ or (3) in other
circumstances, such as, for example, relevant news impacting a security
or securities, periods of extreme market volatility, sustained
illiquidity, or widespread system issues, where use of a different
Reference Price is necessary for the maintenance of a fair and orderly
market and the protection of investors and the public interest,
provided that such circumstances occurred during Pre-Market or Post-
Market Hours or are eligible for review pursuant to subparagraph
(C)(1)(i).
---------------------------------------------------------------------------
\26\ As discussed above, in the case of (C)(1)(iii)(1), the
Exchange would consider a number of factors to determine a new
Reference Price that is based on the theoretical value of the
security, including but not limited to, the offering price of the
new issue, the ratio of the stock split applied to the prior day's
closing price, the theoretical price derived from the numerical
terms of the corporate action transaction such as the exchange ratio
and spin-off terms, and the prior day's closing price on the OTC
market for an OTC up-listing. In the case of (C)(1)(iii)(2), the
Reference Price will be the last effective Price Band that was in a
limit state before the Trading Pause.
---------------------------------------------------------------------------
System Disruption or Malfunction
To conform with the structural changes described above, the
Exchange now proposes to remove paragraph (b)(i), System Disruption or
Malfunctions, and renumber existing paragraph (b)(ii) as (b)(i).
Additionally, the Exchange proposes to add rule text in renumbered
(b)(i) (Senior Official Acting on Own Motion) to specify that a Senior
Official, acting on his or her own motion, may review potentially
erroneous transactions that occur only during Pre-Market or Post-Market
Hours or that are eligible for review pursuant to proposed paragraph
(a)(2)(C)(1).
The Exchange also proposes new subparagraph (C)(1)(ii) of Rule
11890(a)(2). Specifically, as described in subparagraph (C)(1)(ii),
transactions occurring during Market Hours that are executed outside of
the LULD Price Bands due to an Exchange technology or system issue, may
be subject to clearly erroneous review pursuant to proposed paragraph
(g) of Rule 11890. Proposed subparagraph (C)(1)(ii) further provides
that a transaction subject to review pursuant to this paragraph shall
be found to be clearly erroneous if the price of the transaction to buy
(sell) that is the subject of the complaint is greater than (less than)
the Reference Price, described in subparagraph (D), by an amount that
equals or exceeds the applicable Percentage Parameter defined in
Appendix A to the LULD Plan.
Securities Subject to Limit Up-Limit Down Plan
The Exchange proposes to rename paragraph (g) (Securities Subject
to LULD Plan) as ``Transactions Occurring Outside of LULD Price
Bands.'' Given that proposed subparagraph (C)(1) of Rule 11890(a)(2)
defines the LULD Plan, the Exchange also proposes to eliminate
redundant language from paragraph (g). Finally, the Exchange also
proposes to update references to the LULD Plan and Price Bands so that
they are uniform throughout the Rule and to update rule references
throughout the paragraph to conform to the structural changes to the
Rule described above.
Fees, Multi-Day Event and Trading Halts
The Exchange proposes to modify the text of paragraphs (e) (Fees),
(h) (Multi-Day Event), and (i) (Trading Halts) to reference the
Percentage Parameters as well as the Numerical Guidelines, and
[[Page 59155]]
to update rule references therein to conform to the structural changes
to the Rule described above. Specifically, the existing text of
paragraph (e) provides that adjustments or voluntary breaks negotiated
by Nasdaq to trades executed at prices that meet the Numerical
Guidelines set forth in (a)(2)(C)(1) count as breaks by Nasdaq for
purposes of this paragraph. The Exchange now proposes to amend the rule
text to state that adjustments or voluntary breaks negotiated by Nasdaq
to trades executed at prices that meet the Percentage Parameters or
Numerical Guidelines set forth in (a)(2)(C)(2) count as breaks by
Nasdaq for purposes of this paragraph.
In addition, the existing text of paragraphs (h) and (i) provides
that any action taken in connection with this paragraph will be taken
without regard to the Numerical Guidelines set forth in this Rule. The
Exchange proposes to amend the rule text to provide that any action
taken in connection with this paragraph will be taken without regard to
the Percentage Parameters or Numerical Guidelines set forth in this
Rule, with the Percentage Parameters being applicable to an NMS Stock
subject to the LULD Plan and the Numerical Guidelines being applicable
to an NMS Stock not subject to the LULD Plan.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the requirements of Section 6(b) of the Act,\27\ in general, and
Section 6(b)(5) of the Act,\28\ in particular, in that it is designed
to remove impediments to and perfect the mechanism of a free and open
market and a national market system, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest and not to permit unfair discrimination between
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------
\27\ 15 U.S.C. 78f(b).
\28\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
As explained in the purpose section of this proposed rule change,
the current pilot was implemented following the Flash Crash to bring
greater transparency to the process for conducting clearly erroneous
reviews, and to help assure that the review process is based on clear,
objective, and consistent rules across the U.S. equities markets. The
Exchange believes that the amended clearly erroneous rules have been
successful in that regard and have thus furthered fair and orderly
markets. Specifically, the Exchange believes that the pilot has
successfully ensured that such reviews are conducted based on objective
and consistent standards across SROs and has therefore afforded greater
certainty to Members and investors. The Exchange therefore believes
that making the current pilot a permanent program is appropriate so
that equities market participants can continue to reap the benefits of
a clear, objective, and transparent process for conducting clearly
erroneous reviews. In addition, the Exchange understands that the other
U.S. equities exchanges and FINRA will also file largely identical
proposals to make their respective clearly erroneous pilots permanent.
The Exchange therefore believes that the proposed rule change would
promote transparency and uniformity across markets concerning review of
transactions as clearly erroneous and would also help assure consistent
results in handling erroneous trades across the U.S. equities markets,
thus furthering fair and orderly markets, the protection of investors,
and the public interest.
Similarly, the Exchange believes that it is consistent with just
and equitable principles of trade to limit the availability of clearly
erroneous review during Market Hours. The LULD Plan was approved by the
Commission to operate on a permanent rather than pilot basis. As a
number of market participants have noted, the LULD Plan provides
protections that ensure that investors' orders are not executed at
prices that may be considered clearly erroneous. Further, amendments to
the LULD Plan approved in Amendment Eighteen serve to ensure that the
Price Bands established by the LULD Plan are ``appropriately tailored
to prevent trades that are so far from current market prices that they
would be viewed as having been executed in error.'' \29\ Thus, the
Exchange believes that clearly erroneous review should only be
necessary in very limited circumstances during Market Hours.
Specifically, such review would only be necessary in instances where a
transaction was not subject to the LULD Plan, or was the result of some
form of systems issue, as detailed in the purpose section of this
proposed rule change. Additionally, in narrow circumstances where the
transaction was subject to the LULD Plan, a clearly erroneous review
would be available in the case of (1) a corporate action or new issue
or (2) a security that enters a Trading Pause pursuant to LULD and
resumes trading without an auction, where the Reference Price is
determined to be erroneous by an Officer of the Exchange or senior
level employee designee because it clearly deviated from the
theoretical value of the security. Thus, eliminating clearly erroneous
review in all other instances will serve to increase certainty for
Members and investors that trades executed during Market Hours would
typically stand and would not be subject to review.
---------------------------------------------------------------------------
\29\ See Amendment Eighteen, supra note 6.
---------------------------------------------------------------------------
Given the fact that clearly erroneous review would largely be
limited to transactions that were not subject to the LULD Plan, the
Exchange also believes that it is necessary to change the parameters
used to determine whether a trade is clearly erroneous. Specifically,
due to the different parameters currently used for clearly erroneous
review and for determining Price Bands, it is possible that a trade
that would have been permitted to execute within the Price Bands would
later be deemed clearly erroneous, if, for example, a systems issue
prevented the dissemination of the Price Bands. The Exchange believes
that this result is contrary to the principle that trades within the
Price Bands should stand, and has the potential to cause investor
confusion if trades that are properly executed within the applicable
parameters described in the LULD Plan are later deemed erroneous. By
using consistent parameters for clearly erroneous reviews conducted
during Market Hours and the calculation of the Price Bands, the
Exchange believes that this change would also serve to promote greater
certainty with regards to when trades may be deemed erroneous.
Finally, the proposed rule changes make organizational updates to
Rule 11890 as well as minor updates and corrections to the Rule to
improve readability and clarity.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change would
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The proposal would ensure
the continued, uninterrupted operation of harmonized clearly erroneous
execution rules across the U.S. equities markets while also amending
those rules to provide greater certainty to Members and investors that
trades will stand if executed during Market Hours where the LULD Plan
provides adequate protection against trading at erroneous prices. The
Exchange understands that the other national securities exchanges and
FINRA will also file similar proposals, the substance of which are
identical to this proposal. Thus, the proposed rule change will help to
ensure consistency
[[Page 59156]]
across SROs without implicating any competitive issues.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \30\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\31\
---------------------------------------------------------------------------
\30\ 15 U.S.C. 78s(b)(3)(A)(iii).
\31\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
---------------------------------------------------------------------------
A proposed rule change filed under Rule 19b-4(f)(6) \32\ normally
does not become operative prior to 30 days after the date of the
filing. However, Rule 19b-4(f)(6)(iii) \33\ permits the Commission to
designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay so that the proposed
rule change may become operative on October 1, 2022. The Commission
believes that waiving the 30-day operative delay is consistent with the
protection of investors and the public interest, as it will allow the
Exchange to coordinate its implementation of the revised clearly
erroneous execution rules with the other national securities exchanges
and FINRA, and will help ensure consistency across the SROs.\34\ For
this reason, the Commission hereby waives the 30-day operative delay
and designates the proposed rule change as operative upon filing.\35\
---------------------------------------------------------------------------
\32\ 17 CFR 240.19b-4(f)(6).
\33\ 17 CFR 240.19b-4(f)(6)(iii).
\34\ See SR-CboeBZX-2022-37 (July 8, 2022).
\35\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
---------------------------------------------------------------------------
At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or 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
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#d0a2a5bcb5fdb3bfbdbdb5bea4a390a3b5b3feb7bfa6"><span class="__cf_email__" data-cfemail="80f2f5ece5ade3efedede5eef4f3c0f3e5e3aee7eff6">[email protected]</span></a>. Please include
File Number SR-NASDAQ-2022-052 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2022-052. 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 website (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
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 website 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 such filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NASDAQ-2022-052 and should be submitted
on or before October 20, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\36\
---------------------------------------------------------------------------
\36\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-21068 Filed 9-28-22; 8:45 am]
BILLING CODE 8011-01-P
</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>Indexed from Federal Register on September 29, 2022.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.