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11892. Clearly Erroneous Transactions in Exchange-Listed Securities

Past version: effective from Mar 30 2011 - Aug 4 2011.
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(a) Procedures for Reviewing Transactions
(1) An Executive Vice President of FINRA's Market Regulation Department or Transparency Services Department, or any officer designated by such Executive Vice President, may, on his or her own motion, review any over-the-counter transaction involving an exchange-listed security arising out of or reported through a trade reporting system owned or operated by FINRA or its subsidiaries and authorized by the Commission, provided that the transaction meets the thresholds set forth in paragraph (b). A FINRA officer acting pursuant to this subparagraph may declare any such transaction null and void if the officer determines that (A) the transaction is clearly erroneous, or (B) such actions are necessary for the maintenance of a fair and orderly market or the protection of investors and the public interest, consistent with the thresholds set forth in paragraph (b). Absent extraordinary circumstances, the officer shall take action pursuant to this paragraph generally within 30 minutes after becoming aware of the transaction. When extraordinary circumstances exist, any such action of the officer must be taken no later than the start of trading on the day following the date of execution(s) under review.
(2) If a FINRA officer acting pursuant to this paragraph declares any transaction null and void, each party involved in the transaction shall be notified as soon as practicable by FINRA, and the party aggrieved by the action may appeal such action in accordance with Rule 11894, unless the officer making the determination also determines that the number of the affected transactions is such that immediate finality is necessary to maintain a fair and orderly market and to protect investors and the public interest, and further provided that rulings made by FINRA in conjunction with one or more market centers are not appealable.
(b) Thresholds
Determinations of a clearly erroneous execution pursuant to paragraph (a)(1) will be made as follows:
(1) Numerical Guidelines
Subject to the provisions of paragraph (b)(3) below, a transaction shall be found to be clearly erroneous if the price of the transaction is away from the Reference Price by an amount that equals or exceeds the Numerical Guidelines set forth below. The Reference Price will be equal to the consolidated last sale immediately prior to the execution(s) under review except for: (A) Multi-Stock Events involving twenty or more securities, as described in paragraph (b)(2) below; (B) transactions not involving a Multi-Stock Event as described in paragraph (b)(2) that trigger a trading pause and subsequent transactions, as described in paragraph (b)(4) below, in which case the Reference Price shall be determined in accordance with that paragraph (b)(4); and (C) 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.
Reference Price:
Circumstance or Product
Normal Market Hours
(9:30 a.m. Eastern Time
to 4:00 p.m. Eastern
Time) Numerical
Guidelines (Subject
transaction's %
difference from the
Reference Price):
Outside Normal Market
Hours Numerical
Guidelines (Subject
transaction's %
difference from the
Reference Price):
Greater than $0.00 up to
and including $25.00
10% 20%
Greater than $25.00 up to
and including $50.00
5% 10%
Greater than $50.00 3% 6%
Multi-Stock Event —
Events involving five or
more, but less than twenty, securities
whose executions occurred within a
period of five minutes or less
10% 10%
Multi-Stock Event —
Events involving twenty or
more securities whose executions
occurred within a period of five
minutes or less
30%, subject to the terms
of paragraph (b)(2)
below
30%, subject to the terms
of paragraph (b)(2) below
Leveraged ETF/ETN securities Normal Market Hours
Numerical Guidelines
multiplied by the leverage
multiplier (i.e. 2x)
Normal Market Hours
Numerical Guidelines
multiplied by the leverage
multiplier (i.e. 2x)
(2) Multi-Stock Events Involving Twenty or More Securities
During Multi-Stock Events involving twenty or more securities, the number of affected transactions may be such that immediate finality is necessary to maintain a fair and orderly market and to protect investors and the public interest. In such circumstances, FINRA may use a Reference Price other than the consolidated last sale. With the exception of those securities under review that are subject to an individual stock trading pause as described in paragraph (b)(4) below, and to ensure consistent application across the markets when this paragraph is invoked, FINRA will promptly coordinate with the market centers to determine the appropriate review period, which may be greater than the period of five minutes or less that triggered application of this paragraph, as well as select one or more specific points in time prior to the transactions in question and use transaction prices at or immediately prior to the one or more specific points in time selected as the Reference Price. FINRA will nullify as clearly erroneous all transactions that are at prices equal to or greater than 30% away from the Reference Price in each affected security during the review period selected by FINRA and the markets consistent with this paragraph.
(3) Additional Factors
Except in the context of a Multi-Stock Event involving five or more securities and individual stock trading pauses as described in paragraph (b)(4) below, a FINRA Officer may also consider additional factors to determine whether a transaction is clearly erroneous, including but not limited to, system malfunctions or disruptions; volume and volatility for the security; derivative securities products that correspond to greater than 100% in the direction of a tracking index; news released for the security; whether trading in the security was recently halted/resumed; whether the security is an IPO; whether the security was subject to a stock-split, reorganization, or other corporate action; overall market conditions; Opening and Late Session executions; validity of the consolidated tapes' trades and quotes; consideration of primary market indications; and executions inconsistent with the trading pattern in the stock. Each additional factor shall be considered with a view toward maintaining a fair and orderly market and the protection of investors and the public interest.
(4) Individual Stock Trading Pauses
(A) For purposes of this paragraph, the phrase "Trading Pause Trigger Price" shall mean the price that triggered a trading pause on a primary listing market under its rules. The Trading Pause Trigger Price reflects a price calculated by the primary listing market over a rolling five-minute period and may differ from the execution price of a transaction that triggered a trading pause.
(B) In the event a primary listing market issues an individual stock trading pause, and regardless of whether the security at issue is part of a Multi-Stock Event involving five or more securities as described in paragraphs (b)(1) and (b)(2) above, FINRA shall utilize the Trading Pause Trigger Price as the Reference Price for any transactions that trigger a trading pause and subsequent transactions occurring before the trading halt is in effect for transactions otherwise than on an exchange. In connection with the review of transactions pursuant to this paragraph, FINRA will apply the Numerical Guidelines set forth in paragraph (b)(1) above, other than the Numerical Guidelines applicable to Multi-Stock Events. Where a trading pause was triggered by a price decline (rise), FINRA shall deem as clearly erroneous all such transactions that occurred at a price lower (higher) than the Trading Pause Trigger Price. FINRA will rely on the primary listing market that issued an individual stock trading pause to determine and communicate the Trading Pause Trigger Price for such stock. Trades occurring while the trading halt is in effect are in violation of Rule 5260 and also will be deemed clearly erroneous.

• • • Supplementary Material: ------------------

.01 Determinations by a National Securities Exchange to Nullify and Void the Terms of One or More Transactions in an Exchange-Listed Security When There Are Corresponding or Related Transactions Reported Through a FINRA System.

FINRA believes that coordinating with other self-regulatory organizations with the goal of having consistency and transparency regarding the clearly erroneous process is important to the marketplace and to investors. Consequently, for OTC transactions in exchange-listed securities that are reported to a FINRA system, such as a FINRA Trade Reporting Facility (“TRF”) or Alternative Display Facility (“ADF”), FINRA will generally follow the determination of a national securities exchange to break a trade(s) when that national securities exchange has broken a trade(s) at or near the price range in question at or near the time in question (in FINRA staff's sole discretion) such that FINRA breaking such trade(s) would be consistent with market integrity and investor protection. In such a case where multiple national securities exchanges have related trades, FINRA will leave a trade(s) unbroken when any of those national securities exchanges has left a trade(s) unbroken at or near the price range in question at or near the time in question (in FINRA staff's sole discretion) such that FINRA breaking such trade(s) would be inconsistent with market integrity and investor protection.

.02 The amendments set forth in File No. SR-FINRA-2010-032 shall be in effect during a pilot period set to end on the earlier of August 11, 2011 or the date on which a limit up/down mechanism to address extraordinary market volatility, if adopted, applies to the pilot securities. If the pilot is not extended or approved as permanent by August 11, 2011, the version of this Rule prior to SR-FINRA-2010-032 shall be in effect.

Amended by SR-FINRA-2011-014 eff. Mar. 30, 2011.
Amended by SR-FINRA-2010-065 eff. Dec. 8, 2010.
Amended by SR-FINRA-2010-032 eff. Sept. 10, 2010.
Amended by SR-FINRA-2009-068 eff. Feb. 15, 2010.
Amended by SR-FINRA-2008-037 eff. July 8, 2008.
Amended by SR-NASD-2006-104 eff. March 5, 2007.
Amended by SR-NASD-2006-121 eff. Oct. 30, 2006.
Amended by SR-NASD-2005-087 eff. Aug. 1, 2006
Amended by SR-NASD-2006-033 eff. Mar. 1, 2006.
Amended by SR-NASD-2005-089 eff. Oct. 1, 2005.
Amended by SR-NASD-2005-115 eff. Sep. 22, 2005.
Amended by SR-NASD-2004-009 eff. July 27, 2005.
Amended by SR-NASD-2003-125 eff. Aug. 8, 2003.
Amended by SR-NASD-2002-127 eff. Jan. 22, 2003.
Amended by SR-NASD-98-85 eff. October 11, 1999.
Amended by SR-NASD-98-94 eff. April 26, 1999.
Amended by SR-NASD-96-51 eff. Feb. 23, 1998.
Amended June 21, 1991; May 21, 1993.
Adopted eff. Apr. 2, 1990.

Selected Notices: 98-21, 99-29, 00-10, 03-11, 10-04, 10-43.

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