November 15, 2007
Regulatory Alert #2007-109
Behavior That May Be Referred For Regulatory
Scrutiny Regarding Potentially Manipulative
PRLs and Wash Sales Activity
Please Route To:
Head Traders; Technical Contacts; Compliance Officers
What you need to know:
• Orders that may be routed to the New York Stock Exchange (NYSE) must comply with NYSE
interpretations regarding odd-lot activity, including the submission of partial round lot (PRL)
orders.
•
Transactions that violate the NYSE's requirements relating to the use of its odd-lot system,
including with respect to Partial Round Lots (PRLs), or that are potentially manipulative will
be referred by NASDAQ to the Financial Industry Regulatory Authority (FINRA) for further
investigation.
Who you should contact:
• NASDAQ MarketWatch at 800.211.4953 or 301.978.8501.
What information is NASDAQ providing?
NASDAQ® reminds member firms that orders routed to the NYSE must comply with NYSE
interpretations regarding odd-lot activity, including the submission of partial round lot (PRL)
orders. Transactions that violate the NYSE's requirements relating to the use of its odd-lot
system, including with respect to PRLs, or that are potentially manipulative will be referred by
NASDAQ to the Financial Industry Regulatory Authority (FINRA) for further investigation.
In NYSE Information Memo 07-60, NYSE Regulation stated that the NYSE's odd-lot system may not
be used in ways that are intended to circumvent the round-lot auction process. The NYSE has
advised that, among other things, the following activities are inconsistent with the proper
submission of odd-lot orders to the NYSE:
•
Effecting prearranged or wash sales in the round-lot portion of a PRL for the purpose of
effecting an execution of the odd-lot portion of the PRL with no market risk and at a more
favorable price than market conditions would have otherwise permitted. For example, when
the quote in XYZ is $0.05 - $0.15, a customer simultaneously bids $0.06 for 199 shares and
offers 100 shares at $0.06. This would cause 100 shares to execute at .06 (this would be a
prohibited wash sale), which would in turn force the specialist to sell to the customer the
remaining 99 shares at $0.06, thereby generating a riskless odd-lot trade at a better price
for the odd-lot than the market at the time would have provided.
•
Effecting prearranged or wash sales in odd-lots, which are trades in which an offer to buy is
coupled with an offer to sell back at the same or an advanced price (or the reverse). These
trades are violative because they are not actually exposed to the risk of the market.
Whether a transaction presents "market risk" is a facts and circumstances determination.
However, in order to be considered at the risk of the market, there can be no guarantee or
assurance of the price of the second transaction at the time of the first transaction. In
addition, the time period between the two transactions would not of itself determine
whether the trading had been effected at the risk of the market. Rather, factors such as the
liquidity of the security and the volume must be considered. Prearranged or wash sales in
odd-lots or partial round lots ("PRLs") should not be used to create a false or misleading
appearance of more actual or apparent active trading in such security. Such activity would
violate SEC and NYSE anti-manipulation and anti-fraud rules, and other NYSE rules
including but not limited to just and equitable principals of trade and good business
practices.
•
Other trading activity in odd-lot orders or in PRLs that is not consistent with traditional oddlot investment activity, including index arbitrage, certain types of program trading, security
classes not typically involved in program trading (e.g., REITs, certain narrowly based
structure products, etc.), or any pattern of activity that would suggest day trading is
otherwise clearly suspicious because it is inconsistent with traditional odd-lot investment
activity.
What do I need to do?
Please review NYSE Information Memo 07-60 for additional guidance regarding NYSE odd-lot
order requirements.
Where can I get additional information?
•
NASDAQ MarketWatch at 800.211.4953 or 301.978.8501.
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