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FINRA has enacted rules to ensure that broker-dealers do not execute orders at prices that are not reasonably related to the market price for a security. An Executive Vice President of FINRA’s Market Regulation Department or Transparency Services Department or any officer designated by the Executive Vice President may declare a transaction to be clearly erroneous if the reported price is not reasonably related to the market price. Once a transaction is deemed to be clearly erroneous, the officer will declare the transaction to be null and void. FINRA sets a range of acceptable prices for securities based on the reference or market price. A transaction that deviates from the acceptable range will be deemed to be clearly erroneous. For exchange listed securities, absent extraordinary circumstances, FINRA will take action within 30 minutes of becoming aware of the transaction. Should extraordinary circumstances exist, FINRA will take action no later than the opening of trading on the business day following the date of the transaction under review. For OTC securities, FINRA will take action as soon as practicable after becoming aware of an erroneous transaction. However, any action taken must be resolved by 3 p.m. Eastern Standard Time on the following business day. FINRA will notify each broker-dealer of the fact that the transaction has been declared null and void and an aggrieved party may appeal the action within 30 minutes of receiving notification from FINRA, unless FINRA in its sole authority determines that the cancelation of the transaction must be immediate and final to protect the integrity of a fair and orderly market. All appeals will be made to FINRA’s UPC Committee. If an aggrieved party appeals, FINRA will notify the counterparty to the trade and both parties will be able to submit supporting documentation. For exchange listed securities FINRA will render a decision as soon as practicable, generally during the same trading day. If a broker-dealer requests an appeal after 3 p.m. eastern time, FINRA will render a decision as soon as practicable but no later than the trading day following the date of execution. For OTC securities, FINRA will render a decision as soon as practicable but no later than two trading days following the date of execution. No appeal submitted to FINRA will act as a stay of FINRA’s initial determination.
For exchange listed securities, the reference price will be the consolidated last sale reported immediately prior to the transaction in question. For exchange-listed securities FINRA may use a price other than the last sale during times of extreme volatility, system-wide outages or issues, multi stock events involving 20 or more securities, news releases or as necessary to maintain a fair and orderly market. In the case of a series of transactions taking place over multiple days, FINRA may declare all transactions to be clearly erroneous by the start of trading one business day following the last transaction in the series.
The following table provides numerical guidelines based on reference prices for exchange-listed securities
|Reference Price:Circumstance or Product||Normal Market Hours(9:30 a.m. Eastern Timeto 4:00 p.m. EasternTime) NumericalGuidelines (Subjecttransaction’s %difference from theReference Price):||Outside Normal MarketHours NumericalGuidelines (Subjecttransaction’s %difference from theReference Price):|
|Greater than $0.00 up toand including $25.00||10%||20%|
|Greater than $25.00 up toand including $50.00||5%||10%|
|Greater than $50.00||3%||6%|
|Multi-Stock Event —Events involving five ormore, but less than twenty, securitieswhose executions occurred within aperiod of five minutes or less||10%||10%|
|Multi-Stock Event —Events involving twenty ormore securities whose executionsoccurred within a period of fiveminutes or less||30%, subject to the termsof paragraph (b)(2)below||30%, subject to the termsof paragraph (b)(2) below|
|Leveraged ETF/ETN securities||Normal Market HoursNumerical Guidelinesmultiplied by the leveragemultiplier (i.e. 2x)||Normal Market HoursNumerical Guidelinesmultiplied by the leveragemultiplier (i.e. 2x)|
For OTC securities, during times of increased volatility, volume, trading halts or news releases FINRA may use a reference price other than the prevailing market price to determine if a transaction was clearly erroneous. FINRA may consolidate the inside price, the opening price, the price prior to close or the last sale prior to a series of executions to determine an acceptable range of transactions.
The following table illustrates the acceptable price ranges for OTC (non listed) securities
|Reference Price||Numerical Guidelines (SubjectTransaction’s % Difference from theReference Price)|
|$0.9999 and under||20%|
|$1.0000 and up to and including$4.9999||Low end of range minimum 20% –High end of range minimum 10%|
|$5.0000 and up to and including$74.9999||10%|
|$75.0000 and up to and including$199.9999||Low end of range minimum 10% –High end of range minimum 5%|
|$200.0000 and up to and including$499.9999||5%|
|$500.0000 and up to and including$999.9999||Low end of range minimum 5% –High end of range minimum 3%|
|$1,000.0000 and over||3%|
Additionally, it is important to note that any transaction executed during a trading halt is by definition clearly erroneous and will be immediately declared null and void
We hope that this article has helped you better understand the definition of clearly erroneous transactions.
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