Subject: File No. SR-NASDAQ-2012-090
From: Benjamin Bram
Affiliation: Watermill Institutional Trading LLC

August 22, 2012

I want to apologize in advance that this is being written by a trader and not a lawyer and may be hard to follow. I will do my best to keep things as simple and direct as possible but they are likely to get a little sticky.

We were pleased to learn that claims will be paid in cash. As a broker fulfilling our best execution responsibilities we had to pay cash for the price differences involved in NASDAQs error in May and it would have taken years for us to get our money back thru reduced payments to NASDAQ.

Secondly, we agree with NASDAQ that they are responsible for their errors on that day, failing to execute eligible orders or executing them at wrong prices. We also agree that they are not responsible for brokers letting clients out of reports they were eligible for or trading decisions that firms made that had nothing to do with the opening trade.

Where we disagree with NASDAQ is in the methodology they propose to calculate how much they owe on orders that were eligible but were not executed.

We had orders that were executed at the wrong price (Sale of 100k shares) and we also had orders that were eligible for execution (Sell order of 225k shares) that were not executed.

Our order to sell 100k shares at the market placed at 11:15 am was executed at 41.7467 instead of the opening price 42. Our client was entitled to a 42 print, a fact that we had confirmed with NASDAQ markets desk prior to the 13:50 notification. It seems that lots of market orders were held in abeyance by NASDAQ and executed right at 13:50 (14million shares traded in the two minutes between 13:50 and 13:52).

We also had 450k shares to sell at 42, which we had confirmed with the NASDAQ markets desk that they were eligible for the opening 42 print, but received reports on only those placed before 11am (225k) and not on those whose limit changed between 11 and 11:30 (225k, the second piece of the 450k sell order at 42). The 225k shares which we did not receive a 42 print were sold at 40.14 for a loss of approximately $414k.

NASDAQ proposes to use the VWAP of the first 45 minutes after 13:50 as the maximum they should owe for those orders not executed that were owed 42 reports and where brokers like us had to sell out for a loss. While it sounds reasonable to say that you had the first 45 minutes to sell out your error, NASDAQ is really using one error to limit their exposure on the other.

The VWAP of the first 45 minutes, which is what NASDAQ has proposed as the limit for their liability is 40.5357, but that number includes all the orders that NASDAQ mishandled by not executing on the open and executing right at 13:50. Approximately 14.4m shares traded between 13:50 and 13:52 at an average of 40.9643. No one could possibly have gotten into the market more quickly than those orders that NASDAQ had electronically queued up in error and removing those two minutes leaves an average of 40.3757 for the remaining 43 minutes.

One of NASDAQ biggest failings on this day was in the incomplete and disjointed way in which they communicated what the situation was to people. We had an open phone line to the markets desk and it was still about 15 minutes before we could get confirmation that if we hadnt received a report at 1350 for orders that were eligible that I was not going to get one. They advised that we owed our client the report that he was entitled to(42) , and that the correct procedure was to give them the report, sell out my exposure for a price difference, and to make a claim to NASDAQ. I was told by the markets desk that I had to do this to fulfill my best execution responsibilities and that they paid claims usually at the end of the month (I assumed it was the same month). I sold my stock out at 25% of the volume and received 40.14. I dont see how firms who didnt leave a line open to NASDAQ would have reacted more quickly.

The idea that NASDAQ could use the volume that their own error created (market orders executed at 1350 that should have executed at the open) to limit their liability on their other error (limit orders not executed that should have been executed on the open) is objectionable. The volume between 13:50 and 13:52 should definitely be excluded from any VWAP calculations.

This was an unprecedented mess up by an exchange. No one had any idea what was happening and it seems reasonable that people be given more time to figure out what was happening because NASDAQ was not effectively communicating with the community of brokers and investors who had put their trust in them to handle this open and their orders effectively. The high volume of calls from agitated clients made matters worse.

What we propose as fair is that the VWAP calculation clock at 14:20, giving people a half hour to deal with the confusion that NASDAQ created thru their various failures and poor communication, and allow it to run for an hour(limiting NASDAQs exposure to 39.6194). If brokers sold at higher prices then NASDAQs exposure would be limited to that price. We believe very few brokers sold at a price than the 40.5357 that NASDAQ proposed because of the huge volume in those first two minutes due to NASDAQs other error. We feel very strongly that including that volume would call into question the fairness of the whole process as no one could possibly have reacted more quickly than those orders erroneously queued up.

To sum it up, our main contention is that to include the volume of orders that NASDAQ incorrectly excluded from the opening and traded right at 1350 as part of the VWAP calculation limits their exposure on their other errors(orders not executed that were eligible). We think this is terribly unfair and undermines the integrity of the process since no one could have beaten that volume to the market. What we think is fair is to give brokers some reasonable amount of time to determine their exposures and trade out. We agree with NASDAQ that they should not be responsible for others trading decisions that have nothing to do with their error. Where we differ is we think they should be fair when determining how quickly brokers were able to determine what their situation was. Since we feel NASDAQs poor communication was responsible for the confusion that reigned that afternoon, giving brokers a half hour to realize where they were and approximately an hour to trade out seems fair.

We hope this wasnt hard to follow and are happy to answer any questions either in person or on the phone.

Ben Bram
Watermill Institutional Trading LLC
30 W. 21st Street, 12th Flor
New York, NY 10010

917-621-3800