Notice to Members 05-51

Member Obligations with Respect to Volume-Weighted Average Price Transactions

NASD reminds members that when executing a volume-weighted average price (VWAP) or other large, potentially market-moving transactions for a customer,1 it is inconsistent with just and equitable principles of trade (Rule 2110) and a member’s best execution obligations (Rule 2320) to engage in proprietary trading activity that compromises the customer’s interest in favor of a member’s proprietary trading interest. Moreover, members who have received such orders have a duty to disclose in writing to the customer that the member may engage in hedging or other positioning activity that could affect the market for a security that is involved in the transaction. Depending on the nature of the order and the specificity known about it by the member, a duty to disclose such trading activity may arise even before a member is awarded the order for execution.

Members are further cautioned against manipulative activity or impermissible market conditioning in connection with executing a VWAP or other large order and reminded that best execution obligations always pertain once an order is received. Members also must establish and maintain information barriers and appropriate supervisory procedures reasonably designed to ensure the integrity of the trading activity and to evaluate the execution quality of VWAP and other large orders.

Questions concerning this Notice may be directed to the Legal Section, Market Regulation, at (240) 386-5126; or Philip A. Shaikun, Associate General Counsel, Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-8451.

1 Consistent with NASD Rule 0120(g), the term “customer order” for purposes of this Notice shall not include an order received from another broker-dealer.