MADOFF’S GUIDE TO ORDER HANDLING-Listed Securities Jump to specific categories: Introduction Price Liquidity Smart Order Routing Speed Limit Order Exposure Special Situations SEC Order Handling Rules INTRODUCTION A PRIMER FOR EXECUTION QUALITY Bernard L. Madoff Investment Securities LLC has been providing quality executions for broker-dealers, banks, and financial institutions since the firm’s inception in 1960. During this time, Madoff has compiled an uninterrupted record of growth, which has enabled us to continually build financial resources. With more than $600 million in firm capital, Madoff currently ranks among the top 1% of U.S. Securities firms. Our sophisticated proprietary automation and unparalleled client service delivers an enhanced execution that is virtually unmatched in our industry. The hallmarks of our system are price improvement, speed, and enhanced liquidity delivered with a level of client service that sets us apart from our competitors. Madoff utilizes a market based, algorithmic approach to defining price improvement and enhanced liquidity. Discussions with many of our clients have brought to light several key concerns with the decimal-pricing environment: The difficulty of defining "meaningful" price improvement when stocks trade in pennies, the possibility of significantly reduced liquidity at the quoted national best bid/offer (NBBO), and the prospect of an increased number of "split tickets" or multiple-piece fills even on their smaller sized orders. We have designed our system to address all of these concerns. To help you fully understand the services we offer, we have developed this guide to illustrate how our execution system works. The cornerstones of a quality execution -- Price, Liquidity, Smart Order Routing, Speed, and Limit Order Protection -- are highlighted below. Return to Table of Contents... PRICE MARKET ORDER PRICE IMPROVEMENT Madoff has been a market innovator in providing quality executions for its clients. Our clients can confidently state that their clients’ orders will have one of the highest rates of price improvement available in the industry today. In addition, we also offer an on-line audit trail documentation system. This will provide you with additional information to assist you in your obligation under the SEC’s Order Handling Rules to "…regularly and rigorously examine execution quality likely to be obtained from different markets or market makers trading a security." Automatic Price Improvement for all Listed Securities Madoff provides automated price improvement opportunities for all NYSE listed securities in which we make a market. Our systems automatically price improve all eligible market and marketable limit orders by 20% of the NBBO spread. Eligible orders will include immediately executable market and marketable limit orders from 100 up to 3,000 shares where the NBBO is greater than two cents ($0.02) and includes the primary exchange. The amount of improvement will be based on the NBBO spread at the time we receive your order and will be rounded to the nearest penny. The improvement will be no less than a penny per share. Orders 1,000 shares and over will not be eligible for automatic price improvement if the order size exceeds the quoted size. Orders in some Exchange Traded Funds such as the DIA, EWJ, SMH, and SPY will not be eligible for automatic price improvement. Single Price Opening for All Securities Madoff’s systems provide an automated, single-price opening. For listed issues, all pre-opening market and marketable limit orders will be priced based on the opening print on the primary exchange. Oversized orders received after 9:28:00 a.m. EST are not guaranteed the opening price. Return to Table of Contents... LIQUIDITY MADOFF’S ENHANCED LIQUIDITY Madoff offers immediate liquidity for eligible orders under normal market conditions at the displayed price available in the marketplace as defined by the national best bid and offer (NBBO) at the time of receipt of your order and enhanced by our price improvement mechanisms. In NYSE listed securities, immediately executable market and marketable limit orders up to 1,000 shares will be automatically executed in their entirety immediately upon receipt regardless of the size at the NBBO. Orders from 1,000 shares up to 3,000 shares will be automatically executed in their entirety immediately upon receipt as long as the order size does not exceed the quoted size at the NBBO. If the order size does exceed the quoted size, the order will receive an automated execution that is based on a predetermined combination of Madoff's own capital and use of our smart router to efficiently access multiple points of liquidity. Orders from 3,000 shares up to 50,000 shares will also receive an automated execution combining Madoff's own capital and use of our smart-router. Orders 50,000 shares and greater will be handled manually. Orders in Exchange Traded Funds and other less liquid and more volatile securities are subject to lower liquidity guarantees. Madoff’s enhanced liquidity results in more completed trades at superior prices for your clients. During periods of unusual market conditions, we reserve the right to adjust our execution parameters to appropriate levels. During periods when the NBBO is locked or crossed, our liquidity guarantee is reduced automatically. Madoff's liquidity guarantee is intended for regular and continuous, two-sided, non-momentum based business. Orders that do not meet this description may be subject to lower liquidity guarantees. In addition, our liquidity guarantee is intended to cover individual orders. Multiple orders that are the result of a single investment decision may be treated as a single order to the extent that the aggregate size of these orders exceeds our guaranteed liquidity threshold. Madoff reserves the right to adjust liquidity guarantees on a client by client basis. Return to Table of Contents... SMART ORDER ROUTING ACCESS TO ADDITIONAL LIQUIDITY Madoff’s systems are designed to automatically deliver enhanced executions through our price improvement and liquidity guarantees. In those instances where clients’ larger orders exceed our liquidity thresholds and we look to outside sources for liquidity and price discovery, we still offer our clients an enhanced execution. We achieve this in two ways. First, our systems automatically commit capital on a percentage of the order, mitigating the overall market impact of the order. Second, we rely on our proprietary smart router to automatically access additional sources of liquidity. This piece of sophisticated technology has been continuously updated to reflect the numerous new entrants to the marketplace. Our router is connected to all displayed quotes and takes into account factors such as the full depth of accessible quotes, availability of reserve sizes, speed of response, likelihood of getting a fill, and expenses related to the execution. All of these factors enable us to handle larger orders with efficiency and market leading quality. Return to Table of Contents... SPEED AUTOMATION DELIVERS FASTER EXECUTIONS By incorporating an algorithmic approach to defining price improvement and enhanced liquidity, Madoff is able to reduce overall execution speeds for market and marketable limit orders. Madoff’s clients do not sacrifice speed in their efforts to achieve a quality execution . Return to Table of Contents... LIMIT ORDER EXPOSURE SUPERIOR LIMIT ORDER HANDLING Madoff offers its clients superior limit order protection. The SEC has mandated that all market centers and their participants reflect their clients’ interest in their quote. Our automated systems automatically execute or display all held limit orders less than block size (10,000 shares or $200,000) that are priced equal to or better than Madoff's quote or that will add to the size associated with such quote unless an express request is made by our client not to display the order. Our systems also guarantee client limit orders priority over any Madoff proprietary trader interest, in compliance with our Manning obligations. As a result, many of your clients’ limit orders will be executed with greater speed by our system than by our competitors. This occurs not only because your order is exposed on the Nasdaq Stock Exchange where it can interact with other NMS interest, but also because your order will interact with our other clients’ orders if there is a matching interest or activity at the limit price. Return to Table of Contents... SPECIAL SITUATIONS Under certain circumstances orders will be subjected to automated or manual verification. This may be done through the use of orders sent to other market centers. An example of when this may happen would be locked and crossed markets, actively moving markets, and widely spread markets. In addition, orders may be subjected to clarification of the terms of the order (i.e.. limit price, special instructions, etc.). In these instances the price at execution time may be different (favorable or unfavorable) from the price at receipt time. Madoff also employs the following policies for special situations: UNUSUAL MARKET CONDITIONS POLICY During periods of unusual market conditions, often characterized by inordinate volumes and volatility, Madoff will attempt to continue providing our clients with the enhanced service benefits which are generally offered during normal market conditions. These enhanced service benefits include, but are not limited to, automatic execution, automated display of eligible client limit orders, automated limit order protection, automated price improvement opportunities and acceptance of stop orders. During unusual market conditions, however, it is possible that some or all of these features may be temporarily modified or suspended. The following are examples of some of the measures which Madoff may take with respect to client orders in either all or certain securities in an effort to efficiently and effectively address such unusual market conditions: · The order size eligible for automatic execution may be temporarily reduced with the approval of senior management. · Madoff may temporarily decline to accept stop orders. We will continue to honor existing stop and stop limit orders but may decline to accept new ones. Please bear in mind that stop orders are not eligible for Madoff's traditional liquidity guarantees. · Certain orders and executions may be subject to review, adjustment, and/or cancellation Madoff carefully considers the potential effect of such decisions on your clients' orders. Some of the factors evaluated by senior management prior to adjusting our execution parameters are: · The price volatility of a particular security; · The number of client orders received by Madoff in a particular security; · The total number of client orders received by Madoff. These factors are continually reviewed by senior management throughout the trading day. Our goal is to achieve the highest level of client service given the prevailing characteristics of individual securities and the overall market conditions. Nevertheless, client expectations should reflect the unusual market conditions that may be present in the current marketplace. These are some of the potential consequences arising from unusual market conditions with respect to client orders: · Potential delays in execution reports; · Potential multiple execution prices and times for market orders accepted by Madoff which are greater than our current eligible order size. These orders are handled in their entirety on a manual basis. STOP ORDER POLICY Madoff accepts stop orders in all stocks in which we make a market. Stop orders are not eligible for Madoff's traditional liquidity guarantees. There is no guarantee that a "stop" order, once it is elected, will receive an execution at its "stop" price. Stop orders will automatically be elected based on a primary print at or better than the order’s stop price. Upon election, stop orders will be treated as marketable orders and stop limits will be treated as limit orders. Elected stop orders and stop limit orders will automatically be afforded complete Manning protection. Marketable stop orders will receive an automated execution that is based on a predetermined combination of Madoff's own capital and use of our smart router to efficiently access multiple points of liquidity. TRADING HALT POLICY In exchange listed securities, when trading on the primary market is halted either on a regulatory basis or as the result of an order imbalance, it is Madoff's long-standing policy not to execute any client orders during the halt. The period surrounding a trading halt may be deemed subject to unusual market conditions. During this period, we will use our best efforts to continue to maintain an orderly market in the subject security. All orders received during the halt will be executed on a best efforts basis immediately following the resumption of trading in the security. NOT HELD ORDER POLICY By placing a "not held/working" order with us, you are directing that we handle your order on a "not held" basis, which means you are giving us discretion to properly exercise our brokerage judgment to seek to obtain a quality execution of your order. This means that we are relieved of our normal responsibilities for the time of execution and the price or prices of execution of such an order, provided that we otherwise exercise proper brokerage judgment. Specifically, we are not required to execute the order at the time of receipt or at the current market price at the time of receipt. In addition, such discretion means that we may trade for our own account at prices equal to or better than those received by the "not held/working" orders. Therefore, there will be no protections afforded these orders pursuant to NASD IM-2110-2 (the so-called Manning Rule). Nevertheless, any purchases or sales executed on behalf of a "not-held/working" order by us shall be consistent with our efforts to seek to obtain a quality execution of such orders, considering all of the terms agreed to with you and the market conditions surrounding the order. When handling your order, it shall be on a "net" basis unless otherwise instructed. This means that the reported price may reflect our compensation, including an imputed markup or markdown. When multiple executions are employed consistent with a client's "not held/working order" specification, the final price to you may reflect an "average price" plus or minus an imputed markup. Accordingly, we may act in the capacity of principal, riskless principal, or, in the event of multiple executions, more than one capacity. Of course, you may request detail on the individual executions at any time. MARKET ON CLOSE ORDER POLICY Madoff only accepts electronically delivered Listed and Nasdaq Market on Close (MOC) orders prior to 3:40:00 p.m. EST. After 3:40:00 p.m. EST, we will reject such orders as "not within eligible hours". Furthermore, any electronic cancellation requests for MOC orders received after 3:40:00 p.m. EST will be rejected as "not within eligible hours". Orders in listed securities will be priced based on the closing print on the primary exchange. SPECIAL SETTLEMENT POLICY The execution price for special settlement orders will automatically include a 3 cents per share markup for client buys and a 3 cents per share markdown for client sells. SUB-PENNY ORDER POLICY Rule 612 of Regulation NMS (effective January 31, 2006) prohibits market participants from displaying, ranking, or accepting quotations, orders or indications of interest in any NMS stock priced in an increment smaller than $0.01 if the quotation, order or indication of interest is priced greater than or equal to $1.00 per share. In accordance with this rule, Madoff will reject all client orders priced in sub-pennies if the order price is greater than $1.00 per share. Madoff will accept orders priced in sub-pennies if the order price is less than $1, but such orders will be rounded to a penny increment for display purposes (client buy orders will be rounded down to the nearest penny, client sell orders will be rounded up to the nearest penny.) AFFIRMATIVE DETERMINATION In accordance with NASD Rule 3370, Madoff requires that all short sale client orders from firms that are not Nasdaq members must be accompanied by an indication that the non-member firm has performed the affirmative determination (confirmed that the security is available for delivery by settlement date, or confirmed that the security can be borrowed for delivery by the settlement date). Orders that are not accompanied by such an indication will be rejected. The indication that an affirmative determination has been made can be either electronic or verbal. Return to Table of Contents... SEC ORDER HANDLING RULES Madoff’s systems and its procedures are designed to search out and provide a quality execution for all its clients’ orders. Madoff considers a quality execution to include opportunities for price improvement beyond the inside quote (National Best Bid and Offer). Madoff employs its own proprietary automation, the Madoff Integrated Support System (MISS), when seeking a quality execution. MISS considers all quotation information from National Market System (NMS) participants as well as readily accessible quotation information from qualified electronic communication networks (ECNs) that may be disseminated in the NMS. Madoff’s automated systems have been designed and are continually enhanced to automatically provide the highest level of regulatory compliance and execution quality available. While Madoff’s automation provides a level of quality and consistency that would not otherwise be available in a manual environment, Madoff’s employees remain the cornerstone of our execution service. Senior management, as well as trading, systems, and operations personnel are all aware of the significance of the SEC’s Order Handling Rules. Management meetings are held regularly to ensure that the firm is meeting its regulatory and competitive goals. Quality and consistency are rigorously monitored through Madoff’s on-line supervisory systems, which allow management to review each trade for its execution quality on a regular and continuous basis. Under certain circumstances orders will be subjected to manual verification (i.e. locked and crossed markets), or clarification of the terms of the order (i.e. limit price, special instructions, etc.). In these instances the price at execution time may be different (favorable or unfavorable) from the price at receipt time. Return to Table of Contents...