[Federal Register Volume 76, Number 125 (Wednesday, June 29, 2011)]
[Notices]
[Pages 38243-38245]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-16229]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-64735; File Nos. SR-BATS-2011-016; SR-BYX-2011-011; SR-
BX-2011-025; SR-CBOE-2011-049; SR-CHX-2011-09; SR-EDGA-2011-15; SR-
EDGX-2011-14; SR-FINRA-2011-023; SR-ISE-2011-028; SR-NASDAQ-2011-067;
SR-NYSE-2011-21; SR-NYSEAmex-2011-32; SR-NYSEArca-2011-26; SR-NSX-2011-
06; SR-Phlx-2011-64]
Self-Regulatory Organizations; BATS Exchange, Inc.; BATS Y-
Exchange, Inc.; NASDAQ OMX BX, Inc.; Chicago Board Options Exchange,
Incorporated; Chicago Stock Exchange, Inc.; EDGA Exchange, Inc.; EDGX
Exchange, Inc.; Financial Industry Regulatory Authority, Inc.;
International Securities Exchange LLC; The NASDAQ Stock Market LLC; New
York Stock Exchange LLC; NYSE Amex LLC; NYSE Arca, Inc.; National Stock
Exchange, Inc.; NASDAX OMX PHLX LLC; Order Approving Proposed Rule
Changes Relating To Expanding the Pilot Rule for Trading Pauses Due to
Extraordinary Market Volatility to All NMS Stocks
June 23, 2011.
I. Introduction
On May 4, 2011 and May 5, 2011, each of BATS Exchange, Inc.
(``BATS''), BATS Y-Exchange, Inc. (``BYX''), NASDAQ OMX BX, Inc.
(``BX''), Chicago Board Options Exchange, Incorporated (``CBOE''),
Chicago Stock Exchange, Inc. (``CHX''), EDGA Exchange, Inc (``EDGA''),
EDGX Exchange, Inc. (``EDGX''), Financial Industry Regulatory
Authority, Inc. (``FINRA''), International Securities Exchange LLC
(``ISE''), The NASDAQ Stock Market LLC (``Nasdaq''), New York Stock
Exchange LLC (``NYSE''), NYSE Amex LLC (``NYSE Amex''), NYSE Arca, Inc.
(``NYSE Arca''), National Stock Exchange, Inc. (``NSX''), and NASDAX
OMX PHLX LLC (``Phlx'') filed with the Securities and Exchange
Commission (``Commission''), pursuant to Section 19(b)(1) \1\ of the
Securities Exchange Act of 1934 (``Act''),\2\ and Rule 19b-4
thereunder,\3\ proposed rule changes to amend certain of their
respective rules to expand the trading pause pilot in individual stocks
to include all remaining NMS stocks, but to require wider percentage
price moves before a trading pause is triggered for the newly added
securities.\4\ The current trading pause pilot applies only to
securities that are included in the S&P 500[supreg] Index (``S&P
500''), the Russell 1000[supreg] Index (``Russell 1000'') or a select
group of Exchange Traded Products (``ETPs'').\5\ The proposed rule
changes were published for comment in the Federal Register on May 12,
2011.\6\ The Commission received no comments on the proposed rule
changes. On June 20, 2011 and June 21, 2011, the Exchanges and FINRA
filed amendments to their respective proposed rule changes.\7\ This
order approves the proposed rule changes, as amended.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
\4\ The term ``Exchanges'' shall refer collectively to all of
the national securities exchanges in this order.
NMS stock means any NMS security other than an option. See 17
CFR 242.600(47). NMS security means any security or class of
securities for which transaction reports are collected, processed,
and made available pursuant to an effective transaction reporting
plan, or an effective national market system plan for reporting
transactions in listed options. See 17 CFR 242.600(46).
\5\ On May 6, 2011, Phlx filed an amendment to its proposed rule
change. See Amendment No. 1 to SR-Phlx-2011-64 (noting that the
proposed rule change was approved by the Board of Directors of Phlx
on May 6, 2011). Amendment No. 1 to SR-Phlx-2011-64 is a technical
amendment and is not subject to notice and comment.
\6\ See Securities Exchange Act Release Nos. 64435 (May 6,
2011), 76 FR 27684 (May 12, 2011); 64433 (May 6, 2011), 76 FR 27680
(May 12, 2011); 64427 (May 6, 2011), 76 FR 27704 (May 12, 2011);
64434 (May 6, 2011), 76 FR 27687 (May 12, 2011); 64431 (May 6,
2011), 76 FR 27683 (May 12, 2011); 64432 (May 6, 2011), 76 FR 27701
(May 12, 2011); 64428 (May 6, 2011), 76 FR 27702 (May 12, 2011);
64424 (May 6, 2011), 76 FR 27707 (May 12, 2011); 64423 (May 6,
2011), 76 FR 27677 (May 12, 2011); 64426 (May 6, 2011), 76 FR 27678
(May 12, 2011); 64420 (May 6, 2011), 76 FR 27675 (May 12, 2011);
64421 (May 6, 2011), 76 FR 27708 (May 12, 2011); 64422 (May 6,
2011), 76 FR 27691 (May 12, 2011); 64425 (May 6, 2011), 76 FR 27689
(May 12, 2011); 64419 (May 6, 2011), 76 FR 27678 (May 12, 2011).
\7\ See Amendment No. 1 to SR-BATS-2011-016; SR-BYX-2011-011;
SR-BX-2011-025; SR-CBOE-2011-049; SR-CHX-2011-09; SR-EDGA-2011-15;
SR-EDGX-2011-14; SR-FINRA-2011-023; SR-ISE-2011-028; SR-NASDAQ-2011-
067; SR-NYSE-2011-21; SR-NYSEAmex-2011-32; SR-NYSEArca-2011-26; and
SR-NSX-2011-06 and Amendment No. 2 to SR-Phlx-2011-64 (collectively,
the ``Implementation Date Amendments''). The Implementation Date
Amendments propose an implementation date of August 8, 2011 for the
proposed rule changes. In addition, Amendment No. 1 to the Nasdaq
filing corrects a typographical error in a cross-reference in the
proposed rule text. The Implementation Date Amendments are technical
amendments and are not subject to notice and comment.
---------------------------------------------------------------------------
II. Description of the Proposals
On May 6, 2010, the U.S. equity markets experienced a severe
disruption.\8\ Among other things, the prices of a large number of
individual securities suddenly declined by significant amounts in a
very short time period, before suddenly reversing to prices consistent
with their pre-decline levels. This severe price volatility led to a
large number of trades being executed at temporarily depressed prices,
including many that were more than 60% away from pre-decline prices and
were broken by the Exchanges and FINRA. The Commission is concerned
that events such as those that occurred on May 6 can seriously
undermine the integrity of the U.S. securities markets. Accordingly, it
has worked over the past year to identify and assess the causes and
contributing factors of the May 6 market disruption \9\ and to fashion
policy responses that will help prevent a recurrence.\10\
---------------------------------------------------------------------------
\8\ The events of May 6 are described more fully in the report
of the staffs of the Commodity Futures Trading Commission (``CFTC'')
and the Commission, See Report of the Staffs of the CFTC and SEC to
the Joint Advisory Committee on Emerging Regulatory Issues,
``Findings Regarding the Market Events of May 6, 2010,'' dated
September 30, 2010.
\9\ Id.
\10\ In addition to the trading pause pilot for individual
securities, thirteen of the Exchanges and FINRA filed a proposed NMS
Plan to create a market-wide limit up-limit down mechanism that is
intended to address extraordinary market volatility in NMS stocks.
See Securities Exchange Act Release No. 64547 (May 25, 2011), 76 FR
31647 (June 1, 2011) (File No. 4-631) (Notice of Filing of a
National Market System Plan to Address Extraordinary Market
Volatility by BATS Exchange, Inc., BATS Y-Exchange, Inc., Chicago
Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc.,
EDGA Exchange, Inc., EDGX Exchange, Inc., Financial Industry
Regulatory Authority, Inc., NASDAQ OMX BX, Inc., NASDAQ OMX PHLX
LLC, The Nasdaq Stock Market LLC, National Stock Exchange, Inc., New
York Stock Exchange LLC, NYSE Amex LLC, and NYSE Arca, Inc.)
(``Proposed Limit Up-Limit Down NMS Plan''). As discussed further
below, the trading pause pilot would terminate on the earlier of
August 11, 2011 or the date on which a limit up-limit down mechanism
to address extraordinary market volatility, if adopted, applies. The
Commission also approved proposed rule changes that set forth
clearer standards and reduced the discretion of self-regulatory
organizations with respect to breaking erroneous trades. See e.g.,
Securities Exchange Act Release No. 62886 (September 10, 2010), 75
FR 56613 (September 16, 2010). Further, the Commission approved
proposed rule changes that enhanced the minimum quoting standards
for equity market makers to require that they post continuous two-
sided quotations within a designated percentage of the inside market
to eliminate market maker ``stub quotes'' that are so far away from
the prevailing market that they are not intended to be executed. See
Securities Exchange Act Release No. 63255 (November 5, 2010), 75 FR
69484 (November 12, 2010). In addition, the Commission proposed the
creation of a large trader reporting system that would enhance its
ability to identify large market participants, collect information
on their trades, and analyze their trading activity. See Securities
Exchange Act Release No. 61908 (April 14, 2010, 75 FR 21456 (April
23, 2010). The Commission also proposed a new rule that would
require SROs to establish a consolidated audit trail system that
would enable regulators to track information related to trading
orders received and executed across the securities markets. See
Securities Exchange Act Release No. 62174 (May 26, 2010), 75 FR
32556 (June 8, 2010).
---------------------------------------------------------------------------
[[Page 38244]]
On June 10, 2010, the Commission granted accelerated approval for
proposed rule changes by the Exchanges and FINRA to pause trading
during periods of extraordinary market volatility in S&P 500
stocks.\11\ On September 10, 2010, the Commission approved the
Exchanges' and FINRA's proposals to add securities included in the
Russell 1000, as well as specified ETPs, to the pilot.\12\
---------------------------------------------------------------------------
\11\ See Securities Exchange Act Release Nos. 62252 (June 10,
2010), 75 FR 34186 (June 16, 2010) (File Nos. SR-BATS-2010-014; SR-
EDGA-2010-01; SR-EDGX-2010-01; SR-BX-2010-037; SR-ISE-2010-48; SR-
NYSE-2010-39; SR-NYSEAmex-2010-46; SR-NYSEArca-2010-41; SR-NASDAQ-
2010-061; SR-CHX-2010-10; SR-NSX-2010-05; and SR-CBOE-2010-047);
62251 (June 10, 2010), 75 FR 34183 (June 16, 2010) (SR-FINRA-2010-
025).
\12\ See e.g., Securities Exchange Act Release Nos. 62884
(September 10, 2010), 75 FR 56618 (September 16, 2010) (File Nos.
SR-BATS-2010-018; SR-BX-2010-044; SR-CBOE-2010-065; SR-CHX-2010-14;
SR-EDGA-2010-05; SR-EDGX-2010-05; SR-ISE-2010-66; SR-NASDAQ-2010-
079; SR-NYSE-2010-49; SR-NYSEAmex-2010-63; SR-NYSEArca-2010-61; and
SR-NSX-2010-08); and Securities Exchange Act Release No. 62883
(September 10, 2010), 75 FR 56608 (September 16, 2010) (SR-FINRA-
2010-033).
The Exchanges and FINRA submitted proposed rule changes shortly
after the addition of the Russell 1000 securities and ETPs to extend
the operation of the pilot, which was set to expire on December 10,
2010, until April 11, 2011. See e.g., Securities Exchange Act
Release No. 63497 (December 9, 2010), 75 FR 78315 (December 15,
2010). More recently, the Exchanges and FINRA submitted proposed
rule changes to extend the operation of the pilot until the earlier
of August 11, 2011 or the date on which a limit up-limit down
mechanism to address extraordinary market volatility, if adopted,
applies. See e.g., Securities Exchange Act Release No. 64207 (April
6, 2011), 76 FR 20424 (April 12, 2011). The Commission understands
that the Exchanges and FINRA intend to propose a further extension
of the pilot.
---------------------------------------------------------------------------
The rules require the primary listing market for a security
(``Listing Market'') to issue a five-minute trading pause if the
transaction price of the security moves ten percent or more from a
price in the preceding five-minute period. The Listing Market is
required to notify the other Exchanges, FINRA and market participants
of the imposition of a trading pause by immediately disseminating a
special indicator over the Consolidated Tape. Under the rules, once the
Listing Market issues a trading pause, the other Exchanges and FINRA
are required to pause trading in the security on their markets.
At the end of the five-minute pause, the Listing Market reopens
trading in the security in accordance with its procedures for doing so.
Trading resumes on other Exchanges and in the over-the-counter market
once trading has resumed on the Listing Market. In the event of a
significant imbalance on the Listing Market at the end of the trading
pause, the Listing Market may delay reopening. If the Listing Market
has not reopened within ten minutes from the initiation of the trading
pause, however, the other Exchanges and FINRA may resume trading.\13\
---------------------------------------------------------------------------
\13\ For more details on the operation of the Exchanges' and
FINRA's rules, see supra notes 6 and 11.
---------------------------------------------------------------------------
Under the current proposal (the ``Phase III Circuit Breaker
Pilot''), the Exchanges and FINRA propose to include all remaining NMS
stocks (``Phase III securities'') in the existing pilot program shortly
after the Commission approves the proposed rule changes.\14\ The
Exchanges and FINRA believe that adding these securities to the pilot
would have the beneficial effect of applying the circuit breaker's
protections against excessive volatility to a larger group of
securities, while at the same time allowing the opportunity, during the
pilot period, for continued review of the operation of the circuit
breaker and an assessment of whether the parameters should be further
expanded or modified.
---------------------------------------------------------------------------
\14\ Specifically, the Exchanges and FINRA propose to implement
the Phase III Circuit Breaker Pilot on August 8, 2011. See supra
note 7.
---------------------------------------------------------------------------
In addition, the Exchanges and FINRA propose that, for Phase III
securities, the price move required to trigger a trading pause shall be
30% or more for such securities priced at $1 or higher, and 50% or more
for such securities priced less than $1.\15\ The Exchanges and FINRA
believe that these percentages are commensurate with the
characteristics shared by the Phase III securities within the
applicable range given that the proposed additional stocks are more
likely to be less liquid securities or securities with lower trading
volumes. Accordingly, the Exchanges and FINRA believe that broader
price move percentages would be appropriate for the Phase III
securities, and would promote the objectives of the pilot by reducing
the negative impact of unanticipated price movements in a security. The
Exchanges and FINRA believe that applying a broader percentage to
securities priced less than $1 compared to those priced above $1 is
appropriate given that lower-priced securities may tend to be more
volatile, and price movements of lower-priced securities equate to a
higher percentage move than a similar price change for a higher-priced
security.
---------------------------------------------------------------------------
\15\ Under the proposed rule changes, the price of a security
would be based on the closing price on the previous trading day, or,
if no closing price exists, the last sale reported to the
Consolidated Tape on the previous trading day.
---------------------------------------------------------------------------
The Exchanges and FINRA also propose to adjust the market maker
quoting requirements, as necessary, to assure they remain within a
narrower range than the new thresholds. Currently, market makers may
fulfill their quoting obligations by maintaining a quote 30% away from
the National Best Bid and Offer (``NBBO'') in a security that is not
included in the S&P 500, Russell 1000, or in the list of ETPs.
Accordingly, the Exchanges and FINRA \16\ propose to revise this
quoting obligation for Phase III securities trading at or above $1 (for
which the proposed trading pause trigger is 30%) to 28% away from the
NBBO. The quoting obligation for Phase III securities trading below $1
(which would be subject to the 50% threshold) would remain unchanged.
---------------------------------------------------------------------------
\16\ Only those SROs with market makers (i.e., BATS, BYX, BX,
CBOE, CHX, FINRA, Nasdaq, NSX, NYSE, NYSE Amex, and NYSE Arca)
proposed this change to the market maker quoting requirements.
---------------------------------------------------------------------------
III. Discussion and Commission Findings
The Commission finds that the proposed rule changes are consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to national securities exchanges. In particular,
the Commission finds that the proposals submitted by the Exchanges are
consistent with Section 6(b)(5) of the Act,\17\ which requires, among
other things, that the rules of national securities exchanges be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and in general, to protect investors and the public
interest.\18\
---------------------------------------------------------------------------
\17\ 15 U.S.C. 78f(b)(5).
\18\ In approving the proposed rule change, the Commission notes
that it has considered the proposed rules' impact on efficiency,
competition, and capital formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------
Additionally, the Commission finds that the FINRA proposal is
consistent with Section 15A(b)(6) of the Act,\19\ which requires, among
other things, that FINRA rules be designed to prevent fraudulent and
manipulative acts and
[[Page 38245]]
practices, to promote just and equitable principles of trade, and, in
general, to protect investors and the public interest. The Commission
also believes that the proposals submitted by the Exchanges and FINRA
are consistent with Section 11A(a)(1) of the Act \20\ in that they seek
to assure fair competition among brokers and dealers and among exchange
markets.
---------------------------------------------------------------------------
\19\ 15 U.S.C. 78o-3(b)(6).
\20\ 15 U.S.C. 78k-1(a)(1).
---------------------------------------------------------------------------
The proposed rule changes will expand the trading pause pilot to
include all remaining NMS stocks, but will apply wider price move
percentages to the newly added securities to reflect their general
higher volatility, lower liquidity, and other trading characteristics.
The Commission believes that the proposed trigger percentages of 30%
and 50% are reasonable and appropriate for the purposes of the pilot.
The Commission also believes that expanding the market-wide trading
pauses to include all remaining NMS stocks will serve to reduce the
risk of potentially destabilizing price volatility and thereby help
promote the goals of investor protection and fair and orderly markets.
Further, expanding the pilot will promote uniformity across markets
concerning decisions to pause trading in a security when there are
significant price movements.
Finally, on April 5, 2011, thirteen of the Exchanges and FINRA
filed a proposed NMS Plan to create a market-wide limit up-limit down
mechanism to address extraordinary market volatility in NMS stocks. By
its terms, the circuit breaker pilot will expire on the earlier of
August 11, 2011, or the date on which this limit up-limit down
mechanism, if approved by the Commission, applies.\21\
---------------------------------------------------------------------------
\21\ See supra notes 10 and 12.
---------------------------------------------------------------------------
The Commission also believes that the proposed change to the market
maker quoting obligations is consistent with the Act. This aspect of
the proposal would adjust the market maker quoting obligations to
assure they remain within a narrower range than the new trading pause
percentage thresholds for Phase III securities, which is consistent
with the original design of the market maker quoting obligations.
IV. Conclusion
It Is Therefore Ordered, pursuant to Section 19(b)(2) of the
Act,\22\ that the proposed rule changes (SR-BATS-2011-016; SR-BYX-2011-
011; SR-BX-2011-025; SR-CBOE-2011-049; SR-CHX-2011-09; SR-EDGA-2011-15;
SR-EDGX-2011-14; SR-FINRA-2011-023; SR-ISE-2011-028; SR-NASDAQ-2011-
067; SR-NYSE-2011-21; SR-NYSEAmex-2011-32; SR-NYSEArca-2011-26; SR-NSX-
2011-06; SR-Phlx-2011-64) be, and hereby are, approved, as amended.
---------------------------------------------------------------------------
\22\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
---------------------------------------------------------------------------
\23\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-16229 Filed 6-28-11; 8:45 am]
BILLING CODE 8011-01-P