[Federal Register Volume 76, Number 159 (Wednesday, August 17, 2011)]
[Notices]
[Pages 51076-51079]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-20905]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-65104; File No. SR-NASDAQ-2011-116]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Amend the Clearly Erroneous Rule in Light of Changes to the Single
Stock Trading Pause Process
August 11, 2011.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on August 8, 2011, The NASDAQ Stock Market LLC (``Exchange''), filed
with the Securities
[[Page 51077]]
and Exchange Commission (``Commission'') the proposed rule change as
described in Items I and II, below, which Items have been prepared by
the Exchange. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange proposes to extend the pilot period of recent
amendments to Rule 11890, concerning clearly erroneous transactions, so
that the rule will continue to operate in the same manner after changes
to the single stock trading pause process are effective.
The text of the proposed rule change is available from NASDAQ's Web
site at http://nasdaq.cchwallstreet.com/Filings/, at NASDAQ's principal
office, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
Sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Background
The Exchanges \3\ and FINRA, in consultation with the Commission,
have made changes to their respective rules in a concerted effort to
strengthen the markets after the severe market disruption that occurred
on May 6, 2010. One such effort by the Exchanges and FINRA was to adopt
a uniform trading pause process during periods of extraordinary market
volatility as a pilot in S&P 500 Index stocks (``Pause Pilot''),\4\
approved by the Commission on June 10, 2010.\5\ On September 10, 2010,
the Commission approved the Exchanges' and FINRA's proposals to add the
securities included in the Russell 1000 Index and specified ETPs to the
Pause Pilot.\6\ On September 10, 2010, the Commission also approved
changes proposed by the Exchanges to amend certain of their respective
rules to set forth clearer standards and curtail their discretion with
respect to breaking erroneous trades.\7\ The changes, among other
things, provided uniform treatment of clearly erroneous execution
reviews in the event of transactions that result in the issuance of an
individual stock trading pause pursuant to the Pause Pilot on the
listing market and those that occur up to the time the trading pause
message is received by the other markets from the single plan processor
responsible for consolidation and dissemination of information for the
security (``Latency Trades'').
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\3\ For purposes of this filing, the term ``Exchanges'' refers
collectively to BATS Exchange, Inc., BATS Y-Exchange, Inc., NASDAQ
OMX BX, Inc., Chicago Board Options Exchange, Inc., Chicago Stock
Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, 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., and NASDAX [sic] OMX PHLX LLC.
\4\ Rule 4120(a)(11). The pauses under Rule 4120(a)(11) occur
when a security's price moves by the applicable percentage within a
five minute period between 9:45 a.m. and 3:35 p.m., or in the case
of an early scheduled close, 25 minutes before the close of trading.
Such pauses last for five minutes. At the conclusion of the pause
period, the security is opened pursuant to the Halt Cross process
under Rule 4753.
\5\ 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).
\6\ 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).
\7\ Securities Exchange Act Release No. 62886 (September 16
[sic], 2010), 75 FR 56613 (September 16, 2010) (File Nos. SR-BATS-
2010-016; SR-BX-2010-040; SR-CBOE-2010-056; SR-CHX-2010-13; SR-EDGA-
2010-03; SR-EDGX-2010-03; SR-ISE-2010-62; SR-NASDAQ-2010-076; SR-
NSX-2010-07; SR-NYSE-2010-47; SR-NYSEAmex-2010-60; and SR-NYSEArca-
2010-58).
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As part of the changes to the clearly erroneous process under Rule
11890, NASDAQ replaced existing Rule 11890(a)(2)(C)(4) with all new
text to provide clarity in the clearly erroneous process when a Pause
Pilot trading pause is triggered. Pursuant to Rule 11890(a)(2)(C)(4),
Latency Trades will be broken by the exchange if they exceed the
applicable percentage from the Reference Price, as noted in the table
found under Rule 11890(a)(2)(C)(1).\8\ The Reference Price, for
purposes of Rule 11890(a)(2)(C)(4), is the price that triggered a
trading pause pursuant to the Pause Pilot (the ``Trading Pause Trigger
Price''). As such, Latency Trades that occur on NASDAQ would be broken
by the exchange pursuant to Rule 11890(a)(2)(C)(4) if the transaction
occurred at either three, five or ten percent above the Trading Pause
Trigger Price.\9\
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\8\ Pursuant to Rule 11890(a)(2)(C)(1), a security with a
Reference Price of greater than zero and up to and including $25 is
subject to a 10% threshold; a security with a Reference Price of
greater than $25 and up to and including $50 is subject to a 5%
threshold; and a security with a Reference Price of greater than $50
is subject to a 3% threshold.
\9\ Rule 11890(a)(2)(C)(4).
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On June 23, 2011, the Commission approved a joint proposal to
expand the respective Pause Pilot rules of the Exchanges and FINRA to
include all remaining NMS stocks (``Phase III Securities'').\10\ The
new pilot rules, which will be implemented on August 8, 2011, not only
expand the application of the Pause Pilot, but also apply larger
percentage moves that trigger a pause to the Phase III Securities.
NASDAQ amended its Pause Pilot rule, Rule 4120(a)(11), by adding three
new subparagraphs to address the treatment of the Phase III Securities.
The rule applicable to the original Pause Pilot securities was placed
in new Rule 4120(a)(11)(A). The rules applicable to the Phase III
Securities were placed in new Rules 4120(a)(11)(B) and (C). A pause
under Rule 4120(a)(11)(B) is triggered by a 30 percent price move
within a five minute period in a Phase III Security that had a closing
price on the previous trading day of $1 or more. A pause under Rule
4120(a)(11)(C) is triggered by a 50 percent price move within a five
minute period in a Phase III Security that had a closing price on the
previous trading day of less than $1. If no prior day closing price is
available, the last sale reported to the Consolidated Tape on the
previous trading day is used.
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\10\ Securities Exchange Act Release No. 64735 (June 23, 2011),
76 FR 38243 (June 29, 2011) (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).
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The Issue
The recently-approved changes to the Pause Pilot will have the
unintended effect of removing the Phase III Securities from the normal
clearly erroneous process and potentially result in unfair outcomes in
the face of severe
[[Page 51078]]
volatility in such securities. Phase III Securities are currently
subject to the clearly erroneous process under Rules 11890(a)(2)(C)(1)-
(3), which apply to all securities except the current Pause Pilot
securities subject to a pause. For purposes of transactions in
securities not involving Pause Pilot securities, or transactions
involving Pause Pilot securities that occur when there is not a pause
pursuant to the Pause Pilot, the Reference Price is the consolidated
last sale price immediately prior to the execution(s) under review,
subject to certain exceptions.\11\ As noted above, the Trading Pause
Trigger Price is used as the Reference Price when a Pause Pilot pause
is in effect. As a consequence, under the current rules a Latency Trade
is subject to the clearly erroneous thresholds based on the Trading
Pause Trigger Price, which represents a ten percent or greater move in
the transacted price of the security in a five minute period.
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\11\ Id.
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Under the new Pause Pilot rules, a Latency Trade in a Phase III
Security occurs only after either a 30 or 50 percent (or greater) move
in the transacted price of the security in a five minute period. As a
result, a member firm that trades in a Phase III Security that triggers
a clearly erroneous threshold of three, five or ten percent from the
Reference Price, yet falls below the Pause Pilot trigger of either 30
or 50 percent, would be able to avail themselves of a clearly erroneous
review. A similarly situated member firm that transacts in the same
security as a Latency Trade at a price equal to or greater than the
Phase III Security thresholds, yet less than the clearly erroneous
thresholds under Rule 11890(a)(2)(C)(1), would not be able to avail
themselves of the clearly erroneous process. Another member firm that
transacts in the same security as a Latency Trade that exceeds three,
five or ten percent from the Trading Pause Trigger Price would
automatically receive clearly erroneous relief. NASDAQ believes that
this would be an inequitable result and an arbitrary application of the
clearly erroneous process. Specifically, NASDAQ believes that, since
the 30 and 50 percent triggers of the Pause Pilot are substantially
greater than the 10 percent threshold of the original Pause Pilot, the
Phase III Securities should remain under the current clearly erroneous
process of Rules 11890(a)(2)(C)(1)-(3).
Applying the clearly erroneous process under Rules
11890(a)(2)(C)(1)-(3) to the Phase III Securities would allow NASDAQ to
review all transactions that exceed the normal clearly erroneous
thresholds and Reference Price, and, importantly, avoid arbitrary
selection of ``winners'' and ``losers'' in the face of severe volatile
moves in a security of 30 or 50 percent over a five minute period. For
example, a member firm that trades in a security subject to Rule
4120(a)(11)(B) or (C) that triggers a clearly erroneous threshold of
three, five or ten percent, yet falls below the Pause Pilot trigger
threshold trading at 29 percent from the prior day's closing price,
would be potentially entitled to a clearly erroneous break pursuant
Rule 11890(a)(2)(C)(1). Should trading in that same stock trigger a
trading pause at a price of 30 or 50 percent greater than the prior
day's close, the member firm would not be entitled to a clearly
erroneous trade break unless that trade exceeded three, five or ten
percent beyond the price that triggered the pause. This scenario causes
an inequity among a group of member firms that have transactions in the
Phase III Securities falling between the three, five and ten percent
thresholds from the Reference Price under the normal Rule
11890(a)(2)(C)(1) clearly erroneous process and the Pause Pilot clearly
erroneous triggers of three, five or ten percent away from the Trading
Pause Trigger Price. Such member firms would not be provided relief
under the clearly erroneous rules merely due to the imposition of a
Pause Pilot halt, notwithstanding that other member firms with
transactions that occur at the same rolling five minute percentage
difference. NASDAQ believes a better outcome is to afford all members
transacting in Phase III Securities the opportunity of having such
trades reviewed.
Summary
The expansion of the Pause Pilot to the Phase III Securities will
have the unintended consequence of setting the point at which a clearly
erroneous transaction occurs once a Pause Pilot pause is initiated far
beyond the triggers applied prior to the expansion, which will, in
turn, prevent certain market participants from availing themselves of
the clearly erroneous rules, notwithstanding that other similarly
situated participants are able to do so. NASDAQ believes that this
would be an arbitrary application of the clearly erroneous process in a
manner that is unfair and not consistent with the spirit and purpose of
the rule. Accordingly, NASDAQ is proposing to amend Rules
11890(a)(2)(C)(1)-(4) to specify that Rule 11890(a)(2)(C)(4) applies
only to the current securities of Pause Pilot, as found under Rule
4120(a)(11)(A).\12\
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\12\ NASDAQ notes that the Exchanges are filing similar
proposals to make the changes proposed herein.
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2. Statutory Basis
The statutory basis for the proposed rule change is Section 6(b)(5)
of the Securities Exchange Act of 1934 (the ``Act''),\13\ which
requires the rules of an exchange 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. The proposed rule change
also is designed to support the principles of Section 11A(a)(1) \14\ of
the Act in that it seeks to assure fair competition among brokers and
dealers and among exchange markets. NASDAQ believes that the proposed
rule meets these requirements in that it promotes transparency and
uniformity across markets concerning decisions to break erroneous
trades, yet also ensures fair application of the process so that
similarly situated member firms are provided the same opportunity of a
clearly erroneous review. NASDAQ notes that the changes proposed herein
will in no way interfere with the operation of the Pause Pilot process,
as amended.
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\13\ 15 U.S.C. 78f(b)(5).
\14\ 15 U.S.C. 78k-1(a)(1).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act, as amended.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \15\ and Rule 19b-
[[Page 51079]]
4(f)(6)(iii) thereunder.\16\ The Exchange has asked the Commission to
waive the 30-day operative delay so that the proposal may become
operative immediately upon filing. The Commission believes that waiving
the 30-day operative delay is consistent with the protection of
investors and the public interest because such waiver will allow the
clearly erroneous rules to continue to operate as they did prior to the
effectiveness of the Pause Pilot expansion to Phase III Securities so
that similarly situated member firms are provided the same opportunity
of a clearly erroneous review. Accordingly, the Commission waives the
30-day operative delay requirement and designates the proposed rule
change as operative upon filing with the Commission.\17\
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\15\ 15 U.S.C. 78s(b)(3)(A).
\16\ 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-
4(f)(6)(iii) requires that a self-regulatory organization submit to
the Commission written notice of its intent to file the proposed
rule change, along with a brief description and text of the proposed
rule change, at least five business days prior to the filing of the
proposed rule change, or such shorter time as designated by the
Commission. The Commission notes that the Exchange has satisfied
this requirement.
\17\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an e-mail to [email protected]. Please include
File Number SR-NASDAQ-2011-116 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2011-116. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for Web site
viewing and printing in the Commission's Public Reference Room, 100 F
Street, NE., Washington, DC 20549, on official business days between
the hours of 10 a.m. and 3 p.m. Copies of such filing also will be
available for inspection and copying at the principal office of NASDAQ.
All comments received will be posted without change; the Commission
does not edit personal identifying information from submissions. You
should submit only information that you wish to make publicly
available. All submissions should refer to File Number SR-NASDAQ-2011-
116 and should be submitted on or before September 7, 2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-20905 Filed 8-16-11; 8:45 am]
BILLING CODE 8011-01-P