[Federal Register Volume 76, Number 159 (Wednesday, August 17, 2011)]
[Notices]
[Pages 51105-51108]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-20908]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-65107; File No. SR-NYSEArca-2011-58]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change Amending NYSE Arca
Equities Rule 7.10 So That Clearly Erroneous Executions Involving
Securities Recently Added to the Individual Security Trading Pause
Pilot Under NYSE Arca Equities Rule 7.11 Continue To Be Resolved in the
Same Manner Before Being Added to the Pilot
August 11, 2011.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19-4 thereunder,\3\ notice is hereby
given that, on August 9, 2011, NYSE Arca, Inc. (the ``Exchange'' or
``NYSE Arca'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I and II
below, which Items have been prepared by the self-regulatory
organization. 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\ 15 U.S.C. 78a.
\3\ 17 CFR 240.199-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend NYSE Arca Equities Rule 7.10 so that
clearly erroneous executions involving securities recently added to the
individual security trading pause pilot under NYSE Arca Equities Rule
7.11 continue to be resolved in the same manner as they were before
being added to the pilot. The text of the proposed rule change is
available at the Exchange, the Commission's Public Reference Room, and
http://www.nyse.com.
[[Page 51106]]
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 self-regulatory organization
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 those 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 parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend NYSE Arca Equities Rule 7.10 so that
clearly erroneous executions involving securities recently added to the
individual security trading pause pilot under NYSE Arca Equities Rule
7.11 continue to be resolved in the same manner as they were before
being added to the pilot.
Background
The Exchanges \4\ and the Financial Industry Regulatory Authority,
Inc. (``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''),\5\ approved by
the Commission on June 10, 2010.\6\ 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 Exchange-
Traded Products (``ETPs'') to the Pause Pilot.\7\ 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.\8\ The changes, among other things, provided for 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 primary listing market and
those transactions 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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\4\ 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 NASDAQ OMX PHLX LLC.
\5\ See NYSE Arca Equities Rule 7.11. The pauses under NYSE Arca
Equities Rule 7.11 occur when a security's price moves by the
applicable percentage within a five minute period between 6:45 a.m.
and 12:35 p.m. Pacific Time, 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 NYSE Arca Equities Rule 7.11(b).
\6\ 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) and
62251 (June 10, 2010), 75 FR 34183 (June 16, 2010) (SR-FINRA-2010-
025).
\7\ 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 62883 (September 10, 2010), 75 FR 56608
(September 16, 2010) (SR-FINRA-2010-033).
\8\ See Securities Exchange Act Release No. 62886 (September 10,
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 NYSE
Arca Equities Rule 7.10, NYSE Arca added new text to NYSE Arca Equities
Rule 7.10(c)(4) to provide clarity in the clearly erroneous process
when a Pause Pilot trading pause is triggered. Pursuant to NYSE Arca
Equities Rule 7.10(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 NYSE Arca Equities Rule 7.10(c)(1).\9\
The Reference Price, for purposes of Rule 7.10(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 the
Exchange would be broken by the Exchange pursuant to NYSE Arca Equities
Rule 7.10(c)(4) if the transaction occurred at either three, five or
ten percent above the Trading Pause Trigger Price.\10\
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\9\ Pursuant to NYSE Arca Equities Rule 7.10(c)(1), during the
Core Trading Session 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.
\10\ See NYSE Arca Equities Rule 7.10(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'').\11\ 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. The
Exchange amended its Pause Pilot rule, NYSE Arca Equities Rule 7.11, by
adding three new subparagraphs to Rule 7.11(a) to address the treatment
of the Phase III Securities. The rule applicable to the original Pause
Pilot securities was placed in new NYSE Arca Equities Rule 7.11(a)(i).
The rules applicable to the Phase III Securities were placed in new
NYSE Arca Equities Rule 7.11(a)(ii) and (iii). A pause under NYSE Arca
Equities Rule 7.11(a)(ii) 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 NYSE
Arca Equities Rule 7.11(a)(iii) 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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\11\ See 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; and SR-Phlx-2011-64).
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The Exchange has submitted immediately effective proposed rule
changes to the Commission to extend both the Pause Pilot under NYSE
Arca Equities Rule 7.11 and the clearly erroneous execution process
pilot under NYSE Arca Equities Rule 7.10 until January 31, 2012.\12\
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\12\ See SR-NYSEArca-2011-55 (extending NYSE Arca Equities Rule
7.11 pilot until January 31, 2012) and SR-NYSEArca-2011-56
(extending NYSE Arca Equities Rule 7.10 pilot until January 31,
2012).
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The Issue
The recently-approved changes to the Pause Pilot will have the
unintended effect of removing the Phase III
[[Page 51107]]
Securities from the normal clearly erroneous process and potentially
result in unfair outcomes in the face of severe volatility in such
securities. Phase III Securities are currently subject to the clearly
erroneous process under NYSE Arca Equities Rule 7.10(c)(1)-(3), which
applies 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.\13\ 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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\13\ See supra note 9.
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Under the amended Pause Pilot rule, 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, an ETP Holder 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 ETP Holder 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 NYSE Arca Equities Rule 7.10(c)(1), would not be able
to avail themselves of the clearly erroneous process. Another ETP
Holder 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. The Exchange
believes that this would be an inequitable result and an arbitrary
application of the clearly erroneous process. Specifically, the
Exchange 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 NYSE Arca Equities Rule
7.10(c)(1)-(3).
Applying the clearly erroneous process under NYSE Arca Equities
Rule 7.10(c)(1)-(3) to the Phase III Securities would allow the
Exchange 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, an ETP Holder that trades in a security subject to
NYSE Arca Equities Rule 7.11(a)(ii) and (iii) 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 NYSE Arca Equities Rule 7.10(c)(1). Should
trading in that same security trigger a trading pause at a price of 30
or 50 percent greater than the prior day's close, the ETP Holder 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 ETP Holders
that have transactions in the Phase III Securities falling between the
three, five and ten percent thresholds from the Reference Price under
the normal NYSE Arca Equities Rule 7.10(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 ETP Holders
would not be provided relief under the clearly erroneous rules merely
due to the imposition of a Pause Pilot halt, notwithstanding that other
ETP Holders with transactions that occur at the same rolling five
minute percentage difference. The Exchange believes a better outcome is
to afford all ETP Holders 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. The Exchange 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, the Exchange is proposing to amend
NYSE Arca Equities Rule 7.10(c)(1)-(4) to specify that NYSE Arca
Equities Rule 7.10(c)(4) applies only to the current securities of the
Pause Pilot, as found under NYSE Arca Equities Rule 7.11(a)(i).\14\
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\14\ NYSE Arca 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''),\15\ 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) of the
Act \16\ in that it seeks to assure fair competition among brokers and
dealers and among exchange markets. The Exchange 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 ETP Holders are provided the same opportunity of a
clearly erroneous review. The Exchange 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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\15\ 15 U.S.C. 78f(b)(5).
\16\ 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
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
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
[[Page 51108]]
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 \17\ and Rule 19b-
4(f)(6)(iii) thereunder.\18\ 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 ETP Holders 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.\19\
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\17\ 15 U.S.C. 78s(b)(3)(A).
\18\ 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 is waiving the five day written notice
requirement in this case. Therefore, the Commission notes that the
Exchange has satisfied this requirement.
\19\ 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-NYSEArca-2011-58 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-NYSEArca-2011-58. 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 NYSE
Arca. 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-
NYSEArca-2011-58 and should be submitted on or before September 7,
2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-20908 Filed 8-16-11; 8:45 am]
BILLING CODE 8011-01-P