[Federal Register Volume 76, Number 159 (Wednesday, August 17, 2011)]
[Notices]
[Pages 51103-51105]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-20910]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-65109; File No. SR-EDGX-2011-25]
Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Amend
EDGX Rule 11.13
August 11, 2011.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on August 8, 2011, the EDGX Exchange, Inc. (the ``Exchange'' or
the ``EDGX'') filed with the Securities and Exchange Commission
(``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\ 17 CFR 240.19b-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 Rule 11.13, governing clearly
erroneous executions, 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 attached as Exhibit
5 and is available on the Exchange's Web site at http://www.directedge.com, at the Exchange's principal office, and at the
Public Reference Room of the Commission.
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 self-regulatory organization 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[supreg] Index stocks (``Pause
Pilot''), approved by the Commission on June 10, 2010.\4\ 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.\5\ 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.\6\ 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 NASDAQ OMX PHLX LLC.
\4\ 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).
\5\ 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).
\6\ See 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
11.13, EDGX replaced existing Rule 11.13(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 11.13(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 11.13(c)(1).\7\ The Reference Price, for purposes of Rule
11.13(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 EDGX would be broken by the Exchange pursuant to
Rule 11.13(c)(4) if the transaction occurred at either three, five or
ten percent above the Trading Pause Trigger Price.\8\
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\7\ Pursuant to Rule 11.13(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.
\8\ Rule 11.13(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 National Market System (``NMS'') stocks (``Phase
III Securities'').\9\ The new pilot rules, which were implemented on
August 8, 2011, not only expand the application of
[[Page 51104]]
the Pause Pilot, but also apply larger percentage moves that trigger a
pause to the Phase III Securities. Specifically, the rules of the
listing markets were amended so that a pause in a Phase III Security
with a closing price on the previous trading day of $1 or more is
triggered by a 30 percent price move within a five minute period. A
pause in a Phase III Security with closing price on the previous
trading day of less than $1 is triggered by a 50 percent price move
within a five minute period. 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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\9\ 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 volatility in such securities. Phase III Securities
are currently subject to the clearly erroneous process under Rule
11.13(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.\10\ 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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\10\ 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 itself 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 11.13(c)(1), would not be able to avail itself 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. EDGX believes that this would be an
inequitable result and an arbitrary application of the clearly
erroneous process. Specifically, EDGX 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
Rule 11.13(c)(1)-(3).
Applying the clearly erroneous process under Rule 11.13(c)(1)-(3)
to the Phase III Securities would allow EDGX 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 Phase III Security 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 to Rule 11.13(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 11.13(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 would be
provided such relief. EDGX 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. EDGX 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, EDGX is proposing to amend Rule 11.13(c)(1)-(4)
to specify that Rule 11.13(c)(4) applies only to the current securities
of Pause Pilot, and not to Phase III Securities.\11\
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\11\ EDGX 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 Act,\12\ 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) \13\ of the Act in that it seeks to assure fair
competition among brokers and dealers and among exchange markets. EDGX
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. EDGX 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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\12\ 15 U.S.C. 78f(b)(5).
\13\ 15 U.S.C. 78k-1(a)(1).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The proposed rule change does not impose any burden on competition
that is not necessary or appropriate in furtherance of the purposes of
the Act.
[[Page 51105]]
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any unsolicited written comments from members or other interested
parties.
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 \14\ and Rule 19b-
4(f)(6)(iii) thereunder.\15\ 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.\16\
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\14\ 15 U.S.C. 78s(b)(3)(A).
\15\ 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.
\16\ 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-EDGX-2011-25 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-EDGX-2011-25. 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 EDGX. 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-EDGX-2011-25 and should be
submitted on or before September 7, 2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-20910 Filed 8-16-11; 8:45 am]
BILLING CODE 8011-01-P