[Federal Register Volume 76, Number 160 (Thursday, August 18, 2011)]
[Notices]
[Pages 51439-51441]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-21025]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-65114; File No. SR-NSX-2011-10]
Self-Regulatory Organizations; National Stock Exchange, Inc.;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change to
Amend NSX Rule 11.19(c) Relating to Clearly Erroneous Transactions
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 11, 2011, National Stock Exchange, Inc. 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 Exchange. The Commission is publishing this notice to
solicit comment 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
National Stock Exchange, Inc. (``NSX[reg]'' or ``Exchange'')
proposes to amend its rules to ensure NSX Rule 11.19(c) will continue
to operate in the same way after changes to the single stock trading
pauses are effective.
The text of the proposed rule change is available on the Exchange's
Web site at http://www.nsx.com, at the principal office of the
Exchange, 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 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
Background
The exchanges \3\ and FINRA (collectively, the ``Markets''), in
consultation with the Securities and Exchange Commission (``SEC'' or
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 Markets
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''), approved by the Commission on June 10, 2010.\4\ On
September 10, 2010, the Commission approved the Market'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 Markets 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
[[Page 51440]]
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\ 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\ Securities Exchange Act Release No. 62886 (September 16,
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
11.19, the Exchange replaced existing Rule 11.19(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 11.19(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 11.19(c)(1).\7\ The Reference Price, for purposes of Rule
11.19(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 Rule 11.19(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 11.19(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 11.19 (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 Markets to include all
remaining NMS stocks (``Phase III Securities'').\9\ 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. 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 Rules
11.19(c)(1) to 11.19(c)(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 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 Rule 11.19(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 Rules 11.19(c)(1)-(3).
Applying the clearly erroneous process under Rules 11.19(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 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 Rule 11.19(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 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 Rule
11.19(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
[[Page 51441]]
unfair and not consistent with the spirit and purpose of the rule.
Accordingly, the Exchange is proposing to amend Rules 11.19(c)(1)-(4)
to specify that Rule 11.19(c)(4) applies only to the current securities
of Pause Pilot, and not to Phase III Securities.\11\
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\11\ NSX 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''),\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. 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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\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 Exchange does not believe that the proposed rule change will
impose any inappropriate burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has neither solicited nor received written comments on
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 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 5-day written notice requirement and 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.\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-NSX-2011-10 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-NSX-2011-10. 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 the Exchange. 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-NSX-2011-10 and should be
submitted on or before September 8, 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. 2011-21025 Filed 8-17-11; 8:45 am]
BILLING CODE 8011-01-P