[Federal Register Volume 76, Number 160 (Thursday, August 18, 2011)]
[Notices]
[Pages 51447-51449]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-21026]
[[Page 51447]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-65115; File No. SR-CHX-2011-22]
Self-Regulatory Organizations; Chicago Stock Exchange, Inc.;
Notice of Filing of Proposed Rule Change To Amend Article 20, Rule 10,
Governing Clearly Erroneous Executions
August 11, 2011.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given
that on August 10, 2011, the Chicago Stock Exchange, Inc. (``CHX'' or
the ``Exchange'') 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 CHX. CHX has filed this
proposal pursuant to Exchange Act Rule 19b-4(f)(6) \3\ which is
effective upon filing with the Commission.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
CHX proposes to amend Article 20, Rule 10, 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 this proposed rule change is available on the
Exchange's Web site at (http://www.chx.com) and in 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 CHX included statements
concerning the purpose of and basis for the proposed rule changes and
discussed any comments it received regarding the proposal. The text of
these statements may be examined at the places specified in Item IV
below. The CHX 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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
Background
The Exchanges\4\ 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''),\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 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 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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\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 NASDAX [sic] OMX PHLX LLC.
\5\ 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.
\6\ 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).
\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 Securities Exchange Act Release No. 62883
(September 10, 2010), 75 FR 56608 (September 16, 2010) (SR-FINRA-
2010-033).
\8\ 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
Article 20, Rule 10, CHX replaced existing Rule 10(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 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
Rule 10(c)(1).\9\ The Reference Price, for purposes of Rule 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 CHX would be broken by the exchange pursuant to Rule 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 Rule 10(c)(1), a security with a Reference Price
of greater than zero and up to an 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\ Rule 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. CHX
amended its Pause Pilot rule, Rule 2(e), 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 2(e)(i). The rules applicable to the Phase III Securities were
placed in new Rules 2(e)(ii) and (iii). A pause under Rule 2(e)(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 Rule 2(e)(iii) is triggered by a 50
percent price move within a five minute period in a Phase
[[Page 51448]]
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\ 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
10(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.\12\ 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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\12\ 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 10(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. CHX believes that this would be an
inequitable result and an arbitrary application of the clearly
erroneous process. Specifically, CHX 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 10(c)(1)-(3).
Applying the clearly erroneous process under Rules 10(c)(1)-(3) to
the Phase III Securities would allow CHX 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 2(e)(ii) or (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 Rule 10(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
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 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. CHX 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. CHX 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, CHX is proposing to amend Rules 10(c)(1)-(4) to
specify that Rule 10(c)(4) applies only to the current securities of
Pause Pilot, as found under Rule 2(e)(i).\13\
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\13\ CHX 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''),\14\ 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) \15\ of
the Act in that it seeks to assure fair competition among brokers and
dealers and among exchange markets. CHX 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. CHX 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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\14\ 15 U.S.C. 78f(b)(5).
\15\ 15 U.S.C. 78k-L(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 either solicited or 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
[[Page 51449]]
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 \16\ and Rule 19b-
4(f)(6)(iii) thereunder.\17\ 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.\18\
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\16\ 15 U.S.C. 78s(b)(3)(A).
\17\ 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.
\18\ 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-CHX-2011-22 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-CHX-2011-22. 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-CHX-2011-22 and should be
submitted on or before September 8, 2011.
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\19\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets, pursuant
to delegated authority.\19\
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-21026 Filed 8-17-11; 8:45 am]
BILLING CODE 8011-01-P