[Federal Register Volume 78, Number 191 (Wednesday, October 2, 2013)]
[Notices]
[Pages 60937-60939]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-24019]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70530; File No. 4-631]
Joint Industry Plan; Order Approving the Fifth Amendment to the
National Market System Plan to Address Extraordinary Market Volatility
by BATS Exchange, Inc., BATS Y-Exchange, Inc., Chicago Board Options
Exchange, Incorporated, Chicago Stock Exchange, Inc., EDGA Exchange,
Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority,
Inc., NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, The Nasdaq Stock Market
LLC, National Stock Exchange, Inc., New York Stock Exchange LLC, NYSE
MKT LLC, and NYSE Arca, Inc.
September 26, 2013.
1. Introduction
On July 18, 2013, NYSE Euronext, on behalf of New York Stock
Exchange LLC (``NYSE''), NYSE MKT LLC (``NYSE MKT''), and NYSE Arca,
Inc. (``NYSE Arca''), and the following parties to the National Market
System Plan: BATS Exchange, Inc., BATS Y-Exchange, Inc., Chicago Board
Options Exchange, Incorporated, Chicago Stock Exchange, Inc., EDGA
Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory
Authority, Inc., NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, the Nasdaq
Stock Market LLC, and National Stock Exchange, Inc. (collectively with
NYSE, NYSE MKT, and NYSE Arca, the ``Participants''), filed with the
Securities and Exchange Commission (``Commission'') pursuant to Section
11A of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 608
thereunder,\2\ a proposal to amend the Plan to Address Extraordinary
Market Volatility (``Plan'').\3\ The proposal represents the fifth
amendment to the Plan (``Fifth Amendment''), and reflects changes
unanimously approved by the Participants. The Fifth Amendment to the
Plan: (i) Provides that, if a Trading Pause is triggered in the last
ten minutes of trading before the end of Regular Trading Hours, then
the NMS Stock shall not reopen for continuous trading and shall close
pursuant to established closing procedures of the Primary Listing
Exchange; and (ii) revises the definition of which Exchange Traded
Products (``ETPs'') are eligible to be included in the list of Tier 1
NMS Stocks under the Plan. The Fifth Amendment was published for
comment in the Federal Register on September 3, 2013.\4\ The Commission
received no comments letter in response to the Notice. This order
approves the Fifth Amendment to the Plan.
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\1\ 15 U.S.C. 78k-1.
\2\ 17 CFR 242.608.
\3\ See Letter from Janet M. McGinness, Executive Vice President
& Corporate Secretary, NYSE Euronext, to Elizabeth M. Murphy,
Secretary, Commission, dated July 18, 2013 (``Transmittal Letter'').
\4\ See Securities Exchange Act Release No. 70274 (August 27,
2013), 78 FR 54305 (``Notice'').
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II. Description of the Proposal
A. Purpose of the Plan
The Participants filed the Plan in order to create a market-wide
limit up-limit down mechanism that is intended to address extraordinary
market volatility in ``NMS Stocks,'' as defined in Rule 600(b)(47) of
Regulation NMS under the Act.\5\ The Plan sets forth procedures that
provide for market-wide limit up-limit down requirements that would be
designed to prevent trades in individual NMS Stocks from occurring
outside of the specified price bands.\6\ These limit up-limit down
requirements would be coupled with Trading Pauses, as defined in
Section I(Y) of the Plan, to accommodate more fundamental price moves
(as opposed to erroneous trades or momentary gaps in liquidity).
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\5\ 17 CFR 242.600(b)(47). See also Section I(H) of the Plan.
\6\ See Section V of the Plan.
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As set forth in Section V of the Plan, the price bands would
consist of a Lower Price Band and an Upper Price Band for each NMS
Stock.\7\ The price bands would be calculated by the Securities
Information Processors (``SIPs'' or ``Processors'') responsible for
consolidation of information for an NMS Stock pursuant to Rule 603(b)
of Regulation NMS under the Act.\8\ Those price bands would be based on
a Reference Price \9\ for each NMS Stock that equals the arithmetic
mean price of Eligible Reported Transactions for the NMS Stock over the
immediately preceding five-minute period. The price bands for an NMS
Stock would be calculated by applying the Percentage Parameter for such
NMS Stock to the Reference Price, with the Lower Price Band being a
Percentage Parameter \10\ below the Reference Price, and the Upper
Price Band being a Percentage Parameter above the Reference Price.
Between 9:30 a.m. and 9:45 a.m. ET and 3:35 p.m. and 4:00 p.m. ET, the
price bands would be calculated by applying double the Percentage
Parameters as set forth in Appendix A of the Plan.
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\7\ Capitalized terms used herein but not otherwise defined
shall have the meaning ascribed to such terms in the Plan.
\8\ 17 CFR 242.603(b). The Plan refers to this entity as the
Processor.
\9\ See Section I(T) of the Plan.
\10\ As initially proposed by the Participants, the Percentage
Parameters for Tier 1 NMS Stocks (i.e., stocks in the S&P 500 Index
or Russell 1000 Index and certain ETPs) with a Reference Price of
$1.00 or more would be five percent and less than $1.00 would be the
lesser of (a) $0.15 or (b) 75 percent. The Percentage Parameters for
Tier 2 NMS Stocks (i.e., all NMS Stocks other than those in Tier 1)
with a Reference Price of $1.00 or more would be 10 percent and less
than $1.00 would be the lesser of (a) $0.15 or (b) 75 percent. The
Percentage Parameters for a Tier 2 NMS Stock that is a leveraged ETP
would be the applicable Percentage Parameter set forth above
multiplied by the leverage ratio of such product. On May 24, 2012,
the Participants amended the Plan to create a 20% price band for
Tier 1 and Tier 2 stocks with a Reference Price of $0.75 or more and
up to and including $3.00. The Percentage Parameter for stocks with
a Reference Price below $0.75 would be the lesser of (a) $0.15 or
(b) 75 percent. See Letter from Janet M. McGinness, Senior Vice
President, Legal and Corporate Secretary, NYSE Euronext, to
Elizabeth M. Murphy, Secretary, Commission, dated May 24, 2012.
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The Processors would also calculate a Pro-Forma Reference Price for
each NMS Stock on a continuous basis during Regular Trading Hours. If a
Pro-Forma Reference Price did not move by one percent or more from the
Reference Price in effect, no new price bands would be disseminated,
and the current Reference Price would remain the effective Reference
Price. If the Pro-Forma Reference Price moved by one percent or more
from the Reference Price in effect, the Pro-Forma Reference Price would
become the Reference Price, and the Processors would disseminate new
price bands based on
[[Page 60938]]
the new Reference Price. Each new Reference Price would remain in
effect for at least 30 seconds.
When one side of the market for an individual security is outside
the applicable price band, the Processors would be required to
disseminate such National Best Bid \11\ or National Best Offer \12\
with an appropriate flag identifying it as non-executable. When the
other side of the market reaches the applicable price band, the market
for an individual security would enter a Limit State,\13\ and the
Processors would be required to disseminate such National Best Offer or
National Best Bid with an appropriate flag identifying it as a Limit
State Quotation.\14\ All trading would immediately enter a Limit State
if the National Best Offer equals the Lower Limit Band and does not
cross the National Best Bid, or the National Best Bid equals the Upper
Limit Band and does not cross the National Best Offer. Trading for an
NMS Stock would exit a Limit State if, within 15 seconds of entering
the Limit State, all Limit State Quotations were executed or canceled
in their entirety. If the market did not exit a Limit State within 15
seconds, then the Primary Listing Exchange would declare a five-minute
Trading Pause, which would be applicable to all markets trading the
security.
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\11\ 17 CFR 242.600(b)(42). See also Section I(G) of the Plan.
\12\ Id.
\13\ A stock enters the Limit State if the National Best Offer
equals the Lower Price Band and does not cross the National Best
Bid, or the National Best Bid equals the Upper Price Band and does
not cross the National Best Offer. See Section VI(B) of the Plan.
\14\ See Section I(D) of the Plan.
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These limit up-limit down requirements would be coupled with
Trading Pauses \15\ to accommodate more fundamental price moves (as
opposed to erroneous trades or momentary gaps in liquidity). As set
forth in more detail in the Plan, all trading centers \16\ in NMS
Stocks, including both those operated by Participants and those
operated by members of Participants, would be required to establish,
maintain, and enforce written policies and procedures that are
reasonably designed to comply with the limit up-limit down and Trading
Pause requirements specified in the Plan.
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\15\ The primary listing market would declare a Trading Pause in
an NMS Stock; upon notification by the primary listing market, the
Processor would disseminate this information to the public. No
trades in that NMS Stock could occur during the Trading Pause, but
all bids and offers may be displayed. See Section VII(A) of the
Plan.
\16\ As defined in Section I(X) of the Plan, a trading center
shall have the meaning provided in Rule 600(b)(78) of Regulation NMS
under the Act.
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Under the Plan, all trading centers would be required to establish,
maintain, and enforce written policies and procedures reasonably
designed to prevent the display of offers below the Lower Price Band
and bids above the Upper Price Band for an NMS Stock. The Processors
would disseminate an offer below the Lower Price Band or bid above the
Upper Price Band that nevertheless inadvertently may be submitted
despite such reasonable policies and procedures, but with an
appropriate flag identifying it as non-executable; such bid or offer
would not be included in National Best Bid or National Best Offer
calculations. In addition, all trading centers would be required to
develop, maintain, and enforce policies and procedures reasonably
designed to prevent trades at prices outside the price bands, with the
exception of single-priced opening, reopening, and closing transactions
on the Primary Listing Exchange.
As stated by the Participants in the Plan, the limit up-limit down
mechanism is intended to reduce the negative impacts of sudden,
unanticipated price movements in NMS Stocks,\17\ thereby protecting
investors and promoting a fair and orderly market.\18\ In particular,
the Plan is designed to address the type of sudden price movements that
the market experienced on the afternoon of May 6, 2010.\19\ The initial
date of Plan operations was April 8, 2013.\20\
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\17\ 17 CFR 242.600(b)(47).
\18\ See Transmittal Letter, supra note 3.
\19\ The limit up-limit down mechanism set forth in the Plan
would replace the existing single-stock circuit breaker pilot. See
e.g., Securities Exchange Act Release Nos. 62251 (June 10, 2010), 75
FR 34183 (June 16, 2010) (SR-FINRA-2010-025); 62883 (September 10,
2010), 75 FR 56608 (September 16, 2010) (SR-FINRA-2010-033).
\20\ See Securities Exchange Act Release No. 68953 (February 20,
2013), 78 FR 13113 (February 26, 2013).
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B. Fifth Amendment to the Plan
The Fifth Amendment proposes two changes to the Plan. First, the
Participants propose to amend Section VII(C)(1) of the Plan to provide
that if a Trading Pause is declared for an NMS Stock in the last ten
minutes of trading before the end of Regular Trading Hours, the Primary
Listing Exchange shall not reopen for trading and shall attempt to
execute a closing transaction using its established closing procedures.
Second, the Participants propose to amend Section I of Appendix A of
the Plan to revise the definition of which ETPs are eligible to be
included in the list of Tier 1 NMS Stocks under the Plan. The
Commission received no comment letters in response to the Notice.\21\
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\21\ The Participants noted that they developed the proposal to
amend Section VII(C)(1) of the Plan based on feedback from SIFMA and
other market participants. The Participants also noted that SIFMA
raised issues concerning how the Plan operates at the close in its
comment letter on the initial filing of the Plan. See Letter from
Ann L. Vlcek, Managing Director and Associate General Counsel,
SIFMA, to Elizabeth M. Murphy, Secretary, Commission dated June 22,
2011.
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III. Discussion and Commission Findings
After careful review, the Commission finds that the Fifth Amendment
is consistent with the requirements of the Act and the rules and
regulations thereunder.\22\ Specifically, the Commission finds that the
Fifth Amendment is consistent with Section 11A of the Act \23\ and Rule
608 thereunder \24\ in that it is appropriate in the public interest,
for the protection of investors and the maintenance of fair and orderly
markets, removes impediments to, and perfects the mechanism of, a
national market system.
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\22\ In approving the Fifth Amendment, the Commission has
considered its impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
\23\ 15 U.S.C. 78k-1.
\24\ 17 CFR 242.608.
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First, the Participants proposed to amend Section VII(C)(1) of the
Plan to provide that if a Trading Pause is declared for an NMS Stock in
the last ten minutes of trading before the end of Regular Trading
Hours, the Primary Listing Exchange shall not reopen for trading and
shall attempt to execute a closing transaction using its established
closing procedures.\25\ The Participants believe that reopening trading
in a security within five minutes of the closing transaction could
introduce additional volatility into trading for that particular
symbol. The Participants stated that it would be more prudent to use
the time during the Trading Pause and the period preceding the end of
Regular Trading Hours for interest to be entered for the closing
auction, rather than to hold a reopening auction that would be followed
shortly by a closing auction. According to the Participants, holding
two auctions so near in time may introduce additional uncertainty into
the market as market participants may not want to enter interest for a
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reopening auction if the security is going to close shortly thereafter.
This may cause price dislocations, uncertainty of executions, and added
confusion during an already volatile period.\26\ Based on the
Participants' statements, the Commission believes the proposal to amend
Section VII(C)(1) of the Plan is consistent with with Section 11A of
the Act.
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\25\ Section VII(C) of the Plan currently addresses only the
situation of when a Trading Pause is declared less than five minutes
before the end of Regular Trading Hours. In such case, because a
Trading Pause is a minimum of five minutes and trading would not
reopen, the Plan contemplates that the Primary Listing Exchange
shall attempt a closing transaction using its established closing
procedures.
\26\ The Participants noted that Primary Listing Exchanges will
be filing proposed rule changes with the Commission to update their
respective closing procedures to address the ability to permit
additional interest to be entered for the purpose of a closing
auction if there is a Trading Pause declared near the end of Regular
Trading Hours. See Notice, supra note 4.
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Second, the Participants propose to amend Section I of Appendix A
of the Plan to revise the definition of which ETPs are eligible to be
included in the list of Tier 1 NMS Stocks under the Plan by deleting
the following language: ``To ensure that ETPs that track similar
benchmarks but that do not meet this volume criterion do not become
subject to pricing volatility when a component security is the subject
of a Trading Pause, non-leveraged ETPs that have traded below this
volume criterion, but that track the same benchmark as an ETP that does
meet the volume criterion, will be deemed eligible to be included as a
Tier 1 NMS Stock.'' The Participants note that based on experience thus
far with the Plan, certain thinly traded ETPs with wide quotes that are
included as Tier 1 NMS Stocks because they track an index of an ETP
that meets the volume criterion are triggering Trading Pauses.\27\
These Trading Pauses are triggered because of bids or offers that cross
the Price Band rather than because of an execution of a trade in the
underlying security. This results in certain ETPs that have not traded
during the day triggering Trading Pauses and requiring a reopening
auction process, despite the lack of trading in that security.\28\ The
amendment to Section I of Appendix A will reduce the potential for
certain thinly-traded NMS Stock in Tier 1 that have not experienced any
trading volatility to be halted and then have to go through a reopening
auction process. Based on the Participants' statements, the Commission
believes that the proposal to amend Section I of Appendix A of the Plan
is consistent with Section 11A of the Act.
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\27\ The Participants noted that since the initial date of Plan
operations through to July 8, 2013, there have been 32 Trading
Pauses in NYSE Arca-listed securities triggered pursuant to the
Plan. These Trading Pauses have been in only ten NMS Stocks, some
more than once a day, and all are ETPs with less than $2,000,000
notional ADV. The symbols are BXDB, BDG, GIY, VIOO, BOS, SAGG, IELG,
IESM, HUSE, and GMTB. See id.
\28\ See id.
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The Commission reiterates its expectation that the Participants
will continue to monitor the scope and operation of the Plan and study
the data produced during that time with respect to such issues, and
will propose any modifications to the Plan that may be necessary or
appropriate.\29\ Similarly, the Commission expects that the
Participants will propose any modifications to the Plan that may be
necessary or appropriate in response to the data being gathered by the
Participants during the pilot period, including any proposed changes to
thinly-traded NMS Stocks in Tier 2 that have not experienced any
trading volatility.
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\29\ See Securities Exchange Act Release No. 67091 (May 31,
2012), 77 FR 33498 (June 6, 2012).
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Therefore, the Commission finds that the Fifth Amendment to the
Plan is consistent with Section 11A of the Act \30\ and Rule 608
thereunder.\31\
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\30\ 15 U.S.C. 78k-1.
\31\ 17 CFR 242.608.
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IV. Conclusion
It is therefore ordered, pursuant to Section 11A of the Act \32\
and Rule 608 thereunder, \33\ that the Fifth Amendment to the Plan
(File No. 4-631) be, and it hereby is, approved.
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\32\ 15 U.S.C. 78k-1.
\33\ 17 CFR 242.608.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\34\
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\34\ 17 CFR 200.30-3(a)(29).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-24019 Filed 10-1-13; 8:45 am]
BILLING CODE 8011-01-P