[Federal Register Volume 79, Number 87 (Tuesday, May 6, 2014)]
[Notices]
[Pages 25954-25958]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-10287]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72051; File No. SR-NYSEMKT-2014-37]
Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing of
Proposed Rule Change Adding New Paragraphs (j) and (k) to Rule 128--
Equities, Entitled ``Clearly Erroneous Executions for Equities''
April 30, 2014.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on April 21, 2014, NYSE MKT LLC (the ``Exchange'' or ``NYSE
MKT'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III 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 240.19b-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 add new paragraphs (j) and (k) to Rule
128--Equities, entitled ``Clearly Erroneous Executions For Equities.''
The text of the proposed rule change is available on the Exchange's Web
site at www.nyse.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 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
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of this filing is to add new paragraph (j) to Rule
128--Equities to provide the Exchange with authority to nullify
transactions that were effected based on the same fundamentally
incorrect or grossly misinterpreted issuance information even if such
transactions occur over a period of several days, as further described
below. An example of fundamentally incorrect and grossly misinterpreted
issuance information that led to a severe valuation error is included
below for illustrative purposes.
The Exchange also proposes to add new paragraph (k) to Rule 128--
Equities to make clear that in the event of any disruption or
malfunction in the operation of the electronic communications and
trading facilities of
[[Page 25955]]
the Exchange, another market center or responsible single plan
processor in connection with the transmittal or receipt of a regulatory
trading halt, suspension or pause (hereafter generally referred to as a
``trading halt'' for ease of reference), the Exchange will nullify any
transaction that occurs after the primary listing market for a security
declares a trading halt with respect to such security. In the event a
trading halt is declared, then prematurely lifted in error, and then
re-instituted, proposed paragraph (k) would also result in
nullification of any transactions that occur before the official, final
end of the trading halt according to the primary listing market.
The Exchange also proposes a change to certain cross-references in
Rule 128--Equities, due to the addition of (j) and (k). Specifically,
the Exchange proposes to update cross-references in existing paragraph
(i) of Rule 128--Equities in order to make clear that the provisions of
paragraph (i) do not alter the application of other provisions of Rule
128--Equities, including new paragraphs (j) and (k).
Background
On September 10, 2010, the Commission approved, on a pilot basis,
changes to Rule 128--Equities to provide for uniform treatment: (1) Of
clearly erroneous execution reviews in multi-stock events involving
twenty or more securities; and (2) in the event transactions occur that
result in the issuance of an individual stock trading pause by the
primary listing market and subsequent transactions that occur before
the trading pause is in effect on the Exchange.\4\ The Exchange also
adopted additional changes to Rule 128--Equities that reduced the
ability of the Exchange to deviate from the objective standards set
forth in Rule 128--Equities,\5\ and in 2013, adopted a provision
designed to address the operation of the Plan to Address Extraordinary
Market Volatility Pursuant to Rule 608 of Regulation NMS under the Act
(the ``Limit Up-Limit Down Plan'' or the ``Plan'').\6\ Most recently,
the Exchange removed the specific provisions related to individual
stock trading pauses and extended the pilot program to coincide with
the pilot period for the Limit Up-Limit Down Plan, including any
extensions thereof, applicable to certain provisions of Rule 128--
Equities.\7\
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\4\ See Securities Exchange Act Release No. 62886 (Sept. 10,
2010), 75 FR 56613 (Sept. 16, 2010) (SR- NYSEAmex-2010-60).
\5\ Id.
\6\ See Securities Exchange Act Release No. 68801 (Feb. 1,
2013), 78 FR 8630 (Feb. 6, 2013) (SR- NYSEMKT-2013-11); Securities
Exchange Act Release No. 67091 (May 31, 2012), 77 FR 33498 (June 6,
2012) (the ``Limit Up-Limit Down Release''); see also Exchange Rule
128--Equities (i).
\7\ Paragraphs (c), (e)(2), (f), (g), and (i) of Rule 128--
Equities are currently subject to a pilot program. See Securities
Exchange Act Release No. 70517 (September 26, 2013), 78 FR 60943
(October 2, 2013) (SR-NYSEMKT-2013-78); Securities Exchange Act
Release No. 71820 (March 27, 2014), 79 FR 18595 (April 2, 2014) (SR-
NYSEMKT-2014-28).
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As proposed, similar to other provisions added in recent years, as
described above, both paragraph (j) and paragraph (k) would be subject
to the pilot period, and thus, would coincide with the pilot period for
the Limit Up-Limit Down Plan, unless extended or made permanent.
Executions Based on Incorrect or Grossly Misinterpreted Issuance
Information
The Exchange proposes to adopt a new provision, paragraph (j), to
Rule 128--Equities, which would provide that a series of transactions
in a particular security on one or more trading days may be viewed as
one event if all such transactions were effected based on the same
fundamentally incorrect or grossly misinterpreted issuance information
(e.g., with respect to a stock split or corporate dividend) resulting
in a severe valuation error for all such transactions (the ``Event'').
As proposed, an Officer, acting on his or her own motion, would be
required to take action to declare all transactions that occurred
during the Event null and void not later than the start of trading on
the day following the last transaction in the Event. If trading in the
security is halted before the valuation error is corrected, the Officer
would be required to take action to declare all transactions that
occurred during the Event null and void prior to the resumption of
trading. The Exchange proposes to make clear that no action can be
taken pursuant to proposed paragraph (j) with respect to any
transactions that have reached settlement date for the security or that
result from an initial public offering of a security. The Exchange
believes that declaring a trade null and void after settlement date
would be complex to administer and unfair to the affected parties. The
Exchange also believes that excluding IPOs from the proposed rule will
ensure that transactions in a new security for which there is no
benchmark information are not called into question, as it is the IPO
process itself, including the extensive public disclosure associated
with IPOs, that is intended to drive price formation.
Further, the Exchange proposes that to the extent transactions
related to an Event occur on one or more other market centers, the
Exchange will promptly coordinate with such other market center(s) to
ensure consistent treatment of the transactions related to the Event,
if practicable. The Exchange also proposes to state in the Rule that
any action taken in connection with paragraph (j) will be taken without
regard to the Numerical Guidelines set forth in paragraph (c)(1) of
Rule 128--Equities. In particular, the Exchange believes that there
could be scenarios where there are erroneous transactions related to an
Event that do not meet applicable Numerical Guidelines but that are,
upon review, clearly erroneous. One example of a situation that could
occur is a corporate action, such as a stock split, that results in the
dissemination of fundamentally incorrect or grossly misinterpreted
issuance information and leads to erroneous transactions at a price
that is close to the price at which the security was previously
trading. Even if such trading is consistent with prior trading activity
for the security, and thus would not meet applicable Numerical
Guidelines, the Exchange would have the authority to nullify such
transactions if they were affected based on the same fundamentally
incorrect or grossly misinterpreted issuance information and there was
a severe valuation error as a result (i.e., although the security
should be trading at a price further away from its previous range, due
to fundamentally incorrect or grossly misinterpreted issuance
information with respect to the corporate action the security continues
to trade at a price that does not meet applicable Numerical
Guidelines).
The Exchange also proposes to include a provision, as it does in
many other sub-paragraphs of Rule 128--Equities, stating that each
member or member organization involved in a transaction subject to
proposed paragraph (j) shall be notified as soon as practicable by the
Exchange, and that the party aggrieved by the action may appeal such
action in accordance with Exchange Rule 128--Equities (e)(2).
In particular, the Exchange believes it is necessary to have
authority to nullify trades that occur in an event similar to an event
involving an exchange offer (``Exchange Offer'') made by U.S. Bancorp
on the New York Stock Exchange (``NYSE'') in 2010 in which there were a
series of executions based on incorrect or grossly misinterpreted
issuance information. As a result of such information, the securities
traded at severely dislocated prices. At the
[[Page 25956]]
time, the NYSE filed an emergency rule filing in order to respond to
that event.\8\ With the filing the NYSE interpreted the rule applicable
to clearly erroneous executions as permitting the NYSE to nullify all
trades resulting after the Exchange Offer at severely dislocated
prices.\9\ The Exchange believes it is important to have in place a
rule to break such trades if an event like the U.S. Bancorp event
occurs again in the future. The U.S. Bancorp event is described in
further detail below and is intended to be illustrative of the manner
in which the Exchange proposes to utilize proposed paragraph (j), if
necessary.
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\8\ See Securities Exchange Act Release No. 62609 (July 30,
2010), 75 FR 47327 (August 5, 2010) (SR-NYSE-2010-55).
\9\ Id.
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In May 2010, U.S. Bancorp commenced an offer to exchange up to
1,250,000 Depositary Shares, each representing a 1/100 interest in a
share of Series A Non-Cumulative Perpetual Preferred Stock, $100,000
liquidation preference per share (the ``Depositary Shares'') for any
and all of the 1,250,000 outstanding 6.189% Fixed-to-Floating Rate
Normal ITS issued by U.S. Bancorp Capital IX, each with a liquidation
amount of $1,000 (the ``Normal ITS''). The Depositary Shares were
approved for listing on the NYSE under the symbol USB PRA. On June 11,
2010, the NYSE opened the shares on a quote, but trading did not
commence until June 16, 2010 at prices in the range of $79.00 per
share. There were additional executions on the NYSE in that price range
on June 17 and 18, 2010. On June 18, 2010, NYSE staff learned that the
prices at which trades had executed were not consistent with the value
of the security, which was closer to an $800 price. Upon learning of
the pricing disparity, NYSE immediately halted trading in the
Depositary Shares on all markets and alerted U.S. Bancorp and other
exchanges that traded the Depositary Shares of the pricing discrepancy.
In order to address the situation, the NYSE filed a proposal to
interpret its existing clearly erroneous execution rule such that the
trading in Depository Shares from June 16 to June 18 constituted a
single event because that trading was based on incorrect or grossly
misinterpreted issuance information that resulted in severe price
dislocation (the ``U.S. Bancorp Event'').\10\ Because the Depository
Shares were halted before the price of the Depository Shares ceased to
be dislocated, and remain halted, the NYSE was able to review trading
in Depository Shares and declare null and void all trading in the U.S.
Bancorp Event before the security resumed trading.
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\10\ Id.
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Rather than filing a proposal in response to a similar event
happening again, the Exchange proposes to add paragraph (j) in order to
nullify transactions consistent with the description of the proposed
Rule above.
Executions After a Trading Halt Has Been Declared
The Exchange proposes to add new paragraph (k) to Rule 128--
Equities to make clear that in the event of any disruption or
malfunction in the operation of the electronic communications and
trading facilities of the Exchange, another market center or
responsible single plan processor in connection with the transmittal or
receipt of a trading halt, the Exchange will nullify any transaction
that occurs after the primary listing market for a security declares a
trading halt and before such trading halt with respect to such security
has officially ended according to the primary listing market. In
addition, proposed paragraph (k) will make clear that in the event a
trading halt is declared, then prematurely lifted in error and then re-
instituted, the Exchange will nullify transactions that occur before
the official, final end of the trading halt according to the primary
listing market.
As with other provisions in Rule 128--Equities, including proposed
paragraph (j) as discussed above, the authority to nullify transactions
pursuant to paragraph (k) would be vested in an Officer, acting on his
or her own motion. Any action taken in connection with paragraph (k)
would be taken in a timely fashion, generally within thirty (30)
minutes of the detection of the erroneous transaction and in no
circumstances later than the start of regular trading hours \11\ on the
trading day following the date of execution(s) under review. The
Exchange also proposes to specify that any action taken in connection
with proposed paragraph (k) will be taken without regard to the
Numerical Guidelines set forth in paragraph (c)(1) of Rule 128--
Equities. The Exchange believes it is appropriate to act to nullify
transactions pursuant to proposed paragraph (k) without regard to
applicable Numerical Guidelines because in the situations covered by
paragraph (k), such transactions should not have occurred in the first
instance, and thus, their nullification does not put parties in any
different position than they should have been. The Exchange also
believes that the certainty that the proposed rule provides is critical
in situations involving trading halts.
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\11\ The regular trade hours [sic] on the Exchange are defined
in Rule 51--Equities and is generally the time between 9:30 a.m. to
4:00 p.m. E.T.
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As it has proposed for paragraph (j), as described above, the
Exchange also proposes to an [sic] include a provision stating that
each member or member organization involved in a transaction subject to
proposed paragraph (k) shall be notified as soon as practicable by the
Exchange, and that the party aggrieved by the action may appeal such
action in accordance with Exchange Rule 128--Equities (e)(2).
The Exchange notes that trading in a security is typically halted
immediately on the Exchange when the primary listing market issues a
trading halt in such security. However, in certain circumstances, due
to a technical issue related to the transmission or receipt of the
electronic message instituting such trading halt or due to other
extraordinary circumstances, executions can occur on the Exchange
following the declaration of such a trading halt. Similarly, although
rare, the Exchange has witnessed scenarios where due to extraordinary
circumstances a trading halt is declared, then prematurely lifted in
error and then re-instituted. It is these types of extraordinary
circumstances that the Exchange believes require certainty, and thus,
the Exchange believes it necessary to make clear that in such a
circumstance any transactions after a trading halt has been declared
will be nullified. In the event that a trading halt is declared as of a
future time (i.e., if the primary listing exchange declares a trading
halt as of a specific, future time in order to ensure coordination
amongst market participants), the Exchange would only nullify
transactions occurring after the time the trading halt was supposed to
be in place until the official end of the trading halt according to the
primary listing market.
The Exchange also notes that it currently has authority pursuant to
paragraph (f) of Rule 128--Equities to review and nullify transactions
that arise during a disruption or malfunction in the operation of any
electronic communications and trading facilities of the Exchange.
Further, paragraph (f) of Rule 128--Equities gives the Exchange
authority to use a lower numerical guideline than is set forth in
paragraph (c)(1) of the Rule when necessary to maintain a fair and
orderly market and to protect investors and the public interest. Thus,
while the Exchange believes that paragraph (f) does give the Exchange
the authority to nullify
[[Page 25957]]
transactions occurring when there is an Exchange technical issue
related to the transmission or receipt of the electronic message
instituting a trading halt or with respect to a technical issue related
to a prematurely lifted trading halt, the Exchange believes that
proposed paragraph (k) will provide appropriate authority for the
Exchange to nullify all such transactions whether or not the systems
problem occurs on the Exchange with respect to trading halts and
explicit clarity for market participants that such transactions will be
nullified. The Exchange believes that such authority is appropriate
because when relied upon the Exchange will be cancelling trades that
should not have occurred in the first instance. Finally, the Exchange
believes that such authority is appropriate because a trading halt
declared by the primary listing market is indicative of an issue with
respect to the applicable security or a larger set of securities.
2. Statutory Basis
The Exchange believes that its proposal is consistent with the
requirements of the Act and the rules and regulations thereunder that
are applicable to a national securities exchange, and, in particular,
with the requirements of Section 6(b) of the Act.\12\ In particular,
the proposal is consistent with Section 6(b)(5) of the Act,\13\ because
it would promote just and equitable principles of trade, remove
impediments to, and perfect the mechanism of, a free and open market
and a national market system.
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\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that it is appropriate to adopt a provision
granting the Exchange authority to nullify trades that occur if an
Event similar to the U.S. Bancorp Event occurs again. The Exchange
believes that this provision will allow the Exchange to act in the
event of such a severe valuation error, that such action would promote
just and equitable principles of trade and that the proposal is
therefore consistent with the Act. Similarly, the Exchange believes
that adding a provision allowing the Exchange to nullify transactions
that occur when a trading halt is declared, then prematurely lifted in
error and then reinstituted, and providing that in the event of any
disruption or malfunction in the operation of the electronic
communications and trading facilities of the Exchange, another market
center or responsible single plan processor in connection with the
transmittal or receipt of a trading halt the Exchange will nullify
trades occurring after a trading halt has been declared by the primary
listing market for the security will help to avoid confusion amongst
market participants, which is consistent with the protection of
investors and the public interest and therefore consistent with the
Act. The Exchange further believes that the proposal is appropriate and
consistent with the Act because when relied upon the Exchange will be
cancelling trades that should not have occurred in the first instance.
The Exchange also believes that the proposal is appropriate because a
trading halt declared by the primary listing market is indicative of an
issue with respect to the applicable security or a larger set of
securities.
The Exchange believes that the proposal to update cross-references
in existing paragraph (i) of Rule 128--Equities to include new
paragraphs (j) and (k) is consistent with the Act because, as is the
case with respect to the current rule, this change makes clear that the
provisions of paragraph (i) do not alter the application of other
provisions of Rule 128--Equities.
The Exchange believes that the Financial Industry Regulatory
Authority (``FINRA'') and other national securities exchanges are also
filing similar proposals to add provisions similar to the provisions
proposed by the Exchange above. Therefore, the proposal promotes just
and equitable principles of trade in that it promotes transparency and
uniformity across markets concerning treatment of transactions as
clearly erroneous. The proposed rule change would also help to assure
consistent results in handling erroneous trades across the U.S.
markets, thus furthering fair and orderly markets, the protection of
investors and the public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change
implicates any competitive issues. To the contrary, as noted above, the
Exchange believes FINRA and other national securities exchanges are
also filing similar proposals, and thus, that the proposal will help to
ensure consistency across market centers.
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
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
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 email to [email protected]. Please include
File Number SR-NYSEMKT-2014-37 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEMKT-2014-37. This
file number should be included on the subject line if email 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
[[Page 25958]]
10:00 a.m. and 3:00 p.m. Copies of the 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 available publicly. All
submissions should refer to File Number SR-NYSEMKT-2014-37 and should
be submitted on or before May 27, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-10287 Filed 5-5-14; 8:45 am]
BILLING CODE 8011-01-P