[Federal Register Volume 80, Number 17 (Tuesday, January 27, 2015)]
[Notices]
[Pages 4321-4324]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-01384]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-74110; File No. 4-631]
Joint Industry Plan; Notice of Filing of the Eighth Amendment to
the National Market System Plan To Address Extraordinary Market
Volatility by BATS Exchange, Inc., BATS Y-Exchange, Inc., Chicago Board
Options Exchange, Inc., 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.
January 21, 2015.
I. Introduction
On December 24, 2014, Financial Industry Regulatory Authority, Inc.
(``FINRA''), on behalf of 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., NASDAQ OMX BX, Inc., NASDAQ OMX
PHLX LLC, the Nasdaq Stock Market LLC, and National Stock Exchange,
Inc., New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc.
(collectively with FINRA, 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 eighth
amendment to the Plan (``Eighth Amendment''), and reflects changes
unanimously approved by the Participants. The Eighth Amendment to the
Plan proposes to: (i) Establish a requirement for the Participants to
submit a supplemental joint assessment to the Commission by May 29,
2015; and (ii) extend the end date of the pilot period of the Plan from
February 20, 2015 to October 23, 2015. A copy of the Plan, as proposed
to be amended is attached as Exhibit A hereto. The Commission is
publishing this notice to solicit comments from interested
[[Page 4322]]
persons on the Eighth Amendment to the Plan.\4\
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\1\ 15 U.S.C. 78k-1.
\2\ 17 CFR 242.608.
\3\ See Letter from Christopher B. Stone, Vice President, FINRA,
to Brent Fields, Secretary, Commission, dated December 24, 2014
(``Transmittal Letter'').
\4\ ``Any two or more self-regulatory organizations, acting
jointly, . . . may propose an amendment to an effective national
market system plan [] by submitting the text of the plan or
amendment to the Secretary of the Commission, together with a
statement of the purpose of such plan or amendment . . .'' 17 CFR
242.608(a)(1) The Commission is required to publish notice of the
filing of any proposed amendment to any effective national market
system plan, together with the terms of substance of the filing or a
description of the subjects and issues involved, and shall provide
interested persons an opportunity to submit written comments. See 17
CFR 242.608(b)(1). No amendment to a national market system plan
shall become effective unless approved by the Commission or
otherwise permitted in accordance with Rule 608(b)(3). See id.
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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 are
designed to prevent trades in individual NMS Stocks from occurring
outside of the specified price bands.\6\ These limit up-limit down
requirements are 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 consist of a
Lower Price Band and an Upper Price Band for each NMS Stock.\7\ The
price bands are 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 are 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 are 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 are 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. See
Exhibit A, infra.
\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 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 does not move by one percent or more from the
Reference Price in effect, no new price bands are disseminated, and the
current Reference Price remains the effective Reference Price. If the
Pro-Forma Reference Price moves by one percent or more from the
Reference Price in effect, the Pro-Forma Reference Price becomes the
Reference Price, and the Processors disseminate new price bands based
on the new Reference Price. Each new Reference Price remains 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 are 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 enters a Limit State,\13\ and the Processors are
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 immediately enters 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 exits a Limit State
if, within 15 seconds of entering the Limit State, all Limit State
Quotations are executed or canceled in their entirety. If the market
does not exit a Limit State within 15 seconds, then the Primary Listing
Exchange declares a five-minute Trading Pause, which is 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 are 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, are 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 declares a Trading Pause in an
NMS Stock; upon notification by the primary listing market, the
Processor disseminates 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 are 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
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 are 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
[[Page 4323]]
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
replaces 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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The following summarizes the Eighth Amendment to the Plan and the
rationale behind those changes:
Proposed Amendment
The Eighth Amendment proposes two changes to the Plan. First, the
Participants propose to amend Appendix B of the Plan to state that, by
May 29, 2015, the Participants shall provide to the Commission a
supplemental joint assessment relating to the impact of the Plan. On
September 29, 2014, the Participants submitted a Participant Impact
Assessment,\21\ which provided the Commission with the Participants'
initial observations in each area required to be addressed under
Appendix B to the Plan. Though the Participants have submitted the
Participant Impact Assessment, they believe that a supplemental joint
assessment is appropriate. The supplemental joint assessment would
evaluate the impact of the Plan using the measures set forth in
Appendix B, but would be an extensive assessment based upon a data-
driven analysis across trading centers using methodology agreed upon by
the Participants, which would allow the Participants to make unified
recommendations, where appropriate, that would be of greater value to
the Commission and the public than separate submissions. The
Participants also state that they intend to make the supplemental joint
assessment publicly available.
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\21\ See Letter from Participants to Brent J. Fields, Secretary,
Commission, dated September 29, 2014 (``Participant Impact
Assessment'').
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The Participants intend to engage a third-party consultant to
assist in conducting the cross-market analysis and preparing the
supplemental joint assessment. The Participants believe that the
process of selecting, engaging, meeting with, and providing required
data to the ultimate third-party consultant will be time consuming, but
beneficial in that it would facilitate the development of a joint
assessment that, unlike individual Participant submissions, would not
need to be compared and reconciled.
Second, the Participants propose to amend Section VIII.C the Plan
to extend the pilot period of the Plan from February 20, 2015 through
October 23, 2015. The Participants believe that extension of the pilot
period is necessary and appropriate in the interest of the public,
including because additional time will: (i) Provide a reasonable period
of time for the public to comment on the supplemental joint assessment
and recommendations; (ii) provide Participants time to use the
information collected during the operation of the Plan to perform
further analysis and recommend amendments to the Plan; and (iii) allow
the Commission adequate time to review the supplemental joint
assessment and recommendations provided by the Participants, and
determine if any modifications to the Plan are appropriate. The
Participants also believe that the proposed amendment is consistent
with the approval order for the Plan, in which the Commission stated
that having a pilot period would allow ``the public, the Participants,
and the Commission to assess the operation of the Plan and whether the
Plan should be modified prior to approval on a permanent basis.'' \22\
Finally, the Participants believe that the proposed amendment, which
provides for additional time to observe the operation of the Pilot, as
well as to prepare and submit a supplemental joint assessment, will
facilitate the development of better recommendations and will allow the
Participants to make unified recommendations, where appropriate,
regarding the operation of the Plan.
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\22\ See Securities Exchange Act Release No. 67091 (May 31,
2012), 77 FR 33498 at 33508 (June 6, 2012).
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The Participants note that the amended version of the Plan also
includes the revised Appendix A--Schedule 1, which was updated for
trading beginning July 1, 2014. As set forth in Appendix A--Percentage
Parameters, the Primary Listing Exchange updates Schedule 1 to Appendix
A semi-annually based on the fiscal year and such updates do not
require a Plan amendment.
B. Governing or Constituent Documents
The governing documents of the Processor, as defined in Section
I(P) of the Plan, will not be affected by the Plan, but once the Plan
is implemented, the Processor's obligations will change, as set forth
in detail in the Plan.
C. Implementation of Plan
The initial date of the Plan operations was April 8, 2013.
D. Development and Implementation Phases
The Plan was initially implemented as a one-year pilot program in
two Phases, consistent with Section VIII of the Plan: Phase I of Plan
implementation began on April 8, 2013 and was completed on May 3, 2013.
Implementation of Phase II of the Plan began on August 5, 2013 and was
completed on February 24, 2014. Pursuant to this proposed amendment,
the Participants propose to extend the pilot period so that it is set
to end October 23, 2015.
E. Analysis of Impact on Competition
The proposed Plan does not impose any burden on competition that is
not necessary or appropriate in furtherance of the purposes of the
Exchange Act. The Participants do not believe that the proposed Plan
introduces terms that are unreasonably discriminatory for the purposes
of Section 11A(c)(1)(D) of the Exchange Act.
F. Written Understanding or Agreements relating to Interpretation of,
or Participation in the Plan
The Participants have no written understandings or agreements
relating to interpretation of the Plan. Section II(C) of the Plan sets
forth how any entity registered as a national securities exchange or
national securities association may become a Participant.
G. Approval of Amendment of the Plan
Each of the Plan's Participants has executed a written amended
Plan.
H. Terms and Conditions of Access
Section II(C) of the Plan provides that any entity registered as a
national securities exchange or national securities association under
the Exchange Act may become a Participant by: (1) Becoming a
participant in the applicable Market Data Plans, as defined in Section
I(F) of the Plan; (2) executing a copy of the Plan, as then in effect;
(3) providing each then-current Participant with a copy of such
executed Plan; and (4) effecting an amendment to the Plan as specified
in Section III(B) of the Plan.
I. Method of Determination and Imposition, and Amount of, Fees and
Charges
Not applicable.
[[Page 4324]]
J. Method and Frequency of Processor Evaluation
Not applicable.
K. Dispute Resolution
Section III(C) of the Plan provides for each Participant to
designate an individual to represent the Participant as a member of an
Operating Committee. No later than the initial date of the Plan, the
Operating Committee shall designate one member of the Operating
Committee to act as the Chair of the Operating Committee. Any
recommendation for an amendment to the Plan from the Operating
Committee that receives an affirmative vote of at least two-thirds of
the Participants, but is less than unanimous, shall be submitted to the
Commission as a request for an amendment to the Plan initiated by the
Commission under Rule 608.
On September 18, 2014, the Operating Committee, duly constituted
and chaired by Mr. Christopher B. Stone of FINRA, met and voted to
amend the Plan as set forth herein in accordance with Section III(C) of
the Plan.
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed
Eighth Amendment 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 4-631 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number 4-631. 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 Plan that are filed with the Commission,
and all written communications relating to the Plan 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 10:00 a.m. and 3:00 p.m. Copies of
the filing also will be available for inspection and copying at the
Participants' principal offices. 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 4-631 and should be submitted on or before February 17,
2015.
By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2015-01384 Filed 1-26-15; 8:45 am]
BILLING CODE 8011-01-P