Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Clearly Erroneous Rule in Light of Changes to the Single Stock Trading Pause Process, 51076-51079 [2011-20905]
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51076
Federal Register / Vol. 76, No. 159 / Wednesday, August 17, 2011 / Notices
classes may only initiate intra-day
quoting in 40 additional classes.
Additionally, under the proposal the
Exchange will retain the current
requirement that once a CMM enters a
quotation in an appointed options class,
it must maintain continuous quotations
for that series and at least 60% of the
series of the options class until the close
of trading that day. CMMs will also
continue to be subject to the quotation
requirements contained in Rule 803 and
804. If a CMM receives Preferenced
Orders in an options class, it will
continue to be required to maintain
continuous quotations in at least 90% of
the series in that class. The Exchange
will continue to have the ability under
its rules to call upon a CMM to submit
quotations in one or more series of an
options class to which the CMM is
appointed.
Finally, the Exchange proposes to
terminate its current CMM inactivity
fee. That fee currently imposes a charge
of $25,000 a month for CMM trading
rights that are not active. The purpose
of the fee is to help recoup a portion of
the income that the Exchange loses
when market makers do not operate
their trading rights and generate
transaction-based revenue. Under the
proposed CMM trading rights structure,
the Exchange does not believe that the
inactivity fee is appropriate or
necessary, as CMMs will now be able to
manage the number of options classes to
which they are appointed.7 Moreover,
the Exchange believes that there will be
increased demand for CMM trading
rights, and that owners of such rights
will have a financial incentive to sell or
lease any unused trading rights. If this
does not turn out to be the case, the
Exchange states that it will consider
reinstituting some form of inactivity fee
that is appropriate for the new structure.
Emcdonald on DSK2BSOYB1PROD with NOTICES
III. Discussion and Commission
Findings
The Commission finds that the
proposed rule change is consistent with
the requirements of the Act and the
rules and regulations thereunder
applicable to a national securities
exchange 8 and, in particular, the
requirements of Section 6 of the Act.9
7 For example, under the current structure, a
CMM that owns or leases three CMM trading rights
is obligated to continuously quote a minimum of
120 options classes. Under the new structure, a
CMM with three trading rights could seek
appointment for only three options classes (one for
each trading right), thus making the inactivity fee
ineffective.
8 In approving this proposed rule change the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
9 15 U.S.C. 78f.
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18:13 Aug 16, 2011
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Specifically, the Commission finds that
the proposed rule change is consistent
with Section 6(b)(5) of the Act,10 which
requires, among other things, that the
rules of a national securities exchange
be designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
regulating, clearing, settling, processing
information with respect to, and
facilitating transactions in securities, 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 and are not designed to
permit unfair discrimination between
customers, issuers, brokers or dealers.
The Commission also believes that the
proposal is consistent with Section
6(b)(4) of the Act,11 which requires that
the rules of a national securities
exchange provide for the equitable
allocation of reasonable fees and other
charges among the Exchange’s members
and issuers and other persons using its
facilities.
In particular, the Commission
believes that the proposal should allow
CMMs additional flexibility to choosing
their appointed classes.12 The
Commission notes that potential market
makers will be able to purchase or lease
newly-available CMM trading rights.
Under the proposal, CMMs can select
the options classes to which they seek
appointment, but the Exchange retains
the authority to make such
appointments and to remove
appointments from CMMs based on
their performance.13 In addition,
because a PMM will continue to be
appointed to each options class, there
will continue to be continuous, twosided quotations in all options listed on
the Exchange.14
The Exchange proposes to limit the
number of appointed options classes in
which a CMM can initiate intraday
quoting to the number of options classes
in which it participates in the opening
rotation. The Commission notes that
CMMs will also continue to be subject
to the quotation requirements contained
in Rules 803 and 804. In addition, once
a CMM enters a quotation in an
10 15
U.S.C. 78f(b)(5).
U.S.C. 78f(b)(4).
12 The Commission also notes that the new
structure is similar to the Chicago Board Options
Exchange’s (‘‘CBOE’’) rules, which permit its
market makers to choose the options to which they
are appointed. See CBOE Rule 8.3.
13 ISE Rule 802(e)–(f).
14 Pursuant to Rule 804(a)(2), PMMs have the
obligation to provide continuous quotations in all
of the series of all of the options to which they are
appointed.
11 15
PO 00000
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Fmt 4703
Sfmt 4703
appointed options class, it must
maintain continuous quotations for that
series and at least 60% of the series of
the options class until the close of
trading that day.15 If a CMM receives
Preferenced Orders in an options class,
it will continue to be required to
maintain continuous quotations in at
least 90% of the series in that class.16
Also, the Exchange will continue to
have the ability under its rules to call
upon a CMM to submit quotations in
one or more series of an options class
to which the CMM is appointed.17
Finally, the Exchange proposes to
eliminate its current charge of $25,000
a month for CMM trading rights that are
not active. The Exchange states that the
inactivity fee is not appropriate or
necessary, as CMMs will now be able to
manage the number of options classes to
which they are appointed. The
Commission believes that the proposal
is consistent with Section 6(b)(4) of the
Act.18
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,19 that the
proposed rule change (SR–ISE–2011–
33), be, and hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.20
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011–20901 Filed 8–16–11; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–65104; File No. SR–
NASDAQ–2011–116]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Amend the
Clearly Erroneous Rule in Light of
Changes to the Single Stock Trading
Pause Process
August 11, 2011.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on August 8,
2011, The NASDAQ Stock Market LLC
(‘‘Exchange’’), filed with the Securities
15 ISE
Rule 804(e)(2)(iii).
Rule 804(e)(2)(iii).
17 ISE Rule 802(e)(2)(iv).
18 15 U.S.C. 78f(b)(4).
19 15 U.S.C. 78s(b)(2).
20 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
16 ISE
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Federal Register / Vol. 76, No. 159 / Wednesday, August 17, 2011 / Notices
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
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange proposes to extend the
pilot period of recent amendments to
Rule 11890, concerning clearly
erroneous transactions, 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 the proposed rule change
is available from NASDAQ’s Web site at
https://nasdaq.cchwallstreet.com/
Filings/, at NASDAQ’s principal office,
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 aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Emcdonald on DSK2BSOYB1PROD with NOTICES
Background
The Exchanges 3 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
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.
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in S&P 500 Index stocks (‘‘Pause
Pilot’’),4 approved by the Commission
on June 10, 2010.5 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.6 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.7 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’’).
As part of the changes to the clearly
erroneous process under Rule 11890,
NASDAQ replaced existing Rule
11890(a)(2)(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
11890(a)(2)(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
4 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.
5 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).
6 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).
7 Securities Exchange Act Release No. 62886
(September 16 [sic], 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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51077
found under Rule 11890(a)(2)(C)(1).8
The Reference Price, for purposes of
Rule 11890(a)(2)(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 NASDAQ would be broken by
the exchange pursuant to Rule
11890(a)(2)(C)(4) if the transaction
occurred at either three, five or ten
percent above the Trading Pause Trigger
Price.9
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’’).10 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. NASDAQ
amended its Pause Pilot rule, Rule
4120(a)(11), 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
4120(a)(11)(A). The rules applicable to
the Phase III Securities were placed in
new Rules 4120(a)(11)(B) and (C). A
pause under Rule 4120(a)(11)(B) 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 4120(a)(11)(C) is
triggered by a 50 percent price move
within a five minute period in a Phase
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.
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
8 Pursuant to Rule 11890(a)(2)(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.
9 Rule 11890(a)(2)(C)(4).
10 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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Emcdonald on DSK2BSOYB1PROD with NOTICES
51078
Federal Register / Vol. 76, No. 159 / Wednesday, August 17, 2011 / Notices
volatility in such securities. Phase III
Securities are currently subject to the
clearly erroneous process under Rules
11890(a)(2)(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.11 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.
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
11890(a)(2)(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.
NASDAQ believes that this would be an
inequitable result and an arbitrary
application of the clearly erroneous
process. Specifically, NASDAQ 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 11890(a)(2)(C)(1)–(3).
Applying the clearly erroneous
process under Rules 11890(a)(2)(C)(1)–
(3) to the Phase III Securities would
allow NASDAQ to review all
11 Id.
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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 4120(a)(11)(B) or (C) 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 11890(a)(2)(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 11890(a)(2)(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. NASDAQ
believes a better outcome is to afford all
members transacting in Phase III
Securities the opportunity of having
such trades reviewed.
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.
NASDAQ 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,
NASDAQ is proposing to amend Rules
11890(a)(2)(C)(1)–(4) to specify that Rule
11890(a)(2)(C)(4) applies only to the
Frm 00088
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’’),13 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) 14 of the
Act in that it seeks to assure fair
competition among brokers and dealers
and among exchange markets. NASDAQ
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. NASDAQ
notes that the changes proposed herein
will in no way interfere with the
operation of the Pause Pilot process, as
amended.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will result in
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act, as amended.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
Summary
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current securities of Pause Pilot, as
found under Rule 4120(a)(11)(A).12
Fmt 4703
Sfmt 4703
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 15 and Rule 19b–
12 NASDAQ notes that the Exchanges are filing
similar proposals to make the changes proposed
herein.
13 15 U.S.C. 78f(b)(5).
14 15 U.S.C. 78k–1(a)(1).
15 15 U.S.C. 78s(b)(3)(A).
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Federal Register / Vol. 76, No. 159 / Wednesday, August 17, 2011 / Notices
4(f)(6)(iii) thereunder.16 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.17
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 (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–NASDAQ–2011–116 on the
subject line.
Emcdonald on DSK2BSOYB1PROD with NOTICES
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–NASDAQ–2011–116. This
16 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 notes that the Exchange has
satisfied this requirement.
17 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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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 (https://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
NASDAQ. 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–
NASDAQ–2011–116 and should be
submitted on or before September 7,
2011.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.18
Elizabeth M. Murphy,
Secretary.
51079
2011, NASDAQ OMX PHLX LLC
(‘‘PHLX’’), 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 PHLX. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
PHLX proposes to amend Rule 3312,
governing clearly erroneous executions
on the NASDAQ OMX PSX system, 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 the proposed rule change
is available from PHLX’s Web site at
https://
nasdaqomxphlx.cchwallstreet.com/
NASDAQOMXPHLX/Filings/, at PHLX’s
principal office, 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,
PHLX 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. PHLX has prepared
summaries, set forth in Sections A, B,
and C below, of the most significant
aspects of such statements.
BILLING CODE 8011–01–P
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
SECURITIES AND EXCHANGE
COMMISSION
1. Purpose
[FR Doc. 2011–20905 Filed 8–16–11; 8:45 am]
[Release No. 34–65106; File No. SR–Phlx–
2011–114]
Self-Regulatory Organizations;
NASDAQ OMX PHLX LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Amend the
Clearly Erroneous Rule in Light of
Changes to the Single Stock Trading
Pause Process
August 11, 2011.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on August 8,
18 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
PO 00000
Frm 00089
Fmt 4703
Sfmt 4703
Background
The Exchanges 3 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
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.
E:\FR\FM\17AUN1.SGM
17AUN1
]]>Agencies
[Federal Register Volume 76, Number 159 (Wednesday, August 17, 2011)]
[Notices]
[Pages 51076-51079]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-20905]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-65104; File No. SR-NASDAQ-2011-116]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Amend the Clearly Erroneous Rule in Light of Changes to the Single
Stock Trading Pause Process
August 11, 2011.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on August 8, 2011, The NASDAQ Stock Market LLC (``Exchange''), filed
with the Securities
[[Page 51077]]
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
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange proposes to extend the pilot period of recent
amendments to Rule 11890, concerning clearly erroneous transactions, 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 the proposed rule change is available from NASDAQ's Web
site at https://nasdaq.cchwallstreet.com/Filings/, at NASDAQ's principal
office, 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 aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Background
The Exchanges \3\ 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''),\4\
approved by the Commission on June 10, 2010.\5\ 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.\6\ 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.\7\ 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'').
---------------------------------------------------------------------------
\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\ 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.
\5\ 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).
\6\ 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).
\7\ Securities Exchange Act Release No. 62886 (September 16
[sic], 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).
---------------------------------------------------------------------------
As part of the changes to the clearly erroneous process under Rule
11890, NASDAQ replaced existing Rule 11890(a)(2)(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 11890(a)(2)(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 11890(a)(2)(C)(1).\8\ The Reference Price, for
purposes of Rule 11890(a)(2)(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 NASDAQ would be broken
by the exchange pursuant to Rule 11890(a)(2)(C)(4) if the transaction
occurred at either three, five or ten percent above the Trading Pause
Trigger Price.\9\
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\8\ Pursuant to Rule 11890(a)(2)(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.
\9\ Rule 11890(a)(2)(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'').\10\ 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.
NASDAQ amended its Pause Pilot rule, Rule 4120(a)(11), 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 4120(a)(11)(A). The rules applicable to the Phase III
Securities were placed in new Rules 4120(a)(11)(B) and (C). A pause
under Rule 4120(a)(11)(B) 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
4120(a)(11)(C) is triggered by a 50 percent price move within a five
minute period in a Phase 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.
---------------------------------------------------------------------------
\10\ 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).
---------------------------------------------------------------------------
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
[[Page 51078]]
volatility in such securities. Phase III Securities are currently
subject to the clearly erroneous process under Rules 11890(a)(2)(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.\11\ 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.
---------------------------------------------------------------------------
\11\ Id.
---------------------------------------------------------------------------
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 11890(a)(2)(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. NASDAQ believes that
this would be an inequitable result and an arbitrary application of the
clearly erroneous process. Specifically, NASDAQ 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 11890(a)(2)(C)(1)-(3).
Applying the clearly erroneous process under Rules
11890(a)(2)(C)(1)-(3) to the Phase III Securities would allow NASDAQ 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
4120(a)(11)(B) or (C) 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 11890(a)(2)(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
11890(a)(2)(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. NASDAQ 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. NASDAQ 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, NASDAQ is proposing to amend Rules
11890(a)(2)(C)(1)-(4) to specify that Rule 11890(a)(2)(C)(4) applies
only to the current securities of Pause Pilot, as found under Rule
4120(a)(11)(A).\12\
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\12\ NASDAQ notes that the Exchanges are filing similar
proposals to make the changes proposed herein.
---------------------------------------------------------------------------
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''),\13\ 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) \14\ of
the Act in that it seeks to assure fair competition among brokers and
dealers and among exchange markets. NASDAQ 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. NASDAQ notes that the changes proposed herein
will in no way interfere with the operation of the Pause Pilot process,
as amended.
---------------------------------------------------------------------------
\13\ 15 U.S.C. 78f(b)(5).
\14\ 15 U.S.C. 78k-1(a)(1).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act, as amended.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor 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 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 \15\ and Rule 19b-
[[Page 51079]]
4(f)(6)(iii) thereunder.\16\ 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.\17\
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\15\ 15 U.S.C. 78s(b)(3)(A).
\16\ 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 notes that the Exchange has satisfied
this requirement.
\17\ 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).
---------------------------------------------------------------------------
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 (https://www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-NASDAQ-2011-116 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-NASDAQ-2011-116. 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 (https://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 NASDAQ.
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-NASDAQ-2011-
116 and should be submitted on or before September 7, 2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-20905 Filed 8-16-11; 8:45 am]
BILLING CODE 8011-01-P
