Justia Agencies And Commissions Securities And Exchange Commission Self-Regulatory Organizations; BATS Exchange, Inc.; BATS Y-Exchange, Inc.; NASDAQ OMX BX, Inc.; Chicago Board Options Exchange, Incorporated; C2 Options Exchange, Incorporated; Chicago Stock Exchange, Inc.; EDGA Exchange, Inc.; EDGX Exchange, Inc.; Financial Industry Regulatory Authority, 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.; NASDAQ OMX PHLX LLC; Notice of Filing of Amendments No. 1 and Order Granting Accelerated Approval of Proposed Rule Changes as Modified by Amendments No. 1, Relating to Trading Halts Due to Extraordinary Market Volatility, 33531-33535 [2012-13652]

Self-Regulatory Organizations; BATS Exchange, Inc.; BATS Y-Exchange, Inc.; NASDAQ OMX BX, Inc.; Chicago Board Options Exchange, Incorporated; C2 Options Exchange, Incorporated; Chicago Stock Exchange, Inc.; EDGA Exchange, Inc.; EDGX Exchange, Inc.; Financial Industry Regulatory Authority, 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.; NASDAQ OMX PHLX LLC; Notice of Filing of Amendments No. 1 and Order Granting Accelerated Approval of Proposed Rule Changes as Modified by Amendments No. 1, Relating to Trading Halts Due to Extraordinary Market Volatility, 33531-33535 [2012-13652]

Download as PDF Federal Register / Vol. 77, No. 109 / Wednesday, June 6, 2012 / Notices 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 FINRA. 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–FINRA–2012–024 and should be submitted on or before June 27, 2012. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.23 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2012–13698 Filed 6–5–12; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION mstockstill on DSK4VPTVN1PROD with NOTICES [Release No. 34–67090; File Nos. SR–BATS– 2011–038; SR–BYX–2011–025; SR–BX– 2011–068; SR–CBOE–2011–087; SR–C2– 2011–024; SR–CHX–2011–30; SR–EDGA– 2011–31; SR–EDGX–2011–30; SR–FINRA– 2011–054; SR–ISE–2011–61; SR–NASDAQ– 2011–131; SR–NSX–2011–11; SR–NYSE– 2011–48; SR–NYSEAmex–2011–73; SR– NYSEArca–2011–68; SR–Phlx–2011–129] Self-Regulatory Organizations; BATS Exchange, Inc.; BATS Y–Exchange, Inc.; NASDAQ OMX BX, Inc.; Chicago Board Options Exchange, Incorporated; C2 Options Exchange, Incorporated; Chicago Stock Exchange, Inc.; EDGA Exchange, Inc.; EDGX Exchange, Inc.; Financial Industry Regulatory Authority, 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.; NASDAQ OMX PHLX LLC; Notice of Filing of Amendments No. 1 and Order Granting Accelerated Approval of Proposed Rule Changes as Modified by Amendments No. 1, Relating to Trading Halts Due to Extraordinary Market Volatility May 31, 2012. On September 27, 2011, each of BATS Exchange, Inc. (‘‘BATS’’), BATS Y– 23 17 CFR 200.30–3(a)(12). VerDate Mar<15>2010 17:24 Jun 05, 2012 Jkt 226001 Exchange, Inc. (‘‘BYX’’), NASDAQ OMX BX, Inc. (‘‘BX’’), Chicago Board Options Exchange, Incorporated (‘‘CBOE’’), C2 Options Exchange, Incorporated (‘‘C2’’), Chicago Stock Exchange, Inc. (‘‘CHX’’), EDGA Exchange, Inc. (‘‘EDGA’’), EDGX Exchange, Inc. (‘‘EDGX’’), International Securities Exchange LLC (‘‘ISE’’), The NASDAQ Stock Market LLC (‘‘Nasdaq’’), National Stock Exchange, Inc. (‘‘NSX’’), New York Stock Exchange LLC (‘‘NYSE’’), NYSE Amex LLC (‘‘NYSE Amex’’), NYSE Arca, Inc. (‘‘NYSE Arca’’), NASDAQ OMX PHLX LLC (‘‘Phlx’’) (collectively, the ‘‘Exchanges’’) and the Financial Regulatory Industry Authority, Inc. (‘‘FINRA’’) (together, with the Exchanges, the ‘‘SROs’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 proposed rule changes (the ‘‘SRO Proposals’’) to amend certain of their respective rules relating to trading halts due to extraordinary market volatility. The SRO Proposals were published for comment in the Federal Register on October 4, 2011.3 The Commission received seven comment letters on the SRO Proposals.4 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release Nos. 65437 (September 28, 2011), 76 FR 61466 (October 4, 2011); 65428 (September 28, 2011), 76 FR 61453 (October 4, 2011); 65429 (September 28, 2011), 76 FR 61432 (October 4, 2011); 65433 (September 28, 2011), 76 FR 61453 (October 4, 2011); 65438 (September 28, 2011), 76 FR 61447 (October 4, 2011); 65426 (September 28, 2011), 76 FR 61460 (October 4, 2011); 65431 (September 28, 2011), 76 FR 61425 (May 12, 2011); 65440 (September 28, 2011), 76 FR 61444 (October 4, 2011); 65430 (September 28, 2011), 76 FR 61429 (October 4, 2011); 65425 (September 28, 2011), 76 FR 61438 (October 4, 2011); 65435 (May 6, 2011), 76 FR 61416 (October 4, 2011); 65436 (September 28, 2011), 76 FR 61450 (October 4, 2011); 65427 (September 28, 2011), 76 FR 61457 (October 4, 2011); 65432 (September 28, 2011), 76 FR 61422 (October 4, 2011); 65439 (September 28, 2011), 76 FR 61463 (October 4, 2011); 65434 (September 28, 2011), 76 FR 61419 (October 4, 2011) (collectively, the ‘‘Notices’’). 4 See letter to Elizabeth M. Murphy, Secretary, Commission, from Ann L. Vlcek, Managing Director and Associate General Counsel, the Securities Industry and Financial Markets Association, dated October 27, 2011 (‘‘SIFMA Letter I’’); letter to Commission, from James J. Angel, Ph.D., CFA, Associate Professor of Finance, Georgetown University, McDonough School of Business, dated October 25, 2011 (‘‘Angel Letter’’); letter to Elizabeth M. Murphy, Secretary, Commission, from Craig S. Donohue, CME Group, Inc., dated October 25, 2011 (‘‘CME Group Letter I’’); letter to Elizabeth M. Murphy, Secretary, Commission, from Commissioner Bart Chilton, Commodity Futures Trading Commission, dated October 25, 2011 (‘‘Commissioner Chilton Letter’’); letter to Elizabeth M. Murphy, Secretary, Commission, from Richard H. Baker, President and CEO, Managed Funds Association, dated October 25, 2011 (‘‘MFA Letter’’); letter to Commission from Suzanne H. 2 17 PO 00000 Frm 00144 Fmt 4703 Sfmt 4703 33531 On November 17, 2011, the Commission extended the time period in which to approve the SRO Proposals, disapprove the SRO Proposals, or institute proceedings to determine whether to disapprove the SRO Proposals, to December 30, 2011.5 On December 28, 2011, the Commission instituted proceedings to determine whether to disapprove the SRO Proposals.6 The Commission thereafter received an additional three comment letters on the SRO Proposals.7 On May 10, 2012, NYSE Euronext, on behalf of the three U.S. exchanges it operates, NYSE, NYSE Amex, and NYSE Arca, filed a response to comments (the ‘‘Response’’).8 On May 23, 2012 and May 24, 2012, the SROs each submitted Amendment No. 1 to their respective proposed rule change (the ‘‘Amendments’’). In the Amendments, the SROs propose to make the SRO Proposals operative on a pilot basis scheduled to end on the same date that the pilot period for the Limit Up-Limit Down Plan (as defined below) ends.9 The Commission is publishing this notice to solicit comments on the SRO Proposals, as modified by the Amendments, from interested persons and is approving the SRO Proposals, as modified by the Amendments, on an accelerated basis. I. Description of the Proposals In the SRO Proposals, the Exchanges and FINRA propose to revise the existing market-wide circuit breakers, which halt trading in all NMS securities (as defined in Rule 600(b)(47) of Regulation NMS under the Act 10) in the event of extraordinary market volatility, in order to make them more meaningful in today’s high-speed electronic Shatto, dated October 20, 2011 (‘‘Shatto Letter’’); letter to Commission from Mark Roszak, dated October 4, 2011 (‘‘Roszak Letter’’). 5 See Securities Exchange Act Release No. 65770 (November 17, 2011), 76 FR 72492 (November 23, 2011). 6 See Securities Exchange Act Release No. 66065 (December 28, 2011), 77 FR 316 (January 4, 2012). 7 See letters to Elizabeth Murphy, Secretary, Commission, from Timothy Quast, Managing Director, ModernIR, dated January 20, 2012 (‘‘ModernIR Letter’’); Craig S. Donohue, Chief Executive Officer, CME Group, Inc., dated January 25, 2012 (‘‘CME Group Letter II’’), and Ann L. Vlcek, Managing Director and Associate General Counsel, the Securities Industry and Financial Markets Association, dated February 7, 2012 (‘‘SIFMA Letter II’’). 8 See letter to Elizabeth M. Murphy, Secretary, Commission, from Janet McGinness, EVP & Corporate Secretary, General Counsel, NYSE Markets, dated May 10, 2012. 9 See, e.g., SR–NYSE–2011–48, Amendment No. 1. The text of proposed Amendment No. 1 is available on the NYSE’s Web site at https:// www.nyse.com, at the principal office of NYSE and at the Commission’s Public Reference Room. 10 17 CFR 242.600(b)(47). E:\FR\FM\06JNN1.SGM 06JNN1 33532 Federal Register / Vol. 77, No. 109 / Wednesday, June 6, 2012 / Notices markets. In so doing, the exchanges took into account the events of May 6, 2010, where the markets experienced excessive volatility in a short period of time, as well as the recommendations of the Joint CFTC–SEC Advisory Committee on Emerging Regulatory Issues (the ‘‘Joint CFTC–SEC Advisory Committee’’). The existing market-wide circuit breakers provide for specified trading halts following certain ‘‘Level 1,’’ ‘‘Level 2,’’ and ‘‘Level 3’’ market declines.11 The values of Levels 1, 2, and 3 are calculated at the beginning of each calendar quarter, using 10%, 20%, and 30%, respectively, of the average closing value of the Dow Jones Industrial Average (‘‘DJIA’’) for the month prior to the beginning of the quarter.12 The existing Level 1, Level 2, and Level 3 circuit breakers operate as follows: Level 1 Halt Before 2:00 p.m.—one hour; At or after 2:00 p.m. but before 2:30 p.m.— 30 minutes; At or after 2:30 p.m.—trading shall continue, unless there is a Level 2 Halt. Level 2 Halt Before 1:00 p.m.—two hours; At or after 1:00 p.m. but before 2:00 p.m.— one hour; At or after 2:00 p.m.—trading shall halt and not resume for the rest of the day. Level 3 Halt At any time—trading shall halt and not resume for the rest of the day. mstockstill on DSK4VPTVN1PROD with NOTICES As described in detail in the Notices, the SRO Proposals, among other things, would: (i) Replace the DJIA with the S&P 500® Index (‘‘S&P 500’’) as the reference index; (ii) recalculate the values of the triggers daily instead of each calendar quarter; (iii) reduce the 10%, 20%, and 30% market decline trigger percentages to 7%, 13%, and 20%; (iv) shorten the length of the trading halts associated with each market decline level; and (v) modify the times when a trading halt may be triggered. The proposed Level 1, Level 2, and Level 3 circuit breakers would operate as follows: Level 1 Halt Before 3:25 p.m.—15 minutes; At or after 3:25 p.m.—trading shall continue, unless there is a Level 3 halt. Level 2 Halt Before 3:25 p.m.—15 minutes; At or after 3:25 p.m.—trading shall continue, unless there is a Level 3 halt. Level 3 Halt At any time—trading shall halt and not resume for the rest of the day. 11 See, e.g., NYSE Rule 80B. percentage calculation is rounded to the nearest 50 points and remains in effect until the next quarterly calculation. 12 Each VerDate Mar<15>2010 17:24 Jun 05, 2012 Jkt 226001 II. Limit Up-Limit Down Plan Separately, certain equities exchanges 13 and FINRA have proposed to establish a new mechanism to address extraordinary market volatility in individual securities, pursuant to a national market system plan filed under Rule 608 of Regulation NMS (the National Market System Plan to Address Extraordinary Market Volatility, or, the ‘‘Limit Up-Limit Down Plan’’).14 The new Limit Up-Limit Down Plan, which would replace the existing single-stock circuit breaker mechanism,15 would prevent trades in individual securities from occurring outside of a specified price band, and would be coupled with a trading pause mechanism to accommodate more fundamental price moves. In essence, a security would enter a ‘‘limit state’’ if its price moves a certain percentage—generally 5%, 10% or 20%, depending on the stock and the time of day—over a five-minute period. If the market does not naturally exit the limit state within 15 seconds, there would be a five-minute trading pause. The Commission also is approving today the Limit Up-Limit Down Plan on a pilot basis.16 As discussed below, the Commission, in the Notices for the SRO Proposals, specifically requested comment on how the proposed changes to the marketwide circuit breakers would interact with the Limit Up-Limit Down Plan for individual securities, if approved, and several commenters expressed views on this issue.17 III. Summary of Comments The Commission received ten comment letters from eight commenters on the SRO Proposals.18 The commenters generally supported the proposals and their goals, but several expressed concern with particular provisions or offered alternative suggestions.19 13 These exchanges are BATS, BX, BYX, CBOE, CHX, EDGA, EDGX, Nasdaq, NSX, NYSE, NYSE MKT LLC (f/k/a NYSE Amex LLC), NYSE Arca, and Phlx. 14 See Securities Exchange Act Release No. 64547 (May 25, 2011), 76 FR 31647 (June 1, 2011). 15 See Securities Exchange Act Release No. 64735 (June 23, 2011), 76 FR 38243 (June 29, 2011) (order approving the current single-stock circuit breaker mechanism). The single-stock circuit breaker mechanism, which was approved as a pilot program, is currently scheduled to expire on July 31, 2012. See e.g., Securities Exchange Act Release No. 66136 (January 11, 2012), 77 FR 2589 (January 18, 2012) (SR–NYSE–2011–69). 16 See Securities Exchange Act Release No. 67091 (May 31, 2012) (File No. 4–631). 17 See Commissioner Chilton Letter, CME Group Letters I and II, and SIFMA Letters I and II. 18 See supra notes 4 and 7. 19 See SIFMA Letters I and II, MFA Letter, CME Group Letter I, Angel Letter, and Shatto Letter. PO 00000 Frm 00145 Fmt 4703 Sfmt 4703 Some commenters expressed concern that the Level 2 circuit breaker would not apply after 3:25 p.m.20 As explained in the Notices, the SROs adopted this approach to avoid disrupting the normal 4:00 p.m. market close. The Commission, however, specifically solicited comment on whether some provision should be made to end the regular trading session if a market decline suddenly occurs after 3:25 p.m., even if the decline is less than 20%. Some commenters believed that the proposal could leave the market vulnerable to a severe decline that occurs late in the trading day, and instead suggested that a Level 2 circuit breaker triggered at or after 3:25 p.m. halt trading for the remainder of the trading session.21 The Commission also specifically requested comment on how the proposed changes would interact with the single-stock circuit breaker pilot program or, if approved, the proposed Limit Up-Limit Down Plan for individual securities. The Commission further asked whether the market-wide circuit breaker should be triggered if a sufficient number of single-stock circuit breakers or price limits were triggered. One commenter believed that the market-wide circuit breaker should be triggered if a sufficient number of single-stock circuit breakers or price limits were triggered, given the potential difficulties of accurately calculating the value of the S&P 500 Index in such circumstances.22 This commenter made some suggestions for this additional trigger, and encouraged Commission staff to assess empirical data to develop appropriate parameters in this area.23 Two other commenters also expressed Some commenters suggested the Commission instead focus on other market structure changes; those changes are outside the scope of the SRO Proposals. See Modern IR Letter (suggesting the Commission suspend core trading rules in the event of extraordinary volatility) and Roszak Letter (suggesting the Commission more vigorously regulate high-frequency traders such as by limiting connection speeds). 20 See CME Group Letters I and II, Commissioner Chilton Letter, MFA Letter, and SIFMA Letter II. 21 See CME Group Letters I and II, MFA Letter, and SIFMA Letter II. 22 See SIFMA Letters I and II. SIFMA also believed it was critical to coordinate the marketwide circuit breakers with the options and futures markets. The Commission notes that the SRO Proposals have been developed in consultation with the options and futures markets. See, e.g., Securities Exchange Act Release No. 65427, 76 FR at 61458. 23 See SIFMA Letter II. For example, SIFMA suggested that there be an additional market-wide circuit breaker trigger when both (1) 5% (or 25) of the securities in the S&P 500 are in a limit down state or halted and (2) 10% of the market weighting of the SPX is in a limit down state or halted. As a simpler alternative, SIFMA also suggested there be an additional trigger if 10% of the securities in the S&P 100 are in a limit state or halted. E:\FR\FM\06JNN1.SGM 06JNN1 Federal Register / Vol. 77, No. 109 / Wednesday, June 6, 2012 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES concern about the interaction of marketwide circuit breakers and single-stock circuit breakers, and the effect that might have on index calculations, particularly in macro-market events.24 Two commenters also expressed views on how market centers should treat pending orders in the event a market-wide circuit breaker is triggered. One commenter believed that orders pending with a market center at the time of a Level 1 or Level 2 circuit breaker should remain queued by the market center during the halt and be eligible for execution after the halt.25 However, in the event of a Level 3 circuit breaker, that commenter was of the view that all pending orders should be cancelled, since trading will cease for the remainder of the day. The commenter reiterated these views in its subsequent comment letter.26 Another commenter generally took the position that the SROs should not cancel pending orders during a trading halt, in order to preserve the queue priority of market participants.27 These views were restated by the same commenter in its subsequent comment letter.28 The Commission also sought comment on whether a provision should be made for a closing auction in the event of a Level 3 circuit breaker decline. One commenter responded that allowing a closing auction under these extreme circumstances would risk greater market dislocations, and therefore was unadvisable,29 but others believed there should be a closing process so that, among other things, options market participants can unwind hedges and mutual fund prices can be properly determined.30 Another commenter recommended that the markets hold an end-of-day closing auction if the triggering of a Level 2 or Level 3 circuit breaker precluded a normal 4:00 p.m. close.31 The Commission also sought comment on whether the primary market should have a longer period (e.g. 30 minutes) to re-open trading following a Level 2 circuit breaker decline. One commenter responded that trading halts 24 See CME Group Letters I and II and Commissioner Chilton Letter. CME Group noted, among other things, that in a macro-market event, multiple constituent stocks in the S&P 500 index could be limited, halted, and reopened on staggered timelines, creating complexity and confusion in understanding the index calculation and in ascertaining the true value of the index. CME Group Letter I at 3. 25 See SIFMA Letter I. 26 See SIFMA Letter II. 27 See CME Group Letter I. 28 See CME Group Letter II. 29 See CME Group Letter I. 30 See SIFMA Letter II and Angel Letter. 31 See SIMFA Letter II. VerDate Mar<15>2010 17:24 Jun 05, 2012 Jkt 226001 should be as short as operationally practicable, and was of the view that the 15-minute trading halt remained appropriate in this circumstance.32 Finally, commenters offered several other specific suggestions with respect to the SRO Proposals. Two commenters suggested that the market-wide circuit breakers apply after hours.33 One believed the trigger thresholds should be recalculated weekly rather than daily as proposed.34 Another commenter offered a variety of additional recommendations, including triggering the circuit breakers in the event of material issues with market data integrity or disruptions, triggering the circuit breakers based on opening prices rather than the previous day’s close and using a velocity-based mechanism similar to the single-stock circuit breakers, maintaining the Level 1 circuit breaker at 10%, and not having a Level 3 circuit breaker close the markets for the remainder of the day.35 Two commenters stressed the need to coordinate the market-wide circuit breakers with the futures markets.36 The Response addressed the main issues the commenters raised. With respect to the relationship between the Limit Up-Limit Down Plan and the market-wide circuit breakers, and specifically the suggestion that a market-wide trading halt be declared if a sufficient number of single-stock trading pauses or price limits were triggered, the Response argued that attempting to identify the appropriate correlation between individual securities in a trading pause or limit state and a related trigger for a marketwide circuit breaker at this stage is premature. Instead, the Response urged that the Commission use the pilot periods for both the SRO Proposals and Limit Up-Limit Down Plan to examine data and develop a better understanding of how the Limit Up-Limit Down Plan will operate in practice before determining whether any further revisions to the SRO Proposals should be made.37 The Response also addressed the suggestions by certain commenters that provision be made for a trading halt other than a Level 3 halt after 3:25 p.m. The Response recommended that the types of declines that should trigger a halt after 3:25 p.m. should continue to be explored during the pilot period, but that the SRO Proposals should be approved in their current form.38 The Response expressed particular concern that a 15-minute market-wide halt after 3:25 p.m. would be disruptive to the fair and orderly closing of the markets at 4:00 p.m. IV. Discussion and Commission Findings After careful review of the SRO Proposals, as modified by the Amendments, and consideration of the comment letters and the Response, the Commission finds that the SRO Proposals relating to trading halts due to extraordinary market volatility are consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange and national securities association and, in particular, the requirements of Sections 6 39 and 15A 40 of the Act. Specifically, the Commission finds that the SRO Proposals are consistent with Sections 6(b)(5) 41 and 15A(b)(6) 42 of the Act, which, among other things, require that rules of a national securities exchange and national securities association be designed 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 to protect investors and the public interest.43 The Commission believes that the SRO Proposals are reasonably designed to update the existing market-wide circuit breakers to make them more meaningful and effective in today’s high-speed electronic securities markets. The Exchanges and FINRA are amending, in a uniform manner, their rules that halt trading in all NMS securities in the event of extraordinary market volatility so that these circuit breakers would, among other things, be triggered by a smaller market-wide decline but last for a shorter period of time. In developing their proposals, the SROs took into account the events of May 6, 2010—where the markets experienced substantial volatility in a short period of time but at a level insufficient to trigger the existing market-wide circuit breakers—as well as the recommendations of the Joint CFTC–SEC Advisory Committee. 38 Id. at 4. U.S.C. 78f. 40 15 U.S.C. 78o–3. 41 15 U.S.C. 78f(b)(5). 42 15 U.S.C. 78o–3(b)(6). 43 Further, in approving the SRO Proposals, the Commission considered the SRO Proposals’ impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 39 15 32 See CME Group Letter I. CME Group Letter I and Chilton Letter. 34 See CME Group I Letter. 35 See Angel Letter. 36 See SIFMA Letters I and II and CME Group Letter I. 37 See Response at 3. 33 See PO 00000 Frm 00146 Fmt 4703 Sfmt 4703 33533 E:\FR\FM\06JNN1.SGM 06JNN1 mstockstill on DSK4VPTVN1PROD with NOTICES 33534 Federal Register / Vol. 77, No. 109 / Wednesday, June 6, 2012 / Notices As discussed above, the SRO Proposals would reduce the market decline percentage thresholds necessary to trigger a Level 1, 2, or 3 market-wide circuit breaker from 10%, 20% and 30% to 7%, 13% and 20%, respectively. In light of the fact that the market-wide circuit breakers were not triggered on May 6, 2010 when the markets experienced extraordinary market volatility, the SROs are of the view that somewhat lower percentage thresholds are appropriate so that the market-wide circuit breakers are more meaningful. However, given the highly-automated nature of today’s markets and improvements in communication and connectivity, the SROs believe that a trading halt of shorter duration—15 minutes—would be sufficient to allow market participants an opportunity to assess a serious market decline and express their trading interest, with less disruption to the markets than the existing market-wide circuit breakers. The SROs also believe the broader-based S&P 500 is a more meaningful benchmark against which to assess a serious market-wide decline than the 30 listings that comprise the DJIA, and seek to improve the calibration and sensitivity of the circuit breaker mechanism by calculating the trigger values daily rather than quarterly. Commenters generally supported these core elements of the SRO Proposals, but several expressed concern about the interaction of the updated market-wide circuit breakers with the mechanisms to moderate excessive volatility in individual securities set forth in the proposed Limit Up-Limit Down Plan. Concerns were expressed about the impact on index calculations of a significant number of individual securities being in a limit state or halted, and the effectiveness of the market-wide circuit breakers. Some interest was expressed in establishing an additional trigger for the market-wide circuit breakers if trading were limited or halted in a sufficient number of individual securities, and one commenter offered specific suggestions on how such a trigger might be established. The Commission notes that, in the Amendments, the SROs propose to establish the updated market-wide circuit breakers on a pilot basis, so that further thought could be given to this issue—as well as certain other issues raised by commenters—in light of the markets’ experience with the new Limit Up-Limit Down mechanism for individual securities that is being approved today, and the further VerDate Mar<15>2010 17:24 Jun 05, 2012 Jkt 226001 comment the Commission is seeking from market participants in this Order. Several commenters also expressed concern with the fact that the SRO proposals only provide for a Level 3 circuit breaker after 3:25 p.m., so that the markets could experience up to a 20% decline during this period, and suggested instead that the Level 2 circuit breaker apply so as to leave the markets less vulnerable to a severe decline late in the trading day. Although a 13% decline after 3:25 p.m. would not halt trading under the SRO Proposals, the revised market-wide circuit breaker rules do maintain the 20% threshold that is currently in place as the minimum trigger level that would halt trading after 3:25 p.m. The Commission notes that it will continue to consider this issue during the pilot period, and is specifically seeking further comment from market participants on this issue. Suggestions also were made with respect to certain other technical aspects of the SRO Proposals, such as providing for a closing auction in the event of a Level 3 circuit breaker,44 applying the circuit breakers after hours, creating an additional trigger if there are material market data issues, and clarifying the treatment of pending orders during a market-wide circuit breaker halt.45 The Response recommended that the Commission use the pilot periods contemplated in the SRO Proposals and Limit Up-Limit Down Plan to further consider all the concerns raised by the commenters.46 The Commission will continue to consider these issues during the pilot period. On balance, the Commission believes that the SRO Proposals are reasonably designed to improve the operation of the market-wide circuit breakers, in light of the changes to the trading markets since those rules were last amended and the lessons learned from the extraordinary volatility experienced on May 6, 2010. While the circuit breakers are likely to be triggered more frequently than before, the Commission believes this will continue to be a relatively rare event that is designed to address severe market declines.47 In addition, the 44 Certain commenters believed there should be a closing process so that, among other things, options market participants can unwind hedges and mutual fund prices can be properly determined. 45 Commenters also provided input on the duration of the trading halts, the application of market-wide circuit breakers in after hours trading, the frequency in which the trigger thresholds should be recalculated, the consideration of material issues with market data integrity or disruptions, and the use of opening prices rather than the previous day’s close in calculating trigger thresholds. See supra, pp. 9–10. 46 See Response at 3. 47 Data show that, since 1962, there would have been 13 instances where at least a Level 1 circuit PO 00000 Frm 00147 Fmt 4703 Sfmt 4703 updated market-wide circuit breakers should be less disruptive to the markets, given their shorter duration, yet should still be able to accomplish their goals given the significant advances in communication and connectivity in recent years. The Commission, the SROs and market participants will have an opportunity to further consider issues raised by commenters with respect to certain aspects of the operation of the updated circuit breakers during the pilot period, and will further benefit from observing the operation of the Limit UpLimit Down mechanism for individual securities, which is being approved separately by the Commission today, during that period. In light of the foregoing, the Commission finds that the SRO Proposals, as modified by the Amendments, are consistent with the Act. V. Solicitation of Comments During the pilot period, the Commission encourages commenters to provide additional comments on the issues raised by commenters regarding certain aspects of the SRO Proposals or otherwise. The Commission specifically requests further comment on the following: • Should a Level 1 or Level 2 trigger result in a trading halt after 3:25 p.m., or do the SRO Proposals’ provisions that only a Level 3 trigger will halt trading after 3:25 p.m. adequately balance the need for an orderly close against the potential market disruptions associated with absence of a Level 1 or Level 2 halt after 3:25 p.m.? • Should the market-wide circuit breakers be triggered if trading is limited or halted in a sufficient number of individual securities and, if so, how should such additional trigger be designed? What are the tradeoffs associated with such a trigger regarding simplicity and the risk of unnecessary triggers? • Should any other aspects of the market-wide circuit breakers be modified in light of the experience with the new Limit Up-Limit Down mechanism for individual securities? Interested persons are invited to submit written data, views, and arguments concerning the foregoing. Commenters are encouraged to submit empirical evidence to support their arguments. Comments may be submitted by any of the following methods: breaker decline would have been reached under the revised market-wide circuit breaker thresholds. E:\FR\FM\06JNN1.SGM 06JNN1 Federal Register / Vol. 77, No. 109 / Wednesday, June 6, 2012 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rulecomments@sec.gov. Please include File Numbers SR–BATS–2011–038; SR– BYX–2011–025; SR–BX–2011–068; SR– CBOE–2011–087; SR–C2–2011–024; SR–CHX–2011–30; SR–EDGA–2011–31; SR–EDGX–2011–30; SR–FINRA–2011– 054; SR–ISE–2011–61; SR–NASDAQ– 2011–131; SR–NSX–2011–11; SR– NYSE–2011–48; SR–NYSEAmex–2011– 73; SR–NYSEArca–2011–68; SR–Phlx– 2011–129 on the subject line. should refer to File Numbers SR–BATS– 2011–038; SR–BYX–2011–025; SR–BX– 2011–068; SR–CBOE–2011–087; SR– C2–2011–024; SR–CHX–2011–30; SR– EDGA–2011–31; SR–EDGX–2011–30; SR–FINRA–2011–054; SR–ISE–2011–61; SR–NASDAQ–2011–131; SR–NSX– 2011–11; SR–NYSE–2011–48; SR– NYSEAmex–2011–73; SR–NYSEArca– 2011–68; SR–Phlx–2011–129 and should be submitted on or before June 27, 2012. 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 Numbers SR–BATS–2011–038; SR– BYX–2011–025; SR–BX–2011–068; SR– CBOE–2011–087; SR–C2–2011–024; SR–CHX–2011–30; SR–EDGA–2011–31; SR–EDGX–2011–30; SR–FINRA–2011– 054; SR–ISE–2011–61; SR–NASDAQ– 2011–131; SR–NSX–2011–11; SR– NYSE–2011–48; SR–NYSEAmex–2011– 73; SR–NYSEArca–2011–68; SR–Phlx– 2011–129. These file numbers 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 (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 10:00 a.m. and 3:00 p.m. Copies of the filings also will be available for inspection and copying at the principal offices of the exchanges and FINRA, respectively. 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 The Amendments revised the SRO Proposals to, among other things, specify that the proposed rule change will be operative on a pilot basis, beginning February 4, 2013, and continuing until February 4, 2014. The Amendments will allow the Commission, the SROs and market participants to further consider, during the pilot period, issues raised by commenters with respect to certain aspects of the SRO Proposals, and to benefit from the experience with the Limit Up-Limit Down mechanism for individual securities that also is being approved today on a pilot basis. Such further consideration will allow the Commission to consider whether modifications to the market-wide circuit breakers are warranted prior to any decision as to whether to approve them on a permanent basis. Accordingly, the Commission also finds good cause, pursuant to Section 19(b)(2) of the Act,48 for approving the SRO Proposals, as modified by the Amendments, prior to the 30th day after the date of publication of notice in the Federal Register. VerDate Mar<15>2010 17:24 Jun 05, 2012 Jkt 226001 VI. Accelerated Approval of Proposed Rule Changes, as Modified by the Amendments VII. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,49 that the proposed rule changes (SR–BATS– 2011–038; SR–BYX–2011–025; SR–BX– 2011–068; SR–CBOE–2011–087; SR– C2–2011–024; SR–CHX–2011–30; SR– EDGA–2011–31; SR–EDGX–2011–30; SR–FINRA–2011–054; SR–ISE–2011–61; SR–NASDAQ–2011–131; SR–NSX– 2011–11; SR–NYSE–2011–48; SR– NYSEAmex–2011–73; SR–NYSEArca– 2011–68; SR–Phlx–2011–129), as modified by the Amendments, be, and hereby are, approved on an accelerated basis. 48 15 49 15 PO 00000 U.S.C. 78s(b)(2). U.S.C. 78s(b)(2). Frm 00148 Fmt 4703 By the Commission. Elizabeth M. Murphy, Secretary. [FR Doc. 2012–13652 Filed 6–5–12; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–67087; File No. SR–ISE– 2012–43] Self-Regulatory Organizations; International Securities Exchange, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to the Options Regulatory Fee May 31, 2012. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Exchange Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on May 25, 2012, the International Securities Exchange, LLC (the ‘‘Exchange’’ or the ‘‘ISE’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II, and III 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 Substance of the Proposed Rule Change The ISE proposes to increase its Options Regulatory Fee. The text of the proposed rule change is available on the Exchange’s Web site (https:// www.ise.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 these statements may be examined at the places specified in Item IV below. The self-regulatory organization has prepared summaries, set forth in sections A, B and C below, of the most significant aspects of such statements. 1 15 2 17 Sfmt 4703 33535 E:\FR\FM\06JNN1.SGM U.S.C. 78s(b)(1). CFR 240.19b–4. 06JNN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 77, Number 109 (Wednesday, June 6, 2012)]
[Notices]
[Pages 33531-33535]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-13652]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67090; File Nos. SR-BATS-2011-038; SR-BYX-2011-025; SR-
BX-2011-068; SR-CBOE-2011-087; SR-C2-2011-024; SR-CHX-2011-30; SR-EDGA-
2011-31; SR-EDGX-2011-30; SR-FINRA-2011-054; SR-ISE-2011-61; SR-NASDAQ-
2011-131; SR-NSX-2011-11; SR-NYSE-2011-48; SR-NYSEAmex-2011-73; SR-
NYSEArca-2011-68; SR-Phlx-2011-129]

Self-Regulatory Organizations; BATS Exchange, Inc.; BATS Y-
Exchange, Inc.; NASDAQ OMX BX, Inc.; Chicago Board Options Exchange,
Incorporated; C2 Options Exchange, Incorporated; Chicago Stock
Exchange, Inc.; EDGA Exchange, Inc.; EDGX Exchange, Inc.; Financial
Industry Regulatory Authority, 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.; NASDAQ OMX
PHLX LLC; Notice of Filing of Amendments No. 1 and Order Granting
Accelerated Approval of Proposed Rule Changes as Modified by Amendments
No. 1, Relating to Trading Halts Due to Extraordinary Market Volatility

May 31, 2012.
On September 27, 2011, each of BATS Exchange, Inc. (``BATS''), BATS
Y-Exchange, Inc. (``BYX''), NASDAQ OMX BX, Inc. (``BX''), Chicago Board
Options Exchange, Incorporated (``CBOE''), C2 Options Exchange,
Incorporated (``C2''), Chicago Stock Exchange, Inc. (``CHX''), EDGA
Exchange, Inc. (``EDGA''), EDGX Exchange, Inc. (``EDGX''),
International Securities Exchange LLC (``ISE''), The NASDAQ Stock
Market LLC (``Nasdaq''), National Stock Exchange, Inc. (``NSX''), New
York Stock Exchange LLC (``NYSE''), NYSE Amex LLC (``NYSE Amex''), NYSE
Arca, Inc. (``NYSE Arca''), NASDAQ OMX PHLX LLC (``Phlx'')
(collectively, the ``Exchanges'') and the Financial Regulatory Industry
Authority, Inc. (``FINRA'') (together, with the Exchanges, the
``SROs'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\
proposed rule changes (the ``SRO Proposals'') to amend certain of their
respective rules relating to trading halts due to extraordinary market
volatility. The SRO Proposals were published for comment in the Federal
Register on October 4, 2011.\3\ The Commission received seven comment
letters on the SRO Proposals.\4\
---------------------------------------------------------------------------

\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release Nos. 65437 (September
28, 2011), 76 FR 61466 (October 4, 2011); 65428 (September 28,
2011), 76 FR 61453 (October 4, 2011); 65429 (September 28, 2011), 76
FR 61432 (October 4, 2011); 65433 (September 28, 2011), 76 FR 61453
(October 4, 2011); 65438 (September 28, 2011), 76 FR 61447 (October
4, 2011); 65426 (September 28, 2011), 76 FR 61460 (October 4, 2011);
65431 (September 28, 2011), 76 FR 61425 (May 12, 2011); 65440
(September 28, 2011), 76 FR 61444 (October 4, 2011); 65430
(September 28, 2011), 76 FR 61429 (October 4, 2011); 65425
(September 28, 2011), 76 FR 61438 (October 4, 2011); 65435 (May 6,
2011), 76 FR 61416 (October 4, 2011); 65436 (September 28, 2011), 76
FR 61450 (October 4, 2011); 65427 (September 28, 2011), 76 FR 61457
(October 4, 2011); 65432 (September 28, 2011), 76 FR 61422 (October
4, 2011); 65439 (September 28, 2011), 76 FR 61463 (October 4, 2011);
65434 (September 28, 2011), 76 FR 61419 (October 4, 2011)
(collectively, the ``Notices'').
\4\ See letter to Elizabeth M. Murphy, Secretary, Commission,
from Ann L. Vlcek, Managing Director and Associate General Counsel,
the Securities Industry and Financial Markets Association, dated
October 27, 2011 (``SIFMA Letter I''); letter to Commission, from
James J. Angel, Ph.D., CFA, Associate Professor of Finance,
Georgetown University, McDonough School of Business, dated October
25, 2011 (``Angel Letter''); letter to Elizabeth M. Murphy,
Secretary, Commission, from Craig S. Donohue, CME Group, Inc., dated
October 25, 2011 (``CME Group Letter I''); letter to Elizabeth M.
Murphy, Secretary, Commission, from Commissioner Bart Chilton,
Commodity Futures Trading Commission, dated October 25, 2011
(``Commissioner Chilton Letter''); letter to Elizabeth M. Murphy,
Secretary, Commission, from Richard H. Baker, President and CEO,
Managed Funds Association, dated October 25, 2011 (``MFA Letter'');
letter to Commission from Suzanne H. Shatto, dated October 20, 2011
(``Shatto Letter''); letter to Commission from Mark Roszak, dated
October 4, 2011 (``Roszak Letter'').
---------------------------------------------------------------------------

On November 17, 2011, the Commission extended the time period in
which to approve the SRO Proposals, disapprove the SRO Proposals, or
institute proceedings to determine whether to disapprove the SRO
Proposals, to December 30, 2011.\5\ On December 28, 2011, the
Commission instituted proceedings to determine whether to disapprove
the SRO Proposals.\6\ The Commission thereafter received an additional
three comment letters on the SRO Proposals.\7\ On May 10, 2012, NYSE
Euronext, on behalf of the three U.S. exchanges it operates, NYSE, NYSE
Amex, and NYSE Arca, filed a response to comments (the
``Response'').\8\
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\5\ See Securities Exchange Act Release No. 65770 (November 17,
2011), 76 FR 72492 (November 23, 2011).
\6\ See Securities Exchange Act Release No. 66065 (December 28,
2011), 77 FR 316 (January 4, 2012).
\7\ See letters to Elizabeth Murphy, Secretary, Commission, from
Timothy Quast, Managing Director, ModernIR, dated January 20, 2012
(``ModernIR Letter''); Craig S. Donohue, Chief Executive Officer,
CME Group, Inc., dated January 25, 2012 (``CME Group Letter II''),
and Ann L. Vlcek, Managing Director and Associate General Counsel,
the Securities Industry and Financial Markets Association, dated
February 7, 2012 (``SIFMA Letter II'').
\8\ See letter to Elizabeth M. Murphy, Secretary, Commission,
from Janet McGinness, EVP & Corporate Secretary, General Counsel,
NYSE Markets, dated May 10, 2012.
---------------------------------------------------------------------------

On May 23, 2012 and May 24, 2012, the SROs each submitted Amendment
No. 1 to their respective proposed rule change (the ``Amendments''). In
the Amendments, the SROs propose to make the SRO Proposals operative on
a pilot basis scheduled to end on the same date that the pilot period
for the Limit Up-Limit Down Plan (as defined below) ends.\9\ The
Commission is publishing this notice to solicit comments on the SRO
Proposals, as modified by the Amendments, from interested persons and
is approving the SRO Proposals, as modified by the Amendments, on an
accelerated basis.
---------------------------------------------------------------------------

\9\ See, e.g., SR-NYSE-2011-48, Amendment No. 1. The text of
proposed Amendment No. 1 is available on the NYSE's Web site at
https://www.nyse.com, at the principal office of NYSE and at the
Commission's Public Reference Room.
---------------------------------------------------------------------------

I. Description of the Proposals

In the SRO Proposals, the Exchanges and FINRA propose to revise the
existing market-wide circuit breakers, which halt trading in all NMS
securities (as defined in Rule 600(b)(47) of Regulation NMS under the
Act \10\) in the event of extraordinary market volatility, in order to
make them more meaningful in today's high-speed electronic

[[Page 33532]]

markets. In so doing, the exchanges took into account the events of May
6, 2010, where the markets experienced excessive volatility in a short
period of time, as well as the recommendations of the Joint CFTC-SEC
Advisory Committee on Emerging Regulatory Issues (the ``Joint CFTC-SEC
Advisory Committee'').
---------------------------------------------------------------------------

\10\ 17 CFR 242.600(b)(47).
---------------------------------------------------------------------------

The existing market-wide circuit breakers provide for specified
trading halts following certain ``Level 1,'' ``Level 2,'' and ``Level
3'' market declines.\11\ The values of Levels 1, 2, and 3 are
calculated at the beginning of each calendar quarter, using 10%, 20%,
and 30%, respectively, of the average closing value of the Dow Jones
Industrial Average (``DJIA'') for the month prior to the beginning of
the quarter.\12\ The existing Level 1, Level 2, and Level 3 circuit
breakers operate as follows:
---------------------------------------------------------------------------

\11\ See, e.g., NYSE Rule 80B.
\12\ Each percentage calculation is rounded to the nearest 50
points and remains in effect until the next quarterly calculation.

Level 1 Halt
Before 2:00 p.m.--one hour;
At or after 2:00 p.m. but before 2:30 p.m.--30 minutes;
At or after 2:30 p.m.--trading shall continue, unless there is a
Level 2 Halt.
Level 2 Halt
Before 1:00 p.m.--two hours;
At or after 1:00 p.m. but before 2:00 p.m.--one hour;
At or after 2:00 p.m.--trading shall halt and not resume for the
rest of the day.
Level 3 Halt
At any time--trading shall halt and not resume for the rest of
the day.

As described in detail in the Notices, the SRO Proposals, among
other things, would: (i) Replace the DJIA with the S&P 500[supreg]
Index (``S&P 500'') as the reference index; (ii) recalculate the
values of the triggers daily instead of each calendar quarter; (iii)
reduce the 10%, 20%, and 30% market decline trigger percentages to
7%, 13%, and 20%; (iv) shorten the length of the trading halts
associated with each market decline level; and (v) modify the times
when a trading halt may be triggered. The proposed Level 1, Level 2,
and Level 3 circuit breakers would operate as follows:

Level 1 Halt
Before 3:25 p.m.--15 minutes;
At or after 3:25 p.m.--trading shall continue, unless there is a
Level 3 halt.
Level 2 Halt
Before 3:25 p.m.--15 minutes;
At or after 3:25 p.m.--trading shall continue, unless there is a
Level 3 halt.
Level 3 Halt
At any time--trading shall halt and not resume for the rest of
the day.

II. Limit Up-Limit Down Plan

Separately, certain equities exchanges \13\ and FINRA have proposed
to establish a new mechanism to address extraordinary market volatility
in individual securities, pursuant to a national market system plan
filed under Rule 608 of Regulation NMS (the National Market System Plan
to Address Extraordinary Market Volatility, or, the ``Limit Up-Limit
Down Plan'').\14\ The new Limit Up-Limit Down Plan, which would replace
the existing single-stock circuit breaker mechanism,\15\ would prevent
trades in individual securities from occurring outside of a specified
price band, and would be coupled with a trading pause mechanism to
accommodate more fundamental price moves. In essence, a security would
enter a ``limit state'' if its price moves a certain percentage--
generally 5%, 10% or 20%, depending on the stock and the time of day--
over a five-minute period. If the market does not naturally exit the
limit state within 15 seconds, there would be a five-minute trading
pause. The Commission also is approving today the Limit Up-Limit Down
Plan on a pilot basis.\16\
---------------------------------------------------------------------------

\13\ These exchanges are BATS, BX, BYX, CBOE, CHX, EDGA, EDGX,
Nasdaq, NSX, NYSE, NYSE MKT LLC (f/k/a NYSE Amex LLC), NYSE Arca,
and Phlx.
\14\ See Securities Exchange Act Release No. 64547 (May 25,
2011), 76 FR 31647 (June 1, 2011).
\15\ See Securities Exchange Act Release No. 64735 (June 23,
2011), 76 FR 38243 (June 29, 2011) (order approving the current
single-stock circuit breaker mechanism). The single-stock circuit
breaker mechanism, which was approved as a pilot program, is
currently scheduled to expire on July 31, 2012. See e.g., Securities
Exchange Act Release No. 66136 (January 11, 2012), 77 FR 2589
(January 18, 2012) (SR-NYSE-2011-69).
\16\ See Securities Exchange Act Release No. 67091 (May 31,
2012) (File No. 4-631).
---------------------------------------------------------------------------

As discussed below, the Commission, in the Notices for the SRO
Proposals, specifically requested comment on how the proposed changes
to the market-wide circuit breakers would interact with the Limit Up-
Limit Down Plan for individual securities, if approved, and several
commenters expressed views on this issue.\17\
---------------------------------------------------------------------------

\17\ See Commissioner Chilton Letter, CME Group Letters I and
II, and SIFMA Letters I and II.
---------------------------------------------------------------------------

III. Summary of Comments

The Commission received ten comment letters from eight commenters
on the SRO Proposals.\18\ The commenters generally supported the
proposals and their goals, but several expressed concern with
particular provisions or offered alternative suggestions.\19\
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\18\ See supra notes 4 and 7.
\19\ See SIFMA Letters I and II, MFA Letter, CME Group Letter I,
Angel Letter, and Shatto Letter. Some commenters suggested the
Commission instead focus on other market structure changes; those
changes are outside the scope of the SRO Proposals. See Modern IR
Letter (suggesting the Commission suspend core trading rules in the
event of extraordinary volatility) and Roszak Letter (suggesting the
Commission more vigorously regulate high-frequency traders such as
by limiting connection speeds).
---------------------------------------------------------------------------

Some commenters expressed concern that the Level 2 circuit breaker
would not apply after 3:25 p.m.\20\ As explained in the Notices, the
SROs adopted this approach to avoid disrupting the normal 4:00 p.m.
market close. The Commission, however, specifically solicited comment
on whether some provision should be made to end the regular trading
session if a market decline suddenly occurs after 3:25 p.m., even if
the decline is less than 20%. Some commenters believed that the
proposal could leave the market vulnerable to a severe decline that
occurs late in the trading day, and instead suggested that a Level 2
circuit breaker triggered at or after 3:25 p.m. halt trading for the
remainder of the trading session.\21\
---------------------------------------------------------------------------

\20\ See CME Group Letters I and II, Commissioner Chilton
Letter, MFA Letter, and SIFMA Letter II.
\21\ See CME Group Letters I and II, MFA Letter, and SIFMA
Letter II.
---------------------------------------------------------------------------

The Commission also specifically requested comment on how the
proposed changes would interact with the single-stock circuit breaker
pilot program or, if approved, the proposed Limit Up-Limit Down Plan
for individual securities. The Commission further asked whether the
market-wide circuit breaker should be triggered if a sufficient number
of single-stock circuit breakers or price limits were triggered. One
commenter believed that the market-wide circuit breaker should be
triggered if a sufficient number of single-stock circuit breakers or
price limits were triggered, given the potential difficulties of
accurately calculating the value of the S&P 500 Index in such
circumstances.\22\ This commenter made some suggestions for this
additional trigger, and encouraged Commission staff to assess empirical
data to develop appropriate parameters in this area.\23\ Two other
commenters also expressed

[[Page 33533]]

concern about the interaction of market-wide circuit breakers and
single-stock circuit breakers, and the effect that might have on index
calculations, particularly in macro-market events.\24\
---------------------------------------------------------------------------

\22\ See SIFMA Letters I and II. SIFMA also believed it was
critical to coordinate the market-wide circuit breakers with the
options and futures markets. The Commission notes that the SRO
Proposals have been developed in consultation with the options and
futures markets. See, e.g., Securities Exchange Act Release No.
65427, 76 FR at 61458.
\23\ See SIFMA Letter II. For example, SIFMA suggested that
there be an additional market-wide circuit breaker trigger when both
(1) 5% (or 25) of the securities in the S&P 500 are in a limit down
state or halted and (2) 10% of the market weighting of the SPX is in
a limit down state or halted. As a simpler alternative, SIFMA also
suggested there be an additional trigger if 10% of the securities in
the S&P 100 are in a limit state or halted.
\24\ See CME Group Letters I and II and Commissioner Chilton
Letter. CME Group noted, among other things, that in a macro-market
event, multiple constituent stocks in the S&P 500 index could be
limited, halted, and reopened on staggered timelines, creating
complexity and confusion in understanding the index calculation and
in ascertaining the true value of the index. CME Group Letter I at
3.
---------------------------------------------------------------------------

Two commenters also expressed views on how market centers should
treat pending orders in the event a market-wide circuit breaker is
triggered. One commenter believed that orders pending with a market
center at the time of a Level 1 or Level 2 circuit breaker should
remain queued by the market center during the halt and be eligible for
execution after the halt.\25\ However, in the event of a Level 3
circuit breaker, that commenter was of the view that all pending orders
should be cancelled, since trading will cease for the remainder of the
day. The commenter reiterated these views in its subsequent comment
letter.\26\ Another commenter generally took the position that the SROs
should not cancel pending orders during a trading halt, in order to
preserve the queue priority of market participants.\27\ These views
were restated by the same commenter in its subsequent comment
letter.\28\
---------------------------------------------------------------------------

\25\ See SIFMA Letter I.
\26\ See SIFMA Letter II.
\27\ See CME Group Letter I.
\28\ See CME Group Letter II.
---------------------------------------------------------------------------

The Commission also sought comment on whether a provision should be
made for a closing auction in the event of a Level 3 circuit breaker
decline. One commenter responded that allowing a closing auction under
these extreme circumstances would risk greater market dislocations, and
therefore was unadvisable,\29\ but others believed there should be a
closing process so that, among other things, options market
participants can unwind hedges and mutual fund prices can be properly
determined.\30\ Another commenter recommended that the markets hold an
end-of-day closing auction if the triggering of a Level 2 or Level 3
circuit breaker precluded a normal 4:00 p.m. close.\31\
---------------------------------------------------------------------------

\29\ See CME Group Letter I.
\30\ See SIFMA Letter II and Angel Letter.
\31\ See SIMFA Letter II.
---------------------------------------------------------------------------

The Commission also sought comment on whether the primary market
should have a longer period (e.g. 30 minutes) to re-open trading
following a Level 2 circuit breaker decline. One commenter responded
that trading halts should be as short as operationally practicable, and
was of the view that the 15-minute trading halt remained appropriate in
this circumstance.\32\
---------------------------------------------------------------------------

\32\ See CME Group Letter I.
---------------------------------------------------------------------------

Finally, commenters offered several other specific suggestions with
respect to the SRO Proposals. Two commenters suggested that the market-
wide circuit breakers apply after hours.\33\ One believed the trigger
thresholds should be recalculated weekly rather than daily as
proposed.\34\ Another commenter offered a variety of additional
recommendations, including triggering the circuit breakers in the event
of material issues with market data integrity or disruptions,
triggering the circuit breakers based on opening prices rather than the
previous day's close and using a velocity-based mechanism similar to
the single-stock circuit breakers, maintaining the Level 1 circuit
breaker at 10%, and not having a Level 3 circuit breaker close the
markets for the remainder of the day.\35\ Two commenters stressed the
need to coordinate the market-wide circuit breakers with the futures
markets.\36\
---------------------------------------------------------------------------

\33\ See CME Group Letter I and Chilton Letter.
\34\ See CME Group I Letter.
\35\ See Angel Letter.
\36\ See SIFMA Letters I and II and CME Group Letter I.
---------------------------------------------------------------------------

The Response addressed the main issues the commenters raised. With
respect to the relationship between the Limit Up-Limit Down Plan and
the market-wide circuit breakers, and specifically the suggestion that
a market-wide trading halt be declared if a sufficient number of
single-stock trading pauses or price limits were triggered, the
Response argued that attempting to identify the appropriate correlation
between individual securities in a trading pause or limit state and a
related trigger for a market-wide circuit breaker at this stage is
premature. Instead, the Response urged that the Commission use the
pilot periods for both the SRO Proposals and Limit Up-Limit Down Plan
to examine data and develop a better understanding of how the Limit Up-
Limit Down Plan will operate in practice before determining whether any
further revisions to the SRO Proposals should be made.\37\
---------------------------------------------------------------------------

\37\ See Response at 3.
---------------------------------------------------------------------------

The Response also addressed the suggestions by certain commenters
that provision be made for a trading halt other than a Level 3 halt
after 3:25 p.m. The Response recommended that the types of declines
that should trigger a halt after 3:25 p.m. should continue to be
explored during the pilot period, but that the SRO Proposals should be
approved in their current form.\38\ The Response expressed particular
concern that a 15-minute market-wide halt after 3:25 p.m. would be
disruptive to the fair and orderly closing of the markets at 4:00 p.m.
---------------------------------------------------------------------------

\38\ Id. at 4.
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

After careful review of the SRO Proposals, as modified by the
Amendments, and consideration of the comment letters and the Response,
the Commission finds that the SRO Proposals relating to trading halts
due to extraordinary market volatility are consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange and national securities
association and, in particular, the requirements of Sections 6 \39\ and
15A \40\ of the Act. Specifically, the Commission finds that the SRO
Proposals are consistent with Sections 6(b)(5) \41\ and 15A(b)(6) \42\
of the Act, which, among other things, require that rules of a national
securities exchange and national securities association be designed 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 to protect investors and the public interest.\43\
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\39\ 15 U.S.C. 78f.
\40\ 15 U.S.C. 78o-3.
\41\ 15 U.S.C. 78f(b)(5).
\42\ 15 U.S.C. 78o-3(b)(6).
\43\ Further, in approving the SRO Proposals, the Commission
considered the SRO Proposals' impact on efficiency, competition, and
capital formation. See 15 U.S.C. 78c(f).
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The Commission believes that the SRO Proposals are reasonably
designed to update the existing market-wide circuit breakers to make
them more meaningful and effective in today's high-speed electronic
securities markets. The Exchanges and FINRA are amending, in a uniform
manner, their rules that halt trading in all NMS securities in the
event of extraordinary market volatility so that these circuit breakers
would, among other things, be triggered by a smaller market-wide
decline but last for a shorter period of time. In developing their
proposals, the SROs took into account the events of May 6, 2010--where
the markets experienced substantial volatility in a short period of
time but at a level insufficient to trigger the existing market-wide
circuit breakers--as well as the recommendations of the Joint CFTC-SEC
Advisory Committee.

[[Page 33534]]

As discussed above, the SRO Proposals would reduce the market
decline percentage thresholds necessary to trigger a Level 1, 2, or 3
market-wide circuit breaker from 10%, 20% and 30% to 7%, 13% and 20%,
respectively. In light of the fact that the market-wide circuit
breakers were not triggered on May 6, 2010 when the markets experienced
extraordinary market volatility, the SROs are of the view that somewhat
lower percentage thresholds are appropriate so that the market-wide
circuit breakers are more meaningful. However, given the highly-
automated nature of today's markets and improvements in communication
and connectivity, the SROs believe that a trading halt of shorter
duration--15 minutes--would be sufficient to allow market participants
an opportunity to assess a serious market decline and express their
trading interest, with less disruption to the markets than the existing
market-wide circuit breakers. The SROs also believe the broader-based
S&P 500 is a more meaningful benchmark against which to assess a
serious market-wide decline than the 30 listings that comprise the
DJIA, and seek to improve the calibration and sensitivity of the
circuit breaker mechanism by calculating the trigger values daily
rather than quarterly.
Commenters generally supported these core elements of the SRO
Proposals, but several expressed concern about the interaction of the
updated market-wide circuit breakers with the mechanisms to moderate
excessive volatility in individual securities set forth in the proposed
Limit Up-Limit Down Plan. Concerns were expressed about the impact on
index calculations of a significant number of individual securities
being in a limit state or halted, and the effectiveness of the market-
wide circuit breakers. Some interest was expressed in establishing an
additional trigger for the market-wide circuit breakers if trading were
limited or halted in a sufficient number of individual securities, and
one commenter offered specific suggestions on how such a trigger might
be established. The Commission notes that, in the Amendments, the SROs
propose to establish the updated market-wide circuit breakers on a
pilot basis, so that further thought could be given to this issue--as
well as certain other issues raised by commenters--in light of the
markets' experience with the new Limit Up-Limit Down mechanism for
individual securities that is being approved today, and the further
comment the Commission is seeking from market participants in this
Order.
Several commenters also expressed concern with the fact that the
SRO proposals only provide for a Level 3 circuit breaker after 3:25
p.m., so that the markets could experience up to a 20% decline during
this period, and suggested instead that the Level 2 circuit breaker
apply so as to leave the markets less vulnerable to a severe decline
late in the trading day. Although a 13% decline after 3:25 p.m. would
not halt trading under the SRO Proposals, the revised market-wide
circuit breaker rules do maintain the 20% threshold that is currently
in place as the minimum trigger level that would halt trading after
3:25 p.m. The Commission notes that it will continue to consider this
issue during the pilot period, and is specifically seeking further
comment from market participants on this issue.
Suggestions also were made with respect to certain other technical
aspects of the SRO Proposals, such as providing for a closing auction
in the event of a Level 3 circuit breaker,\44\ applying the circuit
breakers after hours, creating an additional trigger if there are
material market data issues, and clarifying the treatment of pending
orders during a market-wide circuit breaker halt.\45\ The Response
recommended that the Commission use the pilot periods contemplated in
the SRO Proposals and Limit Up-Limit Down Plan to further consider all
the concerns raised by the commenters.\46\ The Commission will continue
to consider these issues during the pilot period.
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\44\ Certain commenters believed there should be a closing
process so that, among other things, options market participants can
unwind hedges and mutual fund prices can be properly determined.
\45\ Commenters also provided input on the duration of the
trading halts, the application of market-wide circuit breakers in
after hours trading, the frequency in which the trigger thresholds
should be recalculated, the consideration of material issues with
market data integrity or disruptions, and the use of opening prices
rather than the previous day's close in calculating trigger
thresholds. See supra, pp. 9-10.
\46\ See Response at 3.
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On balance, the Commission believes that the SRO Proposals are
reasonably designed to improve the operation of the market-wide circuit
breakers, in light of the changes to the trading markets since those
rules were last amended and the lessons learned from the extraordinary
volatility experienced on May 6, 2010. While the circuit breakers are
likely to be triggered more frequently than before, the Commission
believes this will continue to be a relatively rare event that is
designed to address severe market declines.\47\ In addition, the
updated market-wide circuit breakers should be less disruptive to the
markets, given their shorter duration, yet should still be able to
accomplish their goals given the significant advances in communication
and connectivity in recent years. The Commission, the SROs and market
participants will have an opportunity to further consider issues raised
by commenters with respect to certain aspects of the operation of the
updated circuit breakers during the pilot period, and will further
benefit from observing the operation of the Limit Up-Limit Down
mechanism for individual securities, which is being approved separately
by the Commission today, during that period.
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\47\ Data show that, since 1962, there would have been 13
instances where at least a Level 1 circuit breaker decline would
have been reached under the revised market-wide circuit breaker
thresholds.
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In light of the foregoing, the Commission finds that the SRO
Proposals, as modified by the Amendments, are consistent with the Act.

V. Solicitation of Comments

During the pilot period, the Commission encourages commenters to
provide additional comments on the issues raised by commenters
regarding certain aspects of the SRO Proposals or otherwise.
The Commission specifically requests further comment on the
following:
Should a Level 1 or Level 2 trigger result in a trading
halt after 3:25 p.m., or do the SRO Proposals' provisions that only a
Level 3 trigger will halt trading after 3:25 p.m. adequately balance
the need for an orderly close against the potential market disruptions
associated with absence of a Level 1 or Level 2 halt after 3:25 p.m.?
Should the market-wide circuit breakers be triggered if
trading is limited or halted in a sufficient number of individual
securities and, if so, how should such additional trigger be designed?
What are the tradeoffs associated with such a trigger regarding
simplicity and the risk of unnecessary triggers?
Should any other aspects of the market-wide circuit
breakers be modified in light of the experience with the new Limit Up-
Limit Down mechanism for individual securities?
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. Commenters are encouraged to submit
empirical evidence to support their arguments. Comments may be
submitted by any of the following methods:

[[Page 33535]]

Electronic Comments

Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Numbers SR-BATS-2011-038; SR-BYX-2011-025; SR-BX-2011-068; SR-
CBOE-2011-087; SR-C2-2011-024; SR-CHX-2011-30; SR-EDGA-2011-31; SR-
EDGX-2011-30; SR-FINRA-2011-054; SR-ISE-2011-61; SR-NASDAQ-2011-131;
SR-NSX-2011-11; SR-NYSE-2011-48; SR-NYSEAmex-2011-73; SR-NYSEArca-2011-
68; SR-Phlx-2011-129 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 Numbers SR-BATS-2011-038; SR-BYX-
2011-025; SR-BX-2011-068; SR-CBOE-2011-087; SR-C2-2011-024; SR-CHX-
2011-30; SR-EDGA-2011-31; SR-EDGX-2011-30; SR-FINRA-2011-054; SR-ISE-
2011-61; SR-NASDAQ-2011-131; SR-NSX-2011-11; SR-NYSE-2011-48; SR-
NYSEAmex-2011-73; SR-NYSEArca-2011-68; SR-Phlx-2011-129. These file
numbers 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 (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
10:00 a.m. and 3:00 p.m. Copies of the filings also will be available
for inspection and copying at the principal offices of the exchanges
and FINRA, respectively. 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 Numbers
SR-BATS-2011-038; SR-BYX-2011-025; SR-BX-2011-068; SR-CBOE-2011-087;
SR-C2-2011-024; SR-CHX-2011-30; SR-EDGA-2011-31; SR-EDGX-2011-30; SR-
FINRA-2011-054; SR-ISE-2011-61; SR-NASDAQ-2011-131; SR-NSX-2011-11; SR-
NYSE-2011-48; SR-NYSEAmex-2011-73; SR-NYSEArca-2011-68; SR-Phlx-2011-
129 and should be submitted on or before June 27, 2012.

VI. Accelerated Approval of Proposed Rule Changes, as Modified by the
Amendments

The Amendments revised the SRO Proposals to, among other things,
specify that the proposed rule change will be operative on a pilot
basis, beginning February 4, 2013, and continuing until February 4,
2014. The Amendments will allow the Commission, the SROs and market
participants to further consider, during the pilot period, issues
raised by commenters with respect to certain aspects of the SRO
Proposals, and to benefit from the experience with the Limit Up-Limit
Down mechanism for individual securities that also is being approved
today on a pilot basis. Such further consideration will allow the
Commission to consider whether modifications to the market-wide circuit
breakers are warranted prior to any decision as to whether to approve
them on a permanent basis. Accordingly, the Commission also finds good
cause, pursuant to Section 19(b)(2) of the Act,\48\ for approving the
SRO Proposals, as modified by the Amendments, prior to the 30th day
after the date of publication of notice in the Federal Register.
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\48\ 15 U.S.C. 78s(b)(2).
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VII. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\49\ that the proposed rule changes (SR-BATS-2011-038; SR-BYX-2011-
025; SR-BX-2011-068; SR-CBOE-2011-087; SR-C2-2011-024; SR-CHX-2011-30;
SR-EDGA-2011-31; SR-EDGX-2011-30; SR-FINRA-2011-054; SR-ISE-2011-61;
SR-NASDAQ-2011-131; SR-NSX-2011-11; SR-NYSE-2011-48; SR-NYSEAmex-2011-
73; SR-NYSEArca-2011-68; SR-Phlx-2011-129), as modified by the
Amendments, be, and hereby are, approved on an accelerated basis.
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\49\ 15 U.S.C. 78s(b)(2).

By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-13652 Filed 6-5-12; 8:45 am]
BILLING CODE 8011-01-P

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