[Federal Register Volume 75, Number 115 (Wednesday, June 16, 2010)]
[Notices]
[Pages 34186-34189]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-14435]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62252; 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; SR-CBOE-2010-047]
Self-Regulatory Organizations; BATS Exchange, Inc.; EDGA
Exchange, Inc.; EDGX Exchange, Inc.; NASDAQ OMX BX, Inc.; International
Securities Exchange LLC; New York Stock Exchange LLC; NYSE Amex LLC;
NYSE Arca, Inc.; The NASDAQ Stock Market LLC; Chicago Stock Exchange,
Inc.; National Stock Exchange, Inc.; Chicago Board Options Exchange,
Incorporated; Order Granting Accelerated Approval to Proposed Rule
Changes Relating to Trading Pauses Due to Extraordinary Market
Volatility
June 10, 2010.
I. Introduction
On May 18, 2010, each of BATS Exchange, Inc. (``BATS''), EDGX
Exchange, Inc. (``EDGX''), NASDAQ OMX BX, Inc. (``BX''), International
Securities Exchange LLC (``ISE''),\1\ New York Stock Exchange LLC
(``NYSE''), NYSE Amex LLC (``NYSEAmex''), NYSE Arca, Inc.
(``NYSEArca''), The NASDAQ Stock Market LLC (``NASDAQ''), National
Stock Exchange, Inc. (``NSX'') and Chicago Board Options Exchange,
Incorporated (``CBOE'') filed with the Securities and Exchange
Commission (``Commission''), pursuant to Section 19(b)(1) \2\ of the
Securities Exchange Act of 1934 (``Act''),\3\ and Rule 19b-4
thereunder,\4\ proposed rule changes to amend certain of their
respective rules, or adopt new rules, to provide for trading pauses in
individual stocks when the price moves ten percent or more in the
preceding five minute period. On May 19, 2010, EDGA Exchange, Inc.
(``EDGA'') and Chicago Stock Exchange, Inc. (``CHX'') filed proposed
rule changes to provide for similar trading pauses.\5\ The proposed
rule changes were published for comment in the Federal Register on May
24, 2010.\6\ The Commission received 26 comments on the proposals and
on the broader concept of circuit breakers on individual securities.\7\
The
[[Page 34187]]
NYSE responded to the comments in a letter dated June 8, 2010.\8\ This
order grants accelerated approval to the proposed rule changes.
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\1\ ISE filed a technical amendment to the proposed rule change
on June 4, 2010.
\2\ 15 U.S.C. 78s(b)(1).
\3\ 15 U.S.C. 78a.
\4\ 17 CFR 240.19b-4.
\5\ The term ``Exchanges'' shall refer collectively to all of
the exchanges in this order. The term ``Listing Markets'' refers
collectively to NYSE, NYSEAmex and NASDAQ. The term ``Nonlisting
Markets'' refers collectively to the remaining nine national
securities exchanges. The term SROs refers collectively to the
Exchanges and the Financial Industry Regulatory Aythority
(``FINRA'').
\6\ See Securities Exchange Act Release Nos. 62121 (May 19,
2010), 75 FR 28834 (May 24, 2010); 62123 (May 19, 2010), 75 FR 28844
(May 24, 2010); 62124 (May 19, 2010), 75 FR 28828 (May 24, 2010);
62125 (May 19, 2010), 75 FR 28836 (May 24, 2010); 62126 (May 19,
2010), 75 FR 28831 (May 24, 2010); 62127 (May 19, 2010), 75 FR 28837
(May 24, 2010); 62128 (May 19, 2010), 75 FR 28830 (May 24, 2010);
62129 (May 19, 2010), 75 FR 28839 (May 24, 2010); 62131 (May 19,
2010), 75 FR 28845 (May 24, 2010); 62132 (May 19, 2010), 75 FR 28847
(May 24, 2010); 62122 (May 19, 2010), 75 FR 28833 (May 24, 2010);
and 62130 (May 19, 2010), 75 FR 28842 (May 24, 2010).
On May 18, 2010, FINRA filed a proposed rule change, which was
approved today. See Securities Exchange Act Release No. 62133 (May
19, 2010), 75 FR 28841 (May 24, 2010); Securities Exchange Act
Release No. 62251 (June 10, 2010)(SR-FINRA-2010-025).
\7\ The Commission considered letters received prior to May 18
discussing the concept of individual stock circuit breakers as well
as formal letters citing the rule filings. See Letter from Senator
Charles E. Schumer to Chairman Schapiro, Commission, et. al., dated
May 10, 2010; Letter from Congressman Edward J. Markey to Chairman
Schapiro, Commission, dated May 11, 2010; Letter from Cliff Pereira
to Elizabeth M. Murphy, Secretary, Commission, dated May 13, 2010;
Letter from Thomas Hofler to Elizabeth M. Murphy, Secretary,
Commission, dated May 13, 2010 (``Hofler Letter''); Letter from
James K. Rutledge to Rule-Comments, Commission, dated May 13, 2010;
Letter from John Meredith to Elizabeth M. Murphy, Secretary, dated
May 19, 2010; Letter from Peter Skopp, Molinete Trading Inc. to
Elizabeth M. Murphy, Secretary, Commission, dated May 20, 2010
(``Molinete Letter''); letter from Paul Rogers to Rule-Comments,
Commission, dated May 20, 2010; Letter from Congressman Eric Cantor
to Chairman Schapiro, Commission, dated May 21, 2010; Letter from
T.P. Tursick to Elizabeth M. Murphy, Secretary, Commission, dated
May 25, 2010; Letter from James J. Angel to the Commission, dated
May 25, 2010 (``Angel Letter''); Letter from Larry Harris, USC
Marshall School of Business, to Elizabeth M. Murphy, Secretary,
Commission, dated May 26, 2010 (``Harris Letter''); Letter from
Judith Kittinger to WebMaster, Commission, dated May 27, 2010;
Letter from Congresswoman Melissa L. Bean to Chairman Schapiro,
Commission, dated May 28, 2010 (``Bean Letter''); Letter from
Patrick J. Healy, Issuer Advisory Group, LLC, to Elizabeth M.
Murphy, Secretary, Commission, dated May 31, 2010 (``IAG Letter'');
Letter from Hal McIntyre, The Summit Group, to Elizabeth M. Murphy,
Commission, undated ``Summit Group Letter''); Letter from Ira
Shapiro, BlackRock Inc. to Elizabeth M. Murphy, Secretary,
Commission, dated June 2, 2010 (``BlackRock Letter''); Letter from
Christopher Nagy, TD Ameritrade to Elizabeth M. Murphy, Secretary,
Commission, dated June 3, 2010 (``TD Ameritrade Letter''); Letter
from Alexander M. Cutler, Business Roundtable to Elizabeth M.
Murphy, Secretary, Commission, dated June 3, 2010 (``Business
Roundtable Letter''); Letter from George U. Sauter, The Vanguard
Group, Inc. to Elizabeth M. Murphy, Secretary, Commission, dated
June 3, 2010 (``Vanguard Letter''); Letter from Julie Sweet,
Accenture plc to Elizabeth M. Murphy, Secretary, Commission, dated
June 3, 2010 (``Accenture Letter''); Letter from Tom Quaadman,
Center for Capital Markets Competitiveness to Elizabeth M. Murphy,
Secretary, Commission, dated June 3, 2010 (CCMC Letter''); Letter
from Jeffrey W. Rubin, American Bar Association Business Law Section
to Elizabeth M. Murphy, Secretary, Commission, dated June 3, 2010
(``ABA Letter''); Letter from Karrie McMillan, Investment Company
Institute to Elizabeth M. Murphy, Secretary, Commission, dated June
3, 2010 (``ICI Letter''); Letter from Daniel Mathisson, Credit
Suisse Securities (USA) LLC to Elizabeth M. Murphy, Secretary,
Commission, dated June 3, 2010 (``Credit Suisse Letter''); Letter
from Leonard J. Amoruso, Knight Capital Group, Inc. to Elizabeth M.
Murphy, Secretary, Commission, dated June 4, 2010 (``Knight
Letter'').
\8\ See Letter from Janet Kissane, Senior Vice President--Legal
& Corporate Secretary, NYSE Euronext to Elizabeth M. Murphy,
Secretary, Commission, dated June 8, 2010 (``Response Letter''),
including data and analysis. See also Memo from the Division of
Risk, Strategy and Financial Innovation to File, dated June 4, 2010.
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II. Description of the Proposals
On May 6, 2010, the U.S. equity markets experienced a severe
disruption.\9\ Among other things, the prices of a large number of
individual securities suddenly declined by significant amounts in a
very short time period, before suddenly reversing to prices consistent
with their pre-decline levels. This severe price volatility led to a
large number of trades being executed at temporarily depressed prices,
including many that were more than 60% away from pre-decline prices and
were broken by the Exchanges. The Commission is concerned that events
such as those that occurred on May 6 can seriously undermine the
integrity of the U.S. securities markets. Accordingly, it is working on
a variety of fronts to assess the causes and contributing factors of
the May 6 market disruption and to fashion policy responses that will
help prevent a recurrence.
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\9\ The events of May 6 are described more fully in the report
of the staffs of the Commodity Futures Trading Commission (``CFTC'')
and the Commission, titled Report of the CFTC and SEC to the Joint
Advisory Committee on Emerging Regulatory Issues, ``Preliminary
Findings Regarding the Market Events of May 6, 2010,'' dated May 18,
2010.
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The Commission also recognizes the importance of moving quickly to
implement appropriate steps that could help limit potential harm from
extreme price volatility. In this regard, it is pleased that the SROs
began consulting soon after May 6 in an effort to develop consistent
circuit breaker rules that could be implemented on an expedited basis.
The SROs were able to reach agreement on a consistent approach, and, on
May 18 and 19, 2010, all of the SROs filed proposed rule changes with
the Commission.
These rules would require the Listing Markets to issue five-minute
trading pauses for individual securities for which they are the primary
Listing Market if the transaction price of the security moves ten
percent or more from a price in the preceding five-minute period. The
Listing Markets would notify the other Exchanges and market
participants of the imposition of a trading pause by immediately
disseminating a special indicator over the consolidated tape.\10\ Under
the rules, once a Listing Market issues a trading pause, the other
Exchanges would be required to pause trading in that security on their
markets.\11\ In order to avoid interfering with existing procedures
designed to facilitate orderly openings and closings, the trading pause
requirements would apply only from 9:45 a.m. until 3:35 p.m.
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\10\ When a trading pause is issued, the Listing Market will
immediately notify the single plan processor responsible for
consolidation of information for the security pursuant to Rule 603
of Regulation NMS under the Exchange Act. The single plan processor
for all listed securities other than Nasdaq-listed securities is the
Securities Industry Automation Corporation (``SIAC''). The single
plan processor for Nasdaq-listed securities is Nasdaq.
\11\ FINRA's rule provides that it will similarly pause trading
in the over-the-counter market by FINRA members, including
alternative trading systems and market makers, when a Listing Market
has issued a trading pause.
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At the end of the five-minute pause, the primary Listing Market
would reopen trading in the security in accordance with its procedures
for doing so. Trading would resume on the other Exchanges and in the
over-the-counter market once trading has resumed on the primary Listing
Market. In the event of a significant imbalance on the primary Listing
Market at the end of a trading pause, the primary Listing Market may
delay reopening. If the primary Listing Market has not reopened within
ten minutes from the initiation of the trading pause, however, the
other Exchanges may resume trading.\12\
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\12\ Some of the Nonlisting Markets, such as ISE, may not begin
trading under their proposed rules until the Listing Market begins.
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The Exchanges have proposed that these rule changes be implemented
as a pilot that would end on December 10, 2010. The pilot period would
enable the Exchanges and the Commission to assess the effect of the new
rules on the marketplace. To initiate this pilot promptly, the proposed
rules would be in effect only with respect to securities included in
the S&P 500 Index. The Commission understands that the Exchanges expect
to file additional rule proposals in the near future to expand the
scope of the pilot (for example, to include ETFs) within the pilot
period.\13\
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\13\ Any such rule proposals would be published for public
comment in accordance with Section 19(b) of the Act.
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The Exchanges have requested that the Commission approve the
proposed rule changes on an accelerated basis, so that they may become
operative as soon as practicable.
III. Discussion of Comments and Commission Findings
As of June 7, the Commission received 26 comment letters regarding
the proposed rule changes, a substantial number of which were generally
supportive. For example, an institutional investor stated that ``on
very rare occasions like May 6 a pause in trading is necessary to give
market participants a chance to `reset' and react appropriately to
periods of dislocation. A reasonable trading halt will provide
investors time to rationally assess the market events and commit
liquidity at appropriate price levels.'' \14\ Another institutional
investor strongly supported single stock circuit breakers, noting that
``trading pauses may reduce market volatility resulting from temporary
supply-demand imbalances without unduly interrupting price discovery.''
\15\
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\14\ See Vanguard Letter, supra note 7.
\15\ See, e.g., BlackRock Letter, supra note 7.
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The commenters also raised a variety of significant issues
regarding the scope and operation of the circuit breakers. These
include: (1) Whether the circuit breakers should be expanded beyond S&P
500 stocks, particularly to exchange traded funds (``ETFs'') and the
securities of other companies that were most severely affected on May
6; \16\ (2) the
[[Page 34188]]
need for revised market-wide circuit breakers; \17\ and (3) operational
issues regarding the circuit breakers, including the times when they
should apply,\18\ the threshold events that should trigger them and the
length of the pause,\19\ the procedures for resuming trading after a
pause,\20\ and alternatives to the circuit breaker mechanism.\21\
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\16\ See, e.g., ABA Letter, Accenture Letter, Angel Letter, Bean
Letter, CCMP Letter, Credit Suisse Letter, IAG Letter, ICI Letter
(expressing particular concern that if circuit breakers exist for
individual securities contained in ETFs' baskets, but not for the
ETFs themselves, ETFs could again suffer disproportionately during a
market event such as that of May 6), Summit Group Letter, TD
Ameritrade Letter, and Vanguard Letter, supra note 7. One commenter
also raised concerns about the potential consequences of circuit
breakers being triggered simultaneously in many securities. See
Angel Letter.
\17\ See, e.g., Angel Letter, supra note 7.
\18\ Suggestions included applying the circuit breakers for the
entire trading day (i.e., including during the opening and closing
periods). See, e.g., Angel Letter (noting the considerable trading
activity and volatility that occurs during the first and last
minutes of the trading day), Credit Suisse Letter (noting that in
S&P 500 stocks 6% of the daily volume typically occurs from 9:30
a.m. to 9:45 a.m., and 18% occurs from 3:35 p.m. to 4 p.m., and that
intra-day volatility tends to be highest during these time periods),
IAG Letter, and TD Ameritrade Letter (arguing that the many retail
investor orders executed at market open should not be deprived the
protections of the circuit breaker rules), supra note 7.
\19\ Suggestions included using a trigger threshold other than
10% or a pause period other than five minutes. See, e.g., Angel
Letter (suggesting securities outside the S&P 500 may need a trigger
threshold greater than 10%, and that the pause period may need to be
longer than five or ten minutes), BlackRock Letter (arguing that the
10% circuit breaker level is too narrow, with their data showing it
would have halted trading on only 58 of S&P 500 stocks on May 6,
2010, as opposed to 309 S&P 500 stocks on that day with a 5% circuit
breaker), Credit Suisse Letter (suggesting a ten-minute halt
period), Hofler Letter (suggesting that trigger thresholds vary
commensurate with the stock's volatility, perhaps 5% for low beta
stocks, 10% for medium beta stocks, and 30% for high beta stocks),
Knight Letter (recommending a minimum trigger threshold of 15%, and
the use of more sophisticated variables such as dollar price,
average daily volume, and market capitalization), and Summit Group
Letter (suggesting a longer pause period may be required to allow
small investors to respond), supra note 7. Other commenters
suggested using a trigger based on the national best bid or offer
rather than a trade price. See, e.g., Molinete Letter, supra note 7.
\20\ Suggestions included precluding resumption of trading until
the primary listing market has resolved any imbalances. See, e.g.,
BlackRock Letter, Credit Suisse Letter, Knight Letter and TD
Ameritrade Letter, supra note 7. But see Harris Letter, supra note 7
(arguing that trade halt rules are anti-competitive because they
encourage traders to submit their orders to the dominant exchanges
so that they can participate in the call auctions that restart
trading).
\21\ Suggestions included using a futures-style ``limit down''
mechanism rather than a full trading pause. See, e.g., Accenture
Letter, Credit Suisse Letter, and Harris Letter (arguing that
trading at prices that reverse the triggering price change should be
permitted), supra note 7.
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The Commission believes that most if not all of these suggestions
regarding potential ways to improve or perfect the scope and operation
of the circuit breaker, or variations on them, were generally
considered by the Exchanges in developing a uniform proposal that could
be implemented in a reasonably short period of time and yet provide
important benefits to the markets.\22\ The Commission recognizes that
all of these issues warrant continued close consideration in the coming
days and months, and it expects that the SROs will continue to consult
with each other, the Commission and market participants on both the
scope and operation of the circuit breakers.
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\22\ See, e.g., Response Letter, supra note 8.
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With respect to the specific proposals under consideration here,
however, the Commission has evaluated them based on whether they are
consistent with the Act and whether they represent a useful first step
that should improve the existing procedures for protecting investors
and maintaining fair and orderly markets. It finds that the proposals
meet these standards and therefore is approving them on an expedited
basis.
The Commission agrees that consideration should be given by the
Exchanges to whether the circuit breakers should be expanded to
additional securities, but does not believe that there is a reason to
delay the implementation of circuit breakers for S&P 500 stocks as a
reasonable first step.\23\ Similarly, it agrees that the existing
market-wide circuit breakers should be re-examined in light of current
market conditions, but again does not believe that the initial stage of
the circuit breaker pilot for individual stocks should be delayed
pending that re-examination. With respect to operational issues
regarding the circuit breakers, the Commission anticipates that the
Exchanges will continue to evaluate these issues during the pilot
period, and will propose any modifications to the circuit breakers that
may be necessary or appropriate before that period has ended, but does
not believe that the first stage of the circuit breaker pilot should be
delayed pending such consideration.\24\
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\23\ In particular, the Commission acknowledges the concerns
raised by the ICI, Blackrock, and others regarding the potential
adverse consequences for ETFs if the circuit breakers cover
individual securities that are held by an ETF but not the ETF
itself. Those comment letters do not explicitly recommend delaying
the launch of the pilot program with respect to the S&P 500, but
they do urge that ETFs be added to the pilot as soon as possible. As
noted below, the Commission anticipates that the Exchanges will be
proposing amendments to the pilot to include ETFs.
\24\ Commenters also raised a number of issues not directly
related to the scope or operation of the trading pauses. One, for
example, was the operation of the Exchanges' erroneous trade rules.
See TD Ameritrade Letter, supra note 7. The Commission expects that
the Exchanges will continue to consult on these rules and
anticipates they will submit proposals to clarify their operation in
the near future.
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A few commenters expressed concern that the proposed circuit
breakers could cause more harm than good. One, for example, suggested
that the Exchanges' timeframe for implementation of the proposed rule
changes could be overly aggressive and lead to systems problems.\25\
The Commission understands that the Exchanges have been working closely
with market participants to address implementation issues and
facilitate a prompt yet workable roll-out of the circuit breaker
pilot.\26\ No other comments were received indicating that exchanges,
other trading venues or broker-dealers would not be able to fully
implement the proposed circuit breakers within the timeframes
established in the Exchange filings.
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\25\ See Molinete Letter, supra note 7.
\26\ See Response Letter, supra note 9.
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Other commenters questioned whether trading halts may exacerbate
price volatility, and one stated that a trading halt on May 6 might
have increased the order imbalance preventing an intraday recovery.\27\
Many other commenters, however, believed that the events of May 6
demonstrate the need for trading pauses in individual stocks as a means
to reduce excessive market volatility.\28\ The Commission agrees that
the proposed trading pauses are prudent measures that are appropriately
being introduced on a pilot basis to address extraordinarily severe and
harmful price volatility of the kind that occurred on May 6.
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\27\ See Harris Letter, supra note 7 (arguing that trading halts
will attenuate volatility if liquidity or rationality arrives before
markets return to normal operation, and positing that on May 6 many
traders would have thought the price drop was due to fundamental
valuation issues, in which case the order imbalance could have grown
larger during the halt as traders drew incorrect inferences from the
event). See also Molinete Letter, supra note 7 (suggesting the
proposed rules may exacerbate market volatility rather than reduce
it due to the interplay of stock circuit breaker rules, erroneous
trade rules, and market participants' reactions to securities
nearing the threshold). Another commenter urged the Commission to
proceed cautiously in this area, expressing the view that
``unencumbered market forces are preferable to the implementation of
artificial trade frictions wherever possible.'' See Knight Letter,
supra note 7. The Commission will continue to consider these
comments in evaluating the impact of the pilot.
\28\ See, e.g., Accenture Letter, BlackRock Letter, Business
Roundtable Letter, CCMP Letter, Credit Suisse Letter, ICI Letter, TD
Ameritrade Letter, Vanguard Letter, supra note 7.
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In sum, the Commission finds that the proposed rule changes are
consistent with the requirements of the Act and the rules and
regulations thereunder
[[Page 34189]]
applicable to national securities exchanges. In particular, the
Commission finds that the proposals are consistent with Section 6(b)(5)
of the Act,\29\ which among other things requires that the rules of
national securities exchanges be designed to prevent fraudulent and
manipulative acts and practices, 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.\30\
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\29\ 15 U.S.C. 78f(b)(5).
\30\ In approving the proposed rule change, the Commission notes
that it has considered the proposed rules' impact on efficiency,
competition, and capital formation. 15 U.S.C. 78c(f).
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The Commission believes the proposed rule changes, among other
things, will establish consistent, market-wide trading pauses as a
means to prevent potentially destabilizing price volatility and will
thereby help promote the goals of investor protection and fair and
orderly markets.
The Commission also finds good cause for approving the proposals
before the 30th day after the publication of notice thereof in the
Federal Register. The Exchanges have worked quickly and cooperatively
to devise a response to the events of May 6, 2010. The Commission
received a number of comments on the proposals, the great majority of
which were supportive of the proposed trading pause. The proposed
changes are being implemented on a pilot basis so that the Commission
and the Exchanges can monitor the effects of the pilot on the
marketplace and consider adjustments, as necessary. The Commission
believes that accelerating approval of these proposals is appropriate
as it will enable the Exchanges nearly immediately to begin
coordinating trading pauses across markets in the event of sudden
changes in the value of the S&P 500 Index stocks. In particular, the
Commission believes that these proposed rule changes should further the
goals of investor protection and fair and orderly markets.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\31\ that the proposed rule changes (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; SR-CBOE-2010-047) be, and hereby are,
approved on an accelerated basis.
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\31\ 15 U.S.C. 78s(b)(2).
By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-14435 Filed 6-15-10; 8:45 am]
BILLING CODE 8010-01-P