[Federal Register Volume 75, Number 129 (Wednesday, July 7, 2010)]
[Notices]
[Pages 39081-39083]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-16408]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62414; File No. SR-NASDAQ-2010-079]
Self-Regulatory Organizations; Notice of Filing of a Proposed
Rule Change by The NASDAQ Stock Market LLC to Amend NASDAQ Rule
4120(a)(11) To Add Securities Included in the Russell 1000[supreg]
Index (``Russell 1000'') and Specified Exchange Traded Products
(``ETP'') to the Pilot Rule
June 30, 2010.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on June 30, 2010, The NASDAQ Stock Market LLC (the ``Exchange'' or
``Nasdaq'') 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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is filing with the Commission a proposed rule change
to amend NASDAQ Rule 4120(a)(11) to add securities included in the
Russell 1000[supreg] Index (``Russell 1000'') and specified Exchange
Traded Products (``ETP'') to the pilot rule.
The text of the proposed rule change is below. Proposed new
language is underlined and proposed deletions are in brackets.\3\
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\3\ Changes are marked to the rule text that appears in the
electronic manual of NASDAQ found at http://nasdaqomx.cchwallstreet.com.
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* * * * *
4120. Trading Halts
(a) Authority To Initiate Trading Halts or Pauses
In circumstances in which Nasdaq deems it necessary to protect
investors and the public interest, Nasdaq, pursuant to the procedures
set forth in paragraph (c):
(1)-(10) No Change.
(11) shall, between 9:45 a.m. and 3:35 p.m., immediately pause
trading for 5 minutes in any Nasdaq-listed security when the price of
such security moves 10 percent or more within a 5-minute period. At the
end of the trading pause, Nasdaq will re-open the security using the
Halt Cross process set forth in Nasdaq Rule 4753. In the event of a
significant imbalance at the end of a trading pause, Nasdaq may delay
the re-opening of a security.
Nasdaq will issue a notification if it cannot resume trading for a
reason other than a significant imbalance.
Price moves under this paragraph will be calculated by changes in
each consolidated last-sale price disseminated by a network processor
over a five minute rolling period measured continuously. Only regular
way in-sequence transactions qualify for use in calculations of price
moves. Nasdaq can exclude a transaction price from use if it concludes
that the transaction price resulted from an erroneous trade.
If a trading pause is triggered under this paragraph, Nasdaq shall
immediately notify the single plan processor responsible for
consolidation of information for the security pursuant to Rule 603 of
Regulation NMS under the Securities Exchange Act of 1934. If a primary
listing market issues an individual stock trading pause, Nasdaq will
pause trading in that security until trading has resumed on the primary
listing market or notice has been received from the primary listing
market that trading may resume. If the primary listing market does not
reopen within 10 minutes of notification of a trading pause, Nasdaq may
resume trading the security.
The provisions of this paragraph shall only apply to securities in
the Standard & Poor's 500 Index, the Russell 1000 Index, as well as a
pilot list of Exchange Traded Products.
The provisions of this paragraph shall be in effect during a pilot
set to end on December 10, 2010.
(b)-(c) No Change.
* * * * *
(b) Not applicable.
(c) Not applicable.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
Sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend NASDAQ Rule 4120(a)(11) to add
securities included in the Russell 1000[supreg] Index (``Russell
1000'') and specified Exchange Traded Products (``ETP'') to the pilot
rule. For purposes of this filing, ETPs include Exchange Traded Funds
(``ETF''), Exchange Traded Vehicles (``ETV''), and Exchange Traded
Notes (``ETN'').
NASDAQ Rule 4120(a)(11) was approved by the Commission on June 10,
2010 on a pilot basis to end on December 10, 2010.\4\ Currently, the
pilot list of securities is all securities included in the S&P
500[supreg] Index (``S&P 500''). As noted in comment letters to the
original NASDAQ filing to adopt NASDAQ Rule 4120(a)(11), concerns were
raised that including only securities in the S&P 500 in the pilot rule
was too narrow. In particular, commenter's noted that securities that
experienced volatility on May 6, 2010, including ETFs, should be
included in
[[Page 39082]]
the pilot. The Exchange agrees with the commenter's that the pilot list
of securities should be expanded.
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\4\ See Securities Exchange Act Release No. 62252 (June 10,
2010) (SR-NASDAQ-2010-061).
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In consultation with other markets, the Exchange proposes to add
the securities included in the Russell 1000 and specified ETPs to the
pilot beginning in July 2010, subject to Commission approval. The
Exchange believes that adding these securities would begin to address
concerns that the scope of the pilot may be too narrow, while at the
same time recognizing that during the pilot period, the markets will
continue to review whether and when to add additional securities to the
pilot and whether the parameters of the rule should be adjusted for
different securities.
In particular, the Exchange proposes to add securities included in
the Russell 1000 because the Exchange believes that the securities
included in that index have similar trading characteristics to
securities included in the S&P 500 (many of which are the same
securities) and therefore the existing 10% price movement applicable
before invoking a trading pause would be appropriate for the Russell
1000 securities. Because the Exchange does not propose to modify the
10% price movement at this time, the Exchange believes that expanding
to the Russell 1000 is an appropriate next step. Based on our analysis,
the number of times that the Trading Pause would be triggered for
Russell 1000 securities would be similar to the instances for the S&P
500 securities.
In addition, the Exchange, in consultation with other markets,
proposes to add to the pilot a selected list of ETPs. The Exchange
developed the proposed pilot list of ETPs first by identifying all ETPs
across multiple asset classes and issuers, including domestic equity,
international equity, fixed income, currency, and commodities and
futures. The Exchange next excluded the leveraged ETPs and sorted the
list by notional consolidated average daily volume (``CADV'') using
year-to-date CADV ending May 5, 2010, multiplied by the closing price
on May 5, 2010. The Exchange then selected those symbols, including
inverse ETPs, that trade over $2,000,000 CADV year to date through May
5, 2010. To ensure that ETPs that track similar benchmarks but that do
not meet this volume criterion do not become subject to pricing
volatility when a component security is the subject of a trading pause,
the Exchange proposes to include certain non-leveraged ETPs that have
traded below this volume criterion, but that track the same benchmark
as an ETP that does meet the volume criterion.
The Exchange believes that the proposed list of ETPs is appropriate
because it identifies those ETPs that have component securities that
largely track the securities included in the S&P 500 and Russell 1000.
Accordingly, if an S&P 500 or Russell 1000 security experiences a
trading pause, any resulting price volatility in a related ETP,
regardless of the CADV of the ETP, would also be subject to a trading
pause trigger. As with the proposal to add the Russell 1000 securities,
the Exchange selected the proposed ETPs because it believes that the
existing 10% price movement would be an appropriate price movement
before invoking a trading pause for ETPs with these characteristics.
The Exchange does not believe that the 10% price movement is an
appropriate threshold for leveraged ETPs because by definition,
leveraged ETPs are based on multiples of price movements in the
underlying index. Accordingly, a 10% percent price movement in a
leveraged ETP may not signify extraordinary volatility. Because the
Exchange is not proposing to adopt revised price movement thresholds at
this time, the Exchange is therefore not proposing to include leveraged
ETPs for now.
As proposed, the list includes broad-based ETPs, which the Exchange
recognizes has raised some debate. In particular, concerns have been
raised about whether halting an index-based ETP may impact an index-
based option or future. However, the Exchange believes that including
broad-based ETPs is appropriate so that ETP investors are protected
should the component securities experience such volatility that trading
in the broad-based ETP is impacted, as it was on May 6, 2010. Because
this is a pilot rule, the markets can continue to assess whether it is
appropriate to have a trading pause in broad-based ETPs when there is
not a similar trading pause in related index-based options or futures.
During the pilot, the Exchange will continue to re-assess whether
specific ETPs should be added or removed from the pilot list. The
Exchange will also assess whether the parameters for invoking a trading
pause continue to be the appropriate standard and whether the
parameters should be modified.
To effect this change, the Exchange proposes to amend Rule
4120(a)(11) to provide that the pilot applies to all securities in the
S&P 500 and/or the Russell 1000. The Exchange notes that because there
is overlap between the two indices, the ``and/or'' construction is
intended to capture all such securities, regardless of which index the
security may be included. The Exchange further proposes to add that the
pilot applies to specified ETPs, which are identified in Exhibit 3.
2. Statutory Basis
The statutory basis for the proposed rule change is Section 6(b)(5)
of the Securities Exchange Act of 1934 (the ``Act''),\5\ which requires
the rules of an exchange to promote just and equitable principles of
trade, to remove impediments to and perfect the mechanism of a free and
open market and a national market system and, in general, to protect
investors and the public interest. The proposed rule change also is
designed to support the principles of Section 11A(a)(1) \6\ of the Act
in that it seeks to assure fair competition among brokers and dealers
and among exchange markets. The Exchange believes that the proposed
rule meets these requirements in that it promotes transparency and
uniformity across markets concerning decisions to pause trading in a
security when there are significant price movements.
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\5\ 15 U.S.C. 78f(b)(5).
\6\ 15 U.S.C. 78k-1(a)(1).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act, as amended.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
Written comments on the proposed rule change were neither solicited
nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
A. By order approve such proposed rule change, or
B. Institute proceedings to determine whether the proposed rule
change should be disapproved.\7\
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\7\ The Commission notes that the Exchange has requested
accelerated approval of the filing.
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[[Page 39083]]
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act.
The Commission notes that ETF trades constituted a substantial
majority of the trades that were cancelled on May 6, and the proposed
amendments would bring certain ETFs within the scope of the trading
pause pilot for the first time. The Commission solicits comment
regarding the inclusion of ETFs within the trading pause pilot. The
Commission requests comment in particular on the implications of
including in the trading pause pilot ETFs on broad-based indices that
also underlie options and futures products. What are the potential
benefits and risks of including those ETFs in the pilot under
circumstances where other products based on the same index may not be
subject to any trading pause, or may be subject to a different type of
trading pause? Are existing mechanisms available in the markets for
those other products sufficient to address any cross-market linkage
concerns? What are the potential effects on price discovery and trading
behavior in the different markets?
Similarly, the Commission solicits comments on the potential
benefits and risks of excluding such ETFs from the pilot, particularly
under circumstances where the securities underlying the ETF are
included in the pilot. If there are trading pauses for the component
securities of an index but not for an ETF based on that index, what
consequences might that have for the ETF or for other products based on
that index? If there are trading pauses in an ETF but not in the stocks
that underlie that ETF, what consequences might that have for the
underlying stocks or other products? What are the potential effects on
price discovery for the ETF, the underlying stocks and other products?
Are there other market-based characteristics or metrics that should
be considered for purposes of determining which ETFs should be included
in the trading pause pilot, or for re-calibrating particular features
of the trading pause?
In addition, the Commission solicits comments regarding the
operation of the trading pause pilot to date with respect to stocks in
the S&P 500.
Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an e-mail to [email protected]. Please include
File Number SR-NASDAQ-2010-079 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2010-079. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for Web site
viewing and printing in the Commission's Public Reference Room 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 offices of the Exchange. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-NASDAQ-2010-079, and should be submitted on or before
July 19, 2010.\8\
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\8\ The Commission believes that a 10-day comment period is
reasonable, given the urgency of the matter. It will provide
adequate time for comment.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\9\
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\9\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-16408 Filed 7-6-10; 8:45 am]
BILLING CODE 8010-01-P