[Federal Register Volume 75, Number 129 (Wednesday, July 7, 2010)]
[Notices]
[Pages 39084-39086]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-16412]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62418; File No. SR-EDGX-2010-05]
Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of
Filing of Proposed Rule Change To Amend EDGX Rule 11.14, Entitled
``Trading Halts Due to Extraordinary Volatility.''
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, EDGX Exchange, Inc. (the ``Exchange'' or ``EDGX'')
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 proposing to amend EDGX Rule 11.14, entitled
``Trading Halts Due to Extraordinary Volatility'' to add additional
securities to the pilot rule. The text of the proposed rule change is
available at the Exchange's Web site at http://www.directedge.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 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 parts 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 EDGX Rule 11.14 to add securities
included in the Russell 1000[supreg] Index
[[Page 39085]]
(``Russell 1000'') and specified Exchange Traded Products (``ETP'') to
the pilot rule. For purposes of this filing, ETPs include Exchange
Traded Funds (``ETF''),\3\ Exchange Traded Vehicles (``ETV''),\4\ and
Exchange Traded Notes (``ETN'').\5\
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\3\ An ETF is an open-ended registered investment company under
the Investment Company Act of 1940 that has received certain
exemptive relief from the SEC to allow secondary market trading in
the ETF shares. ETFs are generally index-based products, in that
each ETF holds a portfolio of securities that is intended to provide
investment results that, before fees and expenses, generally
correspond to the price and yield performance of the underlying
benchmark index.
\4\ An ETV tracks the underlying performance of an asset or
index, allowing investors exposure to underlying assets such as
futures contracts, commodities, and currency without actually
trading futures or taking physical delivery of the underlying asset.
An ETV is traded intraday like an ETF. An ETV is an open-ended trust
or partnership unit that is registered under the Securities Act of
1933.
\5\ An ETN is a senior unsecured debt obligation designed to
track the total return of an underlying index, benchmark or
strategy, minus investor fees. ETNs are registered under the
Securities Act of 1933 and are redeemable to the issuer.
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EDGX Rule 11.14 was approved by the Commission on June 10, 2010 on
a pilot basis to end on December 10, 2010.\6\ As the Exchange noted in
its filing to adopt EDGX Rule 11.14, during the pilot period, the
Exchange would continue to assess whether additional securities need to
be added and whether the parameters of the rule would need to be
modified to accommodate trading characteristics of different
securities.
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\6\ See Securities Exchange Act Release No. 62252 (June 10,
2010) (SR-EDGX-2010-01).
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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 filing to adopt EDGX Rule 11.14, concerns were raised
that including only securities in the S&P 500 in the pilot rule was too
narrow. In particular, commenters noted that securities that
experienced volatility on May 6, 2010, including ETFs, should be
included in the pilot.
In response to these concerns, various exchanges and national
securities associations have collectively determined to expand the list
of pilot securities. As part of a coordinated filing with the 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 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 may be appropriate for the Russell 1000
securities.
In addition, the Exchange, in consultation with other markets,
proposes to add to the pilot a selected list of ETPs. The proposed
pilot list of ETPs was developed by first identifying all ETPs across
multiple asset classes and issuers, including domestic equity,
international equity, fixed income, currency, and commodities and
futures. Next, leveraged ETPs were excluded and sorted 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.
Then, those symbols, including inverse ETPs, that trade over $2,000,000
CADV year to date through May 5, 2010, were selected. 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 proposed list of ETPs identify 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 proposed ETPs were selected because they were
consistent with the existing 10% 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 noted above, during the pilot, the Exchange will continue to re-
assess, in consultation with other markets, 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 supplementary
material .05 to Rule 11.14 to provide that the pilot applies to all
securities in the S&P 500, securities in the Russell 1000, as well as
specified ETPs.
2. Statutory Basis
Approval of the rule change proposed in this submission is
consistent with the requirements of the Act and the rules and
regulations thereunder that are applicable to a national securities
exchange, and, in particular, with the requirements of Section 6(b) of
the Act.\7\ In particular, the proposed change is consistent with
Section 6(b)(5) of the Act,\8\ because it would promote just and
equitable principles of trade, remove impediments to, and perfect the
mechanism of, a free and open market and a national market system, and,
in general, protect investors and the public interest. The proposed
rule change is also designed to support the principles of Section
11A(a)(1) \9\ 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 uniformity across markets concerning decisions to pause
trading in a security when there are significant price movements.
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\7\ 15 U.S.C. 78f(b).
\8\ 15 U.S.C. 78f(b)(5).
\9\ 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 imposes
any burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.
[[Page 39086]]
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.\10\
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\10\ The Commission notes that the Exchange has requested
accelerated approval of the filing.
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning all aspects of 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-EDGX-2010-05 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, Station Place, 100 F
Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-EDGX-2010-05. 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, 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 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 publicly available. All
submissions should refer to File Number SR-EDGX-2010-05 and should be
submitted on or before July 19, 2010.\11\
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\11\ The Commission believes that a 10-day comment period is
reasonable, given the urgency of the matter. It will provide
adequate time for comment.
\12\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\12\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-16412 Filed 7-6-10; 8:45 am]
BILLING CODE 8010-01-P