[Federal Register Volume 75, Number 201 (Tuesday, October 19, 2010)]
[Notices]
[Pages 64384-64387]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-26215]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63098; File No. SR-NASDAQ-2010-074]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order
Instituting Proceedings To Determine Whether To Disapprove Proposed
Rule Change, as Modified by Amendment No. 1, To Adopt Rule 4753(c) as a
Six Month Pilot in 100 NASDAQ-Listed Securities
October 13, 2010.
I. Introduction
On June 18, 2010, The NASDAQ Stock Market LLC (``Nasdaq'' or the
``Exchange'') 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\ a
proposed rule change to implement, on a six-month pilot basis, a
volatility-based trading pause in 100 Nasdaq-listed securities
(``Volatility Guard''). On June 25, 2010, Nasdaq filed Amendment No. 1
to the proposed rule change. The proposed rule change, as amended, was
published for comment in the Federal Register on July 15,
[[Page 64385]]
2010.\3\ The Commission received four comment letters on the
proposal.\4\ Nasdaq responded to these comments on August 12, 2010.\5\
The Commission subsequently extended the time period in which to either
approve the proposed rule change, or to institute proceedings to
determine whether to disapprove the proposed rule change, to October
13, 2010.\6\ This order institutes proceedings to determine whether to
disapprove the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 62468 (July 7,
2010), 75 FR 41258.
\4\ See Letter from Joe Ratterman, Chairman and Chief Executive
Officer, BATS Global Markets, Inc., to Hon. Mary Schapiro, Chairman,
Commission, dated July 1, 2010 (``BATS Letter''); Letter from Jose
Marques, Managing Director, Deutsche Bank Securities Inc., to
Elizabeth M. Murphy, Secretary, Commission, dated July 21, 2010
(``Deutsche Bank Letter''); Letter from Janet M. Kissane, Senior
Vice President, Legal and Corporate Secretary, NYSE Euronext, to
Elizabeth Murphy, Secretary, Commission, dated August 3, 2010
(``NYSE Letter''); Letter from Ann L. Vlcek, Managing Director and
Associate General Counsel, Securities Industry and Financial Markets
Association, to Elizabeth M. Murphy, Secretary, Commission, dated
June 25, 2010 (``SIFMA Letter'').
\5\ See Letter from T. Sean Bennett, Assistant General Counsel,
Nasdaq, to Elizabeth M. Murphy, Secretary, Commission (``Nasdaq
response'').
\6\ See Securities Exchange Act Release No. 62740 (August 18,
2010), 75 FR 52049 (August 24, 2010).
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II. Description of the Proposal
Nasdaq proposes to adopt, on a pilot basis, a volatility-based
trading halt for 100 Nasdaq-listed securities. Under this proposal,
Nasdaq would suspend trading in a security if a trade in that security
is executed at a price that exceeds a certain threshold, as measured
over the preceding 30 seconds. The triggering threshold varies
according to the price of the security, i.e., 15% for securities with
an execution price of $1.75 and under; 10% for securities over $1.75
and up to $25; 5% for securities over $25 and up to $50; and 3% for
securities over $50. If the Volatility Guard were triggered, Nasdaq
would suspend trading in that security for a period of 60 seconds, but
would maintain all current quotes and orders during that time, and
would continue to accept quotes and orders. Following this 60-second
period, Nasdaq would re-open the market using its Halt Cross mechanism.
According to Nasdaq, the Volatility Guard is similar in purpose to the
Liquidity Replenishment Points (``LRPs'') rules that currently exist on
the New York Stock Exchange (``NYSE'').
III. Comment Letters
Three of the four commenters expressed concerns about the effect of
this proposal upon market volatility. These commenters stated that the
Volatility Guard could actually increase volatility marketwide by re-
directing trading in a security to other potentially less liquid venues
once trading in that security had been halted on Nasdaq.\7\ One
commenter argued that this proposal, coupled with the LRPs currently in
effect on the NYSE, would result in disparate market approaches towards
dampening volatility that may create confusion among market
participants, particularly in times of market stress, and exacerbate
market volatility.\8\
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\7\ See BATS Letter at 2; Deutsche Bank Letter at 4; SIFMA
Letter at 3.
\8\ See Deutsche Bank Letter at 4.
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The fourth commenter, however, supported Nasdaq's ``right to design
the controls it believes are best for trading on its market.'' \9\ This
commenter stated that the national market system was designed to
encourage competitive distinctions such as Nasdaq's Volatility Guard
and NYSE's LRPs.\10\ According to this commenter, both the Nasdaq
proposal and the NYSE LRPs ``provide certainty and predictability of
operation,'' and permit those markets to pursue strategies where the
quality of price need not always defer to speed of execution.\11\
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\9\ See NYSE Letter at 2. In its comment letter, NYSE also
addressed what it perceived as Nasdaq's inaccurate description of
the LRPs. NYSE provided additional detail about the LRPs, the role
of the LRPs during the events of May 6, 2010, and the interaction
between LRPs and the recently approved single-stock circuit
breakers.
\10\ Id.
\11\ Id. at 3-4.
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In its response, Nasdaq rejected the argument that the proposed
Volatility Guard would exacerbate market volatility.\12\ Nasdaq stated
that it specifically designed the Volatility Guard to work within the
parameters of the recently adopted single-stock circuit breakers, and
to avoid the potential for conflicting standards between the two
mechanisms.\13\ Nasdaq also asserted that there is no evidence that the
Volatility Guard would increase volatility in a particular security;
rather, Nasdaq stated that the Volatility Guard would actually keep
aberrant volatility on Nasdaq from spreading to other markets.\14\
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\12\ Nasdaq response at 2.
\13\ Id.
\14\ Id.
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Nasdaq also argued that the proposed Volatility Guard differed
significantly from the NYSE LRPs, and that criticizing the Volatility
Guard by comparing it to the LRPs was misleading. Nasdaq stated that
the Volatility Guard, unlike the LRPs, would be based on clear and
predictable criteria that would trigger a pause only in the event of a
significant imbalance.\15\ Accordingly, Nasdaq did not believe it
appropriate to make a generic assertion that all market-based single-
stock circuit breakers are detrimental.\16\
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\15\ Id. at 3.
\16\ Id.
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Finally, Nasdaq stated that it was employing prudent precautions in
implementing the Volatility Guard. In particular, Nasdaq would
implement the Volatility Guard as a pilot, limited in time and scope,
during which time the Volatility Guard could be adjusted as needed.
Nasdaq would also provide data to the Commission during the pilot
period about the efficiency and effect of the Volatility Guard.\17\
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\17\ Id.
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IV. Proceedings To Determine Whether To Disapprove SR-NASDAQ-2010-074
and Grounds for Disapproval Under Consideration
Nasdaq's proposal is presented by the Exchange as an effort to
protect Nasdaq-listed securities and Nasdaq market participants from
aberrant volatility, such as that witnessed on May 6, 2010. As noted
above, however, several commenters argued that individual exchange-
specific mechanisms to moderate volatility may in fact exacerbate the
volatility of the market overall, create confusion, and complicate the
operation of the market-wide single stock circuit breakers.
Although the events of May 6, 2010 provide but one example of the
effect of an individual exchange volatility moderator, the Report of
the Staff of the Commodity Futures Trading Commission and the
Commission (the ``May 6 Staff Report'') \18\ did not find that NYSE
LRPs caused or created the broad-based liquidity crisis on that
day.\19\ However, the May 6 Staff Report noted, among other things,
that there were a few LRP events affecting certain stocks in which
available liquidity on the NYSE may have been sufficient to absorb some
of the selling pressure felt by other markets.\20\ In addition, there
were reports from market participants that the increasing number of
LRPs on May 6 played into their decisions to reduce liquidity, pause
trading, or withdraw from the markets.\21\ More
[[Page 64386]]
broadly, the Commission notes that it is not yet clear whether the
market-wide single-stock circuit breakers, as they may be expanded or
adjusted, are likely to interact with individual exchange volatility
moderators such as the NYSE LRPs or, if approved, Nasdaq's Volatility
Guard, in a positive, neutral or negative way.
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\18\ See Report of the Staffs of the CFTC and SEC to the Joint
Advisory Committee on Emerging Regulatory Issues, ``Findings
Regarding the Market Events of May 6, 2010'', dated September 30,
2010.
\19\ Id. at 70.
\20\ Id. Specifically, the May 6 Staff Report notes that there
were 19 LRP events affecting 12 stocks in which available liquidity
within 500 basis points of the national best bid or offer may have
been able to absorb sell pressure.
\21\ Id. at 70-71.
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The Commission, therefore, is instituting proceedings pursuant to
Section 19(b)(2)(B) of the Act to determine whether the proposed rule
change should be disapproved. Institution of disapproval proceedings
appears appropriate at this time in view of the legal and policy issues
raised by the proposal. Institution of disapproval proceedings,
however, does not indicate that the Commission has formulated any
conclusions with respect to any of the issues involved. Rather, as
described in greater detail below, the Commission seeks and encourages
interested persons to comment on the proposed rule change.
The section of the Act applicable to the proposed rule change that
provides the grounds for disapproval under consideration is Section
6(b)(5),\22\ which requires that the rules of an exchange be designed,
among other things, 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. Specifically, the Commission believes the proposal
raises issues as to whether the Volatility Guard, by halting trading on
Nasdaq when the price of a security moves quickly over a short period
of time, will exacerbate the volatility of trading in that security on
the other exchanges and over-the-counter trading centers that remain
open. In addition, because the thresholds for triggering the Volatility
Guard, and the length of the trading halt that results, differ from
those of the recently approved, market-wide single-stock circuit
breakers, the Commission believes the proposal raises issues as to
whether the operation of the Volatility Guard will interfere with, or
otherwise limit the effectiveness of, the circuit breakers, the goal of
which is to prevent potentially destabilizing price volatility across
the U.S. securities markets.\23\
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\22\ 15 U.S.C. 78f(b)(5).
\23\ In 2008, the Commission approved a similar Nasdaq proposal
to establish a volatility-based trading pause for a one-year pilot
period. See Securities Exchange Act Release No. 58386 (August 19,
2008), 73 FR 50380 (August 26, 2008) (SR-NASDAQ-2007-067). Nasdaq
never implemented that pilot. The initial proposal was, however,
considered and approved by the Commission before the events of May
6, 2010, at which time questions were raised about the market-wide
impact of individual exchange volatility moderators in times of
market stress. In addition, as noted above, there are questions
about the way in which the newly-implemented single-stock circuit
breakers, as they may be expanded or adjusted, will interact with
exchange-specific volatility moderators.
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V. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data and arguments with respect to the
concerns identified above, as well as any others they may have with the
proposal. In particular, the Commission invites the written views of
interested persons concerning whether the proposed rule change is
inconsistent with the Section 6(b)(5) or any other provision of the
Act, or the rules and regulations thereunder. Although there do not
appear to be any issues relevant to approval or disapproval which would
be facilitated by an oral presentation of views, data, and arguments,
the Commission will consider, pursuant to Rule 19b-4, any request for
an opportunity to make an oral presentation.\24\
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\24\ Section 19(b)(2) of the Act, as amended by the Securities
Acts Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by a self-regulatory
organization. See Securities Acts Amendments of 1975, Senate Comm.
on Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
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Interested persons are invited to submit written data, views and
arguments regarding whether the proposed rule change should be
disapproved by December 3, 2010. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
December 20, 2010.
The Commission specifically reiterates its request for comment on
the following items:
A stated purpose of the proposal is to protect Nasdaq-
listed securities and market participants from ``aberrant'' volatility,
such as that which occurred on May 6, 2010 and may be caused by
operational or structural factors beyond the control of issuers and
individual markets. To what extent do the price changes that would
trigger a trading halt under the proposal indicate the potential
existence of ``aberrant'' volatility, as opposed to the normal
operation of the markets? If these price changes indicate potentially
``aberrant'' volatility, to what extent will the proposal address such
volatility in a manner appropriate and consistent with the purposes of
the Act?
Will a trading halt at Nasdaq under the proposal restrict
liquidity or increase volatility in the affected stock, since other
markets can continue to trade the stock and may not have comparable
volatility halts?
In what respects are the consequences of this proposal
likely to be similar to, or different from, the effects of other
exchange-specific mechanisms that currently restrict trading on the
relevant exchange under certain circumstances?
More generally, to what extent is it appropriate for the
various exchanges to adopt different and potentially inconsistent
approaches to trading pauses or restrictions that might affect the same
stock?
To what extent does the answer change based on whether the
affected stock is already subject to a market-wide single-stock circuit
breaker that applies consistently across all trading venues?
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-2010-074 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-NASDAQ-2010-074. 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
[[Page 64387]]
also will be available for inspection and copying at the principal
office of Nasdaq. All comments received will be posted without change;
the Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make
publicly available. All submissions should refer to File Number SR-
NASDAQ-2010-074 and should be submitted on or before December 3, 2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
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\25\ 17 CFR 200.30-3(a)(57).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-26215 Filed 10-18-10; 8:45 am]
BILLING CODE 8011-01-P