[Federal Register Volume 75, Number 218 (Friday, November 12, 2010)]
[Notices]
[Pages 69484-69486]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-28443]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63255; File Nos. SR-BATS-2010-025; SR-BX-2010-66; SR-
CBOE-2010-087; SR-CHX-2010-22; SR-FINRA-2010-049; SR-NASDAQ-2010-115;
SR-NSX-2010-12; SR-NYSE-2010-69; SR-NYSEAmex-2010-96; SR-NYSEArca-2010-
83]
Self-Regulatory Organizations; BATS Exchange, Inc.; NASDAQ OMX
BX, Inc.; Chicago Board Options Exchange, Incorporated; The Chicago
Stock Exchange, Inc.; Financial Industry Regulatory Authority, Inc.;
The NASDAQ Stock Market LLC; National Stock Exchange, Inc.; New York
Stock Exchange LLC; NYSE Amex LLC; NYSE Arca, Inc.; Order Granting
Accelerated Approval to Proposed Rule Changes, as Modified by Amendment
No. 1, To Enhance the Quotation Standards for Market Makers
November 5, 2010.
I. Introduction
On September 17, 2010, each of BATS Exchange, Inc. (``BATS''),
NASDAQ OMX BX, Inc. (``BX''), Chicago Board Options Exchange,
Incorporated (``CBOE''), The Chicago Stock Exchange, Inc. (``CHX''),
The NASDAQ Stock Market LLC (``Nasdaq''), New York Stock Exchange LLC
(``NYSE''), National Stock Exchange, Inc. (``NSX''); NYSE Amex LLC
(``NYSE Amex''); NYSE Arca, Inc. (``NYSE Arca''), and the Financial
Industry Regulatory Authority, Inc. (``FINRA,'' and together with BATS,
BX, CBOE, CHX, Nasdaq, NYSE, NSX, NYSE Amex and NYSE Arca, the
``SROs'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) \1\ of the Securities
Exchange Act of 1934 (``Act''), and Rule 19b-4 thereunder,\2\ proposed
rule changes to amend certain of their respective rules to enhance
minimum quoting standards for market makers registered with the
exchange or, in the case of FINRA, market makers that quote on the
Alternative Display Facility (``ADF''). The purpose of these rule
changes is to require equity market makers to post continuous two-sided
quotations within a designated percentage of the inside market to
eliminate market maker ``stub quotes,'' that are so far away from the
prevailing market that they are not intended to be executed (such as an
order to buy at a penny or sell at $100,000).
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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The proposed rule changes were published for comment in the Federal
Register on September 24 and September 27, 2010.\3\ In addition, each
of the SROs filed an Amendment No. 1 to their respective proposed rule
changes.\4\ The Commission received no comments on the proposed rule
changes. This order approves the proposed rule changes on an
accelerated basis.
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\3\ See Securities Exchange Act Release Nos. 62945 (September
20, 2010), 75 FR 58460 (September 24, 2010) (SR-BATS-2010-025);
62954 (September 20, 2010), 75 FR 59305 (September 27, 2010) (SR-BX-
2010-66); 62951 (September 20, 2010), 75 FR 59309 (September 27,
2010) (SR-CBOE-2010-087); 62949 (September 20, 2010), 75 FR 59315
(September 27, 2010) (SR-CHX-2010-22); 62953 (September 20, 2010),
75 FR 59300 (September 27, 2010) (SR-FINRA-2010-049); 62950
(September 20, 2010), 75 FR 59311 (September 27, 2010) (SR-NASDAQ-
2010-115); 62952 (September 20, 2010), 75 FR 59316 (September 27,
2010) (SR-NSX-2010-12); 62948 (September 20, 2010), 75 FR 58455
(September 24, 2010) (SR-NYSE-2010-69); 62947 (September 20, 2010),
75 FR 58453 (September 24, 2010) (SR-NYSEAmex-2010-96); 62946
(September 20, 2010), 75 FR 58462 (September 24, 2010) (SR-NYSEArca-
2010-83).
\4\ The SROs filed their respective Amendments No. 1 on November
4, 2010. Each of the Amendments No. 1 modifies the proposals so that
a market maker is not expected to enter a quote based on the prior
day's last sale at the commencement of regular trading hours if
there is no National Best Bid (``NBB'') or National Best Offer
(``NBO''). As amended, in such a circumstance, the quoting
obligation would commence as soon as there has been a regular-way
transaction on the primary listing market in the security, as
reported by the responsible single plan processor. In addition, the
Amendment modifies the proposals so that a market maker's quoting
obligations shall be suspended during a trading halt, suspension or
pause, and shall not re-commence until after the first regular-way
transaction on the primary listing market following that halt,
suspension or pause, as reported by the responsible single plan
processor. Finally, so that the markets may coordinate
implementation upon approval of the proposed rule changes, in
Amendment No. 1 the SROs stated that the planned implementation date
for the proposed rule changes would be December 6, 2010.
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II. Description of the Proposals
On May 6, 2010, the U.S. equity markets experienced a severe
disruption.\5\ 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
subsequently broken.
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\5\ 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 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 (``May 6 Staff Report'').
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As noted in the May 6 Staff Report, executions against stub quotes
represented a significant proportion of broken trades on May 6. To
address this aspect of the events of May 6, in coordination with the
Commission, the SROs filed proposals to address stub quotes by
introducing minimum quoting standards for market makers.\6\ The
proposals require market makers to maintain continuous two-sided
quotations throughout the trading day \7\ that are within a certain
percentage band of the national best bid and offer (``NBBO''). These
requirements apply to all NMS stocks \8\ during normal market hours.
For stocks subject to the individual stock circuit breaker pilot
program (i.e., stocks that are included in
[[Page 69485]]
the S&P 500, stocks that are included in the Russell 1000, and certain
exchange-traded products),\9\ market makers must enter quotes that are
not more than 8% away from the NBBO. A quote that is entered at or
within 8% away from the NBBO is allowed to drift a certain additional
amount away from the NBBO before it must be adjusted by the market
maker. However, if the NBBO moves to a point such that the quote is
9.5% away from the NBBO, that quote must be adjusted so that it is no
further than 8% away from the NBBO. During times in which a single-
stock circuit breaker is not applicable (i.e., before 9:45 a.m. and
after 3:35 p.m.), market makers for such securities must maintain a
quote no further than 20% away from the NBBO. Similar to the
requirements when the single-stock circuit breakers are in effect, a
market maker's quote may drift an additional 1.5% away from the NBBO
without adjustment (i.e., until it is 21.5% away from the NBBO), at
which point it would need to be adjusted to a quote no further than 20%
away from the NBBO. In the absence of an NBBO, the same percentages
apply, but the market maker must use the consolidated last sale instead
of the NBBO.
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\6\ See supra note 3.
\7\ As noted, Amendment No. 1 modifies the proposals so that the
quoting obligation would commence as soon as there has been a
regular-way transaction on the primary listing market in the
security, as reported by the responsible single plan processor. The
Amendment also modifies that the market maker's quoting obligations
shall be suspended during a trading halt, suspension or pause, and
shall not re-commence until the first-regular way print on the
primary listing market following that halt, suspension or pause, as
reported by the responsible single plan processor. See supra note 4.
\8\ See 17 CFR 242.600 (defining NMS stock as ``any NMS security
other than an option'' and NMS security as ``any security or class
of securities for which transaction reports are collected,
processed, and made available pursuant to an effective transaction
reporting plan, or an effective national market system plan for
reporting transactions in listed options'').
\9\ See Securities Exchange Act Release Nos. 62283 (September
10, 2010), 75 FR 56608 (September 16, 2010); 62884 (September 10,
2010), 75 FR 56618 (September 16, 2010).
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For securities that are not subject to the single-stock circuit
breakers, market makers must maintain quotes that are no more than 30%
away from the NBBO. Like securities subject to the single-stock circuit
breakers, if the NBBO moves to a point such that the quote is 31.5%
away from the NBBO, the quote must be adjusted to a quote no further
than 30% away from the NBBO.
Nothing in the proposals precludes a market maker from voluntarily
quoting at price levels that are closer to the NBBO than required under
the proposals.
The planned implementation date for the proposed rule changes is
December 6, 2010.
As part of their rule proposals, certain SROs proposed additional
amendments to conform their rules to those of the other SROs with
respect to these market maker obligations. For example, FINRA proposed
to amend its rule to explicitly state that the duties of a market maker
include assisting in the maintenance of fair and orderly markets, while
NYSE and NYSE Amex proposed to amend their respective rules to
explicitly state that the duties of a market maker include maintaining
a continuous two-sided quote with a displayed size of at least one
round lot.
In addition, BATS, BX and Nasdaq proposed functionalities to
automatically update market makers' quotes on their exchanges. Under
the BATS proposal, such functionality would be optional. Upon the
request of a market maker, the BATS system would automatically enter
and adjust quotes in accordance with the proposed quotation
requirements. If a market maker cancelled the quotations entered by
BATS through this functionality, the market maker would remain
responsible for complying with the minimum quotation requirements
imposed by the new rule.
For both BX and Nasdaq, the exchange would automatically create a
quote to comply with the proposed quoting requirements for each issue
in which a market maker is registered. BX and Nasdaq would adjust one
of these automated quotations when it drifts to within 4% of the NBBO
(or, if greater, one-quarter of the applicable percentage necessary to
trigger an individual stock trading pause), or if the quote drifts to
within the applicable percentage necessary to trigger an individual
stock trading pause less 0.5%. If this occurs, BX or Nasdaq would
adjust and display a quotation for the market maker at the appropriate
percentage away from the NBBO. Other quotations directly entered by
market makers would be allowed to move freely towards the NBBO for
potential execution. If a quotation automatically entered by BX or
Nasdaq on behalf of a market maker is executed, BX or Nasdaq would
refresh the market maker's quote on the executed side of the market at
the applicable percentage away from the NBBO or, if there is no NBBO,
the last reported sale.
Finally, NYSE Arca proposed making conforming changes to its Q
Order type. Specifically, NYSE Arca proposed to eliminate the
``standard Q,'' an order that has a price of $0.01 for the bid and two
times the previous day's close for the offer, as an available order
type. NYSE Arca also proposed to add to its Rule 7.31(k) that, to the
extent that other types of Q Order functionality remain, nothing in the
rule relating to Q Orders would be construed to relieve market makers
of their obligations under the revised NYSE Arca Rule 7.23, which
includes the proposed market maker quoting obligations.\10\
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\10\ NYSE Arca has represented that it will separately file a
proposed rule change to delete the text of Rule 7.31(k)(1)(B)(1),
which states that a ``Q Order entered with reserve size * * * will
automatically repost with the original display size and $10 below
the original bid or $10 above the original offer, but never below
$0.01,'' and to remove the accompanying Q Order functionality. The
proposed date of implementation for this change will be December 6,
consistent with the implementation date for the new market maker
quoting requirements. See e-mail from Clare F. Saperstein, Vice
President, Regulatory Policy and Management, NYSE Regulation, Inc.,
to David Liu, Senior Special Counsel, and Andrew Madar, Special
Counsel, Commission, dated November 5, 2010.
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III. Commission Findings
The Commission finds that the proposed rule changes implementing
enhanced market maker quotation standards are consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to national securities exchanges and national securities
associations. In particular, with respect to the proposals submitted by
the national securities exchanges, the Commission finds that the
proposals are consistent with Section 6(b)(5) of the Act,\11\ 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.\12\ Similarly, the Commission finds that the FINRA
proposal is consistent with Section 15A(b)(6) of the Act,\13\ which
requires, among other things, that FINRA rules must be designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, and, in general, to protect
investors and the public interest. The Commission also believes that
the proposals are consistent with Section 11A(a)(1) of the Act \14\ in
that they seek to assure fair competition among brokers and dealers and
among exchange markets.
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\11\ 15 U.S.C. 78f(b)(5).
\12\ 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).
\13\ 15 U.S.C. 78o-3(b)(6).
\14\ 15 U.S.C. 78k-1(a)(1).
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By requiring market makers to maintain quotes that are priced
within a broad range around the NBBO, the proposed rules should help
assure that quotations submitted by market makers to an exchange or
FINRA's ADF, and displayed to market participants, bear some
relationship to the prevailing market price, and thus should promote
fair and orderly markets and the protection of investors. In addition,
by precluding market makers from submitting ``stub'' quotes that are so
far
[[Page 69486]]
away from the prevailing market price that they are not intended to be
executed, the proposed rules should reduce the risk that trades will
occur at irrational prices. As noted above, a large number of trades
were executed at irrational prices on May 6, 2010 and were ultimately
broken. In this respect, the proposals also should promote the goals of
investor protection and fair and orderly markets. Finally, because the
SROs are proposing uniform rules with respect to these market maker
quoting obligations, the proposed rule changes as a whole will assure
these baseline standards are applied throughout the equity markets.
The Commission also finds that the functionality proposed by BATS,
BX and Nasdaq is consistent with Section 6(b)(5) of the Act,\15\ 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. The proposed functionality should assist market makers
on BATS, BX and Nasdaq in maintaining continuous, two-sided limit
orders within the prescribed limits in the securities in which they are
registered to satisfy their new quoting obligations.
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\15\ 15 U.S.C. 78f(b)(5).
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The Commission also finds good cause, pursuant to Section 19(b)(2)
of the Act,\16\ for approving the proposed Amendments No. 1 on an
accelerated basis. These amendments reflect the concern that the
proposed market maker quoting obligations should not apply during times
when market makers should be permitted to absorb material information
affecting a security for which they are registered as a market maker,
whether before or during the trading day, i.e., until there has been a
regular-way transaction on a security's primary listing market or
during a trading halt. Approving these amendments on an accelerated
basis would allow these provisions to be effective as of the
implementation date of the new market maker requirements.
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\16\ 15 U.S.C. 78s(b)(2).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\17\ that the proposed rule changes (SR-BATS-2010-025; SR-BX-2010-
66; SR-CBOE-2010-087; SR-CHX-2010-22; SR-FINRA-2010-049; NASDAQ-2010-
115; SR-NSX-2010-12; SR-NYSE-2010-69; SR-NYSEAmex-2010-96; SR-NYSEArca-
2010-83), as modified by Amendment No. 1, be, and hereby are, approved
on an accelerated basis.
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\17\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-28443 Filed 11-10-10; 8:45 am]
BILLING CODE 8011-01-P