[Federal Register Volume 76, Number 52 (Thursday, March 17, 2011)]
[Notices]
[Pages 14699-14702]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-6171]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-64071; File No. SR-NASDAQ-2010-074]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing of Amendment No. 3 to a Proposed Rule Change and Order
Granting Accelerated Approval to the Proposed Rule Change, as Modified
by Amendment Nos. 1 and 3, To Adopt Rule 4753(c) as a Six-Month Pilot
in 100 NASDAQ-Listed Securities
March 11, 2011.
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 (the ``Act''),\1\ and Rule 19b-4
[[Page 14700]]
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 modified by Amendment No. 1, was published for comment in the
Federal Register on July 15, 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\ On October 13, 2010, the
Commission instituted proceedings to determine whether to disapprove
the proposed rule change.\7\ The Commission thereafter received a fifth
comment letter on the proposed rule change.\8\ On January 10, 2011, the
Commission extended the time period within which to either approve or
disapprove the proposed rule change to March 11, 2011.\9\ On March 10,
2011, the Exchange filed Amendment Nos. 2 and 3 to the proposed rule
change.\10\ The Commission is publishing this notice and order to
solicit comments on Amendment No. 3 and to approve the proposed rule
change, as modified by Amendment Nos. 1 and 3, on an accelerated basis.
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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).
\7\ See Securities Exchange Act Release No. 63098 (October 13,
2010), 75 FR 64384 (October 19, 2010).
\8\ See Letter from Timothy Quast, Managing Director, Modern IR
LLC, to Elizabeth M. Murphy, Secretary, Commission, dated November
11, 2010 (``Modern IR Letter'').
\9\ See Securities Exchange Act Release No. 63685, 76 FR 2732
(January 14, 2011).
\10\ See Amendment No. 3 dated March 10, 2011 (``Amendment No.
3''). Amendment No. 3 replaces and supersedes Amendment No. 2.
Amendment No. 3 extended the proposed start date of the pilot
program from August 1, 2010 to a pilot period ending six months
after the date of Commission approval of SR-NASDAQ-2010-074. The
Exchange proposed to implement the rule change on a date to be
announced to the public through a widely disseminated alert.
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II. Description of the Proposal
Nasdaq proposed 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.\11\ According to Nasdaq, the proposed Volatility Guard is
similar in purpose to the Liquidity Replenishment Points (``LRPs'')
rules that currently exist on the New York Stock Exchange
(``NYSE'').\12\
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\11\ The Nasdaq Halt Cross is ``the process for determining the
price at which Eligible Interest shall be executed at the open of
trading for a halted security and for executing that Eligible
Interest.'' See Nasdaq Rule 4753(a)(3).
\12\ See NYSE Rule 1000(a)(iv).
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III. Comment Letters
The Commission received four comment letters opposing the proposed
rule change \13\ and one comment letter in favor of the proposed rule
change.\14\ Nasdaq responded to the comments regarding its
proposal.\15\
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\13\ See BATS Letter; Deutsche Bank Letter; SIFMA Letter; Modern
IR Letter.
\14\ See NYSE Letter.
\15\ See Nasdaq response, supra note 5.
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Three of the four commenters opposing the proposal expressed
concerns about its effect 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.\16\ One commenter specifically 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.\17\ Another commenter
argued that the Volatility Guard would inappropriately impede the
market's price-setting mechanism, to the detriment of issuers and
investors.\18\
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\16\ See BATS Letter at 2; Deutsche Bank Letter at 4; SIFMA
Letter at 3.
\17\ See Deutsche Bank Letter at 4.
\18\ See Modern IR Letter at 1-2.
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One commenter, however, supported Nasdaq's ``right to design the
controls it believes are best for trading on its market.'' \19\ This
commenter stated that the national market system was designed to
encourage competitive distinctions such as Nasdaq's Volatility Guard
and NYSE's LRPs.\20\ 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.\21\
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\19\ 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 single-stock circuit breaker pilot program.
\20\ Id.
\21\ Id. at 3-4.
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In its response, Nasdaq rejected the argument that the proposed
Volatility Guard would exacerbate market volatility.\22\ Nasdaq stated
that it specifically designed the proposed Volatility Guard to work
within the parameters of the single-stock circuit breaker pilot program
currently in effect across all markets, and to avoid the potential for
conflicting standards between the two mechanisms.\23\ Nasdaq also
asserted that there is no evidence that the proposed 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.\24\
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\22\ See Nasdaq response, supra note 5, at 2.
\23\ Id.
\24\ 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.\25\ Accordingly, Nasdaq did not believe it
appropriate to make a generic assertion that all market-based single-
stock
[[Page 14701]]
trading pauses are detrimental to the overall market.\26\
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\25\ Id. at 3.
\26\ Id.
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Finally, Nasdaq stated that it was proposing to employ 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.\27\
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\27\ Id.
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IV. Discussion and Commission Findings
After carefully considering the proposal and the comments
submitted, the Commission finds that the proposed rule change, as
modified by Amendment Nos. 1 and 3, is consistent with the requirements
of the Act and the rules and regulations thereunder.\28\ Specifically,
the Commission finds that the proposed rule change is consistent with
Section 6(b)(5) of the Act,\29\ 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.
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\28\ In approving this amendment, the Commission has considered
the proposed amendment's impact of efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
\29\ 15 U.S.C. 78f(b)(5).
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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. According
to Nasdaq, the Volatility Guard is similar in purpose to the LRP rules
that currently exist on the NYSE. A few 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.\30\ However, the commenters opposing the proposal did not
provide data or other evidence to support their contention. In
addition, the Commission notes that the presence of another exchange-
specific volatility moderator, the NYSE LRPs, was not found by the
Report of the Staffs of the Commodity Futures Trading Commission and
the Commission (the ``May 6 Staff Report'') \31\ to have caused or
created the broad-based liquidity crisis on that day.\32\
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\30\ See notes 16-17 supra and accompanying text.
\31\ 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.
\32\ Id. at 70. The May 6 Staff Report did note, however, that
the increasing number of LRPs being triggered on NYSE underscored
the severity of market conditions as they were unfolding, and that
this additional ``evidence'' played into market participants'
decisions to reduce liquidity, pause trading, or withdraw from the
markets. Id. at 70-71.
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Since the events of May 6, 2010, the Commission has been working
with the exchanges and FINRA on a consistent mechanism, applicable
throughout the U.S. markets, to moderate excessive volatility in
individual securities. On June 10, 2010, the Commission approved, on a
pilot basis, circuit breaker rules that pause trading for five minutes
in a security in the S&P 500 Index if its price moves ten percent or
more over a five-minute period.\33\ On September 10, 2010, the circuit
breaker pilot was expanded to include securities in the Russell 1000
Index and certain exchange-traded products.\34\ The Commission
continues to work with the exchanges and FINRA to assess the operation
of the circuit breaker pilot and its possible expansion, as well as the
prospect of supplementing the circuit breakers with ``limit up/limit
down'' style trading parameters.
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\33\ See Securities Exchange Act Release Nos. 62251, 75 FR 34183
(June 16, 2010); 62252, 75 FR 34186 (June 16, 2010).
\34\ See Securities Exchange Act Release Nos. 62883, 75 FR 56608
(September 16, 2010); 62884, 75 FR 56618 (September 16, 2010). The
circuit breaker pilot currently is scheduled to end on April 11,
2011. See e.g., Securities Exchange Act Release Nos. 63497 (December
9, 2010), 75 FR 56618 (December 15, 2010); 63503 (December 9, 2010),
75 FR 78316 (December 15, 2010).
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In light of the fact that the circuit breaker mechanism in effect
today applies only to certain securities, and that its operation
currently is being evaluated under the pilot, and in recognition of the
current existence of NYSE's LRPs, the Commission believes there is
continued room for experimentation with certain exchange-specific
volatility moderators. Accordingly, the Commission today finds that
Nasdaq's proposal to implement the Volatility Guard for a six-month
pilot program in 100 Nasdaq-listed securities is consistent with the
Act.
The Commission emphasizes, however, that it is continuing to work
diligently with the exchanges and FINRA to develop an appropriate
consistent cross-market mechanism to moderate excessive volatility that
could be applied widely to individual exchange-listed securities and to
address commenters' concerns regarding the complexity and potential
confusion of exchange-specific volatility moderators. To the extent the
Commission approves such a mechanism, whether it be an expanded circuit
breaker with a limit up/limit down feature or otherwise, the Commission
may no longer be able to find that exchange-specific volatility
moderators--including both Nasdaq's Volatility Guard and the NYSE's
LRPs--are consistent with the Act.
V. Accelerated Approval
The Commission finds good cause, pursuant to Section 19(b)(2) of
the Act,\35\ for approving the proposed rule change, as modified by
Amendment Nos. 1 and 3 thereto, prior to the 30th day after the date of
publication of Amendment No. 3 in the Federal Register. In Amendment
No. 3, the Exchange proposed to change the start date of the pilot
period from August 1, 2010 to a pilot period ending six months after
the date of Commission approval of SR-NASDAQ-2010-074, because as
originally proposed, the pilot period would have expired on February 1,
2011, which is prior to the Commission's approval date. By granting
accelerated approval, the pilot program may be implemented without
delay. Accordingly, the Commission finds that good cause exists to
approve the proposal, as modified by Amendment Nos. 1 and 3, on an
accelerated basis.
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\35\ 15 U.S.C. 78s(b)(2).
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VI. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether Amendment No. 3
to the proposed rule change is consistent with the Act. 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, 100 F Street, NE.,
Washington, DC 20549-1090.
[[Page 14702]]
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 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 the
filing will also 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 available publicly. All submissions should refer to
File No. SR-NASDAQ-2010-074 and should be submitted on or before April
7, 2011.
VII. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\36\ that the proposed rule change (SR-NASDAQ-2010-074), as
modified by Amendment Nos. 1 and 3, be, and hereby is, approved on an
accelerated basis.
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\36\ 15 U.S.C. 78s(b)(2).
\37\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\37\
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-6171 Filed 3-16-11; 8:45 am]
BILLING CODE 8011-01-P