
[Federal Register: June 16, 2010 (Volume 75, Number 115)]
[Notices]               
[Page 34183-34186]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16jn10-108]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62251; File No. SR-FINRA-2010-025]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Granting Accelerated Approval to Proposed Rule 
Change To Amend FINRA Rule 6121 (Trading Halts Due to Extraordinary 
Market Volatility) To Permit FINRA To Halt Trading by FINRA Members 
Otherwise Than on an Exchange Where a Primary Listing Market Has Issued 
a Trading Pause Due to Extraordinary Market Conditions

June 10, 2010.

I. Introduction

    On May 18, 2010, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) \1\ of the Securities 
Exchange Act of 1934 (``Act''),\2\ and Rule 19b-4 thereunder,\3\ a 
proposed rule change to amend FINRA Rule 6121 (Trading Halts Due to 
Extraordinary Market Volatility) to permit FINRA to halt trading by 
FINRA members otherwise than on an exchange where a primary listing 
market has issued a trading pause due to extraordinary market 
conditions.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
    \4\ Also on May 18, 2010, each of BATS Exchange, Inc. 
(``BATS''), EDGX Exchange, Inc. (``EDGX''), NASDAQ OMX BX, Inc. 
(``BX''), International Securities Exchange LLC (``ISE''), New York 
Stock Exchange LLC (``NYSE''), NYSE Amex LLC (``NYSEAmex''), NYSE 
Arca, Inc. (``NYSEArca''), The NASDAQ Stock Market LLC (``NASDAQ''), 
National Stock Exchange, Inc. (``NSX'') and Chicago Board Options 
Exchange, Incorporated (``CBOE'') filed proposed rule changes. On 
May 19, 2010, EDGA Exchange, Inc (``EDGA'') and Chicago Stock 
Exchange, Inc. (``CHX'') filed proposed rule changes to provide for 
similar trading pauses. See Securities Exchange Act Release Nos. 
62121 (May 19, 2010), 75 FR 28834 (May 24, 2010); 62123 (May 19, 
2010), 75 FR 28844 (May 24, 2010); 62124 (May 19, 2010), 75 FR 28828 
(May 24, 2010); 62125 (May 19, 2010), 75 FR 28836 (May 24, 2010); 
62126 (May 19, 2010), 75 FR 28831 (May 24, 2010); 62127 (May 19, 
2010), 75 FR 28837 (May 24, 2010); 62128 (May 19, 2010), 75 FR 28830 
(May 24, 2010); 62129 (May 19, 2010), 75 FR 28839 (May 24, 2010); 
62131 (May 19, 2010), 75 FR 28845 (May 24, 2010); 62132 (May 19, 
2010), 75 FR 28847 (May 24, 2010); 62122 (May 19, 2010), 75 FR 28833 
(May 24, 2010); and 62130 (May 19, 2010), 75 FR 28842 (May 24, 
2010). These filings are being approved today by the Commission. See 
Securities Exchange Act Release No. 62252 (June 10, 2010). In this 
order, the term ``Exchanges'' refers collectively to all of the 
exchanges. The term ``Listing Markets'' refers collectively to NYSE, 
NYSEAmex and NASDAQ. The term ``Nonlisting Markets'' refers 
collectively to the remaining nine national securities exchanges. 
The term ``SROs'' refers to the Exchanges and the Financial Industry 
Regulatory Authority (``FINRA'').

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[[Page 34184]]

    The proposed rule change was published for comment in the Federal 
Register on May 24, 2010.\5\ The Commission received 26 comments on the 
proposals and on the broader concept of circuit breakers on individual 
securities.\6\ This order grants accelerated approval to the proposed 
rule change.
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    \5\ See Securities Exchange Act Release No. 62133 (May 19, 
2010), 75 FR 28841 (May 24, 2010).
    \6\ The Commission considered letters received prior to May 18 
discussing the concept of individual stock circuit breakers as well 
as formal letters citing the rule filings. See Letter from Senator 
Charles E. Schumer to Chairman Schapiro, Commission, et. al., dated 
May 10, 2010; Letter from Congressman Edward J. Markey to Chairman 
Schapiro, Commission, dated May 11, 2010; Letter from Cliff Pereira 
to Elizabeth M. Murphy, Secretary, Commission, dated May 13, 2010; 
Letter from Thomas Hofler to Elizabeth M. Murphy, Secretary, 
Commission, dated May 13, 2010 (``Hofler Letter''); Letter from 
James K. Rutledge to Rule-Comments, Commission, dated May 13, 2010; 
Letter from John Meredith to Elizabeth M. Murphy, Secretary, dated 
May 19, 2010; Letter from Peter Skopp, Molinete Trading Inc. to 
Elizabeth M. Murphy, Secretary, Commission, dated May 20, 2010 
(``Molinete Letter''); letter from Paul Rogers to Rule-Comments, 
Commission, dated May 20, 2010; Letter from Congressman Eric Cantor 
to Chairman Schapiro, Commission, dated May 21, 2010; Letter from 
T.P. Tursick to Elizabeth M. Murphy, Secretary, Commission, dated 
May 25, 2010; Letter from James J. Angel to the Commission, dated 
May 25, 2010 (``Angel Letter''); Letter from Larry Harris, USC 
Marshall School of Business, to Elizabeth M. Murphy, Secretary, 
Commission, dated May 26, 2010 (``Harris Letter''); Letter from 
Judith Kittinger to WebMaster, Commission, dated May 27, 2010; 
Letter from Congresswoman Melissa L. Bean to Chairman Schapiro, 
Commission, dated May 28, 2010 (``Bean Letter''); Letter from 
Patrick J. Healy, Issuer Advisory Group, LLC, to Elizabeth M. 
Murphy, Secretary, Commission, dated May 31, 2010 (``IAG Letter''); 
Letter from Hal McIntyre, The Summit Group, to Elizabeth M. Murphy, 
Commission, undated ``Summit Group Letter''); Letter from Ira 
Shapiro, BlackRock Inc. to Elizabeth M. Murphy, Secretary, 
Commission, dated June 2, 2010 (``BlackRock Letter''); Letter from 
Christopher Nagy, TD Ameritrade to Elizabeth M. Murphy, Secretary, 
Commission, dated June 3, 2010 (``TD Ameritrade Letter''); Letter 
from Alexander M. Cutler, Business Roundtable to Elizabeth M. 
Murphy, Secretary, Commission, dated June 3, 2010 (``Business 
Roundtable Letter''); Letter from George U. Sauter, The Vanguard 
Group, Inc. to Elizabeth M. Murphy, Secretary, Commission, dated 
June 3, 2010 (``Vanguard Letter''); Letter from Julie Sweet, 
Accenture plc to Elizabeth M. Murphy, Secretary, Commission, dated 
June 3, 2010 (``Accenture Letter''); Letter from Tom Quaadman, 
Center for Capital Markets Competitiveness to Elizabeth M. Murphy, 
Secretary, Commission, dated June 3, 2010 (CCMC Letter''); Letter 
from Jeffrey W. Rubin, American Bar Association Business Law Section 
to Elizabeth M. Murphy, Secretary, Commission, dated June 3, 2010 
(``ABA Letter''); Letter from Karrie McMillan, Investment Company 
Institute to Elizabeth M. Murphy, Secretary, Commission, dated June 
3, 2010 (``ICI Letter''); Letter from Daniel Mathisson, Credit 
Suisse Securities (USA) LLC to Elizabeth M. Murphy, Secretary, 
Commission, dated June 3, 2010 (``Credit Suisse Letter''); Letter 
from Leonard J. Amoruso, Knight Capital Group, Inc. to Elizabeth M. 
Murphy, Secretary, Commission, dated June 4, 2010 (``Knight 
Letter'').
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II. Description of the Proposals

    On May 6, 2010, the U.S. equity markets experienced a severe 
disruption.\7\ 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 
were broken by the SROs. The Commission is concerned that events such 
as those that occurred on May 6 can seriously undermine the integrity 
of the U.S. securities markets. Accordingly, it is working on a variety 
of fronts to assess the causes and contributing factors of the May 6 
market disruption and to fashion policy responses that will help 
prevent a recurrence.
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    \7\ 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 CFTC and SEC to the Joint 
Advisory Committee on Emerging Regulatory Issues, ``Preliminary 
Findings Regarding the Market Events of May 6, 2010,'' dated May 18, 
2010.
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    The Commission also recognizes the importance of moving quickly to 
implement appropriate steps that could help limit potential harm from 
extreme price volatility. In this regard, it is pleased that FINRA 
began consulting with the Exchanges soon after May 6 in an effort to 
develop consistent circuit breaker rules that could be implemented on 
an expedited basis. FINRA and the Exchanges were able to reach 
agreement on a consensus approach, and, on May 18 and 19, 2010, all of 
the SROs filed proposed rule changes with the Commission.
    These rules would require the Listing Markets to issue five-minute 
trading pauses for individual securities for which they are the primary 
Listing Market if the transaction price of the security moves ten 
percent or more from a price in the preceding five-minute period. The 
Listing Markets would notify the other Exchanges and market 
participants of the imposition of a trading pause by immediately 
disseminating a special indicator over the consolidated tape.\8\ Under 
the rules, once a Listing Market issues a trading pause, the other 
Exchanges would be required to pause trading in that security on their 
markets. FINRA's rule provides that it will similarly pause trading in 
the over-the-counter market by FINRA members, including alternative 
trading systems and market makers, when a Listing Market has issued a 
trading pause. In order to avoid interfering with existing procedures 
designed to facilitate orderly openings and closings, the trading pause 
requirements would apply only from 9:45 a.m. until 3:35 p.m.
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    \8\ When a trading pause is issued, the Listing Market will 
immediately notify the single plan processor responsible for 
consolidation of information for the security pursuant to Rule 603 
of Regulation NMS under the Exchange Act. The single plan processor 
for all listed securities other than Nasdaq-listed securities is the 
Securities Industry Automation Corporation (``SIAC''). The single 
plan processor for Nasdaq-listed securities is Nasdaq.
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    At the end of the five-minute pause, the primary Listing Market 
would reopen trading in the security in accordance with its procedures 
for doing so. Trading would resume on the other Exchanges and in the 
over-the-counter market once trading has resumed on the primary Listing 
Market. In the event of a significant imbalance on the primary Listing 
Market at the end of a trading pause, the primary Listing Market may 
delay reopening. If the primary Listing Market has not reopened within 
ten minutes from the initiation of the trading pause, however, the 
other Exchanges may resume trading.\9\ In addition, FINRA's proposed 
rule permits over-the-counter market participants to resume trading 
only if trading has resumed on at least one Exchange.
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    \9\ Some of the Nonlisting Markets, such as ISE, may not begin 
trading under their proposed rules until the Listing Market begins.
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    FINRA has proposed that this rule change be implemented as a pilot 
that would end on December 10, 2010. The pilot period would enable the 
SROs and the Commission to assess the effect of the new rules on the 
marketplace. To initiate this pilot promptly, the proposed rules would 
be in effect only with respect to securities included in the S&P 500 
Index. The Commission understands that FINRA expects to file an 
additional rule proposal in the near future to expand the scope of the 
pilot (for example, to include ETFs) within the pilot period.\10\
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    \10\ Any such rule proposals would be published for public 
comment in accordance with Section 19(b) of the Act.
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    FINRA has requested that the Commission approve the proposed rule 
change on an accelerated basis, so that it may become operative as soon 
as practicable.

III. Discussion of Comments and Commission Findings

    As of June 7, the Commission received 26 comment letters regarding 
the proposed rule changes, a substantial number of which were generally 
supportive. For example, an

[[Page 34185]]

institutional investor stated that ``on very rare occasions like May 6 
a pause in trading is necessary to give market participants a chance to 
`reset' and react appropriately to periods of dislocation. A reasonable 
trading halt will provide investors time to rationally assess the 
market events and commit liquidity at appropriate price levels.'' \11\ 
Another institutional investor strongly supported single stock circuit 
breakers, noting that ``trading pauses may reduce market volatility 
resulting from temporary supply-demand imbalances without unduly 
interrupting price discovery.'' \12\
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    \11\ See Vanguard Letter, supra note 6.
    \12\ See, e.g., BlackRock Letter, supra note 6.
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    The commenters also raised a variety of significant issues 
regarding the scope and operation of the circuit breakers. These 
include: (1) Whether the circuit breakers should be expanded beyond S&P 
500 stocks, particularly to exchange traded funds (``ETFs'') and the 
securities of other companies that were most severely affected on May 
6; \13\ (2) the need for revised market-wide circuit breakers; \14\ and 
(3) operational issues regarding the circuit breakers, including the 
times when they should apply,\15\ the threshold events that should 
trigger them and the length of the pause,\16\ the procedures for 
resuming trading after a pause,\17\ and alternatives to the circuit 
breaker mechanism.\18\
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    \13\ See, e.g., ABA Letter, Accenture Letter, Angel Letter, Bean 
Letter, CCMP Letter, Credit Suisse Letter, IAG Letter, ICI Letter 
(expressing particular concern that if circuit breakers exist for 
individual securities contained in ETFs' baskets, but not for the 
ETFs themselves, ETFs could again suffer disproportionately during a 
market event such as that of May 6), Summit Group Letter, TD 
Ameritrade Letter, and Vanguard Letter, supra note 6. One commenter 
also raised concerns about the potential consequences of circuit 
breakers being triggered simultaneously in many securities. See 
Angel Letter.
    \14\ See, e.g., Angel Letter, supra note 6.
    \15\ Suggestions included applying the circuit breakers for the 
entire trading day (i.e., including during the opening and closing 
periods). See, e.g., Angel Letter (noting the considerable trading 
activity and volatility that occurs during the first and last 
minutes of the trading day), Credit Suisse Letter (noting that in 
S&P 500 stocks 6% of the daily volume typically occurs from 9:30 
a.m. to 9:45 a.m., and 18% occurs from 3:35 p.m. to 4 p.m., and that 
intra-day volatility tends to be highest during these time periods), 
IAG Letter, and TD Ameritrade Letter (arguing that the many retail 
investor orders executed at market open should not be deprived of 
the protections of the circuit breaker rules), supra note 6.
    \16\ Suggestions included using a trigger threshold other than 
10% or a pause period other than five minutes. See, e.g., Angel 
Letter (suggesting securities outside the S&P 500 may need a trigger 
threshold greater than 10%, and that the pause period may need to be 
longer than five or ten minutes), BlackRock Letter (arguing that the 
10% circuit breaker level is too narrow, with their data showing it 
would have halted trading on only 58 of S&P 500 stocks on May 6, 
2010, as opposed to 309 S&P 500 stocks on that day with a 5% circuit 
breaker), Credit Suisse Letter (suggesting a ten-minute halt 
period), Hofler Letter (suggesting that trigger thresholds vary 
commensurate with the stock's volatility, perhaps 5% for low beta 
stocks, 10% for medium beta stocks, and 30% for high beta stocks), 
Knight Letter (recommending a minimum trigger threshold of 15%, and 
the use of more sophisticated variables such as dollar price, 
average daily volume, and market capitalization), and Summit Group 
Letter (suggesting a longer pause period may be required to allow 
small investors to respond), supra note 6. Other commenters 
suggested using a trigger based on the national best bid or offer 
rather than a trade price. See, e.g., Molinete Letter, supra note 6.
    \17\ Suggestions included precluding resumption of trading until 
the primary listing market has resolved any imbalances. See, e.g., 
BlackRock Letter, Credit Suisse Letter, Knight Letter and TD 
Ameritrade Letter, supra note 6. But see Harris Letter, supra note 6 
(arguing that trade halt rules are anti-competitive because they 
encourage traders to submit their orders to the dominant exchanges 
so that they can participate in the call auctions that restart 
trading).
    \18\ Suggestions included using a futures-style ``limit down'' 
mechanism rather than a full trading pause. See, e.g., Accenture 
Letter, Credit Suisse Letter, and Harris Letter (arguing that 
trading at prices that reverse the triggering price change should be 
permitted), supra note 6.
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    The Commission believes that most if not all of these suggestions 
regarding potential ways to improve or perfect the scope and operation 
of the circuit breaker, or variations on them, were generally 
considered by FINRA and the Exchanges in developing consistent 
proposals that could be implemented in a reasonably short period of 
time and yet provide important benefits to the markets. The Commission 
recognizes that all of these issues warrant continued close 
consideration in the coming days and months, and it expects that FINRA 
will continue to consult with the Exchanges, the Commission and market 
participants on both the scope and operation of the circuit breakers.
    With respect to the specific proposals under consideration here, 
however, the Commission has evaluated them based on whether they are 
consistent with the Act and whether they represent a useful first step 
that should improve the existing procedures for protecting investors 
and maintaining fair and orderly markets. It finds that the proposal 
meets these standards and therefore is approving it on an expedited 
basis.
    The Commission agrees that consideration should be given by FINRA 
to whether the circuit breakers should be expanded to additional 
securities, but does not believe that there is a reason to delay the 
implementation of circuit breakers for S&P 500 stocks as a reasonable 
first step.\19\ Similarly, it agrees that the existing market-wide 
circuit breakers should be re-examined in light of current market 
conditions, but again does not believe that the initial stage of the 
circuit breaker pilot for individual stocks should be delayed pending 
that re-examination. With respect to operational issues regarding the 
circuit breakers, the Commission anticipates that FINRA will continue 
to evaluate these issues during the pilot period, and will propose any 
modifications to the circuit breakers that may be necessary or 
appropriate before that period has ended, but does not believe that the 
first stage of the circuit breaker pilot should be delayed pending such 
consideration.\20\
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    \19\ In particular, the Commission acknowledges the concerns 
raised by the ICI, BlackRock, and others regarding the potential 
adverse consequences for ETFs if the circuit breakers cover 
individual securities that are held by an ETF but not the ETF 
itself. Those comment letters do not explicitly recommend delaying 
the launch of the pilot program with respect to the S&P 500, but 
they do urge that ETFs be added to the pilot as soon as possible. As 
noted below, the Commission anticipates that FINRA will be proposing 
amendments to the pilot to include ETFs.
    \20\ Commenters also raised a number of issues not directly 
related to the scope or operation of the trading pauses. One, for 
example, was the operation of the SROs' erroneous trade rules. See 
TD Ameritrade Letter, supra note 6. The Commission expects that 
FINRA and the Exchanges will continue to consult on these rules and 
anticipates they will submit proposals to clarify their operation in 
the near future.
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    A few commenters expressed concern that the proposed circuit 
breakers could cause more harm than good. One, for example, suggested 
that the timeframe for implementation of the proposed rule change could 
be overly aggressive and lead to systems problems.\21\ The Commission 
understands that FINRA has been working closely with market 
participants to address implementation issues and facilitate a prompt 
yet workable roll-out of the circuit breaker pilot. No other comments 
were received indicating that exchanges, other trading venues or 
broker-dealers would not be able to fully implement the proposed 
circuit breakers within the timeframes established in the FINRA filing.
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    \21\ See Molinete Letter, supra note 6.
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    Other commenters questioned whether trading halts may exacerbate 
price volatility, and one stated that a trading halt on May 6 might 
have increased the order imbalance, preventing an intraday 
recovery.\22\

[[Page 34186]]

Many other commenters, however, believed that the events of May 6 
demonstrate the need for trading pauses in individual stocks as a means 
to reduce excessive market volatility.\23\ The Commission agrees that 
the proposed trading pauses are prudent measures that are appropriately 
being introduced on a pilot basis to address extraordinarily severe and 
harmful price volatility of the kind that occurred on May 6.
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    \22\ See Harris Letter, supra note 6 (arguing that trading halts 
will attenuate volatility if liquidity or rationality arrives before 
markets return to normal operation, and positing that on May 6 many 
traders would have thought the price drop was due to fundamental 
valuation issues, in which case the order imbalance could have grown 
larger during the halt as traders drew incorrect inferences from the 
event). See also Molinete Letter, supra note 6 (suggesting the 
proposed rules may exacerbate market volatility rather than reduce 
it due to the interplay of stock circuit breaker rules, erroneous 
trade rules, and market participants' reactions to securities 
nearing the threshold). Another commenter urged the Commission to 
proceed cautiously in this area, expressing the view that 
``unencumbered market forces are preferable to the implementation of 
artificial trade frictions wherever possible.'' See Knight Letter, 
supra note 6. The Commission will continue to consider these 
comments in evaluating the impact of the pilot.
    \23\ See, e.g., Accenture Letter, BlackRock Letter, Business 
Roundtable Letter, CCMP Letter, Credit Suisse Letter, ICI Letter, TD 
Ameritrade Letter, Vanguard Letter, supra note 6.
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    In sum, the Commission finds that the proposed rule change is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to FINRA. In particular, the 
Commission finds that the proposal is consistent with Section 15A(b)(6) 
of the Act,\24\ which among other things requires that the rules of 
FINRA 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.\25\
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    \24\ 15 U.S.C. 78f(b)(5), 15 U.S.C. 78o-3(b)(6).
    \25\ In approving the proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
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    The Commission believes the proposed rule change, among other 
things, will establish consistent, market-wide trading pauses as a 
means to prevent potentially destabilizing price volatility and will 
thereby help promote the goals of investor protection and fair and 
orderly markets.
    The Commission also finds good cause for approving the proposal 
before the 30th day after the publication of notice thereof in the 
Federal Register. FINRA has worked quickly and cooperatively with the 
Exchanges to devise a response to the events of May 6, 2010. The 
Commission received a number of comments on the proposal, the great 
majority of which were supportive of the proposed trading pause. The 
proposed rule change is being implemented on a pilot basis so that the 
Commission and FINRA can monitor the effects of the pilot on the 
marketplace and consider adjustments, as necessary. The Commission 
believes that accelerating approval of this proposal is appropriate as 
it will enable FINRA nearly immediately to begin coordinating trading 
pauses with the Exchanges in the event of sudden changes in the value 
of the S&P 500 Index stocks. In particular, the Commission believes 
that this proposed rule change should further the goals of investor 
protection and fair and orderly markets.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\26\ that the proposed rule change (SR-FINRA-2010-025) be, and 
hereby is, approved on an accelerated basis.
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    \26\ 15 U.S.C. 78s(b)(2).

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-14434 Filed 6-15-10; 8:45 am]
BILLING CODE 8010-01-P

