
[Federal Register: June 28, 2010 (Volume 75, Number 123)]
[Notices]               
[Page 36746-36749]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28jn10-138]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62331; File No. SR-NSX-2010-07]

 
Self-Regulatory Organizations; National Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change To Amend Rule 11.19, Entitled 
``Clearly Erroneous Executions''

June 21, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on June 17, 2010, National Stock Exchange, Inc. 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 comment 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

    National Stock Exchange, Inc. (``NSX'' or the ``Exchange'') is 
proposing to amend Rule 11.19, entitled ``Clearly Erroneous 
Executions.''
    The text of the proposed rule change is available on the 
Commission's Web Site at http://www.sec.gov, the Exchange's Web site at 
http://www.nsx.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 is proposing modifications to its Rule 11.19, entitled 
Clearly Erroneous Executions. First, the Exchange proposes replacing 
existing paragraph (c)(2) of Rule 11.19, entitled ``Unusual 
Circumstances and Joint Market Rulings'' with a new paragraph, entitled 
``Multi-Stock Events Involving Twenty or More Securities.'' Second, the 
Exchange replacing existing paragraph (c)(4) of Rule 11.19, entitled 
``Numerical Guidelines Applicable to Volatile Market Opens'' with a new 
paragraph, entitled ``Individual Stock Trading Pauses.'' Third, the 
Exchange is proposing changes to existing paragraphs (g) and (h) of 
Rule 11.19 to eliminate the ability of the Exchange to deviate from the 
Numerical Guidelines contained in paragraph (c)(1) (other than under 
limited circumstances set forth in paragraph (g)) when deciding which 
transactions will be reviewed by the Exchange as potentially clearly 
erroneous. Finally, the Exchange proposes modifications to paragraphs 
(c)(1), (c)(3) and (e) of Rule 11.19 consistent with the proposed 
changes to paragraphs (c)(2) and (c)(4). As proposed, the provisions of 
paragraphs (c), (e)(2), (g), and (h) of Rule 11.19, as amended pursuant 
to this filing, would be in effect during a pilot period set to end on 
December 10, 2010. If the pilot is not either extended or approved 
permanent by December 10, 2010, the prior versions of paragraphs (c), 
(e)(2), (g), and (h) of Rule 11.17 would be in effect.
    The Exchange is proposing the rule changes described below in 
consultation with other markets and Commission staff to provide for 
uniform treatment: (1) Of clearly erroneous execution reviews in Multi-
Stock Events involving twenty or more securities; and (2) in the event 
transactions occur that result in the issuance of an individual stock 
trading pause by the primary market and subsequent transactions that 
occur before the trading pause is in effect on the Exchange. The 
Exchange has also proposed additional changes to Rule 11.19 that reduce 
the ability of the Exchange to deviate from the objective standards set 
forth in the Rule. The proposed changes are described in further detail 
below.
Revised Paragraph (c)(2) Related to Multi-Stock Events Involving Twenty 
or More Securities
    The Exchange proposes to eliminate the majority of existing 
paragraph (c)(2), which provides flexibility to the Exchange to use 
different Numerical Guidelines or Reference Prices in various ``Unusual 
Circumstances.'' The Exchange proposes to replace this paragraph with 
new language that would apply to Multi-Stock Events involving twenty or 
more securities whose executions occurred within a period of five 
minutes or less. The revised paragraph would retain language making 
clear that during Multi-Stock Events involving twenty or more 
securities the number of affected transactions may be such that 
immediate finality is necessary to maintain a fair and orderly market 
and to protect investors and the public interest. Accordingly, in such 
circumstances, decisions made by the Exchange in consultation with 
other markets could not be appealed. Further, as proposed, in 
connection with reviews of Multi-Stock Events involving twenty or more 
securities, the Exchange may use a Reference Price other than

[[Page 36747]]

consolidated last sale in its review of potentially clearly erroneous 
executions. With the exception of those securities under review that 
are subject to an individual stock trading pause as described in 
proposed paragraph (c)(4), and to ensure consistent application across 
market centers when proposed paragraph (c)(2) is invoked, the Exchange 
will promptly coordinate with the other market centers to determine the 
appropriate review period, which may be greater than the period of five 
minutes or less that triggered application of proposed paragraph 
(c)(2), as well as select one or more specific points in time prior to 
the transactions in question and use transaction prices at or 
immediately prior to the one or more specific points in time selected 
as the Reference Price. The Exchange will nullify as clearly erroneous 
all transactions that are at prices equal to or greater than 30% away 
from the Reference Price in each affected security during the review 
period selected by the Exchange and other markets consistent with the 
proposed paragraph (c)(2).
    Because the Exchange and other market centers are adopting a 
different threshold and standards to handle large-scale market events, 
which would include events occurring during times of high volatility at 
the beginning of regular trading hours, the Exchange proposes deletion 
of paragraph (c)(4) (``Numerical Guidelines Applicable to Volatile 
Market Opens'') of the existing rule. The Exchange believes that this 
provision is no longer necessary, and if maintained, could result in 
extremely high Numerical Guidelines (up to 90%) in certain 
circumstances.
Revised Paragraph (c)(4) Related to Individual Stock Trading Pauses
    The primary listing markets for U.S. stocks recently amended their 
rules so that they may, from time to time, issue a trading pause for an 
individual security if the price of such security moves 10% or more 
from a sale in a preceding five-minute period. In this regard, the 
Exchange recently amended its rules to pause trading in an individual 
stock when the primary listing market for such stock issues a trading 
pause in any Circuit Breaker Securities, as defined in Commentary .05 
to Rule 11.20.\3\ As described above, the Exchange is proposing to 
eliminate existing paragraph (c)(4) (``Numerical Guidelines Applicable 
to Volatile Market Opens''). The Exchange proposes adopting a rule, 
numbered as (c)(4) following such elimination, which will provide for 
uniform treatment of clearly erroneous execution reviews in the event 
transactions occur that result in the issuance of an individual stock 
trading pause by the primary listing market and subsequent transactions 
that occur before the trading pause is in effect on the Exchange. The 
proposed rule change is necessary to provide greater certainty of the 
clearly erroneous Reference Price for transactions that trigger a 
trading pause (the ``Trigger Trade'') and subsequent transactions 
occurring between the time of the Trigger Trade and the time the 
trading pause message is received by the Exchange from the single plan 
processor responsible for consolidation and dissemination of 
information for the security and put into effect on the Exchange, 
especially under highly volatile and active market conditions.
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    \3\ See NSX Rule 11.20; see also Securities Exchange Act Release 
No. 62252 (June 10, 2010), 75 FR 34186 (June 16, 2010) (SR-NSX-2010-
05).
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    The Exchange proposes to revise paragraph (c)(4) of Rule 11.19 to 
allow the Exchange to use the price that triggered a trading pause in 
an individual stock (the ``Trading Pause Trigger Price'') as the 
Reference Price for clearly erroneous execution reviews of a Trigger 
Trade and transactions that occur immediately after a Trigger Trade but 
before a trading pause is in effect on the Exchange. As proposed, the 
phrase ``Trading Pause Trigger Price'' shall mean the price that 
triggered a trading pause in any Circuit Breaker Security as defined in 
Commentary .05 of Rule 11.20. The Trading Pause Trigger Price reflects 
a price calculated by the primary listing market over a rolling five-
minute period and may differ from the execution price of a transaction 
that triggered a trading pause. If the Exchange is not the primary 
listing market, the Exchange will rely on the primary listing market 
that issued an individual stock trading pause to determine and 
communicate the Trading Pause Trigger Price for such stock. The 
Exchange proposes to make clear in the text that the proposed standards 
in paragraph (c)(4) apply regardless of whether the security at issue 
is part of a Multi-Stock Event involving five or more securities as 
described in proposed paragraphs (c)(1) and (c)(2).
    As proposed, the Numerical Guidelines set forth in Rule 
11.19(c)(1), other than those Numerical Guidelines applicable to Multi-
Stock Events, would apply to reviews of Trigger Trades and subsequent 
transactions. The Exchange proposes to review, on its own motion 
pursuant to Rule 11.19(h), all transactions that trigger a trading 
pause and subsequent transactions occurring before the trading pause is 
in effect on the Exchange. The Exchange has proposed to limit such 
reviews to reviews of transactions that executed at a price lower than 
the Trading Pause Trigger Price in the event of a price decline and 
higher than the Trading Pause Trigger Price in the event of a price 
rise. Because the proposed rules for trading pauses would only apply 
within Regular Trading Hours,\4\ an execution would be reviewed and 
nullified as clearly erroneous if it exceeds the following thresholds:
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    \4\ Regular Trading Hours are defined in Rule 1.5(R) as the time 
between 8:30 a.m. and 3:00 p.m. Central Time. According to rules of 
the primary listing markets, an individual stock trading pause can 
be issued based on a Trigger Trade that occurs at any time between 
9:45 a.m. and 3:35 p.m. Eastern Time. See NSX Rule 11.20B(a). See 
also NASDAQ Rule 4120(a)(11), NYSE Rule 80C, and NYSE Arca Rule 
7.11.

------------------------------------------------------------------------
                                          Numerical guidelines (subject
                                            transaction's % difference
       Reference price or product         from the trading pause trigger
                                                      price)
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Greater than $0.00 up to and including   10
 $25.00.
Greater than $25.00 up to and including  5
 $50.00.
Greater than $50.00....................  3
Leveraged ETF/ETN securities...........  Regular Trading Hours Numerical
                                          Guidelines multiplied by the
                                          leverage multiplier (i.e.,
                                          2x).
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Revisions to Paragraphs (g) and (h)
    Consistent with other proposals made in this filing, the Exchange 
proposes modifying paragraphs (g) and (h) to eliminate the ability of 
an Exchange official to deviate from the Numerical Guidelines contained 
in the Rule other than under very limited circumstances set forth in 
paragraph (g).

[[Page 36748]]

    Current paragraph (g) provides an officer of the Exchange or other 
senior level employee designee the ability on his or her own motion, to 
review and rule on executions that result from ``any disruption or a 
malfunction in the use or operation of any electronic communications 
and trading facilities of the Exchange, or extraordinary market 
conditions or other circumstances in which the nullification of 
transactions may be necessary for the maintenance of a fair and orderly 
market or the protection of investors and the public interest exist.'' 
Without modification, the language ``extraordinary market conditions or 
other circumstances* * *'' would leave the Exchange with broad 
discretion to deviate from the Numerical Guidelines set forth in 
paragraph (c)(1). Thus, the Exchange proposes narrowing the scope of 
paragraph (g) so that it only permits the Exchange to nullify 
transactions consistent with that paragraph (including at a lower 
Numerical Guideline) if there is a disruption or malfunction in the 
operation of the Exchange's system. For the same reason, the Exchange 
proposes eliminating the words ``use or'' from the language in 
paragraph (g) to make clear that the provision only applies to a 
disruption or malfunction of the Exchange's system (and not of an 
Exchange user's systems).
    Paragraph (h) gives an officer of the Exchange or other senior 
level employee designee the ability on his or her own motion to review 
transactions as potentially clearly erroneous. Consistent with the goal 
of achieving more objective and standard results, the Exchange proposes 
deleting language in existing paragraph (h) that would allow the 
Exchange to deviate from the Numerical Guidelines contained in 
paragraph (c)(1). In addition, the Exchange proposes to make clear that 
any Officer of the Exchange or other senior level employee reviewing 
transactions on his or her own motion must follow the guidelines set 
forth in proposed paragraph (c)(4), if applicable. Accordingly, the 
Exchange proposes to modify paragraph (h) to state that an officer must 
rely on paragraphs (c)(1)-(4) of Rule 11.19 when reviewing transactions 
on his or her own motion.
Additional Conforming Revisions to Paragraphs (c)(1), (c)(3) and (e)
    Based on proposed paragraph (c)(2), the Exchange has proposed 
certain conforming changes to paragraphs (c)(1), (c)(3) and (e) of the 
existing Rule, as described below.
    Under current Rule 11.19, a transaction may be found to be clearly 
erroneous only if the price of the transaction to buy (sell) that is 
the subject of the complaint is greater than (less than) the Reference 
Price by an amount that equals or exceeds the Numerical Guidelines set 
forth in paragraph (c)(1) of the Rule. The ``Reference Price'' is 
currently defined as ``the consolidated last sale immediately prior to 
the execution(s) under review except for in Unusual Circumstances as 
described in paragraph (c)(2)'' of Rule 11.19. The Exchange proposes 
modifying paragraph (c)(1) consistent with the changes described above 
such that the Exchange shall use the consolidated last sale immediately 
prior to the execution(s) under review as the Reference Price except 
for: (A) Multi-Stock Events involving twenty or more securities, as 
described in proposed paragraph (c)(2); (B) transactions not involving 
a Multi-Stock Event as described in proposed paragraph (c)(2) that 
trigger a trading pause and subsequent transactions, as described in 
proposed paragraph (c)(4), in which case the Reference Price shall be 
determined in accordance with that paragraph (c)(4); and (C) in other 
circumstances, such as, for example, relevant news impacting a security 
or securities, periods of extreme market volatility, sustained 
illiquidity, or widespread system issues, where use of a different 
Reference Price is necessary for the maintenance of a fair and orderly 
market and the protection of investors and the public interest. The 
Exchange also proposes modifying paragraph (c)(1) to reduce uncertainty 
as to the applicability of the Numerical Guidelines, by requiring a 
finding that an execution was clearly erroneous if such execution 
exceeds the Numerical Guidelines, subject only to the Additional 
Factors included in paragraph (c)(3). Moreover, the Exchange proposes 
revising the existing description for Multi-Stock Events that is 
contained on the Numerical Guidelines chart to make clear that 
different Numerical Guidelines apply for Multi-Stock Events involving 
five or more, but less than twenty, securities whose executions 
occurred within a period of five minutes or less. In addition, the 
Exchange proposes adding to the Numerical Guidelines chart a row that 
contains the Numerical Guidelines (30%) for Multi-Stock Events 
involving twenty or more securities whose executions occurred within a 
period of five minutes or less.
    The Exchange proposes clarifying paragraph (c)(3) to make clear 
that the additional factors set forth in that paragraph are not 
intended to provide any discretion to an Exchange official to deviate 
from the guidelines that apply to Multi-Stock Events or to transactions 
in securities subject to individual stock trading pauses.
    Finally, the Exchange proposes amending paragraph (e)(2), related 
to appeals of clearly erroneous execution decisions by the Exchange, to 
preserve non-appealability of all joint rulings between the Exchange 
and one or more other market centers. The Exchange believes that 
certainty and consistency is critical to reviews of related executions 
that span multiple market centers. Accordingly, although the Exchange 
has proposed deletion of such language from existing paragraph (c)(2), 
the Exchange proposes adding such language back in to paragraph (e)(2) 
to make clear that joint market rulings are not appealable.
2. Statutory Basis
    Approval of the rule change proposed in this submission is 
consistent with the requirements of the Securities Exchange Act of 1934 
(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.\5\ In particular, the 
proposed change is consistent with Section 6(b)(5) of the Act,\6\ 
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) \7\ 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 transparency and uniformity 
across markets concerning reviews of potentially clearly erroneous 
executions in various contexts, including reviews in the context of a 
Multi-Stock Event involving twenty or more securities and reviews 
resulting from a Trigger Trade and any executions occurring immediately 
after a Trigger Trade but before a trading pause is in effect on the 
Exchange. Further, the Exchange believes that the proposed changes 
enhance the objectivity of decisions made by the Exchange with respect 
to clearly erroneous executions.
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    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
    \7\ 15 U.S.C. 78k-1(a)(1).

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[[Page 36749]]

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Exchange Act.

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.

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.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether 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 rule-comments@sec.gov. Please include File No. 
SR-NSX-2010-07 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.

All submissions should refer to File No. SR-NSX-2010-07. 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,\8\ 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 available publicly. All 
submissions should refer to File No. SR-NSX-2010-07 and should be 
submitted on or before July 19, 2010.
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    \8\ The text of the proposed rule change is available on the 
Commission's Web site at http://www.sec.gov.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-15588 Filed 6-25-10; 8:45 am]
BILLING CODE 8010-01-P

