
[Federal Register: June 28, 2010 (Volume 75, Number 123)]
[Notices]               
[Page 36725-36728]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28jn10-130]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62330; File No. SR-ISE-2010-62]

 
Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing of Proposed Rule Change, as Modified by Amendment 
No. 1, Relating to 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, the International Securities Exchange, LLC (the 
``Exchange'' or the ``ISE'') 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 self-
regulatory organization. On June 18, 2010, the Exchange filed Amendment 
No. 1. The Commission is publishing this notice to solicit comments on 
the proposed rule change, as amended, 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

    The Exchange proposes to amend ISE Rule 2128 governing clearly 
erroneous executions. The text of the proposed rule change is available 
on the Exchange's Internet Web site at http://www.ise.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 self-regulatory organization 
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 self-regulatory organization 
has prepared summaries, set forth in sections A, B and C below, of the 
most significant aspects of such statements.

[[Page 36726]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange hereby submits this Amendment No. 1 to its rule filing 
SR-ISE-2010-62, which replaces and supersedes the original in its 
entirety. The Exchange is proposing modifications to its Rule 2128, 
entitled Clearly Erroneous Executions. First, the Exchange proposes 
replacing existing paragraph (c)(2) of Rule 2128, entitled ``Unusual 
Circumstances and Joint Market Rulings'' with a new paragraph, entitled 
``Multi-Stock Events Involving Twenty or More Securities.'' Second, the 
Exchange is proposing to replace existing paragraph (c)(4) of Rule 
2128, 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 (f) and (g) of Rule 2128 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 (f)) 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 
2128 consistent with the proposed changes to paragraphs (c)(2) and 
(c)(4). As proposed, the provisions of paragraphs (c), (e)(2), (f), and 
(g) of Rule 11.17, 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), (f), and (g) 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 2128 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 
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 Rule 2102.\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 Securities Exchange Act Release No. 62271 (June 10, 
2010) (SR-ISE-2010-58).
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    The Exchange proposes to revise paragraph (c)(4) of ISE Rule 2128 
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 Securities

[[Page 36727]]

as defined in Interpretation and Policy .05 of Rule 11.14. 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. 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 ISE Rule 
2128(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 paragraph (g) of the rule, 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 the Regular Market Session,\4\ an execution would be eligible 
for review as potentially clearly erroneous as follows:
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    \4\ The Regular Market Session is defined in ISE Rule 2102 as 
the time between 9:30 a.m. and 4 p.m. Eastern Time. According to the 
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 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 Market Session
                                          Numerical Guidelines
                                          multiplied by the leverage
                                          multiplier (i.e., 2x).
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Revisions to Paragraphs (f) and (g)
    Consistent with other proposals made in this filing, the Exchange 
proposes modifying paragraphs (f) and (g) 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 (f).
    Current paragraph (f) 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 (f) 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 first sentence of 
paragraph (f) to make clear that the provision only applies to a 
disruption of malfunction of the Exchange's system--(and not of an 
Exchange user's systems).
    Paragraph (g) 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 (g) 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 (g) to state that an officer must 
rely on paragraphs (c)(1)-(4) of Rule 2128 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 ISE Rule 2128, 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 ISE Rule 
2128. 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

[[Page 36728]]

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)(3), 
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 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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B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change does not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the 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-ISE-2010-62 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-ISE-2010-62. 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-ISE-2010-62 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.
    \9\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-15540 Filed 6-25-10; 8:45 am]
BILLING CODE 8010-01-P

