
[Federal Register Volume 75, Number 129 (Wednesday, July 7, 2010)]
[Notices]
[Pages 39078-39081]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-16403]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62409; File No. SR-CBOE-2010-065]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change Related to 
Individual Stock Trading Pauses Due to Extraordinary Market Volatility

June 30, 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 30, 2010, the Chicago Board Options

[[Page 39079]]

Exchange, Incorporated (the ``Exchange'' or ``CBOE'') filed with the 
Securities and Exchange Commission (the ``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 comments 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

    The Exchange is proposing to amend Rule 6.3C, Individual Stock 
Trading Pauses Due to Extraordinary Market Volatility, to add 
additional stocks to the pilot rule applicable to certain stocks traded 
on the CBOE Stock Exchange (``CBSX''), the CBOE's stock trading 
facility. The text of the proposed rule change is available on the 
Exchange's Web site (http://www.cboe.org/Legal), at the Office of the 
Secretary, CBOE and at the Commission.

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 those 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 proposes to amend Rule 6.3C to add stocks included in 
the Russell 1000[supreg] Index (``Russell 1000'') and specified 
Exchange Traded Products (``ETP'') to the pilot rule. For purposes of 
this filing, ETPs include Exchange Traded Funds (``ETF''),\3\ Exchange 
Traded Vehicles (``ETV''),\4\ and Exchange Traded Notes (``ETN'').\5\
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    \3\ An ETF is an open-ended registered investment company under 
the Investment Company Act of 1940 that has received certain 
exemptive relief from the SEC to allow secondary market trading in 
the ETF shares. ETFs are generally index-based products, in that 
each ETF holds a portfolio of securities that is intended to provide 
investment results that, before fees and expenses, generally 
correspond to the price and yield performance of the underlying 
benchmark index.
    \4\ An ETV tracks the underlying performance of an asset or 
index, allowing investors exposure to underlying assets such as 
futures contracts, commodities, and currency without actually 
trading futures or taking physical delivery of the underlying asset. 
An ETV is traded intraday like an ETF. An ETV is an open-ended trust 
or partnership unit that is registered under the Securities Act of 
1933.
    \5\ An ETN is a senior unsecured debt obligation designed to 
track the total return of an underlying index, benchmark or 
strategy, minus investor fees. ETNs are registered under the 
Securities Act of 1933 and are redeemable to the issuer.
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    Rule 6.3C was approved by the Commission on June 10, 2010 on a 
pilot basis to end on December 10, 2010.\6\ The rule was developed in 
consultation with U.S. listing markets to provide for uniform market-
wide trading pause standards for certain individual stocks that 
experience rapid price movement. During the pilot period, the markets 
will continue to assess whether additional stocks need to be added and 
whether the parameters of the rule will need to be modified to 
accommodate trading characteristics of different stocks.
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    \6\ See Securities Exchange Act Release No. 62252 (June 10, 
2010), (SR-CBOE-2010-047).
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    Currently, the pilot list of stocks is all stocks included in the 
S&P 500[supreg] Index (``S&P 500''). As noted in comment letters to the 
original filing to adopt Rule 6.3C, concerns were raised that including 
only stocks in the S&P 500 in the pilot rule was too narrow. In 
particular, commenters noted that stocks that experienced volatility on 
May 6, 2010, including ETFs, should be included in the pilot.
    In consultation with other markets, the Exchange proposes to add 
the stocks included in the Russell 1000 and specified ETPs to the pilot 
beginning in July 2010, subject to Commission approval. The Exchange 
believes that adding these stocks would begin to address concerns that 
the scope of the pilot may be too narrow, while at the same time 
recognizing that during the pilot period, the markets will continue to 
review whether and when to add additional stocks to the pilot and 
whether the parameters of the rule should be adjusted for different 
stocks.
    In particular, the Exchange proposes to add stocks included in the 
Russell 1000 because the Exchange believes that, based on consultation 
with other markets, the stocks included in that index have similar 
trading characteristics to stocks included in the S&P 500 (many of 
which are the same stocks) and therefore the existing 10% price 
movement applicable before invoking a trading pause would be 
appropriate for the Russell 1000 stocks. Because the Exchange does not 
propose to modify the 10% price movement at this time, the Exchange 
believes that expanding to the Russell 1000 is an appropriate next 
step. Based on consultation with other markets, we understand that the 
number of times that the Trading Pause would be triggered for Russell 
1000 stocks would be similar to the instances for the S&P 500 stocks.
    In addition, the Exchange, in consultation with the other markets, 
proposes to add to the pilot a selected list of ETPs. The proposed 
pilot list of ETPs was developed first by identifying all ETPs across 
multiple asset classes and issuers, including domestic equity, 
international equity, fixed income, currency, and commodities and 
futures. Next leveraged ETPs were excluded from the list and the list 
was sorted by notional consolidated average daily volume (``CADV'') 
using year-to-date CADV ending May 5, 2010, multiplied by the closing 
price on May 5, 2010. Then those symbols, including inverse ETPs, were 
selected that trade over $2,000,000 CADV year to date through May 5, 
2010. To ensure that ETPs that track similar benchmarks but that do not 
meet this volume criterion do not become subject to pricing volatility 
when a component stock is the subject of a trading pause, certain non-
leveraged ETPs are proposed to be included that have traded below this 
volume criterion, but that track the same benchmark as an ETP that does 
meet the volume criterion.
    Based on consultation with the other markets, the Exchange believes 
that the proposed list of ETPs is appropriate because it identifies 
those ETPs that have component stocks that largely track the stocks 
included in the S&P 500 and Russell 1000. Accordingly, if an S&P 500 or 
Russell 1000 stock experiences a trading pause, any resulting price 
volatility in a related ETP, regardless of the CADV of the ETP, would 
also be subject to a trading pause trigger. As with the proposal to add 
the Russell 1000 stocks, the proposed ETPs have been selected because 
the Exchange, in consultation with the other markets, believes that the 
existing 10% price movement would be an appropriate price movement 
before invoking a trading pause for ETPs with these characteristics. 
The Exchange does not believe that the 10% price movement is an 
appropriate threshold for leveraged ETPs because by definition, 
leveraged ETPs are based on multiples of price movements in the 
underlying index. Accordingly, a 10% percent price movement in a 
leveraged ETP may not signify extraordinary volatility. Because a 
revised price

[[Page 39080]]

movement thresholds is not being proposed at this time, leveraged ETPs 
are therefore not proposed to be included for now.
    As proposed, the list includes broad-based ETPs, which the Exchange 
recognizes has raised some debate. In particular, concerns have been 
raised about whether halting an index-based ETP may impact an index-
based option or future. However, based on consultation with the other 
markets, the Exchange believes that including broad-based ETPs is 
appropriate so that ETP investors are protected should the component 
stocks experience such volatility that trading in the broad-based ETP 
is impacted, as it was on May 6, 2010. Because this is a pilot rule, 
the markets can continue to assess whether it is appropriate to have a 
trading pause in broad-based ETPs when there is not a similar trading 
pause in related index-based options or futures.
    As noted above, during the pilot, the markets will continue to re-
assess the list to determine whether specific ETPs should be added or 
removed from the pilot list. The markets will also assess whether the 
parameters for invoking a trading pause continue to be the appropriate 
standard and whether the parameters should be modified.
    To effect this change, the Exchange proposes to amend 
Interpretation and Policy .03 to Rule 6.3C to provide that the pilot 
applies to all stocks in the S&P 500, stocks in the Russell 1000, as 
well as specified ETPs. The pilot list of ETPs is identified in Exhibit 
3.
2. Statutory Basis
    The statutory basis for the proposed rule change is Section 6(b)(5) 
of the Act,\7\ which requires the rules of an exchange to promote just 
and equitable principles of trade, to remove impediments to and perfect 
the mechanism of a free and open market and a national market system 
and, in general, to protect investors and the public interest. The 
proposed rule change also is designed to support the principles of 
Section 11A(a)(1) \8\ 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 uniformity across markets concerning decisions to 
pause trading in a stock when there are significant price movements.
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    \7\ 15 U.S.C. 78f(b)(5).
    \8\ 15 U.S.C. 78k-1(a)(1).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE does not believe that the proposed rule change will impose any 
burden on competition 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

    No written comments were solicited or received with respect to 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.\9\
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    \9\ The Commission notes that the Exchange has requested 
accelerated approval of the filing.
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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.
    The Commission notes that ETF trades constituted a substantial 
majority of the trades that were cancelled on May 6, and the proposed 
amendments would bring certain ETFs within the scope of the trading 
pause pilot for the first time. The Commission solicits comment 
regarding the inclusion of ETFs within the trading pause pilot. The 
Commission requests comment in particular on the implications of 
including in the trading pause pilot ETFs on broad-based indices that 
also underlie options and futures products. What are the potential 
benefits and risks of including those ETFs in the pilot under 
circumstances where other products based on the same index may not be 
subject to any trading pause, or may be subject to a different type of 
trading pause? Are existing mechanisms available in the markets for 
those other products sufficient to address any cross-market linkage 
concerns? What are the potential effects on price discovery and trading 
behavior in the different markets?
    Similarly, the Commission solicits comments on the potential 
benefits and risks of excluding such ETFs from the pilot, particularly 
under circumstances where the securities underlying the ETF are 
included in the pilot. If there are trading pauses for the component 
securities of an index but not for an ETF based on that index, what 
consequences might that have for the ETF or for other products based on 
that index? If there are trading pauses in an ETF but not in the stocks 
that underlie that ETF, what consequences might that have for the 
underlying stocks or other products? What are the potential effects on 
price discovery for the ETF, the underlying stocks and other products?
    Are there other market-based characteristics or metrics that should 
be considered for purposes of determining which ETFs should be included 
in the trading pause pilot, or for re-calibrating particular features 
of the trading pause?
    In addition, the Commission solicits comments regarding the 
operation of the trading pause pilot to date with respect to stocks in 
the S&P 500.
    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 Number SR-CBOE-2010-065 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 Number SR-CBOE-2010-065. 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, 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

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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 such filing also will be available for inspection 
and copying at the principal offices 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 Number SR-CBOE-2010-065, and should be 
submitted on or before July 19, 2010.\10\
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    \10\ The Commission believes that a 10-day comment period is 
reasonable, given the urgency of the matter. It will provide 
adequate time for comment.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-16403 Filed 7-6-10; 8:45 am]
BILLING CODE 8010-01-P


