
[Federal Register Volume 75, Number 129 (Wednesday, July 7, 2010)]
[Notices]
[Pages 39086-39089]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-16409]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62415; File No. SR-BX-2010-044]


Self-Regulatory Organizations; Notice of Filing of a Proposed 
Rule Change by NASDAQ OMX BX, Inc. To Amend IM-4120-3

June 30, 2010.

    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 30, 2010, NASDAQ OMX BX, Inc. (the ``Exchange'' or ``BX'') 
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 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 filing this proposed rule change to amend BX IM-
4120-3 to add securities included in the Russell 1000[supreg] Index 
(``Russell 1000'') and specified Exchange Traded Products (``ETP'') to 
the definition of Circuit Breaker Securities.
    The text of the proposed rule change is below. Proposed new 
language is underlined and proposed deletions are in brackets.
* * * * *
4120. Trading Halts

    (a)-(c) No change.
    IM-4120-1. No change.
    IM-4120-2. No change.
    IM-4120-3. Circuit Breaker Securities Pilot
    The provisions of paragraph (a)(11) of this Rule shall be in effect 
during a pilot

[[Page 39087]]

set to end on December 10, 2010. During the pilot, the term ``Circuit 
Breaker Securities'' shall mean the securities included in the Standard 
& Poor's 500 Index, the Russell 1000 Index, as well as a pilot list of 
Exchange Traded Products.
* * * * *

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 aspects 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 BX IM-4120-3 to add securities 
included in the Russell 1000[supreg] Index (``Russell 1000'') and 
specified Exchange Traded Products (``ETPs'') to the definition of 
Circuit Breaker Securities. For purposes of this filing, ETPs include 
Exchange Traded Funds (``ETFs''),\3\ Exchange Traded Vehicles 
(``ETVs''),\4\ and Exchange Traded Notes (``ETNs'').\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 Commission 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 investor's 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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    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 proposed to amend its Rule 4120 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 
IM-4120-3 of Rule 4120. The amendment to BX Rule 4120 was approved by 
the Commission on June 10, 2010 on a pilot basis set to end on December 
10, 2010.\6\
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    \6\ See BX Rule 4120(a)(11); see also Securities Exchange Act 
Release No. 62252 (June 10, 2010), 75 FR 34186 (June 16, 2010) (SR-
BX-2010-037).
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    Currently, the pilot list of securities is all securities included 
in the S&P 500[supreg] Index (``S&P 500''). As noted in comment letters 
to the original filing to amend BX Rule 4120 as described above, 
concerns were raised that including only securities in the S&P 500 in 
the pilot rule was too narrow. In particular, commenter's noted that 
securities that experienced volatility on May 6, 2010, including ETFs, 
should be included in the pilot. The Exchange agrees with the 
commenter's that the pilot list of securities should be expanded.
    In consultation with other markets, the Exchange proposes to add 
the securities 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 securities 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 securities to the 
pilot and whether the parameters of the rule should be adjusted for 
different securities.
    In particular, the Exchange proposes to add securities included in 
the Russell 1000 because the Exchange believes that the securities 
included in that index have similar trading characteristics to 
securities included in the S&P 500 (many of which are the same 
securities) and therefore the existing 10% price movement applicable 
before invoking a trading pause would be appropriate for the Russell 
1000 securities. 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 our analysis, 
the number of times that the Trading Pause would be triggered for 
Russell 1000 securities would be similar to the instances for the S&P 
500 securities.
    In addition, the Exchange, in consultation with other markets, 
proposes to add to the pilot a selected list of ETPs. The Exchange 
developed the proposed pilot list of ETPs first by identifying all ETPs 
across multiple asset classes and issuers, including domestic equity, 
international equity, fixed income, currency, and commodities and 
futures. The Exchange next excluded the leveraged ETPs and sorted the 
list 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. The Exchange then selected those symbols, including 
inverse ETPs, 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 security is the subject of a trading pause, 
the Exchange proposes to include certain non-leveraged ETPs that have 
traded below this volume criterion, but that track the same benchmark 
as an ETP that does meet the volume criterion.
    The Exchange believes that the proposed list of ETPs is appropriate 
because it identifies those ETPs that have component securities that 
largely track the securities included in the S&P 500 and Russell 1000. 
Accordingly, if an S&P 500 or Russell 1000 security 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 securities, 
the Exchange selected the proposed ETPs because it 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 the 
Exchange is not proposing to adopt revised price movement thresholds at 
this time, the Exchange is therefore not proposing to include leveraged 
ETPs 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, the Exchange believes that including 
broad-based ETPs is appropriate so that ETP investors are protected 
should the component securities experience such volatility that trading 
in the broad-based

[[Page 39088]]

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.
    During the pilot, the Exchange will continue to re-assess whether 
specific ETPs should be added or removed from the pilot list. The 
Exchange 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 IM-4120-3 to 
BX Rule 4120 to provide that the pilot applies to securities in the S&P 
500, securities in the Russell 1000, as well as specified ETPs. The 
pilot list of ETPs are identified in Exhibit 3.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\7\ in general, and with 
Sections 6(b)(5) of the Act,\8\ in particular, in that the proposal is 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, 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 is also designed to support the principles of Section 
11A(a)(1) \9\ 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 security when there are significant price movements.
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    \7\ 15 U.S.C. 78f.
    \8\ 15 U.S.C. 78f(b)(5).
    \9\ 15 U.S.C. 78k-1(a)(1).
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments were neither solicited nor received.

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.\10\
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    \10\ 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-BX-2010-044 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-BX-2010-044. 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 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

[[Page 39089]]

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-BX-2010-044, and should be 
submitted on or before July 19, 2010.\11\
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    \11\ 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.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-16409 Filed 7-6-10; 8:45 am]
BILLING CODE 8010-01-P


