
[Federal Register Volume 75, Number 129 (Wednesday, July 7, 2010)]
[Notices]
[Pages 39081-39083]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-16408]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62414; File No. SR-NASDAQ-2010-079]


Self-Regulatory Organizations; Notice of Filing of a Proposed 
Rule Change by The NASDAQ Stock Market LLC to Amend NASDAQ Rule 
4120(a)(11) To Add Securities Included in the Russell 1000[supreg] 
Index (``Russell 1000'') and Specified Exchange Traded Products 
(``ETP'') to the Pilot Rule

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, The NASDAQ Stock Market LLC (the ``Exchange'' or 
``Nasdaq'') 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is filing with the Commission a proposed rule change 
to amend NASDAQ Rule 4120(a)(11) to add securities included in the 
Russell 1000[supreg] Index (``Russell 1000'') and specified Exchange 
Traded Products (``ETP'') to the pilot rule.
    The text of the proposed rule change is below. Proposed new 
language is underlined and proposed deletions are in brackets.\3\
---------------------------------------------------------------------------

    \3\ Changes are marked to the rule text that appears in the 
electronic manual of NASDAQ found at http://nasdaqomx.cchwallstreet.com.
---------------------------------------------------------------------------

* * * * *
4120. Trading Halts
(a) Authority To Initiate Trading Halts or Pauses
    In circumstances in which Nasdaq deems it necessary to protect 
investors and the public interest, Nasdaq, pursuant to the procedures 
set forth in paragraph (c):
    (1)-(10) No Change.
    (11) shall, between 9:45 a.m. and 3:35 p.m., immediately pause 
trading for 5 minutes in any Nasdaq-listed security when the price of 
such security moves 10 percent or more within a 5-minute period. At the 
end of the trading pause, Nasdaq will re-open the security using the 
Halt Cross process set forth in Nasdaq Rule 4753. In the event of a 
significant imbalance at the end of a trading pause, Nasdaq may delay 
the re-opening of a security.
    Nasdaq will issue a notification if it cannot resume trading for a 
reason other than a significant imbalance.
    Price moves under this paragraph will be calculated by changes in 
each consolidated last-sale price disseminated by a network processor 
over a five minute rolling period measured continuously. Only regular 
way in-sequence transactions qualify for use in calculations of price 
moves. Nasdaq can exclude a transaction price from use if it concludes 
that the transaction price resulted from an erroneous trade.
    If a trading pause is triggered under this paragraph, Nasdaq shall 
immediately notify the single plan processor responsible for 
consolidation of information for the security pursuant to Rule 603 of 
Regulation NMS under the Securities Exchange Act of 1934. If a primary 
listing market issues an individual stock trading pause, Nasdaq will 
pause trading in that security until trading has resumed on the primary 
listing market or notice has been received from the primary listing 
market that trading may resume. If the primary listing market does not 
reopen within 10 minutes of notification of a trading pause, Nasdaq may 
resume trading the security.
    The provisions of this paragraph shall only apply to securities in 
the Standard & Poor's 500 Index, the Russell 1000 Index, as well as a 
pilot list of Exchange Traded Products.
    The provisions of this paragraph shall be in effect during a pilot 
set to end on December 10, 2010.
    (b)-(c) No Change.
* * * * *
    (b) Not applicable.
    (c) Not applicable.

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 NASDAQ Rule 4120(a)(11) to add 
securities 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''), Exchange Traded Vehicles (``ETV''), and Exchange Traded 
Notes (``ETN'').
    NASDAQ Rule 4120(a)(11) was approved by the Commission on June 10, 
2010 on a pilot basis to end on December 10, 2010.\4\ 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 NASDAQ filing to adopt NASDAQ Rule 4120(a)(11), 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

[[Page 39082]]

the pilot. The Exchange agrees with the commenter's that the pilot list 
of securities should be expanded.
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 62252 (June 10, 
2010) (SR-NASDAQ-2010-061).
---------------------------------------------------------------------------

    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 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 Rule 
4120(a)(11) to provide that the pilot applies to all securities in the 
S&P 500 and/or the Russell 1000. The Exchange notes that because there 
is overlap between the two indices, the ``and/or'' construction is 
intended to capture all such securities, regardless of which index the 
security may be included. The Exchange further proposes to add that the 
pilot applies to specified ETPs, which are identified in Exhibit 3.
2. Statutory Basis
    The statutory basis for the proposed rule change is Section 6(b)(5) 
of the Securities Exchange Act of 1934 (the ``Act''),\5\ 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) \6\ 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 decisions to pause trading in a 
security when there are significant price movements.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78f(b)(5).
    \6\ 15 U.S.C. 78k-1(a)(1).
---------------------------------------------------------------------------

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 on the proposed rule change 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.\7\
---------------------------------------------------------------------------

    \7\ The Commission notes that the Exchange has requested 
accelerated approval of the filing.

---------------------------------------------------------------------------

[[Page 39083]]

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-NASDAQ-2010-079 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-NASDAQ-2010-079. 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 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-NASDAQ-2010-079, and should be submitted on or before 
July 19, 2010.\8\
---------------------------------------------------------------------------

    \8\ 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.\9\
---------------------------------------------------------------------------

    \9\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-16408 Filed 7-6-10; 8:45 am]
BILLING CODE 8010-01-P


