
[Federal Register Volume 76, Number 159 (Wednesday, August 17, 2011)]
[Notices]
[Pages 51076-51079]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-20905]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65104; File No. SR-NASDAQ-2011-116]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend the Clearly Erroneous Rule in Light of Changes to the Single 
Stock Trading Pause Process

August 11, 2011.
    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 August 8, 2011, The NASDAQ Stock Market LLC (``Exchange''), filed 
with the Securities

[[Page 51077]]

and Exchange Commission (``Commission'') the proposed rule change as 
described in Items I and II, 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 the 
Substance of the Proposed Rule Change

    The Exchange proposes to extend the pilot period of recent 
amendments to Rule 11890, concerning clearly erroneous transactions, so 
that the rule will continue to operate in the same manner after changes 
to the single stock trading pause process are effective.
    The text of the proposed rule change is available from NASDAQ's Web 
site at http://nasdaq.cchwallstreet.com/Filings/, at NASDAQ's principal 
office, 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 aspects of such 
statements.

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

1. Purpose
Background
    The Exchanges \3\ and FINRA, in consultation with the Commission, 
have made changes to their respective rules in a concerted effort to 
strengthen the markets after the severe market disruption that occurred 
on May 6, 2010. One such effort by the Exchanges and FINRA was to adopt 
a uniform trading pause process during periods of extraordinary market 
volatility as a pilot in S&P 500 Index stocks (``Pause Pilot''),\4\ 
approved by the Commission on June 10, 2010.\5\ On September 10, 2010, 
the Commission approved the Exchanges' and FINRA's proposals to add the 
securities included in the Russell 1000 Index and specified ETPs to the 
Pause Pilot.\6\ On September 10, 2010, the Commission also approved 
changes proposed by the Exchanges to amend certain of their respective 
rules to set forth clearer standards and curtail their discretion with 
respect to breaking erroneous trades.\7\ The changes, among other 
things, provided uniform treatment of clearly erroneous execution 
reviews in the event of transactions that result in the issuance of an 
individual stock trading pause pursuant to the Pause Pilot on the 
listing market and those that occur up to the time the trading pause 
message is received by the other markets from the single plan processor 
responsible for consolidation and dissemination of information for the 
security (``Latency Trades'').
---------------------------------------------------------------------------

    \3\ For purposes of this filing, the term ``Exchanges'' refers 
collectively to BATS Exchange, Inc., BATS Y-Exchange, Inc., NASDAQ 
OMX BX, Inc., Chicago Board Options Exchange, Inc., Chicago Stock 
Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., 
International Securities Exchange LLC, The NASDAQ Stock Market LLC, 
New York Stock Exchange LLC, NYSE Amex LLC, NYSE Arca, Inc., 
National Stock Exchange, Inc., and NASDAX [sic] OMX PHLX LLC.
    \4\ Rule 4120(a)(11). The pauses under Rule 4120(a)(11) occur 
when a security's price moves by the applicable percentage within a 
five minute period between 9:45 a.m. and 3:35 p.m., or in the case 
of an early scheduled close, 25 minutes before the close of trading. 
Such pauses last for five minutes. At the conclusion of the pause 
period, the security is opened pursuant to the Halt Cross process 
under Rule 4753.
    \5\ Securities Exchange Act Release Nos. 62252 (June 10, 2010), 
75 FR 34186 (June 16, 2010) (File Nos. SR-BATS-2010-014; SR-EDGA-
2010- 01; SR-EDGX-2010-01; SR-BX-2010-037; SR-ISE- 2010-48; SR-NYSE-
2010-39; SR-NYSEAmex- 2010-46; SR-NYSEArca-2010-41; SR-NASDAQ- 2010-
061; SR-CHX-2010-10; SR-NSX-2010-05; and SR-CBOE-2010-047); 62251 
(June 10, 2010), 75 FR 34183 (June 16, 2010) (SR-FINRA-2010- 025).
    \6\ See e.g., Securities Exchange Act Release Nos. 62884 
(September 10, 2010), 75 FR 56618 (September 16, 2010) (File Nos. 
SR-BATS-2010-018; SR-BX-2010-044; SR-CBOE-2010-065; SR-CHX-2010-14; 
SR-EDGA-2010-05; SR-EDGX-2010-05; SR-ISE-2010-66; SR-NASDAQ-2010-
079; SR-NYSE-2010-49; SR-NYSEAmex-2010-63; SR-NYSEArca-2010-61; and 
SR-NSX-2010-08); and Securities Exchange Act Release No. 62883 
(September 10, 2010), 75 FR 56608 (September 16, 2010) (SR-FINRA-
2010-033).
    \7\ Securities Exchange Act Release No. 62886 (September 16 
[sic], 2010), 75 FR 56613 (September 16, 2010) (File Nos. SR-BATS-
2010-016; SR-BX-2010-040; SR-CBOE-2010-056; SR-CHX-2010-13; SR-EDGA-
2010-03; SR-EDGX-2010-03; SR-ISE-2010-62; SR-NASDAQ-2010-076; SR-
NSX-2010-07; SR-NYSE-2010-47; SR-NYSEAmex-2010-60; and SR-NYSEArca-
2010-58).
---------------------------------------------------------------------------

    As part of the changes to the clearly erroneous process under Rule 
11890, NASDAQ replaced existing Rule 11890(a)(2)(C)(4) with all new 
text to provide clarity in the clearly erroneous process when a Pause 
Pilot trading pause is triggered. Pursuant to Rule 11890(a)(2)(C)(4), 
Latency Trades will be broken by the exchange if they exceed the 
applicable percentage from the Reference Price, as noted in the table 
found under Rule 11890(a)(2)(C)(1).\8\ The Reference Price, for 
purposes of Rule 11890(a)(2)(C)(4), is the price that triggered a 
trading pause pursuant to the Pause Pilot (the ``Trading Pause Trigger 
Price''). As such, Latency Trades that occur on NASDAQ would be broken 
by the exchange pursuant to Rule 11890(a)(2)(C)(4) if the transaction 
occurred at either three, five or ten percent above the Trading Pause 
Trigger Price.\9\
---------------------------------------------------------------------------

    \8\ Pursuant to Rule 11890(a)(2)(C)(1), a security with a 
Reference Price of greater than zero and up to and including $25 is 
subject to a 10% threshold; a security with a Reference Price of 
greater than $25 and up to and including $50 is subject to a 5% 
threshold; and a security with a Reference Price of greater than $50 
is subject to a 3% threshold.
    \9\ Rule 11890(a)(2)(C)(4).
---------------------------------------------------------------------------

    On June 23, 2011, the Commission approved a joint proposal to 
expand the respective Pause Pilot rules of the Exchanges and FINRA to 
include all remaining NMS stocks (``Phase III Securities'').\10\ The 
new pilot rules, which will be implemented on August 8, 2011, not only 
expand the application of the Pause Pilot, but also apply larger 
percentage moves that trigger a pause to the Phase III Securities. 
NASDAQ amended its Pause Pilot rule, Rule 4120(a)(11), by adding three 
new subparagraphs to address the treatment of the Phase III Securities. 
The rule applicable to the original Pause Pilot securities was placed 
in new Rule 4120(a)(11)(A). The rules applicable to the Phase III 
Securities were placed in new Rules 4120(a)(11)(B) and (C). A pause 
under Rule 4120(a)(11)(B) is triggered by a 30 percent price move 
within a five minute period in a Phase III Security that had a closing 
price on the previous trading day of $1 or more. A pause under Rule 
4120(a)(11)(C) is triggered by a 50 percent price move within a five 
minute period in a Phase III Security that had a closing price on the 
previous trading day of less than $1. If no prior day closing price is 
available, the last sale reported to the Consolidated Tape on the 
previous trading day is used.
---------------------------------------------------------------------------

    \10\ Securities Exchange Act Release No. 64735 (June 23, 2011), 
76 FR 38243 (June 29, 2011) (File Nos. SR-BATS-2011-016; SR-BYX-
2011-011; SR-BX-2011-025; SR-CBOE-2011-049; SR-CHX-2011-09; SR-EDGA-
2011-15; SR-EDGX-2011-14; SR-FINRA-2011-023; SR-ISE-2011-028; SR-
NASDAQ-2011-067; SR-NYSE-2011-21; SR-NYSEAmex-2011-32; SR-NYSEArca-
2011-26; SR-NSX-2011-06; SR-Phlx-2011-64).
---------------------------------------------------------------------------

The Issue
    The recently-approved changes to the Pause Pilot will have the 
unintended effect of removing the Phase III Securities from the normal 
clearly erroneous process and potentially result in unfair outcomes in 
the face of severe

[[Page 51078]]

volatility in such securities. Phase III Securities are currently 
subject to the clearly erroneous process under Rules 11890(a)(2)(C)(1)-
(3), which apply to all securities except the current Pause Pilot 
securities subject to a pause. For purposes of transactions in 
securities not involving Pause Pilot securities, or transactions 
involving Pause Pilot securities that occur when there is not a pause 
pursuant to the Pause Pilot, the Reference Price is the consolidated 
last sale price immediately prior to the execution(s) under review, 
subject to certain exceptions.\11\ As noted above, the Trading Pause 
Trigger Price is used as the Reference Price when a Pause Pilot pause 
is in effect. As a consequence, under the current rules a Latency Trade 
is subject to the clearly erroneous thresholds based on the Trading 
Pause Trigger Price, which represents a ten percent or greater move in 
the transacted price of the security in a five minute period.
---------------------------------------------------------------------------

    \11\ Id.
---------------------------------------------------------------------------

    Under the new Pause Pilot rules, a Latency Trade in a Phase III 
Security occurs only after either a 30 or 50 percent (or greater) move 
in the transacted price of the security in a five minute period. As a 
result, a member firm that trades in a Phase III Security that triggers 
a clearly erroneous threshold of three, five or ten percent from the 
Reference Price, yet falls below the Pause Pilot trigger of either 30 
or 50 percent, would be able to avail themselves of a clearly erroneous 
review. A similarly situated member firm that transacts in the same 
security as a Latency Trade at a price equal to or greater than the 
Phase III Security thresholds, yet less than the clearly erroneous 
thresholds under Rule 11890(a)(2)(C)(1), would not be able to avail 
themselves of the clearly erroneous process. Another member firm that 
transacts in the same security as a Latency Trade that exceeds three, 
five or ten percent from the Trading Pause Trigger Price would 
automatically receive clearly erroneous relief. NASDAQ believes that 
this would be an inequitable result and an arbitrary application of the 
clearly erroneous process. Specifically, NASDAQ believes that, since 
the 30 and 50 percent triggers of the Pause Pilot are substantially 
greater than the 10 percent threshold of the original Pause Pilot, the 
Phase III Securities should remain under the current clearly erroneous 
process of Rules 11890(a)(2)(C)(1)-(3).
    Applying the clearly erroneous process under Rules 
11890(a)(2)(C)(1)-(3) to the Phase III Securities would allow NASDAQ to 
review all transactions that exceed the normal clearly erroneous 
thresholds and Reference Price, and, importantly, avoid arbitrary 
selection of ``winners'' and ``losers'' in the face of severe volatile 
moves in a security of 30 or 50 percent over a five minute period. For 
example, a member firm that trades in a security subject to Rule 
4120(a)(11)(B) or (C) that triggers a clearly erroneous threshold of 
three, five or ten percent, yet falls below the Pause Pilot trigger 
threshold trading at 29 percent from the prior day's closing price, 
would be potentially entitled to a clearly erroneous break pursuant 
Rule 11890(a)(2)(C)(1). Should trading in that same stock trigger a 
trading pause at a price of 30 or 50 percent greater than the prior 
day's close, the member firm would not be entitled to a clearly 
erroneous trade break unless that trade exceeded three, five or ten 
percent beyond the price that triggered the pause. This scenario causes 
an inequity among a group of member firms that have transactions in the 
Phase III Securities falling between the three, five and ten percent 
thresholds from the Reference Price under the normal Rule 
11890(a)(2)(C)(1) clearly erroneous process and the Pause Pilot clearly 
erroneous triggers of three, five or ten percent away from the Trading 
Pause Trigger Price. Such member firms would not be provided relief 
under the clearly erroneous rules merely due to the imposition of a 
Pause Pilot halt, notwithstanding that other member firms with 
transactions that occur at the same rolling five minute percentage 
difference. NASDAQ believes a better outcome is to afford all members 
transacting in Phase III Securities the opportunity of having such 
trades reviewed.
Summary
    The expansion of the Pause Pilot to the Phase III Securities will 
have the unintended consequence of setting the point at which a clearly 
erroneous transaction occurs once a Pause Pilot pause is initiated far 
beyond the triggers applied prior to the expansion, which will, in 
turn, prevent certain market participants from availing themselves of 
the clearly erroneous rules, notwithstanding that other similarly 
situated participants are able to do so. NASDAQ believes that this 
would be an arbitrary application of the clearly erroneous process in a 
manner that is unfair and not consistent with the spirit and purpose of 
the rule. Accordingly, NASDAQ is proposing to amend Rules 
11890(a)(2)(C)(1)-(4) to specify that Rule 11890(a)(2)(C)(4) applies 
only to the current securities of Pause Pilot, as found under Rule 
4120(a)(11)(A).\12\
---------------------------------------------------------------------------

    \12\ NASDAQ notes that the Exchanges are filing similar 
proposals to make the changes proposed herein.
---------------------------------------------------------------------------

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''),\13\ 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) \14\ of 
the Act in that it seeks to assure fair competition among brokers and 
dealers and among exchange markets. NASDAQ believes that the proposed 
rule meets these requirements in that it promotes transparency and 
uniformity across markets concerning decisions to break erroneous 
trades, yet also ensures fair application of the process so that 
similarly situated member firms are provided the same opportunity of a 
clearly erroneous review. NASDAQ notes that the changes proposed herein 
will in no way interfere with the operation of the Pause Pilot process, 
as amended.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78f(b)(5).
    \14\ 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 were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \15\ and Rule 19b-

[[Page 51079]]

4(f)(6)(iii) thereunder.\16\ The Exchange has asked the Commission to 
waive the 30-day operative delay so that the proposal may become 
operative immediately upon filing. The Commission believes that waiving 
the 30-day operative delay is consistent with the protection of 
investors and the public interest because such waiver will allow the 
clearly erroneous rules to continue to operate as they did prior to the 
effectiveness of the Pause Pilot expansion to Phase III Securities so 
that similarly situated member firms are provided the same opportunity 
of a clearly erroneous review. Accordingly, the Commission waives the 
30-day operative delay requirement and designates the proposed rule 
change as operative upon filing with the Commission.\17\
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-
4(f)(6)(iii) requires that a self-regulatory organization submit to 
the Commission written notice of its intent to file the proposed 
rule change, along with a brief description and text of the proposed 
rule change, at least five business days prior to the filing of the 
proposed rule change, or such shorter time as designated by the 
Commission. The Commission notes that the Exchange has satisfied 
this requirement.
    \17\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

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 Number SR-NASDAQ-2011-116 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-2011-116. 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, 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 NASDAQ. 
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 publicly 
available. All submissions should refer to File Number SR-NASDAQ-2011-
116 and should be submitted on or before September 7, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
---------------------------------------------------------------------------

    \18\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-20905 Filed 8-16-11; 8:45 am]
BILLING CODE 8011-01-P


