
[Federal Register Volume 76, Number 159 (Wednesday, August 17, 2011)]
[Notices]
[Pages 51094-51097]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-20904]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65103; File No. SR-CBOE-2011-078]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Related to the CBSX Clearly Erroneous Policy Pilot Program

August 11, 2011.
    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 August 8, 2011, the Chicago Board Options Exchange, 
Incorporated (``Exchange'' or

[[Page 51095]]

``CBOE'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and 
II, below, which Items have been prepared by the Exchange. The Exchange 
has designated the proposal as a ``non-controversial'' proposed rule 
change pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 
19b-4(f)(6) thereunder.\4\ 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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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 a clearly erroneous policy pilot 
program pertaining to the CBOE Stock Exchange (``CBSX'', the CBOE's 
stock trading facility). In particular, the Exchange is seeking to 
amend Rule 52.4 so that the rule will continue to operate in the same 
manner after changes to the individual stock trading pause pilot are 
effective. The text of the proposed rule change is available on the 
Exchange's Web site (http://www.cboe.org/Legal), at the Exchange's 
Office of the Secretary 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 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
Background
    The Exchanges \5\ 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''), 
approved by the Commission on June 10, 2010.\6\ 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 exchange 
trading products (``ETPs'') to the Pause Pilot.\7\ 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.\8\ 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'').
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    \5\ 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, Incorporated, 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.
    \6\ 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).
    \7\ 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).
    \8\ 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).
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    As part of the changes to the clearly erroneous process under Rule 
52.4, Clearly Erroneous Policy, the Exchange replaced existing Rule 
52.4(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 52.4(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 52.4(c)(1).\9\ The 
Reference Price, for purposes of Rule 52.4(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 the 
Exchange would be broken by the Exchange pursuant to Rule 52.4(c)(4) if 
the transaction occurred at either three, five or ten percent above the 
Trading Pause Trigger Price.\10\
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    \9\ Pursuant to Rule 52.4(c)(1), a security with a Reference 
Price of greater than zero and up to an 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.
    \10\ Rule 52.4(c)(4).
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    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'').\11\ 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. The 
Exchange amended its Pause Pilot rule, Rule 6.3C, 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 6.3C.03(a). The rules applicable to the Phase III Securities 
were placed in new Rules 6.3C(b) [sic] and (c). A pause under Rule 
6.3C.03(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 6.3C.03(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.
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    \11\ 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).
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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

[[Page 51096]]

erroneous process and potentially result in unfair outcomes in the face 
of severe volatility in such securities. Phase III Securities are 
currently subject to the clearly erroneous process under Rules 
52.4(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.\12\ 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.
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    \12\ Id.
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    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 Trading Permit Holder 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 Trading Permit 
Holder 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 52.4(c)(1), would 
not be able to avail themselves of the clearly erroneous process. 
Another Trading Permit Holder 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. The Exchange believes that this would be an inequitable result 
and an arbitrary application of the clearly erroneous process. 
Specifically, the Exchange 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 
52.4(c)(1)-(3).
    Applying the clearly erroneous process under Rules 52.4(c)(1)-(3) 
to the Phase III Securities would allow the Exchange 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 
Trading Permit Holder that trades in a security subject to Rule 
6.3C.03(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 
52.4(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 
Trading Permit Holder 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 Trading Permit Holders 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 
52.4(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 Trading Permit Holders 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. The Exchange believes a better outcome is to afford all 
Trading Permit Holders 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. The Exchange 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, the Exchange is proposing to amend 
Rules 52.4(c)(1)-(4) to specify that Rule 52.4(c)(4) applies only to 
the current securities of Pause Pilot, as found under Rule 6.3C.03(a), 
and not to Phase III Securities.\13\
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    \13\ The Exchange is also proposing to amend Rule 52.4 to remove 
outdated references to the term ``Circuit Breaker Stocks,'' which 
was previously defined in Rule 6.3C.03. Through August 5, 2011, the 
term ``Circuit Breaker Stocks'' is defined to mean the stocks 
included in the S&P 500 Index, the Russell 1000 Index, as well as 
the pilot list of ETPs. As discussed above, beginning August 8, 
2011, the individual stock trading pause pilot will be expanded to 
include all NMS stocks and Rule 6.3C.03 will be revised accordingly. 
As revised, use of the term ``Circuit Breaker Stocks'' will no 
longer be necessary and it is therefore being removed from the 
Exchange Rules. See Interpretation and Policy .03 to Rule 6.3C and 
Securities Exchange Act Release No. 64735 (June 23, 2011), 76 FR 
38243 (June 29, 2011) (SR-CBOE-2011-049) (order approving expansion 
of the individual stock trading pause pilot to include all NMS 
stocks effective August 8, 2011). In that regard, the Exchange is 
herein proposing to amend Rule 52.4 to remove two references to the 
term ``Circuit Breaker Stocks'' and to replace them with a cross-
reference to Rule 6.3C.03(a).
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2. Statutory Basis
    The statutory basis for the proposed rule change is Section 6(b)(5) 
of the Act,\14\ 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) \15\ 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 break erroneous trades, yet also ensures fair application 
of the process so that similarly situated Trading Permit Holders are 
provided the same opportunity of a clearly erroneous review. The 
Exchange notes that the changes proposed herein will in no way 
interfere with the operation of the Pause Pilot process, as amended.
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    \14\ 15 U.S.C. 78f(b)(5).
    \15\ 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 that is not necessary or appropriate in 
furtherance of the purposes of the Act.

[[Page 51097]]

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

    The Exchange neither solicited nor received comments on the 
proposal.

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 \16\ and Rule 19b-
4(f)(6)(iii) thereunder.\17\ 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 Trading Permit Holders 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.\18\
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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 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 is waiving the five day written notice 
requirement in this case. Therefore, the Commission notes that the 
Exchange has satisfied this requirement.
    \18\ 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).
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    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-CBOE-2011-078 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-2011-078. 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 CBOE. 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-CBOE-2011-078 and should be 
submitted on or before September 7, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-20904 Filed 8-16-11; 8:45 am]
BILLING CODE 8011-01-P


