
[Federal Register Volume 76, Number 160 (Thursday, August 18, 2011)]
[Notices]
[Pages 51439-51441]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-21025]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65114; File No. SR-NSX-2011-10]


Self-Regulatory Organizations; National Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change to 
Amend NSX Rule 11.19(c) Relating to Clearly Erroneous Transactions

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 11, 2011, National Stock Exchange, Inc. filed with the 
Securities 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 comment 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

    National Stock Exchange, Inc. (``NSX[reg]'' or ``Exchange'') 
proposes to amend its rules to ensure NSX Rule 11.19(c) will continue 
to operate in the same way after changes to the single stock trading 
pauses are effective.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.nsx.com, at the principal office of the 
Exchange, 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 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 \3\ and FINRA (collectively, the ``Markets''), in 
consultation with the Securities and Exchange Commission (``SEC'' or 
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 Markets 
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.\4\ On 
September 10, 2010, the Commission approved the Market's proposals to 
add the securities included in the Russell 1000 Index and specified 
ETPs to the Pause Pilot.\5\ On September 10, 2010, the Commission also 
approved changes proposed by the Markets to amend certain of their 
respective rules to set forth clearer standards and curtail their 
discretion with respect to breaking erroneous trades.\6\ The changes, 
among other things, provided uniform treatment of clearly erroneous 
execution

[[Page 51440]]

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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    \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\ 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).
    \5\ 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).
    \6\ Securities Exchange Act Release No. 62886 (September 16, 
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 
11.19, the Exchange replaced existing Rule 11.19(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 11.19(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 11.19(c)(1).\7\ The Reference Price, for purposes of Rule 
11.19(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 11.19(c)(4) if the transaction occurred at either 
three, five or ten percent above the Trading Pause Trigger Price.\8\
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    \7\ Pursuant to Rule 11.19(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.
    \8\ Rule 11.19 (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 Markets to include all 
remaining NMS stocks (``Phase III Securities'').\9\ 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. Specifically, the 
rules of the listing markets were amended so that a pause in a Phase 
III Security with a closing price on the previous trading day of $1 or 
more is triggered by a 30 percent price move within a five minute 
period. A pause in a Phase III Security with closing price on the 
previous trading day of less than $1 is triggered by a 50 percent price 
move within a five minute period. 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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    \9\ 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 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 
11.19(c)(1) to 11.19(c)(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.\10\ 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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    \10\ 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 ETP 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 ETP 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 11.19(c)(1), would not be able to avail 
themselves of the clearly erroneous process. Another ETP 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 11.19(c)(1)-(3).
    Applying the clearly erroneous process under Rules 11.19(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, an 
ETP Holder that trades in a Phase III Security 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 11.19(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 ETP 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 ETP 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 
11.19(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 ETP Holders would not be provided relief 
under the clearly erroneous rules merely due to the imposition of a 
Pause Pilot halt, notwithstanding that other ETP Holders with 
transactions that occur at the same rolling five minute percentage 
difference. The Exchange believes a better outcome is to afford all ETP 
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

[[Page 51441]]

unfair and not consistent with the spirit and purpose of the rule. 
Accordingly, the Exchange is proposing to amend Rules 11.19(c)(1)-(4) 
to specify that Rule 11.19(c)(4) applies only to the current securities 
of Pause Pilot, and not to Phase III Securities.\11\
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    \11\ NSX notes that the Exchanges are filing similar proposals 
to make the changes proposed herein.
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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''),\12\ 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) \13\ 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 ETP 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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    \12\ 15 U.S.C. 78f(b)(5).
    \13\ 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 
impose any inappropriate burden on competition.

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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

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 \14\ and Rule 19b-
4(f)(6)(iii) thereunder.\15\ The Exchange has asked the Commission to 
waive the 5-day written notice requirement and 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 ETP 
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.\16\
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 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.
    \16\ 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-NSX-2011-10 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-NSX-2011-10. 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 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 publicly available. All 
submissions should refer to File Number SR-NSX-2011-10 and should be 
submitted on or before September 8, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-21025 Filed 8-17-11; 8:45 am]
BILLING CODE 8011-01-P


