
[Federal Register Volume 76, Number 161 (Friday, August 19, 2011)]
[Notices]
[Pages 52028-52030]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-21257]



[[Page 52028]]

=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65111; File No. SR-NYSE-2011-42]


Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Amending NYSE Rule 128 So That Clearly Erroneous Executions Involving 
Securities Recently Added to the Individual Security Trading Pause 
Pilot Under NYSE Rule 80C Continue To Be Resolved in the Same Manner 
Before Being Added to the Pilot

August 11, 2011.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that August 9, 2011, New York Stock Exchange LLC (``NYSE'' or the 
``Exchange'') 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 self-regulatory 
organization. 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\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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

    The Exchange proposes to amend NYSE Rule 128 so that clearly 
erroneous executions involving securities recently added to the 
individual security trading pause pilot under NYSE Rule 80C continue to 
be resolved in the same manner as they were before being added to the 
pilot. The text of the proposed rule change is available at the 
Exchange, the Commission's Public Reference Room, and http://www.nyse.com.

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 self-regulatory organization 
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
    The Exchange proposes to amend NYSE Rule 128 so that clearly 
erroneous executions involving securities recently added to the 
individual security trading pause pilot under NYSE Rule 80C continue to 
be resolved in the same manner as they were before being added to the 
pilot.
Background
    The Exchanges \4\ and the Financial Industry Regulatory Authority, 
Inc. (``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''),\5\ 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-
Traded 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 for 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 primary listing market and 
those transactions 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'').
---------------------------------------------------------------------------

    \4\ 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 NASDAQ OMX PHLX LLC.
    \5\ See NYSE Rule 80C. The pauses under NYSE Rule 80C 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 NYSE Rule 80C(b).
    \6\ See 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) and 
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 62883 (September 10, 2010), 75 FR 56608 
(September 16, 2010) (SR-FINRA-2010-033).
    \8\ See Securities Exchange Act Release No. 62886 (September 10, 
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 NYSE 
Rule 128, NYSE added new text to NYSE Rule 128(c)(4) to provide clarity 
in the clearly erroneous process when a Pause Pilot trading pause is 
triggered. Pursuant to NYSE Rule 128(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 NYSE Rule 
128(c)(1).\9\ The Reference Price, for purposes of Rule 128(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 NYSE 
Rule 128(c)(4) if the transaction occurred at either three, five or ten 
percent above the Trading Pause Trigger Price.\10\
---------------------------------------------------------------------------

    \9\ Pursuant to NYSE Rule 128(c)(1), during regular trading 
hours 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\ See NYSE Rule 128(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'').\11\ The 
new pilot rules, which will be implemented on August

[[Page 52029]]

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, NYSE Rule 80C, 
by adding three new subparagraphs to Rule 80C(a) to address the 
treatment of the Phase III Securities. The rule applicable to the 
original Pause Pilot securities was placed in new NYSE Rule 80C(a)(i). 
The rules applicable to the Phase III Securities were placed in new 
NYSE Rule 80C(a)(ii) and (iii). A pause under NYSE Rule 80C(a)(ii) 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 NYSE Rule 80C(a)(iii) 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.
---------------------------------------------------------------------------

    \11\ See 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; and SR-Phlx-2011-64).
---------------------------------------------------------------------------

    The Exchange has submitted immediately effective proposed rule 
changes to the Commission to extend both the Pause Pilot under NYSE 
Rule 80C and the clearly erroneous execution process pilot under Rule 
128 until January 31, 2012.\12\
---------------------------------------------------------------------------

    \12\ See SR-NYSE-2011-40 (extending NYSE Rule 80C pilot until 
January 31, 2012) and SR-NYSE-2011-41 (extending NYSE Rule 128 pilot 
until January 31, 2012).
---------------------------------------------------------------------------

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 NYSE Rule 
128(c)(1)-(3), which applies 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.\13\ 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.
---------------------------------------------------------------------------

    \13\ See supra note 9.
---------------------------------------------------------------------------

    Under the amended Pause Pilot rule, 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 organization 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 organization 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 NYSE Rule 128(c)(1), would not be 
able to avail themselves of the clearly erroneous process. Another 
member organization 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 NYSE Rule 128(c)(1)-(3).
    Applying the clearly erroneous process under NYSE Rule 128(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 
member organization that trades in a security subject to NYSE Rule 
80C(a)(ii) and (iii) 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 
NYSE Rule 128(c)(1). Should trading in that same security trigger a 
trading pause at a price of 30 or 50 percent greater than the prior 
day's close, the member organization 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 organizations that have 
transactions in the Phase III Securities falling between the three, 
five and ten percent thresholds from the Reference Price under the 
normal NYSE Rule 128(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 organizations would 
not be provided relief under the clearly erroneous rules merely due to 
the imposition of a Pause Pilot halt, notwithstanding that other member 
organizations with transactions that occur at the same rolling five 
minute percentage difference. The Exchange believes a better outcome is 
to afford all member organizations 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 
NYSE Rule 128(c)(1)-(4) to specify that NYSE Rule 128(c)(4) applies 
only to the current securities of the Pause Pilot, as found under NYSE 
Rule 80C(a)(i).\14\
---------------------------------------------------------------------------

    \14\ NYSE 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''),\15\ 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) \16\ of 
the Act in that it seeks to assure fair competition among brokers and 
dealers and among exchange markets. The

[[Page 52030]]

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 member organizations 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.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78f(b)(5).
    \16\ 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 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

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

    No written comments were solicited or received with respect to 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 \17\ and Rule 19b-
4(f)(6)(iii) thereunder.\18\ 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 organizations 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.\19\
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 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.
    \19\ 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-NYSE-2011-42 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-NYSE-2011-42. 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 NYSE. 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-NYSE-2011-42 and should be 
submitted on or before September 9, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\

    \20\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-21257 Filed 8-18-11; 8:45 am]
BILLING CODE 8011-01-P


