
[Federal Register Volume 76, Number 166 (Friday, August 26, 2011)]
[Notices]
[Pages 53518-53521]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-21855]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65176; File No. SR-NASDAQ-2011-117]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Extend the Pilot Period of Rule 4753(c)

August 19, 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 12, 2011, 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 and 
II below, which Items have been prepared by NASDAQ. 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

    NASDAQ proposes to extend the pilot period of Rule 4753(c), 
NASDAQ's ``Volatility Guard,'' so that the pilot will now expire on the 
earlier of January 31, 2012 or the date on which, if approved, a limit 
up/limit down mechanism to address extraordinary market volatility, is 
approved.
    The text of the proposed rule change is below. Proposed new 
language is italicized; proposed deletions are in brackets.

* * * * *

4753. Nasdaq Halt and Imbalance Crosses

    (a)-(b) No change.
    (c) For a pilot period ending the earlier of January 31, 2012 or 
the date on which, if approved, a limit up/limit down mechanism to 
address extraordinary market volatility, is approved [six months 
after the date of Commission approval of SR-NASDAQ-2010-074], 
between 9:45 a.m. and 3:35 p.m. EST, the System will automatically 
monitor System executions to determine whether the market is trading 
in an orderly fashion and whether to conduct an Imbalance Cross in 
order to restore an orderly market in a single Nasdaq Security.
    (1) An Imbalance Cross shall occur if the System executes a 
transaction in a Nasdaq Security at a price that is beyond the 
Threshold Range away from the Triggering Price for that security. 
The Triggering Price for each Nasdaq Security shall be the price of 
any execution by the System in that security within the prior 30 
seconds. The Threshold Range shall be determined as follows:

------------------------------------------------------------------------
                                                             Threshold
                                                            range away
                                                               from
                     Execution price                        triggering
                                                               price
                                                             (percent)
------------------------------------------------------------------------
$1.75 and under.........................................              15
Over $1.75 and up to $25................................              10
Over $25 and up to $50..................................               5
Over $50................................................               3
------------------------------------------------------------------------

    (2) If the System determines pursuant to subsection (1) above to 
conduct an Imbalance Cross in a Nasdaq Security, the System shall 
automatically cease executing trades in that security for a 60-
second Display Only Period. During that 60-second Display Only 
Period, the System shall:

[[Page 53519]]

    (A) Maintain all current quotes and orders and continue to 
accept quotes and orders in that System Security; and
    (B) Disseminate by electronic means an Order Imbalance Indicator 
every 5 seconds.
    (3) At the conclusion of the 60-second Display Only Period, the 
System shall re-open the market by executing the Nasdaq Halt Cross 
as set forth in subsection (b)(2)-(4) above.
    (4) If the opening price established by the Nasdaq Halt Cross 
pursuant to subsection (b)(2)(A)-(D) above is outside the benchmarks 
established by Nasdaq by a threshold amount, the Nasdaq Halt Cross 
will occur at the price within the threshold amounts that best 
satisfies the conditions of subparagraphs (b)(2)(A) through (D) 
above. Nasdaq management shall set and modify such benchmarks and 
thresholds from time to time upon prior notice to market 
participants.
    (d) No change.
* * * * *

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

    In its filing with the Commission, NASDAQ 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. NASDAQ 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    NASDAQ is proposing to extend the operative period of the pilot 
under Rule 4753(c), NASDAQ's ``Volatility Guard,'' so that it will 
expire the earlier of January 31, 2012 or the date on which, if 
approved, a limit up/limit down mechanism to address extraordinary 
market volatility, is approved, yet hold the implementation of Rule 
4753(c) in abeyance until that point.
    On March 11, 2011, the Commission approved Rule 4753(c) (the 
``Volatility Guard''), a volatility-based pause in trading in 
individual NASDAQ-listed securities traded on NASDAQ (``NASDAQ 
Securities''), as a six month pilot applied to the NASDAQ 100 Index 
securities.\3\ The Volatility Guard automatically suspends trading in 
individual NASDAQ Securities that are the subject of abrupt and 
significant intraday price movements between 9:30 a.m. and 4 p.m. 
Eastern Standard Time (``EST''), which was subsequently amended to 9:45 
a.m. and 3:35 p.m. EST to avoid potential interference with the opening 
and closing crosses.\4\ Volatility Guard is triggered automatically 
when the execution price of a pilot security moves more than a fixed 
amount away from a pre-established ``triggering price'' for that 
security. The triggering price for each pilot security is the price of 
any execution by the system in that security within the previous 30 
seconds. For each pilot security, the system continually compares the 
price of each execution in the system against the prices of all system 
executions in that security over the 30 seconds. Once triggered, NASDAQ 
institutes a formal trading halt during which time NASDAQ systems are 
prohibited from executing orders. Members, however, may continue to 
enter quotes and orders, which are queued during a 60-second Display 
Only Period. At the conclusion of the Display Only Period, the queued 
orders are executed at a single price, pursuant to NASDAQ's Halt Cross 
mechanism.\5\
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release No. 64071 (March 11, 
2011), 76 FR 14699 (March 17, 2011) (SR-NASDAQ-2010-074). Amendment 
1 to SR-NASDAQ-2010-074 designated the NASDAQ 100 Index as the 100 
pilot securities.
    \4\ See Securities Exchange Act Release No. 64268 (April 8, 
2011), 76 FR 20742 (April 15, 2011) (SR-NASDAQ-2011-051).
    \5\ The Nasdaq Halt Cross is ``the process for determining the 
price at which Eligible Interest shall be executed at the open of 
trading for a halted security and for executing that Eligible 
Interest.'' See Nasdaq Rule 4753(a)(3).
---------------------------------------------------------------------------

    NASDAQ determined to adopt Volatility Guard as a six month pilot in 
response to the unprecedented aberrant volatility witnessed on May 6, 
2010, and the limited effect that NASDAQ's market collars had in 
dampening such volatility. NASDAQ believed that the Rule 4753(c) halt 
process was needed to protect its listed securities and market 
participants from such volatility in the future. In proposing the six 
month pilot, NASDAQ noted that another market had adopted a process 
whereby the market's listed securities each may be temporarily removed 
from automatic trading when the trading exceeds certain average daily 
volume-, price-, and volatility-based criteria. Accordingly, NASDAQ 
believed that adopting its own process would serve to protect its 
market from aberrant volatility, like that experienced on May 6, 2011.
    During the time that the Volatility Guard pilot was progressing 
through the notice and comment process with the Commission, NASDAQ 
together with the other national securities exchanges and FINRA 
(``SROs'') and in consultation with the Commission, worked diligently 
to implement changes to the markets to prevent another event like May 
6, 2010 from occurring. In this regard, the SROs have expanded their 
existing circuit breaker pilots \6\ to cover all NMS stocks,\7\ 
clarified rules concerning clearly erroneous processes,\8\ and have 
made great strides in developing a limit up/limit down system to 
replace the circuit breakers currently in place. With respect to this 
last effort, on April 5, 2011, the SROs filed with the Commission a 
national market system plan to address extraordinary market volatility, 
which proposed a market-wide limit up/limit down system applicable to 
all NMS stocks (the ``Plan'').\9\ The period to submit comments on the 
Plan ended on June 22, 2011, and the Commission stated that it will 
determine whether to approve it shortly after the expiration of the 
comment period.\10\ The SROs propose implementing the Plan 120 calendar 
days following the publication of the Commission's order approving the 
proposed Plan in the Federal Register.
---------------------------------------------------------------------------

    \6\ On June 10, 2010, the Commission approved the Circuit 
Breaker Pilot, which instituted new circuit breaker rules that pause 
trading for five minutes in a security included in the S&P 500 Index 
if its price moves ten percent or more over a five-minute period. 
See Securities Exchange Act Release Nos. 62251 (June 10, 2010), 75 
FR 34183 (June 16, 2010) (SR-FINRA-2010-025); 62252 (June 10, 2010), 
75 FR 34186 (June 16, 2010) (SR-NASDAQ-2010-061, et al.). On 
September 10, 2010, the Circuit Breaker Pilot was expanded to 
include securities in the Russell 1000 Index and certain exchange-
traded products. See Securities Exchange Act Release Nos. 62883 
(September 10, 2010), 75 FR 56608 (September 16, 2010) (SR-FINRA-
2010-033); 62884 (September 10, 2010), 75 FR 56618 (September 16, 
2010) (SR-NASDAQ-2010-079, et al.). The Circuit Breaker Pilot is 
scheduled to expire on August 11, 2011. See e.g., Securities 
Exchange Act Release No. 64174 (April 4, 2011), 76 FR 19819 (April 
8, 2011) (SR-NASDAQ-2011-042).
    \7\ On June 23, 2011, the Commission granted accelerated 
approval to SRO proposals to expand the Circuit Breaker Pilot to all 
NMS securities. See Securities Exchange Act Release No. 64735 (June 
23, 2011), 76 FR 38243 (June 29, 2011) (SR-NASDAQ-2011-067, et al.). 
The term ``NMS stocks'' is defined in Rule 600(b)(47) of Regulation 
NMS under the Act. See 17 CFR 242.600(b)(47).
    \8\ See Securities Exchange Act Release No. 62886 (September 10, 
2010), 75 FR 56613 (September 16, 2010) (SR-NASDAQ-2010-076, et 
al.); see also Securities Exchange Act Release No. 64238 (April 7, 
2011), 76 FR 20780 (April 13, 2011) (SR-NASDAQ-2011-043).
    \9\ See Securities Exchange Act Release No. 64547 (May 25, 
2011), 76 FR 31647 (June 1, 2011) (File No. 4-631).
    \10\ See http://www.sec.gov/news/press/2011/2011-84.htm. NASDAQ 
understands that, given the number of comments received, the 
Commission will need a reasonable time to consider the comments 
provided. Rule 608(b) of Regulation NMS governs the effectiveness of 
national market system plans. See 17 CFR 242.608.
---------------------------------------------------------------------------

    Important to the implementation of Volatility Guard, NASDAQ notes 
that

[[Page 53520]]

the Commission stated that it may find exchange-specific volatility 
moderators inconsistent with the Act once a uniform, cross-market 
mechanism to address aberrant volatility is adopted. In approving 
---------------------------------------------------------------------------
Volatility Guard, the Commission emphasized:

    [T]hat it is continuing to work diligently with the exchanges 
and FINRA to develop an appropriate consistent cross-market 
mechanism to moderate excessive volatility that could be applied 
widely to individual exchange-listed securities and to address 
commenters' concerns regarding the complexity and potential 
confusion of exchange-specific volatility moderators. To the extent 
the Commission approves such a mechanism, whether it be an expanded 
circuit breaker with a limit up/limit down feature or otherwise, the 
Commission may no longer be able to find that exchange-specific 
volatility moderators--including both Nasdaq's Volatility Guard and 
the NYSE's LRPs--are consistent with the Act.\11\

    \11\ See Securities Exchange Act Release No. 64071 (March 11, 
2011), 76 FR 14699, at 14701 (March 17, 2011) (SR-NASDAQ-2010-074, 
as amended) (emphasis added).
---------------------------------------------------------------------------

    NASDAQ calculates that the Plan, if approved, may be implemented by 
the end of 2011 or early 2012.\12\ It is against this backdrop that 
NASDAQ is seeking to extend the pilot period of Volatility Guard.
---------------------------------------------------------------------------

    \12\ Supra note 9.
---------------------------------------------------------------------------

    NASDAQ believes that a limit up/limit down system, as proposed in 
the Plan, would be preferable to disparate individual market solutions 
to aberrant volatility. Given the progress made toward adopting a 
uniform limit up/limit down system and the Commission's statement that 
exchange-specific volatility moderators be abandoned once a consistent 
cross-market mechanism is adopted, NASDAQ believes that implementing 
Volatility Guard at this time may be confusing and onerous to market 
participants.
    NASDAQ is proposing to extend the pilot rather than eliminate it so 
that NASDAQ may continue to have the option to implement Volatility 
Guard should the Plan not be approved. As a primary market, NASDAQ 
takes seriously its responsibility to both its listed companies and the 
investing public. NASDAQ continues to believe that an individual 
solution like Volatility Guard, may be necessary in the event the Plan 
is not approved, much like NYSE-listed stocks may be protected by the 
LRP mechanism if it remains in place. NASDAQ believes that extending 
the Volatility Guard pilot, but holding its implementation in abeyance 
until such time that the Plan is approved will best serve these groups 
by allowing NASDAQ to retain the ability to implement Volatility Guard 
if necessary, while also allowing market participants to make 
preparations in light of the limit up/limit down system, as proposed in 
the Plan. As such, market participants will not needlessly expend 
energy changing, and testing, their systems to account for the 
Volatility Guard pilot in addition to the changes required to implement 
the Plan.
    Accordingly, NASDAQ is proposing to extend the Volatility Guard 
pilot to the earlier of January 31, 2012 or the date on which, if 
approved, a limit up/limit down mechanism to address extraordinary 
market volatility, is approved. Should the Plan not be adopted by the 
expiration of the pilot, NASDAQ may consider further extension of 
Volatility Guard, consistent with the extension proposed herein.
2. Statutory Basis
    NASDAQ believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\13\ in general and with 
Sections 6(b)(5) of the Act,\14\ in particular in that it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, 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. NASDAQ believes that the 
proposed rule continues to meet these requirements in that it promotes 
the adoption of the Plan's uniform, cross-market limit up/limit down 
process to address aberrant volatility, while also allowing NASDAQ to 
retain an important alternative tool to deal with such volatility 
should approval of the Plan be delayed.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78f.
    \14\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    NASDAQ 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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \15\ and Rule 19b-4(f)(6) thereunder.\16\ 
Because the 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 prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act \17\ and Rule 19b-
4(f)(6)(iii) thereunder.\18\
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \16\ 17 CFR 240.19b-4(f)(6).
    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires the Exchange to give the Commission written notice of the 
Exchange's 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 date of filing of the proposed rule 
change, or such shorter time as designated by the Commission. The 
Exchange has satisfied this requirement.
---------------------------------------------------------------------------

    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 No. SR-NASDAQ-2011-117 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 No. SR-NASDAQ-2011-117. This file

[[Page 53521]]

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 available publicly. All 
submissions should refer to File No. SR-NASDAQ-2011-117 and should be 
submitted on or before September 16, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
---------------------------------------------------------------------------

    \19\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-21855 Filed 8-25-11; 8:45 am]
BILLING CODE 8011-01-P


