
[Federal Register Volume 76, Number 192 (Tuesday, October 4, 2011)]
[Notices]
[Pages 61450-61453]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-25527]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65436; File No. SR-NSX-2011-11]


Self-Regulatory Organizations; National Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change To Revise the Current 
Methodology for Determining When To Halt Trading in All Stocks Due to 
Extraordinary Market Volatility

September 28, 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 September 27, 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 Rule 11.20A to revise the current 
methodology for determining when to halt trading in all stocks due to 
extraordinary market volatility.

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

[[Page 61451]]

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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend Exchange Rule 11.20A to revise the 
current methodology for determining when to halt trading in all stocks 
due to extraordinary market volatility. The Exchange is proposing this 
rule change in consultation with other equity, options, and futures 
markets, the Financial Industry Regulatory Authority, Inc. (``FINRA''), 
and staffs of the Securities and Exchange Commission (``SEC'' or the 
``Commission'') and the Commodity Futures Trading Commission 
(``CFTC'').
    Since May 6, 2010, when the markets experienced excessive 
volatility in an abbreviated time period, i.e., the ``flash crash,'' 
the exchanges and FINRA have implemented market-wide measures designed 
to restore investor confidence by reducing the potential for excessive 
market volatility. Among the measures adopted include pilot plans for 
stock-by-stock trading pauses \3\ and related changes to the clearly 
erroneous execution rules \4\ and more stringent market maker quoting 
requirements. In addition, on April 5, 2011, the equities exchanges and 
FINRA filed a plan pursuant to Rule 608 of Regulation NMS to address 
extraordinary market volatility (the ``Limit Up-Limit Down Plan'').\5\ 
As proposed, the Limit Up-Limit Down Plan is designed to prevent trades 
in individual NMS stocks from occurring outside specified price bands.
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    \3\ NSX Rule 11.20.
    \4\ NSX Rule 11.19.
    \5\ See Securities Exchange Act Release No. 64547 (May 25, 
2011), 76 FR 31647 (June 1, 2011).
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    The Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues 
(``Committee'') has recommended that, in addition to the initiatives 
already adopted or proposed, the markets should consider reforming the 
existing market-wide circuit breakers. Among other things, the 
Committee noted that the interrelatedness of today's highly electronic 
markets warrants the need to review the present operation of the 
system-wide circuit breakers now in place. Specifically, the Committee 
recommended that the markets consider replacing the Dow Jones 
Industrial Average (``DJIA'') with the S&P 500[reg] Index (``S&P 
500''), revising the 10%, 20%, and 30% decline percentages, reducing 
the length of trading halts, and allowing halts to be triggered up to 
3:30 p.m. Eastern Time.\6\
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    \6\ See Summary Report of the Committee, ``Recommendations 
Regarding Regulatory Responses to the Market Events of May 6, 2010'' 
(Feb, 18, 2011). The Exchange notes that NYSE Euronext submitted a 
comment letter to the Committee that recommended, among other 
things, reform of the market-wide circuit breaker rules. See Letter 
to Elizabeth Murphy, Secretary, Commission, from Janet M. Kissane, 
SVP and Corporate Secretary, NYSE Euronext (July 19, 2010). The 
proposed reforms set forth in this rule proposal differ slightly 
from the changes recommended in that comment letter, and represent 
consensus among the markets of how to address reform of the market-
wide circuit breakers.
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    The Exchange, along with other markets and FINRA, has taken into 
consideration the Committee's recommendations, and with some 
modifications, has proposed changes to market-wide circuit breakers 
that the Exchange believes will provide for a more meaningful measure 
in today's faster, more electronic markets, of when to halt stocks on a 
market-wide basis as a result of rapid market declines.
Background
    NSX Rule 11.20A provides for market-wide halts in trading at 
specified levels in order to promote stability and investor confidence 
during a period of significant stress. As the Commission noted in its 
approval order, Rule 11.20 was intended to enable market participants 
to establish an equilibrium between buying and selling interest and to 
ensure that market participants have an opportunity to become aware of 
and respond to significant price movements. Importantly, the market-
wide circuit breakers were not intended to prevent markets from 
adjusting to new price levels; rather, they provide for a speed bump 
for extremely rapid market declines.
    In its current form, the rule provides for Level 1, 2, and 3 
declines and specified trading halts following such declines. The 
values of Levels 1, 2 and 3 are calculated at the beginning of each 
calendar quarter, using 10%, 20% and 30%, respectively, of the average 
closing value of the DJIA for the month prior to the beginning of the 
quarter. Each percentage calculation is rounded to the nearest fifty 
points to create the Levels' trigger points. The new trigger levels are 
disseminated quarterly to the media and via an NYSE Euronext 
Information Memo and are available on the NYSE Euronext's Web site.\7\ 
The values then remain in effect until the next quarterly calculation, 
notwithstanding whether the DJIA has moved and a Level 1, 2, or 3 
decline is no longer equal to an actual 10%, 20%, or 30% decline in the 
most recent closing value of the DJIA.
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    \7\ See, e.g., NYSE Regulation Information Memos 11-19 (June 30, 
2011) and 11-10 (March 31, 2011).
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    Once a Rule 11.20A circuit breaker is in effect, trading in all 
stocks halt for the time periods specified below:

Level 1 Halt

    Anytime before 2 p.m.\8\--one hour; at or after 2 p.m. but before 
2:30 p.m.--30 minutes; at or after 2:30 p.m.--trading shall continue, 
unless there is a Level 2 Halt.
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    \8\ Please note all referenced times herein are Eastern Time.
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Level 2 Halt

    Anytime before 1 p.m.--two hours; at or after 1 p.m. but before 2 
p.m.--one hour; at or after 2 p.m.--trading shall halt and not resume 
for the rest of the day.

Level 3 Halt

    At any time--trading shall halt and not resume for the rest of the 
day.
    Unless stocks are halted for the remainder of the trading day, 
price indications are disseminated during a Rule 11.20A trading halt 
for stocks that comprise the DJIA.
Proposed Amendments
    As noted above, the Exchange, other equities, options, and futures 
markets, and FINRA propose to amend the market-wide circuit breakers to 
take into consideration the recommendations of the Committee, and to 
provide for more meaningful measures in today's markets of when to halt 
trading in all stocks. Accordingly, the Exchange proposes to amend Rule 
11.20A as follows: (i) Replace the DJIA with the S&P 500; (ii) replace 
the quarterly calendar recalculation of Rule 11.20A triggers with daily 
recalculations; (iii) replace the 10%, 20%, and 30% market decline 
percentages with 7%, 13%, and 20% market decline percentages; (iv) 
modify the length of the trading halts associated with each market 
decline level; and (v) modify the times when a trading halt may be 
triggered. The Exchange believes that these proposed amendments update 
the rule to reflect today's high-speed, highly electronic trading 
market while still meeting the original purpose of Rule 11.20A: to 
ensure that market participants have an opportunity to become aware of 
and respond to significant price movements.

[[Page 61452]]

    First, the Exchange proposes to replace the DJIA with the S&P 500. 
The Exchange believes that because the S&P 500 is based on the trading 
prices of 500 stocks, as compared to the 30 stocks that comprise the 
DJIA, the S&P 500 represents a broader base of securities against which 
to measure whether extraordinary market-wide volatility is occurring. 
In addition, as noted by the Committee, using an index that correlates 
closely with derivative products, such as the E-Mini and SPY, will 
allow for a better cross-market measure of market volatility.
    Second, the Exchange proposes to change the recalculation of the 
trigger values from once every calendar quarter to daily. The Exchange 
believes that updating the trigger values daily will better reflect 
current market conditions. In particular, a daily recalculation will 
ensure that the percentage drop triggers relate to current market 
conditions, and are not compared to what may be stale market 
conditions. As noted in the proposed rule, the daily calculations of 
the trigger values will be published before the trading day begins.\9\
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    \9\ The listing exchanges, has advised the Exchange and other 
markets that they will issue a circular regarding the specific 
methodology for publishing the daily calculations, as well as the 
manner by which all markets will halt trading in all stocks should a 
Rule 11.20A trading halt be triggered.
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    Third, the Exchange proposes to decrease the current Level 1, 2, 
and 3 declines of 10%, 20%, and 30% to a Level 1 Market Decline of 7%, 
a Level 2 Market Decline of 13%, and Level 3 Market Decline of 20%. In 
particular, as demonstrated by the May 6, 2010 flash crash, the current 
Level 1 10% decline may be too high a threshold before determining 
whether to halt trading across all securities. In fact, since adoption, 
the markets have halted only once, on October 27, 1997.\10\ 
Accordingly, to reflect the potential that a lower, yet still 
significant decline may warrant a market-wide trading halt, the 
Exchange proposes to lower the market decline percentage thresholds.
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    \10\ At that time, the triggers were based on absolute declines 
in the DJIA (350 point decrease for a Level 1 halt and 550 point 
decrease for a Level 2 halt).
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    As further proposed, the Exchange would halt trading based on a 
Level 1 or Level 2 Market Decline only once per day. For example, if a 
Level 1 Market Decline were to occur and trading were halted, following 
the reopening of trading, the Exchange would not halt the market again 
unless a Level 2 Market Decline were to occur. Likewise, following the 
reopening of trading after a Level 2 Market Decline, the Exchange would 
not halt trading again unless a Level 3 Market Decline were to occur, 
at which point, trading in all stocks would be halted until the primary 
market opens the next trading day.
    Fourth, to correspond with the lower percentages associated with 
triggering a trading halt, the Exchange also proposes to shorten the 
length of the market-wide trading halts associated with each Level. As 
proposed, a Level 1 or 2 Market Decline occurring after 9:30 a.m. and 
up to and including 3:25 p.m., would result in a trading halt in all 
stocks for 15 minutes.
    The Exchange believes that by reducing the percentage threshold, 
coupled with the reduced length of a trading halt, the proposed rule 
would allow for trading halts for serious market declines, while at the 
same time, would minimize disruption to the market by allowing for 
trading to continue after the proposed more-abbreviated trading halt. 
The Exchange believes that in today's markets, where trading 
information travels in micro-second speed, a 15-minute trading halt 
strikes the appropriate balance between the need to halt trading for 
market participants to assess the market, while at the same time 
reducing the time that the market is halted.
    Finally, because the proposed Level 1 and Level 2 trading halts 
will now be 15 minutes, the Exchange proposes amending the rule to 
allow for a Level 1 or 2 Market Decline to trigger a trading halt up to 
3:25 p.m. (or in the case of an early scheduled close, 12:25 p.m.). 
Under the current rule, a trading halt cannot be triggered after 2:30 
p.m., and this time corresponds to the need for the markets both to 
reopen following a 30-minute halt and to engage in a fair and orderly 
closing process. However, as the markets experienced on May 6, 2010, 
even if the Level 1 decline had occurred that day, because the market 
decline occurred after 2:30 p.m., it would not have triggered a halt 
under the current rule. The Committee recommended that trading halts be 
triggered up to 3:30 p.m. The Exchange agrees that the proposed 
amendments must strike the appropriate balance between permitting 
trading halts as late in the day as feasible without interrupting the 
closing process.
    Accordingly, to accommodate existing Exchange rules concerning 
closing procedures, the Exchange proposes that the last Level 1 or 
Level 2 Market Decline trading halt should be 3:25 p.m. (or in the case 
of an early scheduled close, 12:25 p.m.). The Exchange proposes 3:25 
p.m. (or in the case of an early scheduled close, 12:25 p.m.) as the 
cut-off time so that there is time following the 15-minute trading halt 
for the markets to reopen before the 3:45 cut-off (and a 12:45 p.m. 
cut-off time for an early scheduled close) for certain stocks under 
Exchange rules.
    As with current Level 3 declines, under the proposed rule, a Level 
3 Market Decline would halt trading for the remainder of the trading 
day, including any trading that may take place after 4:00 p.m., and 
would not resume until the next trading day.
    In addition to these proposed changes, the Exchange proposes to add 
to Rule 11.20A how the markets will reopen following a 15-minute 
trading halt. In particular, similar to the reopening procedures set 
forth in Rule 11.20B(b), the Exchange proposes that if the primary 
market halts trading in all stocks, all markets will halt trading in 
those stocks until the primary market has resumed trading or notice has 
been provided by the primary market that trading may resume. As further 
proposed, if the primary market does not re-open a security within 15 
minutes following the end of the trading halt, other markets may resume 
trading in that security.
2. Statutory Basis
    The basis under the Act for these proposed rule changes are the 
requirement under Section 6(b)(5) \11\ that an Exchange have rules that 
are designed 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. Specifically, this rule proposal 
supports the objectives of perfecting the mechanism of a free and open 
market and the national market system because it promotes uniformity 
across markets concerning when and how to halt trading in all stocks as 
a result of extraordinary market volatility.
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    \11\ 15 U.S.C. 78f(b)(5).
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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.

[[Page 61453]]

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) As the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed 
changes to the market-wide circuit breaker regime are consistent with 
the Act. The Commission specifically requests comment on the following:
     As discussed above, the proposed rule change would narrow 
the percentage market declines that would trigger a market-wide halt in 
trading. How would the proposed changes interact with the existing 
single-stock circuit breaker pilot program \12\ or, if approved, the 
proposed NMS Plan to establish a limit-up/limit-down mechanism for 
individual securities? \13\
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    \12\ See Securities Exchange Act Release No. 64735 (June 23, 
2011), 76 FR 38243 (June 29, 2011) (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) (approving the ``Phase III Pilot 
Program''). The Phase III Pilot Program has been extended through 
January 2012. See, e.g., Securities Exchange Act Release 65094 
(August 10, 2011), 76 FR 50779 (August 16, 2011) (SR-NASDAQ-2011-
011).
    \13\ See Securities Exchange Act Release No. 64547 (May 25, 
2011), 76 FR 31647 (June 1, 2011).
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     To what extent could the concurrent triggering of single 
stock circuit breakers in many S&P 500 Index stocks lead to 
difficulties in calculating the index? Would the triggering of many 
single stock circuit breakers in a general market downturn cause the 
index calculation to become stale and thereby delay the triggering of 
the market-wide circuit breaker?
     Should the market-wide circuit breaker be triggered if a 
sufficient number of single-stock circuit breakers or price limits are 
triggered, and materially affect calculations of the S&P 500 Index?
     Should market centers implement rules that mandate 
cancellation of pending orders in the event a market-wide circuit 
breaker is triggered? If so, should such a rule require cancellation of 
all orders or only certain order types (e.g., limit orders)? Should all 
trading halts trigger such cancellation policies or should the 
cancellation policies apply only to a Level 3 Market Decline?
     Should some provision be made to end the regular trading 
session if a market decline suddenly occurs after 3:25 p.m. but does 
not reach the 20% level?
     In the event of a Level 3 Market Decline, should some 
provision be made for the markets to hold a closing auction?
     Should the primary market have a longer period (e.g., 30 
minutes) to reopen trading following a Level 2 Market Decline before 
trading resumes in other venues?
     In the event of a Level 3 Market Decline, should the 
markets wait for the primary market to reopen trading in a particular 
security on the next trading day before trading in that security 
resumes?
    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-2011-11 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-2011-11. 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 NSX. 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-2011-11 and should be 
submitted on or before October 25, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-25527 Filed 10-3-11; 8:45 am]
BILLING CODE 8011-01-P


