
[Federal Register Volume 76, Number 192 (Tuesday, October 4, 2011)]
[Notices]
[Pages 61460-61463]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-25524]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65426; File No. SR-CHX-2011-30]


Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Notice of Filing 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, the Chicago Stock Exchange, Inc. 
(``Exchange'' or ``CHX'') 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 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes [sic] amend Exchange Article 20, Rule 2 to 
revise the current methodology for determining when to halt trading in 
all stocks due to extraordinary market volatility. The text of this 
proposed rule change is available on the Exchange's Web site at (http://www.chx.com), at the Exchange's Office of the Secretary and in 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 CHX included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received regarding the proposal. The text of 
these statements may be examined at the places specified in Item IV 
below. The CHX 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend Exchange Article 20, Rule 2 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 Commission and the Commodity Futures 
Trading Commission.
    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.\5\ 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'').\6\ 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\ CHX Article 20, Rule 2(e).
    \4\ CHX Article 20, Rule 10.
    \5\ CHX Article 16, Rule 8a(2).
    \6\ 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

[[Page 61461]]

of trading halts, and allowing halts to be triggered up to 2:30 p.m. 
Central Time.\7\
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    \7\ 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 exchanges and FINRA have taken into consideration the 
Committee's recommendations, and with some modifications, have 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
    The Exchange adopted Article 20, Rule 2 in October 1988 as part of 
an effort by the securities and futures markets to implement a 
coordinated means to address potentially destabilizing market 
volatility.\8\ CHX Article 20, Rule 2 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, Article 20, Rule 2 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.\9\
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    \8\ See Securities Exchange Act Release No. 26198 (Oct. 19, 
1988).
    \9\ Id.
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    In its current form,\10\ 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 NYSE disseminates the 
new trigger levels quarterly to the media and via an Information Memo 
and is available on the Exchange's Web site.\11\ 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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    \10\ The rule was last amended in 1998, when declines based on 
specified point drops in the DJIA were replaced with the current 
methodology of using a percentage decline that is recalculated 
quarterly. See Securities Exchange Act Release No. 39846 (April 9, 
1998), 63 FR 18477 (April 15, 1998) (SR-NYSE-98-06, SR-Amex-98-09, 
SR-BSE-98-06, SR-CHX-98-08, SR-NASD-98-27, and SR-Phlx-98-15).
    \11\ See, e.g., NYSE Regulation Information Memos 11-19 (June 
30, 2011) and 11-10 (March 31, 2011).
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    Once an Article 20, Rule 2 circuit breaker is in effect, trading in 
all stocks halt [sic] for the time periods (all times are Central Time) 
specified below:

Level 1 Halt
    Anytime before 1 p.m.--one hour; at or after 1 p.m. but before 1:30 
p.m.--30 minutes; at or after 1:30 p.m.--trading shall continue, unless 
there is a Level 2 Halt.

Level 2 Halt
    Anytime before 12 p.m.--two hours; at or after 12 p.m. but before 1 
p.m.--one hour; at or after 1 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 an Article 20, Rule 2 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 
Article 20, Rule 2 as follows: (i) Replace the DJIA with the S&P 500; 
(ii) replace the quarterly calendar recalculation of Article 20, Rule 2 
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 
Article 20, Rule 2: to ensure that market participants have an 
opportunity to become aware of and respond to significant price 
movements.
    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.\12\
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    \12\ The NYSE and other markets will advise via Trader Update 
the specific methodology for publishing the daily calculations, as 
well as the manner by which the markets will halt trading in all 
stocks should an Article 20, Rule 2 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.\13\ 
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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    \13\ 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

[[Page 61462]]

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 8:30 a.m. 
Central Time and up to and including 2:25 p.m. or in the case of an 
early scheduled close, 11:25 a.m. Central Time, 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 
2:25 p.m. or in the case of an early scheduled close, 11:25 a.m. 
Central Time. Under the current rule, a trading halt cannot be 
triggered after 1:30 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 1:30 p.m., it would not have 
triggered a halt under the current rule. The Committee recommended that 
trading halts be triggered up to 2:30 p.m. Central Time. 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 NYSE rules concerning closing 
procedures, including the publication of imbalance information 
beginning at 2:45 p.m. Central, and the restrictions on entry and 
cancellation of market on close (``MOC'') and limit on close (``LOC'') 
orders after 2:45 p.m.,\14\ the Exchange proposes that the last Level 1 
or Level 2 Market Decline trading halt should be 2:25 p.m. or in the 
case of an early scheduled close, 11:25 a.m. Central Time. The Exchange 
proposes 2:25 p.m. or in the case of an early scheduled close, 11:25 
a.m. Central Time as the cut-off time so that there is time following 
the 15-minute trading halt for the markets to reopen before the 2:45 
cut-off for entry and cancellation of MOC and LOC orders under NYSE 
rules.
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    \14\ See NYSE Rule 123C.
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    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 3 p.m., Central 
Time, and would not resume until the next trading day.
    In addition to these proposed changes, the Exchange proposes to add 
to Article 20, Rule 2 how the markets will reopen following a 15-minute 
trading halt. In particular, similar to the reopening procedures set 
forth in Article 20, Rule 2, 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 bases under the Act for these proposed rule changes are the 
requirement under Section 6(b)(5) \15\ 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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    \15\ 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 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 either solicited or received.

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 
designated 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 such 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 \16\ or, if approved, the 
proposed NMS Plan to establish a limit-up/limit-down mechanism for 
individual securities? \17\
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    \16\ 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).
    \17\ 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

[[Page 61463]]

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-CHX-2011-30 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-CHX-2011-30. 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-CHX-2011-30 and should be 
submitted on or before October 25, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-25524 Filed 10-3-11; 8:45 am]
BILLING CODE 8011-01-P


