
[Federal Register Volume 76, Number 192 (Tuesday, October 4, 2011)]
[Notices]
[Pages 61438-61441]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-25508]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65425; File No. SR-ISE-2011-61]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Proposed Rule Change Related to Trading Halts Due to 
Extraordinary Market Volatility

September 28, 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 September 27, 2011, the International Securities Exchange, LLC 
(``Exchange'' or ``ISE'') filed with the Securities and Exchange 
Commission (``SEC'' or ``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 to adopt Rule 2102(g) to set forth the 
methodology for determining when trading in all stocks will be halted 
due to extraordinary market volatility.
    The text of the proposed rule change is available on the Exchange's 
Internet Web site at http://www.ise.com, at the principal office of the 
Exchange, at the Commission's Public Reference Room, and at the 
Commission's Web site at http://www.sec.gov.

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 these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
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 adopt section (g) of Rule 2102 to set 
forth the current methodology for determining when trading in all 
stocks will be halted 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\ In addition, on April 5, 2011, the 
equities exchanges and FINRA filed a plan pursuant to Rule 608 of 
Regulation NMS to address

[[Page 61439]]

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\ ISE Rule 2102(f).
    \4\ ISE Rule 2128.
    \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[supreg] 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.\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 exchanges and FINRA have taken into consideration the 
Committee's recommendations, and with some modifications, have proposed 
changes to market-wide circuit breakers. The Exchange believes these 
proposed changes 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
    New York Stock Exchange (``NYSE'') Rule 80B 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, the rule was intended to enable 
market participants to establish 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.\7\
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    \7\ See Securities Exchange Act Release No. 26198 (Oct. 19, 
1988).
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    In its current form, the rule provides for Level 1, 2 and 3 
declines and specified trading halts following such declines (each a 
``Level 1, 2 or 3 Halt,'' respectively). The values of Levels 1, 2 and 
3 are calculated at the beginning of each calendar quarter by the 
primary listing market, 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 primary listing 
markets disseminate the new trigger levels quarterly to the media, via 
information memos and publication on their Web sites. 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.
    Once a NYSE Rule 80B circuit breaker is in effect, trading in all 
stocks halt for the time periods specified below:
Level 1 Halt
    Anytime before 2 p.m.--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.
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 by the primary listing market during 
a NYSE Rule 80B 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 adopt Rule 
2102(g), which will reflect the follows [sic] changes to current NYSE 
Rule 80B: (i) Replace the DJIA with the S&P 500; (ii) replace the 
quarterly calendar recalculation of NYSE Rule 80B triggers with daily 
recalculations; (iii) replace the 10%, 20% and 30% market decline 
percentages with 7%, 13% and 20% market decline percentages (each a 
``Level 1, 2 or 3 Market Decline,'' respectively); (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 the rule: 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 SPDR S&P 500 
Exchange-Traded Fund (``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.\8\
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    \8\ The primary listing 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 a Rule 11.14 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 for

[[Page 61440]]

determining whether to halt trading across all securities. In fact, 
since adoption, the markets have halted only once, on October 27, 
1997.\9\ 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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    \9\ 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, trading on the Exchange will be halted based 
on a Level 1 or Level 2 Market Decline only once per day. For example, 
if a Level 1 Market Decline was to occur and trading was halted, 
following the re-opening of trading, trading would not halt again 
unless a Level 2 Market Decline was to occur. Likewise, following the 
re-opening of trading after a Level 2 Market Decline, trading would not 
be halted again unless a Level 3 Market Decline was to occur, at which 
point, trading in all stocks would be halted until the primary listing 
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. 
Eastern Time (``ET'') \10\ and up to and including 3:25 p.m. ET, would 
result in a trading halt in all stocks for 15 minutes.
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    \10\ The Exchange notes that all times listed throughout this 
filing are in Eastern Time.
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    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 speeds, 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. 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 re-open 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 primary listing market rules 
concerning closing procedures, including the publication of imbalance 
information beginning at 3:45 p.m. and the restrictions on entry and 
cancellation of market on close (``MOC'') and limit on close (``LOC'') 
orders after 3:45 p.m.,\11\ the Exchange proposes that the last Level 1 
or Level 2 Market Decline trading halt should be 3:25 p.m. The Exchange 
proposes 3:25 p.m. as the cut-off time so that there is time following 
the 15-minute trading halt for the markets to re-open before the 3:45 
p.m. cut-off for entry and cancellation of MOC and LOC orders under 
primary listing market rules.\12\
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    \11\ See, e.g., NYSE Rule 123C.
    \12\ Id.
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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 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 2102(g) how the Exchange will re-open following a 15-minute 
trading halt and to Rule 2102(f) how the Exchange will re-open 
following a 10-minute trading pause. In particular, the Exchange 
proposes that if the primary listing market halts trading in all 
stocks, the Exchange will halt trading in those stocks until the 
primary listing market has resumed trading or notice has been provided 
by the primary listing market that trading may resume. As further 
proposed, if the primary listing market does not re-open a security 
within 15 minutes following the end of the trading halt, or within 10 
minutes following the end of a trading pause, the Exchange may resume 
trading in that security.
    As a result of the proposed changes described above, the Exchange 
proposes to clarify that 2102(e) applies to trading halts in new 
derivative securities, so as to not be confused with newly proposed 
provisions for trading halts in 2102(g). ISE Rule 2102(e) governs 
trading halts in new derivative securities products when a temporary 
interruption occurs in the calculation or wide dissemination of the 
intraday indicative value (``IIV'') or the value of the underlying 
index by a major market data vendor. Therefore, ISE is clarifying that 
this subsection applies to halts in new derivative securities products 
and proposed ISE Rule 2102(g) applies to trading halts due to 
extraordinary market volatility.
2. Statutory Basis
    The statutory basis for the proposed rule change is Section 6(b)(5) 
of the Act,\13\ which require 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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    \13\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change does not 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

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

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 such proposed rule change, or

[[Page 61441]]

    (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 \14\ or, if approved, the 
proposed NMS Plan to establish a limit-up/limit-down mechanism for 
individual securities? \15\
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    \14\ 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).
    \15\ 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-ISE-2011-61 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-ISE-2011-61. 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-ISE-2011-61 and should be 
submitted on or before October 25, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-25508 Filed 10-3-11; 8:45 am]
BILLING CODE 8011-01-P


