
[Federal Register Volume 76, Number 192 (Tuesday, October 4, 2011)]
[Notices]
[Pages 61447-61450]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-25528]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65438; File No. SR-CBOE-2011-087]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Proposed Rule Change Related to Market-Wide 
Circuit Breakers

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 Chicago Board Options Exchange, Incorporated 
(``Exchange'' or ``CBOE'') 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 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 amend Exchange Rule 6.3B to revise the 
current methodology for determining when to halt trading in all stock 
options trading on CBOE and in all stocks trading on the CBOE Stock 
Exchange, LLC (``CBSX,'' the CBOE's stock trading facility), due to 
extraordinary market volatility. The text of the rule proposal is 
available on the Exchange's Web site (http://www.cboe.org/legal), at 
the Exchange's Office of the Secretary, and at 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 self-regulatory organization 
included statements concerning the purpose of and basis for the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

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

1. Purpose
    The Exchange proposes to amend its rules to revise the current 
methodology for determining when to halt trading in all stocks and 
stock options 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 (``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 stock 
market clearly erroneous execution rules \4\ and more stringent stock 
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\ Exchange Rule 6.3C.
    \4\ Exchange Rule 52.4.
    \5\ Exchange Rules 53.23.01 and 53.56.01.
    \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[supreg] Index (``S&P 
500''), revising the 10%, 20%, and 30% decline percentages, reducing 
the length of trading halts, and allowing halts to be

[[Page 61448]]

triggered up to 2:30 p.m. (all times herein are Central).\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 CBOE submitted a comment 
letter to the Committee that recommended, among other things, reform 
of the market-wide circuit breaker rules. See Letter to Mary 
Schapiro, Chairman, Commission, and Gary Gensler, Chairman, CFTC, 
from Edward J. Joyce, President and Chief Operating Officer, CBOE 
(August 3, 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 and stock options on a 
market-wide basis as a result of rapid market declines.
Background
    The Exchange adopted is its rule on market-wide trading halts 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\ The rule, currently reflected in Exchange Rule 
6.3B, provides for market-wide halts in trading at specified levels in 
order to promote stability and investor confidence during a period of 
significant stress.\9\ As the Commission noted in the 1987 approval 
order, the rule 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.\10\
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    \8\ See Securities Exchange Act Release No. 26198 (Oct. 19, 
1988).
    \9\ Exchange Rule 6.3B does not currently contain any reference 
to the specific levels of decline in the DJIA that would trigger a 
market-wide trading halt. Instead, the rule was amended in 1997 to 
provide that a market-wide halt will be triggered on the Exchange 
whenever a market-wide halt is in effect on the New York Stock 
Exchange (``NYSE''). See Securities Exchange Act Release No. 38221 
(January 31, 1997), 62 FR 5871 (February 7, 1997)(SR-CBOE-96-78).
    \10\ See note 8, supra.
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    In its current form,\11\ 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 distributes new 
trigger levels quarterly to the media and via an NYSE Information Memo, 
and the new trigger levels are also available on the NYSE Web site.\12\ 
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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    \11\ The methodology for calculating market-wide trading halts 
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).
    \12\ See, e.g., NYSE Regulation Information Memos 11-19 (June 
30, 2011) and 11-10 (March 31, 2011).
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    Once a market-wide circuit breaker is in effect, trading in all 
securities on the Exchange, including stock options on CBOE and stocks 
on CBSX, 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.
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 and stock options. Accordingly, the Exchange 
proposes to amend Rule 6.3B as follows: (i) Replace the DJIA with the 
S&P 500; (ii) replace the quarterly calendar recalculation of Rule 6.3B 
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 
the market-wide circuit breaker rules: 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 stocks 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.\13\
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    \13\ The Exchange and other markets will advise via Circular (or 
Trader Alert or similar notice) the specific methodology for 
publishing the daily calculations, as well as the manner by which 
the markets will halt trading in all stocks and stock options should 
a Rule 6.3B 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.\14\ 
Accordingly, to reflect the potential that a lower, yet still 
significant decline may

[[Page 61449]]

warrant a market-wide trading halt, the Exchange proposes to lower the 
market decline percentage thresholds.
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    \14\ 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 and stock options would be halted 
until 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. and 
up to and including 2:25 p.m. or, in the case of an early scheduled 
close, 11:25 a.m., would result in a trading halt in all stocks and 
stock options 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.) 
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. 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 certain existing exchange rules 
concerning closing procedures, including, for example, the publication 
of imbalance information beginning at 2:45 p.m. and the restrictions on 
entry and cancellation of market on close (``MOC'') and limit on close 
(``LOC'') orders after 2:45 p.m.,\15\ 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.). The Exchange 
proposes 2:25 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 2:45 
cut-off for entry and cancellation of MOC and LOC orders under exchange 
rules.
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    \15\ See, e.g., 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., and would 
not resume until the next trading day.
    In addition to these proposed changes, the Exchange proposes to add 
to Rule 6.3B how the markets will reopen following a 15-minute trading 
halt.\16\ For stocks, similar to the reopening procedures set forth in 
Rule 6.3C, the Exchange proposes that if a circuit breaker is initiated 
in all stocks, all markets will halt trading in those stocks until the 
primary listing market has resumed trading in the stock or notice has 
been provided by the primary listing market that trading may resume. As 
further proposed, if the primary listing market does not reopen a stock 
within 15 minutes following the end of the trading halt, other markets 
may resume trading in that stock. For options overlying stocks, similar 
to the reopening procedures set forth in Rule 6.3.06, the Exchange 
proposes that if a circuit breaker is initiated in all stocks, all 
markets will halt trading in the options on those stocks until the 
primary listing market has resumed trading in the stock or notice has 
been provided by the primary listing market that trading may resume. If 
the primary listing market does not reopen a stock within 15 minutes 
following the end of the trading halt, other markets may resume trading 
in the options on that stock if at least one market has resumed traded 
[sic] in the stock. For all other stock options, e.g., stock index 
options, the Exchange proposes that if a circuit breaker is initiated 
in all stocks, all markets shall halt trading in such other stock 
options and may resume trading in such options anytime after the 15-
minute halt period.\17\
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    \16\ Upon reopening, a rotation shall be held in each class of 
options and stock in accordance with the Exchange's opening 
procedures, see, e.g., Rules 6.3B and 51.3, unless the Exchange 
concludes that a different method of reopening is appropriate under 
the circumstances, including but not limited to, no rotation, an 
abbreviated rotation or any other variation in the manner of the 
rotation.
    \17\ The Exchange understands that other markets are submitting 
similar rule changes and revising procedures to address market-wide 
circuit breakers and reopenings for stocks, options and futures. The 
Exchange believes it is integral that the markets have consistent 
procedures for market-wide circuit breakers and reopenings (e.g., 
our intention is to have [sic] same ability to reopen trading in 
stock index options when futures markets reopen). As a result, to 
the extent it may be necessary, the Exchange reserves the right to 
modify its proposed rule change in order to conform its procedures 
based on a review of the rule change filings and procedures of the 
other equities, options and futures markets.
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2. Statutory Basis
    The basis under the Act for these proposed rule changes are [sic] 
the requirement under Section 6(b)(5) \18\ 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 
and stock options as a result of extraordinary market volatility.
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    \18\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE does not believe that the proposed rule change will impose any 
burden on competition 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 neither solicited nor received comments on the 
proposal.

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)

[[Page 61450]]

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
    (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 \19\ or, if approved, the 
proposed NMS Plan to establish a limit-up/limit-down mechanism for 
individual securities? \20\
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    \19\ 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).
    \20\ 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-CBOE-2011-087 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-CBOE-2011-087. 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 CBOE. 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-CBOE-2011-087 and should be 
submitted on or before October 25, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-25528 Filed 10-3-11; 8:45 am]
BILLING CODE 8011-01-P


