
[Federal Register Volume 76, Number 192 (Tuesday, October 4, 2011)]
[Notices]
[Pages 61416-61419]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-25517]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65435; File No. SR-NASDAQ-2011-131]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Revise the Methodology for 
Determining When to Halt Trading 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 NASDAQ Stock Market LLC (``NASDAQ'' or 
``Exchange'') 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, pursuant to Section 19(b)(1) of the Act \3\ and Rule 
19b-4 thereunder,\4\ proposes to amend Exchange Rule 4121 to revise the 
methodology for determining when to halt trading in all stocks due to 
extraordinary market volatility. The proposal is made in conjunction 
with all national securities exchanges and the Financial Industry 
Regulatory Authority (``FINRA'').
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    \3\ 15 U.S.C. 78s(b)(1).
    \4\ 17 CFR 240.19b-4.
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    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaq.cchwallstreet.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 Exchange 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 Exchange 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 Rule 4121 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 \5\ and related changes to the clearly 
erroneous execution rules \6\ and more stringent market maker quoting 
requirements.\7\ 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'').\8\ 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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    \5\ NASDAQ Rule 4120(a)(11).
    \6\ NASDAQ Rule 11890.
    \7\ NASDAQ Rule 4613.
    \8\ 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.\9\
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    \9\ See Summary Report of the Committee, ``Recommendations 
Regarding Regulatory Responses to the Market Events of May 6, 2010'' 
(Feb, 18, 2011).
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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 Rule 4121 when it registered as an exchange in 
January of 2006.\10\ Rule 4121 provides that upon SEC request Nasdaq 
will halt all domestic trading in both securities listed on Nasdaq and 
securities traded on Nasdaq pursuant to unlisted trading privileges if 
other major securities markets initiate marketwide trading halts in 
response to extraordinary market conditions. In effect, the Exchange 
agreed via Rule 4121 to abide by marketwide halts called for by the SEC 
in conjunction with other listing markets. The standards governing such 
halts were adopted in 1988 as part of an effort by the securities and 
futures markets to implement a coordinated means to address potentially 
destabilizing market volatility.\11\
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    \10\ See Securities Exchange Act Release No. 53128 (Jan. 13, 
2006).
    \11\ See Securities Exchange Act Release No. 26198 (Oct. 19, 
1988).
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    The purpose of a marketwide halt, as embodied in Rule 4121, is 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

[[Page 61417]]

bump for extremely rapid market declines.\12\
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    \12\ Id.
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    The current standard, set forth in the rules of other 
exchanges,\13\ 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 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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    \13\ 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).
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    Once a marketwide 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 during a 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 amend Rule 
4121 to create the following standards: (i) Replace the DJIA with the 
S&P 500; (ii) replace the quarterly calendar recalculation of Rule 80B 
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 ensuring 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.\14\
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    \14\ The Exchange 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 a Rule 4121 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.\15\ 
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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    \15\ 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. 
Eastern and up to and including 3:25 p.m. Eastern, 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 scheduled early closure, at 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,

[[Page 61418]]

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, including the publication of imbalance information 
beginning at 3:50 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.,\16\ the Exchange proposes that the last Level 1 or Level 2 
Market Decline trading halt should begin no later than 3:25 p.m. (or, 
in the case of scheduled early closure, at 12:25 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 reopen before the 3:45 
cut-off for entry and cancellation of MOC and LOC orders under Exchange 
rules.
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    \16\ See NASDAQ Rule 4754(b).
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    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 p.m., Eastern, and would not resume until 
the next trading day.
    In addition to these proposed changes, the Exchange proposes to add 
to Rule 4121 how the markets will reopen following a 15-minute trading 
halt. In particular, 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 statutory basis for the proposed rule change is Section 6(b)(5) 
of the Act,\17\ which requires the rules of an exchange 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. The 
proposed rule change also is designed to support the principles of 
Section 11A(a)(1) \18\ of the Act in that it seeks to assure fair 
competition among brokers and dealers and among exchange markets. The 
Exchange believes that the proposed rule meets these requirements in 
that it promotes transparency and uniformity across markets concerning 
decisions to pause [sic] trading in a security when there are 
significant price movements.
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    \17\ 15 U.S.C. 78f(b)(5).
    \18\ 15 U.S.C. 78k-1(a)(1).
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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 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 
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 Exchange 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-NASDAQ-2011-131 on the subject line.

[[Page 61419]]

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-NASDAQ-2011-131. 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-
NASDAQ-2011-131 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. 2011-25517 Filed 10-3-11; 8:45 am]
BILLING CODE 8011-01-P


