
[Federal Register Volume 76, Number 230 (Wednesday, November 30, 2011)]
[Notices]
[Pages 74084-74086]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-30809]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65814; File No. SR-NASDAQ-2011-154]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change to 
Exclude All Rights and Warrants from the Pilot Rule for Trading Pauses 
Due to Extraordinary Market Volatility

November 23, 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 November 18, 2011, The NASDAQ Stock Market LLC (``NASDAQ''), 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 NASDAQ. The Commission is publishing this notice 
to solicit comments on the proposed rule change from interested 
persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASDAQ proposes to exclude all rights and warrants from the pilot 
trading pause process under Rule 4120(a)(11).
    The text of the proposed rule change is available from NASDAQ's Web 
site at http://nasdaq.cchwallstreet.com/Filings/, at NASDAQ's principal 
office, and at the Commission's Public Reference Room, and 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, NASDAQ 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. NASDAQ 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    NASDAQ proposes to amend Rule 4120(a)(11) to exclude all rights and 
warrants from the trading pause process under the rule. The Commission 
approved Rule 4120(a)(11) on a pilot basis on June 10, 2010, together 
with the analogous rules of other equity exchanges (collectively with 
NASDAQ, the ``Exchanges'') and FINRA, to provide for trading pauses in 
individual securities due to extraordinary market volatility in all 
securities included within the S&P 500 Index (``S&P 500'') (the ``Pause 
Pilot'').\3\ NASDAQ noted in its filing to adopt Rule 4120(a)(11) that 
during the Pause Pilot period it would continue to assess whether 
additional securities need to be added and whether the parameters of 
Rule 4120(a)(11) would need to be modified to accommodate trading 
characteristics of different securities. The Exchanges and FINRA 
subsequently received approval to add to the Pause Pilot the securities 
included in the Russell 1000 Index (``Russell 1000'') and a specified 
list of Exchange Traded Products (``ETPs'').\4\
---------------------------------------------------------------------------

    \3\ The Commission approved the Pause Pilot for all equities 
exchanges and FINRA. See Securities Exchange Act Release No. 62252 
(June 10, 2010), 75 FR 34186 (June 16, 2010) (File Nos. SR-BATS-
2010-014; SR-EDGA-2010-01; SR-EDGX-2010-01; SR-BX-2010-037; SR-ISE-
2010-48; SR-NYSE-2010-39; SR-NYSEAmex-2010-46; SR-NYSEArca-2010-41; 
SR-NASDAQ-2010-061; SR-CHX-2010-10; SR-NSX-2010-05; and SR-CBOE-
2010-047), and Securities Exchange Act Release No. 62251 (June 10, 
2010), 75 FR 34183 (June 16, 2010) (SR-FINRA-2010-025).
    \4\ The Commission approved the addition to the Pause Pilot of 
the securities included in the Russell 1000 and ETPs, where 
applicable, for all equities exchanges and FINRA. See Securities 
Exchange Act Release No. 62884 (September 10, 2010), 75 FR 56618 
(September 16, 2010) (File Nos. SR-BATS-2010-018; SR-BX-2010-044; 
SR-CBOE-2010-065; SR-CHX-2010-14; SR-EDGA-2010-05; SR-EDGX-2010-05; 
SR-ISE-2010-66; SR-NASDAQ-2010-079; SR-NYSE-2010-49; SR-NYSEAmex-
2010-63; SR-NYSEArca-2010-61; and SR-NSX-2010-08, and Securities 
Exchange Act Release No. 62883 (September 10, 2010), 75 FR 56608 
(September 16, 2010) (SR-FINRA-2010-033). NASDAQ submitted a 
proposed rule change shortly after the addition of the Russell 1000 
securities and ETPs to extend the operation of the Pause Pilot, 
which was set to expire on December 10, 2010, until April 11, 2011. 
See Securities Exchange Act Release No. 63505 (December 9, 2010), 75 
FR 78302 (December 15, 2010) (SR-NASDAQ-2010-162). On March 31, 
2011, NASDAQ submitted a proposed rule change to further extend the 
Pause Pilot until the earlier of August 11, 2011 or the date on 
which a limit up/limit down mechanism to address extraordinary 
market volatility, if adopted, applies. See Securities Exchange Act 
Release No. 64174 (April 4, 2011), 76 FR 19819 (April 8, 2011) (SR-
NASDAQ-2011-042). On August 8, 2011, NASDAQ submitted a proposed 
rule change to further extend the Pause Pilot until January 31, 
2012. See Securities Exchange Act Release No. 65094 (August 10, 
2011), 76 FR 50779 (August 16, 2011) (SR-NASDAQ-2011-115).

---------------------------------------------------------------------------

[[Page 74085]]

    On June 23, 2011, the Commission approved proposed rule changes of 
the Exchanges and FINRA to amend their respective rules to expand the 
Pause Pilot to include all remaining NMS stocks (``Phase III 
Securities''), which includes rights and warrants.\5\ Unlike the 
original Pause Pilot securities, amended Rule 4120(a)(11) applies wider 
percentage price moves to the Phase III Securities before a trading 
pause is triggered.\6\ The changes to Rule 4120(a)(11) became effective 
on August 8, 2011.
---------------------------------------------------------------------------

    \5\ See Securities Exchange Act Release No. 64735 (June 23, 
2011), 76 FR 38243 (June 29, 2011) (SR-NASDAQ-2011-067, et al.).
    \6\ Under amended Rule 4120(a)(11), a pause is triggered by a 
30% or more price move in a Phase III Security priced at $1 or 
higher, and by a 50% or more price move to such a security priced 
less than $1. The price of a security is based on the closing price 
on the previous trading day, or, if no closing price exists, the 
last sale reported to the Consolidated Tape on the previous trading 
day.
---------------------------------------------------------------------------

    The Exchanges and FINRA analyzed the nature of the trading pauses 
triggered since adoption of the Pause Pilot and found that over 25% of 
such pauses have occurred in rights and warrants. Further, the 
Exchanges and FINRA have experienced a significant increase in trading 
pauses involving rights and warrants since the implementation of the 
Phase III Securities, with such pauses representing approximately 52% 
[sic] all trading pauses occurring through the end of August 2011. 
Rights and warrants trade on equity exchanges, but are closely related 
to call options. Rights and warrants entitle owners to purchase shares 
of stock at predetermined prices subject to various timing and other 
conditions. Like options, the price of rights and warrants are affected 
by the price of the underlying stock as well as other factors, 
particularly the volatility of the stock. As a consequence, the prices 
of rights and warrants may move more dramatically than the prices of 
the underlying stocks even when the rights and warrants (and the 
underlying stock) are trading in an orderly manner. This difference in 
trading behavior may result in the rights and warrants triggering the 
circuit breaker under Rule 4120(a)(11) and being subject to a trading 
pause, even while the underlying stock continues to trade. This can be 
particularly true of rights and warrants that have low prices. As such, 
the Exchanges and FINRA have determined to exclude rights and warrants 
from the Pause Pilot, and accordingly, NASDAQ is proposing to amend 
Rule 4120(a)(11) to exclude rights and warrants from the rule's 
application.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the 
Act,\7\ in general, and furthers the objectives of Section 6(b)(5),\8\ 
in particular, in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, and to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system. The proposed rule change also is 
designed to support the principles of Section 11A(a)(1) \9\ of the Act 
in that it seeks to ensure fair competition among brokers and dealers 
and among exchange markets. NASDAQ believes that the proposed rule 
meets these requirements because it excludes certain securities from 
the rule's coverage that are prone to triggering pauses because of 
their unique characteristics. These securities are unique in that they 
may move more dramatically than the prices of the underlying stocks to 
which they are related even when both securities are trading in an 
orderly manner. As such, the securities that are subject to this 
proposal may trigger the circuit breaker under Rule 4120(a)(11) and be 
subject to a trading pause, even while the underlying security 
continues to trade. Although there is little benefit in pausing trading 
in these securities, such pauses sequester regulatory resources that 
are better applied to the review of trading pauses in other securities 
that have a greater impact on the national market system.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
    \9\ 15 U.S.C. 78k-1(a)(1).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    NASDAQ does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \10\ and Rule 19b-4(f)(6) thereunder.\11\ 
Because the proposed rule change does not: (i) Significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act \12\ and Rule 19b-
4(f)(6)(iii) thereunder.\13\
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \11\ 17 CFR 240.19b-4(f)(6).
    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires the Exchange to give the Commission written notice of the 
Exchange's intent to file the proposed rule change along with a 
brief description and text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission. The 
Exchange has satisfied this requirement.
---------------------------------------------------------------------------

    A proposed rule change filed under Rule 19b-4(f)(6) \14\ normally 
does not become operative for 30 days after the date of filing. 
However, pursuant to Rule 19b-4(f)(6)(iii) \15\ the Commission may 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the proposal 
may become operative immediately upon filing.
---------------------------------------------------------------------------

    \14\ 17 CFR 240.19b-4(f)(6).
    \15\ 17 CFR 240.19b-4(f)(6)(iii).
---------------------------------------------------------------------------

    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest. 
Including rights and warrants in the pilot program which may trigger a 
circuit breaker and be subject to a trading pause, even while the

[[Page 74086]]

underlying security continues to trade, provides little benefit and has 
the potential to create confusion among investors. Excluding rights and 
warrants from the pilot program should minimize investor confusion that 
could result from temporary trading pauses in these securities. For 
this reason, the Commission designates the proposed rule change as 
operative upon the date of this Notice.\16\
---------------------------------------------------------------------------

    \16\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. 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 email to rule-comments@sec.gov. Please include 
File No. SR-NASDAQ-2011-154 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 No. SR-NASDAQ-2011-154. This file 
number should be included on the subject line if email 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 available publicly. All 
submissions should refer to File No. SR-NASDAQ-2011-154 and should be 
submitted on or before December 21, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
---------------------------------------------------------------------------

    \17\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-30809 Filed 11-29-11; 8:45 am]
BILLING CODE 8011-01-P


