
[Federal Register Volume 76, Number 230 (Wednesday, November 30, 2011)]
[Notices]
[Pages 74093-74095]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-30818]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65823; File No. SR-EDGX-2011-36]


Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend 
EDGX Rule 11.14 to Exclude from the Pilot Rule All Rights and Warrants

November 23, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on November 22, 2011, the EDGX Exchange, Inc. (the ``Exchange'' or 
the ``EDGX'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which items have been prepared by the self-regulatory 
organization. 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 EDGX Rule 11.14 to exclude from the 
pilot rule all rights and warrants. The text of the proposed rule 
change is attached as Exhibit 5 \3\ and is available on the Exchange's 
Web site at http://www.directedge.com, at the Exchange's principal 
office, at the Public Reference Room of the Commission, and at http://www.sec.gov.
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    \3\ The Commission notes that Exhibit 5 is attached to the rule 
filing, but not to this Notice.
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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 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend EDGX Rule 11.14(d) to exclude all 
rights and warrants from the single stock circuit breaker under the 
rule. The Commission approved EDGX Rule 11.14 on a pilot basis on June 
10, 2010 to provide for trading pauses in individual securities due to 
extraordinary market volatility (``Trading Pause'') in all securities 
included within the S&P 500[supreg] Index (``S&P 500'') (``Pause 
Pilot'').\4\ The Exchange noted in its filing to adopt EDGX Rule 11.14 
that during the Pause Pilot period it would continue to assess whether 
additional securities need to be added and whether the parameters of 
EDGX Rule 11.14 would need to be modified to accommodate trading 
characteristics of different securities. The Exchange subsequently 
received approval to add to the Pause Pilot the securities included in 
the Russell 1000[supreg] Index (``Russell 1000'') and a specified

[[Page 74094]]

list of Exchange Traded Products (``ETPs'').\5\
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    \4\ 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).
    \5\ 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). The Exchange 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. 63514 (December 9, 2010), 75 
FR 78783 (December 16, 2010) (SR-EDGX-2010-23). On April 5, 2011, 
the Exchange 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. 64204 (April 6, 2011), 76 FR 20394 (April 12, 2011) (SR-
EDGX-2011-11).
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    On June 23, 2011, the Commission approved proposed rule changes of 
the Exchanges to amend certain of their respective rules to expand the 
Pause Pilot to include all remaining NMS stocks (``Phase III 
Securities''), which included rights and warrants.\6\ Unlike the 
original Pause Pilot securities, the rules of primary listing markets 
apply wider percentage price moves to the Phase III Securities before a 
trading pause is triggered.\7\ These changes to the rules of primary 
listing markets became effective on August 8, 2011.
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    \6\ See Securities Exchange Act Release No. 64735 (June 23, 
2011), 76 FR 38243 (June 29, 2011) (SR-EDGX-2011-14 and Amendment 
No. 1 thereto, et al.).
    \7\ Under the rules of primary listing markets, (i.e. Nasdaq 
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.
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    Various exchanges and national securities associations, including 
the Exchange, have analyzed the nature of the trading pauses triggered 
since adoption of the Pause Pilot and noted that over 25% of such 
pauses have occurred in rights and warrants. Further, several primary 
listing markets 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 a scenario whereby the rights and 
warrants trigger the circuit breaker under the rules of various primary 
listing markets and are 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. Accordingly, EDGX is 
proposing to exclude rights and warrants from the trading pauses issued 
by primary listing markets, as referenced in EDGX Rule 11.14(d).
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the 
Act,\8\ in general, and furthers the objectives of Section 6(b)(5),\9\ 
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) \10\ of the Act 
in that it seeks to ensure fair competition among brokers and dealers 
and among exchange markets. The Exchange 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 the rules of various 
primary listing markets 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.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ 15 U.S.C. 78k-1(a)(1).
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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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \11\ and Rule 19b-4(f)(6) thereunder.\12\ 
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 \13\ and Rule 19b-
4(f)(6)(iii) thereunder.\14\
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    \11\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \12\ 17 CFR 240.19b-4(f)(6).
    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 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.
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    A proposed rule change filed under Rule 19b-4(f)(6) \15\ normally 
does not become operative for 30 days after the date of filing. 
However, pursuant to Rule 19b-4(f)(6)(iii) \16\ 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

[[Page 74095]]

the proposal may become operative immediately upon filing.
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    \15\ 17 CFR 240.19b-4(f)(6).
    \16\ 17 CFR 240.19b-4(f)(6)(iii).
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    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 
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.\17\
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    \17\ 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).
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    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-EDGX-2011-36 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-EDGX-2011-36. 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-EDGX-2011-36 and should be 
submitted on or before December 21, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-30818 Filed 11-29-11; 8:45 am]
BILLING CODE 8011-01-P


