
[Federal Register Volume 77, Number 2 (Wednesday, January 4, 2012)]
[Notices]
[Pages 316-319]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-33746]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66065; File Nos. SR-BATS-2011-038; SR-BYX-2011-025; SR-
BX-2011-068; SR-CBOE-2011-087; SR-C2-2011-024; SR-CHX-2011-30; SR-EDGA-
2011-31; SR-EDGX-2011-30; SR-FINRA-2011-054; SR-ISE-2011-61; SR-NASDAQ-
2011-131; SR-NSX-2011-11; SR-NYSE-2011-48; SR-NYSEAmex-2011-73; SR-
NYSEArca-2011-68; SR-Phlx-2011-129]


Self-Regulatory Organizations; BATS Exchange, Inc.; BATS Y-
Exchange, Inc.; NASDAQ OMX BX, Inc.; Chicago Board Options Exchange, 
Incorporated; C2 Options Exchange, Incorporated; Chicago Stock 
Exchange, Inc.; EDGA Exchange, Inc.; EDGX Exchange, Inc.; Financial 
Industry Regulatory Authority, Inc.; International Securities Exchange 
LLC; The NASDAQ Stock Market LLC; New York Stock Exchange LLC; NYSE 
Amex LLC; NYSE Arca, Inc.; National Stock Exchange, Inc.; NASDAQ OMX 
PHLX LLC; Order Instituting Proceedings To Determine Whether To 
Disapprove Proposed Rule Changes Relating to Trading Halts Due to 
Extraordinary Market Volatility

December 28, 2011.

I. Introduction

    On September 27, 2011, each of BATS Exchange, Inc. (``BATS''), BATS 
Y-Exchange, Inc. (``BYX''), NASDAQ OMX BX, Inc. (``BX''), Chicago Board 
Options Exchange, Incorporated (``CBOE''), C2 Options Exchange, 
Incorporated (``C2''), Chicago Stock Exchange, Inc. (``CHX''), EDGA 
Exchange, Inc. (``EDGA''), EDGX Exchange, Inc. (``EDGX''), Financial 
Industry Regulatory Authority, Inc. (``FINRA''), International 
Securities

[[Page 317]]

Exchange LLC (``ISE''), The NASDAQ Stock Market LLC (``Nasdaq''), 
National Stock Exchange, Inc. (``NSX''), New York Stock Exchange LLC 
(``NYSE''), NYSE Amex LLC (``NYSE Amex''), NYSE Arca, Inc. (``NYSE 
Arca''), and NASDAQ OMX PHLX LLC (``Phlx'') (collectively, the 
``SROs'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ 
proposed rule changes (the ``SRO Proposals'') to amend certain of their 
respective rules relating to trading halts due to extraordinary market 
volatility. The SRO Proposals were published for comment in the Federal 
Register on October 4, 2011.\3\ The Commission received seven comment 
letters on the SRO Proposals.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release Nos. 65437 (September 
28, 2011), 76 FR 61466 (October 4, 2011); 65428 (September 28, 
2011), 76 FR 61453 (October 4, 2011); 65429 (September 28, 2011), 76 
FR 61432 (October 4, 2011); 65433 (September 28, 2011), 76 FR 61453 
(October 4, 2011); 65438 (September 28, 2011), 76 FR 61447 (October 
4, 2011); 65426 (September 28, 2011), 76 FR 61460 (October 4, 2011); 
65431 (September 28, 2011), 76 FR 61425 (May 12, 2011); 65440 
(September 28, 2011), 76 FR 61444 (October 4, 2011); 65430 
(September 28, 2011), 76 FR 61429 (October 4, 2011); 65425 
(September 28, 2011), 76 FR 61438 (October 4, 2011); 65435 (May 6, 
2011), 76 FR 61416 (October 4, 2011); 65436 (September 28, 2011), 76 
FR 61450 (October 4, 2011); 65427 (September 28, 2011), 76 FR 61457 
(October 4, 2011); 65432 (September 28, 2011), 76 FR 61422 (October 
4, 2011); 65439 (September 28, 2011), 76 FR 61463 (October 4, 2011); 
65434 (September 28, 2011), 76 FR 61419 (October 4, 2011) 
(collectively, the ``Notices'').
    \4\ See Letter to Elizabeth M. Murphy, Secretary, Commission, 
from Ann L. Vlcek, Managing Director and Associate General Counsel, 
the Securities Industry and Financial Markets Association, dated 
October 27, 2011 (``SIFMA Letter''); Letter to Commission, from 
James J. Angel, Ph.D., CFA, Associate Professor of Finance, 
Georgetown University, McDonough School of Business, dated October 
25, 2011 (``Angel Letter''); Letter to Elizabeth M. Murphy, 
Secretary, Commission, from Craig S. Donohue, CME Group, Inc., dated 
October 25, 2011 (``CME Group Letter''); Letter to Elizabeth M. 
Murphy, Secretary, Commission, from Commissioner Bart Chilton, 
Commodity Futures Trading Commission, dated October 25, 2011 
(``Commissioner Chilton Letter''); Letter to Elizabeth M. Murphy, 
Secretary, Commission, from Richard H. Baker, President and CEO, 
Managed Funds Association, dated October 25, 2011 (``MFA Letter''); 
Letter from Suzanne H. Shatto, dated October 20, 2011; Letter from 
Mark Roszak, dated October 4, 2011.
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    On November 17, 2011, the Commission extended the time period in 
which to either approve the SRO Proposals, disapprove the SRO 
Proposals, or to institute proceedings to determine whether to 
disapprove the SRO Proposals, to December 30, 2011.\5\ This order 
institutes proceedings under Section 19(b)(2)(B) of the Act to 
determine whether to disapprove the SRO Proposals.
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    \5\ See Securities Exchange Act Release No. 65770, 76 FR 72492 
(November 23, 2011).
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II. Description of the Proposals

    In the SRO Proposals, the exchanges and FINRA propose to revise the 
existing market-wide circuit breakers, which halt trading in all NMS 
securities in the event of extraordinary market volatility, in order to 
make them more meaningful in today's high-speed electronic markets. In 
so doing, the exchanges and FINRA took into account the events of May 
6, 2010, where the markets experienced excessive volatility in a short 
period of time, as well as the recommendations of the Joint CFTC-SEC 
Advisory Committee on Emerging Regulatory Issues.
    The existing market-wide circuit breakers provide for specified 
trading halts following certain ``Level 1,'' ``Level 2,'' and ``Level 
3'' market declines.\6\ 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 Dow Jones Industrial 
Average (``DJIA'') for the month prior to the beginning of the 
quarter.\7\ The existing Level 1, Level 2, and Level 3 circuit breakers 
operate as follows:
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    \6\ See NYSE Rule 80B.
    \7\ Each percentage calculation is rounded to the nearest 50 
points, and remains in effect until the next quarterly calculation.
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Level 1 Halt

    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

    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.
    As described in detail in the Notices, the SRO Proposals, among 
other things, would: (i) Replace the DJIA with the S&P 500[supreg] 
Index (``S&P 500'') as the reference index; (ii) recalculate the values 
of the triggers daily instead of each calendar quarter; (iii) reduce 
the 10%, 20%, and 30% market decline trigger percentages to 7%, 13%, 
and 20%; (iv) shorten 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 proposed Level 1, Level 2, and Level 3 circuit 
breakers would operate as follows:

Level 1 Halt

    Before 3:25 p.m.--15 minutes;
    At or after 3:25 p.m.--trading shall continue, unless there is a 
Level 3 halt.

Level 2 Halt

    Before 3:25 p.m.--15 minutes;
    At or after 3:25 p.m.--trading shall continue, unless there is a 
Level 3 halt.

Level 3 Halt

    At any time--trading shall halt and not resume for the rest of the 
day.

III. Limit Up-Limit Down Plan

    Separately, there currently is pending before the Commission a 
proposal by the equities exchanges and FINRA to establish a new 
mechanism to address extraordinary market volatility in individual 
securities, pursuant to a national market system plan under Rule 608 of 
Regulation NMS to address extraordinary market volatility (the National 
Market System Plan to Address Extraordinary Market Volatility, or, the 
``Limit Up-Limit Down Plan'').\8\ The new Limit Up-Limit Down Plan, 
which would replace the existing single-stock circuit breaker 
mechanism,\9\ would prevent trades in individual securities from 
occurring outside of a specified price band, and would be coupled with 
a trading pause mechanism to accommodate more fundamental price moves. 
In essence, a security would enter a ``limit state'' if its price moves 
a certain percentage--generally 5%, 10% or 20%, depending on the stock 
and the time of day--over a 5-minute period. If the market does not 
naturally exit the limit state within 15 seconds, there would be a 
five-minute trading pause. The Commission currently is reviewing the 
comments received.\10\
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    \8\ See Securities Exchange Act Release No. 64547 (May 25, 
2011), 76 FR 31647 (June 1, 2011).
    \9\ See Securities Exchange Act Release No. 64735 (June 23, 
2011), 76 FR 38243 (June 29, 2011) (order approving the current 
single-stock circuit breaker mechanism). The single-stock circuit 
breaker mechanism, which was approved as a pilot program, is 
currently scheduled to expire on January 31, 2012. See, e.g., 
Securities Exchange Act Release No. 65090 (August 10, 2011), 76 FR 
50790 (August 16, 2011) (SR-NYSE-2011-40).
    \10\ The final date for Commission action on the Limit Up-Limit 
Down Plan is February 29, 2012 unless the Participants consent to a 
further extension. See Letter from Janet M. McGinness, Senior Vice 
President, Legal and Corporate Secretary, NYSE Euronext, to 
Elizabeth M. Murphy, Secretary, Commission, dated November 18, 2011.
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    As discussed below, the Commission, in the Notices for the SRO 
Proposals, specifically requested comment on how the proposed changes 
to the market-wide circuit breakers would interact

[[Page 318]]

with the limit up/limit down mechanism for individual securities, if 
approved, and several commenters expressed views on this issue.\11\
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    \11\ See Commissioner Chilton Letter, CME Group Letter, SIFMA 
Letter.
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IV. Comment Letters

    The Commission received seven comment letters on the SRO 
Proposals.\12\ Several commenters expressed concern that the Level II 
circuit breaker would not apply after 3:25 p.m.\13\ As explained in the 
Notices, the SROs adopted this approach to avoid disrupting the normal 
4 p.m. market close. The Commission, however, specifically solicited 
comment on whether some provision should be made to end the regular 
trading session if a market decline suddenly occurs after 3:25 p.m., 
even if the decline is less than 20%. These commenters believed that 
the proposal would potentially leave the market vulnerable to a severe 
decline that occurs late in the trading day, and instead suggested that 
a Level II circuit breaker triggered at or after 3:25 p.m. halt trading 
for the remainder of the trading session.\14\
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    \12\ See supra note 4.
    \13\ See CME Group Letter, Commissioner Chilton Letter, and MFA 
Letter.
    \14\ Id.
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    The Commission also specifically requested comment on how the 
proposed changes would interact with the single-stock circuit breaker 
pilot program or, if approved, the proposed limit up/limit down 
mechanism for individual securities. The Commission further asked 
whether the market-wide circuit breaker should be triggered if a 
sufficient number of single-stock circuit breakers or price limits are 
triggered. One commenter believed that the market-wide circuit breaker 
should be triggered if a sufficient number of single-stock circuit 
breakers or price limits are triggered, given the potential 
difficulties of accurately calculating the value of the S&P 500 Index 
in such circumstances.\15\ Two other commenters also expressed concern 
about the interaction of market-wide circuit breakers and single-stock 
circuit breakers, and the impact that might have on index calculations, 
particularly in macro-market events.\16\
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    \15\ See SIFMA Letter. SIFMA also believed it was critical to 
coordinate the market-wide circuit breakers with the options and 
futures markets.
    \16\ See CME Group Letter and Commissioner Chilton Letter.
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    Two commenters also expressed views on how market centers should 
treat pending orders in the event a market-wide circuit breaker is 
triggered. One commenter believed that orders pending with a market 
center at the time of a Level I or Level II circuit breaker should 
remain queued by the market center during the halt and be eligible for 
execution after the halt.\17\ However, in the event of a Level III 
circuit breaker, that commenter was of the view that all pending orders 
should be cancelled, since trading will cease for the remainder of the 
day. Another commenter generally took the position that the SROs should 
not cancel pending orders during a trading halt, in order to preserve 
the queue priority of market participants.\18\
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    \17\ See SIFMA Letter.
    \18\ See CME Group Letter.
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    The Commission sought comment on whether a provision should be made 
for a closing auction in the event of a Level III circuit breaker 
decline. One commenter responded that allowing a closing auction under 
these extreme circumstances would risk greater market dislocations, and 
therefore was unadvisable,\19\ but another believed there should be a 
normal closing process so that, among other things, mutual fund prices 
are properly determined.\20\ The Commission also sought comment on 
whether the primary market should have a longer period (e.g. 30 
minutes) to re-open trading following a Level II circuit breaker 
decline. One commenter responded that trading halts should be as short 
as operationally practicable, and was of the view that the 15-minute 
trading halt remained appropriate in this circumstance.\21\ Finally, 
one commenter questioned whether the Level 1 circuit breaker should be 
narrowed from 10% to 7%.\22\
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    \19\ Id.
    \20\ See Angel Letter.
    \21\ See CME Letter.
    \22\ See Angel Letter.
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V. Proceedings To Determine Whether To Disapprove SR-BATS-2011-038; SR-
BYX-2011-025; SR-BX-2011-068; SR-CBOE-2011-087; SR-C2-2011-024; SR-CHX-
2011-30; SR-EDGA-2011-31; SR-EDGX-2011-30; SR-FINRA-2011-054; SR-ISE-
2011-61; SR-NASDAQ-2011-131; SR-NSX-2011-11; SR-NYSE-2011-48; SR-
NYSEAmex-2011-73; SR-NYSEArca-2011-68; SR-Phlx-2011-129 and Grounds for 
Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act to determine whether the SRO Proposals should be 
disapproved. Institution of such proceedings is appropriate at this 
time in view of the legal and policy issues raised by the SRO Proposals 
that are discussed below. Institution of disapproval proceedings does 
not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, as described in greater 
detail below, the Commission seeks and encourages interested persons to 
provide additional comment on the SRO Proposals.
    Pursuant to Section 19(b)(2)(B), the Commission is providing notice 
of the grounds for disapproval under consideration. In particular, 
Sections 6(b)(5) and 15A(b)(6) of the Act \23\ require that the rules 
of an exchange and FINRA, respectively, be designed, among other 
things, to prevent fraudulent and manipulative acts and practices, 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.
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    \23\ 15 U.S.C. 78f(b)(5).
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    The SRO Proposals would update the market-wide circuit breakers by, 
among other things, reducing the market decline percentage thresholds 
necessary to trigger a circuit breaker, shortening the duration of the 
resulting trading halts, and changing the reference index used to 
measure a market decline. The market-wide circuit breakers were not 
triggered during the severe market disruption of May 6, 2010, which led 
the exchanges and FINRA in consultation with Commission staff to assess 
whether the circuit breakers needed to be modified or updated in light 
of today's market structure. In addition, the Joint CFTC-SEC Advisory 
Committee on Emerging Regulatory Issues recommended that the SEC and 
CFTC review the current operation of the market-wide circuit breakers, 
and consider appropriate modifications.\24\
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    \24\ See Report of the Staffs of the CFTC and SEC to the Joint 
Advisory Committee on Emerging Regulatory Issues, ``Findings 
Regarding the Market Events of May 6, 2010,'' dated September 30, 
2010 at 6.
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    As discussed above, there is currently pending before the 
Commission a proposal by the equities exchanges and FINRA to establish 
the Limit Up-Limit Down Plan, which would create a new mechanism to 
address extraordinary market volatility in individual securities. 
Several commenters on the SRO Proposals stressed the need to consider 
the SRO Proposals together with the proposed Limit Up-Limit Down Plan, 
given the potential interaction between the mechanisms for moderating 
volatility in individual securities and those for moderating volatility 
market-wide. In addition, commenters

[[Page 319]]

expressed some concerns with the details of the SRO Proposals, 
including whether only the Level III circuit breaker should halt 
trading after 3:25 p.m. and whether the market-wide circuit breakers 
should be triggered if a significant number of volatility moderators 
for individual securities are triggered.
    The Commission shares the desire of the exchanges and FINRA to 
appropriately update the market-wide circuit breakers in light of the 
current market structure and the lessons learned from the events of May 
6, 2010. Because of the importance of both the market-wide and 
individual security volatility moderators to the maintenance of fair 
and orderly markets and the protection of investors, however, the 
Commission believes the SRO Proposals should be considered together 
with the proposed Limit Up-Limit Down Plan, to help assure these 
mechanisms interact appropriately with one another, and that details of 
the market-wide circuit breakers are fully evaluated. Accordingly, in 
light of the pending proposal to establish the Limit Up-Limit Down 
Plan, and the concerns raised by commenters, the Commission believes 
that questions remain as to whether the SRO Proposals are consistent 
with the requirements of Sections 6(b)(5) and 15A(b)(6) of the Act, 
including whether the proposed market-wide circuit breakers would 
remove impediments to and perfect the mechanism of a national market 
system, or protect investors and the public interest.

VI. Solicitation of Comments

    The Commission requests that interested persons provide written 
submissions of their views, data and arguments with respect to the 
concerns identified above, as well as any others they may have with the 
SRO Proposals. In particular, the Commission invites the written views 
of interested persons concerning whether the SRO Proposals are 
inconsistent with Section 6(b)(5), Section 15A(b)(6), or any other 
provision of the Act, or the rules and regulation thereunder. Although 
there do not appear to be any issues relevant to approval or 
disapproval which would be facilitated by an oral presentation of 
views, data, and arguments, the Commission will consider, pursuant to 
Rule 19b-4, any request for an opportunity to make an oral 
presentation.\25\
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    \25\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views and 
arguments regarding whether the SRO Proposals should be disapproved by 
January 25, 2012. Any person who wishes to file a rebuttal to any other 
person's submission must file that rebuttal by February 8, 2012.
    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 Numbers SR-BATS-2011-038; SR-BYX-2011-025; SR-BX-2011-068; SR-
CBOE-2011-087; SR-C2-2011-024; SR-CHX-2011-30; SR-EDGA-2011-31; SR-
EDGX-2011-30; SR-FINRA-2011-054; SR-ISE-2011-61; SR-NASDAQ-2011-131; 
SR-NSX-2011-11; SR-NYSE-2011-48; SR-NYSEAmex-2011-73; SR-NYSEArca-2011-
68; SR-Phlx-2011-129 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 Numbers SR-BATS-2011-038; SR-BYX-
2011-025; SR-BX-2011-068; SR-CBOE-2011-087; SR-C2-2011-024; SR-CHX-
2011-30; SR-EDGA-2011-31; SR-EDGX-2011-30; SR-FINRA-2011-054; SR-ISE-
2011-61; SR-NASDAQ-2011-131; SR-NSX-2011-11; SR-NYSE-2011-48; SR-
NYSEAmex-2011-73; SR-NYSEArca-2011-68; SR-Phlx-2011-129. These file 
numbers 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 SRO Proposals that are filed 
with the Commission, and all written communications relating to the SRO 
Proposals 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 filings also will be available for inspection and 
copying at the principal office of the Exchanges and FINRA. 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 Numbers SR-BATS-2011-038; SR-BYX-2011-
025; SR-BX-2011-068; SR-CBOE-2011-087; SR-C2-2011-024; SR-CHX-2011-30; 
SR-EDGA-2011-31; SR-EDGX-2011-30; SR-FINRA-2011-054; SR-ISE-2011-61; 
SR-NASDAQ-2011-131; SR-NSX-2011-11; SR-NYSE-2011-48; SR-NYSEAmex-2011-
73; SR-NYSEArca-2011-68; SR-Phlx-2011-129 and should be submitted on or 
before January 25, 2012. Rebuttal comments should be submitted by 
February 8, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(57).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-33746 Filed 1-3-12; 8:45 am]
BILLING CODE 8011-01-P


