
[Federal Register Volume 78, Number 69 (Wednesday, April 10, 2013)]
[Notices]
[Pages 21483-21485]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-08249]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69287; File No. 4-631]


Joint Industry Plan; Order Approving the Third Amendment to the 
National Market System Plan to Address Extraordinary Market Volatility 
by BATS Exchange, Inc., BATS Y-Exchange, Inc., Chicago Board Options 
Exchange, Incorporated, Chicago Stock Exchange, Inc., EDGA Exchange, 
Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority, 
Inc., NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, The Nasdaq Stock Market 
LLC, National Stock Exchange, Inc., New York Stock Exchange LLC, NYSE 
MKT LLC, and NYSE Arca, Inc.

April 3, 2013.

I. Introduction

    On February 21, 2013, NYSE Euronext, on behalf of New York Stock 
Exchange LLC (``NYSE''), NYSE MKT LLC (``NYSE MKT''), and NYSE Arca, 
Inc. (``NYSE Arca''), and the following parties to the National Market 
System Plan: BATS Exchange, Inc., BATS Y-Exchange, Inc., Chicago Board 
Options Exchange, Incorporated, Chicago Stock Exchange, Inc., EDGA 
Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory 
Authority, Inc., NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, the Nasdaq 
Stock Market LLC, and National Stock Exchange, Inc. (collectively with 
NYSE, NYSE MKT, and NYSE Arca, the ``Participants''), filed with the 
Securities and Exchange Commission (``Commission'') pursuant to Section 
11A of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 608 
thereunder,\2\ a proposal to amend the Plan to Address Extraordinary 
Market Volatility (``Plan'').\3\ The proposal represents the third 
amendment to the Plan (``Third Amendment''), and reflects changes 
unanimously approved by the Participants. The Third Amendment proposes 
to amend the Plan to provide that odd-lot sized transactions will not 
be exempt from the limitation on trades provision of Section VI.A.1 of 
the Plan and proposes to make a clarifying technical change to Section 
VIII.A.3 of the Plan. The Third Amendment was published for comment in 
the Federal Register on March 12, 2013.\4\ The Commission received one 
comment letter in response to the Notice.\5\ This order approves the 
Third Amendment to the Plan.
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    \1\ 15 U.S.C. 78k-1.
    \2\ 17 CFR 242.608.
    \3\ See Letter from Janet M. McGinness, Executive Vice President 
& Corporate Secretary, NYSE Euronext, to Elizabeth M. Murphy, 
Secretary, Commission, dated February 19, 2013 (``Transmittal 
Letter'').
    \4\ See Securities Exchange Act Release No. 69062 (March 7, 
2013), 78 FR 15757 (``Notice'').
    \5\ See Letter from Manisha Kimmel, Executive Director, 
Financial Information Forum, to Elizabeth M. Murphy, Secretary, 
Commission, dated March 22, 2013 (``FIF Letter'').
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II. Description of the Proposal

A. Purpose of the Plan

    The Participants filed the Plan in order to create a market-wide 
limit up-limit down mechanism that is intended to address extraordinary 
market volatility in ``NMS Stocks,'' as defined in Rule 600(b)(47) of 
Regulation NMS under the Act.\6\ The Plan sets forth procedures that 
provide for market-wide limit up-limit down requirements that would be 
designed to prevent trades in individual NMS Stocks from occurring 
outside of the specified price bands.\7\ These limit up-limit down 
requirements would be coupled with Trading Pauses, as defined in 
Section I(Y) of the Plan, to accommodate more fundamental price moves 
(as opposed to erroneous trades or momentary gaps in liquidity).
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    \6\ 17 CFR 242.600(b)(47). See also Section I(H) of the Plan.
    \7\ See Section V of the Plan.
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    As set forth in Section V of the Plan, the price bands would 
consist of a Lower Price Band and an Upper Price Band for each NMS 
Stock.\8\ The price bands would be calculated by the Securities 
Information Processors (``SIPs'' or ``Processors'') responsible for 
consolidation of information for an

[[Page 21484]]

NMS Stock pursuant to Rule 603(b) of Regulation NMS under the Act.\9\ 
Those price bands would be based on a Reference Price \10\ for each NMS 
Stock that equals the arithmetic mean price of Eligible Reported 
Transactions for the NMS Stock over the immediately preceding five-
minute period. The price bands for an NMS Stock would be calculated by 
applying the Percentage Parameter for such NMS Stock to the Reference 
Price, with the Lower Price Band being a Percentage Parameter \11\ 
below the Reference Price, and the Upper Price Band being a Percentage 
Parameter above the Reference Price. Between 9:30 a.m. and 9:45 a.m. ET 
and 3:35 p.m. and 4:00 p.m. ET, the price bands would be calculated by 
applying double the Percentage Parameters as set forth in Appendix A of 
the Plan.
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    \8\ Capitalized terms used herein but not otherwise defined 
shall have the meaning ascribed to such terms in the Plan.
    \9\ 17 CFR 242.603(b). The Plan refers to this entity as the 
Processor.
    \10\ See Section I(T) of the Plan.
    \11\ As initially proposed by the Participants, the Percentage 
Parameters for Tier 1 NMS Stocks (i.e., stocks in the S&P 500 Index 
or Russell 1000 Index and certain ETPs) with a Reference Price of 
$1.00 or more would be five percent and less than $1.00 would be the 
lesser of (a) $0.15 or (b) 75 percent. The Percentage Parameters for 
Tier 2 NMS Stocks (i.e., all NMS Stocks other than those in Tier 1) 
with a Reference Price of $1.00 or more would be 10 percent and less 
than $1.00 would be the lesser of (a) $0.15 or (b) 75 percent. The 
Percentage Parameters for a Tier 2 NMS Stock that is a leveraged ETP 
would be the applicable Percentage Parameter set forth above 
multiplied by the leverage ratio of such product. On May 24, 2012, 
the Participants amended the Plan to create a 20% price band for 
Tier 1 and Tier 2 stocks with a Reference Price of $0.75 or more and 
up to and including $3.00. The Percentage Parameter for stocks with 
a Reference Price below $0.75 would be the lesser of (a) $0.15 or 
(b) 75 percent. See Letter from Janet M. McGinness, Senior Vice 
President, Legal and Corporate Secretary, NYSE Euronext, to 
Elizabeth M. Murphy, Secretary, Commission, dated May 24, 2012.
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    The Processors would also calculate a Pro-Forma Reference Price for 
each NMS Stock on a continuous basis during Regular Trading Hours. If a 
Pro-Forma Reference Price did not move by one percent or more from the 
Reference Price in effect, no new price bands would be disseminated, 
and the current Reference Price would remain the effective Reference 
Price. If the Pro-Forma Reference Price moved by one percent or more 
from the Reference Price in effect, the Pro-Forma Reference Price would 
become the Reference Price, and the Processors would disseminate new 
price bands based on the new Reference Price. Each new Reference Price 
would remain in effect for at least 30 seconds.
    When one side of the market for an individual security is outside 
the applicable price band, the Processors would be required to 
disseminate such National Best Bid \12\ or National Best Offer \13\ 
with an appropriate flag identifying it as non-executable. When the 
other side of the market reaches the applicable price band, the market 
for an individual security would enter a Limit State,\14\ and the 
Processors would be required to disseminate such National Best Offer or 
National Best Bid with an appropriate flag identifying it as a Limit 
State Quotation.\15\ All trading would immediately enter a Limit State 
if the National Best Offer equals the Lower Limit Band and does not 
cross the National Best Bid, or the National Best Bid equals the Upper 
Limit Band and does not cross the National Best Offer. Trading for an 
NMS Stock would exit a Limit State if, within 15 seconds of entering 
the Limit State, all Limit State Quotations were executed or canceled 
in their entirety. If the market did not exit a Limit State within 15 
seconds, then the Primary Listing Exchange would declare a five-minute 
trading pause, which would be applicable to all markets trading the 
security.
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    \12\ 17 CFR 242.600(b)(42). See also Section I(G) of the Plan.
    \13\ Id.
    \14\ A stock enters the Limit State if the National Best Offer 
equals the Lower Price Band and does not cross the National Best 
Bid, or the National Best Bid equals the Upper Price Band and does 
not cross the National Best Offer. See Section VI(B) of the Plan.
    \15\ See Section I(D) of the Plan.
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    These limit up-limit down requirements would be coupled with 
trading pauses \16\ to accommodate more fundamental price moves (as 
opposed to erroneous trades or momentary gaps in liquidity). As set 
forth in more detail in the Plan, all trading centers \17\ in NMS 
Stocks, including both those operated by Participants and those 
operated by members of Participants, would be required to establish, 
maintain, and enforce written policies and procedures that are 
reasonably designed to comply with the limit up-limit down and trading 
pause requirements specified in the Plan.
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    \16\ The primary listing market would declare a trading pause in 
an NMS Stock; upon notification by the primary listing market, the 
Processor would disseminate this information to the public. No 
trades in that NMS Stock could occur during the trading pause, but 
all bids and offers may be displayed. See Section VII(A) of the 
Plan.
    \17\ As defined in Section I(X) of the Plan, a trading center 
shall have the meaning provided in Rule 600(b)(78) of Regulation NMS 
under the Act.
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    Under the Plan, all trading centers would be required to establish, 
maintain, and enforce written policies and procedures reasonably 
designed to prevent the display of offers below the Lower Price Band 
and bids above the Upper Price Band for an NMS Stock. The Processors 
would disseminate an offer below the Lower Price Band or bid above the 
Upper Price Band that nevertheless inadvertently may be submitted 
despite such reasonable policies and procedures, but with an 
appropriate flag identifying it as non-executable; such bid or offer 
would not be included in National Best Bid or National Best Offer 
calculations. In addition, all trading centers would be required to 
develop, maintain, and enforce policies and procedures reasonably 
designed to prevent trades at prices outside the price bands, with the 
exception of single-priced opening, reopening, and closing transactions 
on the Primary Listing Exchange.
    As stated by the Participants in the Plan, the limit up-limit down 
mechanism is intended to reduce the negative impacts of sudden, 
unanticipated price movements in NMS Stocks,\18\ thereby protecting 
investors and promoting a fair and orderly market.\19\ In particular, 
the Plan is designed to address the type of sudden price movements that 
the market experienced on the afternoon of May 6, 2010.\20\ The initial 
date of Plan operations is April 8, 2013.\21\
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    \18\ 17 CFR 242.600(b)(47).
    \19\ See Transmittal Letter, supra note 3.
    \20\ The limit up-limit down mechanism set forth in the Plan 
would replace the existing single-stock circuit breaker pilot. See 
e.g., Securities Exchange Act Release Nos. 62251 (June 10, 2010), 75 
FR 34183 (June 16, 2010) (SR-FINRA-2010-025); 62883 (September 10, 
2010), 75 FR 56608 (September 16, 2010) (SR-FINRA-2010-033).
    \21\ See Securities Exchange Act Release No. 68953 (February 20, 
2013), 78 FR 13113 (February 26, 2013).
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B. Third Amendment to the Plan

    The Third Amendment proposed two changes to the Plan. First, the 
Participants propose to amend Section VI.A.1 of the Plan to clarify 
that odd-lot sized transactions are not exempt from the limitation on 
trades provision of Section VI.A.1.\22\ This provision requires trading 
centers in NMS stocks to establish, maintain, and enforce written 
policies and procedures that are reasonably designed to prevent trades 
at prices that are below the Lower Price Band or above the Upper Price 
Band for an NMS stock. The Participants stated that they believe that 
odd-lot sized transactions should benefit from the protections of the 
Plan. Second, the Participants propose to amend Section VIII.A.3 of the 
Plan to clarify that during Phase I of implementation no price bands 
shall be calculated and disseminated and therefore trading shall not 
enter a Limit State less than 30

[[Page 21485]]

minutes before the end of Regular Trading Hours. The Participants 
stated that the proposed change is designed to reduce confusion by 
correcting language in the Plan.
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    \22\ The Commission notes that the Plan provisions regarding 
Trading Pauses apply to all trading in NMS Stocks, including odd-lot 
transactions.
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III. Comment Letter

    The Commission received one comment letter in favor of the Third 
Amendment to the Plan.\23\ The commenter stated that the proposed 
changes were raised since September 2012 in discussions that the 
commenter had with the Participants and that it had the understanding 
that amendments would be filed with the Commission to address these 
concerns. As such, market participants have programed their systems 
accordingly well in advance of the April 8, 2013 implantation date of 
the Plan.
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    \23\ See FIF Letter, supra note 5.
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    The commenter further stated that one of the key drivers of the 
Plan is the protection of retail investors.\24\ Thus, having odd-lots 
incorporated at the commencement of the rule is critical. Moreover, the 
commenter stated that the implementation of the Plan has evolved into a 
very complex process and it would prefer that odd-lots not be 
implemented on a different schedule possibly causing investor 
confusion.
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    \24\ Id.
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IV. Discussion and Commission Findings

    After careful review, the Commission finds that Third Amendment is 
consistent with the requirements of the Act and the rules and 
regulations thereunder.\25\ Specifically, the Commission finds that the 
Third Amendment is consistent with Section 11A of the Act \26\ and Rule 
608 thereunder \27\ in that it is appropriate in the public interest, 
for the protection of investors and the maintenance of fair and orderly 
markets, and to remove impediments to, and perfect the mechanism of, a 
national market system.
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    \25\ In approving the Third Amendment, the Commission has 
considered its impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \26\ 15 U.S.C. 78k-1.
    \27\ 17 CFR 242.608.
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    The Third Amendment would make two changes to the Plan. The first 
change amends the Plan to specify that odd-lot transactions will be 
subject to the limitation on trades provision of Section VI.A.1. As 
such, the requirement that trading centers in NMS stocks establish, 
maintain, and enforce written policies and procedures that are 
reasonably designed to prevent trades at prices that are below the 
Lower Price Band or above the Upper Price Band for an NMS stock will 
apply to odd-lot transactions. The Commission notes that this change 
could reduce the ability of market participants to engage in odd-lot 
transactions to circumvent the requirements of the Plan, thereby 
further protecting investors. The Commission also notes that the change 
is widely anticipated and supported in the industry, as it would reduce 
compliance burdens because firms would not need to code specially for 
odd lots.\28\
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    \28\ See FIF Letter.
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    The second change would reconcile an inconsistency in the current 
rule text of the Plan. The current language states that the price bands 
shall not be calculated and disseminated less than 30 minutes before 
the end of the trading day, and that trading shall not enter a Limit 
State less than 25 minutes before the end of the trading day. Under 
this formulation, there would be no price bands after 3:30 p.m. ET, 
although a stock could still enter a Limit State until 3:35 p.m. ET. 
This is internally inconsistent, since the price bands must be 
calculated and disseminated in order for the Limit State to be 
triggered. The Participants proposed to amend the Plan to state that no 
price bands shall be calculated and disseminated and, therefore, 
trading shall not enter a Limit State, less than 30 minutes before the 
end of the trading day. The Commission believes that this change 
provides further clarity on the operation of the limit up-limit down 
mechanism during Phase I of the Plan.
    Therefore, the Commission believes that the Third Amendment to the 
Plan is consistent with Section 11A of the Act \29\ and Rule 608 
thereunder.\30\
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    \29\ 15 U.S.C. 78k-1.
    \30\ 17 CFR 242.608.
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V. Conclusion

    It is therefore ordered, pursuant to Section 11A of the Act \31\ 
and Rule 608 thereunder,\32\ that the Third Amendment to the Plan (File 
No. 4-631) be, and it hereby is, approved.
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    \31\ 15 U.S.C. 78k-1.
    \32\ 17 CFR 242.608.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\33\
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    \33\ 17 CFR 200.30-3(a)(29).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-08249 Filed 4-9-13; 8:45 am]
BILLING CODE 8011-01-P


