
[Federal Register Volume 78, Number 191 (Wednesday, October 2, 2013)]
[Notices]
[Pages 60937-60939]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-24019]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70530; File No. 4-631]


Joint Industry Plan; Order Approving the Fifth 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.

September 26, 2013.

1. Introduction

    On July 18, 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 fifth 
amendment to the Plan (``Fifth Amendment''), and reflects changes 
unanimously approved by the Participants. The Fifth Amendment to the 
Plan: (i) Provides that, if a Trading Pause is triggered in the last 
ten minutes of trading before the end of Regular Trading Hours, then 
the NMS Stock shall not reopen for continuous trading and shall close 
pursuant to established closing procedures of the Primary Listing 
Exchange; and (ii) revises the definition of which Exchange Traded 
Products (``ETPs'') are eligible to be included in the list of Tier 1 
NMS Stocks under the Plan. The Fifth Amendment was published for 
comment in the Federal Register on September 3, 2013.\4\ The Commission 
received no comments letter in response to the Notice. This order 
approves the Fifth 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 July 18, 2013 (``Transmittal Letter'').
    \4\ See Securities Exchange Act Release No. 70274 (August 27, 
2013), 78 FR 54305 (``Notice'').
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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.\5\ 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.\6\ 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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    \5\ 17 CFR 242.600(b)(47). See also Section I(H) of the Plan.
    \6\ 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.\7\ The price bands would be calculated by the Securities 
Information Processors (``SIPs'' or ``Processors'') responsible for 
consolidation of information for an NMS Stock pursuant to Rule 603(b) 
of Regulation NMS under the Act.\8\ Those price bands would be based on 
a Reference Price \9\ 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 \10\ 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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    \7\ Capitalized terms used herein but not otherwise defined 
shall have the meaning ascribed to such terms in the Plan.
    \8\ 17 CFR 242.603(b). The Plan refers to this entity as the 
Processor.
    \9\ See Section I(T) of the Plan.
    \10\ 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

[[Page 60938]]

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 \11\ or National Best Offer \12\ 
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,\13\ 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.\14\ 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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    \11\ 17 CFR 242.600(b)(42). See also Section I(G) of the Plan.
    \12\ Id.
    \13\ 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.
    \14\ See Section I(D) of the Plan.
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    These limit up-limit down requirements would be coupled with 
Trading Pauses \15\ 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 \16\ 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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    \15\ 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.
    \16\ 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,\17\ thereby protecting 
investors and promoting a fair and orderly market.\18\ 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.\19\ The initial 
date of Plan operations was April 8, 2013.\20\
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    \17\ 17 CFR 242.600(b)(47).
    \18\ See Transmittal Letter, supra note 3.
    \19\ 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).
    \20\ See Securities Exchange Act Release No. 68953 (February 20, 
2013), 78 FR 13113 (February 26, 2013).
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B. Fifth Amendment to the Plan

    The Fifth Amendment proposes two changes to the Plan. First, the 
Participants propose to amend Section VII(C)(1) of the Plan to provide 
that if a Trading Pause is declared for an NMS Stock in the last ten 
minutes of trading before the end of Regular Trading Hours, the Primary 
Listing Exchange shall not reopen for trading and shall attempt to 
execute a closing transaction using its established closing procedures. 
Second, the Participants propose to amend Section I of Appendix A of 
the Plan to revise the definition of which ETPs are eligible to be 
included in the list of Tier 1 NMS Stocks under the Plan. The 
Commission received no comment letters in response to the Notice.\21\
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    \21\ The Participants noted that they developed the proposal to 
amend Section VII(C)(1) of the Plan based on feedback from SIFMA and 
other market participants. The Participants also noted that SIFMA 
raised issues concerning how the Plan operates at the close in its 
comment letter on the initial filing of the Plan. See Letter from 
Ann L. Vlcek, Managing Director and Associate General Counsel, 
SIFMA, to Elizabeth M. Murphy, Secretary, Commission dated June 22, 
2011.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the Fifth Amendment 
is consistent with the requirements of the Act and the rules and 
regulations thereunder.\22\ Specifically, the Commission finds that the 
Fifth Amendment is consistent with Section 11A of the Act \23\ and Rule 
608 thereunder \24\ in that it is appropriate in the public interest, 
for the protection of investors and the maintenance of fair and orderly 
markets, removes impediments to, and perfects the mechanism of, a 
national market system.
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    \22\ In approving the Fifth Amendment, the Commission has 
considered its impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \23\ 15 U.S.C. 78k-1.
    \24\ 17 CFR 242.608.
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    First, the Participants proposed to amend Section VII(C)(1) of the 
Plan to provide that if a Trading Pause is declared for an NMS Stock in 
the last ten minutes of trading before the end of Regular Trading 
Hours, the Primary Listing Exchange shall not reopen for trading and 
shall attempt to execute a closing transaction using its established 
closing procedures.\25\ The Participants believe that reopening trading 
in a security within five minutes of the closing transaction could 
introduce additional volatility into trading for that particular 
symbol. The Participants stated that it would be more prudent to use 
the time during the Trading Pause and the period preceding the end of 
Regular Trading Hours for interest to be entered for the closing 
auction, rather than to hold a reopening auction that would be followed 
shortly by a closing auction. According to the Participants, holding 
two auctions so near in time may introduce additional uncertainty into 
the market as market participants may not want to enter interest for a

[[Page 60939]]

reopening auction if the security is going to close shortly thereafter. 
This may cause price dislocations, uncertainty of executions, and added 
confusion during an already volatile period.\26\ Based on the 
Participants' statements, the Commission believes the proposal to amend 
Section VII(C)(1) of the Plan is consistent with with Section 11A of 
the Act.
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    \25\ Section VII(C) of the Plan currently addresses only the 
situation of when a Trading Pause is declared less than five minutes 
before the end of Regular Trading Hours. In such case, because a 
Trading Pause is a minimum of five minutes and trading would not 
reopen, the Plan contemplates that the Primary Listing Exchange 
shall attempt a closing transaction using its established closing 
procedures.
    \26\ The Participants noted that Primary Listing Exchanges will 
be filing proposed rule changes with the Commission to update their 
respective closing procedures to address the ability to permit 
additional interest to be entered for the purpose of a closing 
auction if there is a Trading Pause declared near the end of Regular 
Trading Hours. See Notice, supra note 4.
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    Second, the Participants propose to amend Section I of Appendix A 
of the Plan to revise the definition of which ETPs are eligible to be 
included in the list of Tier 1 NMS Stocks under the Plan by deleting 
the following language: ``To ensure that ETPs that track similar 
benchmarks but that do not meet this volume criterion do not become 
subject to pricing volatility when a component security is the subject 
of a Trading Pause, non-leveraged ETPs that have traded below this 
volume criterion, but that track the same benchmark as an ETP that does 
meet the volume criterion, will be deemed eligible to be included as a 
Tier 1 NMS Stock.'' The Participants note that based on experience thus 
far with the Plan, certain thinly traded ETPs with wide quotes that are 
included as Tier 1 NMS Stocks because they track an index of an ETP 
that meets the volume criterion are triggering Trading Pauses.\27\ 
These Trading Pauses are triggered because of bids or offers that cross 
the Price Band rather than because of an execution of a trade in the 
underlying security. This results in certain ETPs that have not traded 
during the day triggering Trading Pauses and requiring a reopening 
auction process, despite the lack of trading in that security.\28\ The 
amendment to Section I of Appendix A will reduce the potential for 
certain thinly-traded NMS Stock in Tier 1 that have not experienced any 
trading volatility to be halted and then have to go through a reopening 
auction process. Based on the Participants' statements, the Commission 
believes that the proposal to amend Section I of Appendix A of the Plan 
is consistent with Section 11A of the Act.
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    \27\ The Participants noted that since the initial date of Plan 
operations through to July 8, 2013, there have been 32 Trading 
Pauses in NYSE Arca-listed securities triggered pursuant to the 
Plan. These Trading Pauses have been in only ten NMS Stocks, some 
more than once a day, and all are ETPs with less than $2,000,000 
notional ADV. The symbols are BXDB, BDG, GIY, VIOO, BOS, SAGG, IELG, 
IESM, HUSE, and GMTB. See id.
    \28\ See id.
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    The Commission reiterates its expectation that the Participants 
will continue to monitor the scope and operation of the Plan and study 
the data produced during that time with respect to such issues, and 
will propose any modifications to the Plan that may be necessary or 
appropriate.\29\ Similarly, the Commission expects that the 
Participants will propose any modifications to the Plan that may be 
necessary or appropriate in response to the data being gathered by the 
Participants during the pilot period, including any proposed changes to 
thinly-traded NMS Stocks in Tier 2 that have not experienced any 
trading volatility.
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    \29\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012).
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    Therefore, the Commission finds that the Fifth Amendment to the 
Plan is consistent with Section 11A of the Act \30\ and Rule 608 
thereunder.\31\
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    \30\ 15 U.S.C. 78k-1.
    \31\ 17 CFR 242.608.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 11A of the Act \32\ 
and Rule 608 thereunder, \33\ that the Fifth Amendment to the Plan 
(File No. 4-631) be, and it hereby is, approved.
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    \32\ 15 U.S.C. 78k-1.
    \33\ 17 CFR 242.608.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\34\
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    \34\ 17 CFR 200.30-3(a)(29).
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Kevin M. O'Neill,
Deputy Secretary.
 [FR Doc. 2013-24019 Filed 10-1-13; 8:45 am]
BILLING CODE 8011-01-P


