
[Federal Register Volume 79, Number 68 (Wednesday, April 9, 2014)]
[Notices]
[Pages 19687-19689]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-07881]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71851; File No. 4-631]


Joint Industry Plan; Order Approving the Seventh 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, 2014.

I. Introduction

    On February 24, 2014, 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 seventh 
amendment to the Plan (``Seventh Amendment''), and reflects changes 
unanimously approved by the Participants. The Seventh Amendment to the 
Plan: (i) Extends the pilot period of the Plan to February 20, 2015; 
and (ii) makes conforming changes to Appendix B of the Plan regarding 
when the Participants are required to submit specified summary data to 
the Commission. The Seventh Amendment was published for comment in the 
Federal Register on March 11, 2014.\4\ The Commission received no 
comment letters in response to the Notice. This order approves the 
Seventh Amendment to the Plan.
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    \1\ 15 U.S.C. 78k-1.
    \2\ 17 CFR 242.608.
    \3\ See Letter from Martha Redding, Chief Counsel, NYSE 
Euronext, to Elizabeth M. Murphy, Secretary, Commission, dated 
February 21, 2014 (``Transmittal Letter'').
    \4\ See Securities Exchange Act Release No. 71649 (March 5, 
2014), 79 FR 13696 (``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 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

[[Page 19688]]

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. Seventh Amendment to the Plan

    The Seventh Amendment proposes two changes to the Plan. First, the 
Participants propose to amend the Plan to extend the pilot period of 
the Plan to February 20, 2015. Second, the Participants propose to 
amend Appendix B of the Plan regarding when the Participants are 
required to submit specified summary data assessments to the Commission 
to require that the assessments be provided by September 30, 2014. The 
Commission received no comment letters in response to the Notice.

III. Discussion and Commission Findings

    After careful review, the Commission finds that the Seventh 
Amendment is consistent with the requirements of the Act and the rules 
and regulations thereunder.\21\ Specifically, the Commission finds that 
the Seventh Amendment is consistent with Section 11A of the Act \22\ 
and Rule 608 thereunder \23\ 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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    \21\ In approving the Seventh Amendment, the Commission has 
considered its impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \22\ 15 U.S.C. 78k-1.
    \23\ 17 CFR 242.608.
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    First, the Participants proposed to amend Section VIII(C) of the 
Plan to extend the current one-year pilot, which is scheduled to end on 
April 8, 2014, to have the pilot set to end on February 20, 2015.\24\ 
As initially contemplated, the Plan would have been fully implemented 
across all NMS Stocks within six months of initial Plan operations, 
which meant there would have been full implementation of the Plan for 
six months before the end of the pilot period. However, pursuant to the 
Fourth Amendment to the Plan,\25\ the Participants amended Section 
VIII.B of the Plan, which modified the implementation schedule of Phase 
II of the Plan to extend the time period when the Plan would fully 
apply to all NMS Stocks. Accordingly, the Plan was not implemented 
across all NMS Stocks until December 8, 2013.\26\ Subsequently, the 
Sixth Amendment to the Plan \27\ was filed on an immediately effective 
basis to extend the implementation date for full implementation of the 
Plan to February 24, 2014. Prior to February 24, 2014, the Plan was 
only in effect from 9:30 a.m. E.T. to 3:45 p.m. E.T., and did not 
include the fifteen minutes of trading preceding the close.\28\ 
Accordingly, if the pilot were allowed to expire as currently scheduled 
on April 8, 2014, there will be less than two months of full operation 
of the Plan before the end of the pilot period. The Participants note 
that this short period of full implementation of the Plan will not 
provide sufficient time for either the Participants or the Commission 
to assess the impact of the Plan and determine whether the Plan should 
be modified prior to approval on a permanent basis, and that the pilot 
period should be extended to provide sufficient time to review data 
based on full implementation of the Plan and assess the operation of 
the Plan.\29\ The Participants further represent that the proposed 
amendment is consistent with the approval order for the Plan, in which 
the Commission stated that having a pilot period would allow ``the 
public, the Participants, and the Commission to assess the operation of 
the Plan and whether the Plan should be

[[Page 19689]]

modified prior to approval on a permanent basis.'' \30\
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    \24\ See Notice, supra, note 4 at 13697.
    \25\ See Securities Exchange Act Release No. 69287 (April 3, 
2013), 78 FR 21483 (April 10, 2013).
    \26\ See Notice, supra, note 4 at 13697.
    \27\ See Securities Exchange Act Release No. 71247 (January 7, 
2014), 79 FR 2204 (January 13, 2014).
    \28\ See Notice, supra, note 4 at 13697.
    \29\ See id.
    \30\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 at 33508 (June 6, 2012).
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    Second, the Participants propose to amend Section III to Appendix B 
of the Plan to delete the requirement that assessments of Plan 
operations be provided at least two months prior to the end of the 
pilot period, and instead propose that the assessments be provided by 
September 30, 2014, nearly five months before the end of the pilot 
period.\31\ As originally contemplated, such assessments would have 
been based on approximately four months' worth of data from full 
implementation of the Plan. Under the proposal, such data will be based 
on nearly seven months of data from full operation of the Plan, 
providing the Participants with more data on which to base their 
assessments. The Participants continue to believe that they would be 
able to assess the Plan based on a similar data set, and that revising 
the time when such assessments would be provided to the Commission 
would provide the Participants with sufficient time to conduct such 
assessments.\32\ In addition, providing the Commission with such 
assessments earlier than two months before the end of the pilot period 
will provide additional time for the Commission to review such 
assessments to inform any determination of whether the Plan should be 
modified prior to approval on a permanent basis.
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    \31\ See Notice, supra, note 4 at 13698.
    \32\ See id.
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    For the reasons noted above, the Commission believes that the 
proposal to amend Section VII(C)(1) and Section I of Appendix A of the 
Plan is consistent with Section 11A of the Act. The Commission 
reiterates its expectation that the Participants will continue to 
monitor the scope and operation of the Plan and study the data 
produced, and will propose any modifications to the Plan that may be 
necessary or appropriate.\33\ Therefore, the Commission finds that the 
Seventh Amendment to the Plan is consistent with Section 11A of the Act 
\34\ and Rule 608 thereunder.\35\
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    \33\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012).
    \34\ 15 U.S.C. 78k-1.
    \35\ 17 CFR 242.608.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 11A of the Act \36\ 
and Rule 608 thereunder,\37\ that the Seventh Amendment to the Plan 
(File No. 4-631) be, and it hereby is, approved.
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    \36\ 15 U.S.C. 78k-1.
    \37\ 17 CFR 242.608.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\38\
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    \38\ 17 CFR 200.30-3(a)(29).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-07881 Filed 4-8-14; 8:45 am]
BILLING CODE 8011-01-P


