
[Federal Register Volume 79, Number 87 (Tuesday, May 6, 2014)]
[Notices]
[Pages 25954-25958]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-10287]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72051; File No. SR-NYSEMKT-2014-37]


Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing of 
Proposed Rule Change Adding New Paragraphs (j) and (k) to Rule 128--
Equities, Entitled ``Clearly Erroneous Executions for Equities''

April 30, 2014.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on April 21, 2014, NYSE MKT LLC (the ``Exchange'' or ``NYSE 
MKT'') filed with the Securities and Exchange Commission (the 
``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\ 15 U.S.C. 78a.
    \3\ 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 add new paragraphs (j) and (k) to Rule 
128--Equities, entitled ``Clearly Erroneous Executions For Equities.'' 
The text of the proposed rule change is available on the Exchange's Web 
site at www.nyse.com, at the principal office of the Exchange, and at 
the Commission's Public Reference Room.

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 self-regulatory organization 
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 those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of this filing is to add new paragraph (j) to Rule 
128--Equities to provide the Exchange with authority to nullify 
transactions that were effected based on the same fundamentally 
incorrect or grossly misinterpreted issuance information even if such 
transactions occur over a period of several days, as further described 
below. An example of fundamentally incorrect and grossly misinterpreted 
issuance information that led to a severe valuation error is included 
below for illustrative purposes.
    The Exchange also proposes to add new paragraph (k) to Rule 128--
Equities to make clear that in the event of any disruption or 
malfunction in the operation of the electronic communications and 
trading facilities of

[[Page 25955]]

the Exchange, another market center or responsible single plan 
processor in connection with the transmittal or receipt of a regulatory 
trading halt, suspension or pause (hereafter generally referred to as a 
``trading halt'' for ease of reference), the Exchange will nullify any 
transaction that occurs after the primary listing market for a security 
declares a trading halt with respect to such security. In the event a 
trading halt is declared, then prematurely lifted in error, and then 
re-instituted, proposed paragraph (k) would also result in 
nullification of any transactions that occur before the official, final 
end of the trading halt according to the primary listing market.
    The Exchange also proposes a change to certain cross-references in 
Rule 128--Equities, due to the addition of (j) and (k). Specifically, 
the Exchange proposes to update cross-references in existing paragraph 
(i) of Rule 128--Equities in order to make clear that the provisions of 
paragraph (i) do not alter the application of other provisions of Rule 
128--Equities, including new paragraphs (j) and (k).
Background
    On September 10, 2010, the Commission approved, on a pilot basis, 
changes to Rule 128--Equities to provide for uniform treatment: (1) Of 
clearly erroneous execution reviews in multi-stock events involving 
twenty or more securities; and (2) in the event transactions occur that 
result in the issuance of an individual stock trading pause by the 
primary listing market and subsequent transactions that occur before 
the trading pause is in effect on the Exchange.\4\ The Exchange also 
adopted additional changes to Rule 128--Equities that reduced the 
ability of the Exchange to deviate from the objective standards set 
forth in Rule 128--Equities,\5\ and in 2013, adopted a provision 
designed to address the operation of the Plan to Address Extraordinary 
Market Volatility Pursuant to Rule 608 of Regulation NMS under the Act 
(the ``Limit Up-Limit Down Plan'' or the ``Plan'').\6\ Most recently, 
the Exchange removed the specific provisions related to individual 
stock trading pauses and extended the pilot program to coincide with 
the pilot period for the Limit Up-Limit Down Plan, including any 
extensions thereof, applicable to certain provisions of Rule 128--
Equities.\7\
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    \4\ See Securities Exchange Act Release No. 62886 (Sept. 10, 
2010), 75 FR 56613 (Sept. 16, 2010) (SR- NYSEAmex-2010-60).
    \5\ Id.
    \6\ See Securities Exchange Act Release No. 68801 (Feb. 1, 
2013), 78 FR 8630 (Feb. 6, 2013) (SR- NYSEMKT-2013-11); Securities 
Exchange Act Release No. 67091 (May 31, 2012), 77 FR 33498 (June 6, 
2012) (the ``Limit Up-Limit Down Release''); see also Exchange Rule 
128--Equities (i).
    \7\ Paragraphs (c), (e)(2), (f), (g), and (i) of Rule 128--
Equities are currently subject to a pilot program. See Securities 
Exchange Act Release No. 70517 (September 26, 2013), 78 FR 60943 
(October 2, 2013) (SR-NYSEMKT-2013-78); Securities Exchange Act 
Release No. 71820 (March 27, 2014), 79 FR 18595 (April 2, 2014) (SR-
NYSEMKT-2014-28).
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    As proposed, similar to other provisions added in recent years, as 
described above, both paragraph (j) and paragraph (k) would be subject 
to the pilot period, and thus, would coincide with the pilot period for 
the Limit Up-Limit Down Plan, unless extended or made permanent.
Executions Based on Incorrect or Grossly Misinterpreted Issuance 
Information
    The Exchange proposes to adopt a new provision, paragraph (j), to 
Rule 128--Equities, which would provide that a series of transactions 
in a particular security on one or more trading days may be viewed as 
one event if all such transactions were effected based on the same 
fundamentally incorrect or grossly misinterpreted issuance information 
(e.g., with respect to a stock split or corporate dividend) resulting 
in a severe valuation error for all such transactions (the ``Event'').
    As proposed, an Officer, acting on his or her own motion, would be 
required to take action to declare all transactions that occurred 
during the Event null and void not later than the start of trading on 
the day following the last transaction in the Event. If trading in the 
security is halted before the valuation error is corrected, the Officer 
would be required to take action to declare all transactions that 
occurred during the Event null and void prior to the resumption of 
trading. The Exchange proposes to make clear that no action can be 
taken pursuant to proposed paragraph (j) with respect to any 
transactions that have reached settlement date for the security or that 
result from an initial public offering of a security. The Exchange 
believes that declaring a trade null and void after settlement date 
would be complex to administer and unfair to the affected parties. The 
Exchange also believes that excluding IPOs from the proposed rule will 
ensure that transactions in a new security for which there is no 
benchmark information are not called into question, as it is the IPO 
process itself, including the extensive public disclosure associated 
with IPOs, that is intended to drive price formation.
    Further, the Exchange proposes that to the extent transactions 
related to an Event occur on one or more other market centers, the 
Exchange will promptly coordinate with such other market center(s) to 
ensure consistent treatment of the transactions related to the Event, 
if practicable. The Exchange also proposes to state in the Rule that 
any action taken in connection with paragraph (j) will be taken without 
regard to the Numerical Guidelines set forth in paragraph (c)(1) of 
Rule 128--Equities. In particular, the Exchange believes that there 
could be scenarios where there are erroneous transactions related to an 
Event that do not meet applicable Numerical Guidelines but that are, 
upon review, clearly erroneous. One example of a situation that could 
occur is a corporate action, such as a stock split, that results in the 
dissemination of fundamentally incorrect or grossly misinterpreted 
issuance information and leads to erroneous transactions at a price 
that is close to the price at which the security was previously 
trading. Even if such trading is consistent with prior trading activity 
for the security, and thus would not meet applicable Numerical 
Guidelines, the Exchange would have the authority to nullify such 
transactions if they were affected based on the same fundamentally 
incorrect or grossly misinterpreted issuance information and there was 
a severe valuation error as a result (i.e., although the security 
should be trading at a price further away from its previous range, due 
to fundamentally incorrect or grossly misinterpreted issuance 
information with respect to the corporate action the security continues 
to trade at a price that does not meet applicable Numerical 
Guidelines).
    The Exchange also proposes to include a provision, as it does in 
many other sub-paragraphs of Rule 128--Equities, stating that each 
member or member organization involved in a transaction subject to 
proposed paragraph (j) shall be notified as soon as practicable by the 
Exchange, and that the party aggrieved by the action may appeal such 
action in accordance with Exchange Rule 128--Equities (e)(2).
    In particular, the Exchange believes it is necessary to have 
authority to nullify trades that occur in an event similar to an event 
involving an exchange offer (``Exchange Offer'') made by U.S. Bancorp 
on the New York Stock Exchange (``NYSE'') in 2010 in which there were a 
series of executions based on incorrect or grossly misinterpreted 
issuance information. As a result of such information, the securities 
traded at severely dislocated prices. At the

[[Page 25956]]

time, the NYSE filed an emergency rule filing in order to respond to 
that event.\8\ With the filing the NYSE interpreted the rule applicable 
to clearly erroneous executions as permitting the NYSE to nullify all 
trades resulting after the Exchange Offer at severely dislocated 
prices.\9\ The Exchange believes it is important to have in place a 
rule to break such trades if an event like the U.S. Bancorp event 
occurs again in the future. The U.S. Bancorp event is described in 
further detail below and is intended to be illustrative of the manner 
in which the Exchange proposes to utilize proposed paragraph (j), if 
necessary.
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    \8\ See Securities Exchange Act Release No. 62609 (July 30, 
2010), 75 FR 47327 (August 5, 2010) (SR-NYSE-2010-55).
    \9\ Id.
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    In May 2010, U.S. Bancorp commenced an offer to exchange up to 
1,250,000 Depositary Shares, each representing a 1/100 interest in a 
share of Series A Non-Cumulative Perpetual Preferred Stock, $100,000 
liquidation preference per share (the ``Depositary Shares'') for any 
and all of the 1,250,000 outstanding 6.189% Fixed-to-Floating Rate 
Normal ITS issued by U.S. Bancorp Capital IX, each with a liquidation 
amount of $1,000 (the ``Normal ITS''). The Depositary Shares were 
approved for listing on the NYSE under the symbol USB PRA. On June 11, 
2010, the NYSE opened the shares on a quote, but trading did not 
commence until June 16, 2010 at prices in the range of $79.00 per 
share. There were additional executions on the NYSE in that price range 
on June 17 and 18, 2010. On June 18, 2010, NYSE staff learned that the 
prices at which trades had executed were not consistent with the value 
of the security, which was closer to an $800 price. Upon learning of 
the pricing disparity, NYSE immediately halted trading in the 
Depositary Shares on all markets and alerted U.S. Bancorp and other 
exchanges that traded the Depositary Shares of the pricing discrepancy.
    In order to address the situation, the NYSE filed a proposal to 
interpret its existing clearly erroneous execution rule such that the 
trading in Depository Shares from June 16 to June 18 constituted a 
single event because that trading was based on incorrect or grossly 
misinterpreted issuance information that resulted in severe price 
dislocation (the ``U.S. Bancorp Event'').\10\ Because the Depository 
Shares were halted before the price of the Depository Shares ceased to 
be dislocated, and remain halted, the NYSE was able to review trading 
in Depository Shares and declare null and void all trading in the U.S. 
Bancorp Event before the security resumed trading.
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    \10\ Id.
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    Rather than filing a proposal in response to a similar event 
happening again, the Exchange proposes to add paragraph (j) in order to 
nullify transactions consistent with the description of the proposed 
Rule above.
Executions After a Trading Halt Has Been Declared
    The Exchange proposes to add new paragraph (k) to Rule 128--
Equities to make clear that in the event of any disruption or 
malfunction in the operation of the electronic communications and 
trading facilities of the Exchange, another market center or 
responsible single plan processor in connection with the transmittal or 
receipt of a trading halt, the Exchange will nullify any transaction 
that occurs after the primary listing market for a security declares a 
trading halt and before such trading halt with respect to such security 
has officially ended according to the primary listing market. In 
addition, proposed paragraph (k) will make clear that in the event a 
trading halt is declared, then prematurely lifted in error and then re-
instituted, the Exchange will nullify transactions that occur before 
the official, final end of the trading halt according to the primary 
listing market.
    As with other provisions in Rule 128--Equities, including proposed 
paragraph (j) as discussed above, the authority to nullify transactions 
pursuant to paragraph (k) would be vested in an Officer, acting on his 
or her own motion. Any action taken in connection with paragraph (k) 
would be taken in a timely fashion, generally within thirty (30) 
minutes of the detection of the erroneous transaction and in no 
circumstances later than the start of regular trading hours \11\ on the 
trading day following the date of execution(s) under review. The 
Exchange also proposes to specify that any action taken in connection 
with proposed paragraph (k) will be taken without regard to the 
Numerical Guidelines set forth in paragraph (c)(1) of Rule 128--
Equities. The Exchange believes it is appropriate to act to nullify 
transactions pursuant to proposed paragraph (k) without regard to 
applicable Numerical Guidelines because in the situations covered by 
paragraph (k), such transactions should not have occurred in the first 
instance, and thus, their nullification does not put parties in any 
different position than they should have been. The Exchange also 
believes that the certainty that the proposed rule provides is critical 
in situations involving trading halts.
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    \11\ The regular trade hours [sic] on the Exchange are defined 
in Rule 51--Equities and is generally the time between 9:30 a.m. to 
4:00 p.m. E.T.
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    As it has proposed for paragraph (j), as described above, the 
Exchange also proposes to an [sic] include a provision stating that 
each member or member organization involved in a transaction subject to 
proposed paragraph (k) shall be notified as soon as practicable by the 
Exchange, and that the party aggrieved by the action may appeal such 
action in accordance with Exchange Rule 128--Equities (e)(2).
    The Exchange notes that trading in a security is typically halted 
immediately on the Exchange when the primary listing market issues a 
trading halt in such security. However, in certain circumstances, due 
to a technical issue related to the transmission or receipt of the 
electronic message instituting such trading halt or due to other 
extraordinary circumstances, executions can occur on the Exchange 
following the declaration of such a trading halt. Similarly, although 
rare, the Exchange has witnessed scenarios where due to extraordinary 
circumstances a trading halt is declared, then prematurely lifted in 
error and then re-instituted. It is these types of extraordinary 
circumstances that the Exchange believes require certainty, and thus, 
the Exchange believes it necessary to make clear that in such a 
circumstance any transactions after a trading halt has been declared 
will be nullified. In the event that a trading halt is declared as of a 
future time (i.e., if the primary listing exchange declares a trading 
halt as of a specific, future time in order to ensure coordination 
amongst market participants), the Exchange would only nullify 
transactions occurring after the time the trading halt was supposed to 
be in place until the official end of the trading halt according to the 
primary listing market.
    The Exchange also notes that it currently has authority pursuant to 
paragraph (f) of Rule 128--Equities to review and nullify transactions 
that arise during a disruption or malfunction in the operation of any 
electronic communications and trading facilities of the Exchange. 
Further, paragraph (f) of Rule 128--Equities gives the Exchange 
authority to use a lower numerical guideline than is set forth in 
paragraph (c)(1) of the Rule when necessary to maintain a fair and 
orderly market and to protect investors and the public interest. Thus, 
while the Exchange believes that paragraph (f) does give the Exchange 
the authority to nullify

[[Page 25957]]

transactions occurring when there is an Exchange technical issue 
related to the transmission or receipt of the electronic message 
instituting a trading halt or with respect to a technical issue related 
to a prematurely lifted trading halt, the Exchange believes that 
proposed paragraph (k) will provide appropriate authority for the 
Exchange to nullify all such transactions whether or not the systems 
problem occurs on the Exchange with respect to trading halts and 
explicit clarity for market participants that such transactions will be 
nullified. The Exchange believes that such authority is appropriate 
because when relied upon the Exchange will be cancelling trades that 
should not have occurred in the first instance. Finally, the Exchange 
believes that such authority is appropriate because a trading halt 
declared by the primary listing market is indicative of an issue with 
respect to the applicable security or a larger set of securities.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with the 
requirements of the Act and the rules and regulations thereunder that 
are applicable to a national securities exchange, and, in particular, 
with the requirements of Section 6(b) of the Act.\12\ In particular, 
the proposal is consistent with Section 6(b)(5) of the Act,\13\ because 
it would promote just and equitable principles of trade, remove 
impediments to, and perfect the mechanism of, a free and open market 
and a national market system.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that it is appropriate to adopt a provision 
granting the Exchange authority to nullify trades that occur if an 
Event similar to the U.S. Bancorp Event occurs again. The Exchange 
believes that this provision will allow the Exchange to act in the 
event of such a severe valuation error, that such action would promote 
just and equitable principles of trade and that the proposal is 
therefore consistent with the Act. Similarly, the Exchange believes 
that adding a provision allowing the Exchange to nullify transactions 
that occur when a trading halt is declared, then prematurely lifted in 
error and then reinstituted, and providing that in the event of any 
disruption or malfunction in the operation of the electronic 
communications and trading facilities of the Exchange, another market 
center or responsible single plan processor in connection with the 
transmittal or receipt of a trading halt the Exchange will nullify 
trades occurring after a trading halt has been declared by the primary 
listing market for the security will help to avoid confusion amongst 
market participants, which is consistent with the protection of 
investors and the public interest and therefore consistent with the 
Act. The Exchange further believes that the proposal is appropriate and 
consistent with the Act because when relied upon the Exchange will be 
cancelling trades that should not have occurred in the first instance. 
The Exchange also believes that the proposal is appropriate because a 
trading halt declared by the primary listing market is indicative of an 
issue with respect to the applicable security or a larger set of 
securities.
    The Exchange believes that the proposal to update cross-references 
in existing paragraph (i) of Rule 128--Equities to include new 
paragraphs (j) and (k) is consistent with the Act because, as is the 
case with respect to the current rule, this change makes clear that the 
provisions of paragraph (i) do not alter the application of other 
provisions of Rule 128--Equities.
    The Exchange believes that the Financial Industry Regulatory 
Authority (``FINRA'') and other national securities exchanges are also 
filing similar proposals to add provisions similar to the provisions 
proposed by the Exchange above. Therefore, the proposal promotes just 
and equitable principles of trade in that it promotes transparency and 
uniformity across markets concerning treatment of transactions as 
clearly erroneous. The proposed rule change would also help to assure 
consistent results in handling erroneous trades across the U.S. 
markets, thus furthering fair and orderly markets, the protection of 
investors and the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change 
implicates any competitive issues. To the contrary, as noted above, the 
Exchange believes FINRA and other national securities exchanges are 
also filing similar proposals, and thus, that the proposal will help to 
ensure consistency across market centers.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

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 Number SR-NYSEMKT-2014-37 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEMKT-2014-37. 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

[[Page 25958]]

10:00 a.m. and 3:00 p.m. Copies of the 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 Number SR-NYSEMKT-2014-37 and should 
be submitted on or before May 27, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-10287 Filed 5-5-14; 8:45 am]
BILLING CODE 8011-01-P


