
[Federal Register Volume 81, Number 81 (Wednesday, April 27, 2016)]
[Notices]
[Pages 24908-24909]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-09722]



[[Page 24908]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77679; File No. 4-631]


Joint Industry Plan; Order Approving the Tenth Amendment to the 
National Market System Plan to Address Extraordinary Market Volatility 
by Bats BZX Exchange, Inc., Bats BYX Exchange, Inc., Chicago Stock 
Exchange, Inc., Bats EDGA Exchange, Inc., Bats EDGX Exchange, Inc., 
Financial Industry Regulatory Authority, Inc., NASDAQ BX, Inc., NASDAQ 
PHLX LLC, The Nasdaq Stock Market LLC, National Stock Exchange, Inc., 
New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc.

April 21, 2016.

I. Introduction

    On February 19, 2016, Nasdaq, Inc., on behalf of the other parties 
\1\ to the National Market System Plan to Address Extraordinary Market 
Volatility (the ``Plan''), filed with the Securities and Exchange 
Commission (``Commission'') pursuant to Section 11A of the Securities 
Exchange Act of 1934 (``Act'') \2\ and Rule 608 thereunder,\3\ a 
proposal to amend the Plan.\4\ The proposal represents the tenth 
amendment to the Plan, and reflects proposed changes unanimously 
approved by the Participants (``Tenth Amendment''). The proposed Tenth 
Amendment was published for comment in the Federal Register on February 
29, 2016.\5\ The Commission received no comment letters regarding the 
amendment. This order approves the Tenth Amendment to the Plan.
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    \1\ Nasdaq, Inc. filed on behalf of the following parties to the 
Plan: Bats BZX Exchange, Inc., Bats BYX Exchange, Inc., Chicago 
Stock Exchange, Inc., Bats EDGA Exchange, Inc., Bats EDGX Exchange, 
Inc., Financial Industry Regulatory Authority, Inc., NASDAQ BX, 
Inc., NASDAQ PHLX LLC, the Nasdaq Stock Market LLC, National Stock 
Exchange, Inc., the New York Stock Exchange LLC, NYSE MKT LLC, and 
NYSE Arca, Inc. (collectively, the ``Participants'').
    \2\ 15 U.S.C. 78k-1.
    \3\ 17 CFR 242.608.
    \4\ See Letter from Paul Roland, Principal, U.S. Equities, 
Nasdaq, to Brent Fields, Secretary, Commission, dated February 18, 
2016. (``Transmittal Letter'').
    \5\ See Securities Exchange Act Release No. 77205 (February 22, 
2016), 81 FR 10315 (``Notice'').
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II. Description of the Proposal

    In the Tenth Amendment, the Participants propose to extend the 
pilot period of the Plan from April 22, 2016 to April 21, 2017 and make 
one modification to improve the operation of the Plan. Specifically, 
the Participants propose to modify the definition of Opening Price \6\ 
in cases where the Primary Listing Exchange opens with quotations. 
Currently, the Opening Price for NMS Stocks that open on the Primary 
Listing Exchange with quotations is defined to be the midpoint of those 
quotations. The Participants propose to modify the definition of 
Opening Price in these circumstances to be the closing price of the NMS 
Stock on the Primary Listing Exchange on the previous trading day, or 
if no such closing price exists, the last sale on the Primary Listing 
Exchange reported by the SIP. The Opening Price is used under the Plan 
to determine the first Reference Price of the day.\7\
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    \6\ Unless otherwise specified, the terms used herein have the 
same meaning as set forth in the Plan.
    \7\ Section V(B)(1) of the Plan provides that the first 
Reference Price for a Trading Day shall be the Opening Price on the 
Primary Listing Exchange in an NMS Stock if such Opening Price 
occurs less than five minutes after the start of Regular Trading 
Hours.
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III. Discussion and Commission Findings

    The Commission finds that the Tenth Amendment is consistent with 
the requirements of the Act and the rules and regulations thereunder. 
Specifically, the Commission finds that the Tenth Amendment is 
consistent with Section 11A of the Act \8\ and Rule 608 thereunder \9\ 
in that it is appropriate in the public interest, for the protection of 
investors and the maintenance of fair and orderly markets, and that it 
removes impediments to, and perfects the mechanism of, a national 
market system.
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    \8\ 15 U.S.C. 78k-1.
    \9\ 17 CFR 242.608.
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    The Participants presented data in the Transmittal Letter and the 
Supplemental Joint Assessment \10\ that shows that use of the Primary 
Listing Exchange's midpoint of the bid and ask often results in what 
the Participants believe is a skewed initial Reference Price.\11\ The 
Participants also presented data that showed that most Trading Pauses 
occurred in securities that did not trade at or near the time of a 
Trading Pause (i.e., those securities that opened on the midpoint of 
the bid and ask on the Primary Listing Exchange).\12\ The Participants 
performed a back-testing analysis to determine the impact on Trading 
Pauses if the first Reference Price for the day was determined by using 
the Primary Listing Exchange's closing price instead of the midpoint of 
the Exchange's bid and ask.\13\
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    \10\ On May 28, 2015, the Participants submitted a Supplemental 
Joint Assessment, as required under the Plan. The Supplemental Joint 
Assessment is available on the SEC Web site at http://www.sec.gov/comments/4-631/4631-39.pdf. Under the Plan, the Participants were 
required to provide the Commission with a joint assessment relating 
to the impact of the Plan and the calibration of the Percentage 
Parameters by assessing certain identified areas. See Appendix 
B.III.
    \11\ See Transmittal Letter, supra note 4 and Notice, supra note 
5, at Chart 1, Table 9, Table 11, Table 12, and Table 13. See also 
Supplemental Joint Assessment Section V.
    \12\ Id. at Table 9, Table 11, Table 12, and Table 13.
    \13\ Id. at Table 10, Table 11, Table 12, and Table 13.
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    Based on their data, the Participants found that the majority of 
Trading Pauses could have been avoided if the previous day's closing 
price was used as the first Reference Price rather than the midpoint of 
the bid and ask for stocks that opened without transactions.\14\ 
Therefore, the Participants recommend modifying the Plan to amend the 
definition of Opening Price so that the first Reference Price when 
there is no opening transaction is the Primary Listing Exchange's 
previous day's closing price.
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    \14\ See Transmittal Letter, supra note 4 and Notice, supra note 
5.
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    The Commission believes that it is appropriate in the public 
interest, for the protection of investors and the maintenance of a fair 
and orderly market to approve the amendment to modify the definition of 
Opening Price. The Commission believes that the modification of the 
Opening Price definition is appropriate to potentially prevent Trading 
Pauses that are not indicative of extraordinary volatility.\15\
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    \15\ Consistent with their representations set forth in the 
Notice, the Commission expects the Participants to implement the 
amendment to the definition of Opening Price within three months of 
the date of this order.
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    The Participants also propose to amend Section VIII(C) of the Plan 
to extend the pilot period through April 21, 2017. The Commission 
believes that it is appropriate in the public interest, for the 
protection of investors and the maintenance of a fair and orderly 
market to approve the amendment to extend the pilot period until April 
21, 2017 because it will allow the Participants to conduct, and the 
Commission to consider, further analysis of data, including data 
related to the impact of the revised definition of Opening Price, 
regarding the operation of the Plan. An extension of the pilot period 
also will allow the Participants to finalize and file with the 
Commission any proposed amendments to the Plan resulting from such 
further analysis.
    The Commission understands the Participants are conducting 
additional review of certain aspects of the operation of the Plan and 
expects that

[[Page 24909]]

the Participants will provide additional recommendations, as necessary, 
relating to: (i) The harmonization of current clearly erroneous 
execution rules with the Plan, such that clearly erroneous execution 
rules could not be used to break trades occurring within the Price 
Bands absent a legitimate technical failure at a Self-Regulatory 
Organization; (ii) a review of exchange-traded products (ETPs), to 
determine whether adjustments should be made to the Plan to account for 
the particular trading characteristics of ETPs; (iii) a review of other 
issues with the operation of the Plan that may have been revealed by 
the events of August 24, 2015, including the impact of double-wide 
Price Bands during the opening period, and the advisability of 
coordinated reopening procedures; and (iv) potential enhancements to 
the categorization of securities into different tiers. An extension of 
the pilot period of the Plan will allow the Participants' ongoing 
review and analysis to take place and inform any subsequent amendments 
to the Plan. The Commission believes that a one-year extension of the 
Pilot will provide the Participants with sufficient time to analyze the 
impact of change to the definition of Opening Price on the Plan's 
operation, as well as complete analyses of the other outstanding 
matters described above.
    For the reasons noted above, the Commission finds that the Tenth 
Amendment to the Plan is consistent with Section 11A of the Act \16\ 
and Rule 608 thereunder.\17\ 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.\18\
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    \16\ 15 U.S.C. 78k-1.
    \17\ 17 CFR 242.608.
    \18\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 11A of the Act \19\ 
and Rule 608 thereunder,\20\ that the Tenth Amendment to the Plan (File 
No. 4-631) be, and it hereby is, approved.
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    \19\ 15 U.S.C. 78k-1.
    \20\ 17 CFR 242.608.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(29).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-09722 Filed 4-26-16; 8:45 am]
BILLING CODE 8011-01-P


