[Federal Register Volume 86, Number 138 (Thursday, July 22, 2021)]
[Notices]
[Pages 38776-38788]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-15548]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92428; File No. SR-NYSE-2021-40]


Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change To Adopt on a Permanent Basis 
the Pilot Program for Market-Wide Circuit Breakers in Rule 7.12

July 16, 2021.
    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 July 2, 2021, New York Stock Exchange LLC (``NYSE'' or 
the ``Exchange'') 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to adopt on a permanent basis the pilot 
program for Market-Wide Circuit Breakers in Rule 7.12. The proposed 
rule change is available on the Exchange's website 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,

[[Page 38777]]

of the most significant parts of such statements.

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

1. Purpose
    The Exchange proposes to adopt on a permanent basis the pilot 
program for Market-Wide Circuit Breakers in Rule 7.12. The Exchange 
understands that upon approval of this proposal, the other cash 
equities exchanges and FINRA (collectively, the ``SROs'') will also 
submit substantively identical proposals to the Commission [sic].
Rules Overview
    The Market-Wide Circuit Breaker (``MWCB'') rules, including the 
Exchange's Rule 7.12, provide an important, automatic mechanism that is 
invoked to promote stability and investor confidence during periods of 
significant stress when cash equities securities experience extreme 
market-wide declines. The MWCB rules are designed to slow the effects 
of extreme price declines through coordinated trading halts across both 
cash equity and equity options securities markets.
    The cash equities rules governing MWCBs were first adopted in 1988 
and, in 2012, all U.S. cash equity exchanges and FINRA amended their 
cash equities uniform rules on a pilot basis (the ``Pilot Rules,'' 
i.e., Rule 7.12 (a)-(d)).\4\ The Pilot Rules currently provide for 
trading halts in all cash equity securities during a severe market 
decline as measured by a single-day decline in the S&P 500 Index 
(``SPX'').\5\ Under the Pilot Rules, a market-wide trading halt will be 
triggered if SPX declines in price by specified percentages from the 
prior day's closing price of that index. The triggers are set at three 
circuit breaker thresholds: 7% (Level 1), 13% (Level 2), and 20% (Level 
3). A market decline that triggers a Level 1 or Level 2 halt after 9:30 
a.m. and before 3:25 p.m. would halt market-wide trading for 15 
minutes, while a similar market decline at or after 3:25 p.m. would not 
halt market-wide trading. (Level 1 and Level 2 halts may occur only 
once a day.) A market decline that triggers a Level 3 halt at any time 
during the trading day would halt market-wide trading for the remainder 
of the trading day.
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 67090 (May 31, 
2012), 77 FR 33531 (June 6, 2012) (SR-BATS-2011-038; SR-BYX-2011-
025; SR-BX-2011-068; SR-CBOE-2011-087; SR-C2-2011-024; SR-CHX-2011-
30; SR-EDGA-2011-31; SR-EDGX-2011-30; SR-FINRA-2011-054; SR-ISE-
2011-61; SR-NASDAQ-2011-131; SR-NSX-2011-11; SR-NYSE-2011-48; SR-
NYSEAmex-2011-73; SR-NYSEArca-2011-68; SR-Phlx-2011-129) (``Pilot 
Rules Approval Order'').
    \5\ The rules of the equity options exchanges similarly provide 
for a halt in trading if the cash equity exchanges invoke a MWCB 
Halt. See, e.g., NYSE Arca Rule 6.65-O(d)(4).
---------------------------------------------------------------------------

Extensions of the Pilot Rules
    The Commission approved the Pilot Rules, the term of which was to 
coincide with the pilot period for the Plan to Address Extraordinary 
Market Volatility Pursuant to Rule 608 of Regulation NMS (the ``LULD 
Plan''),\6\ including any extensions to the pilot period for the LULD 
Plan.\7\ In April 2019, the Commission approved an amendment to the 
LULD Plan for it to operate on a permanent, rather than pilot, 
basis.\8\ In conjunction with the proposal to make the LULD Plan 
permanent, the Exchange amended Rule 80B to untie the Pilot Rules' 
effectiveness from that of the LULD Plan and to extend the Pilot Rules' 
effectiveness to the close of business on October 18, 2019.\9\ The 
Exchange subsequently amended Rule 80B \10\ and the corresponding 
Pillar rule, Rule 7.12, to extend the Pilot Rules' effectiveness for an 
additional year to the close of business on October 18, 2020,\11\ and 
later, on October 18, 2021.\12\
---------------------------------------------------------------------------

    \6\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012). The LULD Plan provides a 
mechanism to address extraordinary market volatility in individual 
securities.
    \7\ See Securities Exchange Act Release Nos. 67090 (May 31, 
2012), 77 FR 33531 (June 6, 2012) (SR-NYSE-2011-48) (Approval 
Order); and 68784 (January 31, 2013), 78 FR 8662 (February 6, 2013) 
(SR-NYSE-2013-10).
    \8\ See Securities Exchange Act Release No. 85623 (April 11, 
2019), 84 FR 16086 (April 17, 2019).
    \9\ See Securities Exchange Act Release No. 85560 (April 9, 
2019), 84 FR 15247 (April 15, 2019) (SR-NYSE-2019-19). At that time, 
Rule 7.12 existed but was not operative with respect to Exchange-
listed securities and was not amended to extend its effectiveness 
through October 18, 2019. Subsequently, all Exchange-listed 
securities transitioned to the Pillar trading platform. See 
Securities Exchange Act Release No. 85962 (May 29, 2019), 84 FR 
26188 (June 5, 2019) (SR-NYSE-2019-05).
    \10\ Rule 80B is no longer operative. See Securities Exchange 
Act Release No. 88402 (March 17, 2020), 85 FR 16436 (March 23, 2020) 
(SR-NYSE-2020-20).
    \11\ See Securities Exchange Act Release No. 87016 (September 
19, 2019), 84 FR 50502 (September 25, 2019) (SR-NYSE-2019-51).
    \12\ See Securities Exchange Act Release No. 90134 (October 8, 
2020), 85 FR 65107 (October 14, 2020) (SR-NYSE-2020-84).
---------------------------------------------------------------------------

The MWCB Task Force and March 2020 MWCB Events
    In late 2019, Commission staff requested the formation of a MWCB 
Task Force (``Task Force'') to evaluate the operation and design of the 
MWCB mechanism. The Task Force included representatives from the SROs, 
the Commission, CME, the Commodity Futures Trading Commission 
(``CFTC''), and the securities industry and conducted several 
organizational meetings in December 2019 and January 2020.
    Beginning in February 2020, the following events occurred, 
culminating in four MWCB Level 1 halts on March 9, 12, 16, and 18, 
2020:
     February 21, 2020 (Friday): Related to COVID-19 concerns, 
market volatility began to increase, with SPX falling 1.1%.\13\
---------------------------------------------------------------------------

    \13\ All market index statistics sourced from http://finance.yahoo.com.
---------------------------------------------------------------------------

     February 22-23, 2020 (Saturday-Sunday): Concerns related 
to COVID-19 increased during the weekend.
     February 24, 2020 (Monday): SPX opened 2.4% below the 
previous Close and ended the day down 3.4%. Unrelatedly, Amendment 18 
of the LULD Plan) (which eliminated double-wide bands for some symbols 
at the open and close) was implemented on this date.
     February 27, 2020 (Thursday): Elevated volatility 
persisted during the week, peaking with a 4.4% drop in SPX on this 
date.
     February 28, 2020 (Friday): Amid continuing volatility 
stemming from COVID-19 concerns and a rebalance of MSCI indices at the 
close, the U.S. equity market traded 19.375 billion shares--at the 
time, the second most active volume day in history.\14\
---------------------------------------------------------------------------

    \14\ Source: NYSE Daily Trade and Quote.
---------------------------------------------------------------------------

     February 29-March 1, 2020 (Saturday-Sunday): Over this 
weekend, various global actors including the Federal Reserve, the 
European Central Bank, and the Bank of Japan, issued statements 
indicating that they would intervene to support markets.
     March 2, 2020 (Monday): In response to expectations of 
central bank stimulus, the market rallied with a 4.6% increase in SPX.
     March 3, 2020 (Tuesday): Markets remained volatile, with 
SPX falling 2.8%. The market trading range on that date was 5.2%. By 
comparison, the average daily move over the first three weeks of 
February had been 0.7%.
     March 2-6, 2020 (Monday-Friday): On average, the close-to-
close market decreased 3.3% per day between March 2 and March 6.
     March 7-8, 2020 (Saturday-Sunday): Negative news regarding 
COVID-19 multiplied over the weekend, with increasing deaths in Italy 
\15\ and multiple members of

[[Page 38778]]

Congress forced to self-quarantine.\16\ As Asian markets opened for 
Monday trading (during Sunday evening Eastern Time), oil prices 
``collapsed'' after Saudi Arabia announced plans to boost output, with 
Brent crude dropping as much as 30%. These developments led the E-mini 
S&P 500 futures contract to reach its limit-down state (a 5% decline) 
on the Chicago Mercantile Exchange (``CME'') overnight Sunday into 
Monday.\17\
---------------------------------------------------------------------------

    \15\ https://www.wsj.com/articles/italy-with-elderly-population-has-worlds-highest-death-rate-from-virus-11583785086.
    \16\ https://www.wsj.com/articles/number-of-congressional-lawmakers-in-self-quarantine-grows-to-five-11583785594.
    \17\ https://www.bloomberg.com/news/articles/2020-03-08/rout-in-u-s-stock-futures-would-trigger-trading-curbs-at-5.
---------------------------------------------------------------------------

     March 9, 2020 (Monday) (First MWCB Halt): As cash equity 
markets in the U.S. opened at 9:30 a.m., SPX began updating its value 
as each component stock commenced trading. At 9:34:13 a.m., SPX crossed 
the 7% threshold to trigger a Level 1 MWCB halt, halting trading for 15 
minutes. Reopening auctions began on primary exchanges at 9:49:13 a.m. 
Shortly after trading resumed, SPX gained value, reaching as high as 
5.5% down from Friday's close, before closing down 7.6% from Friday's 
close.
     March 10, 2020 (Tuesday): The market recovered somewhat on 
this date.
     March 12, 2020 (Thursday) (Second MWCB Halt): COVID-19 
fears took hold again after ``global health authorities declared the 
virus a pandemic,'' \18\ with the E-mini S&P 500 futures contract 
reaching its limit-down state overnight. At 9:35:44 a.m., SPX crossed 
the 7% threshold to trigger a Level 1 MWCB halt. Reopening auctions 
began on primary exchanges at 9:50:44 a.m. After trading resumed, the 
market recovered value somewhat before falling again and ending the day 
down 9.5%.
---------------------------------------------------------------------------

    \18\ https://www.wsj.com/articles/global-stocks-follow-u-s-markets-lower-11583975524.
---------------------------------------------------------------------------

     March 13, 2020 (Friday): The market vacillated throughout 
the day before rallying into the close, with SPX closing up 9.3% on the 
day but down 8.8% for the week.
     March 14-15, 2020 (Saturday-Sunday): Negative COVID-19 
news continued over the weekend, with more parts of the U.S. economy 
shutting down. On Sunday, the Federal Reserve cut interest rates to 
nearly 0%.
     March 16, 2020 (Monday) (Third MWCB Halt): E-mini S&P 500 
futures again hit a limit-down state in overnight trading. Selling 
pressure was so intense that the Level 1 MWCB threshold of 7% down was 
crossed at 9:30:01 a.m. Given the rapid and severe price drops, the 
vast majority of SPX stocks did not complete a primary listing exchange 
opening auction prior to the Level 1 halt being triggered. Reopening 
auctions began on primary listing exchanges at 9:45:01 a.m. Trading 
resumed at lower price levels before the market recovered over the 
course of the day, but SPX started falling in the final 35 minutes of 
the trading day after President Trump said the virus ``may not be under 
control until July or August.'' \19\ The day ended down 12% from 
Friday's close.
---------------------------------------------------------------------------

    \19\ https://www.wsj.com/articles/stocks-dow-slide-after-fed-slashes-rates-11584310328.
---------------------------------------------------------------------------

     March 17, 2020 (Tuesday): The Federal Reserve announced a 
lending facility to support short-term debt markets, and the Trump 
Administration indicated support for a stimulus plan including direct 
payments to individuals.\20\ The market rallied, with SPX gaining 6%.
---------------------------------------------------------------------------

    \20\ https://www.wsj.com/articles/u-s-futures-rise-as-asia-markets-gyrate-11584413763.
---------------------------------------------------------------------------

     March 18, 2020 (Wednesday) (Fourth MWCB Halt): Negative 
sentiment returned, with price drops across multiple asset classes. 
After initially rising after the open, the market started dropping 
around 10:45 a.m. and crossed the Level 1 MWCB threshold at 12:56:17 
p.m. Reopening auctions began on primary exchanges at 1:11:17 p.m. SPX 
fell further after the market reopened but then rallied into the close 
to finish the day down 5.2%. After the close, the New York Stock 
Exchange (``NYSE'') announced that its Trading Floor would close 
effective Monday, March 23, 2020, due to COVID-19.
     March 20, 2020 (Friday): SPX dropped an additional 4.3%.
    In each instance, pursuant to the Pilot Rules, the markets halted 
as intended upon a 7% drop in SPX and did not start the process to 
resume trading until the prescribed 15-minute halt period ended.
    In response to these events, in the Spring and Summer of 2020, the 
Task Force held ten meetings that were attended by Commission staff, 
with the goal of performing an expedited review of the March 2020 halts 
and identifying any areas where the MWCB mechanism had not worked 
properly. Given the risk of unintended consequences, the Task Force did 
not recommend changes that were not rooted in a noted deficiency. The 
Task Force recommended creating a process for a backup reference price 
in the event that SPX were to become unavailable, and enhancing 
functional MWCB testing. The Task Force also asked CME to consider 
modifying its rules to enter into a limit-down state in the futures 
pre-market after a 7% decline instead of 5%. CME made the requested 
change, which became effective on October 12, 2020.\21\
---------------------------------------------------------------------------

    \21\ See https://www.cmegroup.com/content/dam/cmegroup/market-regulation/rule-filings/2020/9/20-392_1.pdf; https://www.cmegroup.com/content/dam/cmegroup/market-regulation/rule-filings/2020/9/20-392_2.pdf.
---------------------------------------------------------------------------

The MWCB Working Group's Study
    On September 17, 2020, the Director of the Commission's Division of 
Trading and Markets asked the SROs to conduct a more complete study of 
the design and operation of the Pilot Rules and the LULD Plan during 
the period of volatility in the Spring of 2020.
    In response to the request, the SROs created a MWCB ``Working 
Group'' composed of SRO representatives and industry advisers that 
included members of the advisory committees to both the LULD Plan and 
the NMS Plans governing the collection, consolidation, and 
dissemination of last-sale transaction reports and quotations in NMS 
Stocks. The Working Group met regularly from September 2020 through 
March 2021 to consider the Commission's request, review data, and 
compile its study. The Working Group's efforts in this respect 
incorporated and built on the work of an MWCB Task Force.
    The Working Group submitted its study to the Commission on March 
31, 2021 (the ``Study'').\22\ In addition to a timeline of the MWCB 
events in March 2020, the Study includes a summary of the analysis and 
recommendations of the MWCB Task Force; an evaluation of the operation 
of the Pilot Rules during the March 2020 events; an evaluation of the 
design of the current MWCB system; and the Working Group's conclusions 
and recommendations.
---------------------------------------------------------------------------

    \22\ See Report of the Market-Wide Circuit Breaker (``MWCB'') 
Working Group Regarding the March 2020 MWCB Events, submitted March 
31, 2021 (the ``Study''), attached hereto as Exhibit 3; also 
available at https://www.nyse.com/publicdocs/nyse/markets/nyse/Report_of_the_Market-Wide_Circuit_Breaker_Working_Group.pdf.
---------------------------------------------------------------------------

Analysis
    After evaluation and analysis, the Working Group reached five key 
conclusions. The Exchange adopts and agrees with these conclusions and 
accordingly believes that the MWCB rules should be made permanent. The 
conclusions and factual support for each conclusion are below.
1. The MWCB Mechanism Set Out in the Pilot Rules Worked as Intended 
During the March 2020 Events
    The Working Group concluded that the MWCB mechanism set out in the 
Pilot Rules worked as intended during the March 2020 events. The 
Exchange

[[Page 38779]]

adopts and agrees with this conclusion, for the reasons set out below 
and in the Study.
    On March 9, 12, 16, and 18, 2020, as market conditions indicated 
that a Level 1 MWCB Halt was likely, the Exchange activated an 
``Intermarket Bridge'' call and sent an email alert to a pre-existing 
distribution list comprising multiple staff from securities and futures 
exchanges, FINRA, the SEC, the CFTC, the Depository Trust & Clearing 
Corporation, and the Options Clearing Corporation. On each day, the 
call opened before the 7% trigger was hit and remained open during the 
entire period of the halt, until trading in all symbols was reopened.
    When SPX declined 7% from the previous day's closing value, the 
MWCB Level 1 Breach messages and resulting Regulatory Halt messages 
operated as designed. All 9,000+ equity symbols were halted in a timely 
manner.
    In addition, the Exchange and the Cboe markets sent blast halt 
alerts to industry subscribers. For example, on March 18, 2020, Cboe 
sent the following notice:

    Effective 12:56:17 ET Cboe Equities exchanges have halted 
trading due to a Level 1 Market Wide Circuit Breaker breach.
    During the entirety of the Halt period, new orders and cancels 
will be accepted on the BYX, EDGA, and EDGX exchanges for all 
symbols and on the BZX Exchange for non BZX-listed symbols. Orders 
will be entered in a queued state and wait for the re-opening 
requirements. BZX will reject new orders in BZX-listed symbols until 
5 minutes before the halt is scheduled to lift. Orders placed prior 
to the halt may be cancelled depending on cancel on halt port 
settings. The exchanges will be scheduled to re-open at 
approximately 13:11:17 ET.

    Similarly, the Exchange sent the following notice on the same date:

    Due to a 7 percent decline in the S&P 500 index, in accordance 
with the NYSE, NYSE Arca, NYSE American, NYSE National and NYSE 
Chicago Rule 7.12, equity trading at the NYSE Exchanges has been 
halted. Information about order entry during the halt and the 
reopening process is available here.
    The market will re-open today at the following time: 13:11:17 
ET.

    When the Regulatory Halt messages reached the options markets, 
consistent with their respective rules that require the options markets 
to halt if there is a MWCB Halt in the cash equities market, they 
halted trading in approximately 900,000 options series. A total of 
approximately 5,000 options trades that were sent to OPRA after the 
time of the four MWCB Halts were nullified. Specifically, the Nasdaq 
options markets (BX, PHLX, NOM, ISE, GEMX, MRX) nullified approximately 
4,800 trades and the two NYSE options markets (NYSE American and NYSE 
Arca) nullified approximately 180 trades pursuant to those markets' 
``obvious error'' rules.
    CME is not a subscriber to the equity SIP data feeds. In the event 
of a MWCB Halt, CME halts trading in affected symbols manually upon 
notification of the breach during the Intermarket Bridge call. At the 
outset of each event in March 2020, CME staff responded to the Exchange 
staff's announcement of the halt during the Intermarket Bridge call. 
CME halted affected symbols approximately one minute after each breach 
was triggered. Approximately 4,400 contracts (futures and options on 
futures on all U.S. equity indices) traded on the CME between the time 
the breach was declared and the time CME halted trading. No trades on 
CME were nullified.
    The Exchange concludes from the foregoing that the MWCB mechanism 
operated as intended in March 2020. The markets were in communication 
before, during, and after the MWCB Halts occurred, and all 9,000+ 
equity symbols were successfully halted in a timely manner.
2. The MWCB Halts Triggered in March 2020 Appear To Have Had the 
Intended Effect of Calming Volatility in the Market, Without Causing 
Harm
    The Working Group concluded that the MWCB halts triggered in March 
2020 appear to have had the intended effect of calming volatility in 
the market, without causing harm. The Exchange adopts and agrees with 
this conclusion, for the reasons set out below and in the Study.
    The Working Group examined the following measurements of liquidity 
and volatility preceding each of the March 2020 MWCB Halts and compared 
them to liquidity and volatility measurements for other trading 
periods. In particular, the Working Group examined:

    1. Activity before the opening of regular trading hours;
    2. Occurrence of opening on a trade versus opening on a quote; 
\23\
---------------------------------------------------------------------------

    \23\ An opening auction can conclude two ways: (1) Orders are 
paired off and a trade is executed (``opening on a trade''), or (2) 
orders are not paired off and the auction ends with the publication 
of a quote (``opening on a quote'').
---------------------------------------------------------------------------

    3. Size and liquidity in the opening auctions and post-MWCB halt 
reopening auctions as measured by shares available based on 
imbalance messages;
    4. Quote volatility as measured by average mid-point to mid-
point price change every second in basis points; and
    5. Liquidity at the national best bid and offer (``NBBO''); and
    6. LULD Trading Pauses following MWCB Reopening Auctions.

    In the graphs and discussion below, the following abbreviations 
apply:

 Group 1 (G1) = S&P 500 Tier 1 \24\ securities
---------------------------------------------------------------------------

    \24\ Tier 1 and Tier 2 refer to groups of securities prescribed 
in the LULD Plan. Tier 1 comprises S&P 500/Russell 1000 securities 
as well as the active ETPs. Tier 2 comprises the balance of NMS 
securities, except rights and warrants.
---------------------------------------------------------------------------

 Group 2 (G2) = Other non-ETP Tier 1 securities
 Group 3 (G3) = Tier 1 ETPs
 Group 4 (G4) = Non-ETP Tier 2 securities and symbols not 
included in the in LULD Plan (i.e., rights/warrants)
 Group 5 (G5) = Tier 2 ETPs

    In general, the graphs and discussion below break out data for each 
of the four MWCB Halt days individually, and compare it to two time 
periods: (i) January 2020, and (ii) the period from February 24 through 
May 1, 2020, excluding the four days with MWCB Halts (also referred to 
as the ``High-Volatility Period'').
a. Activity Before the Opening of Regular Trading Hours
    SEC staff asked the Working Group to review volatility and 
liquidity preceding the four MWCB Halts. To do so, the Working Group 
examined activity in SPY before the opening of regular trading hours on 
the four MWCB Halt days. With the exception of the occasional ``news,'' 
stock impacted by earnings surprises, or other significant corporate or 
socio-political events, early morning trading activity is typically 
limited. This baseline is shown in Chart 1 of the Study \25\ by the 
data from January 2020. Specifically, in January 2020, prior to the 
opening of regular trading hours at 9:30 a.m., SPY averaged barely over 
one million shares traded per day, and its average trading range was 66 
basis points.
---------------------------------------------------------------------------

    \25\ See Study, supra note 22, at 14.
---------------------------------------------------------------------------

    The impact of COVID-19 and the rapid adjustment in attitudes 
towards economic activity changed that. During the High-Volatility 
Period that began on February 24, pre-opening activity in SPY rose to 
six million shares traded per day, with an average trading range of 390 
basis points. The pre-regular trading hours activity on the four MWCB 
days in March 2020 was even higher, resulting in volumes roughly five 
to nine times those January levels, with pre-market ranges reaching as 
high as 10%.

[[Page 38780]]

b. Securities Opening on a Trade vs. Opening on a Quote on Days With 
MWCB Halts
    SEC staff also asked the Working Group to review whether there were 
any differences between the number of securities that opened on a trade 
vs. opened on a quote on the four days with MWCB Halts. By including 
this information here, the Exchange does not express any opinion about 
whether opening on a trade is preferable or superior to opening on a 
quote. In the Exchange's view, so long as the opening quote represents 
a fair price for the security, opening on a quote is not an indication 
of an ineffective opening or reopening process.
    As shown in Chart 2 of the Study,\26\ there was no meaningful 
difference in the percentage of securities opening on a trade versus on 
a quote (i) on each of the four MWCB Halt days, (ii) during January 
2020, and (iii) during the High-Volatility Period. The one exception 
was in G5 securities (i.e., Tier 2 ETPs), a higher percentage of which 
opened on a trade on the four MWCB Halt days than in January or during 
the High-Volatility Period.
---------------------------------------------------------------------------

    \26\ See id. at 14.
---------------------------------------------------------------------------

    Note that in Chart 2, ``reopens'' are reopening auctions for stocks 
that had already opened prior the MWCB halts. The Exchange accordingly 
expects there to be less interest represented in those reopening 
auctions.
c. Size and Liquidity of Opening and Reopening Auctions
    In order to assess the liquidity available in the reopening 
auctions following the four MWCB Halts, the Working Group compared the 
volumes in these reopening auctions to the average volumes in opening 
auctions in January 2020. Chart 3 of the Study \27\ compares (i) the 
median opening auction volumes in shares traded for the January 2020 
period, (ii) the median opening auction volumes in shares traded for 
the High-Volatility Period, and (iii) the median volumes in shares 
traded in the reopening auctions following the MWCB Halts for symbols 
that had already executed opening auctions.
---------------------------------------------------------------------------

    \27\ See id. at 15.
---------------------------------------------------------------------------

    Given that many securities had already opened before the MWCB Halt 
on the four MWCB Halt days, the size of the reopening auctions for 
those securities was somewhat smaller. The Exchange believes that this 
is unsurprising, and would not expect a reopening auction to be as 
large as an opening auction.
    The Working Group also compared the size of the opening auctions 
plus reopening auctions following the MWCB Halts on the MWCB Halt days 
to the size of opening auctions in the January 2020 period, in order to 
try to assess whether the MWCB Halts resulted in a loss of liquidity 
overall during the auctions.
    Charts 4a and 4b of the Study are two scatter plot charts that 
compare average daily volume in opening auctions during the January 
2020 period with the average of the volume in opening auctions plus 
post-MWCB Halt reopening auctions on March 9, 12, and 16.\28\ Chart 4a 
\29\ shows those three MWCB Halt days combined, while Chart 4b \30\ 
focuses on the March 16 MWCB Halt, which occurred less than two seconds 
after the opening of regular trading hours.
---------------------------------------------------------------------------

    \28\ March 18 was excluded from this analysis since the MWCB 
Halt that day occurred midday, not in the early morning period.
    \29\ See Study, supra note 22, at 17.
    \30\ See id. at 17.
---------------------------------------------------------------------------

    These scatter plot charts show that, on average, the size of the 
opening auctions plus reopening auctions on the MWCB Halt days was not 
very different than the size of opening auctions in the January 2020 
period. The charts include regression lines, which show that the 
opening auction plus MWCB reopening auction volumes on the MWCB Halt 
days hewed closely to the January 2020 auction volumes.
    In Chart 4b, regarding the March 16 MWCB Halt, the green dots show 
that many securities had not started trading or quoting before the halt 
at 9:30:01 a.m. However, even under those conditions, the green 
trendline shows that the size of the reopening auctions after the March 
16 MWCB Halt were still similar to opening auction volumes in the 
January 2020 period.
    SEC staff also asked the Working Group to review the participation 
by market makers in the reopening auctions after the MWCB Halts. The 
Working Group did so by examining principal versus agency activity as a 
proxy for gauging the level of proprietary market maker trading 
activity, since liquidity providers generally act as principal on such 
transactions and agency trades are more typically associated with 
customer flow from institutional or retail investors. The Working Group 
also reviewed the Top 5 firms in each category, using January 2020 
activity as a point of comparison.
    As Chart 5 of the Study \31\ shows, compared to the January 2020 
period, the share of the opening auctions represented by principal 
transactions was higher on the MWCB days, as well as during the High-
Volatility Period. Although principal activity was lower in the 
reopening auctions than the opening auctions, each of the MWCB Halt 
days (except for March 18) showed generally increasing principal 
participation over the previous MWCB Halt days.
---------------------------------------------------------------------------

    \31\ See id. at 18.
---------------------------------------------------------------------------

    Similarly, Chart 6 of the Study \32\ shows the share of trades 
executed in the opening auctions and executed in the MWCB reopening 
auctions represented by transactions involving the top five 
participants from the January 2020 period. In almost all breakouts, the 
top five firms represent a larger share of MWCB reopening auctions than 
of the opening auctions, further highlighting the critical importance 
of liquidity from the most active market participants in providing 
liquidity in the MWCB reopening auctions.\33\
---------------------------------------------------------------------------

    \32\ See id. at 20.
    \33\ The result for G5 was impacted by a 30 million share reopen 
in one leveraged ETP, which accounted for a very large share of the 
total G5 reopen.
---------------------------------------------------------------------------

    SEC staff also asked the Working Group to examine how quickly 
stocks opened following each of the four MWCB Halts. Chart 7 of the 
Study \34\ shows that, on all four dates, even given the uncertainty 
caused by the MWCB Halts, all SPX stocks reopened within 15 minutes of 
the end of the MWCB Halt. The quickest reopens were on March 18, which 
may be due to the fact that (i) all securities had been trading, 
allowing for better price discovery and faster accretion of liquidity, 
(ii) the improved learning curve from the prior three MWCB Halts in 
just over a week,\35\ and (iii) the MWCB Halt was triggered by a 
gradual price drop and there was no sudden price dislocation at that 
time.
---------------------------------------------------------------------------

    \34\ See Study, supra note 22, at 23.
    \35\ Industry participants in the Working Group noted some 
initial uncertainty created by differences in market practices 
(e.g., order submission/cancellation, auction collars), but also 
recognized that real world experience gained after the first halt 
mitigated the issue.
---------------------------------------------------------------------------

d. Quote Volatility
    The Working Group also examined quote volatility on the MWCB Halt 
days. Liquidity typically decreases with higher volatility, so 
examining quote volatility is another way to study the effects of the 
MWCB Halts on liquidity. If quote volatility stabilized following the 
reopening auctions after the MWCB Halts, that would indicate that the 
MWCB Halts had the intended effect of calming volatility.

[[Page 38781]]

    As Chart 8 of the Study \36\ shows, although the median second-to-
second quote volatility was generally higher on the four MWCB Halt days 
as compared to January 2020 and the High-Volatility Period, volatility 
quickly subsided following the reopening auctions after the MWCB Halts 
and stabilized at a level similar to volatility in the High-Volatile 
Period. ETP volatility (G3 and G5) largely subsided after the reopening 
auctions following the MWCB Halts and stabilized near January 2020 
levels, apart from brief spikes midday on March 12 and 18. This 
stabilization may be an indication that the MWCB Halts on these days 
helped to calm the market, since volatility did not continue to 
escalate throughout the day.
---------------------------------------------------------------------------

    \36\ See Study, supra note 22, at 24.
---------------------------------------------------------------------------

    Chart 9 of the Study \37\ shows that almost all of the days with 
the most quote volatility were the four days with MWCB Halts.\38\
---------------------------------------------------------------------------

    \37\ See Study, supra note 22, at 25.
    \38\ These charts show, for each time period, the high and low 
quote volatility measures. The point where the dark grey and light 
grey meet are the median volatility. The boxes are represented by 
1.5 times the interquartile range with the quartiles at the 75th 
percentile and the 25th percentile. For example, if the 25th 
percentile is 10 basis points and the 75th quartile is 14 basis 
points, we had (14-10)*1.5 or 6 basis points to the 75th quartile 
and subtract that from the 25th quartile. Thus, the box would 
represent all values between 4 and 20 basis points and outliers 
would be results above or below those figures.
---------------------------------------------------------------------------

    The Working Group also calculated quote volatility for the five-
minute time periods preceding the MWCBs, for (i) the four MWCB dates, 
(ii) January 2021, and (iii) the High-Volatility Period. As shown in 
Chart 10 of the Study,\39\ the opening volatility was noticeably higher 
on the MWCB days, including March 18, when the market did not halt 
until midday. Note that measurements for March 16 represent only one 
second of trading and are based on limited observations.
---------------------------------------------------------------------------

    \39\ See Study, supra note 22, at 26.
---------------------------------------------------------------------------

e. Liquidity at the NBBO
    The Working Group also examined liquidity at the NBBO on the days 
when MWCB Halts were triggered, in order to understand the impact of 
the MWCB Halts on liquidity. To do so, the Working Group compared the 
median size at the NBBO for (i) each of the four MWCB Halt days, (ii) 
January 2020, and (iii) the High-Volatility Period. As shown in Chart 
11 of the Study,\40\ early morning liquidity was lower on the MWCB Halt 
days, but many stocks did not open at 9:30 a.m., and on the three days 
with early morning MWCB Halts, many stocks did not open on the primary 
listing exchange until after trading resumed.
---------------------------------------------------------------------------

    \40\ See id. at 27.
---------------------------------------------------------------------------

    The results prior to the March 18 midday MWCB Halt tell a different 
story. That MWCB Halt was not a sudden adjustment to overnight 
activity. In most of the groups of securities, size at the inside on 
March 18 was similar to January 2020 levels for the 12:50-12:55 p.m. 
period and was slightly larger for non-ETPs when compared to the 
remainder of the High-Volatility Period.
    Chart 12 of the Study \41\ shows that most of the large decreases 
in size at the inside were on the four days with MWCB Halts.
---------------------------------------------------------------------------

    \41\ See id. at 27.
---------------------------------------------------------------------------

f. LULD Trading Pauses Following MWCB Reopening Auctions
    The Working Group also reviewed how often securities entered into 
an LULD Trading Pause following the reopening auctions after the MWCB 
Halts. A large number of LULD Trading Pauses could be interpreted to 
suggest that more robust reopening procedures were required, or that 
the reopenings occurred too quickly after the MWCB reopens and the 
market did not have the opportunity to truly reprice. The Working Group 
therefore also compared how many LULD Trading Pauses were caused by a 
limit-up state versus a limit-down state.
    Not surprisingly, there were more limit-up LULD Trading Pauses 
following MWCB reopening auctions from MWCB Halts, as the markets (at 
least initially) bounced back following the large drops at the opening 
auction. March 18 was the exception, where there was little difference 
between the number of limit-up and limit-down pauses. March 16, the day 
on which a MWCB halt was triggered one second after the opening of 
regular trading hours, saw the greatest number of LULD Trading Pauses, 
especially within 30 minutes of the market reopening; this is 
unsurprising since there was little trading prior to the MWCB Halt and 
far fewer stocks had opened prior to the halt.
    Charts 13 and 14 \42\ show the number of LULD Trading Pauses within 
5 and 30 minutes of MWCB reopening auctions, broken out by whether the 
stock had opened prior to the MWCB Halt and whether the reopening 
auction concluded with a trade or a quote.
---------------------------------------------------------------------------

    \42\ See id. at 29-30.
---------------------------------------------------------------------------

    There were few consistent results across dates or Groups, although 
in almost all cases there were more limit-up pauses than limit-down 
pauses. The main observation for G1 securities is that stocks that did 
not have their primary listing market opening auction until after the 
MWCB Halt had more LULD Trading Pauses than stocks that opened before 
the MWCB Halt was triggered. There were consistently more limit-up 
Trading Pauses than limit-down Trading Pauses, and the increase in 
Trading Pauses over the 30-minute period after the opening auction 
compared to the first five minutes after the opening auction was larger 
for stocks that did not open until after the MWCB Halt.
    G2 stocks did not show as clear a trend. On March 9, for stocks 
that already opened before the MWCB Halt, there were more limit-down 
Trading Pauses than limit-up Trading Pauses. On March 12, the incidence 
of Trading Pauses was similar for stocks that had opened prior to the 
MWCB and those that did not, while March 16th showed a pattern similar 
to G1 stocks.
    For both G1 and G2 stocks, there were relatively few reopens on a 
quote.
    G3 (Tier 1 ETPs) all opened prior to the MWCB Halt on March 9, 12 
and 18. Most reopened on a trade, and those that reopened on a quote 
only had LULD Trading Pauses on March 18 in the five minutes after the 
reopening auction. Limit-up Trading Pauses were far more likely on 
March 12 and March 16, but the differences were smaller on March 9 and 
18. Note also that some ETPs, such as inverted equity and some fixed 
income based, may naturally move opposite the overall market.
    Regarding G4 (Tier 2 non-ETPs), LULD pauses were less frequent in 
the first five minutes following the MWCB Halts. Limit-up Trading 
Pauses were more common than limit-down. ETPs that did not open prior 
to the MWCB Halts had a slightly higher likelihood of pausing in the 
next five and 30 minutes, but not across all dates and time frames.
    G5 (Tier 2 ETPs) hit very few Trading Pauses within five minutes of 
reopening, although more occurred in the following 25 minutes.
    The Working Group also reviewed the likelihood of an LULD Trading 
Pause being triggered following the MWCB reopening auctions in ETPs 
that were subject to extension logic for trading collars, as compared 
to those that were not subject to extension logic. At the time of the 
MWCBs, NYSE Arca and CBOE BZX maintained collars for their reopening 
auctions with extension logic, but Nasdaq did not. (Nasdaq has since 
implemented collars with extension logic for MWCB reopening auctions.)

[[Page 38782]]

    Chart 15 of the Study \43\ shows that, across the four days with 
MWCB Halts, the likelihood of an LULD Trading Pause within five minutes 
or 30 minutes of reopening after the MWCB Halt was higher for ETPs that 
were not subject to a collar with extension logic than for those that 
did have a collar with extension logic.
---------------------------------------------------------------------------

    \43\ See id. at 31.
---------------------------------------------------------------------------

* * * * *
    The Exchange concludes that the analysis above shows that the MWCB 
Halts triggered in March 2020 appear to have had the intended effect of 
calming volatility in the market, without causing harm. Specifically:
     There was no significant difference in the percentage of 
securities that opened on a trade versus on a quote on the four days 
with MWCB Halts versus the other periods studied.
     While the post-MWCB Halt reopening auctions were smaller 
than typical opening auctions, the size of those post-MWCB Halt 
reopening auctions plus the earlier initial opening auctions in those 
symbols is on average equal to opening auctions in January 2020. This 
indicates that the MWCB Halts on the four days in question did not 
cause liquidity to evaporate.
     All securities in SPX reopened within 15 minutes following 
the end of the MWCB Halts.
     Quote volatility was generally higher on the four MWCB 
Halt days as compared to the other periods studied, but quote 
volatility stabilized following the MWCB Halts at levels similar to the 
January 2020 levels.
     LULD Trading Pauses following the MWCB Halts worked as 
designed to address intra-day volatility.
3. The Design of the MWCB Mechanism With Respect to Reference Value 
(SPX), Trigger Levels (7%/13%/20%), and Halt Times (15 Minutes) Is 
Appropriate
    The Working Group concluded that the design of the MWCB mechanism 
with respect to reference value (SPX), trigger levels (7%/13%/20%), and 
the Level 1 and 2 halt times (15 minutes) is appropriate. The Exchange 
adopts and agrees with these conclusions, for the reasons set out below 
and in the Study.
    Currently, the MWCB mechanism uses SPX as the reference for 
determining when the market has fallen 7%/13%/20% triggering a Level 1/
Level 2/Level 3 halt, respectively. To determine whether these elements 
are appropriately set, the Working Group reviewed the history of MWCB 
Halts, reference value, and trigger levels since their inception in 
1988. While surgical precision in setting these levels is not possible, 
the Working Group concluded, and the Exchange agrees, based on the 
real-world testing of the trigger levels and reference index during 
more than 30 years of trading and a review of alternative indices, that 
the current trigger levels and reference index are appropriately set.
History of the Development of the MWCB Mechanism Since 1988
    On October 19, 1987, the DJIA declined 22.6%. In response, U.S. 
exchanges established the first ``circuit breakers,'' \44\ designed to 
temporarily restrict trading in stocks, stock options, and stock index 
futures when markets experience a severe, rapid decline.\45\ This 
original circuit breakers mechanism, approved by the SEC in 1988, 
provided that halts would be trigged by declines of a set number of 
points in the DJIA. Specifically, if the DJIA declined by 250 points 
from its previous day's close, the markets would halt trading for one 
hour. If, on that same day, the DJIA declined by a total of 400 points 
from the previous day's close, the markets would halt for two 
hours.\46\
---------------------------------------------------------------------------

    \44\ The Report of the Presidential Task Force on Market 
Mechanisms (the ``Brady Report'') noted that the market disorders of 
October 1987 ``became, in effect, ad hoc circuit breakers, 
reflecting the natural limits to market liquidity.'' Accordingly, 
the Brady Report maintained that the October 1987 Market Break 
``demonstrates that it is far better to design and implement 
coherent, coordinated circuit breaker mechanisms in advance, than to 
be left at the mercy of the unavoidable circuit breakers of chaos 
and system failure.'' See Nicholas Brady, Report of the Presidential 
Task Force on Market Mechanisms (January 1988) at 66.
    \45\ See Securities Exchange Act Release No. 26198 (October 19, 
1988), 53 FR 41637 (October 24, 2988) (SR-CBOE-88-14; SR-NASD-88-46; 
SR-NYSE-88-22; SR-NYSE-88-23; SR-NYSE-88-24; SR-AMEX-88-24).
    \46\ The 250-point and 400-point triggers represented 12% and 
19% of the DJIA when implemented.
---------------------------------------------------------------------------

    Amendments approved by the SEC in July 1996 reduced the duration of 
the 250 and 400 points halts to 30 minutes and 60 minutes from one hour 
and two hours, respectively.\47\ This reduction in halt duration 
corresponded to the ``significant technological progress made by the 
securities markets and the broker-dealer community since 1988 in 
efficiently accommodating large order imbalances that may occur under 
volatile market conditions.'' Further amendments approved in January 
1997 increased the two trigger values to 350 and 550 points.\48\ In 
their filings, the exchanges noted that the proposed new levels of 350 
and 550 points would represent approximately a 5.4% and 8.5% decline in 
the DJIA, respectively, reflecting significant market declines that 
they believed served as appropriate levels for triggering a brief 
trading halt.
---------------------------------------------------------------------------

    \47\ See Securities Exchange Act Release Nos. 37457 (July 19, 
1996), 61 FR 39176 (July 26, 1996) (SR-NYSE-96-09); 37458 (July 19, 
1996), 61 FR 39167 (July 26, 1996) (SR-Amex-96-13); and 37459 (July 
19, 1996), 61 FR 39172 (July 26, 1996) (SR-BSE-96-4; SR-CBOE-96-27; 
SR-CHX-96-20; SR-Phlx-96-12).
    \48\ See Securities Exchange Act Release No. 38221 (January 31, 
1997), 62 FR 5871 (February 7, 1997) (SR-NYSE-96-38; SR-Amex-96-49; 
SR-CBOE-96-78; SR-CHX-96-33; SR-BSE-96-12; SR-Phlx-97-03). The 
Commission approved each of the Exchanges' revised circuit breaker 
rules on a one-year pilot basis that expired on January 31, 1998.
---------------------------------------------------------------------------

    These circuit breakers were triggered for the first time since 
their adoption on October 27, 1997, when the DJIA experienced two 
declines, totaling 554 points, or 7.2%. The first circuit breaker of 30 
minutes was triggered at 2:36 p.m. when the DJIA declined 350 points 
(4.54%) from the previous day's close. After the market reopened at 
3:06 p.m., the DJIA continued to drop another 200 points, triggering 
the second circuit breaker at 3:30 p.m. Because the second circuit 
breaker was triggered at 3:30 p.m., within the last hour of trading, 
the market was closed for the remainder of the day.
    The consensus view of the October 27, 1997 halts was that the 
circuit breaker thresholds of 350 and 550 points needed to be raised 
significantly as the percentage declines associated with those hard 
values did not justify halts in trading.\49\ It was believed that the 
circuit breakers' low point value level, close proximity to each other, 
and the fact that the second circuit breaker would close the market for 
the remainder of the day, may have contributed to selling pressure 
after the first halt was lifted. Additionally, the 7% decline in the 
DJIA around 3:30 p.m. should not have caused trading to be halted for 
the remainder of the day.\50\
---------------------------------------------------------------------------

    \49\ See Trading Analysis of October 27 and 28, 1997, A Report 
by the Division of Market Regulation U.S. Securities and Exchange 
Commission, dated September 1998, available at https://www.sec.gov/news/studies/tradrep.htm#cbs.
    \50\ See id. at Part III, Section IV.
---------------------------------------------------------------------------

    In a report by SEC staff analyzing the event, the staff stated:

    First, the circuit breaker thresholds needed to be raised 
significantly from those in place on October 27. When the 350-point 
trigger was reached on October 27, the DJIA was down only 4.54%, a 
level that had been reached on 11 previous days since 1945. 
Moreover, there was little evidence of the types of market liquidity 
constraints that would have justified cross-market halts. Circuit 
breaker halts should be reserved for an abrupt market decline of a 
magnitude that raises concerns that the exhaustion of market 
liquidity might result in uncoordinated, ad hoc market closures.\51\
---------------------------------------------------------------------------

    \51\ See id.


[[Page 38783]]


---------------------------------------------------------------------------

    In January 1998, the exchanges adopted interim changes to the 
circuit breaker rules. These changes provided that if, at or before 
3:00 p.m., the DJIA were to fall 350 or more points below its previous 
trading day's closing value, trading in all stocks and equity-based 
options on the exchanges would halt for 30 minutes, while trading would 
not be halted for such a decline after 3:00 p.m. In addition, if, on 
the same day, the DJIA dropped 550 or more points from its previous 
trading day's close, trading in all stocks and equity-based options on 
the exchanges would halt for 60 minutes, except that if the 550-point 
decline occurred after 2:00 p.m. but before 3:00 p.m., the halt would 
be for 30 minutes instead of 60 minutes, and if the 550-point drop 
occurred at or after 3:00 p.m., trading would close for the remainder 
of the day. These interim changes were adopted only until the markets 
could agree on modifications to raise the circuit breaker trigger 
levels significantly.
    In April 1998, the exchanges implemented new circuit breaker 
trigger levels based upon percentage declines in the DJIA, rather than 
specified point declines.\52\ These percentage declines were set at 
10%, 20%, and 30%, as follows:
---------------------------------------------------------------------------

    \52\ See Securities Exchange Act Release No. 39846 (April 9, 
1998), 63 FR 18477 (April 15, 1998) (SR-NYSE-98-06; SR-Amex-98-09; 
BSE-98-06; SR-CHX-98-08; SR-NASD-98-27; SR-Phlx-98-15).

 Level 1--10% decline in DJIA:
    [cir] Before 2:00 p.m., the market will close for one hour
    [cir] Between 2:00 p.m. and 2:30 p.m., the market will close for 30 
minutes
    [cir] No Level 1 after 2:30 p.m.
 Level 2--20% decline in DJIA:
    [cir] Before 1:00 p.m., the market will close for two hours
    [cir] Between 1:00 p.m. and 2:00 p.m., the market for one hour
    [cir] After 2:00 p.m., the market will close for the day
 Level 3--30% decline in DJIA:
    [cir] The market will close for the remainder of the day, 
regardless of what time the decline occurs

    These values were calculated at the beginning of each calendar 
quarter, using the average closing value of the DJIA for the previous 
month to establish specific point values for the quarter.
    These values were approached but not breached on May 6, 2010, when 
the U.S. securities and futures markets experienced a severe 
disruption, often referred to as the ``Flash Crash.'' Between 2:32 p.m. 
and 2:45 p.m., the DJIA dropped about 9% and then rebounded within 
minutes.\53\ The decline never reached the 10% trigger, so securities 
trading continued unhalted.\54\
---------------------------------------------------------------------------

    \53\ Approximately 86% of securities reached lows for the day 
that were less than 10% away from the 2:40 p.m. price. The other 14% 
of securities suffered greater declines than the broader market, 
with some trading all the way down to one penny. https://www.sec.gov/sec-cftc-prelimreport.pdf.
    \54\ At approximately 2:45 p.m., CME's Globex stop logic 
function initiated a five-second trading pause in the E-mini S&P 500 
futures contract because of a rapid 5% decline in the contract's 
value.
---------------------------------------------------------------------------

    In response to the events of May 6, 2010, the SEC adopted several 
new rules and approved NMS Plans and changes to SRO rules,\55\ 
including: (i) A ban on stub quotes; (ii) single stock circuit 
breakers, which were later replaced by the LULD Plan; (iii) revisions 
to the MWCB rules; (iv) the Consolidated Audit Trail; and (ii) 
Regulation Systems Compliance and Integrity (Regulation SCI). 
Specifically, the changes made to the MWCB rules were:
---------------------------------------------------------------------------

    \55\ See Securities Exchange Act Release No. 67090 (May 31, 
2012), 77 FR 33531 (June 6, 2012) (SR-BATS-2011-038; SR-BYX-2011-
025; SR-BX-2011-068; SR-CBOE-2011-087; SR-C2-2011-024; SR-CHX-2011-
30; SR-EDGA-2011-31; SR-EDGX-2011-30; SR-FINRA-2011-054; SR-ISE-
2011-61; SR-NASDAQ-2011-131; SR-NSX-2011-11; SR-NYSE-2011-48; SR-
NYSEAmex-2011-73; SR-NYSEArca-2011-68; SR-Phlx-2011-129).
---------------------------------------------------------------------------

     The DJIA was replaced by the SPX, which provides a broader 
base of securities against which to measure volatility.\56\
---------------------------------------------------------------------------

    \56\ From the joint CFTC/SEC report: ``Use of the S&P 500 Index 
would lead to easier coordination with halts in the E-Mini and the 
SPY.'' In addition, using an index that correlates closely with 
derivative products, such as the E-mini S&P 500 futures contract or 
SPY, will allow for a better cross-market measure of market 
volatility.
---------------------------------------------------------------------------

     Circuit breaker thresholds are calculated on a daily 
rather than quarterly basis.
     Level 1 and 2 halts are allowed only once per day.
     Level 1 and 2 halts were shortened from 30 minutes to 15 
minutes. Non-primary markets are allowed to reopen after 15 minutes 
even if the primary market has not reopened.\57\
---------------------------------------------------------------------------

    \57\ Many, if not all, equity markets have adopted rules 
requiring the receipt of LULD bands in non-listed symbols before 
reopening after MWCB Halts.
---------------------------------------------------------------------------

     Level 1 and 2 halts are permitted up to 3:25 p.m., instead 
of only until 2:30 p.m. (the Flash Crash occurred after 2:30 p.m.).
     The triggers for each Level were reduced, as follows:

[cir] Level 1--7% decline in SPX:
    [ssquf] Before 3:25 p.m., the market will close for 15 minutes
    [ssquf] No Level 1 halts at or after 3:25 p.m.
[cir] Level 2--13% decline in SPX:
    [ssquf] Before 3:25 p.m., the market will close for 15 minutes
    [ssquf] No Level 2 halts at or after 3:25 p.m.
[cir] Level 3--20% decline in SPX:
    [ssquf] The market will close for remainder of trading day, 
regardless of what time the trigger is reached

    The MWCB mechanism described above has remained substantively 
unchanged since it was implemented in 2012 with the Pilot Rules.
b. Evaluation of Halt Triggers and Length of Halts
    The Exchange observes that since the inception of MWCB trading 
halts in 1988, the pendulum has swung from wider triggers to narrower 
ones, then back to wider ones, and then to narrower ones again. In 
1988, the two triggers were, based on DJIA point values of 250 and 400, 
12% and 19% market declines, which were deemed to be too high. In 1997, 
the DJIA point value declines triggering halts were increased to 350 
and 500, which represented declines of the DJIA of 5.4% and 8.5%. When 
the first ever MWCB halt was triggered in October 1997, the industry 
concluded that the halt trigger of a 4.5% decline from the then 
reference (DJIA) and ``close for the day'' trigger of a 7% decline to 
be too low. The triggers were then increased to 10%, 20% and 30%. But 
in May 2010, when the Level 1 trigger was not breached after a 9% drop, 
the industry determined, in effect, to split the difference and lower 
the trigger levels to the current 7%, 13%, and 20% levels.
    In 2016, the Equity Market Structure Advisory Committee's 
(``EMSAC'') Subcommittee on Market Quality questioned whether the 7% 
decline for triggering for a Level 1 halt should be changed back to the 
previous trigger of 10%:

    [The Subcommittee] . . . considered evidence in international 
markets that having a circuit breaker often acts as a magnet rather 
than a cushion. There is some evidence from China that when markets 
began to approach the 7% band, selling pressure intensified as 
market participants tried to get their trades in before the market 
was closed. As such the Subcommittee feels that a wider band around 
the 10% range is warranted.\58\
---------------------------------------------------------------------------

    \58\ https://www.sec.gov/spotlight/emsac/emsac-market-quality-subcommittee-recomendation-072516.pdf.

    The Exchange concurs with the Working Group's conclusion that 
experience suggests that such a change is unnecessary. Since 1962, 
intraday losses as large as 7% have been rare in SPX, occurring just 16 
times from the prior day close to next day's low. The only four times 
it did occur since the implementation of the LULD Plan was on the four 
dates in March 2020 that triggered the MWCB Halts.
    Since the LULD Plan was implemented, there have been only five

[[Page 38784]]

days where the SPX fell as much as 6%, and all took place during the 
March 9--March 18 period. On March 11, the index fell as much as 6.07%, 
but did not continue lower to trigger a Level 1 MWCB halt at 7%. On 
March 16, SPX declines triggered a Level 1 halt, and continued to fall 
after reopening to a low of -12.18%, but did not continue to fall to 
the 13% trigger for a Level 2 halt. Furthermore, on March 9, 12, and 
18, SPX experienced further losses after the Level 1 halt, with 
intraday lows of -8.01%, -9.58%, and -9.83%. The fact that SPX 
continued to decline after the halt at 7% suggests that the market 
found an equilibrium level that was not particularly tied to the 7% 
Level 1 trigger or the 13% Level 2 trigger.
    Accordingly, the Working Group concluded, and the Exchange agrees, 
that the available evidence does not support the conclusion that the 
current 7% and 13% triggers create a ``magnet effect.'' The sole member 
of the Working Group who was also a member of the EMSAC Subcommittee 
agreed that, with the benefit of actual data and a review of the March 
2020 activity, there is no evidence of possible selling pressure or a 
need to raise the trigger for a Level 1 MWCB halt to 10% from the 
current 7%. The Working Group did not draw any conclusions about 
whether a ``magnet effect'' exists when market declines approach 20% 
(the Level 3 MWCB trigger that would end trading for the remainder of 
the day), given the lack of data.
    As noted above, CME implemented the Task Force recommendation to 
reopen the E-mini S&P 500 futures five minutes before the end of a 15-
minute Level 1 or Level 2 MWCB halt, in order to enhance the equity 
market price discovery process. Given that change, the Working Group 
opted not to simultaneously recommend a change to the length of the 
Level 1 and 2 MWCB Halts. The Exchange shares the Working Group's view.
c. Evaluation of the Reference Value
    During the Spring and Summer of 2020, the MWCB Task Force conducted 
a preliminary evaluation of whether SPX is the appropriate reference 
for the MWCB mechanism. The Task Force met with representatives of S&P 
DJI, who provided a presentation explaining their redundancy and 
resiliency protections for the SPX calculation, as well as supporting 
documentation. The Task Force concluded at that time that there was no 
immediate need to replace SPX as the reference value.
    In late 2020 and early 2021, the Working Group revisited the issue 
and performed additional analysis regarding whether to retain SPX as 
the reference for triggering MWCB halts. The Working Group examined 
criteria for considering an instrument or methodology to replace SPX 
and compared a number of potential alternatives to SPX. Specifically, 
the Working Group considered the following alternatives through various 
``lenses'' noted below:
    Potential alternatives to SPX considered:

 DJIA
 S&P 100 (``OEX'')
 Nasdaq 100 (``NDX'')
 Russell 1000 (``R1000'')
 Russell 3000 (``R3000'')
 Wilshire 5000 (``W5000'')
 E-Mini S&P 500 Futures
 Exchange Traded Products related to SPX/E-Mini (i.e., SPY, 
IVV, VOO) \59\
---------------------------------------------------------------------------

    \59\ Note that while the analysis below focuses on SPY--the 
related ETP with the largest AUM--the Exchange believes that the 
assessment would be comparable for IVV or VOO.

---------------------------------------------------------------------------
    ``Lenses'' for considering potential alternatives:

 Breadth of securities in an index or in the index underlying a 
specific product
 Breadth of sectors represented by product/index
 Breadth of listing exchanges represented by product/index
 Correlation with related products, including derivatives and 
ETPs
 Does the reference value demonstrate dislocations from the 
underlying value?
 Industry awareness of the index/product level
 Activity level in/liquidity generally present in the product 
(or correlated products if reference value is an index)
 If reference value is a traded product, susceptibility of that 
product to short term liquidity imbalances that might erroneously 
trigger a MWCB
 Potential concerns regarding cross-market coordination
 Whose regulatory purview does the reference value fall under
 Reference calculation method
 Index methodology

    After evaluating a number of different potential references 
assessed by the Working Group,\60\ the Exchange concludes that SPX 
remains an appropriate product to use as the reference for the MWCB 
mechanism, and does not recommend making a change, for the following 
reasons:
---------------------------------------------------------------------------

    \60\ See Study, supra note 22, at 41.
---------------------------------------------------------------------------

     The industry practitioners in the Working Group strongly 
believe that the reference should be based on an index rather than an 
individual tradeable product (whether a derivative or an ETP) because 
individual products are vulnerable to temporary order imbalances or 
price shocks, which may result in transient premiums or discounts.\61\ 
In addition, individual products may themselves be subject to single 
stock price bands or circuit breakers. An index has far less potential 
to be influenced by these factors than an individual product.
---------------------------------------------------------------------------

    \61\ For example, on December 21, 2020, at 1:25 p.m., a sudden 
influx of Intermarket Sweep Orders caused a flash surge in SPY, 
resulting in a price jump from around $365.00 to $378.46, and back 
down to $367.50 in less than one second. https://www.bloomberg.com/news/articles/2020-12-23/flash-surge-in-world-s-biggest-etf-linked-to-outlandish-trades.
---------------------------------------------------------------------------

     Of the indices the Working Group examined, the Exchange 
notes that SPX contains a large number of securities with a high degree 
of breadth, an extremely high correlation with the liquidity of its 
underlying securities, and a well-understood calculation methodology. 
S&P DJI disseminates documentation regarding the calculation of SPX, 
especially at and around market open and reopen that addresses 
technical questions regarding the index calculation and value 
dissemination.\62\ The Exchange recognizes the lack of regulatory 
oversight of non-traded products, but nevertheless believe that SPX is 
an appropriate reference given the numerous safeguards provided by S&P 
DJI.\63\
---------------------------------------------------------------------------

    \62\ S&P DJI's Equity Indices Policies & Practices Methodology, 
https://us.spindices.com/governance/methodology-information/. The 
rules governing the S&P 500 are available in the S&P U.S. Indices 
Methodology and published at https://us.spindices.com/indices/equity/sp-500.
    \63\ See id. regarding disclosure from S&P DJI. On May 17, 2021, 
following the completion of the Working Group's Study, the 
Commission charged S&P DJI with securities law violations stemming 
from S&P DJI's use of an undisclosed feature with respect to its S&P 
500 VIX Short Term Futures Index ER. See https://www.sec.gov/news/press-release/2021-84. The Exchange has reviewed that enforcement 
action and has determined that it does not change its conclusion 
that SPX remains an appropriate reference value for the MWCB 
mechanism. As noted, no other index has a calculation method as 
well-understood as SPX, or has SPX's number and breadth of 
securities. In addition, as noted, S&P DJI has been extremely 
transparent and responsive to the Exchange and the other Working 
Group members about the calculation of SPX.
---------------------------------------------------------------------------

     The Exchange notes that S&P DJI periodically improves its 
calculation methods for SPX. For example, following the events of 
August 24, 2015, S&P DJI changed its methodology for calculating SPX to 
use consolidates prices.\64\ This change likely helped to ensure that 
SPX accurately reflected

[[Page 38785]]

market conditions preceding the MWCB Halts in March 2020.
---------------------------------------------------------------------------

    \64\ https://www.prnewswire.com/news-releases/sp-dow-jones-indices-announces-changes-to-us-indices-intraday-calculations-300228793.html.
---------------------------------------------------------------------------

    In addition, the Exchange notes that S&P DJI was forthcoming and 
transparent in responding to the Working Group's questions about the 
resiliency and redundancy of the SPX calculation. In meetings with the 
Working Group, S&P DJI confirmed that it supports three data centers--
in New Jersey, Chicago, and London--with two output nodes per center. 
Each of the three data centers independently calculates SPX, and S&P 
DJI monitors for consistency of values. Alerts are generated if these 
values are not consistent the three data centers. Should there be an 
issue with the feed from any one node, S&P DJI can switch over to a 
different node within the site or to a new site. S&P DJI conducts 
ongoing tests between their three data centers, and performs 
independent internal SPX modeling to detect any aberrations.
    The Exchange did consider the fact that, while S&P DJI's index 
computations are conducted and made available from all three geographic 
locations with delivery through separate communications lines, there is 
no completely independent backup maintained for SPX, which remains a 
single point of failure. S&P DJI has responded that it intends to 
establish an independent index calculation to be conducted and 
maintained by a separate, independent entity thus further reinforcing 
redundancy and resiliency of the calculation.
    For the foregoing reasons, the Working Group concluded, and the 
Exchange agrees, that SPX remains an appropriate product to use as the 
MWCB reference. Neither the Working Group nor the Exchange recommend 
changing to another index or product as a reference value.
4. The Change Implemented in Amendment 10 to the Plan To Address 
Extraordinary Market Volatility (the ``Limit Up/Limit Down Plan'' or 
``LULD Plan'') Did Not Likely Have any Negative Impact on MWCB 
Functionality
    The Working Group concluded that the change implemented in 
Amendment 10 to the Plan to Address Extraordinary Market Volatility 
(the ``Limit Up/Limit Down Plan'' or ``LULD Plan'') did not likely have 
any negative impact on MWCB functionality. The Exchange adopts and 
agrees with this conclusion, for the reasons set out below and in the 
Study.
    The Working Group considered the number of LULD Trading Pauses 
experienced on days with MWCB Halts, noting that the elimination of 
double-wide bands for all securities during the first 15 minutes of 
trading went into effect on February 24, 2020. On March 9 and March 
12--the first two days with early morning MWCB Halts--there were a 
combined 101 LULD pauses, only three of which were symbols included in 
the S&P 500. Of the stocks that had a LULD Trading Pause, 47 were in 
symbols that opened on a trade, while 54 opened on a quote.
    The Working Group also considered whether fewer LULD Trading Pauses 
would have occurred if exchanges had used the midpoint of opening 
quotes as the reference price for LULD Trading Pauses instead of using 
the previous night's closing price (i.e., reversing the change that was 
implemented in Amendment 10 to the LULD Plan). Of the 101 LULD Trading 
Pauses on March 9 and March 12, 31 symbols paused within the first 30 
seconds, which might have indicated that the prior day's closing price 
was stale. Of those 31 symbols, however, 15 in fact opened on a trade, 
indicating that the LULD Trading Pauses were based on Price Bands 
calculated from same-day trades.
    The fact that S&P 500 symbols virtually always open with a trade 
makes the use of SPX for triggering a MWCB Halt preferable as compared 
with using a wider index, which may have more component securities 
paused in LULD Trading Pauses. This led the Working Group to conclude 
that it was unlikely that the Amendment 10 change had any negative 
impact on MWCB functionality.\65\ The Exchange agrees with this 
analysis and conclusion.
---------------------------------------------------------------------------

    \65\ See https://www.sec.gov/dera/staff-papers/white-papers/dera_wp_effect_of_amendment_10_of_luld_pilot_plan.
---------------------------------------------------------------------------

5. No Changes Should Be Made to the Mechanism To Prevent the Market 
From Halting Shortly After the Opening of Regular Trading Hours at 9:30 
a.m.
    The Working Group concluded that no changes should be made to the 
mechanism to prevent the market from halting shortly after the opening 
of regular trading hours at 9:30 a.m. The Exchange adopts and agrees 
with this conclusion, for the reasons set out below and in the Study.
    Since three of the MWCB halts were triggered within the five 
minutes of the 9:30 a.m. start of regular trading hours and before all 
stocks had opened for regular trading, the Task Force that reviewed 
these issues in the Summer of 2020 focused on issues relating to the 
appropriateness of halting the market so soon after its opening. The 
Task Force considered various theoretical ways to modify the MWCBs such 
that a halt could be bypassed close to the cash opening. These 
included:
     Beginning the covered period at a later time, such as 9:45 
a.m.;
     Relying on the futures market as being indicative of a 7% 
level having been breached in advance of the cash open and halting only 
if the market declines 13%; and
     Using a higher trigger for an initial period, e.g., the 
first 15 minutes after the open.
    At that time, the Task Force did not recommend any modifications of 
the MWCB process around the open. While several Task Force members 
initially questioned after the March 9 MWCB event whether halts so 
early in the day made sense, their views evolved as additional halts 
occurred over the next two weeks. With the experience of several halt 
events behind them, market participants became familiar with the 
mechanism and understood the transparency, certainty, and simplicity 
that it provides. The Task Force's inquiry subsequently involved 
identifying whether there were compelling reasons to deviate from the 
current system that offers familiarity, certainty, and simplicity, such 
that changing to an unfamiliar, untested, and more complex system could 
be justified.
    Based on its review of the operation of the three MWCB events near 
the opening of regular trading hours, the Task Force concluded that the 
current process was not causing any harm that would have justified 
moving away from it. Specifically, the Task Force concluded:
     Leaving the markets unprotected (or less protected) for 
the first 15 minutes was not the right outcome for investors, 
particularly as the first 15 minutes of the day are often the most 
volatile, and/or when technology issues arise.
     Market participants are already accustomed to the behavior 
of MWCBs starting at 9:30 a.m. Implementation of any changes would lead 
to additional market structure complexity and introduce new operational 
risk to the markets.
     While market volatility in March 2020 may have been 
discernable before the opening of regular trading hours, which allowed 
market participants time to prepare for the event, future scenarios may 
unfold in a manner that is not so easily anticipated--such as when the 
market moves in response to news breaking right at the open.
    The Task Force also noted that the 5% limit-down trigger on the E-
mini S&P 500 futures contract limited price transparency at a critical 
time by preventing the market from more definitively knowing whether 
the

[[Page 38786]]

futures market was trading at a level that indicated an expected 7% 
halt in the equities market upon their opening. The Task Force, which 
included representation from CME, believed that it would be beneficial 
for the limit-down trigger for the E-mini S&P 500 futures contract to 
be moved to a 7% decline (from 5%) before the equities market open, for 
the following reasons:
     The E-mini S&P 500 futures contract is the most liquid 
instrument; a higher limit-down trigger would enhance price discovery 
and give more certainty to the equity market open; and
     Better alignment of the various traded instruments (e.g., 
SPY) would enhance price discovery and lead to a more stable opening 
process.
    As such, the Task Force recommended that CME consider moving the 
limit-down trigger for the E-mini S&P 500 futures contract to a 7% 
decline, as an initial step. As noted above, CME in fact implemented 
this recommendation on October 12, 2020. This CME change further 
reinforced the view that making additional changes to either the 7% 
MWCB level for equities or changing the time at which the equities 
markets would begin measuring for MWCB Halts was not warranted.
    The Working Group, in revisiting this question, spent considerable 
time looking at the effectiveness of the auctions that occurred close 
to the opening and observed the following:
     The auction pricing mechanisms operated effectively.
     The amount of marketable interest in the MWCB reopening 
auctions was sufficient.
     Effective price discovery occurred, as evidenced by lower 
post-auction volatility.
     Future scenarios may involve extraordinary volatility 
event/news at 9:29 a.m., making it preferable for the MWCB triggers to 
apply from 9:30 a.m. onward.
    As a result, the Working Group did not recommend that changes be 
made to the MWCB halt process around the opening of regular trading 
hours. The Exchange adopts and agrees with this position.
    The Exchange notes that in the 2012 approval order for the Pilot 
Rules,\66\ the Commission queried whether a MWCB should be triggered if 
a sufficient number of single-stock circuit breakers or LULD price 
limits were triggered. The Working Group considered this query but 
concluded, and the Exchange agrees, that ``[t]he LULD Trading Pause 
data prior to the four MWCB halts in March 2020 does not shed light on 
the issue. The four March 2020 MWCB halts were preceded by very few 
LULD Trading Pauses.'' \67\ The Working Group noted, and the Exchange 
agrees, that those events ``do not foreclose the possibility . . . that 
future MWCB Halts may be preceded by numerous LULD Trading Pauses, or 
that a future episode of numerous LULD Trading Pauses may prompt 
inquiry into whether a MWCB Halt should have occurred.'' \68\
---------------------------------------------------------------------------

    \66\ See Pilot Rules Approval Order, supra note 4.
    \67\ Study, supra note 22, at 46.
    \68\ Id.
---------------------------------------------------------------------------

Recommendations of the Working Group
    In light of the foregoing conclusions and analysis, the Working 
Group made four recommendations,\69\ set out below, with which the 
Exchange agrees:
---------------------------------------------------------------------------

    \69\ See id. at 46.
---------------------------------------------------------------------------

     The Pilot Rules should be made permanent without any 
changes.
     S&P DJI should establish an independent SPX calculation to 
be conducted and maintained by a separate, independent entity, to 
further reinforce redundancy and resiliency of the SPX calculation.
     All markets should take appropriate action to minimize the 
reporting of trades to the SIP after the imposition of a MWCB halt.
     U.S. exchanges should adopt a rule requiring all 
designated Regulation SCI firms to participate in at least one Level 1/
Level 2 MWCB test each year and to verify their participation via 
attestation.
Proposal To Make the Pilot Rules Permanent
    Consistent with the Working Group's recommendations and the 
Exchange's analysis above, the Exchange now proposes that the Pilot 
Rules (i.e., paragraphs (a)-(d) of Rule 7.12) be made permanent. To 
accomplish this, the Exchange proposes to remove the preamble to Rule 
7.12, which currently provides that the rule is in effect during a 
pilot period that expires at the close of business on October 18, 2021. 
The Exchange does not propose any changes to paragraphs (a)-(d) of the 
Rule.
    Regarding the Working Group's additional recommendation that SROs 
adopt a rule requiring all designated Regulation SCI firms to 
participate in at least one MWCB test each year, the Exchange already 
requires such participation, as specified in Rule 48(c). In light of 
the Working Group's recommendation, with which the Exchange agrees, 
that such MWCB testing rules contain additional specificity about a 
member organization's attestation regarding such testing, the Exchange 
proposes to both move this testing obligation from Rule 48(c) to new 
paragraph (e) of Rule 7.12 and incorporate the recommendations of the 
Working Group, as follows:

    (e) Market-Wide Circuit Breaker (``MWCB'') Testing.
    1. Member organizations designated pursuant to paragraphs (b)(1) 
and (3) of Rule 48 to participate in Exchange Backup Systems and 
Mandatory Testing are required to participate in at least one MWCB 
test each year and to verify their participation in that test by 
attesting that they are able to or have attempted to:
    (A) Receive and process MWCB halt messages from the securities 
information processors (``SIPs'');
    (B) receive and process resume messages from the SIPs following 
a MWCB halt;
    (C) receive and process market data from the SIPs relevant to 
MWCB halts; and
    (D) send orders following a Level 1 or Level 2 MWCB halt in a 
manner consistent with their usual trading behavior. 2.
    2. Member organizations not designated pursuant to standards 
established in paragraphs (b)(1) and (3) of Rule 48 are permitted to 
participate in any MWCB test.
Implementation Date
    The Exchange proposes that these changes would go into effect on 
October 19, 2021, the day after the expiration of the pilot status of 
the Pilot Rules.
2. Statutory Basis
    The Exchange believes that the proposal to make the Pilot Rules 
permanent is consistent with Section 6(b) of the Act,\70\ in general, 
and furthers the objectives of Section 6(b)(5) of the Act,\71\ in 
particular, in that it is designed to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system, and, in general 
to protect investors and the public interest.
---------------------------------------------------------------------------

    \70\ 15 U.S.C. 78f(b).
    \71\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Pilot Rules set out in Rule 7.12 (a)-(d) are an important, 
automatic mechanism that is invoked to promote stability and investor 
confidence during periods of significant market stress when securities 
markets experience broad-based declines. The four MWCB halts that 
occurred in March 2020 provided the Exchange, the other SROs, and 
market participants with real-world experience as to how the Pilot 
Rules actually function in practice. Based on the Working Group's Study 
and the Exchange's own analysis of those events, the Exchange believes 
that making the Pilot Rules permanent would benefit market 
participants, promote just and equitable principles of trade, remove 
impediments to and perfect the mechanism of a free and

[[Page 38787]]

open market and a national market system, and protect investors and the 
public interest.
    Specifically, the Exchange believes that making the Pilot Rules 
permanent would benefit market participants, 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, and protect 
investors and the public interest, because the Pilot Rules worked as 
intended during the March 2020 events. As detailed above, the markets 
were in communication before, during, and after each of the MWCB Halts 
that occurred in March 2020. All 9,000+ equity symbols were 
successfully halted in a timely manner when SPX declined 7% from the 
previous day's closing value, as designed. The Exchange believes that 
market participants would benefit from having the Pilot Rules made 
permanent because such market participants are familiar with the design 
and operation of the MWCB mechanism set out in the Pilot Rules, and 
know from experience that it has functioned as intended on multiple 
occasions under real-life stress conditions. Accordingly, the Exchange 
believes that making the Pilot Rules permanent would enhance investor 
confidence in the ability of the markets to successfully halt as 
intended when under extreme stress.
    The Exchange further believes that making the Pilot Rules permanent 
would benefit market participants, 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, and protect 
investors and the public interest, because the halts that were 
triggered pursuant to the Pilot Rules in March 2020 appear to have had 
the intended effect of calming volatility in the market without causing 
harm. As detailed above, after studying a variety of metrics concerning 
opening and reopening auctions, quote volatility, and other factors, 
the Exchange concluded that there was no significant difference in the 
percentage of securities that opened on a trade versus on a quote for 
the four days in March 2020 with MWCB Halts, versus the other periods 
studied. In addition, while the post-MWCB Halt reopening auctions were 
smaller than typical opening auctions, the size of those post-MWCB Halt 
reopening auctions plus the earlier initial opening auctions in those 
symbols was on average equal to opening auctions in January 2020. The 
Exchange believes this indicates that the MWCB Halts on the four March 
2020 days did not cause liquidity to evaporate. Finally, the Exchange 
observes that while quote volatility was generally higher on the four 
days in March 2020 with MWCB Halts as compared to the other periods 
studied, quote volatility stabilized following the MWCB Halts at levels 
similar to the January 2020 levels, and LULD Trading Pauses worked as 
designed to address any additional volatility later in the day. From 
this evidence, the Exchange concludes that the Pilot Rules actually 
calmed volatility on the four MWCB Halt days in March 2020, without 
causing liquidity to evaporate or otherwise harming the market. As 
such, the Exchange believes that making the Pilot Rules permanent would 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and protect investors and the 
public interest.
    The Exchange believes that that making the Pilot Rules permanent 
without any changes would benefit market participants, 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, and 
protect investors and the public interest, because the current design 
of the MWCB mechanism as set out in the Pilot Rules remains 
appropriate. As detailed above, the Exchange considered whether SPX 
should be replaced as the reference value, whether the current trigger 
levels (7%/13%/20%) and halt times (15 minutes for Level 1 and 2 halts) 
should be modified, and whether changes should be made to prevent the 
market from halting shortly after the opening of regular trading hours 
at 9:30 a.m., and concluded that the MWCB mechanism set out in the 
Pilot Rules remains appropriate, for the reasons cited above. The 
Exchange believes that public confidence in the MWCB mechanism would be 
enhanced by the Pilot Rules being made permanent without any changes, 
given investors' familiarity with the Pilot Rules and their successful 
functioning in March 2020.
    The Exchange believes that proposed paragraph (e) regarding MWCB 
testing is designed to promote just and equitable principles of trade, 
to remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general to protect 
investors and the public interest. The Working Group recommended that 
all cash equities exchanges adopt a rule requiring all designated 
Regulation SCI firms to participate in MWCB testing, which the Exchange 
already requires. In approving Rule 48(c) (which was then numbered Ruel 
[sic] 49(c)), the Commission noted:

    The Commission believes that amending NYSE Rule 49 to require 
certain member organizations to participate in scheduled MWCB 
testing would enable the Exchange, participating member 
organizations, and others to assess the readiness of participating 
member organizations to respond in the event of unanticipated market 
volatility. Member organizations required to participate in MWCB 
testing pursuant to the proposal would be designated as such using 
the same standards used by the Exchange in determining which member 
organizations are subject to mandatory Regulation SCI testing. 
Because these member organizations have been designated by the 
Exchange as essential to the maintenance of a fair and orderly 
market, their demonstrated ability to halt and subsequently re-open 
trading in a manner consistent with the MWCB rules should contribute 
to the fairness and orderliness of the market for the benefit of all 
market participants. The Commission therefore believes that the 
proposal . . . is designed to remove impediments to, and perfect the 
mechanism of, a free and open market and a national market system, 
and to protect investors and the public interest.\72\
---------------------------------------------------------------------------

    \72\ See Securities Exchange Act Release No. 83836 (August 13, 
2018), 83 FR 41117 (August 17, 2018) (SR-NYSE-2018-31).

    The Exchange believes that moving this testing obligation from Rule 
48(c) to proposed Rule 7.12(e) and updating it to reflect the 
recommendations of the Working Group would remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system by highlighting the MWCB testing obligation as a part of the 
MWCB rules at Rule 7.12. In addition, the Exchange believes that adding 
specificity, as recommended by the Working Group, that such Regulation 
SCI firms must attest to their participation in the MWCB testing would 
promote the stability of the markets and enhance investor confidence in 
the MWCB mechanism and the protections that it provides to the markets 
and to investors.
    For the foregoing reasons, the Exchange believes that the proposed 
change is consistent with the Act.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The proposed change is not 
intended to address competition, but rather, makes permanent the 
current MWCB Pilot Rules for the protection of the markets. The 
Exchange believes that making the current MWCB Pilot Rules permanent 
would have no discernable burden on competition at all, since the Pilot 
Rules have already been in effect since 2012

[[Page 38788]]

and would be made permanent without any changes. Moreover, because the 
MWCB mechanism contained in the Pilot Rules requires all exchanges and 
all market participants to cease trading at the same time, making the 
Pilot Rules permanent would not provide a competitive advantage to any 
exchange or any class of market participants.
    Further, the Exchange understands that upon approval of this 
proposal, the other SROs will submit substantively identical proposals 
to the Commission. Thus, the proposed rule change will help to ensure 
consistency across SROs without implicating any competitive issues.

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 up to 90 days (i) as the Commission may designate 
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. In addition, the Commission 
specifically requests comment on the proposed requirements for MWCB 
testing. The Exchange proposes to require Designated Market Makers and 
Supplemental Liquidity Providers that have been determined by the 
Exchange to contribute a meaningful percentage of the Exchange's 
overall volume, measured on a quarterly or monthly basis, will be 
required to participate in MWCB testing, though the Exchange may 
consider other factors in determining the member organizations that 
will be required to participate in testing. These market participants 
would be required to participate in at least one MWCB test each year 
and attest that they can send and receive MWCB halt and resume 
messages, as well as receive and process market data from the SIPs 
relevant to MWCBs and send orders following a MWCB Level 1 or Level 2 
event. The Commission notes that the proposed testing requirement is 
designed to assess whether the MWCB infrastructure works as designed. 
The proposed testing requirement, however, does not contemplate an 
ongoing assessment of whether the MWCB design (e.g., trigger 
thresholds, measurement criteria, time of day application) remains 
appropriate over time, as the market structure evolves, and under 
various threat scenarios. Do commenters believe that an ongoing 
assessment of the MWCB design should be conducted? If so, how could 
such an assessment meaningfully be conducted (e.g., tabletop 
exercises), understanding that it is difficult to replicate or forecast 
how market participant would behave during an actual MWCB event? Are 
commenters aware of ongoing assessment methods in other contexts (e.g., 
cybersecurity) that could inform how an ongoing assessment of the MWCB 
could be structured? How frequently should such an assessment be done?
    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-NYSE-2021-40 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-NYSE-2021-40. 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 website (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 website 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 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NYSE-2021-40 and should be submitted on 
or before August 12, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\73\
---------------------------------------------------------------------------

    \73\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-15548 Filed 7-21-21; 8:45 am]
BILLING CODE 8011-01-P


