[Federal Register Volume 87, Number 55 (Tuesday, March 22, 2022)]
[Notices]
[Pages 16286-16296]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-05980]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94441; File No. SR-NYSE-2021-40]


Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Amendment No. 1 and Order Granting Accelerated 
Approval of a Proposed Rule Change, as Modified by Amendment No. 1 To 
Adopt on a Permanent Basis the Pilot Program for Market-Wide Circuit 
Breakers in Rule 7.12

March 16, 2022.

I. Introduction

    On July 2, 2021, New York Stock Exchange LLC (``NYSE'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposal to make its rules governing the operation of Market-Wide 
Circuit Breakers (``MWCB'') permanent. The proposed rule change was 
published for comment in the Federal Register on July 22, 2021.\3\ On 
August 27, 2021, the Commission designated a longer period within which 
to either approve the proposed rule changes, disapprove the proposed 
rule changes, or institute proceedings to determine whether to 
disapprove the proposed changes.\4\ On September 30, 2021, the 
Commission instituted proceedings to determine whether to approve or 
disapprove the proposed rule change.\5\ On January 7, 2022, the 
Commission again designated a longer period within which to either 
approve the proposed rule changes, disapprove the proposed rule 
changes, or institute proceedings to determine whether to disapprove 
the proposed changes.\6\ On February 28, 2022, the Exchange filed 
Amendment No. 1 to the proposed rule change.\7\ The

[[Page 16287]]

Commission has received no comments on the proposed rule change. The 
Commission is approving the proposed rule change, as modified by 
Amendment No. 1, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 92428 (July 16, 
2021), 86 FR 38776 (SR-NYSE-2021-40) (``Notice'').
    \4\ See Securities Exchange Act Release No. 92785A, 86 FR 50202 
(September 7, 2021).
    \5\ See Securities and Exchange Act Release No. 93212, 86 FR 
50566 (October 5, 2021). The Commission instituted these proceedings 
to request comments regarding the Exchange's proposed testing 
requirement, which did not contemplate an ongoing assessment of 
whether the MWCB design remains appropriate over time, nor require 
the Exchange to participate in testing.
    \6\ See Securities Exchange Act Release No. 93933, 87 FR 2189 
(January 13, 2022).
    \7\ In Amendment No. 1, the Exchange revised the proposal to: 
(1) Explain options market enhancements following the March 2020 
MWCBs events to eliminate latency in their responses to MWCB halt 
messages; (2) reflect that the pilot period of the Rule 7.12 (MWCB 
Rule) expires on March 18, 2022; (3) require that the Exchange 
participate in all industry-wide tests of the MWCBs; (4) require 
members participating in MWCB tests to notify the Exchange of any 
inability to process messages relating to the MWCB test, records of 
which would be retained by the Exchange along with records of the 
Exchange's own participation in the test; (5) require the Exchange, 
along with the other SROs, to prepare and submit a report containing 
an analysis of any MWCB event and recommendations to the Commission 
within six months of a halt being triggered following a Level 1, 
Level 2, or Level 3 Market Decline; and (6) require the Exchange, 
together with the other SROs, to review the MWCB in the event of 5% 
market declines and any time an SRO makes changes to MWCB reopening 
processes, and provide a report to the Commission concerning such 
review should a modification to the MWCB be recommended. Amendment 
No. 1 is available on the Commission's website at https://www.sec.gov/comments/sr-nyse-2021-40/srnyse202140.htm.
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II. Background

    MWCBs are coordinated, cross-market trading halts designed to 
operate during extreme market-wide declines to provide opportunities 
for markets and market participants to assess market conditions and 
systemic stress. Each cash equity exchange and options exchange have 
rules that govern the operation of these MWCBs. The Commission first 
approved MWCB rules on a pilot basis in 1988 \8\ following the market 
crash in October 1987.\9\ These rules provided for a one-hour halt 
across all securities markets if the Dow Jones Industrial Average 
(``DJIA'') declined 250 points from the previous day's closing level 
and for a two-hour halt if the DJIA declined 400 points from the 
previous day's close.\10\ The Commission approved amendments to MWCB 
rules in July 1996 to reduce the duration of the 250- and 400- point 
halts to 30 minutes and 60 minutes from one hour and two hours, 
respectively.\11\ Subsequently, the Commission approved modifications 
to raise the point triggers to 350 points and 550 points in 1997.\12\ 
In its order approving these changes, the Commission noted the 
importance of revisiting these triggers over time and stated that it 
would work with the markets and the Commodities and Futures Trading 
Commission (``CFTC'') to develop procedures for reevaluating the 
triggers on at least an annual basis.\13\
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    \8\ See Securities Exchange Act Release Nos. 26198 (October 19, 
1988), 53 FR 41637 (October 24, 1988) (approving MWCB rules for 
Amex, CBOE, NASD, and NYSE); 26218 (October 26, 1988), 53 FR 44127 
(November 1, 1988) (approving rules for CHX); 26357 (December 14, 
1988), 53 FR 51182 (December 20, 1988) (approving rules for BSE); 
26368 (December 16, 1988), 53 FR 51942 (December 23, 1988) 
(approving rules for PSE); 26386 (December 22, 1988), 53 FR 52904 
(December 29, 1998) (approving rules for PHLX); and 26440 (January 
10, 1989), 54 FR 1830 (January 17, 1989) (approving rules for CSE).
    \9\ The events of October 19, 1987 are described more fully in a 
report by the staff of the Commission's Division of Market 
Regulation. See ``The October 1987 Market Break, A Report by the 
Division of Market Regulation'' (February 1988).
    \10\ See supra note 8.
    \11\ 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).
    \12\ See Securities Exchange Act Release No. 38221 (January 31, 
1997), 62 FR 5871 (February 7, 1997).
    \13\ See id. at 5875.
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    An MWCB was triggered for the first time on October 27, 1997, when 
the market dropped 350 points, representing a decline of 4.5%.\14\ 
After a 30-minute halt, the market declined again, reaching the 550-
point trigger, representing a total decline of 7%.\15\ After studying 
the events of that day, the Commission approved revised MCWB rules on a 
pilot basis. These rules established trading halts following one-day 
declines in the DJIA of 10%, 20%, and 30%, rather than at specific 
point declines, to be 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.\16\ Under 
these revised MWCB rules, trading would halt for one hour if the DJIA 
declined 10% prior to 2:00 p.m., and for one-half hour if the DJIA 
declined 10% between 2:00 p.m. and 2:30 p.m.\17\ If the DJIA declined 
by 10% at or after 2:30 p.m., trading would not halt at the 10% 
level.\18\ If the DJIA declined 20% prior to 1:00 p.m., trading would 
halt for two hours; trading would halt for one hour if the DJIA 
declined 20% between 1:00 p.m. and 2:00 p.m., and for the remainder of 
the day if a 20% decline occurred at or after 2:00 p.m.\19\ If the DJIA 
declined 30% at any time, trading will halt for the remainder of the 
day.\20\
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    \14\ The events of October 27, 1997 are described more fully in 
a report by the staff of the Commission's Division of Market 
Regulation. See ``Trading Analysis Findings of October 27 and 
October 28, 1997'' (Sept. 1998), available at https://www.sec.gov/news/studies/tradrep.htm#FOOTNOTE_24.
    \15\ See id.
    \16\ See Securities Exchange Act Release No. 39846 (April 9, 
1998), 63 FR 18477 (April 15, 1998), at 18478.
    \17\ See id.
    \18\ See id.
    \19\ See id.
    \20\ See id.
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    On May 6, 2010, the markets sharply dropped 9%, but did not reach 
the 10% MWCB, before rebounding (the ``Flash Crash''). Following these 
events, in 2012 the Commission approved several modifications to MWCB 
rules (the ``Pilot Rules'') that were designed to make them more 
meaningful in high-speed, electronic trading environments.\21\ The MWCB 
triggers were lowered to 7% (``Level 1''), 13% (``Level 2''), and 20% 
(``Level 3''); the DJIA was replaced with the S&P 500[supreg] Index 
(``S&P 500'') as the reference index; the recalculation of the values 
of the triggers was changed to daily instead of each calendar quarter; 
the length of the trading halts associated with each market decline 
level was shortened from 30 minutes to 15 minutes; and the times when a 
trading halt may be triggered were modified.\22\ Specifically, these 
rules provided that if a Level 1 or Level 2 trigger was hit before 3:25 
p.m., trading would halt for 15 minutes, and if a Level 1 or Level 2 
trigger was hit at or after 3:25 p.m., trading would continue, unless a 
Level 3 trigger was hit.\23\ If a Level 3 trigger was hit at any time, 
trading would halt for the rest of the day.\24\
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    \21\ See Securities Exchange Act Release No. 67090 (May 31, 
2012), 77 FR 33531 (June 6, 2012).
    \22\ See id. at 33532.
    \23\ See id.
    \24\ See id.
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    The modified thresholds in the Pilot Rules were not triggered for 
the first time until March 2020 when MWCB Level 1 halts occurred on 
March 9, 12, 16, and 18, 2020.\25\ In response to these events, a task 
force comprised of the SROs and industry participants \26\ reviewed the 
events and concluded that the MWCBs had performed as expected and 
recommended that no changes be made to the MWCB rules.\27\ In 2020, the 
SROs conducted a more complete study of the design and operation of the 
Pilot Rules and the National Market System (``NMS'') Plan to Address 
Extraordinary Market Volatility (``Limit Up-Limit Down'' or ``LULD'') 
during the period of volatility in the Spring of 2020. The SROs created 
an MWCB ``Working Group'' composed of SRO

[[Page 16288]]

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 
prepared a study (the ``Study''),\28\ which includes a timeline of the 
MWCB events in March 2020; 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.
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    \25\ For a full description of the trading halts on March 9, 12, 
14, and 16, see Notice at 38777-78.
    \26\ This task force was formed in late 2019, prior to the MWCB 
events in 2020, to evaluate the operation and design of the MWCB 
mechanism. See Securities Exchange Act Release No. 85560 (April 9, 
2019), 84 FR 15247 (April 15, 2019) (SR-NYSE-2019-19). The task 
force made two recommendations after reviewing the MWCB events in 
2020: (1) Futures markets should change the S&P 500 futures market 
volatility threshold from 5% to 7% to better align with the 
securities market MWCB Level 1 threshold of 7% and 2) futures 
markets should resume trading in S&P 500 futures contracts 5 minutes 
before end of MWCB halt. The futures markets have made changes to 
address these two recommendations, as discussed further below. See 
supra note 96.
    \27\ See id. at 38778.
    \28\ 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 [sic] 
and available at Exhibit 3 [sic] (sec.gov).
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III. Description of the Proposal, as Modified by Amendment No. 1

    Based on the conclusions and recommendations reached by the Working 
Group after analyzing how the MWCBs performed in March 2020, the 
Exchange is proposing to transition the Pilot Rules \29\ to operate on 
a permanent basis, as modified by Amendment No. 1.
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    \29\ NYSE Rule 7.12.
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IV. Discussion and Commission Findings

    After careful consideration, the Commission finds that the 
Exchange's proposed rule change is consistent with the requirements of 
the Act and the rules and regulations thereunder applicable to national 
securities exchanges. In particular, the Commission finds that the 
Exchange's proposed rule change is consistent with Section 6(b)(5) of 
the Act,\30\ which requires that the rules of an exchange be designed, 
among other things, to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities, and to remove impediments to and perfect 
the mechanism of a free and open market and a national market 
system.\31\
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    \30\ 15 U.S.C. 78f(b)(5).
    \31\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f). See also, supra 
Sections IV(A)(2)(f), IV(B), IV(C), and IV(D).
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    In its proposal to make the MWCB rules permanent in their current 
form, the Exchange considered whether the MWCBs functioned as designed, 
and whether the MWCBs calmed volatility without causing harm. The 
Exchange also examined the specific characteristics of the MWCBs: (1) 
Trigger levels; (2) trading halt times; and (3) use of the S&P 500 
Index (``SPX'') as the reference for the MWCB mechanism. Further, the 
Exchange evaluated the impact of LULD Amendment 10 on the MWCB 
mechanism, whether changes should be made to MWCBs to prevent the 
market from halting shortly after the beginning of regular trading 
hours, and whether excessive LULD pauses should trigger a MWCB halt. 
Finally, the Exchange discussed the requirements for industry 
participants to test the operation of the MWCBs at least annually. Each 
of these elements are discussed in greater detail below.

A. MWCB Operation and Effect on Market Volatility

    The Exchange finds that the MWCBs (1) operated as intended during 
the period in March considered in the Study \32\ and (2) had the 
intended effect of calming volatility in the market without causing 
harm.\33\ The Exchange considered the findings of the Study, including 
the effectiveness of communications instructing market participants to 
initiate an MWCB Halt, volatility and liquidity preceding and following 
the MWCB Halts, various measures of liquidity during MWCB Halts, and 
additional LULD halts following MWCB reopening auctions. As discussed 
further below, the Commission believes that the MWCBs operated as 
designed, appropriately halting trading and facilitating reopening 
auctions in NMS stocks. The Commission believes that the evidence, 
however, is not conclusive regarding the MWCB's effect on calming 
market volatility, although the Commission does believe that the MWCBs 
did not appear to harm the market.
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    \32\ See Notice, supra note 3, at 10.
    \33\ See id. at 12.
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1. MWCB Operated as Designed
    On March 9, 12, 16, and 18, 2020, market conditions indicated that 
a Level 1 MWCB halt was likely to occur.\34\ On each of these days, 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 Commission, the CFTC, 
the Depository Trust & Clearing Corporation, and the Options Clearing 
Corporation.\35\ On each day when a Level 1 MWCB Halt was triggered, 
the call opened before the halt was triggered and remained open during 
the entire period of the halt, until trading in all symbols was 
reopened.\36\ When SPX declined 7% from the previous day's closing 
value, breaching the MWCB Level 1 trigger, breach messages and 
regulatory halt messages were sent to relevant market participants.\37\ 
Following these messages, all 9,000+ equity symbols were halted in a 
timely manner.\38\ Further, approximately 900,000 options series were 
halted once regulatory halt messages were received by the options 
markets.\39\ However, a relatively small number of options traded 
following the MWCB Halt messages.\40\ Finally, on each of the four days 
where MWCB Halts were triggered, all SPX stocks reopened within 15 
minutes of the end of the MWCB Halt.\41\
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    \34\ See id. at 10.
    \35\ See id.
    \36\ See id.
    \37\ See id.
    \38\ See id.
    \39\ As noted by the Exchange, options markets are required to 
halt trading in options if there is an MWCB Halt in the cash 
equities market. See Study, supra note 27, at 3.
    \40\ Approximately 5,000 options trades that were sent to OPRA 
after the time of the four MWCB Halts were nullified. See id. 
Additionally, approximately 4,400 futures and options on futures 
traded for one minute following the initiation of the MWCB Halt. See 
id. at 11. The Exchange states that it understands that the Nasdaq 
options markets made a number of enhancements to internal systems to 
eliminate latency in the Nasdaq options markets' response to MWCB 
halt messages. See Amendment No. 1, supra note 7, at 3.
    \41\ See Notice, supra note 3, at 17.
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    The Commission believes that the mechanism for communicating and 
initiating MWCB Halts worked as intended during March 2020. Prior to 
the triggering of the MWCB Halts, the SROs and industry members were 
actively monitoring market conditions in anticipation of an MWCB Halt. 
Before, during, and after the MWCB Halts occurred, the relevant SROs 
and regulators remained in communication about the implementation of an 
MWCB Halt and reopening. Additionally, all equity symbols subject to 
the MWCB were successfully halted in a timely manner, and while a small 
percentage of options continued trading during the MWCBs, the vast 
majority of affected options series halted following the initiation of 
the MWCBs. Furthermore, remedial steps have been taken by options 
exchanges to prevent trades from occurring following a future MWCB 
Halt.\42\ Finally, all SPX symbols reopened within 15 minutes of the 
end of the MWCB Halts, and all securities had reopened within 30 
minutes of the end of the MWCB Halt.\43\
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    \42\ See Amendment No. 1, supra note 7, at 3.
    \43\ The MWCB Pilot Rules do not prescribe a time in which 
securities trading must resume following the halt. These rules 
require that trading halt for 15 minutes, after which exchanges may 
resume trading based on their rules governing reopening auctions and 
trade resumption. See NYSE Rules 7.12 and 7.35A.

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[[Page 16289]]

2. Effect of MWCB Halts on Volatility and Market Functioning
    The Study evaluated the effects of the MWCB Halts in March 2020 on 
market volatility and functioning by examining various measurements of 
liquidity and volatility following each of the March 2020 MWCB Halts 
and comparing them to liquidity and volatility measurements of other 
trading periods.\44\ In particular, the Study reviewed: (1) Activity 
before the opening of regular trading hours and the number of 
securities opening on a trade vs. opening on a quote; (2) size and 
liquidity in the opening auctions and post-MWCB halt reopening 
auctions; (3) quote volatility as measured by the median mid-point to 
mid-point price change every second in basis points; (4) liquidity at 
the national best bid and offer (``NBBO''); and (5) LULD Trading Pauses 
following MWCB reopening auctions.\45\ The Exchange concludes that, 
based on the liquidity and volatility measures reviewed in the Study 
and discussed below, the MWCBs had the intended effect of calming 
volatility in the market, without causing harm.\46\
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    \44\ See Study, supra note 27, at 12. The other trading periods 
include the month of January 2020 and the period from February 24 
through May 1, 2020, excluding the four days with MWCB Halts 
(``High-Volatility Period'')
    \45\ See id.
    \46\ See Notice, supra note 3, at 12.
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a. Activity Before the Opening of Regular Trading Hours and the Number 
of Securities Opening on a Trade vs. Opening on a Quote
    The Study examined liquidity and volatility in the SPDR S&P 500 
Trust ETF (``SPY'') prior to the market open on the four days where 
MWCB Halts occurred.\47\ Generally, pre-market early morning trading 
activity is fairly limited. However, during the High-Volatility 
Period,\48\ and particularly during the four days where an MWCB Halt 
was triggered, pre-market trading activity was significantly 
higher.\49\ On the four MWCB Halt days, roughly five to nine times the 
number of shares traded in pre-market trading, relative to January 2020 
levels.\50\ Further, SPYs pre-market price range on those four days was 
up to ten times larger than what was typical in January 2020.\51\ These 
levels indicate that markets were experiencing significant volatility 
prior to the MWCB being triggered.
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    \47\ See Study, supra note 27, at 13.
    \48\ Capitalized terms used but not defined herein have the 
meanings specified in the Study.
    \49\ See Study, supra note 27, at 13
    \50\ See id.
    \51\ See id.
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    The Study also reviewed whether there were any differences between 
the number of securities opened on a trade vs. opened on a quote during 
the four days with MWCB Halts.\52\ The Study found that there was no 
meaningful difference in the percentage of securities opening on a 
trade versus quote during January 2020, MWCB Halt days, or the High-
Volatility Period.\53\ The one exception to this, however, was with 
respect to Tier 2 ETPs, which had a higher percentage of openings on a 
trade on each of the four MWCB Halt days than in January or during the 
High-Volatility Period.\54\ Further, for most groups of securities, 
there was not a significant difference in the percentage of securities 
opening on a trade during reopening versus the open.\55\ To the extent 
a difference did exist for certain classes of securities, this does not 
necessarily reflect inferior market function, as the reopening auctions 
examined were for securities that had opened prior to the MWCB 
Halts.\56\ Therefore, the Study noted that it would expect there to be 
less interest represented in those reopening auctions.
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    \52\ See id. at 14-15. The Exchange notes that it does not 
express any opinion about whether opening on a trade is preferable 
to opening on a quote.
    \53\ See id.
    \54\ See id.
    \55\ See id. The Commission notes that the Study does show a 
notable difference in the percentage of securities opening on a 
trade during the reopen versus the open for certain Tier 2 
securities including ETPs and Non-ETPs. See id. at 14 (Chart 2, G4 
and G5 graphs). However, as discussed in the Study, this does not 
necessarily reflect inferior market functioning. See Id.
    \56\ See id.
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b. Size and Liquidity of Opening and Reopening Auction
    To assess the effect of MWCB Halts on available liquidity, the 
Study reviewed the liquidity available in the reopening auctions 
following an MWCB Halt and compared it to the average volume in opening 
auctions during other trading periods. The Study first compared (i) the 
median opening auction in share volume in January 2020, (ii) the median 
opening auction volumes in 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.\57\ 
The Study found that given how many securities had already opened 
before the four MWCB Halts, the size of the reopening auctions were 
somewhat smaller than the opening auctions.
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    \57\ See id at 15.
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    The Study 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 January 2020. The Study concluded that 
the MWCB Halts did not result in a loss of liquidity overall in the 
opening and reopening auctions. This was demonstrated, according to the 
Study, because the opening auction plus MWCB reopening auction volumes 
on the MWCB Halt days hewed closely to the January 2020 auction 
volumes.\58\
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    \58\ See id. at 15-16. The Study notes that the March 18 MWCB 
event was excluded from this analysis since the MWCB Halt that day 
occurred midday rather than the early morning. Id.
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    The Study also reviewed the March 16 MWCB Halt (which took place 
almost immediately upon the market open at 9:30:01 a.m.) and 
reopen.\59\ The Study found that the size of the reopening auctions 
after the March 16 MWCB Halt were similar to opening auction volumes in 
January 2020.\60\ This suggests, according to the Study, that MWCB 
Halts did not cause a significant deterioration in market liquidity.
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    \59\ See id.
    \60\ The Study noted that when the March 16 Halt occurred, many 
securities had not yet started trading or quoting. Despite this, the 
size of the reopening auctions were similar to the opening auction 
volumes in January 2020. See id.
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    The Study also assessed the nature of participation in reopening 
auctions. First, the Study assessed the participation of market makers 
in reopening auctions following MWCB Halts by reviewing principal 
versus agency activity in opening and MWCB reopening auctions.\61\ In 
particular, the Study showed that the share of principal transactions 
in opening auctions on MWCB days was higher as compared to control 
periods.\62\ Furthermore, the Study showed that while principal 
activity was lower in the MWCB reopening auctions, principal auction 
participation generally increased with each MWCB event.\63\

[[Page 16290]]

Second, the Study looked at the top five market participants by volume 
during January 2020 and reviewed their involvement in MWCB reopening 
auctions.\64\ The Study found that, compared to January 2020, their 
share of transactions in reopening auctions was higher than their share 
of opening auctions on days where an MWCB Halt was triggered.\65\ 
According to the Study, these results suggest that the most active 
market participants were important providers of liquidity in the MWCB 
reopening auctions.\66\
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    \61\ See id. The Study noted that liquidity providers typically 
act as principal on such transactions and therefore principal trades 
are a proxy for trading by liquidity providers. See id. at 17. The 
Commission notes that the Study does not distinguish riskless 
principal trading by market makers and therefore some of the 
``principal'' market maker interest may have represented as either 
retail or institutional customer interest. However, the Commission 
believes that this distinction does not significantly alter the 
broader analysis showing that the market appropriately reopened 
following each of the events, and market participants were able to 
resume trading in a normal fashion without apparent harmful impacts 
to either the auction processes or market liquidity.
    \62\ See id. at 17-18.
    \63\ See id.
    \64\ See id.
    \65\ See id.
    \66\ The Commission notes, however, that it is not clear from 
the Study whether the reopening liquidity represented by the top 
five firms was due to their principal trading interest or agency 
customer orders (whether retail or institutional) routed to 
participate in the reopening auctions. However, the Commission 
believes that this distinction does not significantly alter the 
broader analysis showing that the market appropriately reopened 
following each of the events, and market participants were able to 
resume trading in a normal fashion without apparent harmful impacts 
to either the auction processes or market liquidity.
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c. Quote Volatility
    The Study also reviewed the volatility of quoted equity prices 
before and after MWCB Halts were initiated as another method of testing 
the effects of MWCB Halts on liquidity and volatility.\67\ As discussed 
above, following an MWCB Halt, if MWCBs perform as intended, volatility 
should decline as markets and market participants have the opportunity 
to assess market conditions and systemic stress. The Study concluded 
that MWCB Halts performed in this manner.
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    \67\ See id at 22.
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    The Study reviewed the median second-to-second quote volatility 
before and after the MWCB Halts, as well as second-to-second quote 
volatility during January 2020 and the High-Volatility Period.\68\ The 
Study stated that although second-to-second quote volatility was higher 
on the four MWCB days as compared to during January 2020 and the High-
Volatility Period, volatility fell or stabilized following MWCB 
Halts.\69\ Further, The Study concluded that during the four days where 
an MWCB was triggered, volatility fell to a level similar with the 
High-Volatility Period.\70\ For Tier 1 and Tier 2 ETPs, volatility fell 
further and stabilized near January 2020 levels, although the Study 
recognized brief spikes in volatility midday on March 12 and March 
18.\71\ The Study asserted that market stabilization may be an 
indication that the MWCB Halts helped to calm the market, since 
volatility did not continue to escalate throughout the day.\72\
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    \68\ See id.
    \69\ See id.
    \70\ See id at 23.
    \71\ See id.
    \72\ See id.
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d. Liquidity at the NBBO
    The Working Group also examined the intraday median quoted size 
(i.e., number of shares) at the NBBO on days when MWCB Halts were 
triggered to understand the impact of the MWCB Halts on liquidity.\73\ 
Specifically, the Study looked at two time periods: (1) 9:30 a.m.-9:34 
a.m. and (2) 12:50 p.m.-12:55 p.m. Generally, when compared to January 
2020 and the High-Volatility Period, the median size at the NBBO in the 
9:30 a.m.-9:34 a.m. was smaller on days where an MWCB Halt was 
triggered.\74\ However, on the three days with early morning MWCB 
Halts, many stocks did not open at 9:30 a.m. and many stocks also did 
not open on primary exchanges until after trading resumed following 
MWCB Halts, possibly explaining the relatively small size at the median 
NBBO.\75\ Further, on March 18, when there was no early morning MWCB 
Halt and the only MWCB Halt took place in the afternoon, early morning 
liquidity was similar to the High-Volatility Period, and liquidity 
during the 12:50 p.m.-12:55 p.m. period was similar to January 2020 
levels in most groups of securities.\76\
---------------------------------------------------------------------------

    \73\ See id at 25.
    \74\ See id. The Commission notes, however, that the Study shows 
that for G1 securities, median size at the NBBO was larger on March 
9 than both January 2020 and the High-Volatility Period. G2 
securities median size at the NBBO on March 12 was higher than the 
January period but lower than the High-Volatility Period. See id.
    \75\ See id.
    \76\ See id.
---------------------------------------------------------------------------

e. LULD Trading Pauses Following MWCB Reopening Auctions
    Finally, the Study reviewed the number of LULD pauses following 
reopenings after MWCB Halts.\77\ A significant increase in the number 
of LULD pauses may suggest that MWCBs did not serve their purpose of 
reducing volatility, or that adjustments need to be made to the 
reopening process, according to the Study.\78\ A large number of LULD 
pauses may also suggest that reopenings occurred too quickly and the 
market did not have sufficient time to reprice.\79\ The Study also 
distinguished limit up and limit down LULD pauses.\80\ Generally, there 
were more limit up LULD pauses than limit down following MWCB reopening 
auctions.\81\ This result is unsurprising as markets bounced back 
following large drops at the open, according to the Study.\82\
---------------------------------------------------------------------------

    \77\ See id at 20.
    \78\ See id.
    \79\ See id.
    \80\ See id.
    \81\ The March 18 MWCB reopening auction was the one exception 
to this trend, where the levels of limit up and limit down LULD 
pauses were similar. See id.
    \82\ See id.
---------------------------------------------------------------------------

    Having reviewed the findings of the Study, the Exchange concludes 
that the MWCB Halts triggered in March 2020 appeared to have the 
intended effect of calming volatility.\83\ Specifically the Exchange 
found that (i) there was not a significant difference in the percentage 
of securities opening on a trade vs. quote during the MWCB days versus 
other periods reviewed; (ii) the size of MWCB reopening plus the 
initial opening for those days were on average equal to opening auction 
sizes during January 2020; (iii) securities in SPX opened relatively 
quickly following the MWCB Halt; (iv) volatility stabilized following 
MWCB Halt days and reached levels similar to other periods studied; and 
(v) the LULD mechanisms following MWCB Halts worked as designed to 
address intra-day volatility.\84\ Based on the Exchange's conclusion 
that the MWCBs worked as intended, and calmed volatility without 
causing harm, it is proposing to make the MWCB rules permanent, as 
modified by Amendment No. 1. The MWCB rules include three main 
operational components, the trigger levels, halt times, and reference 
value, and a testing requirement. The Exchange addressed each of these 
in its proposed rule change, discussed further below.
---------------------------------------------------------------------------

    \83\ See id. at 22.
    \84\ See id. at 23.
---------------------------------------------------------------------------

f. Commission Assessment of MWCB Effect on Market Volatility and Market 
Functioning
    While the Commission believes that the mechanism for communicating 
and initiating MWCB Halts and resumption of trading worked as intended 
during March 2020 as discussed above, we believe the evidence is less 
conclusive regarding the MWCB's effect on calming market volatility. 
For example, the Commission believes that the analysis regarding quote 
volatility is inconclusive. First, because three events occurred at the 
beginning of the trading day, the Study could not compare U.S. equity 
quote volatility before and after the MWCB event; rather it could only 
describe quote volatility after the MWCB event. Second, while the 
Study's analysis shows quote volatility decreasing following the MWCB 
halts, it does not necessarily lead to the conclusion that the MWCB 
halts caused

[[Page 16291]]

quote volatility to decrease. Indeed, the quote volatility metrics 
described in the study are broadly consistent with the natural and 
well-known volatility dynamic in the U.S. equity market where 
volatility tends to be highest at the beginning of the trading day, 
decreases as the trading day progresses, and then increases again as 
the trading day approaches the close.\85\ Third, the Study does 
describe some volatility analysis that shows volatility increasing for 
some stocks after some of the MWCB events and market reopenings, 
although again, it is not clear whether that volatility increase was 
caused by the MWCB.\86\ The analysis is complicated further by the fact 
that three of the MWCB events in March occurred at the beginning of the 
trading day, preventing any comparison of the volatility of securities 
trading before the MWCB event with volatility after the MWCB event.\87\
---------------------------------------------------------------------------

    \85\ See, e.g., Robert A. Wood, Thomas H. McInish, and J. Keith 
Ord., ``Investigation of Transactions Data for NYSE Stocks,'' 40 The 
Journal of Finance (1985).
    \86\ See Study, supra note 27, at 23-25. For example, when 
comparing Charts 8 and 10 of the Study, volatility appears to 
increase for Tier 2 securities after the three morning MWCB Halts 
when compared to the 9:30-9:35 a.m. periods. Additionally, after the 
midday March 18 MWCB Halt, it appears from Chart 9 of the Study that 
volatility rose in some securities. Id. We note, however, that the 
Study does not demonstrate a causal link between the MWCB Halts and 
the volatility increases in these instances.
    \87\ The Commission recognizes the challenges in empirically 
demonstrating a statistically significant causal relationship 
between MWCBs and volatility because MWCBs are rare events that 
occur during times of heightened volatility.
---------------------------------------------------------------------------

    Based on information available to analyze the MWCB's impact on 
market volatility, the Commission believes that the evidence provided 
in the Study generally indicates that the MWCB did not cause harm to 
the market. One concern with the three MWCB events occurring at the 
open of the trading day was that it could harm the opening process for 
equity securities, for example. The Study provides evidence that the 
size of the opening and MWCB reopening auctions, in tandem, was similar 
in size to the opening auction in other time periods considered.\88\ 
Furthermore, on each of the four MWCB event days, the Study showed that 
there was no meaningful difference in the percentage of securities 
opening on a trade versus opening on a quote, with the exception of 
Tier 2 ETPs, which had a higher percentage opening on a trade on each 
of those days.\89\ The Study's look at liquidity by measuring size at 
the NBBO does not present evidence which indicates the MWCB Halts had a 
significant impact on the liquidity available at the NBBO. While the 
Study showed that there was less size at the NBBO on the three MWCB 
event days that occurred at the beginning of the trading day, that 
result is not surprising given many stocks did not open until trading 
resumed after the MWCB reopening.\90\ Additionally, the Study's 
observation of a drop in size at the NBBO around 1:30 p.m. for G4 and 
G5 securities on March 18 is not particularly concerning, given that by 
2 p.m. size at the NBBO in these securities were back to normal.\91\ 
Finally, the March 18 event analysis shows that on the day the MWCB was 
triggered in the middle of the trading day, size at the NBBO leading up 
to the MWCB event was similar to January 2020 levels and was slightly 
larger for non-ETPs when compared to the remainder of the High-
Volatility Period.\92\
---------------------------------------------------------------------------

    \88\ See id. at 16.
    \89\ See id. at 14.
    \90\ See id. at 25.
    \91\ See id. at 25-27.
    \92\ See id.
---------------------------------------------------------------------------

    In sum, the Commission believes that the MWCB operated 
appropriately as designed. While the MWCB impact on volatility is 
inconclusive, evidence shows that the MWCB effectively halted the 
market after the Level 1 threshold was reached on each of the four days 
in March 2020. The market appropriately reopened following each of the 
events, and market participants were able to resume trading in a normal 
fashion without apparent harmful impacts to either the auction 
processes or market liquidity. It is also notable that while the Pilot 
Rules approved in 2012 had never previously been triggered, the four 
events in March 2020 have provided market participants with significant 
experience with the current MWCB design. This familiarity with how the 
mechanism operates should further support a fair and orderly market 
function in the event of a future MWCB halt.\93\ Finally, the 
Exchange's proposed testing provisions, along with the provisions 
requiring an analysis and report to the Commission should future MWCB 
events occur and a commitment to review the MWCB in the event of 5% 
market declines and changes to MWCB reopening processes, will help 
ensure that the MWCB design remains appropriate as market conditions 
and structure change over time. For these reasons, the Commission finds 
that the Exchange's proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to national securities exchanges. In particular, the 
Commission finds that the Exchange's proposed rule change is consistent 
with Section 6(b)(5) of the Act,\94\ which requires that the rules of 
an exchange be designed, among other things, to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, and to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system. The Commission discusses below 
each of the key elements of the MWCB in more detail.
---------------------------------------------------------------------------

    \93\ See id. at 18-21 (showing some evidence of increasing 
principal participation with each MWCB event).
    \94\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. MWCB Threshold Levels

    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).\95\ 
Based on the analysis of these levels, the Exchange is proposing to 
make this aspect of the MWCB rules permanent.\96\ In conducting its 
Study following the March 2020 MWCB trading halts, the Working Group 
examined historical data on large-scale market declines. It also 
considered the recommendation of the Equity Market Structure Advisory 
Committee's (``EMSAC'') Subcommittee on Market Quality from 2016 
suggesting that the Level 1 trigger should be adjusted to 10% based on 
evidence from the Chinese markets that indicated that when markets 
began to approach a 7% band, selling pressure increase as market 
participants tried to complete trades before trading halted.\97\
---------------------------------------------------------------------------

    \95\ See NYSE Rule 7.12(a)(i)-(iii).
    \96\ See Notice, supra note 3, at 38778. The Exchange also noted 
that the Chicago Mercantile Exchange (``CME'') considered whether 
changes could be made to better align the cash and futures market. 
See Study, supra note 27, at 7. Specifically, CME considered whether 
the futures limit-down percentage should be widened to 7% from a 5% 
level. Id. Ultimately, on October 12, 2020, CME decided to implement 
a 7% price limit for overnight trading hours in certain futures and 
options on futures. See CME Submission No. 20-392, dated September 
25, 2020.
    \97\ See EMSAC Recommendations for Rulemaking on Issues of 
Market Quality, July 25, 2016, available at https://www.sec.gov/spotlight/emsac/emsac-market-quality-subcommittee-recomendation-072516.pdf.
---------------------------------------------------------------------------

    The Study observed that since 1962, intraday losses as large as 7% 
in SPX have occurred only 16 times, and that the four times that such 
losses did occur since the implementation of the LULD Plan were the 
four dates in March 2020

[[Page 16292]]

that triggered the MWCB Halts.\98\ The Study further noted that since 
the LULD Plan was implemented, there have been only five days where SPX 
fell as much as 6%, and all took place during the March 9-March 18, 
2020 time period.\99\ The Study observed that on March 11, 2020 the 
index fell as much as 6.07%, but did not continue lower to trigger a 
Level 1 MWCB halt at 7%.\100\ On March 16, 2020, SPX declined enough to 
trigger a Level 1 halt, and continued to fall after reopening down 
12.18%, but did not fall to the 13% trigger for a Level 2 halt, 
according to the Study.\101\ The Study also noted that on March 9, 12, 
and 18, 2020, SPX also declined further after the Level 1 halt, with 
intraday lows of -8.01%, -9.58%, and -9.83%.\102\ The Study concluded 
that 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.'' \103\ The Study further concluded that the available 
evidence supports a conclusion that the current 7% and 13% triggers did 
not create a ``magnet effect.'' \104\ The Exchange has represented that 
it agrees with this analysis and therefore is proposing that the MWCB 
trigger levels be permanently approved without change.\105\
---------------------------------------------------------------------------

    \98\ See Study, supra note 27, at 38.
    \99\ See id.
    \100\ See id.
    \101\ See id.
    \102\ See id.
    \103\ Id.
    \104\ Id. The Study 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. See id.
    \105\ See Notice, supra note 3, at 38782.
---------------------------------------------------------------------------

    The Commission believes that the Level 1 (7%), Level 2 (13%), and 
Level 3 (20%) thresholds are appropriate levels of market decline at 
which the MWCB halts are triggered. The Commission has reviewed the 
levels at which the MWCBs are triggered on several occasions following 
sharp declines in the markets and has made adjustments over the last 
three decades to ensure the thresholds remain meaningful as the markets 
evolve. The initial MWCB rules, approved in 1988, established 
thresholds based on DJIA point values of 250 and 400, which at the time 
represented market declines of 12% and 19%, respectively.\106\ Years 
later, it became clear that the thresholds needed to be updated to keep 
up with changes in the market. Stock prices had risen substantially 
since the MWCBs were first approved, such that by July 1996, a 250-
point decline and a 400-point decline, represented declines of the DJIA 
of only 4.5% and 7%, respectively.\107\ In 1997, the Commission 
approved proposals to increase the thresholds to 350 points and 550 
points.\108\ After the MWCB halts were triggered in October 1997, the 
industry concluded that the thresholds were too low, as they were 
triggered at declines of only 4.54% and 7.18%, which the industry 
believed did not justify halts in trading.\109\ The Commission 
subsequently approved modifications to base the thresholds on a 
percentage of market decline instead of a point decline and set them at 
10%, 20% and 30%.\110\ The market sharply declined 9% in the Flash 
Crash on May 6, 2010, which was not enough to trigger a Level 1 MWCB 
halt. Amidst concerns that events such as the Flash Crash could 
seriously undermine the integrity of the U.S. securities markets, in 
2012, as discussed above, the Commission again approved modification to 
the thresholds, and lowered the Level 1 and Level 2 thresholds to 7% 
and 13%, respectively.\111\
---------------------------------------------------------------------------

    \106\ See supra note 6.
    \107\ 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 (``1997 Trading 
Analysis'').
    \108\ See supra, note 10.
    \109\ See 1997 Trading Report, supra note 118.
    \110\ See supra note 14.
    \111\ See supra note 19.
---------------------------------------------------------------------------

    The MWCB thresholds set in 2012 have been in place on a pilot basis 
since their approval and were not reached until the market declines 
experienced in March 2020.\112\ Over the last 18 months, the SROs, 
Industry Members, and the Commission have had an opportunity to study 
data from these events and consider whether the current trigger levels 
are appropriately set. The Commission believes that data and analysis 
in the Study, in addition to the lessons learned since the original 
implementation of circuit breakers in 1988, support a conclusion that 
the current MWCB threshold levels represent appropriate levels of 
decline in NMS stocks that warrant a temporary halt, in the case of a 
Level 1 and Level 2 decline, or a halt for the remainder of the day, in 
the event of a Level 3. Furthermore, as discussed above, the Exchange's 
proposed testing provisions, along with the provisions requiring an 
analysis and report to the Commission should future MWCB events occur 
and a commitment to review the MWCB in the event of 5% market declines 
and changes to MWCB reopening processes, will help ensure that the MWCB 
design remains appropriate as market conditions and structure change 
over time.
---------------------------------------------------------------------------

    \112\ See Notice, supra note 3, at 38777-78.
---------------------------------------------------------------------------

C. Trading Halt Times

    The Pilot Rules provide that in the event an MWCB Level 1 or Level 
2 halt is triggered after 9:30 a.m. but before 3:25 p.m., trading will 
halt for 15 minutes. If the threshold for a Level 1 or Level 2 MWCB 
halt is triggered after 3:25 p.m., trading will continue unless a Level 
3 halt is triggered.\113\ If the threshold to trigger a Level 3 MWCB is 
reached at any time, trading will halt for the remainder of the 
day.\114\ The Exchange has represented that it agrees with the 
conclusion in the Study that a 15-minute trading halt following a Level 
1 or Level 2 MWCB is appropriate, and is proposing to make this aspect 
of the Pilot Rules permanent, along with the provision that provides 
that trading will halt for the remainder of the day following a Level 3 
circuit breaker.\115\
---------------------------------------------------------------------------

    \113\ See NYSE Rule 7.12(b).
    \114\ See id.
    \115\ See Notice, supra note 3, at 38783-84. The Exchange also 
proposed no changes be made to the MWCB to prevent the market from 
halting shortly after the open of regular trading at 9:30 a.m., 
despite the three MWCB events that occurred near the open of regular 
trading. See Study, supra note 27, at 2. As noted in the Study, 
after considering this potential change, it was determined that (1) 
there was no simple way to design an alternative that would prevent 
a halt at the open, (2) the markets should be protected at the open 
in any event, as it tends to be the most volatile period of the 
trading day and different future scenarios such as breaking news at 
the open would merit a halt, (3) market participants are now 
accustomed to how the MWCBs operate at the open of regular trading, 
and (4) the MWCB Halts at the open of regular trading did not harm 
the market functioning, including the conduct of opening and 
reopening auctions. See Study, supra note 27, at 43-44.
---------------------------------------------------------------------------

    In reaching its conclusion, the Study noted that in October 2020, 
CME implemented a change 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 leading into 
an MWCB reopening auction process, which begin after the end of the 15-
minute MWCB halts.\116\ The Study noted, however, that a similar change 
to the length of the Level 1 and 2 MWCB Halts was unnecessary, and 
recommended the 15-minute length of the Level 1 and Level 2 MWCB halts 
be approved on a permanent basis without change.\117\
---------------------------------------------------------------------------

    \116\ See Study, supra note 25, at 38.
    \117\ See id.
---------------------------------------------------------------------------

    The Commission believes that a trading halt of 15 minutes following 
a triggering of a Level 1 or Level 2 MWCB halt between 9:30-3:25 p.m. 
is appropriate to allow market participants

[[Page 16293]]

to assess the state of the market. Regarding the application of MWCB 
shortly after the open of regular trading, the Commission agrees that 
on balance it remains appropriate. In particular, the Commission 
believes that the MWCB protections are an important protection at the 
beginning of regular trading. Furthermore, as discussed above, the 
Commission believes that the Study provides evidence that the three 
MWCB events at or near the open of regular trading did not cause harm 
to the market, including the conduct of the opening and reopening 
auctions.\118\ Finally, market participants now have substantial 
experience with how the MWCB operates at or near the open of regular 
trading, and any changes to the MWCB at the time of day would introduce 
new uncertainty that is not necessary at this time, given the benefit 
of opening protections and the market's experience thus far. 
Additionally, the Commission believes that the CME's modification to 
resume trading in the E-mini S&P 500 futures should further improve the 
function of the MWCB, as market participants will have a better sense 
of market valuations leading into the MWCB reopening auction for equity 
securities. The Commission further believes that permitting trading to 
continue after 3:25 p.m. despite a decline in the markets, unless a 
Level 3 MWCB threshold is reached remains appropriate as this will help 
ensure a fair and orderly closing at 4 p.m. Finally, the declines in 
SPX in March 2020 did not approach the 20% threshold for triggering a 
Level 3 MWCB halt. Therefore, there is no data available to analyze how 
the markets would respond in the event SPX drops 20% and markets close 
for the day. The Commission believes, however, that any disruption in 
the markets that would cause a 20% decline in SPX would require market 
participants to make significant adjustments to their trading 
strategies, and thus halting trading for the remainder of the day is 
appropriate in such a situation. Furthermore, as discussed above, the 
Exchange's proposed testing provisions, along with the provisions 
requiring an analysis and report to the Commission should future MWCB 
events occur and a commitment to review the MWCB in the event of 5% 
market declines and changes to MWCB reopening processes, will help 
ensure that the MWCB design remains appropriate as market conditions 
and structure change over time.
---------------------------------------------------------------------------

    \118\ See supra Section IV(2)(f).
---------------------------------------------------------------------------

D. SPX as Reference Value 119
---------------------------------------------------------------------------

    \119\ The Exchange also considered the question of whether or 
not the MWCB should be triggered if there is a sufficient number of 
LULD price limits triggered. See Study, supra note 25, at 44. 
According to the Study, the LULD trading pause data prior to the 
MWCB Halts did not shed light on this question, as the March MWCB 
Halts were proceeded by very few LULD Halts. While the MWCB Halts 
did not provide evidence in support of this alternative MWCB 
trigger, the Exchange and the Study note that future events may 
merit looking at this potential modification again. See Study, supra 
note 25, at 44.
---------------------------------------------------------------------------

    The Pilot Rules provide that SPX shall be used as the reference 
value for determining any percentage decline in the markets.\120\ Based 
on the conclusion in the Study that SPX is the best measure for this 
purpose, the Exchange is proposing that the Pilot Rule designating SPX 
as the reference value be approved on a permanent basis.\121\
---------------------------------------------------------------------------

    \120\ See NYSE Rule 7.12(a)(i).
    \121\ See Notice, supra note 3, at 38784-85.
---------------------------------------------------------------------------

    In analyzing whether to retain SPX as the reference for triggering 
MWCB halts, the Study examined criteria for considering an instrument 
or methodology to replace SPX and compared a number of potential 
alternatives to SPX. The Study considered the DJIA, S&P 100, Nasdaq 
100, Russell 1000, Russell 3000, Wilshire 5000, E-Mini S&P 500 Futures, 
Exchange Trading Products-related SPX (i.e., SPY, IVV, VOO) as 
potential alternatives to SPX and for each alternative considered: The 
breath of securities in an index or 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 an MWCB; potential concerns regarding cross-
market coordination; whose regulatory purview does the reference value 
fall under; reference calculation method; and the index 
methodology.\122\
---------------------------------------------------------------------------

    \122\ See Study, supra note 27, at 39-40.
---------------------------------------------------------------------------

    The Study reflected the view of industry practitioners that it is 
important that the reference price be based an index rather than an 
individual tradable product because individual product are vulnerable 
to temporary order imbalances or price shocks, which may result in 
transient premiums or discounts.\123\ In addition, the Study considered 
that individual products may be subject to single stock price bands or 
circuit breakers, but an index has less potential to be influenced by 
these factors than an individual product.\124\
---------------------------------------------------------------------------

    \123\ See id. at 40-41.
    \124\ See id. at 41.
---------------------------------------------------------------------------

    Of the indices the Study examined, it found 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.\125\
---------------------------------------------------------------------------

    \125\ See id. at 41.
---------------------------------------------------------------------------

    Based on the Study's review of the potential alternatives to SPX 
and the Exchange's own observations of the product, the Exchange 
believes that SPX is an appropriate product to use as the reference for 
the MWCB mechanism, and is proposing to make this aspect of the Pilot 
Rules permanent without change.\126\ The Exchange acknowledges that 
non-traded products are not subject to regulatory oversight, but due to 
the safeguards provided by S&P DJI the Exchange nevertheless believes 
that SPX is an appropriate reference.\127\ In particular, the Exchange 
notes that S&P DJI periodically improves its calculation methods for 
SPX.\128\ The Exchange also considered 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.\129\ In meetings with 
the Working Group, S&P DJI explained that three geographically disperse 
data centers independently calculate the SPX, and S&P DJI monitors for 
consistency of values.\130\ The Exchange also considered however that, 
while S&P DJI's index computations are conducted and made available 
from three geographic locations with delivery through separate 
communications lines, there is no completely independent backup 
maintained for SPX, which remains a

[[Page 16294]]

single point of failure.\131\ S&P DJI addressed this concern by 
explaining that it intends to establish an independent index 
calculation to be conducted and maintained by a separate, independent 
entity to further reinforce redundancy and resiliency of the 
calculation.\132\
---------------------------------------------------------------------------

    \126\ See Notice, supra note 3, at 38785.
    \127\ See id.
    \128\ See id. at 38784-5. For example, following the events of 
August 24, 2015, S&P DJI changed its methodology for calculating SPX 
to use consolidates prices. The Exchange believes that this change 
likely helped to ensure that SPX accurately reflected market 
conditions preceding the MWCB Halts in March 2020. See id.
    \129\ See id. at 38785.
    \130\ See id.
    \131\ See id.
    \132\ See id.
---------------------------------------------------------------------------

    The Commission believes that SPX is the best reference for gauging 
a decline in the markets overall. The Commission agrees that at this 
time an index is a more reliable reference than a single tradable 
product as it is not subject to same degree of temporary volatility or 
liquidity gaps and remains more in-line with a large number of 
products. Additionally, SPX's number and breadth of securities, high 
correlation to those underlying securities, and its well-understood 
calculation methodology makes it an appropriate benchmark for the MWCB. 
The SPX calculation is performed at separate, geographically diverse 
locations to help ensure the integrity of the index calculation. 
Further, as noted by the Exchange, S&P DJI has been transparent and 
responsive to the Exchange and the other Working Group members about 
the calculation of SPX, and has committed to further enhance the 
redundancy and resiliency of the SPX calculation by establishing an 
independent index calculation to be conducted and maintained by a 
separate, independent entity.\133\ Finally, as discussed above, the 
Exchange's proposed testing provisions, along with the provisions 
requiring an analysis and report to the Commission should future MWCB 
events occur and a commitment to review the MWCB in the event of 5% 
market declines and changes to MWCB reopening processes, will help 
ensure that the MWCB design remain appropriate as market conditions and 
structure change over time
---------------------------------------------------------------------------

    \133\ The Commission believes that further efforts to enhance 
the redundancy and resiliency of the SPX calculation is appropriate.
---------------------------------------------------------------------------

E. Testing Requirement

    The Exchange's Rules require that the Exchange participate in all 
industry wide tests of the MWCB Mechanism. Further, the Rules also 
provide that all designated Regulation SCI firms participate in at 
least one MWCB test each year.\134\ This test is designed to ensure 
that relevant systems function as intended in the event an MWCB is 
triggered.\135\ Each of these firms must also verify their 
participation in a MWCB test by attesting that they are able to or have 
attempted to: (1) Receive and process MWCB halt messages from the 
securities information processors (``SIPs''); (2) receive and process 
resume messages from the SIP following a MWCB Halt; (3) receive and 
process market data from the SIPs relevant to MWCB Halts; and (4) send 
orders following a Level 1 or Level 2 MWCB halt in a manner consistent 
with their usual trading behavior.\136\ To the extent that a member 
organization that participated in a MWCB test is unable to receive and 
process any of these messages, its attestation should notify the 
Exchange which messages it was unable to process and any known reason 
why the messages could not be received or processed.\137\ 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.\138\
---------------------------------------------------------------------------

    \134\ See Study, supra note 27, at 9.
    \135\ See id.
    \136\ See Notice, supra note 3, at 42.
    \137\ See Amendment No. 1, supra note 7.
    \138\ See supra note 137.
---------------------------------------------------------------------------

    In addition to testing of MWCB technical functionalities, the 
Exchange has also proposed a mandatory review of the performance of 
MWCBs generally, should certain events occur. In the event of a MWCB 
Halt, the Working Group will analyze the MWCB performance and prepare a 
report that documents its analysis and recommendations.\139\ This 
report will be provided to the Commission within 6 months of MWCB 
Halt.\140\ In the event that there is (1) a market decline of more than 
5% or (2) an SRO implements a rule change that effects its reopening 
process following a MWCB Halt, the Exchange and the Working Group will 
review such event and consider when any modification should be made to 
the MWCB rules.\141\ If the Working Group recommends that a 
modification be made, the Working Group will prepare a report that 
documents its analysis and recommendations and provide that report to 
the Commission.\142\
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    \139\ See supra note 138.
    \140\ See id.
    \141\ See id.
    \142\ See id.
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    The Exchange believes that these testing obligations remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system.\143\ Specifically, the Exchange contends that 
adding specificity by requiring SCI firms to attest to their 
participation in the MWCB will promote stability and investor 
confidence in the MWCB mechanism.\144\ Further, the Exchange believes 
that requiring firms to identify any inability to process any messages 
related to the MWCB mechanism will contribute to a fair and orderly 
market by flagging potential issues that should be corrected.\145\ The 
Exchange also notes that the attestations, as well as the Exchange's 
own records regarding the MWCB test, will be preserved and retained by 
the Exchange.\146\
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    \143\ See Notice, supra note 3, at 47.
    \144\ See id.
    \145\ See supra note 138, at 6.
    \146\ See id.
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    The Exchange is also of the opinion that the ``event driven'' MWCB 
review described in the MWCB Rules 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.\147\ The 
Exchange believes that requiring the Working Group to review any halt 
triggered under the MWCB Rules and prepare a report on of its analysis 
and recommendations, would permit the Working Group and the Commission 
to evaluate the efficacy of the MWCB mechanism and whether any 
modifications should be made.\148\ The Exchange also contends that 
having the Working Group review instances of a market decline of more 
than 5% or an SRO rule that changes its reopening process following a 
MWCB Halt will allow the Working Group to identify situations where it 
recommends that the MWCB Rules should be modified. Finally, the 
Exchange notes that in those situations where the Working Group 
recommends that a modification should be made and a report is submitted 
to the Commission, providing this report to the Commission will help 
protect investors and the public interest.\149\
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    \147\ See id.
    \148\ See id. at 7.
    \149\ See id.
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    The Commission believes that these testing and ongoing assessment 
provisions will allow the Commission and the SROs to evaluate the MWCB 
mechanism going forward. As noted by the Exchange, by requiring 
Regulation SCI firms and the Exchange to participate in yearly tests of 
certain basic messaging functionalities, the SROs and the Commission 
can help ensure that important technical aspects of the MWCB mechanism 
will function properly should a MWCB Halt occur. Additionally, as the 
Exchange noted, the results of this testing will be retained by the 
Exchange pursuant to its obligation to keep books and records. This 
will allow the Commission to review the results of the MWCB test to 
ensure that the MWCB mechanism continues to operate as intended.

[[Page 16295]]

    The Commission also believes that the proposed ``event driven'' 
reviews of the MWCB mechanism will allow the Commission and the SROs to 
evaluate whether any modification to the MWCB mechanism is necessary. 
Specifically, should a MWCB Halt occur, the SROs will examine how the 
MWCBs functioned and report this to the Commission. If the SROs or the 
Commission finds that the MWCB mechanism did not work as intended 
during a future MWCB Halt, then the MWCB mechanism can be further 
refined to address this deficiency. The Commission also supports the 
proposal concerning review of the MWCB when either (1) a market decline 
of more than 5% or (2) an SRO implements a rule that changes its 
reopening process following a MWCB Halt. A review of a market decline 
of more than 5% will allow the Working Group to evaluate significant 
market events that do not reach the threshold for initiating a MWCB, 
and determine whether any alterations to the MWCB mechanism should be 
made. Further, a review of any changes to reopening processes following 
a MWCB Halt will allow the Working Group to evaluate the implications 
of the proposed changes on the effectiveness of the MWCB mechanism. 
Finally, the Commission believes that the requirement to report any 
proposed modification following the Working Group's review will give 
the Commission an opportunity to study the event that preceded the 
Working Group's review and any potential modification that the Working 
Group recommends.
    In conclusion, the Commission believes that the analysis presented 
by the Exchange demonstrates that the MWCBs operated effectively in 
accomplishing the goal of providing a trading halt during extreme 
market-wide declines to provide opportunities for markets and market 
participants to assess market conditions and systemic stress. Further, 
the Commission believes that the proposal sets forth testing and 
ongoing assessment requirements for industry members and the Exchange 
that should allow market participants and the Exchange to detect issues 
with the MWCB design or their internal system in response to MWCB halts 
and recommend modifications. For these reasons, the Commission finds 
that it is appropriate to approve the Exchange's MWCB rules on a 
permanent basis.

V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to sec.gov">[email protected]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; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSE-2021-40 and should be 
submitted on or before April 12, 2022.

VI. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act,\150\ to approve the proposed rule change, as modified by 
Amendment No. 1, prior to the 30th day after the date of publication of 
Amendment No. 1, in the Federal Register. As discussed above, Amendment 
No. 1 requires Exchange participation in all industry-wide testing of 
the MWCBs, and further requires the Exchange, together with the other 
SROs, to provide the Commission with a report that documents its 
analysis and recommendations following a halt that is triggered 
following a Level 1, Level 2, or Level 3 Market Decline. The amendment 
also requires the Exchange, together with the other SROs, to review the 
MWCB in the event of 5% market declines and any time an SRO makes 
changes to MWCB reopening processes, and provide a report to the 
Commission concerning such review should a modification to the MWCB be 
recommended. Amendment No. 1 also requires an industry member to notify 
the Exchange in its attestation following testing if it was unable to 
process any messages and, if known, why. In Amendment No. 1, the 
Exchange commits to maintain records documenting its participation in 
MWCB testing. Amendment No. 1 also provides additional detail on 
actions taken by SROs in response to the March 2020 MWCB halts.\151\
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    \150\ 15 U.S.C.78s(b)(2).
    \151\ Amendment No. 1 also makes technical changes to the 
proposal to update the dates on which the MWCB Pilot Rule expires 
and the proposed rule would take effect.
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    The Commission believes that the revisions to the proposal in 
Amendment No. 1 raise no novel regulatory issues. The amendment 
proposes additional protections that will help ensure that the MWCB 
design is appropriate over time. In particular, it provides for more 
robust ongoing testing processes and assessments of the operation of 
the MWCBs. The tests will be conducted on an industry-wide basis with 
Exchange participation and will require the creation and retention of 
records concerning testing effectiveness. Furthermore, the amendment 
provides for MWCB assessments in key events that will provide an 
opportunity for the Exchange, along with the other SROs, to more 
effectively evaluate the MWCB design. Accordingly, the Commission finds 
good cause, pursuant to Section 19(b)(2) of the Act,\152\ to approve 
the proposed rule change, as modified by Amendment No. 1, on an 
accelerated basis.
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    \152\ 15 U.S.C. 78s(b)(2).
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VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\153\ that the proposed rule change, as modified by Amendment No. 
1, (SR-NYSE-2021-40), be, and hereby is, approved on an accelerated 
basis.
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    \153\ 15 U.S.C. 78s(b)(2).


[[Page 16296]]


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    By the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\154\
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    \154\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-05980 Filed 3-21-22; 8:45 am]
BILLING CODE 8011-01-P


