[Federal Register Volume 74, Number 194 (Thursday, October 8, 2009)]
[Notices]
[Pages 51906-51910]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-24250]
[[Page 51906]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-60761; File No. SR-ISE-2009-73]
Self-Regulatory Organizations; International Securities Exchange,
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule
Change and Amendment No. 1 Thereto Relating to Clearly Erroneous
Executions
October 1, 2009.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on September 28, 2009, the International Securities Exchange, LLC
(``Exchange'' or ``ISE'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the Exchange.
On October 1, 2009, the ISE filed Amendment No. 1 to the proposed rule
change. The ISE has designated the proposed rule change as constituting
a rule change under Rule 19b-4(f)(6) under the Act,\3\ which renders
the proposal effective upon filing with the Commission. The Commission
is publishing this notice to solicit comments on the proposed rule
change, as amended, from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The ISE proposes to amend ISE Rule 2128 governing clearly erroneous
executions.
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 these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in sections A, B and C below, of the
most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend ISE Rule 2128 by replacing the
current rule text, in its entirety, with newly proposed rule text in
order to improve the Exchange's policies and procedures regarding
clearly erroneous executions. The newly proposed rule text is part of a
market-wide effort designed to provide transparency and finality with
respect to clearly erroneous executions. This effort seeks to achieve
consistent results for participants across U.S. equities exchanges
while maintaining a fair and orderly market, protecting investors and
protecting the public interest. This proposed rule change shall be
effective on October 5, 2009. The proposed rule text is more fully
discussed below.
Definition
The Exchange proposes to adopt a definition of a clearly erroneous
execution and adopt language addressing cancelled trades. The proposed
rule text states that a transaction is ``clearly erroneous'' when there
is an obvious error in any term, such as price, number of shares or
other unit of trading, or identification of the security. The proposed
rule text also states that a transaction made in clearly erroneous
error and agreed to be canceled by both parties or determined by the
Exchange to be clearly erroneous will be removed ``from the
Consolidated Tape.'' \4\ A trade will only be removed from the
Consolidated Tape when the determination is deemed final and any
applicable appeals have been exhausted.
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\4\ For purposes of this Rule, ``removed from the Consolidate
Tape'' means that a subsequent message will be sent to the
Consolidated Tape indicating that a previously executed trade has
been cancelled.
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Equity Electronic Access Member Initiated Review Requests
In ISE Rule 2128(b), the Exchange proposes procedures for
requesting a review of a clearly erroneous transaction. First, the
proposed rule would require that requests for review be made only by
electronic mail (``e-mail'') or other electronic means specified from
time to time by the Exchange. Requiring requests for review to be made
via e-mail creates a standard format that can easily be logged and
tracked. The Exchange will publish the email address or other
electronic means to be used for all clearly erroneous filings in a
circular distributed to Equity Electronic Access Members (``Equity
EAMs'').
The Exchange further proposes that requests for review must be
received by the Exchange within 30 minutes of the execution time for
orders initially routed to and executed on the Exchange. The Exchange
proposes that Equity EAMs submit certain essential identifying
information with the request including the time of the transaction(s),
security symbol(s), number of shares, price(s), side (bought or sold),
and factual basis for believing that the trade is clearly erroneous.
The Exchange believes that 30 minutes is an appropriate time frame that
offers the requesting party sufficient time to gather and submit all
required information.
The proposed rule also requires the Exchange to notify the
counterparty to a trade upon receipt of a timely filed request for
review that satisfies the numerical guidelines set forth within the
Rule. The Exchange proposes to adopt language allowing an Officer of
the Exchange or such other employee designee (``Officer'') of ISE to
request additional information from each party to a transaction under
review. Parties to the review will have 30 minutes from the time of the
request to provide additional supporting information.
Routed Executions
The Exchange proposes to give other market centers an additional 30
minutes from the receipt of their participant's timely filing to
request a ruling, but no longer than 60 minutes from the time of the
execution under review. This provision accounts for those executions
initially directed to an away market center and subsequently routed by
that away market center to the Exchange.
For example, assume an order is initially routed by a participant
to Market Center A and subsequently routed to ISE where the order is
executed at a price outside of the Numerical Guidelines. This provision
generally requires Market Center A to file with the Exchange within 30
minutes from the time it receives its participant's timely filed
request for review. This provision caps the filing deadline for an away
market center at 60 minutes from the time of the execution under
review.
Threshold Factors
The Exchange proposes adding certain numerical thresholds to the
Rule that explicitly state what constitutes a clearly erroneous
execution.
Numerical Guidelines
The proposed numerical guidelines state that a transaction executed
during
[[Page 51907]]
the Regular Market Session \5\ or the Pre-Market Session \6\ and Post-
Market Session \7\ may be found to be clearly erroneous only if the
price of the transaction to buy is greater, or less in the case of a
sale, than the reference price by an amount that equals or exceeds the
numerical guidelines for a particular transaction category. The
Reference Price shall be equal to the Consolidated Last Sale
immediately prior to the execution under review, unless unusual
circumstances are present. The proposed guidelines for sales greater
than $0.00 and up to and including $25.00 are 10% for the Regular
Market Session and 20% for the Pre-Market Session and Post-Market
Sessions. The proposed guidelines for sales greater than $25.00 and up
to and including $50.00 are 5% for the Regular Market Session and 10%
for Pre-Market Session and Post-Market Sessions. The proposed
guidelines for sales greater than $50.00 are 3% for the Regular Market
Session and 6% for Pre-Market Session and Post-Market Sessions. A
filing involving five or more securities by the same Equity EAM will be
aggregated into a single filing called a ``Multi-Stock Event.'' In the
case of a Multi-Stock Event, the proposed guidelines are 10% for the
Regular Market Session and 10% for the Pre-Market Session and Post-
Market Sessions. In the case of Leveraged ETF/ETN securities, the above
guidelines are to be multiplied by the leverage multiplier of the
security. Executions that do not meet or exceed the Numerical
Guidelines will not be eligible for review under this section. The
following chart summarizes the proposed Numerical Guidelines.
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\5\ The Regular Market Session begins for each security with the
Opening Transaction, as defined in Rule 2106, and continues until
the primary listing market closes such security. See ISE Rule
2102(b) and (c).
\6\ The Pre-Market Session begins at 8 a.m. and concludes with
the Opening Transaction of a security. See ISE Rule 2102(a).
\7\ The Post-Market Session begins following the conclusion of
the Regular Market Session and concludes at 8 p.m. See ISE Rule
2102(d).
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Regular market
session numerical Pre-market session
guidelines and post-market
(subject session numerical
Reference price: Consolidated transaction's guidelines (subject
last sale percent transaction's percent
difference from difference from the
the consolidated consolidated last
last sale): sale):
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Greater than $0.00 and up to 10%.............. 20%.
and including $25.00.
Greater than $25.00 and up to 5%............... 10%.
and including $50.00.
Greater than $50.00........... 3%............... 6%.
Multi-Stock Event--Filings 10%.............. 10%.
involving five or more
securities by the same Equity
EAM will be aggregated into a
single filing.
Leveraged ETF/ETN securities.. Regular Market Regular Market
Session Session Numerical
Numerical Guidelines
Guidelines multiplied by the
multiplied by leverage multiplier
the leverage (i.e. 2x).
multiplier (i.e.
2x).
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Establishing Numerical Guidelines within the Rule brings regulatory
transparency and consistency in the application of the rules of the
Exchange. These Numerical Guidelines represent the general consensus
approach and were developed based on the collective experiences of a
market-wide group. The Exchange believes that the Thresholds
established are fair and appropriate and apply evenly to all
participants.
Unusual Circumstances
ISE further proposes that in Unusual Circumstances the Exchange
may, in its discretion and with a view toward maintaining a fair and
orderly market, use a Reference Price other than the consolidated last
sale. Unusual Circumstances may include periods of extreme market
volatility, sustained illiquidity, or widespread system issues. Other
Reference Prices that the Exchange may use would include the
consolidated inside price, the consolidated opening price, the
consolidated prior close, or the consolidated last sale prior to a
series of executions.
The following example explains the use of a Reference Price equal
to the consolidated last sale prior to a series of executions.
ABC has a consolidated last sale of $10.00. During the Regular
Market Session Customer A enters a market order to buy 10,000 shares,
although it had intended a market order for 1,000 shares. The size of
the order is such that the order sweeps the ISE Book, which reflects
1,000 shares of liquidity offered at each of following prices.
Executions occur, moving through the depth of Book, as follows:
Trade 1--1,000 shares @ $10.00 (9,000 remaining)
Trade 2--1,000 shares @ $10.20 (8,000 remaining)
Trade 3--1,000 shares @ $10.40 (7,000 remaining)
Trade 4--1,000 shares @ $10.60 (6,000 remaining)
Trade 5--1,000 shares @ $10.80 (5,000 remaining)
Trade 6--1,000 shares @ $11.00 (4,000 remaining)
Trade 7--1,000 shares @ $11.20 (3,000 remaining)
Trade 8--1,000 shares @ $11.40 (2,000 remaining)
Trade 9--1,000 shares @ $11.60 (1,000 remaining)
Trade 10--1,000 shares @ $11.80 (complete)
Thus, to be eligible for review, a transaction must be at a price
that is at least 10% higher than the consolidated last sale prior to
the series of executions. Customer A could request a ruling for trades
6 through 10, priced at $11.00 and above, but trades
1 through 5 would not be eligible for review.
Under the proposed rule the Exchange may also use a higher
numerical guideline if, after market participants have been alerted to
erroneous activity, the price of the security returns toward its prior
trading range but continues to trade beyond the price it would have
normally been busted.
Joint Market Rulings
In the interest of achieving consistency across markets, the
Exchange proposes that, in events that involve other markets, the
Exchange would have the ability to use a different Reference Price and/
or Numerical Guideline. In these instances the Reference Price would be
determined based on a consensus among the Exchanges where the
transactions occurred. Furthermore, when a ruling is made across
markets, the Exchange may
[[Page 51908]]
determine that the ruling is not eligible for appeal because immediate
finality is necessary to maintain a fair and orderly market and to
protect investors and the public interest.
Additional Factors
The proposed amendments to ISE Rule 2128 also enumerate some
additional factors that an Officer may consider when determining
whether an execution is clearly erroneous. These factors include, but
are not limited to, system malfunctions or disruptions, volume and
volatility for the security, derivative securities products that
correspond to greater than 100% in the direction of a tracking index,
news released for the security, whether trading in the security was
recently halted/resumed, whether the security is an IPO, whether the
security was subject to a stock-split, reorganization, or other
corporate action, overall market conditions, Pre-Market and Post-Market
Session executions, validity of the consolidated tapes trades and
quotes, consideration of primary market indications, and executions
inconsistent with the trading pattern in the stock. Each additional
factor shall be considered with a view toward maintaining a fair and
orderly market, the protection of investors and the public interest.
Numerical Guidelines Applicable to Volatile Market Opens
The Exchange proposes to expand the Numerical Guidelines applicable
to transactions occurring between 9:30 a.m. and 10 a.m. based on the
disseminated value of the S&P 500 Futures at 9:15 a.m. When the S&P
Futures are up or down from 3% to up to but not including 5% at 9:15
a.m., the Numerical Guidelines are doubled. When the S&P Futures are up
or down 5% or greater at 9:15 a.m., the Numerical Guidelines are
tripled. The Exchange believes that the S&P 500 futures contract is an
appropriate and reliable barometer of market activity prior to the
market opening due to its broad based market coverage and deep
liquidity. By using the S&P 500 Futures disseminated value at 9:15 a.m.
as the barometer of market activity, the Exchange is providing a
transparent means of offering adjusted guidelines in times of volatile
market activity.
Outlier Transactions
The proposed amendments to ISE Rule 2128 provide that an Officer of
the Exchange may consider requests for review received after thirty
minutes, but not longer than sixty minutes after the execution in
question in the case of an Outlier Transaction. An Outlier Transaction
is a transaction where, (1) The execution price of the security is
greater than three times the current Numerical Guidelines, or (2) the
execution price of the security breaches the 52-week high or low, in
which case the Exchange may consider Additional Factors to determine if
the transaction qualifies for review or if the Exchange shall decline
to act.
Review Procedures
Initial Determination
Under the proposed rule, the Officer will only have the authority
to break the trades or rule to let the trades stand and will no longer
have the authority to adjust one or more terms of the transaction. This
limitation attempts to remove the subjectivity from the rule that is
necessitated by an adjustment.
The Exchange also proposes adding language stating that a
determination shall be made generally within 30 minutes of receipt of
the complaint, but in no case later than the start of the Regular
Market Session on the following trading day. Rulings made outside of 30
minutes by an Officer will not fail for lack of timeliness. The
guideline simply provides participants an appropriate expectation that
a ruling will generally be made within 30 minutes, and in no case later
than the start of the Regular Market Session on the following trading
day.
Appeals
The Exchange proposes to amend the appeals procedure for trades
that are deemed to be clearly erroneous. First, the Exchange will no
longer accept appeal requests via facsimile. Similar to the proposed
language for an initial request for a ruling, all appeal requests must
be made via e-mail.
The current rule provides that the Exchange shall review and render
a decision upon an appeal within a timeframe provided by the Exchange.
The proposed rule offers more definite guidelines to ensure the
expedient resolution of appeals. It requires the Exchange to review
appeals as soon as practicable, but generally on the same day as the
executions under review. Appeals received between 3 p.m. ET and the
close of trading in the Post-Market Session should be made as soon as
practicable, but in no case later than the trading day following the
date of the execution under review. Appeals will not fail for lack of
timeliness. This revised provision provides participants a reasonable
expectation of when a ruling on appeal will generally be made.
Further, the proposed rule declares that any determination made by
an Officer or by the CEE Panel shall be rendered without prejudice as
to the right of the parties to the transaction to submit their dispute
to arbitration. This provision simply clarifies the fact that nothing
in the proposed rule limits or impedes the rights of the parties to
arbitrate their dispute.
System Disruption and Malfunctions
Currently, within the System Disruptions and Malfunctions section
of the rule, after an Officer determines that a trade was clearly
erroneous he may declare the transaction null and void or modify the
trade to attempt to achieve and equitable rectification of the error.
The proposed Rule eliminates the Exchange's ability to modify a clearly
erroneous execution. The Exchange must either uphold or nullify the
execution based upon the findings of the Officer reviewing the
execution.
The proposed Rule provides that, in the event of a disruption or a
malfunction, an Officer of the Exchange or other senior level employee
designee will rely on the proposed numerical guidelines in determining
whether an execution is clearly erroneous. However, the Officer or
senior level employee may also use a lower Numerical Guideline if
necessary to maintain a fair and orderly market, protect investors, and
protect the public interest. The proposed rule also adds that actions
taken under these circumstances must be taken within 30 minutes of
detection of the erroneous transaction in the ordinary case, and by no
later than the start of the Regular Market Session on the day following
the date of the execution under review when extraordinary circumstances
exist.
Officers Acting on Their Own Motion
The Exchange proposes to add a section to the Rule that will grant
an Officer of the Exchange or other senior level employee designee the
ability to act on their own motion to review potentially erroneous
executions. Under the current rule, Officers have the ability to act
upon their own motion only in the event of a system disruption or
malfunction. The proposed rule would allow an Officer of the Exchange
or other senior level employee designee to review executions and rely
on the Numerical Guidelines, under any circumstance. In extraordinary
circumstances an Officer of the Exchange or other senior level employee
designee may apply a lower Numerical Guideline if it is determined that
such action is necessary to maintain a fair and orderly market or
protect investors and the public interest. In some instances the
Exchange may detect a
[[Page 51909]]
single execution that breaches the Numerical Guidelines but is not the
subject of a ruling request. This provision gives the Exchange the
ability to review such executions. Additionally, in practice clearly
erroneous executions commonly involve multiple parties and multiple
executions. In such instances, all affected parties may not request a
ruling. The Exchange proposes this provision to permit an Officer of
the Exchange or other senior level employee designee to rule on a group
of transactions related to the same occurrence or event as a whole,
without a formal request for a ruling from every affected party.
Trade Nullification for UTP Securities that are Subject of Initial
Public Offerings
The proposed rule also modifies ISE's policy on trade nullification
and for UTP securities that are subject to initial public offerings.
Under the proposed rule, an Officer of the Exchange or other senior
level employee designee must either declare an opening transaction null
and void or decline to take action, but can no longer be adjusted.
Furthermore, the proposed rule requires that, in extraordinary
circumstances, the reviewing Officer of the Exchange or other senior
level employee designee may take action by no later than the start of
the Regular Market Session on the day following the date of the
execution under review.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the objectives of Section 6 of the Act,\8\ in general, and
furthers the objectives of Section 6(b)(4),\9\ in particular, in that
it is designed to provide for the equitable allocation of reasonable
dues, fees and other charges among its members and other persons using
its facilities. The proposed rule change provides transparency and
finality for Equity EAMs and creates consistent results across U.S.
equities exchanges with respect to clearly erroneous executions. This
proposed change further promotes the maintenance of a fair and orderly
market, the protection of investors and the protection of the public
interest.
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\8\ 15 U.S.C. 78f.
\9\ 15 U.S.C. 78f(b)(4).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The proposed rule change does not impose any burden on competition
that is not necessary or appropriate in furtherance of the purposes of
the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any unsolicited written comments from members or other interested
parties.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \10\ and Rule 19b-
4(f)(6) thereunder.\11\
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\10\ 15 U.S.C. 78s(b)(3)(A).
\11\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the
Act \12\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6) \13\ permits the Commission to
designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange requests
that the Commission waive the 30-day operative delay so that it may
implement the new rule on October 5, 2009, the same date as the other
equities exchanges. The Commission believes that waiving the 30-day
operative delay is consistent with the protection of investors and the
public interest because it will allow the Exchange to begin applying
the new rule on the same date as the other equities exchanges.\14\
Application of the new rule on this date should help foster
transparency and consistency among those exchanges that adopt clearly
erroneous execution rules substantially similar to those previously
approved by the Commission.\15\ For these reasons, the Commission
designates that the proposed rule change, as amended, become operative
on October 5, 2009.
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\12\ 17 CFR 240.19b-4(f)(6).
\13\ 17 CFR 240.19b-4(f)(6).
\14\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposal's impact on efficiency,
competition, and capital formation. 15 U.S.C. 78c(f).
\15\ See Securities Exchange Act Release No. 60706 (September
22, 2009) 74 FR 49416 (September 28, 2009) (NYSEArca-2009-36).
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At any time within 60 days of the filing of the proposed rule
change, the Commission may summarily abrogate such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Act.\16\
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\16\ The Commission considers the 60-day period within which the
Commission may summarily abrogate the proposal pursuant to Section
19(b)(3)(C) of the Act, 15 U.S.C. 78s(b)(3)(C), to commence on
October 1, 2009, the date ISE filed Amendment No. 1 to the proposal.
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an e-mail to [email protected]. Please include
File Number SR-ISE-2009-73 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-ISE-2009-73. This file
number should be included on the subject line if e-mail is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for inspection and
copying in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m.
[[Page 51910]]
Copies of such 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 publicly available. All submissions
should refer to File Number SR-ISE-2009-73 and should be submitted on
or before October 29, 2009.
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\17\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-24250 Filed 10-7-09; 8:45 am]
BILLING CODE 8011-01-P