[Federal Register Volume 74, Number 186 (Monday, September 28, 2009)]
[Notices]
[Pages 49416-49419]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-23358]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60706; File No. SR-NYSEArca-2009-36]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Amendment No. 1 and Order Granting Accelerated Approval of Proposed 
Rule Change, as Modified by Amendment No. 1 Thereto, Relating to NYSE 
Arca Equities Rule 7.10 Governing Clearly Erroneous Executions

September 22, 2009.

I. Introduction

    On April 27, 2009, NYSE Arca, Inc. (``NYSE Arca'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend NYSE Arca Equities Rule 7.10 governing 
clearly erroneous executions. The proposed rule change was published 
for comment in the Federal Register on May 5, 2009.\3\ On September 21, 
2009, the Exchange submitted Amendment No. 1 to the proposed rule 
change.\4\ The Commission received no comment letters on the proposal. 
This order provides notice of filing of Amendment No. 1 to the proposed 
rule change and grants accelerated approval to the proposed rule 
change, as modified by Amendment No. 1.
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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. 59838 (April 28, 
2009), 74 FR 20767 (the ``Notice'').
    \4\ In Amendment No. 1, the Exchange specifies an effective date 
of October 5, 2009 for the proposed rule change, if the proposed 
rule change is approved by the Commission, and makes certain other 
changes as described in Section V, infra. The text of Amendment No. 
1 is available on the Exchange's Web site at http://www.nyse.com, at 
the principal office of the Exchange, and at the Commission's Public 
Reference Room.
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II. Description of the Proposal

    The Exchange proposes to amend NYSE Arca Rule 7.10 in order to 
improve the Exchange's rule regarding clearly erroneous executions. The 
proposed changes are 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. A summary of 
the most significant proposed changes are discussed below. A more 
detailed description of the proposed changes may be found in the 
Notice.

A. ETP Holder Initiated Review Requests

1. Requests for Review
    The Exchange proposes that requests for review must be received by 
the Exchange by electronic mail (``email''), or other electronic means 
specified from time to time by the Exchange, within 30 minutes of the 
execution time for orders initially routed to and executed on the 
Exchange.\5\ However, requests for review relating to orders routed 
from another market center to NYSE Arca will have an additional 30 
minutes.\6\ These requests for review must contain certain essential 
identifying information, 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.
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    \5\ 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 Trading Permit (``ETP'') Holders.
    \6\ Specifically, if an order is initially routed by a 
participant to Market Center A and subsequently routed to NYSE Arca, 
the proposed rule will generally require 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 proposed rule 
caps the filing deadline for an away market center at 60 minutes 
from the time of the execution at issue.
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    The proposed rule requires the Exchange to notify the counterparty 
to a trade only upon receipt of a timely filed request for review that 
satisfies the numerical guidelines set forth within the Rule. The 
Exchange also proposes to allow an Officer of the Corporation or such 
other senior level employee designee (``Officer'') of NYSE Arca 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.
2. Threshold Factors and Numerical Guidelines
    Currently, the Exchange does not identify specific numeric 
guidelines for determining what constitutes a clearly erroneous 
transaction, but instead provides that ``an Officer of the Corporation 
will review the transaction and determine whether it is clearly 
erroneous, with a view toward maintaining a fair and orderly market and 
the protection of investors and the public interest.'' \7\ The Exchange 
proposes adding certain numerical thresholds to the Rule that 
explicitly

[[Page 49417]]

state what constitutes a clearly erroneous execution.
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    \7\ See NYSE Arca Rule 7.10(b).
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    Specifically, the proposed numerical guidelines state that a 
transaction executed during the Core, Opening, or Late Trading Session 
may be found to be clearly erroneous only if the price of the 
transaction is greater (for a buy) or less (for a sale) than a 
reference price (the ``Reference Price'') by an amount that equals or 
exceeds the numerical guidelines for a particular transaction category. 
The Reference Price will 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 up to and including $25.00 will be 10% for the Core Trading 
Session and 20% for the Opening and Late Trading Sessions. The proposed 
guidelines for sales greater than $25.00 up to an including $50.00 will 
be 5% for the Core Trading Session and 10% for Opening and Late Trading 
Sessions. The proposed guidelines for sales greater than $50.00 will be 
3% for the Core Trading Session and 6% for Opening and Late Trading 
Sessions. A filing involving five or more securities by the same ETP 
Holder will be aggregated into a single filing called a ``Multi-Stock 
Event.'' In the case of a Multi-Stock Event, the proposed guidelines 
will be 10% for both the Core Trading Session and the Opening and Late 
Trading Sessions. In the case of Leveraged ETF/ETN securities, the 
above guidelines will 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 the proposed rule.
3. Unusual Circumstances
    NYSE Arca proposes that, in Unusual Circumstances the Exchange may, 
in its discretion and with a view toward maintaining a fair and orderly 
market and the protection of investors and the public interest, 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 will include the consolidated inside 
price, the consolidated opening price, the consolidated prior close, or 
the consolidated last sale prior to a series of executions.
    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 at which it would 
have normally been broken.
4. Joint Market Rulings
    In the interest of achieving consistency across markets, the 
Exchange proposes that, in events that involve other markets, the 
Exchange will have the ability to use a different Reference Price and/
or Numerical Guideline than those specifically outlined in the proposed 
rule in an effort to coordinate a Reference Price and/or a Numerical 
Guideline that is consistent across the Exchanges on which the 
transactions occurred. Furthermore, when a ruling is made across 
markets, the Exchange may 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.
5. Additional Factors
    The proposed rule change enumerates 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 initial public offering, whether the security was 
subject to a stock-split, reorganization, or other corporate action, 
overall market conditions, Opening and Late 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 will be considered 
with a view toward maintaining a fair and orderly market, and the 
protection of investors and the public interest.
6. Numerical Guidelines Applicable to Volatile Market Opens
    Under the proposed rule change, the Exchange will have the ability 
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 3% to 
up to but not including 5% at 9:15 a.m., the Numerical Guidelines will 
be doubled. When the S&P Futures are up or down 5% or greater at 9:15 
a.m., the Numerical Guidelines will be tripled.

B. Outlier Transactions

    The proposed rule change permits an Officer to consider requests 
for review received after 30 minutes, but not longer than 60 minutes 
after the execution in question in the case of an Outlier Transaction. 
An Outlier Transaction will be 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 
Corporation will decline to act.

C. Review Procedures

    Under the proposed rule, an Officer will only have the authority to 
break trades or rule to let trades stand. An Officer will no longer be 
able to modify the terms of an individual transaction.
    The Exchange also proposes that an initial determination must be 
made generally within 30 minutes of receipt of the complaint, but in no 
case later than the start of Core Trading on the following trading day 
in order to provide a time frame in which ruling may be expected.
    The Exchange proposes that all appeal requests must be submitted 
via email. The Exchange also proposes more definite guidelines to 
ensure the expedient resolution of appeals by requiring the Exchange to 
review appeals as soon as practicable, but generally on the same day as 
the executions under review. Appeals received between 3 ET and the 
close of trading in the Late Trading Session will be made as soon as 
practicable, but in no case later than the trading day following the 
date of the execution under review.

D. System Disruption and Malfunctions

    The proposed rule provides that, in the event of a disruption or a 
malfunction, an Officer will rely on the proposed numerical guidelines 
in determining whether an execution is clearly erroneous. However, the 
Officer 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 states 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 Core Trading Session on the day following the date of the 
execution under review when extraordinary circumstances exist.

[[Page 49418]]

    In addition, under the proposed rule, an Officer will only have the 
authority to break trades or rule to let trades stand. An Officer will 
no longer be able to modify the terms of an individual transaction.

E. Officers Acting on Their Own Motion

    The Exchange proposes to grant Officers 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 will allow an Officer to review executions and rely on the 
Numerical Guidelines with respect to any potentially erroneous 
executions. In extraordinary circumstances an Officer may apply a lower 
Numerical Guideline if such action is necessary to maintain a fair and 
orderly market or protect investors and the public interest.

F. Trade Nullification for UTP Securities That Are Subject of Initial 
Public Offerings

    The proposed rule also modifies NYSE Arca's policy on trade 
nullification and for UTP securities that are subject to initial public 
offerings. Under the proposed rule, Officers must either declare an 
opening transaction null and void or decline to take action. An opening 
transaction can no longer be adjusted. Furthermore, the proposed rule 
requires that, in extraordinary circumstances, the reviewing Officer 
must take action by no later than the start of Core Trading on the day 
following the date of the execution under review.

III. Discussion and Commission Findings

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\8\ In 
particular, it is consistent with Section 6(b)(5) of the Act,\9\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to promote just and equitable principles of trade, 
to remove impediments to and perfect the mechanism of a free and open 
market and a national market system and, in general, to protect 
investors and the public interest, and not be designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers.
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    \8\ 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).
    \9\ 15 U.S.C. 78f(b)(5).
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    The Commission considers that, under ordinary circumstances, trades 
that are executed between parties should be honored. On rare occasions, 
the price of the executed trade indicates that an obvious error may 
exist, suggesting that it is unrealistic to expect that the parties to 
the trade had come to a meeting of the minds regarding the terms of the 
transaction and therefore that a clearly erroneous transaction may have 
taken place. In the Commission's view, the determination of whether a 
clearly erroneous trade has occurred should be based on specific and 
objective criteria and subject to specific and objective procedures.
    The Commission believes that the proposed rule change sets forth a 
specific methodology for reviewing potentially erroneous trades and 
should increase transparency and certainty for participants for 
transactions executed on NYSE Arca with respect to such trades. 
Specifically, the proposed rule change sets forth a specified procedure 
and imposes a timeframe for requesting reviews of potentially clearly 
erroneous transactions and for appealing clearly erroneous 
determinations. The proposed rule change also sets forth timeframes for 
NYSE Arca to make a ruling and to consider an appeal relating to trades 
that are claimed to be clearly erroneous. In addition, the Commission 
notes that the establishment of Numerical Guidelines, below which NYSE 
Arca will not break trades, sets forth a more specific and objective 
methodology that should provide greater certainty to market 
participants who are parties to trades that are claimed to be clearly 
erroneous. The Commission notes that the guidance for Unusual 
Circumstances provides the Exchange needed flexibility to respond to 
market conditions and to help facilitate the fair and orderly operation 
of the markets and protection of investors and the public interest. 
Further, the Commission believes that the use of enumerated Additional 
Factors provides the Officers with more transparent standards and 
procedures when they are called upon to determine whether a transaction 
that exceeds the Numerical Guidelines is clearly erroneous.
    The Commission notes that the joint ruling provision allowing the 
Exchange to use a different Reference Price and/or Numerical Guideline, 
determined based on a consensus among the relevant exchanges, is 
designed to increase the likelihood that that clearly erroneous 
execution rules will be consistently applied across markets, while also 
helping to facilitate the fair and orderly operation of the markets and 
protection of investors and the public interest.
    The proposed rule change provides that Officers of NYSE Arca acting 
on their own motion in the event of a system disruption or malfunction 
must rely on the Numerical Guidelines. In addition, the proposed rule 
change expands the ability of such Officers to act on their own motion, 
subject to the Numerical Guidelines, to any circumstance in which 
nullification of the transaction may be necessary for the maintenance 
of a fair and orderly market or the protection of investors and the 
public interest. In addition, the rule allows, in extraordinary 
circumstances, an Officer to 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. The Commission 
believes that these proposed changes set forth more specific and 
objective standards and procedures than under the current rule.
    Finally, the Commission notes that the proposed rule change 
eliminates the Exchange's ability to modify or adjust a clearly 
erroneous execution. Under the proposed rule, the Exchange must either 
uphold or nullify the execution based upon the determination of the 
Officer reviewing the execution. The Commission believes that it is 
reasonable for the Exchange to eliminate the subjectivity in 
determining the appropriate adjustment amount and that the proposed 
change is specific and objective.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1, including whether Amendment No. 1 
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-NYSEArca-2009-36 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-NYSEArca-2009-36. This 
file number should be included on the

[[Page 49419]]

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. 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-NYSEArca-2009-36 and 
should be submitted on or before October 19, 2009.

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

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 1, prior to the thirtieth day 
after publication for comment in the Federal Register.
    In Amendment No. 1, the Exchange clarifies that, throughout the 
rule, the definition of ``Officer'' encompasses only Officers of the 
Corporation or such other senior level employee designee of the 
Corporation. In addition, in the context of rulings in Unusual 
Circumstances, the Exchange added the protection of investors and the 
public interest as a basis for using a reference price other than the 
consolidated last sale.
    In the context of the Numerical Guidelines, the Exchange also 
clarifies that the execution time of the transaction under review 
determines whether the Numerical Guideline applied is Core Trading 
Session or Opening and Late Trading Session. In addition, the Exchange 
corrected a drafting error regarding the sales price at which certain 
numerical guidelines are applicable. The corrected language, which is 
reflected in the discussion above, now states that the proposed 
guidelines for sales greater than $0.00 up to and including $25.00 are 
10% for the Core Trading Session and 20% for the Opening and Late 
Trading Sessions, and the proposed guidelines for sales greater than 
$25.00 up to and including $50.00 are 5% for the Core Trading Session 
and 10% for Opening and Late Trading Sessions.
    In addition, as is reflected in the discussion above, the Exchange 
clarifies the percentage range at which volatility in the S & P 500 
Futures would trigger the Exchange's ability to double or triple the 
applicable Numerical Guidelines. The Exchange also clarifies that, the 
context of appeals, in no case will a CEE Panel include a person 
affiliated with a party to the trade in question.
    The changes proposed in Amendment No. 1, discussed above, seek to 
clarify the operation of the proposed rule and do not differ materially 
from the proposal as published in the Federal Register on May 5, 2009. 
Therefore, the Commission finds good cause, consistent with Section 
19(b)(2) of the Act,\10\ to approve the proposed rule change, as 
modified by Amendment No. 1, on an accelerated basis.
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    \10\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-NYSEArca-2009-36), as 
amended, be, and it hereby is, approved on an accelerated basis.
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    \11\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-23358 Filed 9-25-09; 8:45 am]
BILLING CODE 8010-01-P