[Federal Register Volume 75, Number 123 (Monday, June 28, 2010)]
[Notices]
[Pages 36765-36768]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-15546]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62339; File No. SR-EDGX-2010-03]
Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of
Filing of Proposed Rule Change, as Modified by Amendment No. 1, To
Amend EDGX Rule 11.13, Entitled ``Clearly Erroneous Executions''
June 21, 2010.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on June 17, 2010, EDGX Exchange, Inc. (the ``Exchange'' or EDGX)
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the Exchange. On June 18, 2010, the
Exchange submitted Amendment No. 1 to the proposed rule change. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is proposing to amend EDGX Rule 11.13, entitled
``Clearly Erroneous Executions.''
The text of the proposed rule change is available at the Exchange's
Web site at http://www.directedge.com, at the principal office of the
Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange 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 Exchange has prepared summaries, set forth in
Sections A, B, and C below, of the most significant parts 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 hereby submits this Amendment No. 1 to its rule
filing, SR-EDGX-2010-03, to replace and supersede the original filing
in its entirety.
The Exchange is proposing modifications to its Rule 11.13, entitled
Clearly Erroneous Executions. First, the Exchange proposes replacing
existing paragraph (c)(2) of Rule 11.13, entitled ``Unusual
Circumstances and Joint Market Rulings'' with a new paragraph, entitled
``Multi-Stock Events Involving Twenty or More Securities.'' Second, the
Exchange is proposing to replace existing paragraph (c)(4) of Rule
11.13, entitled ``Numerical Guidelines Applicable to Volatile Market
Opens'' with a new paragraph, entitled ``Individual Stock Trading
Pauses.'' Third, the Exchange is proposing changes to existing
paragraphs (f) and (g) of Rule 11.13 to eliminate the ability of the
Exchange to deviate from the
[[Page 36766]]
Numerical Guidelines contained in paragraph (c)(1) (other than under
limited circumstances set forth in paragraph (f)) when deciding which
transactions will be reviewed by the Exchange as potentially clearly
erroneous. Finally, the Exchange proposes modifications to paragraphs
(c)(1),(c)(3) and (e) of Rule 11.13 consistent with the proposed
changes to paragraphs (c)(2) and (c)(4). As proposed, the provisions of
paragraphs (c), (e)(2), (f), and (g) of Rule 11.13, as amended pursuant
to this filing, would be in effect during a pilot period set to end on
December 10, 2010. If the pilot is not either extended or approved
permanent by December 10, 2010, the prior versions of paragraphs (c),
(e)(2), (f), and (g) of Rule 11.13 would be in effect.
The Exchange is proposing the rule changes described below in
consultation with other markets and Commission staff to provide for
uniform treatment: (1) Of clearly erroneous execution reviews in Multi-
Stock Events involving twenty or more securities; and (2) in the event
transactions occur that result in the issuance of an individual stock
trading pause by the primary market and subsequent transactions that
occur before the trading pause is in effect on the Exchange. The
Exchange has also proposed additional changes to Rule 11.13 that reduce
the ability of the Exchange to deviate from the objective standards set
forth in the Rule. The proposed changes are described in further detail
below.
Revised Paragraph (c)(2) Related to Multi-Stock Events Involving Twenty
or More Securities
The Exchange proposes to eliminate the majority of existing
paragraph (c)(2), which provides flexibility to the Exchange to use
different Numerical Guidelines or Reference Prices in various ``Unusual
Circumstances.'' The Exchange proposes to replace this paragraph with
new language that would apply to Multi-Stock Events involving twenty or
more securities whose executions occurred within a period of five
minutes or less. The revised paragraph would retain language making
clear that during Multi-Stock Events involving twenty or more
securities the number of affected transactions may be such that
immediate finality is necessary to maintain a fair and orderly market
and to protect investors and the public interest. Accordingly, in such
circumstances, decisions made by the Exchange in consultation with
other markets could not be appealed. Further, as proposed, in
connection with reviews of Multi-Stock Events involving twenty or more
securities, the Exchange may use a Reference Price other than
consolidated last sale in its review of potentially clearly erroneous
executions. With the exception of those securities under review that
are subject to an individual stock trading pause as described in
proposed paragraph (c)(4), and to ensure consistent application across
market centers when proposed paragraph (c)(2) is invoked, the Exchange
will promptly coordinate with the other market centers to determine the
appropriate review period, which may be greater than the period of five
minutes or less that triggered application of proposed paragraph
(c)(2), as well as select one or more specific points in time prior to
the transactions in question and use transaction prices at or
immediately prior to the one or more specific points in time selected
as the Reference Price. The Exchange will nullify as clearly erroneous
all transactions that are at prices equal to or greater than 30% away
from the Reference Price in each affected security during the review
period selected by the Exchange and other markets consistent with the
proposed paragraph (c)(2).
Because the Exchange and other market centers are adopting a
different threshold and standards to handle large-scale market events,
which would include events occurring during times of high volatility at
the beginning of regular trading hours, the Exchange proposes deletion
of paragraph (c)(4) (``Numerical Guidelines Applicable to Volatile
Market Opens'') of the existing rule. The Exchange believes that this
provision is no longer necessary, and if maintained, could result in
extremely high Numerical Guidelines (up to 90%) in certain
circumstances.
Revised Paragraph (c)(4) Related to Individual Stock Trading Pauses
The primary listing markets for U.S. stocks recently amended their
rules so that they may, from time to time, issue a trading pause for an
individual security if the price of such security moves 10% or more
from a sale in a preceding five-minute period. In this regard, the
Exchange recently amended its rules to pause trading in an individual
stock when the primary listing market for such stock issues a trading
pause in any Circuit Breaker Securities, as defined in Interpretation
and Policy .05 of Rule 11.14.\3\ As described above, the Exchange is
proposing to eliminate existing paragraph (c)(4) (``Numerical
Guidelines Applicable to Volatile Market Opens''). The Exchange
proposes adopting a rule, numbered as (c)(4) following such
elimination, which will provide for uniform treatment of clearly
erroneous execution reviews in the event transactions occur that result
in the issuance of an individual stock trading pause by the primary
listing market and subsequent transactions that occur before the
trading pause is in effect on the Exchange. The proposed rule change is
necessary to provide greater certainty of the clearly erroneous
Reference Price for transactions that trigger a trading pause (the
``Trigger Trade'') and subsequent transactions occurring between the
time of the Trigger Trade and the time the trading pause message is
received by the Exchange from the single plan processor responsible for
consolidation and dissemination of information for the security and put
into effect on the Exchange, especially under highly volatile and
active market conditions.
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\3\ See EDGX Rule 11.14; see also Securities Exchange Act
Release No. 62252 (June 10, 2010), 75 FR 34186 (June 16, 2010) (SR-
EDGX-2010-01).
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The Exchange proposes to revise paragraph (c)(4) of EDGX Rule 11.13
to allow the Exchange to use the price that triggered a trading pause
in an individual stock (the ``Trading Pause Trigger Price'') as the
Reference Price for clearly erroneous execution reviews of a Trigger
Trade and transactions that occur immediately after a Trigger Trade but
before a trading pause is in effect on the Exchange. As proposed, the
phrase ``Trading Pause Trigger Price'' shall mean the price that
triggered a trading pause in any Circuit Breaker Securities as defined
in Interpretation and Policy .05 of Rule 11.14. The Trading Pause
Trigger Price reflects a price calculated by the primary listing market
over a rolling five-minute period and may differ from the execution
price of a transaction that triggered a trading pause. The Exchange
will rely on the primary listing market that issued an individual stock
trading pause to determine and communicate the Trading Pause Trigger
Price for such stock. The Exchange proposes to make clear in the text
that the proposed standards in paragraph (c)(4) apply regardless of
whether the security at issue is part of a Multi-Stock Event involving
five or more securities as described in proposed paragraphs (c)(1) and
(c)(2).
As proposed, the Numerical Guidelines set forth in EDGX Rule
11.13(c)(1), other than those Numerical Guidelines applicable to Multi-
Stock Events, would apply to reviews of Trigger Trades and subsequent
transactions. The Exchange proposes to
[[Page 36767]]
review, on its own motion pursuant to paragraph (g) of the Rule, all
transactions that trigger a trading pause and subsequent transactions
occurring before the trading pause is in effect on the Exchange. The
Exchange has proposed to limit such reviews to reviews of transactions
that executed at a price lower than the Trading Pause Trigger Price in
the event of a price decline and higher than the Trading Pause Trigger
Price in the event of a price rise. Because the proposed rules for
trading pauses would only apply within Regular Trading Hours,\4\ an
execution would be reviewed and nullified as clearly erroneous if it
exceeds the following thresholds:
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\4\ Regular Trading Hours are defined in EDGX Rule 1.5 as the
time between 9:30 a.m. and 4 p.m. Eastern Time. According to rules
of the primary listing markets, an individual stock trading pause
can be issued based on a Trigger Trade that occurs at any time
between 9:45 a.m. and 3:35 p.m. Eastern Time. See NASDAQ Rule
4120(a)(11), NYSE Rule 80C, and NYSE Arca Rule 7.11.
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Numerical guidelines (subject
transaction's % difference
Reference price or product from the trading pause trigger
price)
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Greater than $0.00 up to and including 10
$25.00.
Greater than $25.00 up to and including 5
$50.00.
Greater than $50.00.................... 3
Leveraged ETF/ETN securities........... Regular Trading Hours Numerical
Guidelines multiplied by the
leverage multiplier (i.e.,
2x).
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Revisions to Paragraphs (f) and (g)
Consistent with other proposals made in this filing, the Exchange
proposes modifying paragraphs (f) and (g) to eliminate the ability of
an Exchange official to deviate from the Numerical Guidelines contained
in the Rule other than under very limited circumstances set forth in
paragraph (f).
Current paragraph (f) provides an Officer of the Exchange or other
senior level employee designee the ability on his or her own motion, to
review and rule on executions that result from ``any disruption or a
malfunction in the use or operation of any electronic communications
and trading facilities of the Exchange, or extraordinary market
conditions or other circumstances in which the nullification of
transactions may be necessary for the maintenance of a fair and orderly
market or the protection of investors and the public interest exist.''
Without modification, the language ``extraordinary market conditions or
other circumstances* * *'' would leave the Exchange with broad
discretion to deviate from the Numerical Guidelines set forth in
paragraph (c)(1). Thus, the Exchange proposes narrowing the scope of
paragraph (f) so that it only permits the Exchange to nullify
transactions consistent with that paragraph (including at a lower
Numerical Guideline) if there is a disruption or malfunction in the
operation of the Exchange's system. For the same reason, the Exchange
proposes eliminating the words ``use or'' from the language in
paragraph (f) to make clear that the provision only applies to a
disruption or malfunction of the Exchange's system (and not of an
Exchange user's systems).
Paragraph (g) gives an Officer of the Exchange or other senior
level employee designee the ability on his or her own motion to review
transactions as potentially clearly erroneous. Consistent with the goal
of achieving more objective and standard results, the Exchange proposes
deleting language in existing paragraph (g) that would allow the
Exchange to deviate from the Numerical Guidelines contained in
paragraph (c)(1). In addition, the Exchange proposes to make clear that
any Officer of the Exchange or other senior level employee reviewing
transactions on his or her own motion must follow the guidelines set
forth in proposed paragraph (c)(4), if applicable. Accordingly, the
Exchange proposes to modify paragraph (g) to state that an Officer must
rely on paragraphs (c)(1)-(4) of Rule 11.13 when reviewing transactions
on his or her own motion.
Additional Conforming Revisions to Paragraphs (c)(1),(c)(3), and (e)
Based on proposed paragraph (c)(2), the Exchange has proposed
certain conforming changes to paragraphs (c)(1), (c)(3), and (e) of the
existing Rule, as described below.
Under current EDGX Rule 11.13, a transaction may be found to be
clearly erroneous only if the price of the transaction to buy (sell)
that is the subject of the complaint is greater than (less than) the
Reference Price by an amount that equals or exceeds the Numerical
Guidelines set forth in paragraph (c)(1) of the Rule. The ``Reference
Price'' is currently defined as ``the consolidated last sale
immediately prior to the execution(s) under review except for in
Unusual Circumstances as described in paragraph (c)(2)'' of EDGX Rule
11.13. The Exchange proposes modifying paragraph (c)(1) consistent with
the changes described above such that the Exchange shall use the
consolidated last sale immediately prior to the execution(s) under
review as the Reference Price except for: (A) Multi-Stock Events
involving twenty or more securities, as described in proposed paragraph
(c)(2); (B) transactions not involving a Multi-Stock Event as described
in proposed paragraph (c)(2) that trigger a trading pause and
subsequent transactions, as described in proposed paragraph (c)(4), in
which case the Reference Price shall be determined in accordance with
that paragraph (c)(4); and (C) in other circumstances, such as, for
example, relevant news impacting a security or securities, periods of
extreme market volatility, sustained illiquidity, or widespread system
issues, where use of a different Reference Price is necessary for the
maintenance of a fair and orderly market and the protection of
investors and the public interest. The Exchange also proposes modifying
paragraph (c)(1) to reduce uncertainty as to the applicability of the
Numerical Guidelines, by requiring a finding that an execution was
clearly erroneous if such execution exceeds the Numerical Guidelines,
subject only to the Additional Factors included in paragraph (c)(3).
Moreover, the Exchange proposes revising the existing description for
Multi-Stock Events that is contained on the Numerical Guidelines chart
to make clear that different Numerical Guidelines apply for Multi-Stock
Events involving five or more, but less than twenty, securities whose
executions occurred within a period of five minutes or less. In
addition, the Exchange proposes adding to the Numerical Guidelines
chart a row that contains the Numerical Guidelines (30%) for Multi-
Stock Events involving twenty or more securities whose executions
occurred within a period of five minutes or less.
The Exchange proposes clarifying paragraph (c)(3) to make clear
that the additional factors set forth in that paragraph are not
intended to provide
[[Page 36768]]
any discretion to an Exchange official to deviate from the guidelines
that apply to Multi-Stock Events or to transactions in securities
subject to individual stock trading pauses.
Finally, the Exchange proposes amending paragraph (e)(2), related
to appeals of clearly erroneous execution decisions by the Exchange, to
preserve non-appealability of all joint rulings between the Exchange
and one or more other market centers. The Exchange believes that
certainty and consistency is critical to reviews of related executions
that span multiple market centers. Accordingly, although the Exchange
has proposed deletion of such language from existing paragraph (c)(3),
the Exchange proposes adding such language back in to paragraph (e)(2)
to make clear that joint market rulings are not appealable.
2. Statutory Basis
Approval of the rule change proposed in this submission is
consistent with the requirements of the Act and the rules and
regulations thereunder that are applicable to a national securities
exchange, and, in particular, with the requirements of Section 6(b) of
the Act.\5\ In particular, the proposed change is consistent with
Section 6(b)(5) of the Act,\6\ because it would 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,
in general, protect investors and the public interest. The proposed
rule change is also designed to support the principles of Section
11A(a)(1) \7\ of the Act in that it seeks to assure fair competition
among brokers and dealers and among exchange markets. The Exchange
believes that the proposed rule meets these requirements in that it
promotes transparency and uniformity across markets concerning reviews
of potentially clearly erroneous executions in various contexts,
including reviews in the context of a Multi-Stock Event involving
twenty or more securities and reviews resulting from a Trigger Trade
and any executions occurring immediately after a Trigger Trade but
before a trading pause is in effect on the Exchange. Further, the
Exchange believes that the proposed changes enhance the objectivity of
decisions made by the Exchange with respect to clearly erroneous
executions.
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\5\ 15 U.S.C. 78f(b).
\6\ 15 U.S.C. 78f(b)(5).
\7\ 15 U.S.C. 78k-1(a)(1).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change imposes
any burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
A. By order approve such proposed rule change, or
B. Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. 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-EDGX-2010-03 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-EDGX-2010-03. 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 Web site 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
a.m. and 3 p.m. 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-EDGX-2010-03 and should be
submitted on or before July 19, 2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\8\
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\8\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-15546 Filed 6-25-10; 8:45 am]
BILLING CODE 8010-01-P