[Federal Register Volume 76, Number 159 (Wednesday, August 17, 2011)]
[Notices]
[Pages 51079-51082]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-20907]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65106; File No. SR-Phlx-2011-114]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend the 
Clearly Erroneous Rule in Light of Changes to the Single Stock Trading 
Pause Process

August 11, 2011.
    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 August 8, 2011, NASDAQ OMX PHLX LLC (``PHLX''), 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 PHLX. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

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

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

    PHLX proposes to amend Rule 3312, governing clearly erroneous 
executions on the NASDAQ OMX PSX system, so that the rule will continue 
to operate in the same manner after changes to the single stock trading 
pause process are effective.
    The text of the proposed rule change is available from PHLX's Web 
site at http://nasdaqomxphlx.cchwallstreet.com/NASDAQOMXPHLX/Filings/, 
at PHLX's principal office, 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, PHLX 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. PHLX 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
Background
    The Exchanges \3\ and FINRA, in consultation with the Commission, 
have made changes to their respective rules in a concerted effort to 
strengthen the markets after the severe market disruption that occurred 
on May 6, 2010. One such effort by the Exchanges and FINRA was to adopt 
a uniform trading pause process during periods of

[[Page 51080]]

extraordinary market volatility as a pilot in S&P 500 Index stocks 
(``Pause Pilot''), approved by the Commission on June 10, 2010.\4\ On 
September 10, 2010, the Commission approved the Exchanges' and FINRA's 
proposals to add the securities included in the Russell 1000 Index and 
specified ETPs to the Pause Pilot.\5\ On September 10, 2010, the 
Commission also approved changes proposed by the Exchanges to amend 
certain of their respective rules to set forth clearer standards and 
curtail their discretion with respect to breaking erroneous trades.\6\ 
The changes, among other things, provided uniform treatment of clearly 
erroneous execution reviews in the event of transactions that result in 
the issuance of an individual stock trading pause pursuant to the Pause 
Pilot on the listing market and those that occur up to the time the 
trading pause message is received by the other markets from the single 
plan processor responsible for consolidation and dissemination of 
information for the security (``Latency Trades'').
---------------------------------------------------------------------------

    \3\ For purposes of this filing, the term ``Exchanges'' refers 
collectively to BATS Exchange, Inc., BATS Y-Exchange, Inc., NASDAQ 
OMX BX, Inc., Chicago Board Options Exchange, Inc., Chicago Stock 
Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., 
International Securities Exchange LLC, The NASDAQ Stock Market LLC, 
New York Stock Exchange LLC, NYSE Amex LLC, NYSE Arca, Inc., 
National Stock Exchange, Inc., and NASDAX [sic] OMX PHLX LLC.
    \4\ Securities Exchange Act Release Nos. 62252 (June 10, 2010), 
75 FR 34186 (June 16, 2010) (File Nos. SR-BATS-2010-014; SR-EDGA-
2010-01; SR-EDGX-2010-01; SR-BX-2010-037; SR-ISE-2010-48; SR-NYSE-
2010-39; SR-NYSEAmex- 2010-46; SR-NYSEArca-2010-41; SR-NASDAQ- 2010-
061; SR-CHX-2010-10; SR-NSX-2010-05; and SR-CBOE-2010-047); 62251 
(June 10, 2010), 75 FR 34183 (June 16, 2010) (SR-FINRA-2010- 025).
    \5\ See e.g., Securities Exchange Act Release Nos. 62884 
(September 10, 2010), 75 FR 56618 (September 16, 2010) (File Nos. 
SR-BATS-2010-018; SR-BX-2010-044; SR-CBOE-2010-065; SR-CHX-2010-14; 
SR-EDGA-2010-05; SR-EDGX-2010-05; SR-ISE-2010-66; SR-NASDAQ-2010-
079; SR-NYSE-2010-49; SR-NYSEAmex-2010-63; SR-NYSEArca-2010-61; and 
SR-NSX-2010-08); and Securities Exchange Act Release No. 62883 
(September 10, 2010), 75 FR 56608 (September 16, 2010) (SR-FINRA-
2010-033).
    \6\ Securities Exchange Act Release No. 62886 (September 16 
[sic], 2010), 75 FR 56613 (September 16, 2010) (File Nos. SR-BATS-
2010-016; SR-BX-2010-040; SR-CBOE-2010-056; SR-CHX-2010-13; SR-EDGA-
2010-03; SR-EDGX-2010-03; SR-ISE-2010-62; SR-NASDAQ-2010-076; SR-
NSX-2010-07; SR-NYSE-2010-47; SR-NYSEAmex-2010-60; and SR-NYSEArca-
2010-58).
---------------------------------------------------------------------------

    As part of the changes to the clearly erroneous process under Rule 
3312, PHLX replaced existing Rule 3312(a)(2)(C)(iv) with all new text 
to provide clarity in the clearly erroneous process when a Pause Pilot 
trading pause is triggered. Pursuant to Rule 3312(a)(2)(C)(iv), Latency 
Trades will be broken by the exchange if they exceed the applicable 
percentage from the Reference Price, as noted in the table found under 
Rule 3312(a)(2)(C)(i).\7\ The Reference Price, for purposes of Rule 
3312(a)(2)(C)(iv), is the price that triggered a trading pause pursuant 
to the Pause Pilot (the ``Trading Pause Trigger Price''). As such, 
Latency Trades that occur on PHLX would be broken by the exchange 
pursuant to Rule 3312(a)(2)(C)(iv) if the transaction occurred at 
either three, five or ten percent above the Trading Pause Trigger 
Price.\8\
---------------------------------------------------------------------------

    \7\ Pursuant to Rule 3312(a)(2)(C)(i), a security with a 
Reference Price of greater than zero and up to and including $25 is 
subject to a 10% threshold; a security with a Reference Price of 
greater than $25 and up to and including $50 is subject to a 5% 
threshold; and a security with a Reference Price of greater than $50 
is subject to a 3% threshold.
    \8\ Rule 3312(a)(2)(C)(iv).
---------------------------------------------------------------------------

    On June 23, 2011, the Commission approved a joint proposal to 
expand the respective Pause Pilot rules of the Exchanges and FINRA to 
include all remaining NMS stocks (``Phase III Securities'').\9\ The new 
pilot rules, which will be implemented on August 8, 2011, not only 
expand the application of the Pause Pilot, but also apply larger 
percentage moves that trigger a pause to the Phase III Securities. 
Specifically, the rules of the listing markets were amended so that a 
pause in a Phase III Security with a closing price on the previous 
trading day of $1 or more is triggered by a 30 percent price move 
within a five minute period. A pause in a Phase III Security with 
closing price on the previous trading day of less than $1 is triggered 
by a 50 percent price move within a five minute period. If no prior day 
closing price is available, the last sale reported to the Consolidated 
Tape on the previous trading day is used.
---------------------------------------------------------------------------

    \9\ Securities Exchange Act Release No. 64735 (June 23, 2011), 
76 FR 38243 (June 29, 2011) (File Nos. SR-BATS-2011-016; SR-BYX-
2011-011; SR-BX-2011-025; SR-CBOE-2011-049; SR-CHX-2011-09; SR-EDGA-
2011-15; SR-EDGX-2011-14; SR-FINRA-2011-023; SR-ISE-2011-028; SR-
NASDAQ-2011-067; SR-NYSE-2011-21; SR-NYSEAmex-2011-32; SR-NYSEArca-
2011-26; SR-NSX-2011-06; SR-Phlx-2011-64).
---------------------------------------------------------------------------

The Issue
    The recently-approved changes to the Pause Pilot will have the 
unintended effect of removing the Phase III Securities from the normal 
clearly erroneous process and potentially result in unfair outcomes in 
the face of severe volatility in such securities. Phase III Securities 
are currently subject to the clearly erroneous process under Rules 
3312(a)(2)(C)(i)-(iii), which apply to all securities except the 
current Pause Pilot securities subject to a pause. For purposes of 
transactions in securities not involving Pause Pilot securities, or 
transactions involving Pause Pilot securities that occur when there is 
not a pause pursuant to the Pause Pilot, the Reference Price is the 
consolidated last sale price immediately prior to the execution(s) 
under review, subject to certain exceptions.\10\ As noted above, the 
Trading Pause Trigger Price is used as the Reference Price when a Pause 
Pilot pause is in effect. As a consequence, under the current rules a 
Latency Trade is subject to the clearly erroneous thresholds based on 
the Trading Pause Trigger Price, which represents a ten percent or 
greater move in the transacted price of the security in a five minute 
period.
---------------------------------------------------------------------------

    \10\ Id.
---------------------------------------------------------------------------

    Under the new Pause Pilot rules, a Latency Trade in a Phase III 
Security occurs only after either a 30 or 50 percent (or greater) move 
in the transacted price of the security in a five minute period. As a 
result, a member firm that trades in a Phase III Security that triggers 
a clearly erroneous threshold of three, five or ten percent from the 
Reference Price, yet falls below the Pause Pilot trigger of either 30 
or 50 percent, would be able to avail themselves of a clearly erroneous 
review. A similarly situated member firm that transacts in the same 
security as a Latency Trade at a price equal to or greater than the 
Phase III Security thresholds, yet less than the clearly erroneous 
thresholds under Rule 3312(a)(2)(C)(i), would not be able to avail 
themselves of the clearly erroneous process. Another member firm that 
transacts in the same security as a Latency Trade that exceeds three, 
five or ten percent from the Trading Pause Trigger Price would 
automatically receive clearly erroneous relief. PHLX believes that this 
would be an inequitable result and an arbitrary application of the 
clearly erroneous process. Specifically, PHLX believes that, since the 
30 and 50 percent triggers of the Pause Pilot are substantially greater 
than the 10 percent threshold of the original Pause Pilot, the Phase 
III Securities should remain under the current clearly erroneous 
process of Rules 3312(a)(2)(C)(i)-(iii).
    Applying the clearly erroneous process under Rules 
3312(a)(2)(C)(i)-(iii) to the Phase III Securities would allow PHLX to 
review all transactions that exceed the normal clearly erroneous 
thresholds and Reference Price, and, importantly, avoid arbitrary 
selection of ``winners'' and ``losers'' in the face of severe volatile 
moves in a security of 30 or 50 percent over a five minute period. For 
example, A [sic] member firm that trades in a Phase III Security that 
triggers a clearly erroneous threshold of three, five or ten percent, 
yet falls below the Pause Pilot trigger threshold trading at 29 percent 
from the prior day's closing price, would be potentially entitled to a 
clearly erroneous break pursuant Rule 3312(a)(2)(C)(i). Should trading 
in that same stock trigger a trading pause at a

[[Page 51081]]

price of 30 or 50 percent greater than the prior day's close, the 
member firm would not be entitled to a clearly erroneous trade break 
unless that trade exceeded three, five or ten percent beyond the price 
that triggered the pause. This scenario causes an inequity among a 
group of member firms that have transactions in the Phase III 
Securities falling between the three, five and ten percent thresholds 
from the Reference Price under the normal Rule 3312(a)(2)(C)(i) clearly 
erroneous process and the Pause Pilot clearly erroneous triggers of 
three, five or ten percent away from the Trading Pause Trigger Price. 
Such member firms would not be provided relief under the clearly 
erroneous rules merely due to the imposition of a Pause Pilot halt, 
notwithstanding that other member firms with transactions that occur at 
the same rolling five minute percentage difference. PHLX believes a 
better outcome is to afford all members transacting in Phase III 
Securities the opportunity of having such trades reviewed.
Summary
    The expansion of the Pause Pilot to the Phase III Securities will 
have the unintended consequence of setting the point at which a clearly 
erroneous transaction occurs once a Pause Pilot pause is initiated far 
beyond the triggers applied prior to the expansion, which will, in 
turn, prevent certain market participants from availing themselves of 
the clearly erroneous rules, notwithstanding that other similarly 
situated participants are able to do so. PHLX believes that this would 
be an arbitrary application of the clearly erroneous process in a 
manner that is unfair and not consistent with the spirit and purpose of 
the rule. Accordingly, PHLX is proposing to amend Rules 
3312(a)(2)(C)(i)-(iv) to specify that Rule 3312(a)(2)(C)(iv) applies 
only to the current securities of Pause Pilot, and not to Phase III 
Securities.\11\
---------------------------------------------------------------------------

    \11\ PHLX notes that the Exchanges are filing similar proposals 
to make the changes proposed herein.
---------------------------------------------------------------------------

2. Statutory Basis
    The statutory basis for the proposed rule change is Section 6(b)(5) 
of the Securities Exchange Act of 1934 (the ``Act''),\12\ which 
requires the rules of an exchange to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system and, in general, 
to protect investors and the public interest. The proposed rule change 
also is designed to support the principles of Section 11A(a)(1)\13\ of 
the Act in that it seeks to assure fair competition among brokers and 
dealers and among exchange markets. PHLX believes that the proposed 
rule meets these requirements in that it promotes transparency and 
uniformity across markets concerning decisions to break erroneous 
trades, yet also ensures fair application of the process so that 
similarly situated member firms are provided the same opportunity of a 
clearly erroneous review. PHLX notes that the changes proposed herein 
will in no way interfere with the operation of the Pause Pilot process, 
as amended.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78f(b)(5).
    \13\ 15 U.S.C. 78k-1(a)(1).
---------------------------------------------------------------------------

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

    PHLX does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

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 \14\ and Rule 19b-
4(f)(6)(iii) thereunder.\15\ The Exchange has asked the Commission to 
waive the 30-day operative delay so that the proposal may become 
operative immediately upon filing. The Commission believes that waiving 
the 30-day operative delay is consistent with the protection of 
investors and the public interest because such waiver will allow the 
clearly erroneous rules to continue to operate as they did prior to the 
effectiveness of the Pause Pilot expansion to Phase III Securities so 
that similarly situated member firms are provided the same opportunity 
of a clearly erroneous review. Accordingly, the Commission waives the 
30-day operative delay requirement and designates the proposed rule 
change as operative upon filing with the Commission.\16\
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-
4(f)(6)(iii) requires that a self-regulatory organization submit to 
the Commission written notice of its intent to file the proposed 
rule change, along with a brief description and text of the proposed 
rule change, at least five business days prior to the filing of the 
proposed rule change, or such shorter time as designated by the 
Commission. The Commission notes that the Exchange has satisfied 
this requirement.
    \16\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend 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.

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-Phlx-2011-114 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-Phlx-2011-114. 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

[[Page 51082]]

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 PHLX. 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-Phlx-2011-114 and should be 
submitted on or before September 7, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
---------------------------------------------------------------------------

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

Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-20907 Filed 8-16-11; 8:45 am]
BILLING CODE 8011-01-P