[Federal Register Volume 76, Number 159 (Wednesday, August 17, 2011)]
[Notices]
[Pages 51082-51084]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-20909]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65108; File No. SR-ISE-2011-53]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change To Amend ISE Rule 2128

August 11, 2011.
    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 August 10, 2011, the International Securities Exchange, LLC 
(the ``Exchange'' or the ``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 self-regulatory organization. The Commission is publishing this 
notice to solicit comments on the proposed rule change 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 proposes to amend Rule 2128, governing clearly 
erroneous executions, 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 on the Exchange's 
Internet Web site at http://www.ise.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 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
Background
    The Exchanges \3\ and FINRA, in consultation with the Securities 
and Exchange Commission (``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 extraordinary market volatility as a pilot in 
S&P 500[supreg] 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'').
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    \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 NASDAQ OMX PHLX LLC.
    \4\ See 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\ See 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).
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    As part of the changes to the clearly erroneous process under Rule 
2128, ISE replaced existing Rule 2128(c)(4) with all new text to 
provide clarity in the clearly erroneous process when a Pause Pilot 
trading pause is triggered. Pursuant to Rule 2128(c)(4), 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 
2128(c)(1).\7\ The Reference Price, for purposes of Rule 11.13(c)(4) 
[sic], 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 ISE would be broken by the Exchange pursuant to 
Rule 2128(c)(4) if the transaction occurred at either three, five or 
ten percent above the Trading Pause Trigger Price.\8\
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    \7\ Pursuant to Rule 2128(c)(1), 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 2128(c)(4).
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    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 National Market System (``NMS'') stocks (``Phase 
III Securities'').\9\ The new pilot rules,

[[Page 51083]]

which were 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.
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    \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).
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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 Rule 
2128(c)(1)-(3), 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.
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    \10\ Id.
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    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 itself 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 2128(c)(1), would not be able to avail itself 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. ISE believes that this would be an 
inequitable result and an arbitrary application of the clearly 
erroneous process. Specifically, ISE 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 
Rule 2128(c)(1)-(3).
    Applying the clearly erroneous process under Rule 2128(c)(1)-(3) to 
the Phase III Securities would allow ISE 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 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 to Rule 2128(c)(1). Should trading in that same stock 
trigger a trading pause at a 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 2128(c)(1) 
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 would be 
provided such relief. ISE 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. ISE 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, ISE is proposing to amend Rule 2128(c)(1)-(4) to 
specify that Rule 2128(c)(4) applies only to the current securities of 
Pause Pilot, and not to Phase III Securities.\11\
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    \11\ ISE notes that the Exchanges are filing similar proposals 
to make the changes proposed herein.
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2. Statutory Basis
    The statutory basis for the proposed rule change is Section 6(b)(5) 
of 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. ISE 
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. ISE notes that the 
changes proposed herein will in no way interfere with the operation of 
the Pause Pilot process, as amended.
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    \12\ 15 U.S.C. 78f(b)(5).
    \13\ 15 U.S.C. 78k-1(a)(1).
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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

[[Page 51084]]

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 \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\
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    \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 is waiving the five day written notice 
requirement in this case. Therefore, 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).
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    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-ISE-2011-53 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-2011-53. 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 ISE. 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-2011-53 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\
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    \17\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-20909 Filed 8-16-11; 8:45 am]
BILLING CODE 8011-01-P