[Federal Register Volume 76, Number 192 (Tuesday, October 4, 2011)]
[Notices]
[Pages 61419-61422]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-25515]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-65434; File No. SR-Phlx-2011-129]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by NASDAQ OMX PHLX LLC Relating to Trading Halts Due to
Extraordinary Market Volatility
September 28, 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 September 27, 2011, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'')
filed with the Securities and Exchange Commission (``SEC'' or
``Commission'') the proposed rule change as described in Items I and
II, below, which Items have been prepared by the Exchange. 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 Exchange Rule 133 to revise the
methodology for determining when to halt trading in all stocks due to
extraordinary market volatility. The proposal is made in conjunction
with all national securities exchanges and the Financial Industry
Regulatory Authority (``FINRA'').
The text of the proposed rule change is available on the Exchange's
Web site at http://www.nasdaqtrader.com/micro.aspx?id=PHLXRulefilings,
at the principal office of the Exchange, at the Commission's Public
Reference Room, and at the Commission's Web site at http://www.sec.gov.
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 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 Exchange Rule 133 to revise the
current methodology for determining when to halt trading in all stocks
due to extraordinary market volatility. The Exchange is proposing this
rule change in consultation with other equity, options, and futures
markets, the Financial Industry Regulatory Authority, Inc. (``FINRA''),
and staffs of the Commission and the Commodity Futures Trading
Commission.
Since May 6, 2010, when the markets experienced excessive
volatility in an abbreviated time period, i.e., the ``flash crash,''
the exchanges and FINRA have implemented market-wide measures designed
to restore investor confidence by reducing the potential for excessive
market volatility. Among the measures adopted include pilot plans for
stock-by-stock trading pauses \3\ and related changes to the clearly
erroneous execution rules.\4\ In addition, on April 5, 2011, the
equities exchanges and FINRA filed a plan pursuant to Rule 608 of
Regulation NMS to address extraordinary market volatility (the ``Limit
Up-Limit Down Plan'').\5\ As proposed, the Limit Up-Limit Down Plan is
designed to prevent trades in individual NMS stocks from occurring
outside specified price bands.
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\3\ PHLX Rule 3120.
\4\ PHLX Rule 3312.
\5\ See Securities Exchange Act Release No. 64547 (May 25,
2011), 76 FR 31647 (June 1, 2011).
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The Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues
(``Committee'') has recommended that, in addition to the initiatives
already adopted or proposed, the markets should consider reforming the
existing market-wide circuit breakers. Among other things, the
Committee noted that the interrelatedness of today's highly electronic
markets warrants the need to review the present operation of the
system-wide circuit breakers now in place. Specifically, the Committee
recommended that the markets consider replacing the Dow Jones
Industrial Average (``DJIA'') with the S&P 500[reg] Index (``S&P
500''), revising the 10%, 20%, and 30% decline percentages, reducing
the length of trading halts, and allowing halts to be triggered up to
3:30 p.m.\6\
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\6\ See Summary Report of the Committee, ``Recommendations
Regarding Regulatory Responses to the Market Events of May 6, 2010''
(Feb, 18, 2011).
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[[Page 61420]]
The exchanges and FINRA have taken into consideration the
Committee's recommendations, and with some modifications, have proposed
changes to market-wide circuit breakers that the Exchange believes will
provide for a more meaningful measure in today's faster, more
electronic markets, of when to halt stocks on a market-wide basis as a
result of rapid market declines.
Background
The Exchange adopted Rule 133 in October 1988 as part of an effort
by the securities and futures markets to implement a coordinated means
to address potentially destabilizing market volatility.\7\ Rule 133
provides for market-wide halts in trading at specified levels in order
to promote stability and investor confidence during a period of
significant stress. As the Commission noted in its approval order, Rule
133 was intended to enable market participants to establish an
equilibrium between buying and selling interest and to ensure that
market participants have an opportunity to become aware of and respond
to significant price movements. Importantly, the market-wide circuit
breakers were not intended to prevent markets from adjusting to new
price levels; rather, they provide for a speed bump for extremely rapid
market declines.\8\
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\7\ See Securities Exchange Act Release No. 26198 (Oct. 19,
1988).
\8\ Id.
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In its current form,\9\ the rule provides for Level 1, 2, and 3
declines and specified trading halts following such declines. The
values of Levels 1, 2 and 3 are calculated at the beginning of each
calendar quarter, using 10%, 20% and 30%, respectively, of the average
closing value of the DJIA for the month prior to the beginning of the
quarter. Each percentage calculation is rounded to the nearest fifty
points to create the Levels' trigger points. The Exchange disseminates
the new trigger levels quarterly to the media and via an Information
Memo and is [sic] available on the Exchange's website. The values then
remain in effect until the next quarterly calculation, notwithstanding
whether the DJIA has moved and a Level 1, 2, or 3 decline is no longer
equal to an actual 10%, 20%, or 30% decline in the most recent closing
value of the DJIA.
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\9\ The rule was last amended in 1998, when declines based on
specified point drops in the DJIA were replaced with the current
methodology of using a percentage decline that is recalculated
quarterly. See Securities Exchange Act Release No. 39846 (April 9,
1998), 63 FR 18477 (April 15, 1998) (SR-NYSE-98-06, SR-Amex-98-09,
SR-BSE-98-06, SR-CHX-98-08, SR-NASD-98-27, and SR-Phlx-98-15).
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Once a marketwide circuit breaker is in effect, trading in all
stocks halt for the time periods specified below:
Level 1 Halt
Anytime before 2 p.m.--one hour;
at or after 2 p.m. but before 2:30 p.m.--30 minutes;
at or after 2:30 p.m.--trading shall continue, unless there is a
Level 2 Halt.
Level 2 Halt
Anytime before 1 p.m.--two hours;
at or after 1 p.m. but before 2 p.m.--one hour;
at or after 2 p.m.--trading shall halt and not resume for the rest
of the day.
Level 3 Halt
At any time--trading shall halt and not resume for the rest of the
day.
Unless stocks are halted for the remainder of the trading day,
price indications are disseminated during a Rule 80B trading halt for
stocks that comprise the DJIA.
Proposed Amendments
As noted above, the Exchange, other equities, options, and futures
markets, and FINRA propose to amend the market-wide circuit breakers to
take into consideration the recommendations of the Committee, and to
provide for more meaningful measures in today's markets of when to halt
trading in all stocks. Accordingly, the Exchange proposes to amend Rule
133 to create the following standards: (i) Replace the DJIA with the
S&P 500; (ii) replace the quarterly calendar recalculation of Rule 133
triggers with daily recalculations; (iii) replace the 10%, 20%, and 30%
market decline percentages with 7%, 13%, and 20% market decline
percentages; (iv) modify the length of the trading halts associated
with each market decline level; and (v) modify the times when a trading
halt may be triggered. The Exchange believes that these proposed
amendments update the rule to reflect today's high-speed, highly
electronic trading market while still ensuring that market participants
have an opportunity to become aware of and respond to significant price
movements.
First, the Exchange proposes to replace the DJIA with the S&P 500.
The Exchange believes that because the S&P 500 is based on the trading
prices of 500 stocks, as compared to the 30 stocks that comprise the
DJIA, the S&P 500 represents a broader base of securities against which
to measure whether extraordinary market-wide volatility is occurring.
In addition, as noted by the Committee, using an index that correlates
closely with derivative products, such as the E-Mini and SPY, will
allow for a better cross-market measure of market volatility.
Second, the Exchange proposes to change the recalculation of the
trigger values from once every calendar quarter to daily. The Exchange
believes that updating the trigger values daily will better reflect
current market conditions. In particular, a daily recalculation will
ensure that the percentage drop triggers relate to current market
conditions, and are not compared to what may be stale market
conditions. As noted in the proposed rule, the daily calculations of
the trigger values will be published before the trading day begins.\10\
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\10\ The Exchange and other markets will advise via Trader
Update the specific methodology for publishing the daily
calculations, as well as the manner by which the markets will halt
trading in all stocks should a Rule 133 trading halt be triggered.
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Third, the Exchange proposes to decrease the current Level 1, 2,
and 3 declines of 10%, 20%, and 30% to a Level 1 Market Decline of 7%,
a Level 2 Market Decline of 13%, and Level 3 Market Decline of 20%. In
particular, as demonstrated by the May 6, 2010 flash crash, the current
Level 1 10% decline may be too high a threshold before determining
whether to halt trading across all securities. In fact, since adoption,
the markets have halted only once, on October 27, 1997.\11\
Accordingly, to reflect the potential that a lower, yet still
significant decline may warrant a market-wide trading halt, the
Exchange proposes to lower the market decline percentage thresholds.
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\11\ At that time, the triggers were based on absolute declines
in the DJIA (350 point decrease for a Level 1 halt and 550 point
decrease for a Level 2 halt).
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As further proposed, the Exchange would halt trading based on a
Level 1 or Level 2 Market Decline only once per day. For example, if a
Level 1 Market Decline were to occur and trading were halted, following
the reopening of trading, the Exchange would not halt the market again
unless a Level 2 Market Decline were to occur. Likewise, following the
reopening of trading after a Level 2 Market Decline, the Exchange would
not halt trading again unless a Level 3 Market Decline were to occur,
at which point, trading in all stocks would be halted until the primary
market opens the next trading day.
Fourth, to correspond with the lower percentages associated with
triggering a trading halt, the Exchange also proposes to shorten the
length of the market-wide trading halts associated with each Level. As
proposed, a Level 1 or 2 Market Decline occurring after 9:30 a.m.
Eastern
[[Page 61421]]
and up to and including 3:25 p.m. Eastern, would result in a trading
halt in all stocks for 15 minutes.
The Exchange believes that by reducing the percentage threshold,
coupled with the reduced length of a trading halt, the proposed rule
would allow for trading halts for serious market declines, while at the
same time, would minimize disruption to the market by allowing for
trading to continue after the proposed more-abbreviated trading halt.
The Exchange believes that in today's markets, where trading
information travels in micro-second speed, a 15-minute trading halt
strikes the appropriate balance between the need to halt trading for
market participants to assess the market, while at the same time
reducing the time that the market is halted.
Finally, because the proposed Level 1 and Level 2 trading halts
will now be 15 minutes, the Exchange proposes amending the rule to
allow for a Level 1 or 2 Market Decline to trigger a trading halt up to
3:25 p.m. (or, in the case of scheduled early closure, at 12:25 p.m.).
Under the current rule, a trading halt cannot be triggered after 2:30
p.m., and this time corresponds to the need for the markets both to
reopen following a 30-minute halt and to engage in a fair and orderly
closing process. However, as the markets experienced on May 6, 2010,
even if the Level 1 decline had occurred that day, because the market
decline occurred after 2:30 p.m., it would not have triggered a halt
under the current rule. The Committee recommended that trading halts be
triggered up to 3:30 p.m. The Exchange agrees that the proposed
amendments must strike the appropriate balance between permitting
trading halts as late in the day as feasible without interrupting the
closing process.
Accordingly, to accommodate existing rules of other exchanges
concerning closing procedures, including the publication of imbalance
information beginning at 3:50 p.m. and the restrictions on entry and
cancellation of market on close (``MOC'') and limit on close (``LOC'')
orders after 3:45 p.m., the Exchange proposes that the last Level 1 or
Level 2 Market Decline trading halt should begin no later than 3:25
p.m. (or, in the case of scheduled early closure, at 12:25 p.m.). The
Exchange proposes 3:25 p.m. as the cut-off time so that there is time
following the 15-minute trading halt for the markets to reopen before
the 3:45 cut-off for entry and cancellation of MOC and LOC orders under
Exchange rules.
Under the proposed rule, a Level 3 Market Decline would halt
trading for the remainder of the trading day, including any trading
that may take place after 4:00 p.m., Eastern, and would not resume
until the next trading day.
In addition to these proposed changes, the Exchange proposes to add
to Rule 133 how the markets will reopen following a 15-minute trading
halt. In particular, the Exchange proposes that if the primary market
halts trading in all stocks, all markets will halt trading in those
stocks until the primary market has resumed trading or notice has been
provided by the primary market that trading may resume. As further
proposed, if the primary market does not re-open a security within 15
minutes following the end of the trading halt, other markets may resume
trading in that security.
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. The
Exchange believes that the proposed rule meets these requirements in
that it promotes transparency and uniformity across markets concerning
decisions to pause [sic] trading in a security when there are
significant price movements.
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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 Exchange does not believe that the proposed rule change will
impose any burden on competition 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
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 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 Exchange consents, the Commission will:
(A) By order approve or disapprove 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
changes to the market-wide circuit breaker regime are consistent with
the Act. The Commission specifically requests comment on the following:
As discussed above, the proposed rule change would narrow
the percentage market declines that would trigger a market-wide halt in
trading. How would the proposed changes interact with the existing
single-stock circuit breaker pilot program \14\ or, if approved, the
proposed NMS Plan to establish a limit-up/limit-down mechanism for
individual securities? \15\
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\14\ See Securities Exchange Act Release No. 64735 (June 23,
2011), 76 FR 38243 (June 29, 2011) (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) (approving the ``Phase III Pilot
Program''). The Phase III Pilot Program has been extended through
January 2012. See, e.g., Securities Exchange Act Release 65094
(August 10, 2011), 76 FR 50779 (August 16, 2011) (SR-NASDAQ-2011-
011).
\15\ See Securities Exchange Act Release No. 64547 (May 25,
2011), 76 FR 31647 (June 1, 2011).
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To what extent could the concurrent triggering of single
stock circuit breakers in many S&P 500 Index stocks lead to
difficulties in calculating the index? Would the triggering of many
single stock circuit breakers in a general market downturn cause the
index calculation to become stale and thereby delay the triggering of
the market-wide circuit breaker?
Should the market-wide circuit breaker be triggered if a
sufficient number of single-stock circuit breakers or price limits are
triggered, and materially affect calculations of the S&P 500 Index?
Should market centers implement rules that mandate
cancellation of pending orders in the event a market-wide circuit
breaker is triggered? If so, should such a rule require cancellation of
all orders or only certain order types (e.g., limit orders)? Should all
trading halts trigger such cancellation policies
[[Page 61422]]
or should the cancellation policies apply only to a Level 3 Market
Decline?
Should some provision be made to end the regular trading
session if a market decline suddenly occurs after 3:25 p.m. but does
not reach the 20% level?
In the event of a Level 3 Market Decline, should some
provision be made for the markets to hold a closing auction?
Should the primary market have a longer period (e.g., 30
minutes) to reopen trading following a Level 2 Market Decline before
trading resumes in other venues?
In the event of a Level 3 Market Decline, should the
markets wait for the primary market to reopen trading in a particular
security on the next trading day before trading in that security
resumes?
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-2011-129 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-2011-129. 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-Phlx-2011-129 and should be
submitted on or before October 25, 2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-25515 Filed 10-3-11; 8:45 am]
BILLING CODE 8011-01-P