[Federal Register Volume 76, Number 192 (Tuesday, October 4, 2011)]
[Notices]
[Pages 61457-61460]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-25525]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65427; File No. SR-NYSE-2011-48]


Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change Amending Exchange Rule 80B To 
Revise the Current Methodology For Determining When To Halt Trading in 
All Stocks Due to Extraordinary Market Volatility

September 28, 2011.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on September 27, 2011, New York Stock Exchange LLC 
(``NYSE'' or the ``Exchange'') filed with the Securities and Exchange 
Commission (the ``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\ 15 U.S.C. 78a.
    \3\ 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 80B to revise the 
current methodology for determining when to halt trading in all stocks 
due to extraordinary market volatility. The text of the proposed rule 
change is available at the Exchange, the Commission's Public Reference 
Room, and http://www.nyse.com.

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 those 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 proposes to amend Exchange Rule 80B 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 \4\ and related changes to the clearly 
erroneous execution rules \5\ and more stringent market maker quoting 
requirements.\6\ 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'').\7\ 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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    \4\ NYSE Rule 80C.
    \5\ NYSE Rule 128.
    \6\ NYSE Rule 104(a)(1)(B).
    \7\ 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.\8\
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    \8\ See Summary Report of the Committee, ``Recommendations 
Regarding Regulatory Responses to the Market Events of May 6, 2010'' 
(Feb, 18, 2011). The Exchange notes that NYSE Euronext submitted a 
comment letter to the Committee that recommended, among other 
things, reform of the market-wide circuit breaker rules. See Letter 
to Elizabeth Murphy, Secretary, Commission, from Janet M. Kissane, 
SVP and Corporate Secretary, NYSE Euronext (July 19, 2010). The 
proposed reforms set forth in this rule proposal differ slightly 
from the changes recommended in that comment letter, and represent 
consensus among the markets of how to address reform of the market-
wide circuit breakers.
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    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 80B 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.\9\ NYSE Rule 
80B 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 
80B

[[Page 61458]]

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.\10\
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    \9\ See Securities Exchange Act Release No. 26198 (Oct. 19, 
1988) (SR-CBOE-88-14, SR-NASD-88-46, SR-NYSE-88-22, SR-NYSE-88-23, 
SR-NYSE-88-24, and SR-Amex-88-24).
    \10\ Id.
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    In its current form,\11\ 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 available on the Exchange's Web site.\12\ 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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    \11\ 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).
    \12\ See e.g., NYSE Regulation Information Memos 11-19 (June 30, 
2011) and 11-10 (March 31, 2011).
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    Once a Rule 80B 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 
80B as follows: (i) Replace the DJIA with the S&P 500; (ii) replace the 
quarterly calendar recalculation of Rule 80B 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 meeting the original purpose of Rule 80B: To ensure 
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.\13\
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    \13\ 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 80B 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.\14\ 
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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    \14\ 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 and up to and including 3:25 p.m. Eastern, or in the case of an 
early scheduled close, 12:25 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.

[[Page 61459]]

    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. 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 Exchange rules concerning 
closing procedures, including the publication of imbalance information 
beginning at 3:45 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.,\15\ the Exchange proposes that the last Level 1 or Level 2 
Market Decline trading halt should be 3:25 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.
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    \15\ See NYSE Rule 123C.
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    As with current Level 3 declines, 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 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 80B how the markets will reopen following a 15-minute trading 
halt. In particular, similar to the reopening procedures set forth in 
Rule 80C, 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.
    The Exchange proposes to implement the changes to Rule 80B at the 
same time that the Limit Up-Limit Down Plan, if approved, is 
implemented.
2. Statutory Basis
    The basis under the Act for these proposed rule changes are [sic] 
the requirement under Section 6(b)(5) \16\ that an Exchange have rules 
that are 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. Specifically, this rule proposal 
supports the objectives of perfecting the mechanism of a free and open 
market and the national market system because it promotes uniformity 
across markets concerning when and how to halt trading in all stocks as 
a result of extraordinary market volatility.
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    \16\ 15 U.S.C. 78f(b)(5).
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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 that 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

    No written comments were solicited or received with respect to the 
proposed rule change.

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 self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the 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 \17\ or, if approved, the 
proposed NMS Plan to establish a limit-up/limit-down mechanism for 
individual securities? \18\
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    \17\ 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).
    \18\ 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 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

[[Page 61460]]

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-NYSE-2011-48 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-NYSE-2011-48. 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-NYSE-2011-48 and should be 
submitted on or before October 25, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-25525 Filed 10-3-11; 8:45 am]
BILLING CODE 8011-01-P