[Federal Register Volume 76, Number 230 (Wednesday, November 30, 2011)]
[Notices]
[Pages 74088-74090]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-30813]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65818; File No. SR-CHX-2011-32]


Self-Regulatory Organizations; Chicago Stock Exchange, 
Incorporated; Notice of Filing Proposed Rule Change To Exclude Rights 
and Warrants From the Individual Securities Circuit Breaker Rule

November 23, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on November 21, 2011, the Chicago Stock Exchange, Inc. (``CHX'' or 
the ``Exchange'') 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 CHX. CHX has filed this 
proposal pursuant to Exchange Act Rule 19b-4(f)(6) \3\ which is 
effective upon filing with the Commission.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CHX proposes to amend Article 20, Rule 2(e) to exclude all rights 
and warrants from the individual securities circuit breaker rule. The 
text of this proposed rule change is available on the Exchange's Web 
site at (http://www.chx.com), in the Commission's Public Reference 
Room, and 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 CHX included statements 
concerning the purpose of and basis for the proposed rule changes and 
discussed any comments it received regarding the proposal. The text of 
these statements may be examined at the places specified in Item IV 
below. The CHX 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend Article 20, Rule 2(e) to exclude all 
rights and warrants from the individual securities circuit breaker 
under the rule. The Commission approved Article 20, Rule 2(e) on a 
pilot basis on June 10, 2010 to provide for trading pauses in 
individual securities due to extraordinary market volatility (``Trading 
Pause'') in all securities included within the S&P 500[supreg] Index 
(``S&P 500'') (``Pause Pilot'').\4\ The Exchange noted in its filing to 
adopt Article 20, Rule 2(e) that during the Pause Pilot period it would 
continue to assess whether additional securities need to be added and 
whether the parameters of Article 20, Rule 2(e) would need to be 
modified to accommodate trading characteristics of different 
securities. The Exchange subsequently received approval to add to the 
Pause Pilot the securities included in the Russell 1000[supreg] Index 
(``Russell 1000'') and a specified list of Exchange Traded Products 
(``ETPs'').\5\
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    \4\ The Commission approved the Pause Pilot for all equities 
exchanges and FINRA. See Securities Exchange Act Release No. 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) and Securities Exchange Act Release No. 62251 (June 10, 
2010), 75 FR 34183 (June 16, 2010) (SR-FINRA-2010-025).
    \5\ The Commission approved the addition to the Pause Pilot of 
the securities included in the Russell 1000 and ETPs, where 
applicable, for all equities exchanges and FINRA. See Securities 
Exchange Act Release No. 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). The Exchange submitted a 
proposed rule change shortly after the addition of the Russell 1000 
securities and ETPs to extend the operation of the Pause Pilot, 
which was set to expire on December 10, 2010, until April 11, 2011. 
See Securities Exchange Act Release No. 63505 (December 9, 2010), 75 
FR 78302 (December 15, 2010) (SR-CHX-2010-24). On March 31, 2011, 
the Exchange submitted a proposed rule change to further extend the 
Pause Pilot until the earlier of August 11, 2011 or the date on 
which a limit up/limit down mechanism to address extraordinary 
market volatility, if adopted, applies. See Securities Exchange Act 
Release No. 64174 (April 4, 2011), 76 FR 19819 (April 8, 2011) (SR-
CHX-2011-05).

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[[Page 74089]]

    On June 23, 2011, the Commission approved proposed rule changes of 
the Exchanges to amend certain of their respective rules to expand the 
Pause Pilot to include all remaining NMS stocks (``Phase III 
Securities''), which included rights and warrants.\6\ Unlike the 
original Pause Pilot securities, amended Article 20, Rule 2(e) applies 
wider percentage price moves to the Phase III Securities before a 
trading pause is triggered.\7\ The changes to Article 20, Rule 2(e) 
became effective on August 8, 2011.
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    \6\ See Securities Exchange Act Release No. 64735 (June 23, 
2011), 76 FR 38243 (June 29, 2011) (SR-CHX-2011-09, et al.).
    \7\ Under amended Article 20, Rule 2(e), a pause is triggered by 
a 30% or more price move in a Phase III Security priced at $1 or 
higher, and by a 50% or more price move to such a security priced 
less than $1. The price of a security is based on the closing price 
on the previous trading day, or, if no closing price exists, the 
last sale reported to the Consolidated Tape on the previous trading 
day.
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    CHX analyzed the nature of the trading pauses triggered since 
adoption of the Pause Pilot and noted that over 25% of such pauses have 
occurred in rights and warrants. Further, CHX has experienced a 
significant increase in trading pauses involving rights and warrants 
since the implementation of the Phase III Securities, with such pauses 
representing approximately 52% [sic] all trading pauses occurring 
through the end of August 2011. Rights and warrants trade on equity 
exchanges, but are closely related to call options. Rights and warrants 
entitle owners to purchase shares of stock at predetermined prices 
subject to various timing and other conditions. Like options, the price 
of rights and warrants are affected by the price of the underlying 
stock as well as other factors, particularly the volatility of the 
stock. As a consequence, the prices of rights and warrants may move 
more dramatically than the prices of the underlying stocks even when 
the rights and warrants (and the underlying stock) are trading in an 
orderly manner. This difference in trading behavior may result in a 
scenario whereby the rights and warrants trigger the circuit breaker 
under Article 20, Rule 2(e) and are subject to a trading pause, even 
while the underlying stock continues to trade. This can be particularly 
true of rights and warrants that have low prices. Accordingly, CHX is 
proposing to exclude rights and warrants from the trading pause under 
Article 20, Rule 2(e).
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the 
Securities Exchange Act of 1934 (the ``Act''),\8\ in general, and 
furthers the objectives of Section 6(b)(5),\9\ in particular, in that 
it is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities, and to remove impediments to and perfect 
the mechanism of a free and open market and a national market system. 
The proposed rule change also is designed to support the principles of 
Section 11A(a)(1) \10\ of the Act in that it seeks to ensure fair 
competition among brokers and dealers and among exchange markets.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ 15 U.S.C. 78k-1(a)(1).
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    The Exchange believes that the proposed rule meets these 
requirements because it excludes certain securities from the rule's 
coverage that are prone to triggering pauses because of their unique 
characteristics. These securities are unique in that they may move more 
dramatically than the prices of the underlying stocks to which they are 
related even when both securities are trading in an orderly manner. As 
such, the securities that are subject to this proposal may trigger the 
circuit breaker under Article 20, Rule 2(e) and be subject to a trading 
pause, even while the underlying security continues to trade. Although 
there is little benefit in pausing trading in these securities, such 
pauses sequester regulatory resources that are better applied to the 
review of trading pauses in other securities that have a greater impact 
on the national market system.

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 either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act\11\ and Rule 19b-4(f)(6) thereunder.\12\ 
Because the 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 prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act \13\ and Rule 19b-
4(f)(6)(iii) thereunder.\14\
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    \11\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \12\ 17 CFR 240.19b-4(f)(6).
    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires the Exchange to give the Commission written notice of the 
Exchange's 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 date of filing of the proposed rule 
change, or such shorter time as designated by the Commission. The 
Exchange has satisfied this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) \15\ normally 
does not become operative for 30 days after the date of filing. 
However, pursuant to Rule 19b-4(f)(6)(iii) \16\ the Commission may 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the proposal 
may become operative immediately upon filing.
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    \15\ 17 CFR 240.19b-4(f)(6).
    \16\ 17 CFR 240.19b-4(f)(6)(iii).
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    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest. 
Including rights and warrants in the pilot program which may trigger a 
circuit breaker and be subject to a trading pause, even while the 
underlying security continues to trade, provides little benefit and has 
the potential to create confusion among investors. Excluding rights and 
warrants from the pilot program should minimize investor confusion that 
could result from temporary trading pauses in these securities. For 
this reason, the

[[Page 74090]]

Commission designates the proposed rule change as operative upon the 
date of this Notice.\17\
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    \17\ For purposes only of waiving the 30-day operative delay, 
the Commission has also 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 email to [email protected]. Please include 
File No. SR-CHX-2011-32 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 No. SR-CHX-2011-32. This file 
number should be included on the subject line if email 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 available publicly. All 
submissions should refer to File No. SR-CHX-2011-32 and should be 
submitted on or before December 21, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-30813 Filed 11-29-11; 8:45 am]
BILLING CODE 8011-01-P