[Federal Register Volume 76, Number 230 (Wednesday, November 30, 2011)]
[Notices]
[Pages 74111-74113]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-30819]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65824; File No. SR-CBOE-2011-111]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Related to the Individual Stock Trading Pause Pilot Program

November 23, 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 November 23, 2011, the Chicago Board Options Exchange, 
Incorporated (``Exchange'' or ``CBOE'') 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 Exchange. The Exchange has designated the proposal as a ``non-
controversial'' proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6) thereunder.\4\ 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 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

    The Exchange is proposing to amend CBOE Stock Exchange, LLC's 
(``CBSX'', the CBOE's stock trading facility) rules to exclude all 
rights and warrants from the individual stock trading pause pilot and 
to include a conforming amendment to CBOE's options trading halt 
provisions. The text of the proposed rule change is available on the 
Exchange's Web site (http://www.cboe.org/Legal), at the Exchange's 
Office of the Secretary 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 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 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend Rule 6.3C to exclude all rights and 
warrants from the single stock circuit breaker under the rule. The 
Commission approved Rule 6.3C 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'').\5\ 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'').\6\
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    \5\ 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).
    \6\ 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 Pause Pilot, which was 
originally set to expire on December 10, 2010, has been extended and 
is currently set to expire on January 31, 2012. See Securities 
Exchange Act Release Nos. 63502 (December 9, 2010), 75 FR 78306 
(December 15, 2010) (SR-CBOE-2010-112) (extension of Pilot through 
April 11, 2011); 64194 (April 5, 2011), 76 FR 20389 (April 12, 
2011)(SR-CBOE-2011-031)(extension of Pilot through 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 to 
the pilot stocks) and 65070 (August 9, 2011), 76 FR 50516 (August 
15, 2011)(SR-CBOE-2011-076).
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    On June 23, 2011, the Commission approved proposed rule changes to 
expand the Pause Pilot to include all remaining NMS stocks (``Phase III 
Securities''), which included rights and warrants.\7\ Unlike the 
original Pause Pilot securities, amended Rule 6.3C applies wider 
percentage price moves to the Phase III Securities before a trading 
pause is triggered.\8\ The changes to Rule 6.3C became effective on 
August 8, 2011.\9\
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    \7\ See Securities Exchange Act Release No. 64735 (June 23, 
2011), 76 FR 38243 (June 29, 2011) (SR-NASDAQ-2011-067, et al.).
    \8\ Under amended Rule 6.3C, 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.
    \9\ The Exchange notes that CBSX is not currently the primary 
listing market for any stocks, and thus, will not be issuing any 
trading pauses pursuant to its rules.
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    Analysis of the nature of the trading pauses triggered since 
adoption of the Pause Pilot notes that over 25% of such pauses have 
occurred in rights and warrants. Further, there has been 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 Rule 6.3C 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, the Exchange is 
proposing to exclude rights and warrants from the trading pause under 
Rule 6.3C.

[[Page 74112]]

    Finally, the Exchange is proposing a conforming amendment to Rule 
6.3.06, which pertains to trading halts on CBOE. In relevant part, Rule 
6.3.06 currently provides that, if the primary listing market issues an 
individual stock trading pause in an underlying NMS stock, then CBOE 
will halt trading in the options on that stock until trading has 
resumed in the stock. Given the proposed exclusion of rights and 
warrants from the Pause Pilot, the Exchange is proposing to replace a 
reference in Rule 6.2.06 to ``an underlying NMS stock'' with a 
conforming reference to ``an underlying eligible NMS stock'' and to 
define the term ``eligible NMS stocks'' to mean NMS stocks, other than 
rights and warrants.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the 
Act,\10\ in general, and furthers the objectives of Section 
6(b)(5),\11\ 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) \12\ of the Act 
in that it seeks to ensure fair competition among brokers and dealers 
and among exchange markets. The Exchange believes that the proposed 
rule meets these requirements because it excludes certain securities 
from Rule 6.3C'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 Rule 6.3C 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.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
    \12\ 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 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

    The Exchange neither solicited nor received comments on the 
proposal.

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 \13\ and Rule 19b-4(f)(6) thereunder.\14\ 
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 \15\ and Rule 19b-
4(f)(6)(iii) thereunder.\16\
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    \13\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \14\ 17 CFR 240.19b-4(f)(6).
    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 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) \17\ normally 
does not become operative for 30 days after the date of filing. 
However, pursuant to Rule 19b-4(f)(6)(iii) \18\ 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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    \17\ 17 CFR 240.19b-4(f)(6).
    \18\ 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 Commission designates the proposed rule change as 
operative upon the date of this Notice.\19\
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    \19\ 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-CBOE-2011-111 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-CBOE-2011-111. 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

[[Page 74113]]

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-CBOE-2011-111 and should be submitted on or before December 
21, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-30819 Filed 11-29-11; 8:45 am]
BILLING CODE 8011-01-P