[Federal Register Volume 77, Number 23 (Friday, February 3, 2012)]
[Notices]
[Pages 5606-5609]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-2404]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66275; File No. SR-NASDAQ-2012-019]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Extend the Pilot Period of Rule 4753(c)

January 30, 2012.
    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 January 27, 2012, The NASDAQ Stock Market LLC (``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 Exchange. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASDAQ proposes to extend the pilot period of Rule 4753(c), 
NASDAQ's ``Volatility Guard,'' so that the pilot will now expire on the 
earlier of July 31,

[[Page 5607]]

2012 or the date on which a limit up/limit down system is adopted.
    The text of the proposed rule change is below. Proposed new 
language is in italics; proposed deletions are in brackets.
* * * * *

4753. Nasdaq Halt and Imbalance Crosses

    (a)-(b) No change.
    (c) For a pilot period ending the earlier of July 31, 2012 [January 
31, 2012] or the date on which, if approved, a limit up/limit down 
mechanism to address extraordinary market volatility, is approved, 
between 9:30 a.m. and 3:35 p.m. EST, the System will automatically 
monitor System executions to determine whether the market is trading in 
an orderly fashion and whether to conduct an Imbalance Cross in order 
to restore an orderly market in a single Nasdaq Security.
    (1) An Imbalance Cross shall occur if the System executes a 
transaction in a Nasdaq Security at a price that is beyond the 
Threshold Range away from the Triggering Price for that security. The 
Triggering Price for each Nasdaq Security shall be the price of any 
execution by the System in that security within the prior 30 seconds. 
The Threshold Range shall be determined as follows:

------------------------------------------------------------------------
                                                             Threshold
                                                            range away
                     Execution price                           from
                                                            triggering
                                                            price  (%)
------------------------------------------------------------------------
$1.75 and under.........................................              15
Over $1.75 and up to $25................................              10
Over $25 and up to $50..................................               5
Over $50................................................               3
------------------------------------------------------------------------

    (2) If the System determines pursuant to subsection (1) above to 
conduct an Imbalance Cross in a Nasdaq Security, the System shall 
automatically cease executing trades in that security for a 60-second 
Display Only Period. During that 60-second Display Only Period, the 
System shall:
    (A) maintain all current quotes and orders and continue to accept 
quotes and orders in that System Security; and
    (B) Disseminate by electronic means an Order Imbalance Indicator 
every 5 seconds.
    (3) At the conclusion of the 60-second Display Only Period, the 
System shall re-open the market by executing the Nasdaq Halt Cross as 
set forth in subsection (b)(2)-(4) above.
    (4) If the opening price established by the Nasdaq Halt Cross 
pursuant to subsection (b)(2)(A)-(D) above is outside the benchmarks 
established by Nasdaq by a threshold amount, the Nasdaq Halt Cross will 
occur at the price within the threshold amounts that best satisfies the 
conditions of subparagraphs (b)(2)(A) through (D) above. Nasdaq 
management shall set and modify such benchmarks and thresholds from 
time to time upon prior notice to market participants.
    (d) No change.
* * * * *

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 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
    NASDAQ is proposing to extend the operative period of the pilot 
under Rule 4753(c), NASDAQ's ``Volatility Guard,'' so that it will 
expire the earlier of July 31, 2012 or the date on which a limit up/
limit down system is adopted, yet hold the implementation of Rule 
4753(c) in abeyance until a limit up/limit down system is either 
adopted or disapproved.
Background
    On March 11, 2011, the Commission approved Rule 4753(c) (the 
``Volatility Guard''), a volatility-based pause in trading in 
individual NASDAQ-listed securities traded on NASDAQ (``NASDAQ 
Securities''), as a six month pilot applied to the NASDAQ 100 Index 
securities.\3\ The Volatility Guard automatically suspends trading in 
individual NASDAQ Securities that are the subject of abrupt and 
significant intraday price movements between 9:30 a.m. and 4 p.m. 
Eastern Standard Time (``EST''), which was subsequently amended to 9:45 
a.m. and 3:35 p.m. EST to avoid potential interference with the opening 
and closing crosses.\4\ Volatility Guard is triggered automatically 
when the execution price of a pilot security moves more than a fixed 
amount away from a pre-established ``triggering price'' for that 
security. The triggering price for each pilot security is the price of 
any execution by the system in that security within the previous 30 
seconds. For each pilot security, the system continually compares the 
price of each execution in the system against the prices of all system 
executions in that security over the 30 seconds. Once triggered, NASDAQ 
institutes a formal trading halt during which time NASDAQ systems are 
prohibited from executing orders. Members, however, may continue to 
enter quotes and orders, which are queued during a 60-second Display 
Only Period. At the conclusion of the Display Only Period, the queued 
orders are executed at a single price, pursuant to NASDAQ's Halt Cross 
mechanism.\5\
---------------------------------------------------------------------------

    \3\ Securities Exchange Act Release No. 64071 (March 11, 2011), 
76 FR 14699 (March 17, 2011) (SR-NASDAQ-2010-074). Amendment 1 to 
SR-NASDAQ-2010-074 designated the NASDAQ 100 Index as the 100 pilot 
securities.
    \4\ Securities Exchange Act Release No. 64268 (April 8, 2011), 
76 FR 20742 (April 15, 2011) (SR-NASDAQ-2011-051).
    \5\ The Nasdaq Halt Cross is ``the process for determining the 
price at which Eligible Interest shall be executed at the open of 
trading for a halted security and for executing that Eligible 
Interest.'' See Nasdaq Rule 4753(a)(3).
---------------------------------------------------------------------------

    NASDAQ determined to adopt Volatility Guard as a six month pilot in 
response to the unprecedented aberrant volatility witnessed on May 6, 
2010, and the limited effect that NASDAQ's market collars had in 
dampening such volatility. NASDAQ believed that the Rule 4753(c) halt 
process was needed to protect its listed securities and market 
participants from such volatility in the future. In proposing the six 
month pilot, NASDAQ noted that another market had adopted a process 
whereby the market's listed securities each may be temporarily removed 
from automatic trading when the trading exceeds certain average daily 
volume-, price-, and volatility-based criteria. Accordingly, NASDAQ 
believed that adopting its own process would serve to protect its 
market from aberrant volatility, like that experienced on May 6, 2011.
Limit Up/Limit Down Proposal
    During the time that the Volatility Guard pilot was progressing 
through the notice and comment process with the Commission, NASDAQ 
together with the other national securities exchanges and FINRA 
(``SROs'') and in consultation with the Commission, worked diligently 
to implement changes to the markets to prevent another event like May 
6, 2010 from occurring. In this regard, the SROs have expanded their 
existing circuit breaker pilots \6\ to cover

[[Page 5608]]

all NMS stocks other than rights and warrants,\7\ clarified rules 
concerning clearly erroneous processes,\8\ and have made great strides 
in developing a limit up/limit down system to replace the circuit 
breakers currently in place. With respect to this last effort, on May 
25, 2011, the SROs filed with the Commission a national market system 
plan to address extraordinary market volatility, which proposed a 
market-wide limit up/limit down system applicable to all NMS stocks 
(the ``Plan'').\9\ The period to submit comments on the Plan ended on 
June 22, 2011, and the Commission had previously stated that it would 
determine whether to approve the Plan shortly after the expiration of 
the comment period.\10\ The SROs have proposed implementing the Plan 
120 calendar days following the publication of the Commission's order 
approving the proposed Plan in the Federal Register.
---------------------------------------------------------------------------

    \6\ On June 10, 2010, the Commission approved the Circuit 
Breaker Pilot, which instituted new circuit breaker rules that pause 
trading for five minutes in a security included in the S&P 500 Index 
if its price moves ten percent or more over a five-minute period. 
See Securities Exchange Act Release Nos. 62251 (June 10, 2010), 75 
FR 34183 (June 16, 2010) (SR-FINRA-2010-025); 62252 (June 10, 2010), 
75 FR 34186 (June 16, 2010) (SR-NASDAQ-2010-061, et al.). On 
September 10, 2010, the Circuit Breaker Pilot was expanded to 
include securities in the Russell 1000 Index and certain exchange-
traded products. See Securities Exchange Act Release Nos. 62883 
(September 10, 2010), 75 FR 56608 (September 16, 2010) (SR-FINRA-
2010-033); 62884 (September 10, 2010), 75 FR 56618 (September 16, 
2010) (SR-NASDAQ-2010-079, et al.). The Circuit Breaker Pilot is 
scheduled to expire on August 11, 2011. See e.g., Securities 
Exchange Act Release No. 64174 (April 4, 2011), 76 FR 19819 (April 
8, 2011) (SR-NASDAQ-2011-042).
    \7\ On June 23, 2011, the Commission granted accelerated 
approval to SRO proposals to expand the Circuit Breaker Pilot to all 
NMS securities. See Securities Exchange Act Release No. 64735 (June 
23, 2011), 76 FR 38243 (June 29, 2011) (SR-NASDAQ-2011-067, et al.). 
In November 2011, the SROs filed immediately effective rule changes 
to exclude rights and warrants from the Circuit Breaker Pilot. See 
e.g., Securities Exchange Act Release No. 65814 (November 23, 2011), 
76 FR 74084 (November 30, 2011) (SR-NASDAQ-2011-154). The term ``NMS 
stocks'' is defined in Rule 600(b)(47) of Regulation NMS under the 
Act. See 17 CFR 242.600(b)(47).
    \8\ Securities Exchange Act Release No. 62886 (September 10, 
2010), 75 FR 56613 (September 16, 2010) (SR-NASDAQ-2010-076, et 
al.); see also Securities Exchange Act Release No. 64238 (April 7, 
2011), 76 FR 20780 (April 13, 2011) (SR-NASDAQ-2011-043).
    \9\ Securities Exchange Act Release No. 64547 (May 25, 2011), 76 
FR 31647 (June 1, 2011) (File No. 4-631).
    \10\ See http://www.sec.gov/news/press/2011/2011-84.htm. At the 
close of the comment period, NASDAQ understood that, given the 
number of comments received, the Commission would need a reasonable 
time to consider the comments provided. Rule 608(b) of Regulation 
NMS governs the effectiveness of national market system plans. See 
17 CFR 242.608.
---------------------------------------------------------------------------

    Important to the implementation of Volatility Guard, NASDAQ notes 
that the Commission stated that it may find exchange-specific 
volatility moderators inconsistent with the Act once a uniform, cross-
market mechanism to address aberrant volatility is adopted. In 
approving Volatility Guard, the Commission emphasized:

    [T]hat it is continuing to work diligently with the exchanges 
and FINRA to develop an appropriate consistent cross-market 
mechanism to moderate excessive volatility that could be applied 
widely to individual exchange-listed securities and to address 
commenters' concerns regarding the complexity and potential 
confusion of exchange-specific volatility moderators. To the extent 
the Commission approves such a mechanism, whether it be an expanded 
circuit breaker with a limit up/limit down feature or otherwise, the 
Commission may no longer be able to find that exchange-specific 
volatility moderators--including both Nasdaq's Volatility Guard and 
the NYSE's LRPs--are consistent with the Act.\11\
---------------------------------------------------------------------------

    \11\ Securities Exchange Act Release No. 64071 (March 11, 2011), 
76 FR 14699, at 14701 (March 17, 2011) (SR-NASDAQ-2010-074, as 
amended) (emphasis added).

    NASDAQ calculated that the Plan, if approved, may be implemented by 
the end of 2011 or early 2012.\12\ It was based on that calculation 
that NASDAQ determined to extend the pilot period of Volatility Guard 
until January 31, 2012.\13\
---------------------------------------------------------------------------

    \12\ Supra note 9.
    \13\ Securities Exchange Act Release No. 65176 (August 19, 
2011), 76 FR 53518 (August 26, 2011) (SR-NASDAQ-2011-117).
---------------------------------------------------------------------------

    On September 27, 2011, the Commission provided notice that it was 
extending the period for Commission action on the limit up/limit down 
proposal.\14\ Pursuant to Section 11A \15\ of the Act and Rule 608 
thereunder,\16\ the Commission may designate up to 180 days from the 
date of publication of notice of filing of a national market system 
plan if it finds such longer period to be appropriate and publishes its 
reasons for so finding, or as to which the sponsors consent. In 
extending the date by which the Commission shall approve the Plan to 
November 28, 2011, the Commission noted that the extension of time was 
appropriate because, among other things, the additional time would 
ensure that the Commission has sufficient time to consider and take 
action on the SROs' proposal in light of the comments received on the 
proposal.\17\ On November 18, 2011, the SROs notified the Commission 
that they consented to a three-month extension for Commission action on 
the Plan.\18\ Pursuant to such consent, the Commission must take action 
on the Plan by February 29, 2012.
---------------------------------------------------------------------------

    \14\ Securities Exchange Act Release No. 65410 (September 27, 
2011), 76 FR 61121 (October 3, 2011) (File No. 4-631).
    \15\ 15 U.S.C. 78k-1.
    \16\ 17 CFR 242.608.
    \17\ At the time of the notice, the Commission had received 18 
comment letters on the proposed Plan.
    \18\ Letter from Janet M. McGinness, Senior Vice President and 
Corporate Secretary, NYSE Euronext, to Elizabeth M. Murphy, 
Secretary, Commission, dated November 18, 2011.
---------------------------------------------------------------------------

Proposal
    NASDAQ continues to believe that a limit up/limit down system, as 
proposed in the Plan, would be preferable to disparate individual 
market solutions to aberrant volatility. Given the progress made toward 
adopting a uniform limit up/limit down system and the Commission's 
apparent desire that exchange-specific volatility moderators be 
abandoned once a consistent cross-market mechanism is adopted, NASDAQ 
believes that implementing Volatility Guard at this time may be 
confusing and onerous to market participants.
    NASDAQ is proposing to again extend the pilot rather than eliminate 
it so that NASDAQ may continue to have the option to implement 
Volatility Guard should the Plan not be approved by the Commission. As 
a primary market, NASDAQ takes seriously its responsibility to both its 
listed companies and the investing public. NASDAQ continues to believe 
that an individual solution like Volatility Guard, may be necessary in 
the event the Plan is rejected, much like NYSE-listed stocks may be 
protected by the LRP mechanism if it remains in place. NASDAQ believes 
that extending the Volatility Guard pilot, but holding its 
implementation in abeyance until such time that the Plan is approved or 
disapproved will best serve these groups by allowing NASDAQ to retain 
the ability to implement Volatility Guard if necessary, while also 
allowing market participants to make preparations to implement a limit 
up/limit down system, as proposed in the Plan. As such, market 
participants will not needlessly expend energy changing, and testing, 
their systems to account for the Volatility Guard pilot in addition to 
the changes required to implement the Plan.
    Accordingly, NASDAQ is proposing to extend the Volatility Guard 
pilot to the earlier of July 31, 2012 or the date on which the Plan is 
approved and implemented. Should the Plan not be implemented by the 
expiration of the pilot, NASDAQ may consider further extension of 
Volatility Guard, consistent with the extension proposed herein.

[[Page 5609]]

2. Statutory Basis
    NASDAQ believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\19\ in general and with 
Sections 6(b)(5) of the Act,\20\ 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 regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, 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. NASDAQ believes that the 
proposed rule continues to meet these requirements in that it promotes 
the adoption of the Plan's uniform, cross-market limit up/limit down 
process to address aberrant volatility, while also allowing NASDAQ to 
retain an important alternative tool to deal with such volatility 
should approval of the Plan be delayed or disapproved.
---------------------------------------------------------------------------

    \19\ 15 U.S.C. 78f.
    \20\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    NASDAQ does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor 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 \21\ and Rule 19b-4(f)(6) thereunder.\22\ 
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 \23\ and Rule 19b-
4(f)(6)(iii) thereunder.\24\
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \22\ 17 CFR 240.19b-4(f)(6).
    \23\ 15 U.S.C. 78s(b)(3)(A).
    \24\ 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.
---------------------------------------------------------------------------

    A proposed rule change filed under Rule 19b-4(f)(6) \25\ normally 
does not become operative for 30 days after the date of filing. 
However, pursuant to Rule 19b-4(f)(6)(iii) \26\ 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.
---------------------------------------------------------------------------

    \25\ 17 CFR 240.19b-4(f)(6).
    \26\ 17 CFR 240.19b-4(f)(6)(iii).
---------------------------------------------------------------------------

    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest, as 
it will allow the pilot program to continue uninterrupted, thereby 
avoiding the investor confusion that could result from a temporary 
interruption in the pilot program. For this reason, the Commission 
designates the proposed rule change to be operative upon filing.\27\
---------------------------------------------------------------------------

    \27\ 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).
---------------------------------------------------------------------------

    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-NASDAQ-2012-019 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-NASDAQ-2012-019. 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-NASDAQ-2012-019 and should be 
submitted on or before February 24, 2012.
---------------------------------------------------------------------------

    \28\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-2404 Filed 2-2-12; 8:45 am]
BILLING CODE 8011-01-P