[Federal Register Volume 78, Number 70 (Thursday, April 11, 2013)]
[Notices]
[Pages 21675-21677]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-08477]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69333; File No. SR-NASDAQ-2013-043]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Approving, on an Accelerated Basis, Proposed Rule Change To Adopt 
Chapter V, Section 3(d)(iii) Regarding Quoting Obligations

April 5, 2013.

I. Introduction

    On March 5, 2013, The NASDAQ Stock Market LLC (``NASDAQ'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) \1\ of the Securities 
Exchange Act of 1934 (``Act''),\2\ and Rule 19b-4 thereunder,\3\ a 
proposed rule change to adopt Chapter V, Section 3(d)(iii) regarding 
quoting obligations. The proposed rule change was published for comment 
in the Federal Register on March 13, 2013.\4\ The Commission received 
no comment letters on the proposal. This order approves the proposed 
rule change on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
    \4\ See Securities Exchange Act Release No. 69069 (March 7, 
2013), 78 FR 15995.
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II. Background

    On May 6, 2010, the U.S. equity markets experienced a severe 
disruption that, among other things, resulted in the prices of a large 
number of individual securities suddenly declining by significant 
amounts in a very short time period before suddenly reversing to prices 
consistent with their pre-decline levels.\5\ This severe price 
volatility led

[[Page 21676]]

to a large number of trades being executed at temporarily depressed 
prices, including many that were more than 60% away from pre-decline 
prices. One response to the events of May 6, 2010, was the development 
of the single-stock circuit breaker pilot program, which was 
implemented through a series of rule filings by the equity exchanges 
and by FINRA.\6\ The single-stock circuit breaker was designed to 
reduce extraordinary market volatility in NMS stocks by imposing a 
five-minute trading pause when a trade was executed at a price outside 
of a specified percentage threshold.\7\
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    \5\ The events of May 6 are described more fully in a joint 
report by the staffs of the Commodity Futures Trading Commission 
(``CFTC'') and the Commission. See Report of the Staffs of the CFTC 
and SEC to the Joint Advisory Committee on Emerging Regulatory 
Issues, ``Findings Regarding the Market Events of May 6, 2010,'' 
dated September 30, 2010, available at http://www.sec.gov/news/studies/2010/marketevents-report.pdf.
    \6\ For further discussion on the development of the single-
stock circuit breaker pilot program, see Securities Exchange Act 
Release No. 67091 (May 31, 2012), 77 FR 33498 (June 6, 2012) 
(``Limit Up-Limit Down Plan'' or ``Plan'').
    \7\ See Securities Exchange Act Release Nos. 62884 (September 
10, 2010), 75 FR 56618 (September 16, 2010) and Securities Exchange 
Act Release No. 62883 (September 10, 2010), 75 FR 56608 (September 
16, 2010) (SR-FINRA-2010-033) (describing the ``second stage'' of 
the single-stock circuit breaker pilot) and Securities Exchange Act 
Release No. 64735 (June 23, 2011), 76 FR 38243 (June 29, 2011) 
(describing the ``third stage'' of the single-stock circuit breaker 
pilot).
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    To replace the single-stock circuit breaker pilot program, the 
equity exchanges filed a National Market System Plan \8\ pursuant to 
Section 11A of the Act,\9\ and Rule 608 thereunder,\10\ which featured 
a ``limit up-limit down'' mechanism (as amended, the ``Limit Up-Limit 
Down Plan'' or ``Plan'').
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    \8\ NYSE Euronext filed on behalf of New York Stock Exchange LLC 
(``NYSE''), NYSE Amex LLC (``NYSE Amex''), and NYSE Arca, Inc. 
(``NYSE Arca''), and the parties to the proposed National Market 
System Plan, BATS Exchange, Inc., BATS Y-Exchange, Inc., Chicago 
Board Options Exchange, Incorporated (``CBOE''), Chicago Stock 
Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial 
Industry Regulatory Authority, Inc., NASDAQ OMX BX, Inc., NASDAQ OMX 
PHLX LLC, the Nasdaq Stock Market LLC, and National Stock Exchange, 
Inc. (collectively with NYSE, NYSE MKT, and NYSE Arca, the 
``Participants''). On May 14, 2012, NYSE Amex filed a proposed rule 
change on an immediately effective basis to change its name to NYSE 
MKT LLC (``NYSE MKT''). See Securities Exchange Act Release No. 
67037 (May 21, 2012) (SR-NYSEAmex-2012-32).
    \9\ 15 U.S.C. 78k-1.
    \10\ 17 CFR 242.608.
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    The Plan sets forth requirements that are designed to prevent 
trades in individual NMS stocks from occurring outside of the specified 
price bands. The price bands consist of a lower price band and an upper 
price band for each NMS stock. When one side of the market for an 
individual security is outside the applicable price band, i.e., the 
National Best Bid is below the Lower Price Band, or the National Best 
Offer is above the Upper Price band, the Processors \11\ are required 
to disseminate such National Best Bid or National Best Offer \12\ with 
a flag identifying that quote as non-executable. When the other side of 
the market reaches the applicable price band, i.e., the National Best 
Offer reaches the lower price band, or the National Best Bid reaches 
the upper price band, the market for an individual security enters a 
15-second Limit State, and the Processors are required disseminate such 
National Best Offer or National Best Bid with an appropriate flag 
identifying it as a Limit State Quotation. Trading in that stock would 
exit the Limit State if, within 15 seconds of entering the Limit State, 
all Limit State Quotations were executed or canceled in their entirety. 
If the market does not exit a Limit State within 15 seconds, then the 
Primary Listing Exchange will declare a five-minute trading pause, 
which is applicable to all markets trading the security.
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    \11\ As used in the Plan, the Processor refers to the single 
plan processor responsible for the consolidation of information for 
an NMS Stock pursuant to Rule 603(b) of Regulation NMS under the 
Exchange Act. See id.
    \12\ ``National Best Bid'' and ``National Best Offer'' has the 
meaning provided in Rule 600(b)(42) of Regulation NMS under the 
Exchange Act. See id.
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    The Primary Listing Exchange may also declare a trading pause when 
the stock is in a Straddle State, i.e., the National Best Bid (Offer) 
is below (above) the Lower (Upper) Price Band and the NMS Stock is not 
in a Limit State. In order to declare a trading pause in this scenario, 
the Primary Listing Exchange must determine that trading in that stock 
deviates from normal trading characteristics such that declaring a 
trading pause would support the Plan's goal to address extraordinary 
market volatility.\13\
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    \13\ As set forth in more detail in the Plan, all trading 
centers would be required to establish, maintain, and enforce 
written policies and procedures reasonably designed to prevent the 
display of offers below the Lower Price Band and bids above the 
Upper Price Band for an NMS Stock. The Processors would be able to 
disseminate an offer below the Lower Price Band or bid above the 
Upper Price Band that nevertheless may be inadvertently submitted 
despite such reasonable policies and procedures, but with an 
appropriate flag identifying it as non-executable; such bid or offer 
would not be included in National Best Bid or National Best Offer 
calculations. In addition, all trading centers would be required to 
develop, maintain, and enforce policies and procedures reasonably 
designed to prevent trades at prices outside the price bands, with 
the exception of single-priced opening, reopening, and closing 
transactions on the Primary Listing Exchange.
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    On May 31, 2012, the Commission approved the Plan as a one-year 
pilot, which shall be implemented in two phases.\14\ The first phase of 
the Plan shall be implemented beginning April 8, 2013.\15\
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    \14\ See ``Limit Up-Limit Down Plan,'' supra note 6. See also 
Securities Exchange Act Release No. 68953 (February 20, 2013), 78 FR 
13113 (February 26, 2013) (Second Amendment to Limit Up-Limit Down 
Plan by BATS Exchange, Inc., BATS Y-Exchange, Inc., Chicago Board 
Options Exchange, Inc., et al.) and Securities Exchange Act Release 
No. 69062 (March 7, 2013), 78 FR 15757 (March 12, 2013) (Third 
Amendment to Limit Up-Limit Down Plan by BATS Exchange, Inc., BATS 
Y-Exchange, Inc., Chicago Board Options Exchange, Inc., et al.)
    \15\ See ``Second Amendment to Limit Up-Limit Down Plan,'' supra 
note 14.
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III. Description of the Proposal

    In light of and in connection with the Limit Up-Limit Down Plan, 
the Exchange is adopting Chapter V, Section 3(d)(iii) to provide that 
the Exchange shall exclude the amount of time an NMS stock underlying a 
NOM option is in a Limit State or Straddle State from the total amount 
of time in the trading day when calculating the percentage of the 
trading day Options Market Makers are required to quote.
    Currently, under Chapter VII, Sections 5 and 6, NASDAQ requires 
Market Makers, on a daily basis, to make markets consistent with the 
applicable quoting requirements specified in Sections 5 and 6, on a 
continuous basis in at least 60% of the series in options in which the 
Market Maker is registered. To satisfy this requirement with respect to 
quoting a series, a Market Maker must quote such series 90% of the 
trading day (as a percentage of the total number of minutes in such 
trading day) or such higher percentage as NASDAQ may announce in 
advance. The Exchange's proposal would suspend a Market Maker's 
continuous quoting obligation for the duration that an underlying NMS 
stock is in a Limit State or a Straddle State. As a result, when 
calculating the duration necessary for a Market Maker to meet its 
obligations that it post valid quotes at least 90% of the time the 
classes are open for trading, that time will not include the duration 
that the underlying is in a Limit State or Straddle State.

IV. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and rules and 
regulations thereunder applicable to a national securities 
exchange.\16\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\17\ which, 
among other things, requires a national securities

[[Page 21677]]

exchange to be so organized and have the capacity to be able to carry 
out the purposes of the Act and to enforce compliance by its members 
and persons associated with its members with the provisions of the Act, 
the rules and regulations thereunder, and the rules of the exchange, 
and 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 regulation, 
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.
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    \16\ In approving the proposed rule changes, the Commission has 
considered their impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \17\ 15 U.S.C. 78f(b).
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    The Commission finds that the proposal to suspend a Market Maker's 
obligations when the underlying security is in a limit up-limit down 
state is consistent with the Act. During a limit up-limit down state, 
there may not be a reliable price for the underlying security to serve 
as a benchmark for market makers to price options. In addition, the 
absence of an executable bid or offer for the underlying security will 
make it more difficult for market makers to hedge the purchase or sale 
of an option. Given these significant changes to the normal operating 
conditions of market makers, the Commission finds that the Exchange's 
decision to suspend a Market Maker's obligations in these limited 
circumstances is consistent with the Act.
    The Commission notes, however, that the Plan was approved on a 
pilot basis and its Participants will monitor how it is functioning in 
the equity markets during the pilot period. To this end, the Commission 
expects that, upon implementation of the Plan, the Exchange will 
continue monitoring the quoting requirements that are being amended in 
this proposed rule change and determine if any necessary adjustments 
are required to ensure that they remain consistent with the Act.
    The Commission also notes that the Exchange did not propose to 
waive its bid-ask spread requirements for Market Makers when the 
underlying is in a Limit or Straddle State. The Commission believes 
that retaining this requirement should help ensure the quality of the 
quotes that are entered and preserves one of the obligations of being a 
Market Maker.
    In addition, the Commission finds good cause, pursuant to Section 
19(b)(2) of the Act \18\ for approving the proposed rule change on an 
accelerated basis. The proposal is related to the Plan, which will 
become operative on April 8, 2013.\19\ Without accelerated approval, 
the proposed rule change, and any attendant benefits, would take effect 
after the Plan's implementation date. Accordingly, the Commission finds 
that good cause exists for approving the proposed rule change on an 
accelerated basis.
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    \18\ 15 U.S.C. 78s(b)(2)
    \19\ See supra note 15.
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\20\ that the proposed rule change (SR-NASDAQ-2013-043) is approved on 
an accelerated basis.
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    \20\ 15 U.S.C. 78f(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-08477 Filed 4-10-13; 8:45 am]
BILLING CODE 8011-01-P