[Federal Register Volume 79, Number 87 (Tuesday, May 6, 2014)]
[Notices]
[Pages 25972-25976]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-10282]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72046; File No. SR-NSX-2014-08]
Self-Regulatory Organizations; National Stock Exchange, Inc.;
Notice of Filing of Proposed Rule Change to Amend Exchange Rule 11.19
Entitled ``Clearly Erroneous Executions'' To Add Provisions Regarding
Executions Based on Incorrect or Grossly Misinterpreted Issuance
Information and Executions Occurring After a Trading Halt Has Been
Declared
April 30, 2014.
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 April 17, 2014, National Stock Exchange, Inc. (``NSX[supreg]''
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 Exchange. The
Commission is publishing this notice to solicit comment 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 the
Substance of the Proposed Rule Change
The Exchange is proposing to amend Rule 11.19 entitled ``Clearly
Erroneous Executions'' to add new paragraphs (k) and (l) and to amend
paragraph (j) to make certain conforming changes based on the addition
of these new paragraphs.
The text of the proposed rule change is available on the Exchange's
Web site at http://www.nsx.com, at the principal office of the
Exchange, 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 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
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of this filing is to add new paragraph (k) to Exchange
Rule 11.19 to provide the Exchange with authority to nullify
transactions that were effected based on the same fundamentally
incorrect or grossly misinterpreted issuance information even if such
transactions occur over a period of several days, as further described
below. An example of fundamentally incorrect and grossly misinterpreted
issuance information that led to a severe valuation error is included
below for illustrative purposes.
The Exchange also proposes to add new paragraph (l) to Rule 11.19
to make clear that in the event of any disruption or malfunction in the
operation of the electronic communications and trading facilities of
the Exchange, another market center or responsible single plan
processor in connection with the transmittal or receipt of a regulatory
trading halt, suspension or pause (hereafter generally referred to as a
``trading halt'' for ease of reference), the Exchange will nullify any
transaction that occurs after the primary listing market for a security
declares a trading
[[Page 25973]]
halt with respect to such security. In the event a trading halt is
declared, then prematurely lifted in error, and then re-instituted,
proposed paragraph (l) would also result in nullification of any
transactions that occur before the official, final end of the trading
halt according to the primary listing market.
The Exchange also proposes to change certain cross-references in
Rule 11.19, due to the addition of paragraphs (k) and (l).
Specifically, the Exchange proposes to update cross-references in
existing paragraph (j) of Rule 11.19 in order to make clear that the
provisions of paragraph (j) do not alter the application of other
provisions of Rule 11.19, including new paragraphs (k) and (l).
Background
On September 10, 2010, the Commission approved, on a pilot basis,
changes to Rule 11.19 to provide for uniform treatment: (1) Of clearly
erroneous execution reviews in multi-stock events involving twenty or
more securities; and (2) in the event transactions occur that result in
the issuance of an individual stock trading pause by the primary
listing market and subsequent transactions that occur before the
trading pause is in effect on the Exchange.\3\ The Exchange also
adopted additional changes to Rule 11.19 that reduced the ability of
the Exchange to deviate from the objective standards set forth in Rule
11.19,\4\ and in 2013, adopted a provision designed to address the
operation of the Plan to Address Extraordinary Market Volatility
Pursuant to Rule 608 of Regulation NMS under the Act (the ``Limit Up-
Limit Down Plan'' or the ``Plan'').\5\ In October 2013, the Exchange
removed the specific provisions related to individual stock trading
pauses and extended to April 8, 2014 the pilot program applicable to
certain provisions of Rule 11.19.\6\ Most recently, the Exchange
extended the pilot program applicable to certain provisions of Rule
11.19 to coincide with the pilot period for the Limit Up-Limit Down
Plan, including any extensions to the pilot period for the Plan.\7\
---------------------------------------------------------------------------
\3\ See, Exchange Act Release No. 62886 (Sept. 10, 2010); 75 FR
56613 (Sept. 16, 2010); SR-NSX-2010-07.
\4\ Id.
\5\ See Exchange Act Release No. 68803 (February 1, 2013), 78 FR
9078 (February 7, 2013) (SR-NSX-2013-06); Exchange Act Release No.
67091 (May 31, 2012), 77 FR 33498 (June 6, 2012) (the ``Limit Up-
Limit Down Release''); See also NSX Rule 11.19(j).
\6\ Paragraphs (c), (e)(2), (g), (h) and (j) of Rule 11.19 are
currently subject to a pilot program. See Exchange Act Release No.
70589 (October 1, 2013); 78 FR 62782 (October 22, 2013) (SR-NSX-
2013-19).
\7\ See Exchange Act Release No. 71797 (March 25, 2014); 79 FR
18108 (March 31, 2014) (SR-NSX-2014-07).
---------------------------------------------------------------------------
As proposed, similar to other provisions added in recent years, as
described above, both paragraph (k) and paragraph (l) would be subject
to the pilot period, and thus, would last for a period to coincide with
the pilot period for the Limit Up-Limit Down Plan, including any
extensions to the pilot period for the Plan.
Executions Based on Incorrect or Grossly Misinterpreted Issuance
Information
The Exchange proposes to adopt a new provision, paragraph (k), to
Rule 11.19, which would provide that a series of transactions in a
particular security on one or more trading days may be viewed as one
event if all such transactions were effected based on the same
fundamentally incorrect or grossly misinterpreted issuance information
(e.g., with respect to a stock split or corporate dividend) resulting
in a severe valuation error for all such transactions (the ``Event'').
As proposed, an Officer of the Exchange or senior level employee
designee, acting on his or her own motion, would be required to take
action to declare all transactions that occurred during the Event null
and void not later than the start of trading on the day following the
last transaction in the Event. If trading in the security is halted
before the valuation error is corrected, the Officer of the Exchange or
senior level employee designee would be required to take action to
declare all transactions that occurred during the Event null and void
prior to the resumption of trading. The Exchange proposes to make clear
that no action can be taken pursuant to proposed paragraph (k) with
respect to any transactions that have reached settlement date for the
security or that result from an initial public offering of a security.
The Exchange believes that declaring a trade null and void after
settlement date would be complex to administer and unfair to the
affected parties. The Exchange also believes that excluding IPOs from
the proposed rule will ensure that transactions in a new security for
which there is no benchmark information are not called into question,
as it is the IPO process itself, including the extensive public
disclosure associated with IPOs that is intended to drive price
formation.
Further, the Exchange proposes that to the extent transactions
related to an Event occur on one or more other market centers, the
Exchange will promptly coordinate with such other market center(s) to
ensure consistent treatment of the transactions related to the Event,
if practicable. The Exchange also proposes to state in the Rule that
any action taken in connection with paragraph (k) will be taken without
regard to the Numerical Guidelines set forth in paragraph (c)(1) of
Rule 11.19. In particular, the Exchange believes that there could be
scenarios where there are erroneous transactions related to an Event
that do not meet applicable Numerical Guidelines but that are, upon
review, clearly erroneous. One example of a situation that could occur
is a corporate action, such as a stock split, that results in the
dissemination of fundamentally incorrect or grossly misinterpreted
issuance information and leads to erroneous transactions at a price
that is close to the price at which the security was previously
trading. Even if such trading is consistent with prior trading activity
for the security, and thus would not meet applicable Numerical
Guidelines, the Exchange would have the authority to nullify such
transactions if they were affected based on the same fundamentally
incorrect or grossly misinterpreted issuance information and there was
a severe valuation error as a result (i.e., although the security
should be trading at a price further away from its previous range, due
to fundamentally incorrect or grossly misinterpreted issuance
information with respect to the corporate action the security continues
to trade at a price that does not meet applicable Numerical
Guidelines).
The Exchange also proposes to include a provision, as it does in
many other sub-paragraphs of Rule 11.19, stating that each Equity
Trading Permit (``ETP'') Holder involved in a transaction subject to
proposed paragraph (k) shall be notified as soon as practicable by the
Exchange, and that the party aggrieved by the action may appeal such
action in accordance with Exchange Rule 11.19(e)(2).
In particular, the Exchange believes it is necessary to have
authority to nullify trades that occur in an event similar to an event
involving an exchange offer (``Exchange Offer'') made by U.S. Bancorp
on the New York Stock Exchange (``NYSE'') in 2010 in which there were a
series of executions based on incorrect or grossly misinterpreted
issuance information. As a result of such information, the securities
traded at severely dislocated prices. At the time, the NYSE filed an
emergency rule
[[Page 25974]]
filing in order to respond to that event.\8\ With the filing the NYSE
interpreted the rule applicable to clearly erroneous executions as
permitting the NYSE to nullify all trades resulting after the Exchange
Offer at severely dislocated prices.\9\ The Exchange believes it is
important to have in place a rule to break such trades if an event like
the U.S. Bancorp event occurs again in the future. The U.S. Bancorp
event is described in further detail below and is intended to be
illustrative of the manner in which the Exchange proposes to utilize
proposed paragraph (k), if necessary.
---------------------------------------------------------------------------
\8\ Securities Exchange Act Release No. 62609 (July 30, 2010),
75 FR 47327 (August 5, 2010) (SR-NYSE-2010-55).
\9\ Id.
---------------------------------------------------------------------------
In May 2010, U.S. Bancorp commenced an offer to exchange up to
1,250,000 Depositary Shares, each representing a 1/100 interest in a
share of Series A Non-Cumulative Perpetual Preferred Stock, $100,000
liquidation preference per share (the ``Depositary Shares'') for any
and all of the 1,250,000 outstanding 6.189% Fixed-to-Floating Rate
Normal ITS issued by U.S. Bancorp Capital IX, each with a liquidation
amount of $1,000 (the ``Normal ITS''). The Depositary Shares were
approved for listing on the NYSE under the symbol USB PRA. On June 11,
2010, the NYSE opened the shares on a quote, but trading did not
commence until June 16, 2010 at prices in the range of $79.00 per
share. There were additional executions on the NYSE in that price range
on June 17 and 18, 2010. On June 18, 2010, NYSE staff learned that the
prices at which trades had executed were not consistent with the value
of the security, which was closer to an $800 price. Upon learning of
the pricing disparity, NYSE immediately halted trading in the
Depositary Shares on all markets and alerted U.S. Bancorp and other
exchanges that traded the Depositary Shares of the pricing discrepancy.
In order to address the situation, the NYSE filed a proposal to
interpret its existing clearly erroneous execution rule such that the
trading in Depository Shares from June 16 to June 18 constituted a
single event because that trading was based on incorrect or grossly
misinterpreted issuance information that resulted in severe price
dislocation (the ``U.S. Bancorp Event'').\10\ Because the Depository
Shares were halted before the price of the Depository Shares ceased to
be dislocated, and remain halted, the NYSE was able to review trading
in Depository Shares and declare null and void all trading in the U.S.
Bancorp Event before the security resumed trading. Rather than filing a
proposal in response to a similar event happening again, the Exchange
proposes to add paragraph (k) in order to nullify transactions
consistent with the description of the proposed Rule above.
---------------------------------------------------------------------------
\10\ Id.
---------------------------------------------------------------------------
Executions After a Trading Halt Has Been Declared
The Exchange proposes to add new paragraph (l) to Rule 11.19 to
make clear that in the event of any disruption or malfunction in the
operation of the electronic communications and trading facilities of
the Exchange, another market center or responsible single plan
processor in connection with the transmittal or receipt of a trading
halt, the Exchange will nullify any transaction that occurs after the
primary listing market for a security declares a trading halt and
before such trading halt with respect to such security has officially
ended according to the primary listing market. In addition, proposed
paragraph (l) will make clear that in the event a trading halt is
declared, then prematurely lifted in error and then re-instituted, the
Exchange will nullify transactions that occur before the official,
final end of the trading halt according to the primary listing market.
As with other provisions in Rule 11.19, including proposed
paragraph (k) as discussed above, the authority to nullify transactions
pursuant to paragraph (l) would be vested in an Officer of the Exchange
or other senior level employee designee, acting on his or her own
motion. Any action taken in connection with paragraph (l) would be
taken in a timely fashion, generally within thirty (30) minutes of the
detection of the erroneous transaction and in no circumstances later
than the start of Regular Trading Hours \11\ on the trading day
following the date of the execution(s) under review. The Exchange also
proposes to specify that any action taken in connection with proposed
paragraph (l) will be taken without regard to the Numerical Guidelines
set forth in paragraph (c)(1) of Rule 11.19. The Exchange believes it
is appropriate to act to nullify transactions pursuant to proposed
paragraph (l) without regard to applicable Numerical Guidelines because
in the situations covered by paragraph (l), such transactions should
not have occurred in the first instance, and thus, their nullification
does not put parties in any different position than they should have
been. The Exchange also believes that the certainty that the proposed
rule provides is critical in situations involving trading halts.
---------------------------------------------------------------------------
\11\ Regular Trading Hours are defined in Exchange Rule 1.5 as
the time between 9:30 a.m. and 4:00 p.m. Eastern Time.
---------------------------------------------------------------------------
As it has proposed for paragraph (k) described above, the Exchange
also proposes to include a provision stating that each ETP Holder
involved in a transaction subject to proposed paragraph (l) shall be
notified as soon as practicable by the Exchange, and that the party
aggrieved by the action may appeal such action in accordance with
Exchange Rule 11.19(e)(2).
The Exchange notes that trading in a security is typically halted
immediately on the Exchange when the primary listing market issues a
trading halt in such security. However, in certain circumstances, due
to a technical issue related to the transmission or receipt of the
electronic message instituting such trading halt or due to other
extraordinary circumstances, executions can occur on the Exchange
following the declaration of such a trading halt. Similarly, although
rare, the Exchange has witnessed scenarios where due to extraordinary
circumstances a trading halt is declared, then prematurely lifted in
error and then re-instituted. It is these types of extraordinary
circumstances that the Exchange believes require certainty, and thus,
the Exchange believes it necessary to make clear that in such a
circumstance any transactions after a trading halt has been declared
will be nullified. In the event that a trading halt is declared as of a
future time (i.e., if the primary listing exchange declares a trading
halt as of a specific, future time in order to ensure coordination
among market participants), the Exchange would only nullify
transactions occurring after the time the trading halt was supposed to
be in place until the official end of the trading halt according to the
primary listing market.
The Exchange also notes that it currently has authority pursuant to
paragraph (g) of Rule 11.19 to review and nullify transactions that
arise during a disruption or malfunction in the operation of any
electronic communications and trading facilities of the Exchange.
Further, paragraph (g) of Rule 11.19 gives the Exchange authority to
use a lower numerical guideline than is set forth in paragraph (c)(1)
of the Rule when necessary to maintain a fair and orderly market and to
protect investors and the public interest. Thus, while the Exchange
believes that paragraph (g) does give the Exchange the authority to
nullify transactions occurring when there is an Exchange
[[Page 25975]]
technical issue related to the transmission or receipt of the
electronic message instituting a trading halt or with respect to a
technical issue related to a prematurely lifted trading halt, the
Exchange believes that proposed paragraph (l) will provide appropriate
authority for the Exchange to nullify all such transactions whether or
not the systems problem occurs on the Exchange with respect to trading
halts and explicit clarity for market participants that such
transactions will be nullified. The Exchange believes that such
authority is appropriate because when relied upon the Exchange will be
cancelling trades that should not have occurred in the first instance.
Finally, the Exchange believes that such authority is appropriate
because a trading halt declared by the primary listing market is
indicative of an issue with respect to the applicable security or a
larger set of securities.
2. Statutory Basis
The Exchange believes that its proposal is consistent with the
requirements of the Act and the rules and regulations thereunder that
are applicable to a national securities exchange and, in particular,
with the requirements of Section 6(b) of the Act.\12\ In particular,
the proposal is consistent with Section 6(b)(5) of the Act,\13\ because
it would promote just and equitable principles of trade and operate to
remove impediments to, and perfect the mechanism of, a free and open
market and a national market system.
---------------------------------------------------------------------------
\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes that it is appropriate to adopt a provision
granting it the authority to nullify trades that occur if an Event
similar to the U.S. Bancorp Event occurs again. The Exchange believes
that this provision will allow the Exchange to act in the event of such
a severe valuation error, that such an action would promote just and
equitable principles of trade, and that the proposal is therefore
consistent with the Act. Similarly, the Exchange believes that adding a
provision allowing the Exchange to nullify transactions that occur when
a trading halt is declared, then prematurely lifted in error and then
reinstituted, and providing that in the event of any disruption or
malfunction in the operation of the electronic communications and
trading facilities of the Exchange, another market center or
responsible single plan processor in connection with the transmittal or
receipt of a trading halt the Exchange will nullify trades occurring
after a trading halt has been declared by the primary listing market
for the security, will help to avoid confusion among market
participants, which is consistent with the protection of investors and
the public interest and therefore consistent with the Act. The Exchange
further believes that the proposal is appropriate and consistent with
the Act because when relied upon the Exchange will be canceling trades
that should not have occurred in the first instance. The Exchange also
believes that the proposal is appropriate because a trading halt
declared by the primary listing market is indicative of an issue with
respect to the applicable security or a larger set of securities.
The Exchange believes that the proposal to update the cross-
references in existing paragraph (j) of Rule 11.19 to include new
paragraphs (k) and (l) is consistent with the Act because, as is the
case with respect to the current rule, this change makes clear that the
provisions of paragraph (j) do not alter the application of the other
provisions of Rule 11.19.
The Exchange believes that the Financial Industry Regulatory
Authority (``FINRA'') and other national securities exchanges are also
filing similar proposals to add provisions similar to the provisions
proposed by the Exchange above. Therefore, the proposal promotes just
and equitable principles of trade in that it promotes transparency and
uniformity across markets concerning treatment of transactions as
clearly erroneous. The proposed rule change would also help to assure
consistent results in handling erroneous trades across the U.S.
markets, thus furthering fair and orderly markets, the protection of
investors and the public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change
implicates any competitive issues. To the contrary, as noted above, the
Exchange believes FINRA and other national securities exchanges are
also filing similar proposals, and thus, that the proposal will help to
ensure consistency across market centers.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has not solicited, and does not intend to solicit,
written comments on the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The proposed rule change was filed with the Commission pursuant to
Section 19(b)(2) of the Act. 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 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 Number SR-NSX-2014-08 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-NSX-2014-08. 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
[[Page 25976]]
business days between the hours of 10:00 a.m. and 3:00 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 Number SR-NSX-2014-08, and should be submitted on or before May
27, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
---------------------------------------------------------------------------
\14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-10282 Filed 5-5-14; 8:45 am]
BILLING CODE 8011-01-P