[Federal Register Volume 84, Number 74 (Wednesday, April 17, 2019)]
[Notices]
[Pages 16086-16092]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-07637]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85623; File No. 4-631]


Joint Industry Plan; Order Approving the Eighteenth Amendment to 
the National Market System Plan To Address Extraordinary Market 
Volatility by Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe 
EDGA Exchange, Inc., Cboe EDGX Exchange, Inc., Chicago Stock Exchange, 
Inc., Financial Industry Regulatory Authority, Inc., Investors Exchange 
LLC, NASDAQ BX, Inc., NASDAQ PHLX LLC, The Nasdaq Stock Market LLC, 
NYSE National, Inc., New York Stock Exchange LLC, NYSE American LLC, 
and NYSE Arca, Inc.

April 11, 2019.

I. Introduction

    On November 5, 2018, NYSE Group, Inc., on behalf of the other 
parties \1\ to the National Market System Plan to Address Extraordinary 
Market Volatility (the ``Plan''), filed with the Securities and 
Exchange Commission (``Commission'') pursuant to Section 11A of the 
Securities Exchange Act of 1934 (``Act'') \2\ and Rule 608 
thereunder,\3\ a proposal to amend the Plan \4\ to, among other things, 
amend Section VIII of the Plan to transition the Plan from operating on 
a pilot to a permanent basis. The proposal represents the eighteenth 
amendment to the Plan, and reflects proposed changes unanimously 
approved by the Participants (``Eighteenth Amendment''). A copy of the 
Plan is

[[Page 16087]]

attached hereto as Exhibit A. The proposed Eighteenth Amendment was 
published for comment in the Federal Register on December 26, 2018.\5\ 
The Commission received three comment letters regarding the 
amendment.\6\ This order approves the Eighteenth Amendment to the Plan 
as proposed.
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    \1\ Cboe BZX Exchange, Inc., Cboe BYX Exchange, Inc., Cboe EDGA 
Exchange, Inc., Cboe EDGX Exchange, Inc., Chicago Stock Exchange, 
Inc., the Financial Industry Regulatory Authority, Inc. (``FINRA''), 
Investors Exchange LLC (``IEX''), NASDAQ BX, Inc., NASDAQ PHLX LLC, 
The NASDAQ Stock Market LLC (``Nasdaq''), New York Stock Exchange 
LLC (``NYSE''), NYSE Arca, Inc., NYSE National Inc., and NYSE 
American LLC (collectively, the ``Participants'').
    \2\ 15 U.S.C. 78k-1.
    \3\ 17 CFR 242.608.
    \4\ See Letter from Elizabeth King, General Counsel and 
Corporate Secretary, NYSE, to Brent Fields, Secretary, Commission, 
dated November 2, 2018 (``Transmittal Letter'').
    \5\ See Securities Exchange Act Release No. 84843 (December 18, 
2018), 83 FR 66464 (``Notice'').
    \6\ See Letter from Theodore R. Lazo, Managing Director and 
Associate General Counsel, The Securities Industry and Financial 
Markets Association (``SIFMA'') to Brent J. Fields, Secretary, 
Commission, dated January 16, 2019 (``SIFMA Letter''); Letter from 
Susan M. Olson General Counsel, Investment Company Institute; John 
Ramsay, Chief Market Policy Officer, IEX; T.R. Lazo, Managing 
Director and Associate General Counsel, SIFMA to Brent J. Fields, 
Secretary, Commission, dated January 16, 2019 (``ICI Letter''); 
Samara Cohen, Head of Global Markets, BlackRock; Timothy J. Coyne, 
Global Head of SPDR ETF Capital Markets, State Street Global 
Advisors; Stephen John Berger, Managing Director, Global Head of 
Government & Regulatory Policy, Citadel Securities; Tim Gately, Head 
of Americas Equities, Citigroup Global Markets Inc.; Chris 
Hempstead, Head ETF Sales, Deutsche Bank Securities Intl.; Luke 
Oliver, Head of US ETF Capital Markets, DWS Investment Management 
Americas Inc.; Bas Tammens, CFA, Head of Business Development, Flow 
Traders US LLC; Andrew Stevens, General Counsel, IMC; Eric M. 
Pollackov, Global Head of ETF Capital Markets, Invesco Ltd.; Michael 
Lewin, CEO, Istra LLC; Frank Liu, Chief Compliance Officer, Jane 
Street Capital, LLC; Michael Lieder, Head of US ETF Capital Markets, 
J.P. Morgan Asset Management; Christopher Berthe, Head of Global 
Cash Execution, Equities, J.P. Morgan Securities LLC; Sapna Patel, 
Head of Americas Market Structure and Liquidity Strategy, Morgan 
Stanley & Co. LLC; Sean Stanzak, RBC Capital Markets; Damon 
Walvoord, ETF Business Development, Susquehanna International Group; 
Jim Toes, President and CEO, Security Traders Association; Mehmet 
Kinak, Global Head of Systematic Trading and Market Structure, T. 
Rowe Price Associates, Inc.; Vlad Khandros, Global Head of Market 
Structure and Liquidity Strategy, UBS Securities LLC; Ryan Ludt, 
Global Head of ETF Capital Markets, Vanguard; John Dibacco, Global 
Head Equities Trading, Virtu Financial Inc.; Anita Rausch, Head of 
Capital Markets, WisdomTree Asset Management, Inc. to Brent J. 
Fields, Secretary, Commission, dated January 30, 2019 (``Market 
Participants Letter'').
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II. Background

    On May 6, 2010, the U.S. equity markets experienced a severe 
disruption.\7\ Among other things, the prices of a large number of 
individual securities suddenly declined by significant amounts in a 
very short time period, before suddenly reversing to prices consistent 
with their pre-decline levels. The Commission was concerned that events 
such as those that occurred on May 6, 2010 could seriously undermine 
the integrity of the U.S. markets. Accordingly, Commission staff worked 
with the exchanges and FINRA (``SROs'') to develop policy responses 
that would help prevent a recurrence of the May 6 market disruption. 
Initially, the SROs developed a single-stock circuit breakers pilot 
program, implemented through a series of rule filings, to pause trading 
during periods of extraordinary volatility in all NMS Stocks, except 
rights and warrants.
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    \7\ The events of May 6 are described more fully in a joint 
report by the staffs of the Commodity Futures Trading Commission and 
the Commission. See Report of the Staffs of the CTFC and SEC to the 
Joint Advisory Committee on Emerging Regulatory Issues, ``Findings 
Regarding the Market Events of May 6, 2010'' (September 30, 2010), 
available at http://www.sec.gov/news/studies/2010/marketevents-report.pdf.
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    As a replacement to the single-stock circuit breaker pilot, the 
Participants filed the Plan with the Commission on April 5, 2011 to 
create a market-wide limit up-limit down (``LULD'') mechanism intended 
to address extraordinary market volatility in ``NMS Stocks,'' as 
defined in Rule 600(b)(47) of Regulation NMS under the Exchange Act.\8\ 
The Plan sets forth procedures that provide for market-wide limit up-
limit down requirements to prevent trades in individual NMS Stocks from 
occurring outside of the specified Price Bands.\9\ These limit up-limit 
down requirements are coupled with Trading Pauses, as defined in 
Section I(Y) of the Plan, to accommodate more fundamental price moves 
(as opposed to erroneous trades or momentary gaps in liquidity). The 
limit up-limit down mechanism is intended to reduce the negative 
impacts of sudden, unanticipated price movements in NMS Stocks, such as 
those experienced on May 6, 2010, thereby protecting investors and 
promoting a fair and orderly market.
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    \8\ 17 CFR 242.600(b)(47). See also Section I(H) of the Plan.
    \9\ Unless otherwise specified, the terms used herein have the 
same meaning as set forth in the Plan or the revisions to the Plan 
proposed in the Eighteenth Amendment. See Notice, supra note 5, 
Exhibit A.
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    The Plan was approved in May 2012 on a pilot basis to ``allow the 
Participants and the public to gain valuable practical experience with 
Plan operations during the pilot period'' and to assess ``whether 
further modifications of the Plan are necessary or appropriate prior to 
final approval.'' \10\ After two amendments,\11\ the initial date of 
Plan operations was April 8, 2013.\12\ Since that date, the Plan has 
been amended fourteen times \13\ and the pilot period has been extended 
six times.\14\ The most recent substantive changes to the Plan were 
made through the Tenth,\15\ Twelfth,\16\ and Thirteenth \17\ 
Amendments. On May 28, 2015, the Participants submitted a Supplemental 
Joint Assessment, in which the Participants provided additional 
analysis required under Appendix B.\18\
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    \10\ See Securities Exchange Act Release No. 67091, 77 FR 33498 
(June 6, 2012) (File No. 4-631) (``Plan Approval Order'') (approving 
Plan as amended).
    \11\ See Securities Exchange Act Release Nos. 68953 (February 
20, 2013), 78 FR 13113 (February 26, 2013) (noticing for immediate 
effectiveness the Second Amendment to the Plan); 69287 (April 3, 
2013), 78 FR 21483 (April 10, 2013) (approving the Third Amendment 
to the Plan).
    \12\ See Securities Exchange Act Release No. 68953 (February 20, 
2013), 78 FR 13113 (February 26, 2013).
    \13\ On August 27, 2013, the Commission noticed for immediate 
effectiveness the Fourth Amendment to the Plan. See Securities 
Exchange Act Release No. 70273, 78 FR 54321 (September 3, 2013). On 
September 26, 2013, the Commission approved the Fifth Amendment to 
the Plan. See Securities Exchange Act Release No. 70530, 78 FR 60937 
(October 2, 2013). On January 7, 2014, the Commission noticed for 
immediate effectiveness the Sixth Amendment to the Plan. See 
Securities Exchange Act Release No. 71247, 79 FR 2204 (January 13, 
2014). On April 3, 2014, the Commission approved the Seventh 
Amendment to the Plan. See Securities Exchange Act Release No. 
71851, 79 FR 19687 (April 9, 2014) (``Seventh Amendment Approval 
Order''). On February 19, 2015, the Commission approved the Eight 
Amendment to the Plan. See Securities Exchange Act Release No. 
74323, 80 FR 10169 (February 25, 2015) (``Eighth Amendment Approval 
Order''). On October 22, 2015, the Commission approved the Ninth 
Amendment to the Plan. See Securities Exchange Act Release No. 
76244, 80 FR 66099 (October 28, 2015) (``Ninth Amendment Approval 
Order''). On April 21, 2016, the Commission approved the Tenth 
Amendment to the Plan. See Securities Exchange Act Release No. 
77679, 81 FR 24908 (April 27, 2016) (``Tenth Amendment Approval 
Order''). On August 26, 2016, the Commission noticed for immediate 
effectiveness the Eleventh Amendment to the Plan. See Securities 
Exchange Act Release No. 78703, 81 FR 60397 (September 1, 2016). On 
January 19, 2017, the Commission approved the Twelfth Amendment to 
the Plan. See Securities Exchange Act Release No. 79845, 82 FR 8551 
(January 26, 2017) (``Twelfth Amendment Approval Order''). On April 
13, 2017, the Commission approved the Thirteenth Amendment to the 
Plan (``Thirteenth Amendment Approval Order''). See Securities 
Exchange Act Release No. 80455, 82 FR 18519 (April 19, 2017). On 
April 28, 2017, the Commission noticed for immediate effectiveness 
the Fourteenth Amendment to the Plan. See Securities Exchange Act 
Release No. 80549, 82 FR 20928 (May 4, 2017). On September 26, 2017, 
the Commission noticed for immediate effectiveness the Fifteenth 
Amendment to Plan. See Securities Exchange Act Release No. 81720, 82 
FR 45922 (October 2, 2017). On March 15, 2018, the Commission 
noticed for immediate effectiveness the Sixteenth Amendment to the 
Plan. See Securities Exchange Act Release No. 82887, 83 FR 12414 
(March 21, 2018) (File No. 4-631). On April 12, 2018, the Commission 
approved the Seventeenth Amendment to the Plan. See Securities 
Exchange Act Release No. 83044, 83 FR 17205 (April 18, 2018) 
(``Seventeenth Amendment Approval Order'').
    \14\ See Seventh Amendment Approval Order; Eighth Amendment 
Approval Order; Ninth Amendment Approval Order; Tenth Amendment 
Approval Order; Thirteenth Amendment Approval Order; Seventeenth 
Amendment Approval Order, supra note 13.
    \15\ See Tenth Amendment Approval Order, supra note 13.
    \16\ See Twelfth Amendment Approval Order, supra note 13.
    \17\ See Thirteenth Amendment Approval Order, supra note 13.
    \18\ See Ninth Amendment Approval Order, supra note 13.

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[[Page 16088]]

III. Description of the Proposal

    In the Eighteenth Amendment, the Participants propose to: (i) Amend 
Section VIII of the Plan to transition the Plan from operating on a 
pilot to a permanent basis; (ii) adopt a mechanism for periodic review 
and assessment of the Plan; (iii) eliminate the doubling of the 
Percentage Parameters between 9:30 a.m. and 9:45 a.m.; and (iv) 
eliminate the doubling of the Percentage Parameters between 3:35 p.m. 
and 4:00 p.m., or in the case of an early scheduled close, during the 
last 25 minutes of trading before the early scheduled close, for Tier 2 
NMS Stocks with a Reference Price above $3.00.

IV. Summary of Comments Received

    The Commission received three comment letters regarding the 
amendment.\19\ All three commenter letters support approval of the 
Eighteenth Amendment.\20\ Two commenters specifically support the 
proposal to transition the plan from a pilot to operating on a 
permanent basis, subject to periodic review and assessment.\21\ Two 
commenters support the proposal to eliminate the doubling of percentage 
parameters,\22\ with both commenters providing specific rationales for 
eliminating doubling of parameters between 9:30 a.m. and 9:45 a.m.,\23\ 
and one commenter providing specific support for the elimination of 
double-wide Price Bands at the close for certain securities.\24\
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    \19\ See supra note 6.
    \20\ See SIFMA Letter, supra note 6, at 1 (recommending the 
Commission adopt the proposal); ICI Letter, supra note 6, at 1 
(urging Commission to approve the proposal); Market Participants 
Letter supra note 6, at 1 (stating collective support for the 
proposals in the Eighteenth Amendment).
    \21\ See SIFMA Letter, supra note 6, at 2 (stating the plan has 
been effective in suspending trading before execution when a 
security experiences extraordinary price volatility and has been 
effective during particularly volatile market conditions like August 
24, 2015 and February 2018); Market Participants Letter supra note 
6, at 1 (stating that the Plan helps not only to ensure orderly 
markets in periods of extraordinary volatility, but also prevents 
potentially harmful price volatility during normal market 
conditions).
    \22\ See SIFMA Letter, supra note 6, at 2-3 (stating that 
eliminating double-wide Price Bands should reduce volatility and not 
result in a significant increase in limit states and trading pauses 
during that time, and that market participants will adjust their 
quotes to be within the tighter Price Bands); Market Participants 
Letter supra note 6, at 2.
    \23\ See SIFMA Letter, supra note 6, at 3 (stating that 
narrowing of the Price Bands at 9:45 a.m. has led to some extraneous 
halts from quotations not being updated before the narrowing and 
citing the proposal's statement that over 21% of all limit states 
and trading pauses occur in the five minutes following the 
contraction of Price Bands); Market Participants Letter supra note 
6, at 2 (stating that although elimination of double-wide Price 
Bands between 9:30 a.m. and 9:45 a.m. could increase the number of 
LULD trading pauses that occur during this time period, it will help 
reduce the number of extraneous halts that occur at or shortly after 
9:45 a.m. and that on August 24th, 2015, the tightening of LULD 
parameters at 9:45 a.m. impeded price discovery as markets recovered 
following rapid declines at the start of regular trading hours).
    \24\ See Market Participants Letter supra note 6, at 1 (stating 
that doubling the LULD Percentage Parameters for these securities is 
unwarranted and leaves investors at risk of extreme price 
movements).
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    Beyond addressing the proposals in the Eighteenth Amendment, one 
commenter urges the Commission to add representatives of non-SRO 
experts, including advisers to registered funds and broker-dealers, to 
the operating committee of the Limit Up-Limit Down Plan and other NMS 
plans.\25\ Another commenter recommends that the Commission, after 
adopting the proposal, adopt the recommendation of the Equity Market 
Structure Advisory Committee (``EMSAC'') \26\ to review clearly 
erroneous execution (``CEE'') rules to promote certainty of execution 
so that all trades executed within the Limit Up-Limit Down Plan bands 
stand.\27\
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    \25\ See ICI Letter supra note 6, at 1 (stating that the Plan 
governance framework fails to take account of the interests of non-
SROs and the potential contributions non-SROs could make to NMS plan 
governance and that NMS plan operating committees would be far 
better informed-and less influenced by conflicts of interest if they 
included non-SRO representatives). While this is outside the scope 
of this proposed amendment, SEC staff will consider this comment to 
the extent it is relevant in connection with future regulatory 
recommendations.
    \26\ SEC Equity Market Structure Advisory Committee, 
Recommendations for Rulemaking on Issues of Market Quality (November 
29, 2016), available at https://www.sec.gov/spotlight/emsac/emsac-recommendations-rulemaking-market-quality.pdf.
    \27\ See SIFMA Letter supra note 6, at 3 (stating that the 
inconsistencies between CEE levels and Plan stock tiers and Price 
Bands result in some executions within Plan Price Bands breaking 
pursuant to CEE rules with narrower percentage ranges). The 
Commission notes that the CEE rules are contained in the various SRO 
rulebooks and function independently of the Plan as previously 
operated or as will be operated pursuant to Amendment 18. See, e.g., 
NYSE Rule 128(a); CBOE BZX Rule 11.17; IEX Rule 11.270. The 
Commission would consider, pursuant to the Exchange Act, any 
proposed rule changes that would modify operation of the current CEE 
rules.
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V. Discussion and Commission Findings

    The Commission finds that the Eighteenth Amendment, as proposed, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder. Specifically, the Commission finds that the 
Eighteenth Amendment is consistent with Section 11A of the Act \28\ and 
Rule 608 thereunder \29\ in that, as discussed below, the proposal is 
appropriate in the public interest, for the protection of investors and 
the maintenance of fair and orderly markets, and that it removes 
impediments to, and perfects the mechanism of, a national market 
system.
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    \28\ 15 U.S.C. 78k-1.
    \29\ 17 CFR 242.608.
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Proposal for Plan To Operate on a Permanent Basis

    The Plan was originally approved on a pilot basis to allow the 
public, the Participants, and the Commission to assess the operation of 
the Plan and whether the Plan should be modified prior to consideration 
of approval on a permanent basis.\30\ The Plan has been operating on a 
pilot basis since its inception.\31\ The Participants are now proposing 
to make the Plan permanent, with procedures to help ensure regular 
monitoring of the LULD mechanism.\32\
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    \30\ See Plan Approval Order, supra note 10, at 33508.
    \31\ See Plan Approval Order, supra note 10.
    \32\ See Notice, supra note 5, at 66466, 66471.
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    In support of their proposal for permanence, the Participants state 
that during the pilot period they collected and provided to the 
Commission and the public with a significant amount of data on the 
Plan's performance to aid in an assessment of its operations.\33\ The 
Participants state that the data collected during the pilot period and 
studies conducted by the Participants and the Commission's Division of 
Economic and Risk Analysis (``DERA'') show that the Plan has been 
beneficial to the markets by serving to dampen price volatility.\34\ 
The Participants cite a DERA analysis that, depending on the 
methodology employed, found evidence that the LULD mechanism reduced 
extraordinary transitory volatility relative to the Single Stock 
Circuit Breaker (``SSCB'') mechanism that was in place prior to the 
LULD mechanism.\35\ The Participants also rely on the results of the 
Supplemental Joint Assessment by the Participants that found that the 
number of trades that were cancelled decreased under the Plan and that 
the Plan's parameters were successful in preventing trades from 
occurring outside of the Price Bands, thus avoiding the types of 
mispriced trades that resulted in the Flash Crash.\36\
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    \33\ See id. at 66466.
    \34\ See id.
    \35\ See id. (citing ```Limit Up-Limit Down'' Pilot Plan and 
Extraordinary Transitory Volatility'', by Paul Hughes, John Ritter, 
and Hao Zhang, DERA (December 2017), available at https://www.sec.gov/comments/4-631/4631-2830173-161647.pdf.)
    \36\ See id. (citing National Market System Plan Assessment to 
Address Extraordinary Market Volatility (the ``Supplemental Joint 
Assessment'' or ``Assessment''), available at https://www.sec.gov/comments/4-631/4631-39.pdf.)

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[[Page 16089]]

    The Participants further state that recent amendments approved by 
the Commission have improved the operation of the Plan.\37\ Amendment 
No. 10 changed the manner in which Reference Prices were determined in 
situations where a security opened for trading on a quote rather than a 
trade. Prior to implementation of Amendment No. 10, Participants state 
that Reference Prices in these situations triggered Limit States and 
Trading Pauses at inaccurate price levels.\38\ After implementation of 
Amendment No. 10, data provided by the Participants in the Transmittal 
Letter showed the number of Trading Pauses dropped significantly.\39\ A 
White Paper written by DERA confirmed these findings.\40\
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    \37\ See id. at 66467.
    \38\ See id.
    \39\ See id. at 66468-9.
    \40\ See id. at 66469 (citing ``The Effects of Amendment No. 10 
of the `Limit Up-Limit Down' Pilot Plan'', by Paul Hughes, DERA 
(December 2017), available at https://www.sec.gov/comments/4-631/4631-2830189-161648.pdf.)
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    Additionally, the Participants note that the implementation of 
Amendment Nos. 12 and 13 in November 2017 modified the operation of the 
Plan to address issues that were uncovered by market events on August 
24, 2015.\41\ These changes, which were made alongside coordinated 
changes by Primary Listing Exchanges to their reopening auction 
processes, were designed to avoid repeated Trading Pauses by improving 
the accuracy of reopening prices.\42\ To achieve this, the Plan was 
amended to prohibit trade resumption until a Primary Listing Exchange 
conducted a reopening auction, a feature that was designed to 
concentrate liquidity in the reopening auctions.\43\ The Primary 
Listing Exchanges also harmonized aspects of their reopening auction 
processes that provided for gradual extension of auction time frames 
accompanied by a gradual widening of auction price ranges with each 
auction extension.\44\ The Participants state that since these changes, 
although there has not been an event like August 24, 2015, there has 
been stable price continuity at the open and following reopenings after 
a Trading Pause, and the amended Plan has worked well during normal 
market conditions as well as the volatile market activity that occurred 
in February 2018.\45\
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    \41\ See id. at 66469-70.
    \42\ See id.
    \43\ See Twelfth Amendment Approval Order; Thirteenth Amendment 
Approval Order, supra note 13.
    \44\ See Securities Exchange Act Release Nos. 79846 (January 19, 
2017), 82 FR 8548 (January 26, 2017) (SR-NYSEArca-2016-130); 79884 
(January 26, 2017), 82 FR 8968 (February 1, 2017) (SR-BatsBZX-2016-
61); 79876 (January 25, 2017), 82 FR 8888 (January 31, 2017) (SR-
Nasdaq-2016-131). The Primary Listing Exchanges implemented these 
changes to their automated reopenings on November 20, 2017.
    \45\ See Notice, supra note 5, at 66470. The Commission notes 
that while the Participants have not yet published a data analysis 
of the effects of Amendments 12 and 13, the effectiveness of these 
amendments will continue to be assessed as part of the proposed 
ongoing review of the Plan described in detail below.
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    The Commission notes that the analysis presented by the 
Participants, in addition to other analyses, demonstrates that the Plan 
has operated effectively in accomplishing its stated goal of addressing 
extraordinary market volatility.\46\ For example, the analysis 
presented in the Supplemental Joint Assessment demonstrates that the 
Plan has been effective in reducing volatility by showing that the Plan 
has reduced the frequency of multiple cancellation events that occur 
compared to the period during which the SSCB mechanism was in effect, 
as well as the time period before the SSCB mechanism was in effect.\47\ 
The Commission notes that this analysis is also consistent with other 
analyses. One of the DERA White Papers cited by the Participants also 
found that the Plan's mechanism reduced extraordinary transitory 
volatility relative to the SSCB mechanism, as well as the time period 
before the SSCB mechanism was in effect.\48\ Both the Supplemental 
Joint Assessment \49\ and a DERA White Paper \50\ demonstrate that over 
90% of Limit States resolve themselves in less than five seconds. 
Alternatively, the Commission notes that other analysis has found that 
the LULD mechanism increased the number of trading pauses and cancelled 
trades in Tier 2 securities compared to the SSCB mechanism.\51\ 
However, since this study focused on the time period before the 
implementation of Amendment 10, the results could be driven by bad 
Reference Prices that resulted from opening auctions with no trades. 
Both a DERA White Paper \52\ and the Transmittal Letter from the 
Participants,\53\ present analysis that demonstrates that Amendment 10 
reduced the number of Trading Pauses that occurred during the trading 
day.
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    \46\ See also Market Participants Letter, supra note 6, at 1 
(stating, ``We support making LULD permanent, subject to periodic 
review and assessment, because we believe LULD is beneficial to the 
national market system. LULD not only helps to ensure orderly 
markets in periods of extraordinary volatility, but also prevents 
potentially harmful price volatility during normal market 
conditions, when transitory gaps in liquidity may occur for non-
fundamental reasons''); SIFMA Letter, supra note 6, at 2 (stating, 
``[T]he Limit Up-Limit Down Plan has been effective during 
particularly volatile market conditions. As evidenced by the market 
events on August 24, 2015, the Limit Up-Limit Down Plan bands work 
to limit runaway stocks and panic selling or buying. Additionally, 
in February 2018, the Limit Up-Limit Down Plan operated as intended 
to reduce volatility by keeping prices within the bands. As a 
result, the Limit Up-Limit Down Plan falls within the Commission's 
mission to protect investors and promote fair, orderly, and 
efficient markets, and the plan should be made permanent'').
    \47\ See Supplemental Joint Assessment, supra note 36, at 34-35. 
For purposes of the Supplemental Joint Assessment, a multiple 
cancellation event is an event in which there were six or more 
cancelled trade reports for a single stock during the day.
    \48\ See supra note 35.
    \49\ See Supplemental Joint Assessment, supra note 36, at 19.
    \50\ See ```Limit Up-Limit Down' Pilot Plan and Associated 
Events'', by Claudia Moise and Paca Flaherty, DERA (March 2017), 
(available at https://www.sec.gov/files/dera-luld-white-paper.pdf) 
at 25.
    \51\ See id., at 28-31.
    \52\ See supra note 40.
    \53\ See Charts A and B in the Notice, supra note 5, at 66468-9.
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    The Participants have worked together with the Plan Advisory 
Committee to identify instances where improvements to the Plan were 
necessary, and developed and implemented amendments to the Plan to 
modify the operation of the LULD mechanism to help ensure its continued 
effectiveness over time.\54\ As a result of these efforts and based on 
analyses of the Plan's operation, the Commission believes that the LULD 
mechanism effectively addresses extraordinary market volatility, and 
therefore is approving the Plan on a permanent basis.
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    \54\ See infra notes 15-17 and accompanying text for 
descriptions of Amendment Nos. 10, 12 and 13.
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    The Commission recognizes, however, that the market is dynamic and 
constantly evolving and that the Participants will continue to study 
the Plan. As a result, certain features or parameters used in the LULD 
mechanism may require modifications over time for the mechanism to 
remain effective. For example, the occurrence of CEE events and long-
lasting Straddle States, i.e. Straddle States that last longer than 
five minutes,\55\ demonstrate that the parameters for Price Bands set 
forth in the Plan need to continue to be monitored in order to ensure 
their

[[Page 16090]]

calibration is appropriate.\56\ The Participants acknowledge the need 
for ongoing review of these and other types of potential issues, and 
have proposed a process that will include quarterly, annual, and ad hoc 
reports that will facilitate an ongoing assessment of the Plan's 
effectiveness.\57\
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    \55\ DERA contracted with Cornerstone Research to analyze the 
occurrence of long-lasting Straddle States under the Plan. The 
analysis found over 140 long-lasting Straddle States occurred each 
day and that they were more likely to occur in securities with lower 
trading volume, higher volatility, and smaller market 
capitalizations and on days when no trade occurs during the opening. 
See ``Memorandum from Division of Economic and Risk Analysis 
regarding Cornerstone Analysis of Long-Lasting Straddle State'', 
dated December 2017, available at https://www.sec.gov/files/DERA_Memo_on_a_Cornerstone_Straddle_State_Analysis.pdf.
    \56\ Under the amendments, data on the frequency of occurrence 
of Straddle States and Clearly Erroneous Executions (i.e. CEE 
events) will be contained in the Monitoring Report. See Notice, 
supra note 5, at 66472-3. Additionally, under the amendments, the 
Annual Report will examine the calibration of the parameters set 
forth in the Plan, including the impact of Straddle States. See 
Notice, supra note 5, at 66472.
    \57\ See Notice, supra note 5, at 66471.
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Proposed Mechanism for Periodic Review and Assessment

    The Participants state that the proposed ongoing review and 
assessment procedures are designed to ensure that the Plan will be 
monitored continually in a data-driven manner.\58\ Pursuant to this 
periodic reporting and assessment mechanism, the Participants propose 
to provide the Commission, and make publicly available, three 
categories of reports concerning the Plan's ongoing operation: (1) An 
annual report produced in consultation with the Advisory Committee 
assessing the Plan's performance,\59\ which would include an update on 
the Plan's operations,\60\ an analysis of any amendments to the Plan 
implemented during the period covered by the report,\61\ and an 
analysis of potential material emerging issues that may directly impact 
the operation of the Plan; \62\ (2) quarterly reports providing basic 
statistics that could be used to identify trends in the performance and 
impact of the Plan on market activity; \63\ and (3) upon Commission 
request, an ad hoc report on the effectiveness of LULD following a 
significant market event.\64\
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    \58\ See id.
    \59\ Any analysis conducted by the Participants and included in 
the Annual Report will be based on aggregated data from all relevant 
exchanges and FINRA, depending on the issue that is being analyzed, 
and will be posted on the Plan website. See id. at 66472.
    \60\ This section of the Annual Report will examine the 
calibration of the parameters set forth in the Plan (e.g., Price 
Bands, duration of Limit States, impact of Straddle States, duration 
of Trading Pauses, and the performance of reopening procedures 
following a Trading Pause), consider stock characteristics and 
variations in market conditions over time, and include tests that 
differentiate results for different characteristics, both in 
isolation and in combination. See id. at 66472.
    \61\ The analysis will include a discussion of the amendment's 
operation and its impact on the overall operation of the Plan. See 
id.
    \62\ This section of the Annual Report will vary from year-to-
year and include a discussion and analysis of the Plan's operation 
during a significant market event that may have occurred during the 
covered period. It will also include any additional analyses 
performed during the covered period on issues that were raised in 
previous Annual Reports. The Participants intend to discuss the 
November 29, 2016 recommendations made by EMSAC's Market Quality 
Subcommittee in this section of the first Annual Report, which will 
be produced by March 31, 2020. See id.
    \63\ The Participants will provide the Commission and make 
publicly available a report including basic statistics regarding the 
Plan's operation 30 days following the end of each calendar quarter, 
during the preceding calendar quarter as well as aggregated data 
from the previous 12 quarters beginning with the calendar quarter 
covered by the first report. The data included will be collected and 
transmitted to the Commission in an agreed-upon format that would 
allow for the download and analysis by the Commission and the 
public. See id.
    \64\ Upon Commission request, the Plan Operating Committee will 
provide the Commission and make publicly available a report 
analyzing the Plan's operation during a significant market event 
that (1) materially impacted the trading of more than one security 
across multiple Trading Centers; (2) and is directly related to or 
implicating the performance of the Plan. See id.
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    The Commission believes that a process for the ongoing evaluation 
of the Plan is critical for its permanent approval. Markets evolve, and 
the Commission believes that a process for assessing the effectiveness 
of the Plan over time will help ensure that the Plan continues to 
achieve its objective of reducing extraordinary volatility. In order to 
assess its effectiveness and identify appropriate modifications to the 
Plan, data and analysis of the ongoing functions of the LULD mechanism 
must be produced, reviewed and considered. In addition to the 
Participants, Advisory Committee members and the Commission having 
access to data and analyses regarding the Plan's performance, making 
such information available to the public will promote a robust public 
dialogue regarding the Plan's effectiveness.
    As proposed, the Participants will provide the Commission and make 
available publicly quarterly reports, including basic statistics that 
can be used to identify trends in the performance of the LULD mechanism 
and its impact on market activity. In addition, the Participants will 
provide the Commission, and make available publicly on the LULD 
website,\65\ an Annual Report containing an analysis of the Plan's 
operation, including an examination of the parameters for Price Bands 
set forth in the Plan. The Annual Report will also include an analysis 
of the impact of any amendments to the Plan on the operation on the 
LULD mechanism. Finally, the Annual Report will discuss and analyze the 
LULD mechanism's performance during any significant market event that 
occurred during the period covered by the Annual Report, as well as any 
analyses performed on issues raised in the previous Annual Report. The 
Participants intend to submit the first Annual Report no later than 
March 31, 2020.\66\ The Participants will also provide to the 
Commission upon request, and make publicly available, a report 
analyzing the Plan's operation during a significant market event to the 
extent it is not reported in the Annual Report. In addition to these 
reports, the Participants will provide the Commission upon request 
within 30 days, data that is not otherwise publicly available and is 
substantially similar to the data they are required to provide under 
the current Plan.\67\
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    \65\ The website can be found at http://www.luldplan.com. The 
Commission encourages the Participants to make Annual Reports freely 
available on a continuous basis and in a format that is easily 
accessible on the LULD website. Proposed Appendix B of the Plan 
provides that all data shall be collected and transmitted to the 
Commission in an agreed-upon format, and the Participants represent 
that this format would allow for the download and analysis by the 
Commission and the public. See Notice, supra note 5, at 66472, 
Exhibit A. The Commission encourages the Participants to make data 
and information available on the LULD website not subject to any 
restrictions, including restrictions on access, retrieval, 
distribution, and reuse.
    \66\ See Transmittal Letter, supra note 4.
    \67\ The Participants may submit this data with a request for 
confidential treatment pursuant to the Commission's rules and 
regulations under the Freedom of Information Act. See 17 CFR 200.83.
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    The Commission believes the ongoing review and assessment 
requirements proposed by the Participants will both facilitate a 
robust, data-driven assessment of the Plan's effectiveness and provide 
the Commission and the public sufficient transparency of the 
effectiveness of the LULD mechanism necessary to help ensure the Plan 
remains designed to achieve its objective.

Proposal To Amend Calculation of Percentage Parameters

    The Participants propose to (i) eliminate the doubling of the 
Percentage Parameters between 9:30 a.m. and 9:45 a.m.; and (ii) 
eliminate the doubling of the Percentage Parameters between 3:35 p.m. 
and 4:00 p.m., or in the case of an early scheduled close, during the 
last 25 minutes of trading before the early scheduled close, for Tier 2 
NMS Stocks with a Reference Price above $3.00.
A. Elimination of Double-Wide Percentage Parameters at the Open
    Currently under the Plan, between 9:30 a.m. and 9:45 a.m. (``the 
Open''), the Price Bands are calculated by applying double the 
Percentage Parameters. The Percentage Parameters are doubled to 
accommodate higher volatility at the Open.\68\ The

[[Page 16091]]

Participants propose to eliminate the double-wide Percentage Parameters 
at the Open.\69\ The Participants make two arguments for narrowing 
Price Bands at the Open.
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    \68\ See Plan Section V.A.1.
    \69\ See Notice, supra note 5, at 66473.
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    First, the Participants argue that the current contraction of price 
bands at 9:45 causes unnecessary Limit States and Trading Pauses. In 
support of this argument, the Participants provide data that shows 
there is a disproportionate number of Limit States and Trading Pauses 
that occur at or shortly after 9:45 a.m., which is the only time during 
the trading day that the Price Bands contract.\70\ Furthermore, the 
Participants present evidence that the contraction of Price Bands at 
9:45 causes Limit States and Trading Pauses at 9:45 a.m. that are not 
due to market volatility.\71\ Second, the Participants argue that 
narrower Price Bands at the Open would prevent erroneous trades during 
this time period by pausing trading at the narrower Price Bands rather 
than allowing such trades to execute at erroneous prices.\72\ The 
Participants present evidence that there are a disproportionate number 
of erroneous trades at the Open when the Price Bands are double-
wide.\73\
---------------------------------------------------------------------------

    \70\ See id.
    \71\ See id. at 66473-4.
    \72\ See id.
    \73\ See id. at 66475.
---------------------------------------------------------------------------

    While the Participants present evidence that narrowing the Price 
Bands at the Open could be beneficial to the market, the Participants 
also present data analyzing the potential negative impact of narrowing 
Price Bands at the Open. This data shows that if double-wide Percentage 
Parameters are eliminated at the Open, the number of Limit State and 
Trading Pauses could quadruple in NMS Stocks and could triple in 
ETPs.\74\ The Participants argue that this projected increase in Limit 
States and Trading Pauses may not occur, however, because they and the 
Advisory Committee anticipate that market participants will quickly 
adapt systems to quote within the new, narrower Price Bands.\75\
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    \74\ See id. at 66475-76 (eliminating the doubling of Percentage 
Parameters between 9:30 a.m. and 9:45 a.m. would increase the number 
of NMS Stocks that experience a Limit State from 1.3 to 5.5 per day, 
and increase the number of ETP that experience a Limit States from 
0.5 per day to 1.4 per day).
    \75\ See id.
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    As noted above, commenters support narrowing the Price Bands at the 
Open. One commenter argues that narrowing the Price Bands should reduce 
volatility and not result in a significant increase in Limit States and 
Trading Pauses as market participants will adjust their quotes to be 
within the narrower Price Bands.\76\ Other commenters similarly argue 
that narrowing Price Bands at the Open would promote continuous trading 
by helping reduce the number of extraneous halts that occur shortly 
after 9:45 a.m., although these same commenters recognize that there 
could be an increase in the number of Trading Pauses between 9:30 a.m. 
and 9:45 a.m.\77\ These commenters also argue that band contraction at 
9:45 a.m. has been shown to harm price discovery.\78\
---------------------------------------------------------------------------

    \76\ See SIFMA Letter, supra note 6, at 2-3.
    \77\ See Market Participants Letter supra note 6, at 2.
    \78\ See id.
---------------------------------------------------------------------------

    Calibration of the Price Bands requires the balancing of dual 
objectives: Preventing extraordinary volatility and facilitating price 
discovery. On one hand, if Price Bands are too wide, there is potential 
for extraordinary volatility resulting in trades at prices far away 
from a security's fundamental value, ultimately harming investors that 
are party to the trade. On the other hand, if Price Bands are too 
narrow, there is a potential for increased Trading Pauses that could 
impede price discovery for a security, also resulting in investor 
harm.\79\
---------------------------------------------------------------------------

    \79\ See Plan Approval Order, supra note 10, at 33503 (quoting 
commenter's statement that ``trading halts interfere with the 
natural interaction of orders and the price discovery process''), 
33504 (noting that Participants stated in their response letter that 
they believed that the proposed doubling of the Percentage 
Parameters around the opening and closing periods was appropriate in 
light of the increased volatility at those times).
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    By proposing to narrow the Price Bands at the Open, the 
Participants (and the market participants commenting in favor of the 
proposal) believe a better balance can be achieved in favor of 
preventing extraordinary volatility that could result in erroneous 
trades at the Open. As the Participants demonstrate, the wider Price 
Bands currently employed have resulted in a number of trades that 
qualify as clearly erroneous executions under current SRO rules. 
Preventing trades that qualify as clearly erroneous executions protects 
investors that may have traded at bad prices. Preventing these trades 
also promotes better liquidity provision, as liquidity providers would 
be certain that executed trades will stand and that their hedging 
trades will not need to be unwound at potential losses.
    The trade-off, however, is that there could be more Limit States 
and Trading Pauses during this most volatile period of the trading 
day,\80\ potentially impeding price discovery. Indeed, the 
Participants' historical analysis demonstrates that the number of Limit 
States could quadruple for NMS Stocks and triple for ETPs.\81\ The 
Participants believe, however, that the benefits of narrower Price 
Bands may be achieved without resulting in an increase in Limit States 
and Trading Pauses, arguing that their historical analysis is only 
theoretical and the number of Limit States and Trading Pauses overall 
will decrease at the Open because they expect that market participants 
will adjust their quoting behavior to narrower price bands.\82\
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    \80\ The Participants data in Chart D demonstrates that the most 
volatile period of the trading day is between 9:30 a.m. and 9:45 
a.m. See Notice, supra note 5, at 66474. See also Market 
Participants Letter supra note 6, at 2 (acknowledging the potential 
for more Trading Pauses at the Open as a result of narrower Price 
Bands).
    \81\ See supra note 74.
    \82\ See Notice, supra note 5, at 66476; see also SIFMA Letter, 
supra note 6, at 2-3
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    In approving this proposal, the Commission recognizes the dual 
objectives served by the Price Bands. While the Commission acknowledges 
that narrowing the Price Bands during the most volatile period of the 
trading day \83\ could potentially harm the price discovery process, 
the Commission recognizes the benefits of preventing extraordinary 
volatility discussed above,\84\ and believes that the amendment is an 
appropriate resolution regarding the balance of these dual objectives. 
The Commission also notes that no commenters opposed the proposed 
rebalancing of the dual objectives of preventing extraordinary 
volatility and facilitating price discovery.
---------------------------------------------------------------------------

    \84\ As noted above, preventing extraordinary volatility that 
could result in erroneous trades both protects investors and 
promotes liquidity provision.
---------------------------------------------------------------------------

    In approving this proposal, the Commission notes that the 
Participants have committed to analyzing the performance of narrower 
Price Bands at the Open in a future Annual Report.\85\ The Commission 
looks forward to reviewing that analysis. The Commission notes that an 
analysis of anticipated adjustments to quoting behavior prior to 
implementation of the proposed changes would not have been practical. 
As part of their future analysis, the Commission is particularly 
interested in whether the data demonstrate a change in quoting behavior 
by market participants, as argued by the Participants and commenters, 
and if there is no change in quoting behavior, the extent to which 
Trading Pauses and Limit states negatively impact price discovery and 
whether the Participants continue to believe that the narrower Price 
Bands at the Open remain warranted.
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    \85\ See Transmittal Letter, supra note 4, at 18.

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[[Page 16092]]

B. Elimination of Double-Wide Percentage Parameters at the Close
    Similar to the Percentage Parameters in place at the Open, between 
3:35 p.m. and 4:00 p.m., or in the case of an early scheduled close, 
during the last 25 minutes of trading before the early scheduled close 
(``the Close''), the Percentage Parameters are doubled to accommodate 
increased volatility that may occur at the Close.\86\ The Participants 
are proposing to eliminate double-wide Percentage Parameters at the 
Close for Tier 2 NMS Stocks 2 with a Reference Price above $3.00.\87\ 
This would result in narrowing the Price Bands from 20% to 10% at the 
Close for these securities.\88\
---------------------------------------------------------------------------

    \86\ Plan Section V.A.1.
    \87\ See Notice, supra note 5, at 66476.
    \88\ See id.
---------------------------------------------------------------------------

    In particular, the Participants state that this proposed change is 
intended to dampen extreme price movements that may occur inside of the 
current Price Bands near the Close, noting that the current double-wide 
Percentage Parameters would accommodate price swings of as much as 40% 
when trading from the Upper Price Band to the Lower Price Band.\89\ The 
Participants state that the original concerns about volatility around 
the close were unfounded with respect to Tier 2 NMS Stocks.\90\ The 
Participants present data showing that only a de minimis number of 
trades actually occur outside of the regular 10% Percentage Parameter, 
and that therefore the doubling of the Percentage Parameters for Tier 2 
NMS Stocks at the close is unwarranted.\91\ Further, the Participants 
present data that shows that the average number of Trading Pauses at 
the Close is nearly ten times lower than the average number of Trading 
Pauses for any other 25 minute period across the trading day.\92\
---------------------------------------------------------------------------

    \89\ See id. at 66477.
    \90\ See id. at 66477-78.
    \91\ See id.
    \92\ See id.
---------------------------------------------------------------------------

    However, the Participants acknowledge that if the double-wide 
Percentage Parameters at the Close were eliminated, the number of 
Trading Pauses would approximately triple based on their historical 
analysis, though the average number of Trading Pauses at the Close 
would still be lower than the average for any other 25 minute period 
across the trading day.\93\ Further, as with the proposal to eliminate 
double-wide Percentage Parameters at the Open, the Participants argue 
that this projected increase may not occur, because market participants 
may make behavioral changes to adjust to the new, narrower Price Bands, 
such that Trading Halts may not increase as projected.\94\
---------------------------------------------------------------------------

    \93\ See id. at 66478.
    \94\ See id. at 66479.
---------------------------------------------------------------------------

    The Participants state that there have been discussions around 
eliminating clearly erroneous rules when the Plan is in effect. They 
note that without the backstop of clearly erroneous rules, it is vital 
that the Price Bands are appropriately tailored to prevent trades that 
are so far from current market prices that they would be viewed as 
having been executed in error.\95\ The Participants state that 
permitting trading to occur within Price Bands that are as much as 20% 
above or below the Reference Price without the protections of the 
clearly erroneous rules would be detrimental to investors and the 
public interest.\96\
---------------------------------------------------------------------------

    \95\ See id. at 66480.
    \96\ See id.
---------------------------------------------------------------------------

    Similar to the considerations around Price Bands at the Open noted 
above, the calibration of the Price Bands at the Close requires 
balancing dual objectives: preventing extraordinary volatility and 
facilitating price discovery. With respect to trading at the Close in 
particular, excessive Trading Pauses could impact the closing processes 
for securities in a manner that could harm price discovery at an 
important time of the trading day.\97\
---------------------------------------------------------------------------

    \97\ See Plan Approval Order, supra note 10, at 33504 
(commenters described the close as a critical part of the trading 
day and argued that exchanges could have inconsistent closing times 
as a result of a trading pause).
---------------------------------------------------------------------------

    By proposing to narrow the Price Bands at the Close for Tier 2 NMS 
Stocks with a Reference Price above $3.00, the Participants (and the 
market participants commenting in favor of the proposal) believe a 
better balance can be achieved in favor of preventing extreme price 
movements and erroneous trades from occurring at the Close. Narrower 
bands, the Participants state, will prevent the potential for 40% price 
swings at the Close, which is consistent with the Plan's stated goal of 
preventing extraordinary volatility in NMS stocks.\98\ While their 
historical analysis shows that Trading Pauses could have tripled if 
narrower Price Bands as proposed were in place,\99\ the Participants 
argue that the number of Trading Pauses were de minimis and that the 
adjustment in market participant quoting behavior to the narrower price 
bands would result in even fewer Trading Pauses than the historical 
analysis demonstrated.\100\
---------------------------------------------------------------------------

    \98\ See Notice, supra note 5, at 66477.
    \99\ See supra note 74.
    \100\ See Notice, supra note 5, at 66477.
---------------------------------------------------------------------------

    In approving this proposal to narrow the Price Bands at the Close 
for Tier 2 NMS Stocks with a Reference Price above $3.00, the 
Commission recognizes the dual objectives served by the Price Bands and 
believes that the Participants' proposal for narrower bands represents 
a different balance than that achieved by the current Plan. The 
Commission also notes that no commenters opposed the proposed 
rebalancing of the dual objectives of preventing extraordinary 
volatility and facilitating price discovery.
    In approving this proposal, the Commission notes that the 
Participants have committed to analyzing the performance of narrower 
Price Bands at the Close in a future Annual Report. The Commission 
looks forward to reviewing that analysis. The Commission notes that an 
analysis of anticipated adjustments to quoting behavior prior to 
implementation of the proposed changes would not have been practical. 
As with the future analysis of the proposal concerning the narrower 
Price Bands at the Open, the Commission is particularly interested in 
whether the data demonstrate a change in quoting behavior by market 
participants, as argued by the Participants and commenters, and if 
there is no change in quoting behavior, whether the Participants 
continue to believe that the narrower Price Bands at the Close remain 
warranted. Furthermore, with respect to the analysis relating to the 
Close, the Commission is interested in an assessment of whether any 
increased Trading Pauses and Limit States negatively impacted closing 
auctions in affected securities.
    For the reasons noted above, the Commission finds that the 
Eighteenth Amendment to the Plan is consistent with Section 11A of the 
Act \101\ and Rule 608 thereunder.\102\
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    \101\ 15 U.S.C. 78k-1.
    \102\ 17 CFR 242.608.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 11A of the Act \103\ 
and Rule 608 thereunder,\104\ that the Eighteenth Amendment to the Plan 
(File No. 4-631) be, and it hereby is, approved.
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    \103\ 15 U.S.C. 78k-1.
    \104\ 17 CFR 242.608.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\105\
---------------------------------------------------------------------------

    \105\ 17 CFR 200.30-3(a)(29).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-07637 Filed 4-16-19; 8:45 am]
 BILLING CODE P