[Federal Register Volume 75, Number 218 (Friday, November 12, 2010)]
[Notices]
[Pages 69484-69486]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-28443]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63255; File Nos. SR-BATS-2010-025; SR-BX-2010-66; SR-
CBOE-2010-087; SR-CHX-2010-22; SR-FINRA-2010-049; SR-NASDAQ-2010-115; 
SR-NSX-2010-12; SR-NYSE-2010-69; SR-NYSEAmex-2010-96; SR-NYSEArca-2010-
83]


Self-Regulatory Organizations; BATS Exchange, Inc.; NASDAQ OMX 
BX, Inc.; Chicago Board Options Exchange, Incorporated; The Chicago 
Stock Exchange, Inc.; Financial Industry Regulatory Authority, Inc.; 
The NASDAQ Stock Market LLC; National Stock Exchange, Inc.; New York 
Stock Exchange LLC; NYSE Amex LLC; NYSE Arca, Inc.; Order Granting 
Accelerated Approval to Proposed Rule Changes, as Modified by Amendment 
No. 1, To Enhance the Quotation Standards for Market Makers

November 5, 2010.

I. Introduction

    On September 17, 2010, each of BATS Exchange, Inc. (``BATS''), 
NASDAQ OMX BX, Inc. (``BX''), Chicago Board Options Exchange, 
Incorporated (``CBOE''), The Chicago Stock Exchange, Inc. (``CHX''), 
The NASDAQ Stock Market LLC (``Nasdaq''), New York Stock Exchange LLC 
(``NYSE''), National Stock Exchange, Inc. (``NSX''); NYSE Amex LLC 
(``NYSE Amex''); NYSE Arca, Inc. (``NYSE Arca''), and the Financial 
Industry Regulatory Authority, Inc. (``FINRA,'' and together with BATS, 
BX, CBOE, CHX, Nasdaq, NYSE, NSX, NYSE Amex and NYSE Arca, the 
``SROs'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) \1\ of the Securities 
Exchange Act of 1934 (``Act''), and Rule 19b-4 thereunder,\2\ proposed 
rule changes to amend certain of their respective rules to enhance 
minimum quoting standards for market makers registered with the 
exchange or, in the case of FINRA, market makers that quote on the 
Alternative Display Facility (``ADF''). The purpose of these rule 
changes is to require equity market makers to post continuous two-sided 
quotations within a designated percentage of the inside market to 
eliminate market maker ``stub quotes,'' that are so far away from the 
prevailing market that they are not intended to be executed (such as an 
order to buy at a penny or sell at $100,000).
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule changes were published for comment in the Federal 
Register on September 24 and September 27, 2010.\3\ In addition, each 
of the SROs filed an Amendment No. 1 to their respective proposed rule 
changes.\4\ The Commission received no comments on the proposed rule 
changes. This order approves the proposed rule changes on an 
accelerated basis.
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    \3\ See Securities Exchange Act Release Nos. 62945 (September 
20, 2010), 75 FR 58460 (September 24, 2010) (SR-BATS-2010-025); 
62954 (September 20, 2010), 75 FR 59305 (September 27, 2010) (SR-BX-
2010-66); 62951 (September 20, 2010), 75 FR 59309 (September 27, 
2010) (SR-CBOE-2010-087); 62949 (September 20, 2010), 75 FR 59315 
(September 27, 2010) (SR-CHX-2010-22); 62953 (September 20, 2010), 
75 FR 59300 (September 27, 2010) (SR-FINRA-2010-049); 62950 
(September 20, 2010), 75 FR 59311 (September 27, 2010) (SR-NASDAQ-
2010-115); 62952 (September 20, 2010), 75 FR 59316 (September 27, 
2010) (SR-NSX-2010-12); 62948 (September 20, 2010), 75 FR 58455 
(September 24, 2010) (SR-NYSE-2010-69); 62947 (September 20, 2010), 
75 FR 58453 (September 24, 2010) (SR-NYSEAmex-2010-96); 62946 
(September 20, 2010), 75 FR 58462 (September 24, 2010) (SR-NYSEArca-
2010-83).
    \4\ The SROs filed their respective Amendments No. 1 on November 
4, 2010. Each of the Amendments No. 1 modifies the proposals so that 
a market maker is not expected to enter a quote based on the prior 
day's last sale at the commencement of regular trading hours if 
there is no National Best Bid (``NBB'') or National Best Offer 
(``NBO''). As amended, in such a circumstance, the quoting 
obligation would commence as soon as there has been a regular-way 
transaction on the primary listing market in the security, as 
reported by the responsible single plan processor. In addition, the 
Amendment modifies the proposals so that a market maker's quoting 
obligations shall be suspended during a trading halt, suspension or 
pause, and shall not re-commence until after the first regular-way 
transaction on the primary listing market following that halt, 
suspension or pause, as reported by the responsible single plan 
processor. Finally, so that the markets may coordinate 
implementation upon approval of the proposed rule changes, in 
Amendment No. 1 the SROs stated that the planned implementation date 
for the proposed rule changes would be December 6, 2010.
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II. Description of the Proposals

    On May 6, 2010, the U.S. equity markets experienced a severe 
disruption.\5\ 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. This severe price volatility led to a 
large number of trades being executed at temporarily depressed prices, 
including many that were more than 60% away from pre-decline prices and 
subsequently broken.
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    \5\ The events of May 6 are described more fully in the report 
of the staffs of the Commodity Futures Trading Commission (``CFTC'') 
and the Commission, titled 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 (``May 6 Staff Report'').
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    As noted in the May 6 Staff Report, executions against stub quotes 
represented a significant proportion of broken trades on May 6. To 
address this aspect of the events of May 6, in coordination with the 
Commission, the SROs filed proposals to address stub quotes by 
introducing minimum quoting standards for market makers.\6\ The 
proposals require market makers to maintain continuous two-sided 
quotations throughout the trading day \7\ that are within a certain 
percentage band of the national best bid and offer (``NBBO''). These 
requirements apply to all NMS stocks \8\ during normal market hours. 
For stocks subject to the individual stock circuit breaker pilot 
program (i.e., stocks that are included in

[[Page 69485]]

the S&P 500, stocks that are included in the Russell 1000, and certain 
exchange-traded products),\9\ market makers must enter quotes that are 
not more than 8% away from the NBBO. A quote that is entered at or 
within 8% away from the NBBO is allowed to drift a certain additional 
amount away from the NBBO before it must be adjusted by the market 
maker. However, if the NBBO moves to a point such that the quote is 
9.5% away from the NBBO, that quote must be adjusted so that it is no 
further than 8% away from the NBBO. During times in which a single-
stock circuit breaker is not applicable (i.e., before 9:45 a.m. and 
after 3:35 p.m.), market makers for such securities must maintain a 
quote no further than 20% away from the NBBO. Similar to the 
requirements when the single-stock circuit breakers are in effect, a 
market maker's quote may drift an additional 1.5% away from the NBBO 
without adjustment (i.e., until it is 21.5% away from the NBBO), at 
which point it would need to be adjusted to a quote no further than 20% 
away from the NBBO. In the absence of an NBBO, the same percentages 
apply, but the market maker must use the consolidated last sale instead 
of the NBBO.
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    \6\ See supra note 3.
    \7\ As noted, Amendment No. 1 modifies the proposals so that the 
quoting obligation would commence as soon as there has been a 
regular-way transaction on the primary listing market in the 
security, as reported by the responsible single plan processor. The 
Amendment also modifies that the market maker's quoting obligations 
shall be suspended during a trading halt, suspension or pause, and 
shall not re-commence until the first-regular way print on the 
primary listing market following that halt, suspension or pause, as 
reported by the responsible single plan processor. See supra note 4.
    \8\ See 17 CFR 242.600 (defining NMS stock as ``any NMS security 
other than an option'' and NMS security as ``any security or class 
of securities for which transaction reports are collected, 
processed, and made available pursuant to an effective transaction 
reporting plan, or an effective national market system plan for 
reporting transactions in listed options'').
    \9\ See Securities Exchange Act Release Nos. 62283 (September 
10, 2010), 75 FR 56608 (September 16, 2010); 62884 (September 10, 
2010), 75 FR 56618 (September 16, 2010).
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    For securities that are not subject to the single-stock circuit 
breakers, market makers must maintain quotes that are no more than 30% 
away from the NBBO. Like securities subject to the single-stock circuit 
breakers, if the NBBO moves to a point such that the quote is 31.5% 
away from the NBBO, the quote must be adjusted to a quote no further 
than 30% away from the NBBO.
    Nothing in the proposals precludes a market maker from voluntarily 
quoting at price levels that are closer to the NBBO than required under 
the proposals.
    The planned implementation date for the proposed rule changes is 
December 6, 2010.
    As part of their rule proposals, certain SROs proposed additional 
amendments to conform their rules to those of the other SROs with 
respect to these market maker obligations. For example, FINRA proposed 
to amend its rule to explicitly state that the duties of a market maker 
include assisting in the maintenance of fair and orderly markets, while 
NYSE and NYSE Amex proposed to amend their respective rules to 
explicitly state that the duties of a market maker include maintaining 
a continuous two-sided quote with a displayed size of at least one 
round lot.
    In addition, BATS, BX and Nasdaq proposed functionalities to 
automatically update market makers' quotes on their exchanges. Under 
the BATS proposal, such functionality would be optional. Upon the 
request of a market maker, the BATS system would automatically enter 
and adjust quotes in accordance with the proposed quotation 
requirements. If a market maker cancelled the quotations entered by 
BATS through this functionality, the market maker would remain 
responsible for complying with the minimum quotation requirements 
imposed by the new rule.
    For both BX and Nasdaq, the exchange would automatically create a 
quote to comply with the proposed quoting requirements for each issue 
in which a market maker is registered. BX and Nasdaq would adjust one 
of these automated quotations when it drifts to within 4% of the NBBO 
(or, if greater, one-quarter of the applicable percentage necessary to 
trigger an individual stock trading pause), or if the quote drifts to 
within the applicable percentage necessary to trigger an individual 
stock trading pause less 0.5%. If this occurs, BX or Nasdaq would 
adjust and display a quotation for the market maker at the appropriate 
percentage away from the NBBO. Other quotations directly entered by 
market makers would be allowed to move freely towards the NBBO for 
potential execution. If a quotation automatically entered by BX or 
Nasdaq on behalf of a market maker is executed, BX or Nasdaq would 
refresh the market maker's quote on the executed side of the market at 
the applicable percentage away from the NBBO or, if there is no NBBO, 
the last reported sale.
    Finally, NYSE Arca proposed making conforming changes to its Q 
Order type. Specifically, NYSE Arca proposed to eliminate the 
``standard Q,'' an order that has a price of $0.01 for the bid and two 
times the previous day's close for the offer, as an available order 
type. NYSE Arca also proposed to add to its Rule 7.31(k) that, to the 
extent that other types of Q Order functionality remain, nothing in the 
rule relating to Q Orders would be construed to relieve market makers 
of their obligations under the revised NYSE Arca Rule 7.23, which 
includes the proposed market maker quoting obligations.\10\
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    \10\ NYSE Arca has represented that it will separately file a 
proposed rule change to delete the text of Rule 7.31(k)(1)(B)(1), 
which states that a ``Q Order entered with reserve size * * * will 
automatically repost with the original display size and $10 below 
the original bid or $10 above the original offer, but never below 
$0.01,'' and to remove the accompanying Q Order functionality. The 
proposed date of implementation for this change will be December 6, 
consistent with the implementation date for the new market maker 
quoting requirements. See e-mail from Clare F. Saperstein, Vice 
President, Regulatory Policy and Management, NYSE Regulation, Inc., 
to David Liu, Senior Special Counsel, and Andrew Madar, Special 
Counsel, Commission, dated November 5, 2010.
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III. Commission Findings

    The Commission finds that the proposed rule changes implementing 
enhanced market maker quotation standards are consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to national securities exchanges and national securities 
associations. In particular, with respect to the proposals submitted by 
the national securities exchanges, the Commission finds that the 
proposals are consistent with Section 6(b)(5) of the Act,\11\ which, 
among other things, requires that the rules of national securities 
exchanges be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, 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.\12\ Similarly, the Commission finds that the FINRA 
proposal is consistent with Section 15A(b)(6) of the Act,\13\ which 
requires, among other things, that FINRA rules must be designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, and, in general, to protect 
investors and the public interest. The Commission also believes that 
the proposals are consistent with Section 11A(a)(1) of the Act \14\ in 
that they seek to assure fair competition among brokers and dealers and 
among exchange markets.
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    \11\ 15 U.S.C. 78f(b)(5).
    \12\ In approving the proposed rule change, the Commission notes 
that it has considered the proposed rules' impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \13\ 15 U.S.C. 78o-3(b)(6).
    \14\ 15 U.S.C. 78k-1(a)(1).
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    By requiring market makers to maintain quotes that are priced 
within a broad range around the NBBO, the proposed rules should help 
assure that quotations submitted by market makers to an exchange or 
FINRA's ADF, and displayed to market participants, bear some 
relationship to the prevailing market price, and thus should promote 
fair and orderly markets and the protection of investors. In addition, 
by precluding market makers from submitting ``stub'' quotes that are so 
far

[[Page 69486]]

away from the prevailing market price that they are not intended to be 
executed, the proposed rules should reduce the risk that trades will 
occur at irrational prices. As noted above, a large number of trades 
were executed at irrational prices on May 6, 2010 and were ultimately 
broken. In this respect, the proposals also should promote the goals of 
investor protection and fair and orderly markets. Finally, because the 
SROs are proposing uniform rules with respect to these market maker 
quoting obligations, the proposed rule changes as a whole will assure 
these baseline standards are applied throughout the equity markets.
    The Commission also finds that the functionality proposed by BATS, 
BX and Nasdaq is consistent with Section 6(b)(5) of the Act,\15\ which, 
among other things, requires that the rules of national securities 
exchanges be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, 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. The proposed functionality should assist market makers 
on BATS, BX and Nasdaq in maintaining continuous, two-sided limit 
orders within the prescribed limits in the securities in which they are 
registered to satisfy their new quoting obligations.
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    \15\ 15 U.S.C. 78f(b)(5).
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    The Commission also finds good cause, pursuant to Section 19(b)(2) 
of the Act,\16\ for approving the proposed Amendments No. 1 on an 
accelerated basis. These amendments reflect the concern that the 
proposed market maker quoting obligations should not apply during times 
when market makers should be permitted to absorb material information 
affecting a security for which they are registered as a market maker, 
whether before or during the trading day, i.e., until there has been a 
regular-way transaction on a security's primary listing market or 
during a trading halt. Approving these amendments on an accelerated 
basis would allow these provisions to be effective as of the 
implementation date of the new market maker requirements.
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    \16\ 15 U.S.C. 78s(b)(2).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\17\ that the proposed rule changes (SR-BATS-2010-025; SR-BX-2010-
66; SR-CBOE-2010-087; SR-CHX-2010-22; SR-FINRA-2010-049; NASDAQ-2010-
115; SR-NSX-2010-12; SR-NYSE-2010-69; SR-NYSEAmex-2010-96; SR-NYSEArca-
2010-83), as modified by Amendment No. 1, be, and hereby are, approved 
on an accelerated basis.
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    \17\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-28443 Filed 11-10-10; 8:45 am]
BILLING CODE 8011-01-P