Federal Register / Vol. 89, No. 183 / Friday, September 20, 2024 / Notices 77203 

1The Participants are: Cboe BYX Exchange, Inc., 

Cboe BZX Exchange, Inc., Cboe EDGA Exchange, 

Inc., Cboe EDGX Exchange, Inc., the Financial 

Industry Regulatory Authority, Inc., Investors 

Exchange LLC, Long-Term Stock Exchange, Inc., 

MEMX LLC, MIAX Pearl, LLC, NASDAQ BX, Inc., 

NASDAQ PHLX LLC, The NASDAQ Stock Market 

LLC, New York Stock Exchange LLC, NYSE 

American LLC, NYSE Arca, Inc., NYSE Chicago, 

Inc., and NYSE National, Inc. (collectively, 

‘‘Participants’’). 

2 15 U.S.C. 78k–1(a)(3). 

3 17 CFR 242.608. 

4See Securities Exchange Act Release No. 98928 

(Nov. 14, 2023), 88 FR 81131 (‘‘Notice’’). Comments 

received in response to the Notice can be found on 

the Commission’s website at: https://www.sec.gov/ 

comments/4-631/4-631.htm. 

5 17 CFR 242.608(b)(2)(i). 

6See Securities Exchange Act Release No. 99545 

(Feb. 15, 2024), 89 FR 13389 (Feb. 22, 2024) 

(‘‘OIP’’). Comments received in response to the OIP 

can be found on the Commission’s website at: 

https://www.sec.gov/comments/4-631/4-631.htm. 

7See Securities Exchange Act Release No. 100127 

(May 14, 2024), 89 FR 43969 (May 20, 2024). 

8See Securities Exchange Act Release No. 100556 

(July 18, 2024), 89 FR 59779 (July 23, 2024). 

9See Notice, 88 FR at 81144–45 (setting forth the 

defined terms as used under the Plan). For purposes 

of this order, all capitalized terms referenced, but 

not otherwise defined, herein shall have the 

meanings as defined under the Plan or as defined 

in the Notice. 

10See Notice, 88 FR at 81148 (Appendix A to the 

Plan). 

11This section summarizes the proposed changes 

to the Plan and the Participants’ analysis supporting 

the proposed changes, as described in the Notice. 

The Notice contains the Participants’ full 

discussion of the Proposed Amendment, including 

the Participants’ justifications for the Proposed 

Amendment. See Notice, supra note 4. 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–101036; File No. 4–631] 

Joint Industry Plan; Order 

Disapproving the Twenty-Third 

Amendment to the National Market 

System Plan To Address Extraordinary 

Market Volatility 

September 16, 2024. 

I. Introduction 

On October 24, 2023, NYSE Group, 

Inc., on behalf of the Participants 1 to 

the National Market System Plan to 

Address Extraordinary Market Volatility 

(‘‘Plan’’), filed with the Securities and 

Exchange Commission (‘‘Commission’’), 

pursuant to section 11A(a)(3) of the 

Securities Exchange Act of 1934 (‘‘Act’’ 

or ‘‘Exchange Act’’) 2 and Rule 608 

thereunder,3 a proposal (‘‘Proposal’’ or 

‘‘Proposed Amendment’’) to amend the 

Plan. The Proposed Amendment was 

published for comment in the Federal 

Register on November 21, 2023.4 On 

February 15, 2024, the Commission 

instituted proceedings pursuant to Rule 

608(b)(2)(i) of Regulation NMS 5 to 

determine whether to approve or 

disapprove the Proposed Amendment or 

to approve the Proposed Amendment 

with any changes or subject to any 

conditions the Commission deems 

necessary or appropriate.6 On May 14, 

2024, the Commission designated a 

longer period within which to conclude 

proceedings regarding the Proposed 

Amendment.7 On July 18, 2024, the 

Commission designated a longer period 

for Commission action on the Proposed 

Amendment.8

This order disapproves the Proposed 

Amendment. 

II. Overview 

The Participants adopted the Plan to 

address extraordinary volatility in the 

securities markets, i.e., significant 

fluctuations in individual securities’ 

prices over a short period of time, such 

as those experienced during the ‘‘Flash 

Crash’’ on the afternoon of May 6, 2010. 

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 to 

address instances of extraordinary 

volatility in NMS Stocks.9 These limit 

up-limit down requirements are coupled 

with Trading Pauses to accommodate 

more fundamental price moves. 

As set forth in more detail in the Plan, 

the single plan processor, which is 

responsible for consolidation of 

information for an NMS Stock pursuant 

to Rule 603(b) of Regulation NMS under 

the Exchange Act, calculates and 

disseminates a lower Price Band and 

upper Price Band for each NMS Stock. 

As set forth in Section V of the Plan, the 

Price Bands are based on a Reference 

Price for each NMS Stock that equals 

the arithmetic mean price of Eligible 

Reported Transactions for the NMS 

Stock over the immediately preceding 

five-minute period. The Price Bands for 

an NMS Stock are calculated by 

applying the Percentage Parameters, as 

set out in Appendix A to the Plan,10 for 

such NMS Stock to the Reference Price, 

with the lower Price Band being a 

Percentage Parameter below the 

Reference Price, and the upper Price 

Band being a Percentage Parameter 

above the Reference Price. 

Appendix A to the Plan sets out the 

definitions of Tier 1 and Tier 2 NMS 

Stocks and the Percentage Parameters 

for each. Appendix A currently provides 

that Tier 1 includes all NMS Stocks 

included in the S&P 500 Index and the 

Russell 1000 Index, as well as ‘‘eligible’’ 

ETPs, which are ETPs that trade over 

$2,000,000 notional consolidated 

average daily volume (‘‘CADV’’) over a 

period from the first day of the previous 

fiscal half year up until one week before 

the beginning of the next fiscal half 

year. Eligible ETPs are listed in 

Schedule 1 to Appendix A, and the list 

is reviewed and updated semi-annually. 

All ETPs that do not meet the 

‘‘eligibility’’ definition are currently 

assigned to Tier 2. 

For Tier 1 NMS Stocks, Appendix A 

defines the Percentage Parameters as: 

• 5% for Tier 1 NMS Stocks with a 

Reference Price more than $3.00; 

• 20% for Tier 1 NMS Stocks with a 

Reference Price equal to $0.75 and up to 

and including $3.00; and 

• The lesser of $0.15 or 75% for Tier 

1 NMS Stocks with a Reference Price 

less than $0.75. 

For Tier 2 NMS Stocks, Appendix A 

defines the Percentage Parameters as: 

• 10% for Tier 2 NMS Stocks with a 

Reference Price of more than $3.00; 

• 20% for Tier 2 NMS Stocks with a 

Reference Price equal to $0.75 and up to 

and including $3.00; and 

• The lesser of $0.15 or 75% for Tier 

2 NMS Stocks with a Reference Price 

less than $0.75. 

Appendix A further provides that the 

Percentage Parameter for a Tier 2 NMS 

Stock that is a leveraged ETP is the 

applicable Percentage Parameter set 

forth above, multiplied by the leverage 

ratio of such product. 

III. Summary of the Proposed 

Amendment 11

The Participants propose to amend 

Appendix A to delete the definition of 

ETPs ‘‘eligible’’ for Tier 1, and to specify 

that all ETPs except for single-stock 

ETPs would be assigned to Tier 1. The 

Proposed Amendment would generally 

result in tighter Price Bands being 

applied on Tier 2 ETPs than currently 

apply. The Participants also propose to 

delete Schedule 1 to Appendix A as 

obsolete. Under the Proposal, Appendix 

A, Section I, paragraph (1) would read 

as follows: 

Tier 1 NMS Stocks shall include all NMS 

Stocks included in the S&P 500 Index and 

the Russell 1000 Index, and all exchangetraded products (‘‘ETP’’), except for single 

stock ETPs, which will be assigned to the 

same Tier as their underlying stock, adjusted 

for any leverage factor. 

Because all leveraged ETPs (except 

Tier 2 single-stock ETPs) would be 

assigned to Tier 1, the Participants also 

propose to add text into Section I of 

Appendix A describing how the 

Percentage Parameters would be set for 

leveraged ETPs. The Participants 

propose to insert the following as 

paragraph (5) of Section I, and to 

renumber the paragraphs of Section I 

accordingly: 

Notwithstanding the foregoing, the 

Percentage Parameters for a Tier 1 NMS 


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12See Notice, 88 FR at 81133. 

13The Participants submitted a letter with the 

Supplemental Analysis in support of the Proposed 

Amendment. See Letter from Robert Books, Chair, 

Operating Committee of the Plan, dated June 17, 

2024 (‘‘Participants’ Letter’’). 

14See Notice, 88 FR at 81142. 

15See Participants’ Letter at 3 (‘‘When combined 

with the data in the Proposal’s Table 2 concerning 

the incidence of Limit States and Trading Pauses 

among Tier 1 non-ETPs and Tier 2 ETPs and nonETPs, these additional volatility statistics provide 

further support for the Participant’s conclusion in 

the Proposal . . . that the current Price Bands are 

not well-calibrated to the realized volatility for Tier 

2 ETPs and should not be twice as wide as those 

for Tier 1 non-ETPs.’’). 

16See Notice, 88 FR at 81142. See also id. at 

81135–36 (explaining how the Participants 

calculated the upper and lower ranges of the 

notional value of trades). 

17 Id. at 81135. 

18 Id. at 81142. 

19While the Supplemental Analysis stated that it 

compared the midpoint of the NBBO at five and ten 

minutes after the trade to the midpoint of the quote 

at the time of execution, in the context of the 

analysis performed, the Commission understands 

that ‘‘quote’’ meant the NBBO at the time of 

execution, given the use of the midpoint at five and 

ten minutes in the Supplemental Analysis and the 

use of the NBBO midpoint in the Participant’s study 

that was part of the Proposal. 

20See Participants’ Letter at 4 (stating that the 

results of the Supplemental Analysis show that 

‘‘more than 60% of the time, prices 5 and 10 

minutes after a theoretically prevented trade 

reverted away from the offending trade price 

towards prior prices. Share volume reversion 

remained above 50% after five minutes and above 

60% after 10 minutes. This tendency toward 

reversion is further evidence in support of 

narrowing the bands to Tier 1-levels.’’). The 

Participants state they conducted this additional 

price reversion analysis to account for concerns 

with the prior analysis, which compared the 

execution prices of Tier 2 ETPs to the midpoint of 

the NBBO five and ten minutes after such 

execution. See Participants’ Letter at 4. 

21See Notice, 88 FR at 81142. 

22 Id. 

23 Id. 

24See Notice, 88 FR at 81142. See also 

Participants’ Letter at 6. 

25 17 CFR 242.608(b)(2). 

26 17 CFR 201.700(b)(3)(ii). In addition, Rule 

700(b)(3)(ii) of the Commission’s Rules of Practice 

states that ‘‘[a]ny failure of the plan participants 

that filed the NMS plan filing to provide such detail 

and specificity may result in the Commission not 

having a sufficient basis to make an affirmative 

finding that a NMS plan filing is consistent with the 

Exchange Act and the rules and regulations issued 

thereunder that are applicable to NMS plans.’’ Id. 

27 17 CFR 242.608(b)(2). Approval or disapproval 

of a national market system plan, or an amendment 

to an effective national market system plan (other 

than an amendment initiated by the Commission), 

shall be by order. Id. 

28 17 CFR 242.608(b)(2). 

Stock that is a leveraged ETP shall be the 

applicable Percentage Parameter set forth in 

clauses (2), (3), or (4) above, multiplied by 

the leverage ratio of such product. 

At the request of ETP issuers, the 

Participants conducted a study 

concerning the calibration of the 

Percentage Parameters set forth in the 

Plan with respect to ETPs in Tier 2.12

The Participants subsequently 

conducted additional analysis 

(‘‘Supplemental Analysis’’) on the 

narrowing of the Percentage 

Parameters.13 The Participants reached 

the following conclusions based on the 

analysis in the study and the 

Supplemental Analysis (collectively 

‘‘Analyses’’): 

• Tier 1 non-ETPs are far more likely 

than Tier 2 ETPs to enter into Limit 

States and Trading Pauses due to the 

underlying volatility of these securities. 

This finding suggests that the Price 

Band width for Tier 2 ETPs is poorly 

calibrated relative to their actual trading 

behavior.14 The Supplemental Analysis 

performed by the Participants reached 

the same conclusion using two different 

methodologies.15

• During the period looked at in the 

study presented in the Proposed 

Amendment, the notional value of 

trades that would have been prevented 

if Tier 2 ETPs had used tighter Tier 1 

Price Bands would have been 

substantial for such thinly traded 

products, bounded on the lower end at 

$36.8 million and the upper end at 

$711.1 million.16

• The Participants calculated 

theoretical Tier 1 (i.e., 5%, adjusted for 

the leverage factor) Price Bands for all 

Tier 2 ETPs in the study presented in 

the Proposed Amendment (‘‘Theoretical 

Tier 1 Bands’’).17 In this analysis from 

the study, the Participants compared the 

execution price to the midpoint price of 

the National Best Bid or Offer (‘‘NBBO’’) 

at five and ten minutes after such 

execution. Using this methodology, in 

the majority of cases where a trade 

would have been prevented by the 

narrower Theoretical Tier 1 Bands, 

prices reverted by the end of the 

following five- and ten-minute periods, 

suggesting that having these thinly 

traded ETPs in Tier 1 would protect 

investors from executing trades at 

inferior prices that may occur due to 

transitory gaps in liquidity rather than 

fundamental valuation changes.18 In the 

Supplemental Analysis, the Participants 

used a different methodology, 

specifically comparing the midpoint of 

the NBBO at five and ten minutes after 

the trade to the midpoint of the NBBO 19

at the time of execution, to demonstrate 

price movement after theorical block 

trades and again reached conclusions 

they state support the Proposed 

Amendment.20

• In most cases where ETPs have 

been reclassified from Tier 2 to Tier 1, 

market quality improved as evidenced 

by the lower quote volatility, tighter 

spreads, and increased liquidity for 

ETPs that moved from Tier 2 to Tier 1.21

• Using tighter Tier 1 bands for all 

ETPs would provide greater investor 

protection from temporary liquidity 

gaps, which are facilitated by the wider 

Price Bands in Tier 2.22

• The number of Limit States and 

Trading Pauses decreased when Tier 2 

ETPs moved to Tier 1, and increased 

when Tier 1 ETPs moved to Tier 2.23

Based on these conclusions, the 

Participants state that they believe that 

moving Tier 2 ETPs to Tier 1 would 

improve market quality, more 

effectively dampen volatility, decrease 

the number of unnecessary Limit States 

and Trading Pauses, and thereby 

provide greater investor protection.24

IV. Discussion 

A. The Applicable Standard of Review 

Under Rule 608(b)(2) of Regulation 

NMS, the Commission shall approve a 

national market system plan or 

proposed amendment to an effective 

national market system plan, with such 

changes or subject to such conditions as 

the Commission may deem necessary or 

appropriate, if it finds that such plan or 

amendment is necessary or appropriate 

in the public interest, for the protection 

of investors and the maintenance of fair 

and orderly markets, to remove 

impediments to, and perfect the 

mechanisms of, a national market 

system, or otherwise in furtherance of 

the purposes of the Exchange Act.25

Under Rule 700(b)(3)(ii) of the 

Commission’s Rules of Practice, the 

‘‘burden to demonstrate that a NMS 

plan filing is consistent with the 

Exchange Act and the rules and 

regulations issued thereunder that are 

applicable to NMS plans is on the plan 

participants that filed the NMS plan 

filing.’’ 26 The Commission shall 

disapprove a national market system 

plan or proposed amendment if it does 

not make such a finding.27

For the reasons described below, the 

Participants have not demonstrated that 

the Proposal meets the standard under 

Rule 608(b)(2) of Regulation NMS. As 

such, the Commission is disapproving 

the Proposed Amendment because it 

cannot make the finding that the 

Proposed Amendment is necessary or 

appropriate in the public interest, for 

the protection of investors and the 

maintenance of fair and orderly markets, 

to remove impediments to, and perfect 

the mechanisms of, a national market 

system, or otherwise in furtherance of 

the purposes of the Exchange Act.28


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29See Letters from Samara Cohen, Chief 

Investment Officer of ETF and Index Investments, 

BlackRock, et al., dated Dec. 18, 2023 (‘‘BlackRock 

Letter’’); Kenneth Fang, Associate General Counsel, 

and Kevin Ercoline, Assistant General Counsel, 

Investment Company Institute, dated Mar. 14, 2024 

(‘‘ICI Letter’’) (expressing support for the comments 

made in the BlackRock Letter); Ellen Greene, 

Managing Director, Equities & Options Market 

Structure, Securities Industry and Financial 

Markets Association (‘‘SIFMA’’) and Kevin Ehrlich, 

Managing Director, SIFMA Asset Management 

Group, dated Apr. 22, 2024 (‘‘SIFMA Letter’’). 

30See ICI Letter at 4. See also SIFMA Letter at 

3 (stating that multiplying the Tier 1 Percentage 

Parameters by an ETP’s leverage ratio, as proposed, 

would address potential volatility in these 

products). 

31See BlackRock Letter at 1. 

32 Id. at 2. 

33See id. at 1–2. Some commenters state that, in 

instances of sustained order imbalances and/or gaps 

in liquidity in the market for an ETP, a trading 

pause would help attract liquidity from diverse 

market participants and promote price discovery 

through the reopening mechanism, helping to keep 

ETP prices in line with the value of underlying 

holdings. See BlackRock Letter at 2. See also ICI 

Letter at 3 (stating that during periods of extreme 

volatility and transitory gaps in liquidity, it may be 

beneficial for a trading pause to be triggered); 

SIFMA Letter at 2. 

34See ICI Letter at 3. 

35See BlackRock Letter at 2. See also ICI Letter 

at 4 (stating that the Participants’ data demonstrate 

that an assumption that lower-volume ETPs were 

more suited for wider Price Bands was not 

accurate). 

36See BlackRock Letter at 2. See also ICI Letter 

at 4 (stating Tier 2 ETPs on average exhibit lower 

quote volatility than Tier 1 non-ETP stocks); SIFMA 

Letter at 2–3 (stating that the Participants’ study 

showed that ETPs assigned to Tier 2 had quote 

volatilities lower than both Tier 1 ETPs and Tier 2 

non-ETPs). 

37See BlackRock Letter at 2. See also SIFMA 

Letter at 4 (stating that approval of the Proposed 

Amendment ‘‘would benefit investors by reducing 

complexity and enhancing fair and orderly markets 

for trading ETPs’’). 

38See SIFMA Letter at 3 (stating additionally that 

several ETPs consisting of currency products are 

also assigned to Tier 1). 

39See, e.g., Letters from Alexander Kuchta dated 

Nov. 27, 2023 (‘‘Kuchta Letter’’); Rax Nahali dated 

Nov. 27, 2023 (‘‘Nahali Letter’’); and Rene Wright 

dated Nov. 27, 2023 (‘‘Wright Letter’’). 

40See Kuchta Letter. See also Joe Edwards dated 

Nov. 27, 2023 (‘‘Edwards Letter’’) (stating that 

‘‘[t]his rule goes against the ideals of a free and fair 

market’’); Nahali Letter (stating that ‘‘[i]f the 

markets are as free and fair as the SEC suggests they 

are, there is no need for this rule to be in place’’). 

41See Kuchta Letter (stating that ‘‘as trades 

accumulate at the band limits, the resumption of 

trading could trigger sudden and sharp price 

movements, contrary to the proposal’s intent to 

reduce volatility’’). 

42See id. 

43See id. 

44See Mazundar Letter. See also Nahali Letter 

(stating the rule ‘‘would allow the exchanges to 

collude and set prices where they want them.’’). 

45See Securities Exchange Act Release No. 67091 

(May 31, 2012), 77 FR 33498, 33510 (June 6, 2012) 

(‘‘LULD Plan Approval Order’’). 

46See Securities Exchange Act Release No. 85623 

(Apr. 11, 2019), 84 FR 16086, 16090 (Apr. 17, 2019). 

47 17 CFR 242.608. 

48See Notice, 88 FR at 81141. The Participants 

state that when ETPs moved from Tier 2 to Tier 1 

there was an improvement in market quality and a 

decrease in the number of Trading Pauses, Limit 

States, or the amount of time spent in Limit States, 

as compared with ETPs that remained in Tier 2 

during the period studied by the Participants. The 

Participants state that this is likely because market 

participants will change their behavior and provide 

more liquidity to ETPs if the bands are tightened. 

The Participants also state that market participants 

adjusted to tighter Price Bands after Amendment 18 

to the Plan narrowed the Price Bands near the open 

and close of trading. However, the Participants state 

that this analysis concerning Trading Pauses and 

Limit States may not offer strong support for its 

conclusions given the relatively small number of 

ETPs that move between Tier 1 and Tier 2 

designations; further, the Participants state that, ‘‘in 

some cases, changes in the volume of trades are 

what cause an ETP to change from one tier to 

another, and the improvements in market quality 

may be attributable to that increased volume, and 

not the tier change in and of itself.’’ Id. 

B. Comments Received 

Certain commenters express support 

for the Proposed Amendment.29 One 

commenter states that it is important to 

maintain the leverage factor adjustment 

when moving leveraged ETPs into Tier 

1.30 Another commenter, writing on 

behalf of a ‘‘diverse cross-section of 

market participants,’’ states that using 

Tier 1 Percentage Parameters for all 

ETPs would better protect investors 

during temporary liquidity gaps.31 The 

commenter states that the risk of an 

inefficient execution away from the fair 

value of the ETP’s holdings (as far as 

10% away from a Tier 2 ETP’s Reference 

Price) rises in the case of a liquidity gap 

resulting from an outsized or aggressive 

order, temporary uncertainty about any 

inputs into the calculation of the ETP’s 

fair value, or lower levels of market 

participation.32 This commenter also 

states that the application of Tier 1 

Percentage Parameters may enhance 

investor protection, provide a better ETP 

execution experience for market 

participants, and would improve 

transparency and efficiency, particularly 

during periods of extreme volatility.33

Another commenter states that the 

Participants’ data presented in the 

Proposed Amendment showed that 

while narrow Price Bands resulted in 

more trading halts in the time period 

studied, had narrower Price Bands been 

in place for ETPs during periods of 

extreme volatility, retail investor 

executions at inferior prices would 

likely have been prevented.34 Some 

commenters that support the proposal 

state that ETPs are assigned to tiers 

based on an assumption that lowervolume ETPs are more suited for wider 

Price Parameters, and state that the data 

presented in the Proposed Amendment 

suggest that this assumption was 

wrong.35 Some commenters that support 

the Proposal state that the analysis from 

the study in the Proposed Amendment 

demonstrated that on average, Tier 2 

ETPs across asset classes exhibit lower 

quote volatility than Tier 1 non-ETP 

stocks.36 In light of the findings derived 

from the study, some commenters state 

that the imposed semi-annual migration 

of ETPs from one tier to the other 

appears to be overly complex, arbitrary, 

and unnecessary.37 One commenter 

states that there is no reason to expect 

the Tier 1 Price Band is inappropriate 

for Tier 2 ETPs that are based on a 

single reference asset, stating that 

approximately 33% of single asset 

commodity based ETPs representing a 

wide range of commodity types are Tier 

1 securities.38

Some commenters oppose the 

Proposed Amendment,39 with some 

commenters stating that the proposed 

tighter Price Bands would effectively 

limit the natural price discovery 

process, which would infringe upon free 

market principles 40 and may lead to 

increased volatility.41 One commenter 

further states that leveraged derivatives, 

such as options and futures, allow 

significant positions to be taken with 

relatively less capital.42 The same 

commenter states that the Proposal 

caters to the interests of larger, 

institutional investors who may benefit 

from reduced volatility and more 

predictable price movements at the 

expense of smaller, retail investors.43

Some commenters state that the 

Proposal enables the Participants to 

control the price of a security 

inappropriately.44

C. Participants’ Findings and 

Commission Response 

The Commission approved the Plan in 

2012 on a pilot basis, recognizing that 

after the Participants and the public 

gain experience with the operations of 

the Plan, modifications may be 

necessary or appropriate.45 At the time 

the Commission permanently approved 

the Plan in 2019, the Commission 

recognized that robust, data-driven 

assessments of the Plan’s effectiveness 

are important to ensure that the Plan 

remains designed to achieve its 

objective,46 and the Commission 

supports continuing efforts to improve 

the operation of the Plan consistent with 

Rule 608 of Regulation NMS under the 

Exchange Act.47

The Participants state that assigning 

all ETPs, except for single stock ETPs, 

to Tier 1 would improve market quality, 

more effectively dampen volatility, 

provide greater investor protection, and 

decrease the number of unnecessary 

Limit States and Trading Pauses for Tier 

2 ETPs.48 For these reasons, the 

Participants state that the Proposed 

Amendment is consistent with Rule 


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49 Id. at 81134. 

50See Annual Report for 2023 of the Operating 

Committee of the Plan to Address Extraordinary 

Market Volatility, May 3, 2024 (available at https:// 

www.luldplan.com/studies). 

51The Participants state that the purpose of 

having different LULD tiers is to assign Price Bands 

that are commensurate with a security’s underlying 

volatility and that single stock ETPs should be 

assigned to the same LULD tier as the underlying 

security because the ETP should closely track the 

price movement and volatility of its underlying 

security. See Notice, 88 FR at 81133. 

52With respect to the comment that there are 

many single reference asset ETPs that currently are 

Tier 1 securities, those securities are designated as 

Tier 1 securities because their CADV meets the 

standard set forth in the Plan for ETPs that are 

designated as Tier 1 securities. See supra note 3838 

38and accompanying text. The fact that some single 

reference asset ETPs may be appropriately 

characterized as Tier 1 securities under the Plan 

does not demonstrate that all single reference asset 

ETPs would be appropriately designated as Tier 1 

securities because different single reference asset 

ETPs may have different trading characteristics that 

result in them being appropriately categorized as 

Tier 2 securities. The Participants’ Analyses do not 

provide sufficient detail and specificity concerning 

these securities for the Commission to make an 

affirmative finding that the Proposed Amendment 

meets the standard for approval. See 17 CFR 

201.700(b)(3)(ii). See also infra note 56. 

53See Notice, 88 FR at 81143 and OIP, 89 FR at 

13394. 

54 In the analysis in the Proposed Amendment, 

Table 3, 4, 5, and Chart 1 aggregate all Tier 2 ETP 

trades into a single group; Table B of the 

Supplemental Analysis does likewise. These tables 

quantify the amount of volume that would be 

affected by tighter bands, and the price dynamics 

around the tighter bands. 

55For example, in the second half of 2023, TQQQ, 

SQQQ, and SOXL averaged daily volume in excess 

of $1 billion; these are all ETPs with a leverage ratio 

of three. The 20 Tier 2 ETPs with the highest dollar 

volume each averaged over $100 million per day 

during this period. For this analysis, a stock’s tier 

is assigned based on FINRA’s OTC Transparency 

Data, http://www.finra.org/industry/OTCTransparency, which classifies stocks by tier on a 

weekly basis. A stock is considered an ETP if its 

security description in the TAQ database is ‘ETF,’ 

‘ETN,’ or ‘ETV.’ The TAQ database also contains 

information on the ETPs’ Price Bands, which the 

Commission uses to infer the ETPs’ leveraged ratios 

(e.g., a Price Band of 30% during the day implies 

that the ETP has a leverage ratio of three). Finally, 

trading volume for each stock comes from WRDS 

intra-day indicators. 

56The OIP raised the issue that an aggregated 

approach to evaluating Tier 2 ETPs may not support 

moving all Tier 2 ETPs into Tier 1. See OIP, 89 FR 

at 13394. In response, the Participants provided a 

disaggregated analysis of commodity ETPs in the 

Supplemental Analysis that they believe shows that 

commodity ETPs should not be excluded from Tier 

1 designation under the Proposed Amendment 

because they have similar characteristics to ETPs 

already in Tier 1; however, this disaggregated 

analysis contained only 65 Tier 2 ETPs. See 

Participants’ Letter at 4–6. This disaggregated 

analysis does not sufficiently address the 

Commission’s concerns because it does not provide 

insight as to whether it is appropriate to move other 

Tier 2 ETPs to Tier 1. Commission analysis 

indicates that, in the second half of 2023, the 20 

Tier 2 ETPs with the highest share volume 

comprised 80% of all share volume among Tier 2 

ETPs. Those same ETPs account for 74% of all Tier 

2 ETP dollar volume, and 76% of all Tier 2 ETP 

trade volume. This implies that the trade-weighted 

aggregated analysis in the Proposed Amendment 

(see supra note 54) was likely driven by 

approximately 20 out of the 2,000 Tier 2 ETPs; 

separately analyzing 65 Tier 2 ETPs still overlooks 

the vast majority of Tier 2 ETPs. 

57See 17 CFR 242.608(b)(2). See also 17 CFR 

201.700(b)(3)(ii). 

608(b)(2). As discussed in detail below, 

the Participants have not carried their 

burden of demonstrating why the 

Proposed Amendment is consistent with 

Rule 608 of Regulation NMS. 

In the Proposal, the Participants state 

that, except for single-stock, commodity, 

and foreign exchange-based ETPs, ETPs 

are diversified instruments and that the 

analysis in the Proposal supports the 

modern portfolio theory that portfolios 

of securities exhibit lower volatility 

than individual securities, unless those 

products are perfectly correlated. At the 

same time, the Participants 

acknowledge that the ETPs studied 

cover several asset classes, including 

domestic equities, international 

equities, fixed income, currency, 

commodity, and digital currency 

ETPs.49 The Participants’ Analyses, 

however, provide aggregate statistical 

information with respect to all Tier 2 

ETPs despite securities within this 

group having different trading 

characteristics. These Analyses and the 

resulting aggregate statistical 

information concern the volatility 

characteristics of Tier 2 ETPs and the 

potential costs (i.e., trading activity 

disruption) and benefits (i.e., protecting 

investors from trading at inferior prices 

that may occur because of transitory 

gaps in liquidity rather than 

fundamental value changes; market 

quality improvement) of designating all 

Tier 2 ETPs as Tier 1 securities. The 

Commission is concerned that these 

aggregate statistical analyses for Tier 2 

ETPs do not reflect the trading 

characteristics and potential effects of 

the Proposed Amendment for many Tier 

2 ETPs. 

According to the Annual Report for 

2023 by the Operating Committee of the 

Plan, in 2023 there were over two 

thousand ETPs designated as Tier 2 

securities.50 While the Proposed 

Amendment would exclude single stock 

ETPs from automatically being 

designated as Tier 1 securities,51 the 

Proposal would not exclude other Tier 

2 ETPs, including those based on other 

single reference assets,52 that may 

exhibit substantially different trading 

characteristics than those reflected in 

the Proposal’s aggregate statistical 

analysis concerning the over two 

thousand Tier 2 ETPs or otherwise 

provide data demonstrating why these 

Tier 2 ETPs would be appropriately 

designated as Tier 1 securities 

regardless of their different trading 

characteristics. The above-mentioned 

issues were raised by the Commission in 

the Notice and OIP.53

For example, key elements of the 

Analyses aggregate all trades of Tier 2 

ETPs together.54 Such a method will 

effectively ignore Tier 2 ETPs that trade 

infrequently—this is because any 

analysis that uses aggregate trading 

statistics will be driven by the ETPs 

with a high level of trading activity, 

while ETPs with a low level of trading 

will have a low weight in the statistical 

analysis. This result is compounded by 

combining leveraged and non-leveraged 

Tier 2 ETPs in the same group because 

trading activity among Tier 2 ETPs is 

highly skewed by leveraged ETPs. All 

leveraged ETPs are in Tier 2 regardless 

of their trading volume, and some have 

a high level of volume.55 In contrast, a 

non-leveraged ETP is only in Tier 2 if 

it has less than $2 million CADV per 

day over the past six months. This 

implies that an aggregate analysis of all 

Tier 2 ETP trades will be driven by a 

relatively small number of high-volume 

leveraged ETPs, and such analysis will 

effectively ignore the vast majority of 

Tier 2 ETPs.56 Because elements of the 

Analyses are driven by a small number 

of high-volume leveraged ETPs, it is not 

appropriate to extend the conclusions 

from the Analyses to the nearly 2,000 

non-leveraged Tier 2 ETPs with 

substantially less volume; therefore, key 

analyses—such as the analysis of price 

dynamics around the Price Bands—do 

not support moving all 2,000 Tier 2 

ETPs into Tier 1. A more granular 

statistical analysis could show that, for 

certain ETPs that are currently in Tier 

2, the move to Tier 1 and resultant 

narrower Price Bands would result in 

excessive Straddle States, Limit States 

and Trading Pauses that are not due to 

extraordinary volatility caused by 

transitory gaps in liquidity, which these 

measures are designed to mitigate, but 

instead would unduly interrupt trading 

activity driven by fundamental value 

changes. For this reason, the 

Participants’ Analyses do not provide 

sufficient detail and specificity 

concerning these securities for the 

Commission to make an affirmative 

finding that the Proposed Amendment 

meets the standard for approval.57

In addition to the issues discussed 

above, in the Notice and OIP the 

Commission addressed potential issues 

with respect to the Participants’ 

statements regarding the Proposed 

Amendment’s benefits and analysis 

concerning the volatility characteristics 

of Tier 2 ETPs as compared to Tier 1 


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58See Notice, 88 FR at 81143 and OIP, 89 FR at 

13395. 

59See Notice, 88 FR at 81137–38. 

60See supra notes 31–33 and accompanying text. 

61See Notice, 88 FR at 81137; Participants’ Letter 

at 4. 

62For example, consider a trade that crosses 

below the lower Theoretical Tier 1 Band. It is likely 

that this trade executed at the bid (because the bid 

price is lower than the ask). Assume the bid is at 

$9 and the ask is at $11. If there is no price 

reversion—that is, the bid ($9) and ask ($11) stay 

the same after this trade—then the subsequent 

midpoint price ($10) would be higher than the trade 

price ($9), resulting in the methodology incorrectly 

identifying this as a price reversion. It is also 

possible that prices exhibited continuation—that is, 

prices continued to fall—but the subsequent 

midpoint did not fall below the original bid. Both 

of these cases would incorrectly be coded as a 

‘‘price reversion’’ in the Proposal’s analysis; the 

Proposal’s analysis therefore appears to 

overestimate the degree of price reversion. 

63See Notice, 88 FR at 81143 and OIP, 89 FR at 

13394–95. 

64See Participants’ Letter at 4. 

65 Id. 

66 Id. 

67The Supplemental Analysis shows higher 

reversion when measured as a fraction of trades, 

which implies that trades with a low number of 

shares are more likely to revert. This analysis does 

not calculate reversion on a dollar-weighted basis, 

so it is unclear what fraction of dollars may have 

been executed during a transitory gap in liquidity. 

68See Notice, 88 FR at 81134–37. 

69See supra notes 34–36 and accompanying text. 

70See Notice, 88 FR at 81143 and OIP, 89 FR at 

13395. 

71See 17 CFR 242.608(b)(2). See also 17 CFR 

201.700(b)(3)(ii). 

72Changes in stock valuations are often modelled 

as a ‘‘random walk.’’ In such a model, the stock’s 

value moves randomly at successive steps; as the 

number of steps increases, the dispersion in the 

stock’s value also increases (i.e., the change in stock 

value is more volatile when it is measured over a 

longer horizon (because there are more steps as the 

horizon increases)). When a stock trades relatively 

infrequently, there are more such steps between 

trades, which generates greater volatility from one 

trade to the next. 

73As discussed in the previous paragraph, many 

Tier 2 ETPs may show different price reversion 

results than reflected in the aggregate statistical 

analysis. For example, when a stock’s trades are 

spread out over time, it will experience greater 

price changes trade-to-trade due to the greater 

amount of information between trades; such price 

changes will be less likely to revert after crossing 

the Theoretical Tier 1 Bands because the price 

change is driven by new information rather than a 

temporary liquidity gap. 

74See LULD Plan Approval Order, 77 FR at 

33508–33510. As the participants’ analysis shows 

in Table 2 of the Proposed Amendment, limit states 

and trading pauses are rare events. 

75The methodology studying theoretical blocked 

trades more precisely captures the relevant periods 

of extraordinary volatility because this method 

includes only relatively rare events in which prices 

move several percentage points within a short time 

period. But, as discussed previously, this analysis 

Continued 

securities that are not ETPs.58 The 

Participants state that the Proposed 

Amendment would protect investors 

from executing trades at inferior prices 

that may occur due to transitory gaps in 

liquidity rather than fundamental 

valuation,59 and some commenters state 

their support for this element of the 

Proposal’s analysis.60 However, as 

discussed further below, the study 

presented in the Proposed Amendment 

and the Supplemental Analysis 

supporting this investor protection 

benefit are not robust or compelling. 

The Participants rely on the Analyses, 

which documented price reversion after 

Theoretical Tier 1 Bands had been 

breached in Tier 2 ETPs, as evidence 

that investors transacted at inferior 

prices and would have benefited from 

tighter Price Bands.61

There are three concerns with the 

price reversion analysis provided in the 

study presented in the Proposed 

Amendment and the Supplemental 

Analysis. First, as stated above, the 

price reversion analyses in the study in 

the Proposed Amendment and 

Supplemental Analysis are done on an 

aggregate basis for all Tier 2 ETPs. Many 

Tier 2 ETPs may show different price 

reversion results than reflected in the 

Analyses. Second, the conclusions from 

the study’s price reversion analysis are 

not robust because that price reversion 

analysis compared trade prices that 

occurred outside of the Theoretical Tier 

1 Bands to subsequent midpoint prices. 

This methodology is flawed because by 

comparing the execution price to a 

subsequent midpoint price, the 

methodology could incorrectly identify 

a price reversion—which is cited as 

evidence of inferior trades—even if 

nothing else changes with respect to the 

security (e.g., fundamental value, bid 

and ask prices stay constant) or even if 

the midpoint price continues to move in 

the same direction.62 The Commission 

requested comment concerning the 

analysis included with the Proposal in 

the Notice and OIP,63 and the 

Participants performed a Supplemental 

Analysis to address concerns that the 

Proposal’s analysis could overestimate 

the degree of price reversion.64 In 

particular, the Participants performed a 

price reversion analysis that compared 

the midpoint of the NBBO at five and 

ten minutes after the trade to the 

midpoint of the NBBO at the time of 

execution.65 While this methodology in 

the Supplemental Analysis 66 is more 

robust than the methodology of the 

study included in the Proposed 

Amendment, it also showed a decrease 

in the amount of price reversion 

experienced by Tier 2 ETPs. This raises 

a third concern. In particular, the 

additional price reversion analysis 

reflects some reversion metrics 

dropping from 74% in the Proposal to 

52% in the Supplemental Analysis. 

Given that prices fluctuate 

unpredictably over such short horizons, 

prices should revert 50% of the time 

and continue in the same direction 50% 

of the time; therefore, this estimated 

reversion probability of 52% in the 

Supplemental Analysis is little better 

than chance and does not support the 

Participants’ statement that investors 

would have been protected by the 

tighter band.67 The reduction in the 

estimated amount of price reversion also 

increases the likelihood that some 

individual Tier 2 ETPs experience price 

continuation—rather than reversion— 

near the Theoretical Tier 1 Bands, but 

this possibility cannot be detected when 

all two thousand Tier 2 ETPs are 

included in the aggregate statistical 

analysis. 

The Participants also state that Tier 2 

ETPs are less volatile than Tier 1 nonETP securities, and that this lesser 

volatility is evidence that the current 

Price Bands for Tier 2 ETPs are poorly 

calibrated.68 Some commenters 

supported this element of the Proposal’s 

analysis.69 However, that volatility 

analysis is also flawed.70 First, as 

discussed above, the Participants’ 

Analyses are insufficiently granular as 

they combine nearly two thousand nonleveraged Tier 2 ETPs into a single 

group and compare them to all Tier 1 

non-ETPs. Yet there may be many nonleveraged Tier 2 ETPs that reflect 

substantially different trading 

characteristics, and the Participants’ 

Analyses do not provide sufficient 

detail and specificity concerning these 

securities for the Commission to make 

an affirmative finding that the Proposed 

Amendment meets the standard for 

approval.71

Some non-leveraged Tier 2 ETPs—due 

to their relatively low trading volume— 

may experience trades that are spread 

out over time. When the time between 

trades is longer, the amount of new 

information in the market since the last 

trade will generally be higher, resulting 

in greater price changes—i.e., greater 

volatility—from trade-to-trade.72 A 

tighter Price Band for these securities 

will be likely to inhibit this new 

information from being incorporated 

into trade prices and the Participants’ 

Analyses do not address this possibility 

and its potential impact.73 Second, 

volatility is an imprecise metric for 

determining Price Bands. This is 

because volatility is averaged over many 

days and many stocks, while the Price 

Bands are meant to curb extraordinary 

volatility (e.g., the velocity of significant 

price moves).74 Average levels of 

volatility, therefore, are a coarse metric 

in determining whether a stock can 

sustain tighter Price Bands.75 Third, the 


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was aggregated in a way that makes its results 

impossible to generalize to the typical Tier 2 ETP. 

76For example, consider two ETPs with the same 

fundamental volatility but different levels of trading 

activity. Suppose the first ETP is traded frequently 

with quote updates every second; it therefore has 

23,400 second-to-second returns during the trading 

day (sixty updates per minute for 6.5 hours). 

Suppose that the second ETP only receives a quote 

update once per minute; it will have 390 secondto-second returns, and 23,010 seconds with an 

unchanged midpoint (i.e., a return of 0). The 

Proposal’s methodology is likely to estimate a 

substantially lower volatility for the second ETP 

due to the fact that the vast majority of observations 

are coded as a 0. Using the NBBO files in the TAQ 

database for the second half of 2023, the 

Commission estimates that the median nonleveraged Tier 2 ETP receives approximately 2,900 

NBBO updates per day; this implies that the 

second-to-second volatility calculation for the 

median Tier 2 ETP will use at least 20,500 seconds 

with a return of 0 due to a lack of data (23,400 

seconds per day, less the 2,900 NBBO updates). In 

contrast, the median Tier 1 security receives over 

23,400 NBBO updates per day. It is likely therefore 

that the Proposal’s methodology underestimates the 

volatility of non-leveraged Tier 2 ETPs due to the 

prevalence of missing returns. The Participants 

disagreed with this assessment of their 

methodology, stating that ‘‘quotes for even thinlytraded ETPs change frequently as market makers 

update their valuations of ETPs’ underlying 

portfolios, so it is not the case that the computation 

of quote volatility is biased by many zeroes.’’ See 

Participants’ Letter at 2. The Participants did not 

provide any evidence to support this statement. 

77See Participants’ Letter at 2–4. 

78 15 U.S.C. 78k–1. 

79 17 CFR 242.608(b)(2). 

1The Securities Act requires the delivery of 

prospectuses to investors who buy securities from 

an issuer or from underwriters or dealers who 

participate in a registered distribution of securities; 

see Securities Act sections 2(a)(10), 4(1), 4(3), 5(b) 

[15 U.S.C. 77b(a)(10), 77d(1), 77d(3), 77e(b); see 

also rule 174 under the Securities Act (17 CFR 

230.174) (regarding the prospectus delivery 

obligation of dealers); rule 15c2–8 under the 

Securities Exchange Act of 1934 (17 CFR 240.15c2– 

8) (prospectus delivery obligations of brokers and 

dealers). 

2Rule 154 permits the householding of 

prospectuses that are delivered electronically to 

investors only if delivery is made to a shared 

electronic address and the investors give written 

consent to householding. Implied consent is not 

permitted in such a situation. See rule 154(b)(4). 

Proposal’s analysis measured volatility 

using changes in the midpoint price of 

Tier 2 ETPs from second-to-second. This 

method of analysis is not robust for 

studying the volatility of securities that 

trade infrequently or have low quoting 

activity because the estimated volatility 

will be biased toward zero for these 

securities.76 As part of the 

Supplemental Analysis the Participants 

provided a new analysis of the volatility 

Tier 2 ETPs.77 While this analysis uses 

a more robust method for evaluating the 

volatility of Tier 2 ETPs as compared to 

Tier 1 non-ETPs, it presents the same 

concerns discussed above. In particular, 

it is an insufficiently granular statistical 

analysis of all Tier 2 ETP volatility, and 

there may be many Tier 2 ETPs that 

exhibit different trading characteristics, 

which the Analyses do not take into 

consideration. This possibility is 

evident in the distributional statistics in 

the Supplemental Analysis: the average 

quote volatilities for Tier 2 ETPs (both 

leveraged and non-leveraged) are 

multiples of the median quote 

volatilities, implying that the 

distribution is skewed by observations 

with volatility far higher than the 

average. Tier 1 ETPs exhibit less 

evidence of skewness. Therefore, the 

supplemental volatility analysis does 

not support moving all Tier 2 ETPs into 

Tier 1. 

Accordingly, based on the study in 

the Proposal and the Supplemental 

Analysis and for the reasons discussed 

throughout this order, the Commission 

cannot find that designating over two 

thousand ETPs as Tier 1 securities and 

subjecting them to tighter Price Bands is 

necessary or appropriate in the public 

interest, for the protection of investors 

and the maintenance of fair and orderly 

markets, to remove impediments to, and 

perfect the mechanisms of, a national 

market system, or otherwise in 

furtherance of the purposes of the Act, 

as required for approval of a plan 

amendment pursuant to Rule 608(b)(2). 

Designating Tier 2 ETPs as Tier 1 

securities based on an aggregate 

statistical analysis could result in 

excessive Straddle States, Limit States 

and Trading Pauses in certain affected 

ETPs due to tighter Price Bands, and 

thus unduly impede trading in many 

securities for market participants that 

trade in these securities. 

V. Conclusion 

For the reasons set forth above, the 

Commission does not find, pursuant to 

Section 11A of the Act,78 and Rule 

608(b)(2) thereunder,79 that the 

Proposed Amendment is necessary or 

appropriate in the public interest, for 

the protection of investors and the 

maintenance of fair and orderly markets, 

to remove impediments to, and perfect 

the mechanisms of, a national market 

system, or otherwise in furtherance of 

the purposes of the Act. 

It is therefore ordered, pursuant to 

Section 11A of the Act, and Rule 

608(b)(2) thereunder, that the Proposed 

Amendment (File No. 4–631) be, and it 

hereby is, disapproved. 

By the Commission. 

Vanessa A. Countryman, 

Secretary. 

[FR Doc. 2024–21508 Filed 9–19–24; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[SEC File No. 270–438, OMB Control No. 

3235–0495] 

Proposed Collection; Comment 

Request; Extension: Rule 154 

Upon Written Request, Copies Available 

From: Securities and Exchange 

Commission, Office of FOIA Services, 

100 F Street NE, Washington, DC 

20549–2736. 

Notice is hereby given that, pursuant 

to the Paperwork Reduction Act of 1995 

(44 U.S.C. 3501–3520), the Securities 

and Exchange Commission 

(‘‘Commission’’) is soliciting comments 

on the collection of information 

summarized below. The Commission 

plans to submit this existing collection 

of information to the Office of 

Management and Budget for extension 

and approval. 

The federal securities laws generally 

prohibit an issuer, underwriter, or 

dealer from delivering a security for sale 

unless a prospectus meeting certain 

requirements accompanies or precedes 

the security. Rule 154 (17 CFR 230.154) 

under the Securities Act of 1933 (15 

U.S.C. 77a) (the ‘‘Securities Act’’) 

permits, under certain circumstances, 

delivery of a single prospectus to 

investors who purchase securities from 

the same issuer and share the same 

address (‘‘householding’’) to satisfy the 

applicable prospectus delivery 

requirements.1 The purpose of rule 154 

is to reduce the amount of duplicative 

prospectuses delivered to investors 

sharing the same address. 

Under rule 154, a prospectus is 

considered delivered to all investors at 

a shared address, for purposes of the 

federal securities laws, if the person 

relying on the rule delivers the 

prospectus to the shared address, 

addresses the prospectus to the 

investors as a group or to each of the 

investors individually, and the investors 

consent to the delivery of a single 

prospectus. The rule applies to 

prospectuses and prospectus 

supplements. Currently, the rule 

permits householding of all 

prospectuses by an issuer, underwriter, 

or dealer relying on the rule if, in 

addition to the other conditions set forth 

in the rule, the issuer, underwriter, or 

dealer has obtained from each investor 

written or implied consent to 

householding.2 The rule requires 

issuers, underwriters, or dealers that 

wish to household prospectuses with 

implied consent to send a notice to each 

investor stating that the investors in the 

household will receive one prospectus 

in the future unless the investors 


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