56618 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Notices 

53 15 U.S.C. 78f(b). 

54 15 U.S.C. 78f(b)(5). 

55 15 U.S.C. 78s(b)(2). 

1 15 U.S.C. 78s(b)(1). 

2 15 U.S.C. 78a. 

3 17 CFR 240.19b–4. 

4The term ‘‘Exchanges’’ shall refer collectively to 

all of the exchanges in this order. The term ‘‘Listing 

Markets’’ refers collectively to NYSE, NYSE Amex, 

NYSE Arca, and NASDAQ. The term ‘‘Nonlisting 

Markets’’ refers collectively to the remaining 

national securities exchanges. 

The Commission notes that NYSE and NYSE 

Amex do not currently trade ETPs. Therefore, the 

expansion of the pilot to the select list of ETPs does 

not apply to these two markets. 

For purposes of Phase II, ETPs consist of 

exchange-traded funds (including widely traded 

broad-based funds like SPY), exchange-traded 

vehicles (which track the performance of an asset 

or index, providing investors with exposure to 

futures contracts, currencies and commodities 

without actually trading futures or taking physical 

delivery of the asset), and exchange-traded notes. 

5See Securities Exchange Act Release Nos. 62407 

(June 30, 2010), 75 FR 39060 (July 7, 2010); 62415 

(June 30, 2010), 75 FR 39086 (July 7, 2010); 62409 

(June 30, 2010), 75 FR 39078 (July 7, 2010); 62408 

(June 30, 2010), 75 FR 39065 (July 7, 2010); 62417 

(June 30, 2010), 75 FR 39074 (July 7, 2010); 62418 

(June 30, 2010), 75 FR 39084 (July 7, 2010); 62419 

(June 30, 2010), 75 FR 39070 (July 7, 2010); 62414 

(June 30, 2010), 75 FR 39081 (July 7, 2010); 62411 

(June 30, 2010), 75 FR 39067 (July 7, 2010); 62412 

(June 30, 2010), 75 FR 39073 (July 7, 2010); 62413 

(June 30, 2010), 75 FR 39076 (July 7, 2010); and 

62410 (June 30, 2010), 75 FR 39063 (July 7, 2010) 

(‘‘Phase II Circuit Breaker Pilot Notices’’). 

On June 30, 2010, FINRA filed a proposed rule 

change, which was approved today. See Securities 

Exchange Act Release No. 62416 (June 30, 2010), 75 

FR 39069 (July 7, 2010); Securities Exchange Act 

Release No. 62883 (September 10, 2010) (SR– 

FINRA–2010–033). 

6The Commission considered letters received as 

of August 25 discussing the concept of the 

effectiveness of the individual stock circuit breaker 

pilot to date as well as formal letters citing the rule 

filings. See Letter from Paul Schott Stevens, 

President & CEO, Investment Company Institute to 

Chairman Schapiro, Commission, dated June 22, 

2010 (‘‘ICI Letter’’); Letter from Craig S. Donohue, 

CEO, CME Group, Inc. to Chairman Schapiro, 

Commission, dated June 23, 2010 (‘‘CME Letter’’); 

Letter from Ann L. Vlcek, Managing Director and 

Associate General Counsel, Securities Industry and 

Financial Markets Association to Elizabeth M. 

Murphy, Secretary, Commission, dated June 25, 

2010 (‘‘SIFMA Letter’’); Letter from Peter Skopp, 

President, Molinete Trading Inc. to Elizabeth M. 

Murphy, Secretary, Commission, dated July 8, 2010 

(‘‘Molinete Letter’’); Letter from Sal L. Arnuk, CoHead, and Joseph Saluzzi, Co-Head, Themis 

Trading to Elizabeth M. Murphy, Secretary, 

Commission, dated July 8, 2010 (‘‘Themis Letter’’); 

Letter from Peter A. Ianello, Partner, CSS, LLC to 

Elizabeth M. Murphy, Secretary, Commission, dated 

July 15, 2010 (‘‘CSS Letter’’); Letter from Julie S. 

Sweet, General Counsel, Secretary, Chief 

Compliance Officer, Accenture plc to Elizabeth M. 

Murphy, Secretary, Commission, dated July 15, 

2010 (‘‘Accenture Letter’’); Letter from Patrick J. 

Healy, CEO, Issuer Advisory Group, LLC, 

Washington, District of Columbia to Elizabeth M. 

Murphy, Secretary, Commission, dated July 18, 

2010 (‘‘Issuer Advisory Group Letter’’); Letter from 

Alexander M. Cutler, Chair, Business Roundtable 

Corporate Leadership Initiative, Business 

Roundtable, to Elizabeth M. Murphy, Secretary, 

Commission, dated July 19, 2010 (‘‘Business 

Roundtable Letter’’); Letter from Geva Patz, Android 

Alpha Fund to Elizabeth M. Murphy, Secretary, 

Commission, dated July 19, 2010 (‘‘Android Alpha 

Fund Letter’’); Letter from David C. Cushing, 

Director of Global Equity Trading, Wellington 

Management Company, LLP to Elizabeth M. 

Murphy, Secretary, Commission, dated July 19, 

2010 (‘‘Wellington Letter’’); Letter from Karrie 

McMillan, General Counsel, Investment Company 

Institute to Elizabeth M. Murphy, Secretary, 

rules and regulations thereunder 

applicable to national securities 

exchanges. In particular, the 

Commission finds that the proposed 

rule changes submitted by the 

Exchanges are consistent with the 

requirements of Section 6(b) of the 

Act 53 and with Section 6(b)(5) of the 

Act 54 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. 

In the Commission’s view, the 

proposed rule changes will help assure 

that the determination of whether a 

clearly erroneous trade has occurred 

will be based on clear and objective 

criteria, and that the resolution of the 

incident will occur promptly through a 

transparent process. The proposed rule 

changes also should help assure 

consistent results in handling erroneous 

trades across the U.S. markets, thus 

furthering fair and orderly markets, the 

protection of investors and the public 

interest. Finally, the Commission notes 

that the proposed rule changes are being 

implemented on a pilot basis so that the 

Commission and the Exchanges can 

monitor the effects of the pilot on the 

markets and investors, and consider 

appropriate adjustments, as necessary. 

IV. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,55 that the 

proposed rule changes (SR–BATS– 

2010–016; SR–BX–2010–040; SR– 

CBOE–2010–056; SR–CHX–2010–13; 

SR–EDGA–2010–03; SR–EDGX–2010– 

03; SR–ISE–2010–62; SR–NASDAQ– 

2010–076; SR–NSX–2010–07; SR– 

NYSE–2010–47; SR–NYSEAmex–2010– 

60; SR–NYSEArca–2010–58), be, and 

hereby are, approved. 

By the Commission. 

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. 2010–23076 Filed 9–15–10; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–62884; File Nos. SR–BATS– 

2010–018; SR–BX–2010–044; SR–CBOE– 

2010–065; SR–CHX–2010–14; SR–EDGA– 

2010–05; SR–EDGX–2010–05; SR–ISE– 

2010–66; SR–NASDAQ–2010–079; SR– 

NYSE–2010–49; SR–NYSEAmex–2010–63; 

SR–NYSEArca–2010–61; SR–NSX–2010–08] 

Self-Regulatory Organizations; BATS 

Exchange, Inc.; NASDAQ OMX BX, 

Inc.; Chicago Board Options 

Exchange, Incorporated; Chicago 

Stock Exchange, Inc.; EDGA 

Exchange, Inc.; EDGX Exchange, Inc.; 

International Securities Exchange LLC; 

The NASDAQ Stock Market LLC; New 

York Stock Exchange LLC; NYSE 

Amex LLC; NYSE Arca, Inc.; National 

Stock Exchange, Inc.; Order Approving 

Proposed Rule Changes Relating to 

Expanding the Pilot Rule for Trading 

Pauses Due to Extraordinary Market 

Volatility to the Russell 1000® Index 

and Specified Exchange Traded 

Products 

September 10, 2010. 

I. Introduction 

On June 30, 2010, each of BATS 

Exchange, Inc. (‘‘BATS’’), NASDAQ 

OMX BX, Inc. (‘‘BX’’), Chicago Board 

Options Exchange, Incorporated 

(‘‘CBOE’’), Chicago Stock Exchange, Inc. 

(‘‘CHX’’), EDGA Exchange, Inc (‘‘EDGA’’), 

EDGX Exchange, Inc. (‘‘EDGX’’), 

International Securities Exchange LLC 

(‘‘ISE’’), The NASDAQ Stock Market LLC 

(‘‘NASDAQ’’), New York Stock Exchange 

LLC (‘‘NYSE’’), NYSE Amex LLC (‘‘NYSE 

Amex’’), NYSE Arca, Inc. (‘‘NYSE Arca’’), 

and National Stock Exchange, Inc. 

(‘‘NSX’’) filed with the Securities and 

Exchange Commission (‘‘Commission’’), 

pursuant to Section 19(b)(1) 1 of the 

Securities Exchange Act of 1934 

(‘‘Act’’),2 and Rule 19b–4 thereunder,3

proposed rule changes to amend certain 

of their respective rules to expand the 

trading pause pilot in individual stocks 

comprising the S&P 500® Index (‘‘S&P 

500’’) when the price moves ten percent 

or more in the preceding five minute 

period to securities included in the 

Russell 1000® Index (‘‘Russell 1000’’) 

and specified Exchange Traded 

Products (‘‘ETPs’’).4 The proposed rule 

changes were published for comment in 

the Federal Register on July 7, 2010.5

The Commission received 19 comments 

on the proposal and on broader issues 

relating to the effectiveness of the 

circuit breaker pilot program to date.6

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Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Notices 56619 

Commission, dated July 19, 2010 (‘‘ICI 2 Letter’’); 

Letter from Ira P. Shapiro, Managing Director, 

BlackRock, Inc., San Francisco, California to 

Elizabeth M. Murphy, Secretary, Commission, dated 

July 19, 2010 (‘‘BlackRock Letter’’); Letter from Tom 

Quaadman, Vice President, Center for Capital 

Markets Competitiveness, Washington, District of 

Columbia to Elizabeth M. Murphy, Secretary, 

Commission, dated July 19, 2010 (‘‘CCMC Letter’’); 

Letter from James J. Angel, Associate Professor of 

Finance, Georgetown University, dated June 19, 

2010 [sic] (‘‘Angel Letter’’); Letter from John A. 

McCarthy, General Counsel, GETCO to Elizabeth M. 

Murphy, Secretary, Commission, dated July 20, 

2010 (‘‘GETCO Letter’’); Letter from Jose Marques, 

Managing Director, Deutsche Bank Securities Inc. to 

Elizabeth M. Murphy, Secretary, Commission, dated 

July 21, 2010 (‘‘Deutsche Bank Letter’’); Letter from 

Paul Schott Stevens, President & CEO, Investment 

Company Institute to Chairman Schapiro, 

Commission, dated July 27, 2010 (‘‘ICI 3 Letter’’); 

Letter from Craig S. Donohue, Chief Executive 

Officer, CME Group to Elizabeth M. Murphy, 

Secretary, Commission, dated July 30, 2010 (CME 

2 Letter’’). 

7See Letter from Janet M. Kissane, Senior Vice 

President—Legal & Corporate Secretary, NYSE 

Euronext to Elizabeth M. Murphy, Secretary, 

Commission, dated July 23, 2010 (‘‘Response 

Letter’’). 

8See Letter from Janet M. Kissane, Senior Vice 

President—Legal & Corporate Secretary, NYSE 

Euronext to Elizabeth M. Murphy, Secretary, 

Commission, dated August 25, 2010. 

9See Letter from Thomas P. Moran, Associate 

General Counsel, The NASDAQ Stock Market LLC 

to Elizabeth M. Murphy, Secretary, Commission, 

dated August 26, 2010. 

10 15 U.S.C. 78f(b)(5). That section, 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. 

11The 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 CFTC and SEC to the Joint 

Advisory Committee on Emerging Regulatory Issues, 

‘‘Preliminary Findings Regarding the Market Events 

of May 6, 2010,’’ dated May 18, 2010 (‘‘Joint 

Report’’). 

12See Securities Exchange Act Release No. 62252 

(June 10, 2010), 75 FR 34186 (June 16, 2010) (‘‘Phase 

I Approval Order’’). 

13For more details on the operation of the 

Exchanges’ rule, see Securities Exchange Act 

Release No. 62252. 

14See, e.g., Letter from Jeffrey W. Rubin, 

American Bar Association Business Law Section to 

Elizabeth M. Murphy, Secretary, Commission, dated 

June 3, 2010; Letter from Julie Sweet, Accenture plc 

to Elizabeth M. Murphy, Secretary, Commission, 

dated June 3, 2010; and Letter from Karrie 

McMillan, Investment Company Institute to 

Elizabeth M. Murphy, Secretary, Commission, dated 

June 3, 2010 (expressing particular concern that if 

circuit breakers exist for individual securities 

contained in ETFs’ baskets, but not for the ETFs 

themselves, ETFs could again suffer 

disproportionately during a market event such as 

that of May 6). 

The NYSE responded to the comments 

in a letter dated July 23, 2010,7 and in 

a letter dated August 25, 2010.8 Nasdaq 

submitted a response on August 26, 

2010.9

The Commission finds that the 

proposals are consistent with Section 

6(b)(5) of the Act,10 as it believes that 

expanding the uniform, market-wide 

trading pauses will serve to prevent 

potentially destabilizing price volatility 

and will thereby help promote the goals 

of investor protection and fair and 

orderly markets. This order approves 

the proposed rule changes. 

II. Description of the Proposals 

On May 6, 2010, the U.S. equity 

markets experienced a severe 

disruption.11 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 

were broken by the Exchanges. The 

Commission is concerned that events 

such as those that occurred on May 6 

can seriously undermine the integrity of 

the U.S. securities markets. 

Accordingly, it is working on a variety 

of fronts to assess the causes and 

contributing factors of the May 6 market 

disruption and to fashion policy 

responses that will help prevent a 

recurrence. 

The Commission also recognizes the 

importance of moving quickly to 

implement appropriate steps that could 

help limit potential harm from extreme 

price volatility. In this regard, it is 

pleased that the SROs began consulting 

soon after May 6 in an effort to develop 

consistent circuit breaker rules that 

could be implemented on an expedited 

basis. The SROs were able to reach 

agreement on a consistent approach 

and, on May 18 and 19, 2010, all of the 

SROs filed proposed rule changes with 

the Commission. 

On June 10, 2010, the Commission 

granted accelerated approval, for a pilot 

period to end December 10, 2010, for 

proposed rule changes by the Exchanges 

to pause trading during periods of 

extraordinary market volatility in S&P 

500 stocks (the ‘‘Phase I Circuit Breaker 

Pilot’’).12 The rules require the Listing 

Markets to issue five-minute trading 

pauses for individual securities for 

which they are the primary Listing 

Market if the transaction price of the 

security moves ten percent or more from 

a price in the preceding five-minute 

period. The Listing Markets are required 

to notify the other Exchanges and 

market participants of the imposition of 

a trading pause by immediately 

disseminating a special indicator over 

the consolidated tape. Under the rules, 

once the Listing Market issues a trading 

pause, the other Exchanges are required 

to pause trading in the security on their 

markets. 

At the end of the five-minute pause, 

the Listing Market reopens trading in 

the security in accordance with its 

procedures for doing so. Trading 

resumes on other Exchanges and in the 

over-the-counter (OTC) market once 

trading has resumed on the Listing 

Market. In the event of a significant 

imbalance on the Listing Market at the 

end of the trading pause, the Listing 

Market may delay reopening. If the 

Listing Market has not reopened within 

ten minutes from the initiation of the 

trading pause, however, the other 

Exchanges may resume trading.13

Several commenters on the proposal 

for the Phase I Circuit Breaker Pilot 

expressed the view that the circuit 

breaker pilot should be expanded 

beyond S&P 500 stocks, particularly to 

exchange traded funds (‘‘ETFs’’) and the 

securities of other companies that were 

most severely affected by the market 

disruption on May 6, 2010.14 In the 

approval order for the Phase I Circuit 

Breaker Pilot, the Commission agreed 

that consideration should be given by 

the Exchanges to whether the circuit 

breakers should be expanded to cover 

additional securities, but did not believe 

that there was a reason to delay 

implementation of the Phase I Circuit 

Breaker Pilot as a reasonable first step 

to address potential market volatility. 

Under the current proposal, the 

Exchanges propose to add securities 

included in the Russell 1000, as well as 

specified ETPs, to the pilot (the ‘‘Phase 

II Circuit Breaker Pilot’’) shortly after the 

Commission approves the proposed rule 

changes. The Exchanges believe that 

adding these securities to the pilot 

would have the beneficial effect of 

applying the circuit breakers’ 

protections against excessive volatility 

to a larger group of securities, while at 

the same time allowing the opportunity, 

during the pilot period, for continued 

review of the operation of the circuit 

breakers and an assessment of whether 

the pilot should be further expanded or 

modified. 

The Exchanges believe that the 

securities in the Russell 1000 have 

similar trading characteristics to 

securities included in the S&P 500, and 

therefore the 10% price movement that 

triggers a trading pause in the Phase I 

Circuit Breaker Pilot is appropriate for 

Russell 1000 securities. Based on the 

analyses of certain of the Exchanges, the 

number of times that the trading pause 

would be triggered for Russell 1000 

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56620 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Notices 

15For details on how the Exchanges developed 

the pilot list of ETPs, see, e.g., Securities Exchange 

Act Release No. 62413 (June 30, 2010), 75 FR 39076 

(July 7, 2010) (SR–NYSEArca–2010–61). 

16One consequence of excluding leveraged ETFs 

is that they could still suffer significant price 

dislocations even though trading in the stocks they 

track might be paused as discussed above. 

The Exchanges do not believe that the 10% price 

movement is an appropriate threshold for leveraged 

ETPs because, by definition, leveraged ETPs are 

based on multiples of price movements in the 

underlying index. Accordingly, a 10% percent price 

movement in a leveraged ETP may not signify 

extraordinary volatility. Because the Exchanges are 

not proposing to adopt revised price movement 

thresholds at this time, they are not proposing to 

include leveraged ETPs for now. 

17See Phase II Circuit Breaker Pilot Notices, 

supra note 5. 

18See Accenture Letter, Business Roundtable 

Letter; CCMC Letter; ICI Letter; ICI 2 Letter; ICI 3 

Letter; Issuer Advisory Group Letter; Wellington 

Letter; Deutsche Bank Letter; SIFMA Letter; and 

BlackRock Letter. 

19See SIFMA Letter. 

20See Business Roundtable Letter. 

21See Accenture Letter. 

22See, e.g., Themis Letter; Accenture Letter; 

Molinete Letter; SIFMA Letter; and Angel Letter. 

23See Molinete Letter. 

24 Id. (referring to the trading pauses in Citigroup 

on June 29, 2010 and in Anadarko Petroleum on 

July 6, 2010). As of August 25, stock-specific circuit 

breakers have been triggered seven times in six 

stocks. 

25The Commission notes that anyone reporting a 

trade with the intention of triggering a trading 

pause could be charged with manipulation, fraud or 

other violations of the Federal securities laws. 

26See Themis Letter and Angel Letter. 

27 Id. 

28See SIFMA Letter; Accenture Letter; 

Wellington Letter; and CME 2 Letter. Under this 

approach, trades could occur within the established 

price bands, so that erroneous trades would largely 

be eliminated. In addition, there would not be a 

complete trading halt—trading would be prevented 

outside the applicable price band, but could 

continue within it. 

29See SIFMA Letter and CME 2 Letter. 

securities would be similar to the 

number of instances for S&P 500 

securities. 

In addition, the Exchanges proposed 

to include in the Phase II Circuit 

Breaker Pilot the more liquid ETPs— 

specifically, those with a minimum 

average daily volume of $2,000,000— 

that tend to have similar trading 

characteristics as securities in the S&P 

500 and Russell 1000 and for which 

they believe a 10% circuit breaker 

trigger is appropriate.15 In addition, to 

assure related ETPs are subject to 

comparable circuit breakers, the 

Exchanges proposed to include any ETP 

that did not meet the $2,000,000 average 

daily volume threshold, but tracked 

similar stocks and indices as ETPs 

meeting this criterion and proposed to 

be included in the pilot. ETPs with 

average-daily-volumes of less than 

$2,000,000, and for which there were no 

high-volume counterparts were not 

included. Also excluded were leveraged 

ETFs since those products by design are 

more volatile than the underlying stocks 

they track, and the current proposal 

only contemplates adding securities for 

which a 10% trigger is appropriate.16

As proposed, the list of ETPs includes 

those that track broad-based equity 

indices, which the Exchanges recognize 

has caused some debate. For example, 

as described in Section III, concerns 

have been raised about the effect that 

halting trading in an index-based ETP 

may have on a related index-based 

option or future. However, the 

Exchanges believe that including broadbased index ETPs is appropriate so that 

ETP investors are protected should the 

component securities experience such 

volatility that trading in the broad-based 

ETP is affected. Because the proposal is 

for a pilot period, the Exchanges will 

continue to assess, among other things, 

whether it is appropriate to have a 

trading pause in broad-based index 

ETPs when there is not a similar trading 

pause in related index-based options or 

futures. 

In addition, during the pilot period, 

the Exchanges will continue to assess 

whether specific stocks or ETPs should 

be added to, or removed from, the list 

of securities subject to the circuit 

breakers. The Exchanges will also 

continue to assess whether the 

parameters for invoking a trading pause 

continue to be appropriate or should be 

modified.17

III. Discussion of Comments and 

Commission Findings 

As of August 25, 2010, the 

Commission received 19 comment 

letters regarding the proposed rule 

changes. Many commenters supported 

the Phase II Circuit Breaker Pilot and its 

expansion to the Russell 1000 and the 

specified ETPs.18 For example, one 

commenter encouraged the Commission 

to act expeditiously to expand the scope 

of the trading halt rules to securities 

other than the S&P 500, particularly to 

ETFs, and noted that ETFs experienced 

significant volatility on May 6, 2010 and 

would benefit from uniform pauses in 

trading.19 Another commenter urged the 

Commission to approve the Phase II 

Circuit Breaker Pilot as quickly as 

possible, arguing that many of the 

securities that experienced the most 

extreme trading jolts on May 6, 2010 

were not included in the Phase I Circuit 

Breaker Pilot, and that expansion of the 

pilot was appropriate both to protect 

additional companies from potential 

aberrational price movements and 

liquidity events affecting their 

securities, and to provide investors with 

greater certainty about the availability of 

the circuit breakers.20 Yet another 

commenter noted that expanding the 

trading halt pilot to securities in the 

Russell 1000 would protect investors in 

publicly traded companies not in the 

S&P 500 that experienced severely 

aberrational trading on May 6.21

Some commenters raised concerns 

about the proposed rule changes. The 

two main areas of concern were: (1) The 

ability of erroneous trades to trigger a 

trading pause; and (2) whether ETPs— 

particularly broad-based index 

products—should be included in the 

pilot. 

1. Erroneous Trades Triggering the 

Trading Pause 

Several commenters pointed out that, 

under the circuit breaker pilot, 

erroneous trades can trigger—and have 

triggered—trading pauses, when there 

otherwise is no extraordinary market 

volatility.22 One commenter asserted 

that under the current circuit breaker 

logic, erroneous trades would have 

triggered a trading halt at least 238 times 

in the past 18 months.23 This same 

commenter pointed out that, as of the 

date of its letter, three stocks had been 

halted under the Phase I Circuit Breaker 

Pilot, two of which were triggered on 

markets with prices that were far away 

from the current national best bid or 

offer (‘‘NBBO’’) and prevailing prices at 

other markets.24

Other commenters expressed concern 

that any trader in the world, illintentioned 25 or not, has the power to 

halt trading in a stock simply by 

printing a trade outside the circuit 

breaker range on a trade reporting 

facility for the OTC market.26 One of 

these commenters suggested that either 

a minimum number of trades outside 

the circuit breaker range occur before 

trading is halted, or that the trade first 

be checked for consistency with the 

NBBO before trading is halted.27

Several commenters concerned with 

erroneous trades triggering the circuit 

breakers offered alternatives to the 

‘‘trading pause’’ mechanism used in the 

current pilot. A number of commenters 

suggested that the Commission consider 

moving to a ‘‘limit up/limit down’’ 

approach to moderate market volatility, 

similar to that utilized in the futures 

markets.28 Some commenters also 

encouraged the Commission to consider 

adopting collars on market orders and 

eliminating stub quotes.29 One 

commenter suggested that the markets 

trigger the single stock circuit breakers 

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Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Notices 56621 

30See Molinete Letter. As an alternative, this 

commenter suggested requiring at least two 

consecutive trades outside the NBBO to trigger the 

circuit breaker, and the exclusion of manuallyentered trades from being potential triggers. 31See SR–BATS–2010–016; SR–BX–2010–040; 

SR–CBOE–2010–056; SR–CHX–2010–13; SR– 

EDGA–2010–03; SR–EDGX–2010–03; SR–FINRA– 

2010–032; SR–ISE–2010–62; SR–NASDAQ–2010– 

076; SR–NSX–2010–07; SR–NYSE–2010–47; SR– 

NYSEAmex–2010–60; SR–NYSEArca–2010–58 

(proposed rule changes to amend certain SRO rules 

to set forth clearer standards and curtail SRO 

discretion with respect to breaking erroneous 

trades). 

32See Letter from Janet M. Kissane, Senior Vice 

President—Legal & Corporate Secretary, NYSE 

Euronext to Elizabeth M. Murphy, Secretary, 

Commission, dated August 25, 2010; Letter from 

Thomas P. Moran, Associate General Counsel, The 

NASDAQ Stock Market LLC to Elizabeth M. 

Murphy, Secretary, Commission, dated August 26, 

2010. The Listing Markets may roll out these new 

automated processes on a staggered basis. 

In addition, the Commission understands FINRA 

is developing more effective ways to prevent 

erroneous OTC trades from being printed on a trade 

reporting facility, and it encourages those efforts. 

See, e.g., FINRA Trade Reporting Notice, dated 

August 19, 2010 (issuing new guidance on the use 

of the weighted-average price/special pricing 

formula (.W) trade modifier for reporting certain 

types of OTC trades in NMS stocks to FINRA). 

33See, e.g., Securities Exchange Act Release Nos. 

62485 (July 13, 2010), 75 FR 41914 (July 19, 2010) 

(SR–NYSEArca–2010–67); 60371 (July 23, 2009), 74 

FR 38075 (July 30, 2009) (SR–NASDAQ–2009–70). 

34See Accenture Letter; Android Alpha Fund 

Letter; BlackRock Letter; Business Roundtable 

Letter; CME Letter; CME 2 Letter; CCMC Letter; ICI 

Letter; ICI 2 Letter; ICI 3 Letter; Molinete Letter; 

SIFMA Letter. 

35See Accenture Letter; BlackRock Letter; 

Business Roundtable Letter; CCMC Letter; ICI 

Letter; ICI 2 Letter; ICI 3 Letter; SIFMA Letter. 

36See SIFMA Letter at 2. 

37See ICI Letter and ICI 2 Letter. 

38 Id. 

39See ICI Letter. In a subsequent letter, that 

commenter supported examining the connection 

between price discovery in the equities and the 

futures markets, and potentially making rules 

consistent across markets. See ICI 2 Letter. 

According to this commenter, however, such an 

examination should not prevent including broadbased index ETFs in the pilot program. Id. 

40See ICI 2 Letter. 

41See BlackRock Letter. According to the 

commenter, this arbitrage mechanism generally 

requires liquidity providers to sell a basket of stocks 

equivalent to an ETF’s underlying portfolio (or a 

correlated derivative) as a hedge when purchasing 

ETF shares. 

42 Id. This commenter did, however, question the 

exclusion of lower-volume ETFs from the Phase II 

Circuit Breaker Pilot, and urged that these ETFs be 

included in the pilot at the earliest opportunity. See 

discussion on pages 6–7 describing the rationale for 

selecting the list of ETPs for inclusion in the pilot 

program. 

43See Molinete Letter at 4. 

44 Id. at 4–5. 

45See CME Letter and CME 2 Letter. This 

commenter expressed further concerns with the 

prospect of multiple constituent stocks in an index 

being halted without the market-wide circuit 

breaker being triggered. The commenter thought 

this would create complexity and confusion in 

understanding the index calculation. In addition, 

the commenter was of the view that the halting of 

high capitalization, highly-liquid index components 

would be disruptive because it could affect whether 

the index triggers a market-wide circuit breaker, the 

intra-day index values circulated for risk 

management purposes may not be reflective of the 

true value of the underlying market, and large 

liquidity providers in index futures and ETFs may 

have difficulty hedging with the result that they 

withdraw from the market. 

off of changes to the NBBO rather than 

to changes in the last trade price.30

The Commission believes that the 

ability of an erroneous trade to trigger a 

trading pause is a concern that the 

Exchanges should seek to address 

promptly. The Commission understands 

that the Exchanges are working on a 

variety of measures to reduce the 

instances of erroneous trades and to 

assure that, when they occur, they are 

resolved promptly through a clear and 

transparent process.31 The Commission 

also notes that, under the pilot rules, the 

Listing Market can exclude a transaction 

price that results from an erroneous 

execution from triggering a circuit 

breaker. In this regard, the Commission 

notes that the Listing Markets, pursuant 

to this authority, intend to implement 

automated processes to help prevent 

trades that may be erroneous— 

specifically, those outside the NBBO— 

from triggering a circuit breaker.32

Various Exchanges have taken steps to 

‘‘collar’’ market orders, which are 

intended to prevent executions that 

occur a specified percentage away from 

the last sale,33 and Commission staff has 

been working with the Exchanges on an 

initiative to prevent stub quotes. The 

Commission, in conjunction with the 

Exchanges, will continue to evaluate 

what further steps need to be taken to 

reduce the likelihood of erroneous 

trades and to improve the efficiency of 

the pilot. However, the Commission 

does not believe it is appropriate to 

delay implementation of the Phase II 

Circuit Breaker Pilot pending the 

conclusion of those efforts. 

2. Inclusion of ETPs 

Many commenters addressed the 

inclusion of ETPs in the pilot 

program.34 Several supported the 

proposed expansion of the Phase II 

Circuit Breaker Pilot to include ETPs.35

One of these commenters stated that 

ETFs experienced significant volatility 

on May 6, and would benefit from a 

uniform trading pause.36 Another 

commenter noted that the price of an 

ETF is typically highly correlated to the 

market price of its basket of component 

securities.37 Under normal 

circumstances, when trading has been 

halted for one or two component 

securities, an ETF may experience a 

slight deviation from the price of its 

basket because of the challenge of 

pricing the non-trading security, and 

may trade with a wider spread to 

account for the associated risk. When 

multiple underlying securities are 

affected, however, the correlation 

between the prices of an ETF and its 

underlying basket may break down and 

the ETF may experience more severe 

price dislocation.38 While this 

commenter thought that a different 

circuit breaker trigger may be 

appropriate for ETFs, it nonetheless 

encouraged the Commission to include 

all ETFs in the pilot where a substantial 

number of the component securities are 

subject to the circuit breakers.39 Doing 

otherwise, in its view, creates risks that 

ETFs could again suffer 

disproportionately during a market 

event similar to that of May 6.40

One commenter supported the 

inclusion of ETFs in the pilot program, 

in part because halting trading in the 

underlying component securities, but 

not in the ETF, would hinder the 

arbitrage mechanism that is critical to 

the ability of ETFs to track the 

performance of their underlying basket 

or benchmark index.41 According to this 

commenter, if an ETF were allowed to 

continue to trade while trading in the 

majority of its underlying securities 

were halted, the arbitrage mechanism 

would not work effectively, with the 

result that liquidity for the ETF would 

diminish greatly, and perhaps lead to a 

collapse in price similar to that which 

occurred on May 6.42

Other commenters criticized various 

aspects of the application of the 

proposed rule change to ETPs. One 

commenter described certain ETFs— 

such as the S&P 500 SPDR (SPY)—as 

‘‘systemically important,’’ and expressed 

concern that halting trading in these 

ETFs, especially as a result of erroneous 

trades, might destabilize markets. 

Because the SPY, for example, is used 

as a hedging vehicle in many trading 

strategies, halting trading in it could 

cause liquidity providers broadly to 

withdraw from the market, increasing 

volatility and perhaps leading to a chain 

reaction like that witnessed on May 6.43

This commenter did not believe that 

allowing ETFs to continue to trade 

while some of the underlying 

component securities were halted 

would be detrimental, because market 

participants would determine their own 

fair value of the halted component 

securities.44

Another commenter expressed 

significant concern with the proposed 

expansion of the pilot to broad-based 

equity index ETFs, as it believed there 

could be potentially significant 

disruptions to trading across related 

markets.45 This commenter noted that 

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56622 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Notices 

46 Id. The commenter also noted that these 

markets are very closely linked and the absence of 

effective coordination across comparable markets 

was one factor cited by many as having contributed 

to certain market issues experienced on May 6. The 

Commission addresses issues of cross-market 

linkage in its discussion infra. 

47 Id. 

48See CME Letter. 

49See CME Letter. This commenter also noted 

that, while approximately 70% of the trades broken 

on May 6, 2010 were in ETFs, they were not in the 

most liquid domestic, large cap index products. 

50See CME 2 Letter. These price limits would be 

established at the 5%, 10% and 20% levels, and 

would be implemented for a 10 minute period, after 

which trading would continue to the next 

applicable limit. 

51 Id. Specifically, the commenter recommended 

that all markets adopt: (1) Automated means— 

similar to the commenter’s stop logic 

functionality—to briefly pause the market in the 

event that cascading sell orders precipitate a 

material market decline because of a transitory 

dearth of liquidity; (2) functionality—similar to the 

commenter’s protection point functionality—to 

automatically apply limit prices to all orders, 

including market and stop orders; and (3) 

automated price banding functionality and 

maximum order size restrictions to help prevent 

erroneous trades. For as long as single stock circuit 

breakers continue to be employed, however, the 

commenter believed regulators and the markets 

should establish uniform policies and procedures to 

address situations where the computation of the 

market-wide circuit breaker index value is 

negatively affected due to the triggering of stock 

specific circuit breakers on the component 

securities. 

52See Response Letter. 

53 Id. 

54The Commission notes that a pause in the ETF 

could also affect trading in underlying component 

stocks that were not otherwise halted to the extent 

that the ETF was no longer available as a hedging 

mechanism. 

the indices underlying the most active 

ETFs are the same as those underlying 

the most active cash index options, 

index futures, and options on ETFs.46 If 

a different circuit breaker mechanism 

applied to broad-based equity index 

ETFs and ETF options than applied to 

index futures and index options, or 

differed from the overall market-wide 

circuit breakers, the commenter feared 

this could lead to further market stress 

during periods of turbulence, perhaps 

impeding liquidity and exacerbating 

risk management challenges.47 In 

addition, the commenter thought that 

the inability of market makers to hedge 

using equity index ETFs during a 

trading pause could lead to their 

withdrawing liquidity across all 

markets, including in the E-mini index 

futures.48 Accordingly, the commenter 

believed that the circuit breakers 

applicable to equity index-based ETFs 

(as well as index futures, index options, 

options on ETFs, and swaps) should be 

consistent with both the methodology 

and levels of the market-wide circuit 

breakers.49 Specifically, the commenter 

recommended the adoption of uniform 

price limits across all broad-based index 

products based upon the S&P 500, the 

DJIA, and the NASDAQ 100, which 

would preclude trading beyond the 

enumerated limit but not within it.50

This commenter also recommended that 

automated risk and volatility mitigation 

mechanisms be implemented in place of 

trading halts in individual securities.51

In its response to comments, NYSE 

stated that the ‘‘prompt review and 

implementation of revised and 

coordinated market wide circuit 

breakers is * * * a high priority.’’ 52

NYSE also indicated that it would 

continue to review the operation of the 

pilot, including its effect on how indexbased products trade across multiple 

markets, and would propose ‘‘such 

changes as may be warranted for those 

securities.’’ 53

The Commission believes that, on 

balance, the inclusion of ETPs, 

including broad-based index equity 

ETFs, in the Phase II Circuit Breaker 

Pilot is warranted and consistent with 

the Act. The Commission notes that 

there are a number of scenarios in 

which the application of a circuit 

breaker to trading in an ETF would 

promote market stability. For example, 

if an ETF triggers a circuit breaker when 

none of its component stocks is 

experiencing abnormal moves, then it is 

likely that the ETF is suffering from a 

temporary liquidity imbalance. In that 

case, the ETF would no longer be 

suitable for use as a hedging instrument 

because its price would no longer reflect 

an accurate consensus market value of 

the ETF or its underlying stocks. By 

pausing the ETF under these 

circumstances, the Exchanges would 

allow liquidity to rebuild and provide 

time for the market to self-correct 

without allowing the aberrant price of 

the ETF to adversely affect the trading 

and pricing of the underlying stocks, 

other ETFs or other related products. 

In another scenario, an ETF might 

trigger a circuit breaker, even though its 

component stocks have not, because the 

ETF is leading its underlying stocks in 

price discovery. In that case, the prices 

of many of the underlying stocks may 

follow, triggering their own circuit 

breakers shortly after the ETF does. In 

a broad market event such as this, the 

net result would be that trading in the 

ETF and individual stocks have each 

been paused, providing time for the 

market as a whole to re-evaluate prices. 

In yet another scenario, a number of 

individual component stocks might 

trigger their circuit breakers even 

though the related ETF has not yet done 

so. In that case, different market 

participants may very well have 

differing opinions on the market value 

for the ETF because they will be 

required to estimate the value of those 

component stocks that have been 

paused. If only a small number of 

component stocks is paused (perhaps 

due to some temporary liquidity 

imbalances in those stocks) then there 

likely would be minimal effect on the 

ETF, and the ETF circuit breakers 

appropriately would not be triggered. 

But if a large number of component 

stocks trigger halts, the market likely is 

experiencing a broad-based move, either 

for fundamental reasons, or because of 

a large-scale liquidity imbalance similar 

to that of May 6. As noted above, if 

many component stocks of an ETF are 

paused, but the ETF itself continues to 

trade, the arbitrage relationship between 

the ETF and its component stocks likely 

will break down as market participants 

find they cannot hedge their exposures 

and, as a consequence, cease to provide 

liquidity. Without a circuit breaker 

mechanism that also applies to ETFs, 

the ETF could experience excessive 

volatility that is not necessarily driven 

by the prices of its underlying stocks. By 

pausing the ETF, market participants 

would be given time to re-evaluate 

prices and replenish liquidity as 

needed. 

The Commission acknowledges that a 

variety of ETFs do indeed trade without 

incident when most, and sometimes all, 

of their underlying components are not 

trading (e.g., ETFs on international 

stocks). However, market makers and 

other participants trading these ETFs 

account for this known and permanent 

structural difference by building 

alternative methods for hedging and 

pricing into their trading models. 

Market participants trading ETFs for 

which the component stocks normally 

trade at the same time would not 

necessarily have the opportunity to 

implement new hedging and pricing 

strategies in real time if underlying 

component stocks were suddenly 

paused. Rather, they would most likely 

withdraw from the market leaving the 

ETF with little liquidity and even 

further need for a trading pause.54

The above arguments demonstrating 

the need to couple pauses in ETFs with 

pauses in underlying stocks are equally 

applicable to the futures market, and the 

Commission acknowledges the 

comments and concerns of the CME for 

consistent treatment across instrument 

types. However, the Commission notes 

that the CME’s markets already have 

mechanisms for limiting or pausing 

trading, and thus some inconsistency 

exists today between the two markets. 

Maintaining the status quo, moreover, 

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Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Notices 56623 

55See CME Letter. 

56See NYSE Response Letter. 

57 Id. 

58See BlackRock Letter. 

59See CME Letter. 60See Joint Report, supra note 11, at 39 (noting 

that many ETFs ‘‘experienced extreme daily lows’’ 

on May 6, and that a ‘‘significant number of ETFs’’ 

experienced extreme daily highs on May 6). 61See Angel Letter (recommending that the 

trading pause be expanded to cover the open, close, 

and after-hours trading); ICI Letter (recommending 

examining whether a different circuit breaker 

trigger is appropriate for ETFs); Wellington Letter 

(recommending that the Commission require the 

Exchanges to continuously disclose the high/low 

trigger of a security and its maximum remaining 

life). 

62See Android Alpha Fund Letter. 

63See Deutsche Bank Letter. 

64See CME 2 Letter; SIFMA Letter. 

65 15 U.S.C. 78f(b)(5). 

66 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). 

67 15 U.S.C. 78s(b)(2). 

would leave ETFs without a trading 

pause mechanism. In addition, the 

Commission notes that there will need 

to be substantial work to determine how 

best to make the volatility constraints in 

the futures markets and the securities 

markets consistent. 

Commenters also raised related 

concerns that a pause in a broad-based 

ETF (such as the SPY) could lead to 

significant liquidity pressures on other 

index-based products in the futures 

market (such as the E-mini).55 Although 

this is a potential point of concern, as 

noted above the futures markets already 

have in place volatility mechanisms that 

should help mitigate the effect of such 

an event. Moreover, it should be noted 

that currently there could be a pause on 

the futures market (e.g., in the E-mini) 

which could create liquidity pressure 

for corresponding ETFs—but there is 

currently no mechanism to protect the 

ETF against aberrant prices as a result 

of such liquidity pressures. 

NYSE also recognized these concerns 

in its response to comments, and 

committed to working with regulators 

and other markets in coordinating alerts 

to trading interruptions ‘‘so consistent 

application of pauses will be effected.’’56

NYSE also described ‘‘the prompt 

review and implementation of revised 

and coordinated market wide circuit 

breakers’’ as ‘‘a high priority.’’57

In response to the comment that the 

Commission instead implement 

automated risk and volatility mitigation 

mechanisms—such as price banding or 

stop logic functionality—the 

Commission notes that, even as the 

circuit breaker pilot is being expanded, 

the Commission is simultaneously 

exploring possible alternatives to a 

circuit breaker approach that may 

include price limit bands or other 

mechanisms described by the 

commenters. 

One commenter noted that the 

proposal would exclude many ETFs 

with trading volumes below the criteria 

set by the Exchanges and FINRA, 

although such ETFs were significantly 

affected in the cancelled trades of May 

6.58 The Commission acknowledges that 

fact, but notes that, as the Exchanges 

have indicated, the potential application 

of the circuit breakers to less liquid 

securities is more complex, as different 

triggering thresholds may be appropriate 

for them. As the pilot progresses, the 

Commission will work with the SROs to 

consider expanding the circuit breakers 

to cover additional securities in an 

appropriate manner. 

The Commission acknowledges the 

point made by commenters that broadbased index products were not 

significantly implicated in the cancelled 

trades on May 6.59 However, the 

Commission notes that broad-based 

index products did experience 

substantial volatility on May 6 60 and, 

like other securities, could benefit from 

the protections of a circuit breaker. In 

addition, a sudden change in price, due 

to a loss of liquidity or otherwise, to a 

widely traded ETF could have an 

adverse market-wide effect even more 

far-reaching than that of May 6. It is 

important that the use of circuit 

breakers not be limited to only those 

ETFs that happened to have 

experienced severe dislocations on May 

6, since there is no fundamental reason 

why broad-based ETFs could not 

experience a similar liquidity crisis. In 

addition, there were no circuit breakers 

in effect for underlying stocks on May 

6. If a similar event occurred when 

many underlying stocks in an index 

were halted by circuit breakers, broadbased ETFs could experience greater 

volatility than occurred on May 6. 

3. Other Areas of Comment 

Other areas of comment included 

potential ways to expand or modify the 

circuit breaker pilot going forward,61 the 

need to carefully study the effect of the 

pilot,62 the effect and continued 

advisability of individual market 

volatility moderators in addition to the 

uniform single-stock circuit breakers,63

and possible modifications to the 

market-wide circuit breakers.64

With regard to expanding or 

modifying the circuit breaker pilot, as 

noted above, the Commission intends to 

continue working with the Exchanges to 

consider expanding the pilot to include 

additional securities, or modifying the 

circuit breaker mechanism or pursuing 

other approaches to moderating market 

volatility, in the coming months. In 

addition, as noted in the Joint Report, 

the Commission currently is evaluating 

the extent to which individual market 

volatility moderators exacerbated the 

market instability that occurred on May 

6, 2010, and expects to develop 

appropriate policy recommendations 

based on the outcome of that analysis. 

Finally, as noted in the Joint Report, the 

Commission intends to work with the 

CFTC to consider whether modifications 

to the existing market-wide circuit 

breakers are warranted in light of the 

events of May 6. While all of these 

issues warrant further study in the 

coming months, the Commission does 

not believe they provide a basis for not 

approving the Phase II Circuit Breaker 

Pilot at this time. The fact that better 

alternatives to address inordinate 

market volatility ultimately may be 

developed does not provide a basis for 

the Commission not to approve the 

Exchanges’ proposals if, as the 

Commission believes, the proposed rule 

changes are consistent with Section 

6(b)(5) of the Act. 

4. Findings 

The Commission finds that the 

proposed rule changes are consistent 

with the requirements of the Act and the 

rules and regulations thereunder 

applicable to national securities 

exchanges. In particular, the 

Commission finds that the proposals are 

consistent with Section 6(b)(5) of the 

Act,65 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.66

The proposed rule changes will 

expand the trading pause pilot to 

include the securities in the Russell 

1000 and specified ETPs. The 

Commission believes that expanding the 

uniform, market-wide trading pauses 

will serve to prevent potentially 

destabilizing price volatility and will 

thereby help promote the goals of 

investor protection and fair and orderly 

markets. 

IV. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,67 that the 

proposed rule changes (SR–BATS– 

2010–018; SR–BX–2010–044; SR– 

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56624 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Notices 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3Securities Exchange Act Release No. 58613 

(September 22, 2008), 73 FR 57181 (October 1, 

2008) (SR–PHLX–2008–65). 

4Securities Exchange Act Release No. 62519 (July 

16, 2010), 75 FR 43597 (July 26, 2010) (SR–PHLX– 

2010–79). 

5See, e.g., Securities Exchange Act Release No. 

59452 (February 25, 2009), 74 FR 9456 (March 4, 

2009) (SR–BX–2009–012) (temporarily decreasing 

order execution fee to a level below prevailing 

liquidity provider rebate); BATS ECN Unveils UltraAggressive January Pricing Special (December 19, 

2006) (available at http://www.batstrading.com/

resources/press_releases/BATS%20ECN%20

Unveils%20Ultra-Aggressive%20January%20

Pricing%20Special.pdf). 

6 In contrast with the NASDAQ Exchange and BX, 

however, all orders designated as Displayed Orders 

will be displayed without attribution to the entering 

market participant. 

7These annual administrative fees may be waived 

for colleges and universities receiving the data for 

research and educational purposes. 

CBOE–2010–065; SR–CHX–2010–14; 

SR–EDGA–2010–05; SR–EDGX–2010– 

05; SR–ISE–2010–66; SR–NASDAQ– 

2010–079; SR–NYSE–2010–49; SR– 

NYSEAmex–2010–63; SR–NYSEArca– 

2010–61; SR–NSX–2010–08) be, and 

hereby are, approved. 

By the Commission. 

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. 2010–23074 Filed 9–15–10; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–62876; File No. SR–Phlx2010–120] 

Self-Regulatory Organizations; Notice 

of Filing and Immediate Effectiveness 

of Proposed Rule Change by NASDAQ 

OMX PHLX, Inc. To Establish Fees for 

NASDAQ OMX PSX 

September 9, 2010. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’) 1, and Rule 19b–4 thereunder,2

notice is hereby given that on August 

31, 2010, NASDAQ OMX PHLX, Inc. 

(‘‘Phlx’’ or ‘‘Exchange’’) filed with the 

Securities and Exchange Commission 

(‘‘SEC’’ or ‘‘Commission’’) the proposed 

rule change as described in Items I, II, 

and III, below, which Items have been 

prepared by the Exchange. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange proposes to adopt new 

fees in connection with the trading of 

NMS stocks through the new NASDAQ 

OMX PSX system (‘‘PSX’’). The text of 

the proposed rule change is available on 

the Exchange’s Web site at http:// 

nasdaqtrader.com/ 

micro.aspx?id=PHLXfilings, on the 

Commission’s Web site at http:// 

www.sec.gov, at the principal office of 

the Exchange, and at the Commission’s 

Public Reference Room. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, the 

Exchange included statements 

concerning the purpose of and basis for 

the proposed rule change and discussed 

any comments it received on the 

proposed rule change. The text of these 

statements may be examined at the 

places specified in Item IV below. The 

Exchange has prepared summaries, set 

forth in sections A, B, and C below, of 

the most significant aspects of such 

statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

Shortly after its acquisition by The 

NASDAQ OMX Group, Inc. (‘‘NASDAQ 

OMX’’) in 2008, the Exchange ceased 

operation of XLE, its former system for 

trading NMS stocks.3 Earlier this year, 

the Exchange filed a proposed rule 

change to resume trading NMS stocks 

through a new electronic platform 

known as NASDAQ OMX PSX.4 In 

anticipation of approval and launch of 

PSX, the Exchange is filing this 

proposed rule change to establish fees, 

dues, and other charges applicable to 

PSX. The proposed fees are structurally 

similar to those of the Exchange’s 

affiliated exchanges, The NASDAQ 

Stock Market LLC (the ‘‘NASDAQ 

Exchange’’) and NASDAQ OMX BX, Inc. 

(‘‘BX’’), but with the omission of fees 

that are not pertinent to the Exchange’s 

planned business and with differences 

in the level of certain fees. 

Order Execution Fees 

Order execution fees will be uniform 

for all types of securities and member 

organizations. Specifically, for securities 

executed at prices of $1 or more, the 

Exchange will charge $0.0013 per share 

executed and pay a liquidity provider 

rebate of $0.0020 per share executed. 

For executions below $1, the execution 

fee will be 0.2% of the total transaction 

cost, and the rebate will be $0. The 

Exchange proposes this ‘‘inverted’’ 

pricing structure as a temporary 

promotional mechanism to attract 

liquidity to PSX. Other exchanges and 

trading venues have adopted inverted 

pricing in the past as a means to 

promote the development of a new 

market entrant.5

PSX TotalView 

The Exchange proposes to establish 

fees for its PSX TotalView data product. 

Like NASDAQ TotalView and BX 

TotalView, PSX TotalView will provide 

all Displayed Orders in the market at 

every price level.6 In recognition of the 

start-up nature of the new market, the 

data feed will be provided free of charge 

to subscribers and distributors for a 

period ending on the last day of the 

twelfth full calendar month of PSX’s 

operation. Thus, if PSX commences 

operations on September 27, 2010, PSX 

TotalView fees will be waived until 

October 1, 2011. 

After the initial free period, the 

Exchange will offer users a range of 

pricing options. In general, charges will 

be assessed to distributors of PSX Total 

View on a per distributor basis, with 

additional charges assessed on a per 

subscriber basis for each subscriber 

receiving the data from a distributor. A 

‘‘distributor’’ is defined as any entity that 

receives a feed or data file of Exchange 

data directly from the Exchange (a 

‘‘direct distributor’’) or indirectly 

through another entity (an ‘‘indirect 

distributor’’) and then distributes the 

data either internally (within that entity) 

or externally (outside that entity). 

Distributors of PSX TotalView will pay 

a $1,000 monthly fee to receive the data 

directly from the Exchange (including 

from the Exchange through an extranet); 

indirect distributors would not pay this 

charge. Distributors will also pay either 

a $500 monthly fee to distribute the data 

feed internally (i.e., to employees) or a 

$1,250 monthly fee to distribute to 

external customers (as well as 

internally, if applicable). All of the 

foregoing fees will be waived during the 

initial free period. Finally, distributors 

receiving any PSX TotalView or any 

other PSX data feed will be charged an 

annual administrative fee: either $500 

for delayed distribution of data, or 

$1,000 for real-time distribution.7 The 

administrative fees, which are assessed 

annually, will be charged at the 

beginning of the first calendar year after 

the launch of PSX, rather than being 

subject to the one-year free period 

applicable to other data fees. If, as the 

Exchange expects, PSX launches in 

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