56608 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Notices 

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

2 15 U.S.C. 78a. 

3 17 CFR 240.19b–4. 

4For 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 No. 62416 

(June 30, 2010), 75 FR 39069 (July 7, 2010) (SR– 

FINRA–2010–033). 

Also 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’’) securities exchanges filed 

proposed rule changes to expand the pilot program. 

See 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). 

Those rule changes were approved today. See 

Securities Exchange Act Release No. 62884 

(September 10, 2010). 

In this order, the term ‘‘Exchanges’’ refers 

collectively to all of the exchanges. 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 term 

‘‘SROs’’ refers to the Exchanges and the Financial 

Industry Regulatory Authority (‘‘FINRA’’). 

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, 

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’’). 

7 15 U.S.C. 78o–3(b)(6). That section, among other 

things, requires that FINRA rules must be designed 

to prevent fraudulent and manipulative acts and 

practices, to promote just and equitable principles 

of trade and in general, to protect investors and the 

public interest. 

8The 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’’). 

SECURITIES AND EXCHANGE 

COMMISSION 

Agency Meeting 

Federal Register Citation of Previous 

Announcement: [To be published] 

Status: Open Meeting. 

Place: 100 F. Street, NE., Washington, 

DC. 

Date and Time of Previously 

Announced Meeting: September 15, 

2010. 

Change In the Meeting: Room Change. 

The Joint Public Roundtable on Swap 

Execution Facilities and Security-Based 

Swap Execution scheduled for 

Wednesday, September 15, 2010 at 9 

a.m. will be held in the Multi-Purpose 

Room (Room L–006). 

At times, changes in Commission 

priorities require alterations in the 

scheduling of meeting items. For further 

information and to ascertain what, if 

any, matters have been added, deleted 

or postponed, please contact: 

The Office of the Secretary at (202) 

551–5400. 

Dated: September 13, 2010. 

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. 2010–23169 Filed 9–15–10; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–62883; File No. SR–FINRA– 

2010–033] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Order Approving 

Proposed Rule Change 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, the Financial 

Industry Regulatory Authority, Inc. 

(‘‘FINRA’’) 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 a 

proposed rule change to amend its 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 change was 

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

The Commission finds that the 

proposals are consistent with Section 

15A(b)(6) of the Act,7 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 just and 

equitable principles of trade. This order 

approves the proposed rule change. 

II. Description of the Proposals 

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

markets experienced a severe 

disruption.8 Among other things, the 

prices of a large number of individual 

securities suddenly declined by 

significant amounts in a very short time 

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Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Notices 56609 

9See Securities Exchange Act Release No. 62251 

(June 10, 2010), 75 FR 34183 (June 16, 2010) (SR– 

FINRA–2010–025) (‘‘Phase I Approval Order’’). 

10The rules of the Exchanges 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. 

11For more details on the operation of FINRA’s 

rule, see Securities Exchange Act Release No. 

62251. 

12See, 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). 

13See Securities Exchange Act Release No. 62416 

(June 30, 2010), 75 FR 39069 (July 7, 2010) (SR– 

FINRA–2010–033). 

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 national securities 

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 a 

proposed rule change by FINRA to 

pause trading during periods of 

extraordinary market volatility in S&P 

500 stocks (the ‘‘Phase I Circuit Breaker 

Pilot’’).9 That rule requires FINRA, once 

a Listing Market issues a trading pause, 

to halt trading otherwise than on an 

exchange in that security until trading 

has resumed on the primary listing 

market.10 The Listing Markets are 

required to notify the other exchanges, 

market participants and FINRA 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, FINRA is 

required to pause trading in the security 

otherwise than on an exchange. 

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, FINRA will halt 

trading otherwise than on an exchange 

in that security until trading has 

resumed on the primary Listing Market. 

FINRA may permit the resumption of 

trading if trading has commenced on at 

least one other national securities 

exchange.11

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, 2010.12 In the 

approval order for the Phase I Circuit 

Breaker Pilot, the Commission agreed 

that consideration should be given by 

the exchanges and FINRA 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, FINRA 

proposes 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. FINRA believes 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. 

FINRA believes 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. 

In addition, FINRA proposed to 

include in the Phase II Circuit Breaker 

Pilot 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. To 

assure related ETPs are subject to 

comparable circuit breakers, any ETPs 

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

daily volume threshold, but tracked 

similar stocks and indices as ETPs 

meeting this criterion and included in 

the pilot, were proposed for inclusion. 

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. 

As proposed, the list of ETPs includes 

those that track broad-based equity 

indices, which FINRA recognizes 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, FINRA believes that 

including broad-based 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, FINRA 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, 

FINRA 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. FINRA 

will also continue to assess whether the 

parameters for invoking a trading pause 

continue to be appropriate or should be 

modified.13

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56610 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Notices 

14See 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. 

15See SIFMA Letter. 

16See Business Roundtable Letter. 

17See Accenture Letter. 

18See, e.g., Themis Letter; Accenture Letter; 

Molinete Letter; SIFMA Letter; and Angel Letter. 

19See Molinete Letter. 

20 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. 

21The 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. 

22See Themis Letter and Angel Letter. 

23 Id. 

24See 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. 

25See SIFMA Letter and CME 2 Letter. 

26See 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. 

27See 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). 

28See 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. 

29See, 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). 

30See, 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). 

31See 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. 

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.14 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.15 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.16 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 6.17

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.18 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.19 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.20

Other commenters expressed concern 

that any trader in the world, illintentioned 21 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.22 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.23

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.24 Some commenters also 

encouraged the Commission to consider 

adopting collars on market orders and 

eliminating stub quotes.25 One 

commenter suggested that the markets 

trigger the single stock circuit breakers 

off of changes to the NBBO rather than 

to changes in the last trade price.26

The Commission believes that the 

ability of an erroneous trade to trigger a 

trading pause is a concern that FINRA 

should seek to address promptly. The 

Commission understands that FINRA is 

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.27 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.28 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 

as well.29 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,30 and Commission staff has 

been working with FINRA on an 

initiative to prevent stub quotes. The 

Commission, in conjunction with 

FINRA, 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.31 Several supported the 

proposed expansion of the Phase II 

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Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Notices 56611 

32See Accenture Letter; BlackRock Letter; 

Business Roundtable Letter; CCMC Letter; ICI 

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

33See SIFMA Letter at 2. 

34See ICI Letter and ICI 2 Letter. 

35 Id. 

36See 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. 

37See ICI 2 Letter. 

38See 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. 

39 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. 

40See Molinete Letter at 4. 

41 Id. at 4–5. 

42See 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. 

43 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. 

44 Id. 45CME Letter. 46CME 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. 47CME 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. 48 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. 

Circuit Breaker Pilot to include ETPs.32

One of these commenters stated that 

ETFs experienced significant volatility 

on May 6, and would benefit from a 

uniform trading pause.33 Another 

commenter noted that the price of an 

ETF is typically highly correlated to the 

market price of its basket of component 

securities.34 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.35 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.36 Doing 

otherwise, in its view, creates risks that 

ETFs could again suffer 

disproportionately during a market 

event similar to that of May 6.37

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.38 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 6.39

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 6.40

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.41

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.42 This commenter noted that 

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.43 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.44 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.45 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.46 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.47

This commenter also recommended that 

automated risk and volatility mitigation 

mechanisms be implemented in place of 

trading halts in individual securities.48

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 

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49The 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. 

50See CME Letter. 

51See BlackRock Letter. 

52See CME Letter. 

53See Joint Report, supra note 8, 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). 

54See Angel Letter (recommending that the 

trading pause be expanded to cover the open, close, 

and after-hours trading); ICI Letter (recommending 

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 

since 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.49

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, 

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 have 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).50 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. 

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 FINRA, although such ETFs were 

significantly affected in the cancelled 

trades of May 6.51 The Commission 

acknowledges that fact, but notes that, 

as FINRA has 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 FINRA 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 6.52 However, the 

Commission notes that broad-based 

index products did experience 

substantial volatility on May 6 53 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,54 the 

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Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Notices 56613 

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). 

55See Android Alpha Fund Letter. 

56See Deutsche Bank Letter. 

57See CME 2 Letter; SIFMA Letter. 

58 15 U.S.C. 78o–3(b)(6). 

59 In approving the proposed rule change, the 

Commission notes that it has considered the 

proposed rule’s impact on efficiency, competition, 

and capital formation. 15 U.S.C. 78c(f). 

60 15 U.S.C. 78s(b)(2). 

1Also, on June 17, 2010, Financial Industry 

Regulatory Authority, Inc. (‘‘FINRA’’) filed a similar 

proposed rule change with respect to breaking 

erroneous trades. See Securities Exchange Act 

Release No. 62341 (June 21, 2010), 75 FR 36756 

(June 28, 2010). The FINRA proposal also was 

approved today. See Securities Exchange Act 

Release No. 62885 (Sept. 10, 2010). 

2See Securities Exchange Act Release Nos. 62330 

(June 21, 2010), 75 FR 36725; 62331 (June 21, 2010), 

75 FR 36746; 62332 (June 21, 2010), 75 FR 36749; 

62333 (June 21, 2010), 75 FR 36759; 62334 (June 21, 

2010), 75 FR 36732; 62336 (June 21, 2010), 75 FR 

36743; 62337 (June 21, 2010), 75 FR 36739; 62338 

(June 21, 2010), 75 FR 36762; 62339 (June 21, 2010), 

75 FR 36765; 62340 (June 21, 2010), 75 FR 36768; 

and 62342 (June 21, 2010), 75 FR 36752. 

3See Securities Exchange Act Release No. 62335 

(June 21, 2010), 75 FR 37494. 

4 In Amendment No. 2, CHX amended its 

proposed rule change to conform defined terms in 

its proposed rule text to defined terms used in the 

remainder of its rule. This is a technical 

amendment. 

5See letter from Peter Ianello, Partner, CSS, LLC, 

to Elizabeth Murphy, Secretary, Commission, dated 

July 15, 2010 (‘‘CSS Letter’’); letter from Gary 

DeWaal, Senior Managing Director and Group 

General Counsel, Newedge USA, LLC, to Elizabeth 

M. Murphy, Secretary, Commission, dated July 19, 

2010 (‘‘Newedge Letter’’); letter from Karrie 

McMillan, General Counsel, Investment Company 

Institute, to Elizabeth M. Murphy, Secretary, 

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

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 John 

A. McCarthy, General Counsel, GETCO, to Elizabeth 

Murphy, Secretary, Commission, dated July 20, 

Continued 

need to carefully study the effect of the 

pilot,55 the effect and continued 

advisability of individual market 

volatility moderators in addition to the 

uniform single-stock circuit breakers,56

and possible modifications to the 

market-wide circuit breakers.57

With regard to expanding or 

modifying the circuit breaker pilot, as 

noted above, the Commission intends to 

continue working with FINRA 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 FINRA’s 

proposal if, as the Commission believes, 

the proposed rule change is consistent 

with Section 15A(b)(6) of the Act. 

4. Findings 

The Commission finds that the 

proposed rule change is consistent with 

the requirements of the Act and the 

rules and regulations thereunder 

applicable to a national securities 

association. In particular, the 

Commission finds that the proposal is 

consistent with the provisions of 

Section 15A(b)(6) of the Act,58 which 

requires, among other things, that 

FINRA rules must be designed to 

prevent fraudulent and manipulative 

acts and practices, to promote just and 

equitable principles of trade and, in 

general, to protect investors and the 

public interest.59

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,60 that the 

proposed rule change (SR–FINRA– 

2010–033) be, and hereby is, approved. 

By the Commission. 

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. 2010–23073 Filed 9–15–10; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–62886; File Nos. 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] 

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; 

National Stock Exchange, Inc.; New 

York Stock Exchange LLC; NYSE 

Amex LLC; NYSE Arca, Inc.; Order 

Granting Approval of Proposed Rule 

Changes Relating to Clearly Erroneous 

Transactions 

September 10, 2010. 

I. Introduction 

On June 17, 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’’), National 

Stock Exchange, Inc. (‘‘NSX’’), New York 

Stock Exchange LLC (‘‘NYSE’’), NYSE 

Amex LLC (‘‘NYSE Amex’’), and NYSE 

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

the ‘‘Exchanges’’) filed with the 

Securities and Exchange Commission 

(‘‘Commission’’), pursuant to Section 

19(b)(1) of the Securities Exchange Act 

of 1934 (‘‘Act’’), and Rule 19b–4 

thereunder, proposed rule changes to 

amend certain of their respective rules 

to set forth clearer standards and curtail 

their discretion with respect to breaking 

erroneous trades.1 On June 18, 2010, 

BX, EDGA, EDGX, ISE, Nasdaq, NSX, 

and NYSE Arca submitted amendments 

to their respective proposed rule 

changes. On June 21, 2010, CHX 

submitted an amendment to its 

proposed rule change. The proposed 

rule changes, as amended, submitted by 

BATS, BX, CBOE, CHX, EDGA, EDGX, 

ISE, Nasdaq, NYSE, and NYSE Amex, 

were published for comment in the 

Federal Register on June 28, 2010.2 The 

proposed rule change, as amended, 

submitted by NYSE Arca was published 

for public comment in the Federal 

Register on June 29, 2010.3 On June 30, 

2010, CHX submitted an additional 

amendment to its proposed rule 

changes.4 The Commission received 

nine comment letters on the proposals.5

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