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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56614 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Notices 

2010 (‘‘GETCO Letter’’); letter from Ira P. Shapiro, 

Managing Director, BlackRock, Inc., to Elizabeth M. 

Murphy, Secretary, Commission, dated July 20, 

2010 (‘‘BlackRock Letter’’); and letter from Manisha 

Kimmel, Executive Director, Financial Information 

Forum, On behalf of the FIF Front Office 

Committee, to Elizabeth M. Murphy, Secretary, 

Commission, dated July 21, 2010 (‘‘FIF Letter’’); 

letter from Ann Vlcek, Managing Director and 

Associate General Counsel, Securities Industry and 

Financial Markets Association, to Elizabeth M. 

Murphy, Secretary, Commission, dated July 26, 

2010 (‘‘SIFMA Letter’’); and letter from Leonard J. 

Amoruso, General Counsel, Knight Capital Group, 

Inc., to Elizabeth M. Murphy, Secretary, 

Commission, dated July 27, 2010 (‘‘Knight Letter’’). 

6See letter from Eric J. Swanson, SVP and 

General Counsel, BATS, to Elizabeth M. Murphy, 

Secretary, Commission, dated August 16, 2010 

(‘‘BATS Letter’’). 7The 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. 

8See, e.g., Written Statement of Leonard J. 

Amoruso, Senior Managing Director and General 

Counsel, Knight Capital Group, Inc., Submitted 

before the CFTC–SEC Advisory Committee on 

Emerging Regulatory Issues, Panel Discussion, ‘‘The 

events of May 6—views and observations regarding 

liquidity, trading and the apparent breakdown of an 

orderly market,’’ dated June 22, 2010. 

9See Securities Exchange Act Release Nos. 62251; 

75 FR 34183 (June 10, 2010); and 62252, 75 FR 

34186 (June 16, 2010). 

10Such reviews would be limited to transactions 

that executed at a price lower than the Trading 

Pause Trigger Price in the event of a price decline 

and higher than the Trading Pause Trigger Price in 

the event of a price rise. 

11The Exchanges propose to use the Trading 

Pause Trigger Price as the Reference Price for such 

clearly erroneous execution reviews of a transaction 

triggering a trading pause and the transactions that 

occur immediately after such transactions but 

before the trading pause is in effect. The Trading 

Pause Trigger Price reflects a price calculated by the 

primary listing market over a rolling five-minute 

period and may differ from the execution price of 

a transaction that triggered a trading pause. The 

primary listing market that issued an individual 

stock trading pause will determine and 

communicate to the Exchanges the Trading Pause 

Trigger Price for such stock. 

BATS responded to the comments in a 

letter dated August 16, 2010.6 This 

order approves the proposed rule 

changes, as amended. 

II. Background and Description of the 

Proposals 

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

markets experienced a severe 

disruption.7 Among other things, the 

prices of a large number of individual 

securities suddenly declined by 

significant amounts in a very short time 

period, before suddenly reversing to 

prices consistent with their pre-decline 

levels. This severe price volatility led to 

a large number of trades being executed 

at temporarily depressed prices, 

including many that occurred at prices 

dramatically away from pre-decline 

levels. In response, the Exchanges and 

FINRA exercised their authority under 

their clearly erroneous execution rules 

to break trades that were effected at 

prices 60% or more away from predecline prices, using a process that was 

not sufficiently clear or transparent to 

market participants. There are reports 

that the lack of clear guidelines for 

dealing with clearly erroneous 

transactions under circumstances such 

as occurred on May 6, and the lack of 

transparency surrounding the 

Exchanges’ and FINRA’s decision to 

break only trades at least 60% away 

from the market, added to the confusion 

and uncertainty faced by investors on 

May 6.8

The Commission is concerned that 

events such as those that occurred on 

May 6 can 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 steps that could 

help limit potential harm from extreme 

price volatility. On June 10, 2010, the 

Commission approved rules, on a pilot 

basis, that require the Exchanges to 

pause trading in securities included in 

the S&P 500 Index if the price moves 

10% or more in a five-minute period.9

By establishing circuit breakers that 

uniformly pause trading in these 

securities across all markets, the new 

rules are designed to facilitate 

coordinated price discovery and provide 

time for investors to trade at rational 

prices. In addition to the individual 

stock trading pause rules, the Exchanges 

and FINRA worked together to develop 

proposed amendments to their clearly 

erroneous execution rules to provide 

greater transparency and certainty to the 

process of breaking trades. 

The current clearly erroneous 

execution rules set forth procedures the 

Exchanges must use to break trades. 

Specifically, the current rules provide 

that the Exchanges will break trades in 

Exchange-listed stocks only if the price 

of the trades exceeds a specified 

‘‘Reference Price’’—usually the 

consolidated last sale—by an amount 

that equals or exceeds specified 

‘‘Numerical Guidelines.’’ The Numerical 

Guidelines vary depending on the price 

of the stock and during the regular 

trading session are 10% if the 

consolidated last sale is $25.00 or less, 

5% if the consolidated last sale is more 

than $25 and up to and including $50, 

and 3% if the consolidated last sale is 

more than $50. These percentages 

double during pre-open and post-close 

trading sessions. For events involving 

five or more securities, the Numerical 

Guidelines currently are 10% during 

pre-open, regular, and post-close trading 

sessions. 

While the current rules do not give 

the Exchanges discretion to break trades 

that do not exceed the Numerical 

Guidelines, they do permit the 

Exchanges discretion to select a 

percentage threshold at which trades 

will be broken that is higher than the 

Numerical Guidelines. As noted above, 

on May 6 the Exchanges selected 60% 

as the threshold for breaking trades in 

a process that, from the perspective of 

market participants, was not clear or 

transparent, and led to further 

uncertainty and confusion in the 

market. Thus, the events of May 6 

highlight the need to clarify the clearly 

erroneous execution review process 

across all markets, and reduce the 

discretion of the Exchanges to deviate 

from the objective standards in their 

respective rules when dealing with 

clearly erroneous transactions. 

Under the proposed rule changes, the 

Exchanges will no longer have the 

discretion to deviate from the specified 

percentage threshold at which trades 

will be broken in many situations, 

including those where the single-stock 

circuit breakers are applicable and in 

other larger ‘‘Multi-Stock Events’’ 

involving five or more securities. Under 

the proposed rules, a Multi-Stock Event 

is determined by looking at the number 

of securities with potentially erroneous 

executions occurring within a period of 

five minutes or less. 

When an individual stock trading 

pause is triggered, transactions could 

occur before the trading pause is fully 

implemented on all of the Exchanges 

and in the over-the-counter (OTC) 

market. In such event, the Exchanges 

propose to review, on their own motion, 

all transactions triggering an individual 

stock trading pause and subsequent 

transactions that may occur before the 

trading pause is in effect.10 The 

Exchanges would use the price that 

triggered the trading pause (the ‘‘Trading 

Pause Trigger Price’’) 11 as the Reference 

Price and break trades that are 10% or 

more away from the Reference Price for 

stocks priced $25 or less, 5% or more 

away from the Reference Price for stocks 

priced from $25 to $50, and 3% or more 

away from the Reference Price for stocks 

priced more than $50. If the security is 

a leveraged exchange-traded fund (ETF) 

or exchange-traded note (ETN), these 

percentage thresholds would be 

multiplied by the leverage multiplier. 

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Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Notices 56615 

12Additional Factors that the Exchanges may 

consider include but are not limited to: system 

malfunctions or disruptions, volume and volatility 

for the security, derivative securities products that 

correspond to greater than 100% in the direction of 

a tracking index, news released for the security, 

whether trading in the security was recently halted 

or resumed, whether the security is an IPO, whether 

the security was subject to a stock split, 

reorganization, or other corporate action, overall 

market conditions, pre-opening and post-closing 

session executions, validity of consolidated tapes 

trades and quotes, consideration of primary market 

indications, and executions inconsistent with the 

trading pattern in the stock. 

13See ICI Letter, at 1, FIF Letter, at 1, Newedge 

Letter, at 1–2, GETCO Letter, at 2, and SIFMA 

Letter, at 1–2 (also stating its belief that it is ‘‘critical 

for the options markets to achieve consistency in 

their existing clearly erroneous execution rules 

before additional rule changes are implemented 

***’’). See also BlackRock Letter at 1 (supporting 

amendments to rules that contribute to market 

volatility). 

14See CSS Letter, at 1. 

15See BlackRock Letter, at 1. 

16See Wellington Letter, at 3–4. See also FIF 

Letter, at 1–2 (supporting trade validation and 

rejection mechanisms) and GETCO Letter, at 3 

(supporting protections designed to reject clearly 

erroneous orders that reach market centers). 

17See Knight Letter, at 3. 

18See BATS Letter. 

19See Newedge Letter, at 4–5, and BlackRock 

Letter, at 2. 

20See Newedge Letter, at 4. 

21 Id. 

22See BlackRock Letter, at 2, and CSS Letter, at 

1–2. 

For situations in which a stock is not 

subject to an individual stock trading 

pause (e.g., because the stock is not in 

the circuit breaker pilot program, or 

when the stock is part of the pilot 

program but the circuit breaker does not 

apply because it is the beginning or end 

of the day), the trade break rules will 

differ based on the number of stocks 

involved. In the event of Multi-Stock 

Events involving 20 or more securities, 

the Exchanges propose to review on 

their own motion and break all 

transactions at prices equal to or greater 

than 30% away from the Reference Price 

in each affected security during the 

review period selected. In such event, 

the Exchanges may use a Reference 

Price other than the consolidated last 

sale. To ensure consistent application 

across markets, the Exchanges will 

consult to determine the appropriate 

review period, which may be greater 

than the period (of five minutes or less) 

that triggered the application of this 

provision, as well as select one or more 

specific points in time prior to the 

transactions in question and use 

transaction prices at or immediately 

prior to the time(s) selected as the 

Reference Price(s). 

Similarly, in the event of Multi-Stock 

Events involving five or more, but less 

than twenty, securities, the Exchanges 

propose to review on their own motion 

and break all transactions at prices 

equal to or greater than 10% away from 

the Reference Price. In such event, the 

Reference Price will generally be the 

consolidated last sale immediately prior 

to the execution(s) under review. 

However, if there is relevant news 

impacting a security, periods of extreme 

volatility, sustained illiquidity, or 

widespread systems issues, the 

Exchanges may use a different Reference 

Price, where necessary for the 

maintenance of a fair and orderly 

market and the protection of investors, 

and where it is in the public interest. 

The current rules provide that the 

Exchanges may consider ‘‘Additional 

Factors’’ 12 in determining whether to 

break trades. The proposed rule changes 

limit the circumstances during which 

the Exchanges may consider those 

Additional Factors. Specifically, under 

the proposed rules, the Exchanges 

would only be permitted to consider 

Additional Factors in the context of 

clearly erroneous reviews that do not 

involve Multi-Stock Events involving 

five or more securities or individual 

stock trading pauses, as described 

above. In such event, the Exchanges 

would consider the Additional Factors 

with a view toward maintaining a fair 

and orderly market and the protection of 

investors and the public interest. 

Finally, the proposed rule changes 

limit the discretion of the Exchanges to 

deviate from the Numerical Guidelines 

in the event of system disruptions or 

malfunctions. The proposed rules make 

clear that this provision only applies to 

a disruption or malfunction of an 

Exchange system, not to that of a user 

of an Exchange system. The proposed 

rules also remove the language 

‘‘extraordinary market conditions or 

other circumstances’’ as a basis for 

nullifying trades outside of the 

Numerical Guidelines, further limiting 

the discretion of the Exchanges. The 

proposed rules also retain the current 

requirement that, absent extraordinary 

circumstances, an action taken in 

connection with a review of a 

potentially erroneous transaction must 

be taken in a timely fashion, generally 

within thirty (30) minutes of detection 

of the erroneous transaction. 

The Exchanges have proposed that 

these rule changes be implemented as a 

pilot that would end on December 10, 

2010. 

III. Discussion of Comment Letters and 

Commission Findings 

The Commission received nine 

comment letters on the proposed rule 

changes filed by the Exchanges and 

FINRA. Five commenters were generally 

supportive of the principles underlying 

the proposed rule changes, to provide 

greater transparency and certainty to 

investors, market participants, and the 

public regarding the handling of clearly 

erroneous transactions.13 However, 

these commenters also believed that the 

proposed rule changes should go 

further, and offered a number of 

suggestions as discussed below. Two 

commenters generally did not oppose 

the proposed rule changes, but believed 

they were ‘‘overly complex and 

opaque’’ 14 and ‘‘do not adequately 

address the most significant flaws in the 

current rules.’’ 15 One commenter 

believed that trades should only be 

cancelled in extraordinary 

circumstances, stating that the 

Commission and the SROs should 

instead consider alternatives that would 

prevent the execution of erroneous 

trades rather than canceling them after 

the fact.16 Another commenter 

supported a ‘‘principles-based 

approach’’ to handling clearly erroneous 

trades instead of numerical thresholds, 

particularly with respect to transactions 

involving illiquid stocks and the 

dissemination of news or a fundamental 

change that requires a significant 

reevaluation of underlying business 

conditions.17 Additionally, BATS 

responded to the comments.18 These 

comments are discussed in greater detail 

below. 

A. Comments Recommending Other 

Comprehensive Approaches 

Some commenters believed that the 

Exchanges’ rules relating to clearly 

erroneous trades should be more 

definitive, and expressed the view that 

the proposed rule changes were not 

sufficiently clear in all cases when 

trades would actually be cancelled.19

For example, one commenter noted that 

the Exchanges ‘‘appear to be able to 

cancel trades for many reasons other 

than significant price discrepancies— 

including, for example, systems 

malfunctions, news released regarding a 

security, whether a security was subject 

to a stock split or reorganization.’’ 20

This commenter believed the Exchanges 

should adopt ‘‘no-bust’’ zones for 

transactions executed within specified 

price ranges, and cancel trades outside 

of the ‘‘no-bust’’ zones absent a 

compelling public interest to the 

contrary.21

Two commenters questioned whether 

the proposed rule changes would 

achieve their stated goals of making the 

erroneous trade execution review 

process more transparent and less 

arbitrary.22 Specifically, these 

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56616 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Notices 

23 Id. 24 Id. 25See BlackRock Letter, at 2. 26See CSS Letter, at 1–2. 27See BATS Letter, at 1. 28 Id. at 5. 29 Id. 30 Id. at 3–4. 31 Id. 

32 Id. 

33See GETCO Letter, at 3, Newedge Letter, at 5, 

BlackRock Letter, at 2, and Knight Letter, at 2. 

34 Id. 

35See GETCO Letter, at 3. 

36See GETCO Letter, at 3, Newedge Letter, at 5, 

BlackRock Letter, at 2, and Knight Letter, at 2. 

37See GETCO Letter, at 2–3. 

38See GETCO Letter, at 3. 

39See SIFMA Letter, at 2. 

40See FIF Letter, at 2, Wellington Letter, at 2–4, 

and SIFMA Letter, at 2. See also CSS Letter, at 2 

(suggesting that circuit breakers for individual 

stocks based off of a percentage change from the 

previous day’s closing price (or the opening price 

to allow for the dissemination of overnight news) 

would eliminate the need for erroneous trade rules). 

41See Newedge Letter, at 6. 

commenters were concerned that the 

proposed rule changes did not clearly 

establish a reference price upon which 

the Numerical Guidelines would be 

based.23 They noted that the Exchanges 

retain the flexibility in certain 

circumstances to use a Reference Price 

other than the consolidated last sale, as 

well as to determine the review period 

for Multi-Stock Events involving twenty 

or more securities.24 These commenters 

believed that if the Exchanges retained 

discretion in these areas, the proposed 

rule changes may not achieve the goal 

of making the trade break process more 

transparent and less arbitrary,25 or could 

create mass confusion.26

In response, BATS acknowledged that 

the proposals do not ‘‘in all 

circumstances provide 100% advanced 

certainty with respect to whether a 

particular execution will be deemed to 

be clearly erroneous,’’ but stated its 

belief that ‘‘its proposal reflects a 

significant improvement * * * over its 

existing rule.’’ 27 Specifically, BATS 

noted that its discretion to utilize 

‘‘additional factors’’ would now be 

limited to instances involving less than 

five securities under review and further 

limited to securities that are not subject 

to a single stock circuit breaker.28 BATS 

believed its limited discretion in this 

regard is necessary and appropriate for 

maintaining fair and orderly markets.29

With respect to the concern expressed 

by some commenters that the proposed 

rule changes do not clearly establish a 

reference price upon which the 

Numerical Guidelines would be based, 

BATS stated that it is ‘‘critical’’ for it to 

retain some limited discretion to use a 

different reference price when applying 

the clearly erroneous thresholds because 

‘‘there are circumstances under which 

last sale would be an inappropriate 

reference price * * * .’’ 30 BATS noted, 

however, that this discretion is limited 

because its ‘‘rule is designed to generally 

guide BATS to look at the last sale as 

the reference price’’ for those securities 

not subject to a circuit breaker and its 

proposal tries to be ‘‘abundantly clear 

and objective that if a security is subject 

to a single stock circuit breaker, the 

reference price will be the circuit 

breaker trigger price.’’ 31 BATS also 

noted that the determination of the 

point in time from which to derive the 

reference price on May 6 had ‘‘nothing 

to do’’ with the delay in announcing 

which trades would be broken on May 

6; rather, the delay was attributable to 

the time it took the Exchanges to 

determine the appropriate percentage at 

which trades would be broken.32

The Commission appreciates the 

suggestions and responses offered by 

these commenters to make the process 

by which the Exchanges address clearly 

erroneous executions more certain and 

transparent by reducing their discretion. 

The Commission intends to continue 

working with the Exchanges to further 

clarify, as appropriate, their processes 

for breaking erroneous trades that arise 

in contexts not covered by the proposed 

rule changes, as well as to continue to 

evaluate the operations of and potential 

refinements to such processes in 

contexts covered by the proposed rule 

changes. Nevertheless, the Commission 

believes that the proposed rule changes 

represent a productive first step by the 

Exchanges in bringing greater clarity 

and transparency to the process for 

breaking clearly erroneous trades, and 

that these improvements should not be 

delayed pending consideration of 

further changes. 

B. Comments Recommending 

Alternative Approaches 

Four commenters were of the view 

that, rather than breaking erroneous 

trades, the Exchanges should allow the 

trades to stand and adjust the price in 

line with the market.33 These 

commenters were particularly 

concerned about the risk, when trades 

are broken, that market participants 

suddenly may find themselves exposed 

on one side of the market when they 

thought they had a hedged position.34

As one commenter stated, ‘‘[t]his 

uncertainty is even more problematic 

during periods of heightened volatility 

in the markets, when liquidity may be 

reduced as some market participants 

limit their trading until they are able to 

determine their positions, or volatility 

may increase further because of 

speculative hedging in an attempt to 

protect unknown positions.’’ 35 These 

commenters believed that a price 

adjustment process would substantially 

reduce the uncertainty created by the 

potential for broken trades, and thus 

would be a better way to address 

erroneous executions.36

Other commenters urged alternatives 

to clearly erroneous execution rules. For 

example, one commenter believed that 

the proposed rules would ‘‘provide 

market participants more certainty as to 

whether or not their trades will stand in 

the event of market volatility,’’ but urged 

the Commission to move to a ‘‘futuresstyle limit up/down functionality’’ as a 

better alternative to the circuit breaker 

trading halt approach.37 This 

commenter argued that the limit up/ 

limit down approach ‘‘would virtually 

eliminate clearly erroneous trades.’’ 38

Another commenter also believed that 

the Commission should consider a 

‘‘limit up/limit down approach or 

hybrid approach.’’ 39 Other commenters 

suggested alternative procedures, 

systems or rules to prevent erroneous 

trades from occurring, such as by 

rejecting orders that are materially away 

from the market.40

The Commission appreciates the 

suggestions offered by these 

commenters to make more fundamental 

changes to the way in which the 

Exchanges address clearly erroneous 

executions. In the coming months, the 

Commission expects to continue to 

work with the markets and market 

participants on ways to reduce the 

occurrence of erroneous trades and 

improve the method by which they are 

resolved, as well as on enhancements to 

the mechanisms for addressing 

excessive market volatility, such as 

those that currently are reflected in the 

single-stock circuit breaker pilot. As 

noted above, however, the Commission 

believes that the proposed rule changes 

represent a productive first step by the 

Exchanges in bringing greater clarity 

and transparency to the process for 

breaking clearly erroneous trades, and 

that these improvements should not be 

delayed pending consideration of more 

far-reaching initiatives. 

C. Other Comments 

One commenter was concerned that 

the proposed rule changes were not 

clear as to how news or information 

regarding the review and cancellation of 

clearly erroneous trades would be 

disseminated to the markets.41 This 

commenter believed that the proposed 

rules should require the Exchanges to 

disseminate this information quickly 

and in a non-discriminatory fashion to 

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Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Notices 56617 

42 Id. 

43See BATS Letter, at 2. 

44 Id. 

45 Id. 

46 Id. 

47See ICI Letter, at 3. 

48 Id. 

49See SIFMA Letter, at 2–3. 

50 Id. 

51 Id. 

52 Id. 

market participants in order to 

minimize the market impact and not 

favor any one group of market 

participants over another.42 In its 

response letter, BATS stated that it emails members with respect to clearly 

erroneous reviews and determinations 

according to a consistent and well 

established protocol that, according to 

BATS, strikes an appropriate balance 

between notifying members of 

significant market events and avoiding 

notifications every time a transaction is 

reviewed as potentially clearly 

erroneous.43 In addition, BATS believes 

that the existing requirement that an 

SRO promptly notify affected members 

of clearly erroneous reviews and 

determinations is sufficient.44 BATS 

also stated that communication between 

the exchanges and members should 

remain flexible as such methods are 

constantly changing.45 BATS indicated 

that it is not aware of discrimination 

amongst participants with respect to the 

dissemination of information in relation 

to clearly erroneous reviews and 

believes that the ‘‘anti-discrimination 

requirements of the Act would 

sufficiently restrain’’ discrimination.46

Another commenter believed that the 

Commission should require the 

Exchanges to clarify the application of 

the clearly erroneous execution rules 

when an event causes the price to cross 

to a different specified percentage 

threshold for breaking trades. 

Specifically, the commenter asked, ‘‘if a 

market decline triggers the CEE rules 

intra-day with respect to a stock that 

was priced at $25.01, so the CEE price 

is below $25, the proposed amendments 

do not explain at what price trading 

would be calculated for the next 

application of the CEE rules. Would it 

be at 5 percent for stocks between $25 

and $50 or 10 percent for stocks priced 

less than $25?’’ 47 That commenter also 

expressed concern that the proposed 

rule changes might provide an 

opportunity for market participants to 

manipulate events involving multiple 

stocks that are not subject to the singlestock circuit breakers. This might occur, 

for example, when an event subject to 

a 10% threshold (e.g., involving 20 

securities) could be forced into the 30% 

threshold category (e.g., by 

manipulating the 21st security and 

causing an erroneous trade), by a market 

participant seeking the flexibility to 

trade at wider spreads with respect to 

all impacted securities.48

Another commenter noted that, when 

an individual stock trading pause is 

triggered, trades will be broken at 

specified percentages away from the 

Trading Pause Trigger Price.49

According to this commenter, this 

calculation ‘‘has the practical effect of 

doubling the clearly erroneous price 

window for most U.S. equity securities 

and is a significant expansion of the 

window for certain securities.’’ 50 This 

commenter suggested using more 

conservative parameters such as the 

greater of 2% or $0.05 from the Trading 

Pause Trigger Price or, alternatively, 

using the Trading Pause Trigger Price, 

in addition to a comparison to the last 

sale, as part of an analysis for clearly 

erroneous trades.’’ 51 This commenter 

also favored providing the Exchanges 

discretion to break trades after the 

deadlines specified in their rules in 

extraordinary circumstances.52

With respect to the dissemination of 

information regarding the review and 

resolution of clearly erroneous trades, 

the Commission understands that the 

practice of the Exchanges is to promptly 

notify participants that specified trades 

are under review and, once that review 

is complete, to describe the resolution 

thereof. Although the Commission 

believes prompt communication by email, phone, Web site or otherwise 

concerning erroneous trade reviews 

should generally assure dissemination 

in a non-discriminatory fashion, as 

noted above, it intends to continue to 

work with the Exchanges on additional 

ways to improve the transparency of 

this process. 

With respect to an event that causes 

the price to cross to a different specified 

percentage threshold for breaking 

trades, the Commission believes that the 

proposals are sufficiently clear 

regarding the applicability of the new 

rules. As to the specific example 

provided by the commenter, under the 

proposed rules, if a stock triggers a 

trading pause, the Trading Pause Trigger 

Price would be used as the Reference 

Price. The Trading Pause Trigger Price 

is calculated by the listing market over 

a rolling five-minute period. If the 

Trading Pause Trigger Price is 

calculated at a level below $25.00, as 

identified in the example, then the 10% 

threshold would apply to clearly 

erroneous execution reviews of the 

Trigger Trade and other transactions 

that occur immediately after a Trigger 

Trade but before the trading pause is 

fully implemented across markets. If 

another series of transactions trigger a 

second trading pause, the review 

process set forth in the rules would be 

repeated and a new Reference Price 

would be calculated to determine the 

appropriate percentage threshold. 

With respect to the potential for 

market participants to engage in 

manipulation in order to achieve a 

higher trade break percentage threshold, 

the Commission emphasizes that it will 

vigorously pursue instances of illegal 

market manipulation. In addition, 

during the pilot period, the Commission 

will work with the Exchanges to review 

the operation of the amended rules, and 

make improvements as warranted, 

including if it appears the selected 

percentage thresholds create distortions 

or incent improper or illegal behavior. 

With respect to the chosen 

parameters, the Commission notes that 

the parameters that were selected were 

the product of a coordinated and 

deliberate effort by the Exchanges and 

FINRA to improve the handling of 

clearly erroneous trades. Regarding the 

specific comment expressing concern 

that breaking trades only when they are 

10%, 5% or 3% away from the Trading 

Pause Trigger Price has the practical 

effect of doubling the trading pause 

parameters, the Commission notes that, 

as an initial matter, implementation of 

the individual stock trading pause 

should prevent most trades from 

occurring at prices outside of the 

Trading Pause Trigger Price. To the 

extent trades occur outside of such price 

before the trading pause is fully applied 

across all markets, the Commission 

believes that it is appropriate to break 

these ‘‘leakage’’ trades only when they 

are a meaningful percentage away from 

the Trading Pause Trigger Price. This is 

consistent with the traditional approach 

of the Exchanges and FINRA to take the 

more extreme step of breaking a trade 

only in cases where it occurs at a price 

sufficiently away from the current 

market price that the parties should 

have been on notice it may be ‘‘clearly 

erroneous.’’ Of course, the pilot program 

may indicate that different parameters 

are better to accomplish the stated goals. 

If so, the parameters could be changed 

as part of the overall initiative. The 

Commission will further study and 

consider the examples and suggestions 

offered by the commenters during the 

pilot period. 

D. Commission Findings 

The Commission finds that the 

proposed rule changes are consistent 

with the requirements of the Act and the 

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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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