Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Notices 56641 

120On November 16, 1989, the Commission 

published its first Automation Review Policy (‘‘ARP 

I’’), in which it created a voluntary framework for 

self-regulatory organizations to establish 

comprehensive planning and assessment programs 

to determine systems capacity and vulnerability. On 

May 9, 1991, the Commission published its second 

Automation Review Policy (‘‘ARP II’’) to clarify the 

types of review and reports that were expected from 

self-regulatory organizations. See Securities 

Exchange Act Release Nos. 27445 (November 16, 

1989), 54 FR 48703 (November 24, 1989); and 29185 

(May 9, 1991), 56 FR 22490 (May 15, 1991). 

121 17 CFR 200.30–3(a)(12). 

1Also, 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’’), NYSE Arca, Inc. 

(‘‘NYSE Arca’’) (collectively, the ‘‘Exchanges’’) filed 

similar proposed rule changes with respect to 

breaking erroneous trades. See 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; 

62335 (June 21, 2010), 75 FR 37494; 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. These proposals also were approved today. 

See Securities Exchange Act Release No. 62886 

(Sept. 10, 2010). 

2See Securities Exchange Act Release No. 62341 

(June 21, 2010), 75 FR 36756. 

3See 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, 

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’’). 

4See letter from Eric J. Swanson, SVP and 

General Counsel, BATS, to Elizabeth M. Murphy, 

Secretary, Commission, dated August 16, 2010 

(‘‘BATS Letter’’). 

5The 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. 

6See, 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. 

7See Securities Exchange Act Release Nos. 62251; 

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

34186 (June 16, 2010). 

that the operation of PSX is conditioned 

on the satisfaction of the following 

requirements: 

A. Examination by the Commission. 

The Exchange must have, and must 

represent in a letter to the staff in the 

Commission’s Office of Compliance 

Inspections and Examinations that it has 

adequate surveillance procedures and 

programs in place to effectively regulate 

PSX. 

B. Trade Processing and Exchange 

Systems. The Exchange must have, and 

must represent in a letter to the staff in 

the Commission’s Division of Trading 

and Markets that it has adequate 

procedures and programs in place, as 

noted in Commission Automation 

Review Policy guidelines,120 to 

effectively process trades and maintain 

the confidentiality, integrity, and 

availability of the Exchange’s systems. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.121

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. 2010–23104 Filed 9–15–10; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–62885; File No. SR–FINRA– 

2010–032] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Order Granting 

Approval of Proposed Rule Change 

Relating to Clearly Erroneous 

Transactions 

I. Introduction 

September 10, 2010. 

On June 17, 2010, the Financial 

Industry Regulatory Authority, Inc. 

(‘‘FINRA’’) 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, a proposed 

rule change to amend its rules to set 

forth clearer standards and curtail its 

discretion with respect to breaking 

erroneous trades.1 The proposed rule 

change was published for comment in 

the Federal Register on June 28, 2010.2

The Commission received nine 

comment letters on the proposal.3 BATS 

responded to the comments in a letter 

dated August 16, 2010.4 This order 

approves the proposed rule change. 

II. Background and Description of the 

Proposal 

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

markets experienced a severe 

disruption.5 Among other things, the 

prices of a large number of individual 

securities suddenly declined by 

significant amounts in a very short time 

period, before suddenly reversing to 

prices consistent with their pre-decline 

levels. This severe price volatility led to 

a large number of trades being executed 

at temporarily depressed prices, 

including many that 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 6.6

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.7

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, FINRA 

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56642 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Notices 

8Such 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. Where a trading pause was 

triggered by a price decline (rise), FINRA shall 

deem as clearly erroneous all such transactions that 

occurred at a price lower (higher) than the Trading 

Pause Trigger Price but only if such prices exceeded 

the Trading Pause Trigger Price by an amount equal 

to or exceeding the Numerical Guidelines. 

9FINRA proposes 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 FINRA the Trading Pause Trigger 

Price for such stock. 

10Additional Factors that FINRA 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. 

worked with the Exchanges 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 rule sets forth procedures 

FINRA must use to break trades. 

Specifically, the current rule provides 

that FINRA 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 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 rule does not give 

FINRA discretion to break trades that do 

not exceed the Numerical Guidelines, it 

does permit FINRA 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 FINRA to deviate from the 

objective standards in its rule when 

dealing with clearly erroneous 

transactions. 

Under the proposed rule change, 

FINRA 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 rule, 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, FINRA proposes 

to review, on its own motion, all 

transactions triggering an individual 

stock trading pause and subsequent 

transactions that may occur before the 

trading pause is in effect.8 FINRA would 

use the price that triggered the trading 

pause (the ‘‘Trading Pause Trigger 

Price’’) 9 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. 

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, 

FINRA proposes to review on its 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, FINRA 

may use a Reference Price other than the 

consolidated last sale. To ensure 

consistent application across markets, 

FINRA will consult with the Exchanges 

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, FINRA proposes 

to review on its 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, FINRA 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 rule provides that FINRA 

may consider ‘‘Additional Factors’’ 10 in 

determining whether to break trades. 

The proposed rule change limits the 

circumstances during which FINRA 

may consider those Additional Factors. 

Specifically, under the proposed rule, 

FINRA 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, FINRA 

would consider the Additional Factors 

with a view toward maintaining a fair 

and orderly market and the protection of 

investors and the public interest. 

FINRA has proposed that this rule 

change 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 FINRA and the 

Exchanges. Five commenters were 

generally supportive of the principles 

underlying the proposed rule change, to 

provide greater transparency and 

certainty to investors, market 

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Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Notices 56643 

11See 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). 

12See CSS Letter, at 1. 

13See BlackRock Letter, at 1. 

14See 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). 

15See Knight Letter, at 3. 

16See BATS Letter. The response from BATS is 

discussed in this Order because FINRA’s proposed 

clearly erroneous rule is similar to those of the 

Exchanges. 

17See Newedge Letter, at 4–5, and BlackRock 

Letter, at 2. 

18See Newedge Letter, at 4. 

19 Id. 

20See BlackRock Letter, at 2, and CSS Letter, at 

1–2. 

21 Id. 

22 Id. 

23See BlackRock Letter, at 2. 

24See CSS Letter, at 1–2. 

25See BATS Letter, at 1. 

26 Id. at 5. 

27 Id. 

28 Id. at 3–4. 

29 Id. 

30 Id. 

31See GETCO Letter, at 3, Newedge Letter, at 5, 

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

participants, and the public regarding 

the handling of clearly erroneous 

transactions.11 However, these 

commenters also believed that the 

proposed rule change should go further, 

and offered a number of suggestions as 

discussed below. Two commenters 

generally did not oppose the proposed 

rule change, but believed it was ‘‘overly 

complex and opaque’’ 12 and does ‘‘not 

adequately address the most significant 

flaws in the current rules.’’ 13 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.14 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.15 Additionally, BATS 

responded to the comments on the 

similar proposal by the Exchanges.16

These comments are discussed in 

greater detail below. 

A. Comments Recommending Other 

Comprehensive Approaches 

Some commenters believed that 

FINRA’s rule relating to clearly 

erroneous trades should be more 

definitive, and expressed the view that 

the proposed rule change was not 

sufficiently clear in all cases when 

trades would actually be cancelled.17

For example, one commenter noted that 

FINRA ‘‘appear[s] 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.’’ 18

This commenter believed FINRA should 

adopt ‘‘no-bust’’ zones for transactions 

executed within specified price ranges, 

and cancel trades outside of the ‘‘nobust’’ zones absent a compelling public 

interest to the contrary.19

Two commenters questioned whether 

the proposed rule change would achieve 

its stated goals of making the erroneous 

trade execution review process more 

transparent and less arbitrary.20

Specifically, these commenters were 

concerned that the proposed rule 

change did not clearly establish a 

reference price upon which the 

Numerical Guidelines would be 

based.21 They noted that FINRA retains 

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 MultiStock Events involving twenty or more 

securities.22 These commenters believed 

that if FINRA retained discretion in 

these areas, the proposed rule change 

may not achieve the goal of making the 

trade break process more transparent 

and less arbitrary,23 or could create 

mass confusion.24

In response to comments made on 

similar proposals made by the 

Exchanges, 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.’’ 25 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.26 BATS 

believed its limited discretion in this 

regard is necessary and appropriate for 

maintaining fair and orderly markets.27

With respect to the concern expressed 

by some commenters that the proposed 

rule change does not clearly establish a 

reference price upon which the 

Numerical Guidelines would be based, 

BATS, which proposed similar 

discretionary provisions, 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. * * * ’’ 28 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.’’ 29 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 and 

FINRA to determine the appropriate 

percentage at which trades would be 

broken.30

The Commission appreciates the 

suggestions and responses offered by 

these commenters to make the process 

by which FINRA addresses clearly 

erroneous executions more certain and 

transparent by reducing its discretion. 

The Commission intends to continue 

working with FINRA to further clarify, 

as appropriate, its process for breaking 

erroneous trades that arise in contexts 

not covered by the proposed rule 

change, as well as to continue to 

evaluate the operations of and potential 

refinements to such processes in 

contexts covered by the proposed rule 

change. Nevertheless, the Commission 

believes that the proposed rule change 

represents a productive first step by 

FINRA 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, FINRA should allow the trades 

to stand and adjust the price in line 

with the market.31 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 

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32 Id. 

33See GETCO Letter, at 3. 

34See GETCO Letter, at 3, Newedge Letter, at 5, 

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

35See GETCO Letter, at 2–3. 

36See GETCO Letter, at 3. 

37See SIFMA Letter, at 2. 

38See 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). 

39See Newedge Letter, at 6. 

40 Id. 

41See BATS Letter, at 2. 

42 Id. 

43 Id. 

44 Id. 

45See ICI Letter, at 3. 

46 Id. 

47See SIFMA Letter, at 2–3. 

48 Id. 

49 Id. 

50 Id. 

market when they thought they had a 

hedged position.32 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.’’ 33 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.34

Other commenters urged alternatives 

to clearly erroneous execution rules. For 

example, one commenter believed that 

the proposed rule 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.35 This 

commenter argued that the limit up/ 

limit down approach ‘‘would virtually 

eliminate clearly erroneous trades.’’ 36

Another commenter also believed that 

the Commission should consider a 

‘‘limit up/limit down approach or 

hybrid approach.’’ 37 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.38

The Commission appreciates the 

suggestions offered by these 

commenters to make more fundamental 

changes to the way in which FINRA 

addresses 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 singlestock circuit breaker pilot. As noted 

above, however, the Commission 

believes that the proposed rule change 

represents a productive first step by 

FINRA 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 farreaching initiatives. 

C. Other Comments 

One commenter was concerned that 

the proposed rule change was not clear 

as to how news or information regarding 

the review and cancellation of clearly 

erroneous trades would be disseminated 

to the markets.39 This commenter 

believed that the proposed rule should 

require FINRA to disseminate this 

information quickly and in a nondiscriminatory fashion to market 

participants in order to minimize the 

market impact and not favor any one 

group of market participants over 

another.40 In its response letter with 

respect to its proposal, BATS stated that 

it e-mails 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.41 In addition, BATS 

believes that the existing requirement 

that an SRO promptly notify affected 

members of clearly erroneous reviews 

and determinations is sufficient.42

BATS also stated that communication 

between the exchanges and members 

should remain flexible as such methods 

are constantly changing.43 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.44

Another commenter believed that the 

Commission should require FINRA to 

clarify the application of the clearly 

erroneous execution rule 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?’’ 45 That commenter also expressed 

concern that the proposed rule change 

might provide an opportunity for market 

participants to manipulate events 

involving multiple stocks that are not 

subject to the single-stock 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.46

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.47

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.’’ 48 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.’’ 49 This commenter 

also favored providing FINRA discretion 

to break trades after the deadlines 

specified in its rule in extraordinary 

circumstances.50

With respect to the dissemination of 

information regarding the review and 

resolution of clearly erroneous trades, 

the Commission understands that the 

practice of FINRA 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 

e-mail, phone, website 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 FINRA on additional ways to 

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Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Notices 56645 

51 15 U.S.C. 78o–3(b)(6). 

52 15 U.S.C. 78s(b)(2). 

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 

proposal is sufficiently clear regarding 

the applicability of the new rule. As to 

the specific example provided by the 

commenter, under the proposed rule, 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 rule 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 FINRA to review the 

operation of the amended rule, 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 FINRA and the 

Exchanges 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 change is consistent with 

the requirements of the Act and the 

rules and regulations thereunder 

applicable to FINRA. In particular, the 

Commission finds that the proposed 

rule change is consistent with the 

requirements of Section 15A(b)(6) of the 

Act,51 which, among other things, 

requires that the rules of FINRA 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 change 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 

change 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 change is being 

implemented on a pilot basis so that the 

Commission and FINRA 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,52 that the 

proposed rule change (SR–FINRA– 

2010–032), be, and hereby is, approved. 

By the Commission. 

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. 2010–23075 Filed 9–15–10; 8:45 am] 

BILLING CODE 8010–01–P 

DEPARTMENT OF STATE 

[Public Notice 7173] 

Bureau of Educational and Cultural 

Affairs (ECA) Request for Grant 

Proposals: Study of the United States 

Institutes for Scholars and Secondary 

Educators 

Announcement Type: New 

Cooperative Agreement. 

Funding Opportunity Number: ECA/ 

A/E/USS–11–05–09. 

Catalog of Federal Domestic 

Assistance Number: 19.401. 

Key Dates: 

Application Deadline: October 27, 

2010. 

Executive Summary: The Branch for 

the Study of the United States, Office of 

Academic Exchange Programs, Bureau 

of Educational and Cultural Affairs, 

invites proposal submissions for the 

design and implementation of five 

different Study of the United States 

Institutes to take place over the course 

of six weeks beginning in June 2011, 

pending the availability of funds. These 

Institutes should provide a 

multinational group of experienced 

educators with a deeper understanding 

of U.S. society, culture, values, and 

institutions. 

Four of these Institutes will be for 

groups of 18 foreign university level 

faculty, focusing on American Politics 

and Political Thought, Contemporary 

American Literature, Religious 

Pluralism in the United States, and U.S. 

Foreign Policy. The fifth Institute will 

be a general survey course on the study 

of the United States for a group of 30 

foreign secondary educators. 

Applicants may propose to submit 

one proposal to host only one Institute 

listed under this competition. Should an 

applicant submit multiple proposals 

under this competition, all proposals 

will be declared technically ineligible 

and given no further consideration in 

the review process. 

I. Funding Opportunity Description 

Authority 

Overall grant making authority for 

this program is contained in the Mutual 

Educational and Cultural Exchange Act 

of 1961, Public Law 87–256, as 

amended, also known as the FulbrightHays Act. The purpose of the Act is ‘‘to 

enable the Government of the United 

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