Document ID: SEC-2011-1486-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2011-10-04T04:00Z

[Federal Register Volume 76, Number 192 (Tuesday, October 4, 2011)]
[Notices]
[Pages 61429-61432]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-25511]

[[Page 61429]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65430; File No. SR-FINRA-2011-054]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Update 
Rule 6121 (Trading Halts Due to Extraordinary Market Volatility) and 
Amend Rule 6440 (Trading and Quotation Halt in OTC Equity Securities)

September 28, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on September 27, 2011, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to update Rule 6121 (Trading Halts Due to 
Extraordinary Market Volatility) (i) To reflect changes to market-wide 
circuit breaker triggers for NMS stocks, and (ii) amend Rule 6440 
(Trading and Quotation Halt in OTC Equity Securities) to provide 
specifically for a halt in trading in all OTC Equity Securities when a 
market-wide circuit breaker is in effect for NMS stocks.
    The text of the proposed rule change is available on FINRA's Web 
site at http://www.finra.org, at the principal office of FINRA and at 
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    FINRA is proposing to amend Rule 6121 (Trading Halts Due to 
Extraordinary Market Volatility) to update the methodology for 
determining when to halt trading due to extraordinary market volatility 
and Rule 6440 (Trading and Quotation Halt in OTC Equity Securities) to 
provide specifically that FINRA will halt trading in all OTC Equity 
Securities pursuant to its authority under Rule 6440(a)(3) \3\ until 
the market-wide circuit breaker no longer is in effect for NMS 
stocks.\4\ FINRA is proposing this rule change in consultation with the 
self-regulatory organizations (``SROs'') and staffs of the Commission 
and the Commodity Futures Trading Commission (``CFTC'').
---------------------------------------------------------------------------

    \3\ Rule 6440(a)(3) provides that FINRA may halt quoting and 
trading in an OTC Equity Security if it determines that an 
``extraordinary event'' has occurred or is ongoing that has had a 
material effect on the market for the OTC Equity Security or has 
caused or has the potential to cause major disruption to the 
marketplace and/or significant uncertainty in the settlement and 
clearance process.
    \4\ On October 7, 2008, FINRA filed a Uniform Practice Code 
Advisory that provides notice that FINRA will halt trading in OTC 
Equity Securities under Rule 6440(a)(3) (formerly Rule 6460(a)(3)) 
if there is a market-wide halt in trading in NMS stocks. See 
Securities Exchange Act Release No. 58754 (October 8, 2008); 73 FR 
61178 (October 15, 2008) (Notice of Filing and Immediate 
Effectiveness of SR-FINRA-2008-049) (``OTC Circuit Breaker 
Filing''). In the OTC Circuit Breaker Filing, FINRA stated that 
FINRA considers a market-wide halt in the trading of exchange-listed 
securities to be an ``extraordinary event'' under paragraph (a)(3) 
and, therefore, FINRA will halt quoting and trading in OTC Equity 
Securities under these circumstances. The instant proposed rule 
change codifies this interpretation in the text of FINRA Rule 6440.
---------------------------------------------------------------------------

    Since May 6, 2010, when the markets experienced excessive 
volatility in an abbreviated time period, i.e., the ``flash crash,'' 
FINRA and the national securities exchanges (``other SROs'') have 
implemented market-wide measures designed to restore investor 
confidence by reducing the potential for excessive market volatility. 
The measures adopted include pilot plans for stock-by-stock trading 
pauses \5\ and related changes to the clearly erroneous rules.\6\ In 
addition, on April 5, 2011, FINRA and the other SROs filed a plan 
pursuant to Rule 608 of SEC Regulation NMS to address extraordinary 
market volatility (the ``Limit Up-Limit Down Plan'').\7\ As proposed, 
the Limit Up-Limit Down Plan is designed to prevent trades in 
individual NMS stocks from occurring outside specified price bands.
---------------------------------------------------------------------------

    \5\ See FINRA Rule 6121.01 (Trading Pauses); See Securities 
Exchange Act Release No. 62251 (June 10, 2010), 75 FR 34183 (June 
16, 2010) (Order Approving SR-FINRA-2010-025); See Securities 
Exchange Act Release No. 62883 (September 10, 2010); 75 FR 56608 
(September 16, 2010) (Order Approving SR-FINRA-2010-033); See 
Securities Exchange Act Release No. 64735 (June 23, 2011), 76 FR 
38243 (June 29, 2011) (Order Approving SR-FINRA-2011-023).
    \6\ See FINRA Rule 11892 (Clearly Erroneous Transactions in 
Exchange-Listed Securities); See Securities Exchange Act Release No. 
62885 (September 10, 2010); 75 FR 56641 (September 16, 2010) (Order 
Approving SR-FINRA-2010-032); See Securities Exchange Act Release 
No. 65101 (August 11, 2011), 76 FR 51097 (August 17, 2011) (Order 
Approving SR-FINRA-2011-039).
    \7\ See Securities Exchange Act Release No. 64547 (May 25, 
2011), 76 FR 31647 (June 1, 2011).
---------------------------------------------------------------------------

    The Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues 
(``Committee'') has recommended that, in addition to the initiatives 
already adopted or proposed, the SROs consider reforming the existing 
market-wide circuit breakers. Among other things, the Committee noted 
that the interrelatedness of today's highly electronic markets warrants 
a review of the present operation of the system-wide circuit breakers 
now in place. Specifically, the Committee recommended that the SROs 
consider replacing the Dow Jones Industrial Average (``DJIA'') with the 
S&P 500[reg] Index (``S&P 500''), revising the 10%, 20% and 30% decline 
percentages, reducing the length of trading halts, and allowing halts 
to be triggered up to 3:30 p.m.\8\
---------------------------------------------------------------------------

    \8\ See Summary Report of the Committee, Recommendations 
Regarding Regulatory Responses to the Market Events of May 6, 2010 
(February 18, 2011).
---------------------------------------------------------------------------

    FINRA and the other SROs have taken into consideration the 
Committee's recommendations and, with some modifications, are proposing 
changes to address market-wide circuit breakers. FINRA believes that 
this proposal will provide for a more meaningful measure in today's 
faster, more electronic markets, of when to halt stocks on a market-
wide basis as a result of rapid market declines.
Background
    In 1988, the SEC approved several SRO rule proposals that provided 
for market-wide circuit breakers at specified levels to promote 
stability and investor confidence during a period of significant 
stress, along with a policy statement by FINRA (then known as NASD) 
that provided trading halt authority in the event of severe market 
declines.\9\ These measures were adopted

[[Page 61430]]

as part of an effort by the securities and futures markets to implement 
a coordinated means to address potentially destabilizing market 
volatility.\10\
---------------------------------------------------------------------------

    \9\ See Securities Exchange Act Release No. 26198 (October 19, 
1988), 53 FR 41637 (October 24, 1988) (Order Approving SR-NASD-88-
46). FINRA's Policy Statement on Market Closings (``Policy 
Statement'') provided, among other things, that when other major 
securities markets initiate market-wide trading halts in response to 
extraordinary market conditions, FINRA will, upon SEC request, halt 
domestic trading in all securities in equity and equity-related 
securities in the OTC market. As part of the approval order, the SEC 
requested that FINRA impose a trading halt as quickly as practicable 
whenever the NYSE and other equity markets have suspended trading. 
The language in the Policy Statement was subsequently codified, on a 
pilot basis, in Interpretive Material (IM) 4120-3 (later renumbered 
IM-4120-4). See Securities Exchange Act Release No. 39846 (April 9, 
1998), 63 FR 18477 (April 15, 1998) (Order Approving SR-NASD-98-27). 
The IM-4120-3 pilot, which also was extended numerous times, expired 
on April 30, 2002.
    \10\ See Order Approving SR-NASD-88-46.
---------------------------------------------------------------------------

    On October 7, 2008, FINRA permanently adopted a new rule--Rule 
6121--that authorizes FINRA to halt over-the-counter trading in NMS 
stocks if other major U.S. securities markets initiate market-wide 
trading halts in response to their rules or extraordinary market 
conditions, or if otherwise directed by the SEC.\11\ Rule 6121 provides 
for a halt in trading otherwise than on an exchange in any NMS stock to 
promote stability and investor confidence during a period of 
significant stress.
---------------------------------------------------------------------------

    \11\ See Securities Exchange Act Release No. 58753 (October 8, 
2008), 73 FR 61177 (October 15, 2008) (Order Approving SR-FINRA-
2008-048).
---------------------------------------------------------------------------

    As the Commission noted in the Order Approving SR-NASD-88-46, 
circuit breakers were intended to enable market participants to 
establish an equilibrium between buying and selling interest and to 
ensure that market participants have an opportunity to become aware of 
and respond to significant price movements. Importantly, the circuit 
breakers were not intended to prevent markets from adjusting to new 
price levels; rather, they provide a speed bump for extremely rapid 
market declines.\12\
---------------------------------------------------------------------------

    \12\ See Order Approving SR-NASD-88-46.
---------------------------------------------------------------------------

Proposed Amendments
    As noted above, FINRA and the other SROs are proposing amendments 
to their respective rules to take into consideration the 
recommendations of the Committee, and to provide for more meaningful 
measures in today's markets in determining when to halt trading in 
stocks on a market-wide basis. Accordingly, FINRA is proposing, in 
coordination with the other SROs, to update the methodology for 
determining the trigger for market-wide circuit breakers for trading 
otherwise than on an exchange in all NMS stocks and to provide 
specifically that FINRA will halt trading in all OTC Equity Securities 
until the market-wide circuit breaker no longer is in effect for NMS 
stocks. FINRA's proposed parameters and thresholds for market-wide 
circuit breakers for trading otherwise than on an exchange would track 
those being proposed by the other SROs.
    First, FINRA and the other SROs propose to use the S&P 500 as the 
benchmark index for the market-wide circuit breakers.\13\ FINRA 
believes that because the S&P 500 is based on the trading prices of 500 
stocks, it represents a broader base of securities against which to 
measure whether extraordinary market-wide volatility is occurring.
---------------------------------------------------------------------------

    \13\ The current rules of the exchanges use the DJIA, not the 
S&P 500. The Committee noted that using an index that correlates 
closely with derivative products, such as the E-Mini and SPY, will 
allow for a better cross-market measure of market volatility.
---------------------------------------------------------------------------

    Second, FINRA proposes to reference the triggers by the primary 
markets that establish a Level 1 Market Decline of 7%, a Level 2 Market 
Decline of 13% and a Level 3 Market Decline of 20%. As demonstrated by 
the May 6, 2010 flash crash, the SROs believe that the current Level 1 
10% decline may be too high a threshold before determining whether to 
halt trading across all securities. Since adoption, the exchanges have 
halted only once, on October 27, 1997.\14\ Accordingly, to reflect the 
potential that a lower, yet still significant decline may warrant a 
market-wide trading halt, the SROs are proposing to lower the decline 
percentage thresholds.
---------------------------------------------------------------------------

    \14\ At that time, the triggers were based on absolute declines 
in the DJIA (350 point decrease for a Level 1 halt and 550 point 
decrease for a Level 2 halt).
---------------------------------------------------------------------------

    FINRA and the other SROs would halt trading based on a Level 1 or a 
Level 2 Market Decline only once per day. For example, if a Level 1 
Market Decline was to occur and trading otherwise than on an exchange 
in all NMS stocks and all OTC Equity Securities was halted, following 
the reopening of trading on the primary listing market or the 
commencement of trading by another national securities exchange, FINRA 
would not halt market-wide trading again unless a Level 2 Market 
Decline was to occur. Likewise, following the resumption of trading 
after a Level 2 Market Decline, FINRA would not halt trading otherwise 
than on an exchange in all NMS stocks and all OTC Equity Securities 
again unless a Level 3 Market Decline was to occur, at which point all 
trading otherwise than on an exchange in all NMS stocks and all OTC 
Equity Securities would be halted until the primary listing market 
opens the next trading day. As proposed, a Level 1 or a Level 2 Market 
Decline may trigger a market-wide circuit breaker after 9:30 a.m. 
Eastern and up to and including 3:25 p.m. Eastern, or in the case of an 
early scheduled close, 12:25 p.m. Eastern.\15\ The proposed rule would 
require that members halt quoting and trading otherwise than on an 
exchange in any NMS stock as of the time the market-wide trading halt 
is publicly disseminated.
---------------------------------------------------------------------------

    \15\ As the markets experienced on May 6, 2010, even if the 
Level 1 decline had occurred that day, because the market decline 
occurred after 2:30 p.m., it would not have triggered a market-wide 
circuit breaker under the other SROs' existing rules. The Committee 
recommended that trading halts be triggered up to 3:30 p.m and FINRA 
and the other SROs agree that the proposed amendments must strike 
the appropriate balance between permitting trading halts as late in 
the day as feasible, without interrupting the closing process. The 
SROs are proposing 3:25 p.m. as the cut-off time so that there is 
time following the 15-minute trading halt for the markets to reopen 
before the 3:45 cut-off for entry and cancellation of certain orders 
under other SROs' rules.
---------------------------------------------------------------------------

    Third, as proposed, a Level 1 or a Level 2 Market Decline would 
result in a market-wide circuit breaker in trading otherwise than on an 
exchange in all NMS stocks and all OTC Equity Securities for the 
duration of 15 minutes. When a primary listing market halts trading in 
all NMS stocks for a Level 1 or a Level 2 Market Decline, FINRA's halt 
on trading otherwise than on an exchange in all NMS stocks would 
continue until trading has resumed on the primary listing market. If, 
however, the primary listing market does not reopen trading within 15 
minutes following the end of the 15-minute halt period, FINRA may 
permit the resumption of trading otherwise than on an exchange in that 
security if trading in the security has commenced on at least one other 
national securities exchange.
    Following a market-wide circuit breaker due to a Level 1 or a Level 
2 Market Decline, trading in OTC Equity Securities would remain halted 
until the market-wide circuit breaker no longer is in effect for NMS 
stocks, even if some individual NMS stocks have not yet resumed 
trading, for example, due to significant imbalances in those 
securities. The proposed rule would require that members halt quoting 
and trading in all OTC Equity Securities as of the time the market-wide 
trading halt in NMS stocks is publicly disseminated.
    FINRA and the other SROs believe that the proposed percentage 
thresholds--coupled with the proposed duration of the market-wide 
circuit breakers for Level 1 and Level 2 Market Declines--allows for 
trading halts for serious market declines, while at the

[[Page 61431]]

same time minimizing disruption to the markets by allowing for trading 
to continue after the halt. FINRA and the other SROs believe that in 
today's markets, where trading information may travel at a speed of 
micro-seconds, a 15-minute trading halt for a Level 1 and a Level 2 
Market Decline strikes the appropriate balance between halting trading 
for market participants to assess the market and minimizing the time 
needed for an effective halt.
    Upon the occurrence of a Level 3 Market Decline occurring at any 
time during the trading day, FINRA would halt trading otherwise than on 
an exchange in all NMS stocks until the primary listing market opens 
the next trading day. As is the case with a Level 1 or Level 2 Market 
Decline, upon the occurrence of a Level 3 Market Decline, the proposed 
rule would require members to halt quoting and trading in all OTC 
Equity Securities as of the time the market-wide trading halt in NMS 
stocks is publicly disseminated. FINRA would halt trading in all OTC 
Equity Securities until such time that the market-wide circuit breaker 
no longer is in effect for NMS stocks, even if some individual NMS 
stocks have not yet resumed trading, for example, due to significant 
imbalances in those securities.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\16\ 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. Specifically, this proposal promotes uniformity 
concerning when and how to halt trading in all stocks as a result of 
extraordinary market volatility. FINRA believes that the proposed rule 
change is consistent with the market-wide circuit breaker rules of 
other SROs and will promote the goal of investor protection by further 
providing for a coordinated means to address potentially destabilizing 
market volatility.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed 
changes to the market-wide circuit breaker regime are consistent with 
the Act. The Commission specifically requests comment on the following:
     As discussed above, the proposed rule change would narrow 
the percentage market declines that would trigger a market-wide halt in 
trading. How would the proposed changes interact with the existing 
single-stock circuit breaker pilot program \17\ or, if approved, the 
proposed NMS Plan to establish a limit-up/limit-down mechanism for 
individual securities? \18\
---------------------------------------------------------------------------

    \17\ See Securities Exchange Act Release No. 64735 (June 23, 
2011), 76 FR 38243 (June 29, 2011) (SR-BATS-2011-016; SR-BYX-2011-
011; SR-BX-2011-025; SR-CBOE-2011-049; SR-CHX-2011-09; SR-EDGA-2011-
15; SR-EDGX-2011-14; SR-FINRA-2011-023; SR-ISE-2011-028; SR-NASDAQ-
2011-067; SR-NYSE-2011-21; SR-NYSEAmex-2011-32; SR-NYSEArca-2011-26; 
SR-NSX-2011-06; SR-Phlx-2011-64) (approving the ``Phase III Pilot 
Program''). The Phase III Pilot Program has been extended through 
January 2012. See, e.g., Securities Exchange Act Release 65094 
(August 10, 2011), 76 FR 50779 (August 16, 2011) (SR-NASDAQ-2011-
011).
    \18\ See Securities Exchange Act Release No. 64547 (May 25, 
2011), 76 FR 31647 (June 1, 2011).
---------------------------------------------------------------------------

     To what extent could the concurrent triggering of single 
stock circuit breakers in many S&P 500 Index stocks lead to 
difficulties in calculating the index? Would the triggering of many 
single stock circuit breakers in a general market downturn cause the 
index calculation to become stale and thereby delay the triggering of 
the market-wide circuit breaker?
     Should the market-wide circuit breaker be triggered if a 
sufficient number of single-stock circuit breakers or price limits are 
triggered, and materially affect calculations of the S&P 500 Index?
     Should market centers implement rules that mandate 
cancellation of pending orders in the event a market-wide circuit 
breaker is triggered? If so, should such a rule require cancellation of 
all orders or only certain order types (e.g., limit orders)? Should all 
trading halts trigger such cancellation policies or should the 
cancellation policies apply only to a Level 3 Market Decline?
     Should some provision be made to end the regular trading 
session if a market decline suddenly occurs after 3:25 p.m. but does 
not reach the 20% level?
     In the event of a Level 3 Market Decline, should some 
provision be made for the markets to hold a closing auction?
     Should the primary market have a longer period (e.g., 30 
minutes) to reopen trading following a Level 2 Market Decline before 
trading resumes in other venues?
     In the event of a Level 3 Market Decline, should the 
markets wait for the primary market to reopen trading in a particular 
security on the next trading day before trading in that security 
resumes?
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2011-054 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2011-054. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written

[[Page 61432]]

communications relating to the proposed rule change between the 
Commission and any person, other than those that may be withheld from 
the public in accordance with the provisions of 5 U.S.C. 552, will be 
available for Web site viewing and printing in the Commission's Public 
Reference Room, 100 F Street, NE., Washington, DC 20549, on official 
business days between the hours of 10 a.m. and 3 p.m. Copies of such 
filing also will be available for inspection and copying at the 
principal office of FINRA. All comments received will be posted without 
change; the Commission does not edit personal identifying information 
from submissions. You should submit only information that you wish to 
make publicly available. All submissions should refer to File Number 
SR-FINRA-2011-054 and should be submitted on or before October 25, 
2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
---------------------------------------------------------------------------

    \19\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-25511 Filed 10-3-11; 8:45 am]
BILLING CODE 8011-01-P