Document ID: SEC-2013-0274-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: International Securities Exchange, LLC
Posted Date: 2013-02-08T05:00Z

[Federal Register Volume 78, Number 27 (Friday, February 8, 2013)]
[Notices]
[Pages 9440-9443]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-02845]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68822; File No. SR-ISE-2013-12]

Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by International Securities 
Exchange, LLC To Amend ISE Rule 2128 Relating to Clearly Erroneous 
Trades

February 4, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on February 1, 2013, the International Securities Exchange, LLC 
(the ``Exchange'' or the ``ISE'') filed with the Securities and 
Exchange Commission (the ``Commission'') the proposed rule change as 
described in Items I and II below, which items have been prepared by 
the self-regulatory organization. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 2128 (Clearly Erroneous Trades) 
to extend the expiration of the pilot rule. The Exchange also proposes 
to adopt

[[Page 9441]]

new paragraph (i) to Rule 2128 in connection with the upcoming 
operation of the Plan to Address Extraordinary Market Volatility 
Pursuant to Rule 608 of Regulation NMS under the Act (the ``Limit Up-
Limit Down Plan'' or ``Plan'').\3\
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    \3\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012) (the ``Limit Up-Limit Down 
Release'').
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    The text of the proposed rule change is available on the Exchange's 
Internet Web site at http://www.ise.com, at the principal office of the 
Exchange, and at the Commission's Public Reference Room.

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

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
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
    The Exchange proposes to amend ISE Rule 2128 (Clearly Erroneous 
Trades) to extend the expiration of the pilot rule to September 30, 
2013 and to adopt new paragraph (i) to Rule 2128 in connection with 
upcoming operation of the Limit Up-Limit Down Plan. Amendments to ISE 
Rule 2128 to provide for uniform treatment of certain clearly erroneous 
execution reviews in multi-stock events involving twenty or more 
securities and in the event transactions occur that result in the 
issuance of an individual stock trading pause by the primary market and 
subsequent transactions that occur before a trading pause is in effect 
on the Exchange were approved by the Commission on September 10, 2010 
on a pilot basis to end on April 11, 2011.\4\ The Exchange then 
extended this pilot to expire upon the earlier of August 11, 2011 or 
the date on which the limit up/limit down mechanism to address 
extraordinary market volatility applies.\5\ The Exchange then extended 
the pilot to January 31, 2012 \6\ and, once again, extended the pilot 
to July 31, 2012.\7\ On July 27, 2012, ISE Rule 2102 [sic] was amended 
to extend the pilot to February 4, 2013.\8\ The Exchange now proposes 
to extend the date by which this pilot rule will expire to September 
30, 2013, which is the date that the Exchange anticipates that the 
phased implementation of the Limit Up-Limit Down Plan will be complete.
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    \4\ See Securities Exchange Act Release Nos. 62886 (September 
10, 2010), 75 FR 56613 (September 16, 2010) (SR-ISE-2010-62) 
(Extending the pilot period to December 10, 2010); 63481 (December 
9, 2010), 75 FR 78275 (December 15, 2010) (Extending the pilot 
period to April 11, 2011).
    \5\ See Securities and Exchange Act Release No. 64231 (April 7, 
2011), 76 FR 20733 (April 13, 2011) (SR-ISE-2011-19).
    \6\ See Securities and Exchange Act Release No. 65061 (August 9, 
2011), 76 FR 50503 (August 15, 2011) (SR-ISE-2011-51).
    \7\ See Securities and Exchange Act Release No. 66255 (January 
26, 2012), 77 FR 5081 (February 1, 2012) (SR-ISE-2012-04).
    \8\ See Securities Exchange Act Release No. 67528 (July 27, 
2012), 77 FR 46532 (August 3, 2012) (SR-ISE-2012-67).
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    As explained in further detail below, although the Limit Up-Limit 
Down Plan is intended to prevent executions that would need to be 
nullified as clearly erroneous, the Exchange believes that certain 
protections should be maintained while the industry gains initial 
experience operating with the Limit Up-Limit Down Plan, including the 
provisions of Rule 11.17 that currently operate as a pilot.

Proposed Limit Up-Limit Down Provision to Rule 11.17

    The Exchange proposes to adopt new paragraph (i) to Rule 2128, to 
provide that the existing provisions of Rule 2128 will continue to 
apply to all Exchange transactions, including transactions in 
securities subject to the Plan, other than as set forth in proposed 
paragraph (i). Accordingly, other than as proposed below, the Exchange 
proposes to maintain and continue to apply the Clearly Erroneous trade 
standards in the same way that it does today. Notably, this means that 
the Exchange might nullify transactions that occur within the price 
bands disseminated pursuant to the Limit Up-Limit Down Plan to the 
extent such transactions qualify as clearly erroneous under existing 
criteria. As an example, assume that a Tier 1 security pursuant to the 
Plan has a reference price pursuant to both the Plan and Rule 2128 of 
$100.00. The lower pricing band under the Plan would be $95.00 and the 
upper pricing band under the Plan would be $105.00. An execution could 
occur on the Exchange in this security at $96.00, as this is within the 
Plan's pricing bands. However, if subjected to review as potentially 
clearly erroneous, the Exchange would nullify an execution at $96.00 as 
clearly erroneous because it exceeds the 3% threshold that is in place 
pursuant to Rule 2128(c)(1) for securities priced above $50.00 (i.e., 
with a reference price of $100.00, any transactions at or below $97.00 
or above $103.00 could be nullified as clearly erroneous). Accordingly, 
this proposal maintains the status quo with respect to reviews of 
Clearly Erroneous Executions and the application of objective numerical 
guidelines by the Exchange. The proposal does not increase the 
discretion afforded to the Exchange in connection with reviews of 
Clearly Erroneous Executions.
    The Limit Up-Limit Down Plan is designed to prevent executions from 
occurring outside of dynamic price bands disseminated to the public by 
the single plan processor as defined in the Limit Up-Limit Down 
Plan.\9\ The possibility remains that the Exchange could experience a 
technology or systems problem with respect to the implementation of the 
price bands disseminated pursuant to the Plan. To address such 
possibilities, the Exchange proposes to adopt language to make clear 
that if an Exchange technology or systems issue results in any 
transaction occurring outside of the price bands disseminated pursuant 
to the Plan, an Officer of the Exchange or senior level employee 
designee, acting on his or her own motion or at the request of a third 
party, shall review and declare any such trades null and void. Absent 
extraordinary circumstances, any such action of the Officer of the 
Exchange or other senior level employee designee shall be taken in a 
timely fashion, generally within thirty (30) minutes of the detection 
of the erroneous transaction. When extraordinary circumstances exist, 
any such action of the Officer of the Exchange or other senior level 
employee designee must be taken by no later than the start of Regular 
Market Session \10\ on the trading day following the date on which the 
execution(s) under review occurred. Although the Exchange will act as 
promptly as possible and the proposed objective standard (i.e., whether 
an execution occurred outside the band) should make it feasible to 
quickly make a determination, there may be circumstances in which 
additional time may be needed for verification of facts or coordination 
with outside parties, including the single plan processor responsible 
for disseminating the price bands and other market centers. 
Accordingly, the Exchange believes it

[[Page 9442]]

necessary to maintain some flexibility to make a determination outside 
of the thirty (30) minute guideline. In addition, the Exchange proposes 
that a transaction that is nullified pursuant to new paragraph (i) 
would be appealable in accordance with the provisions of Rule 
2128(e)(2). In addition, the Exchange proposes to make clear that in 
the event that a single plan processor experiences a technology or 
systems problem that prevents the dissemination of price bands, the 
Exchange would make the determination of whether to nullify 
transactions based on Rule 2128(a)-(h).
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    \9\ See Limit Up-Limit Down Release, supra note 3.
    \10\ Regular Market Session commence [sic] at 9:30 a.m. Eastern 
Time. See ISE Rules 2102 and 2106.
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    The Exchange believes that cancelling trades that occur outside of 
the price bands disseminated pursuant to the Plan is consistent with 
the purpose and intent of the Plan, as such transactions are not 
intended to occur in the first place. If transactions do occur outside 
of the price bands and no exception applies--which necessarily would be 
caused by a technology or systems issue--then the Exchange believes the 
appropriate result is to nullify such transactions.
2. Statutory Basis
    The statutory basis for the proposed rule change is Section 6(b)(5) 
of the Act,\11\ which requires the rules of an exchange 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. The 
Exchange believes that the pilot program promotes just and equitable 
principles of trade in that it promotes transparency and uniformity 
across markets concerning review of transactions as clearly erroneous. 
More specifically, the Exchange believes that the extension of the 
pilot would 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 would also 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. Although the Limit Up-Limit Down 
Plan will be operational during the same time period as the proposed 
extended pilot, the Exchange believes that maintaining the pilot for at 
least through the phased implementation of the Plan is operational will 
help to protect against unanticipated consequences. To that end, the 
extension will allow the Exchange to determine whether Rule 2128 is 
necessary once the Plan is operational and, if so, whether improvements 
can be made. Further, the Exchange believes it consistent with the 
protection of investors and the public interest to adopt objective 
criteria to nullify transactions that occur outside of the Plan's price 
bands when such transactions should not have been executed but were due 
to a systems or technology issue.
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    \11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change does not impose 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

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

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

    Because the proposed rule change does not (i) Significantly affect 
the protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative for 30 
days from the date on which it was filed, or such shorter time as the 
Commission may designate if consistent with the protection of investors 
and the public interest, the proposed rule change has become effective 
pursuant to Section 19(b)(3)(A) of the Act \12\ and Rule 19b-
4(f)(6)(iii) thereunder.\13\
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6)(iii). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and the text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission.
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    The Exchange has asked the Commission to waive the 30-day operative 
delay so that the proposal may become operative immediately upon 
filing. The Commission believes that waiving the 30-day operative delay 
is consistent with the protection of investors and the public interest, 
as it will allow the pilot program to continue uninterrupted, thereby 
avoiding the investor confusion that could result from a temporary 
interruption in the pilot program. For this reason, the Commission 
designates the proposed rule change to be operative upon filing.\14\
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    \14\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. 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 email to rule-comments@sec.gov. Please include 
File Number SR-ISE-2013-12 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-ISE-2013-12. This file 
number should be included on the subject line if email 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 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 on official business 
days between the hours of 10:00 a.m.

[[Page 9443]]

and 3:00 p.m. Copies of such filing also will be available for 
inspection and copying at the principal offices of the Exchange. 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 available publicly. All 
submissions should refer to File Number SR-ISE-2013-12, and should be 
submitted on or before March 1, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-02845 Filed 2-7-13; 8:45 am]
BILLING CODE 8011-01-P