Document ID: SEC-2013-0260-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: EDGX Exchange, Inc.
Posted Date: 2013-02-07T05:00Z

[Federal Register Volume 78, Number 26 (Thursday, February 7, 2013)]
[Notices]
[Pages 9086-9088]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-02746]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68814; File No. SR-EDGX-2013-06]

Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend 
EDGX Rule 11.13 To Extend the Operation of a Pilot Pursuant to Rule 
11.13 Until September 30, 2013

February 1, 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 January 31, 2013, EDGX Exchange, Inc. (the ``Exchange'' or 
``EDGX'') filed with the Securities and Exchange Commission 
(``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 EDGX Rule 11.13 to extend the 
operation of a pilot pursuant to Rule 11.13 (the ``Pilot'') until 
September 30, 2013. The Exchange also proposes to adopt new paragraph 
(i) to Rule 11.13 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 the 
``Plan'').\3\ All of the changes described herein are applicable to 
EDGX Members. The text of the proposed rule change is available on the 
Exchange's Internet Web site at www.directedge.com, at the Exchange's 
principal office, and at the Public Reference Room of the Commission.
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    \3\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012).
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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 purpose of this filing is to extend the effectiveness of the 
Exchange's current rule applicable to Clearly Erroneous Executions and 
to adopt new paragraph (i) to Rule 11.13 in connection with upcoming 
operation of the Limit Up-Limit Down Plan.
Background
    Portions of Rule 11.13, explained in further detail below, are 
currently operating as the Pilot and are set to expire on February 4, 
2013.\4\ The Exchange proposes to extend the Pilot to September 30, 
2013.
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    \4\ See Securities Exchange Act Release No. 67499 (July 25, 
2012), 77 FR 45399 (July 31, 2012) (SR-EDGX-2012-27).
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    On September 10, 2010, the Commission approved, on a pilot basis, 
changes to EDGX Rule 11.13 to provide for uniform treatment: (1) Of 
clearly erroneous execution reviews in multi-stock events involving 
twenty or more securities; and (2) 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 the 
trading pause is in effect on the Exchange.\5\ The Exchange also 
adopted additional changes to Rule 11.13 that reduced the ability of 
the Exchange to deviate from the objective standards set forth in Rule 
11.13.\6\ The Exchange believes the benefits to market participants 
from the more objective clearly erroneous executions rule should 
continue on a pilot basis through 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. 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 11.13 
that currently operate as a pilot.
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    \5\ See Securities Exchange Act Release No. 62886 (September 10, 
2010), 75 FR 56613 (September 16, 2010) (SR-EDGX-2010-03).
    \6\ Id.

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[[Page 9087]]

Proposed Limit Up-Limit Down Provision to Rule 11.13
    The Exchange proposes to adopt new paragraph (i) to Rule 11.13, to 
provide that the existing provisions of Rule 11.13 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 
Execution 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 11.13 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 11.13(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.\7\ 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 
Trading Hours \8\ 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 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 11.13(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 11.13(a)-(h).
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    \7\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012).
    \8\ Regular Trading Hours commence at 9:30 a.m. Eastern Time. 
See Exchange Rule 1.5(y).
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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,\9\ 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 proposed rule meets these requirements 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 11.13 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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    \9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Financial Industry 
Regulatory Authority (``FINRA'') and other national securities 
exchanges are also filing similar proposals. Thus the Exchange believes 
that the proposal will help to ensure consistent rules across market 
centers.

[[Page 9088]]

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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

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 \10\ and Rule 19b-
4(f)(6)(iii) thereunder.\11\
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 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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    A proposed rule change filed under Rule 19b-4(f)(6) \12\ normally 
does not become operative for 30 days after the date of filing. 
However, pursuant to Rule 19b-4(f)(6)(iii) \13\ the Commission may 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the proposal 
may become operative immediately upon filing.
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    \12\ 17 CFR 240.19b-4(f)(6).
    \13\ 17 CFR 240.19b-4(f)(6)(iii).
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    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-EDGX-2013-06 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-EDGX-2013-06. 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, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office 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-EDGX-2013-06 and should be 
submitted on or before February 28, 2013.
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    \15\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-02746 Filed 2-6-13; 8:45 am]
BILLING CODE 8011-01-P