Document ID: SEC-2010-1001-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: National Stock Exchange, Inc.
Posted Date: 2010-07-07T04:00Z

[Federal Register Volume 75, Number 129 (Wednesday, July 7, 2010)]
[Notices]
[Pages 39063-39065]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-16404]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62410; File No. SR-NSX-2010-08]

Self-Regulatory Organizations; National Stock Exchange, Inc.; 
Notice of Filing of a Proposed Rule Change To Include Additional 
Securities in the Trading Halt Pilot Program Under Exchange Rule 11.20B

June 30, 2010.
    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 June 30, 2010, National Stock Exchange, Inc. filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change, as described in Items I, II, and III below, which Items have 
been prepared by the Exchange. The Commission is publishing this notice 
to solicit comment 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

    National Stock Exchange, Inc. (``NSX[supreg]'' or the ``Exchange'') 
is proposing to amend NSX Rule 11.20B to add additional securities to 
the pilot rule.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.nsx.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 Exchange 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 Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant parts 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 NSX Rule 11.20B to add securities 
included in the Russell 1000 [supreg] Index (``Russell 1000'') and 
specified Exchange Traded Products (``ET Products'') to the pilot rule. 
For purposes of this filing, ET Products include Exchange Traded Funds 
(``ETF \3\''), Exchange Traded Vehicles (``ETV \4\''), and Exchange 
Traded Notes (``ETN \5\'').
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    \3\ An ETF is an open-ended registered investment company under 
the Investment Company Act of 1940 that has received certain 
exemptive relief from the SEC to allow secondary market trading in 
the ETF shares. ETFs are generally index-based products, in that 
each ETF holds a portfolio of securities that is intended to provide 
investment results that, before fees and expenses, generally 
correspond to the price and yield performance of the underlying 
benchmark index.
    \4\ An ETV tracks the underlying performance of an asset or 
index, allowing investors exposure to underlying assets such as 
futures contracts, commodities, and currency without actually 
trading futures or taking physical delivery of the underlying asset. 
An ETV is traded intraday like an ETF. An ETV is an open-ended trust 
or partnership unit that is registered under the Securities Act of 
1933.
    \5\ An ETN is a senior unsecured debt obligation designed to 
track the total return of an underlying index, benchmark or 
strategy, minus investor fees. ETNs are registered under the 
Securities Act of 1933 and are redeemable to the issuer.
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    NSX Rule 11.20B was approved by the Securities and Exchange 
Commission (the ``Commission'') on June 10, 2010 on a pilot basis to 
end on December 10, 2010.\6\ As the Exchange noted in its filing to 
adopt NSX Rule 11.20B, during the pilot period, the Exchange, in 
conjunction with other markets in the national market system, would 
continue to assess whether additional securities need to be added and 
whether the parameters of the rule would need to be modified to 
accommodate trading characteristics of different securities.
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    \6\ See Securities Exchange Act Release No. 62252 (June 10, 
2010) (SR-NSX-2010-05).
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    Currently, the pilot list of securities is all securities included 
in the S&P 500[supreg] Index (``S&P 500''). As noted in comment letters 
relating to the original filing to adopt NSX Rule 11.20B, concerns were 
raised that including only securities in the S&P 500 in the pilot rule 
was too narrow. In particular, commenting parties noted that securities 
that experienced volatility on May 6, 2010, including ETFs, should be 
included in the pilot. The Exchange agrees with the commenting parties 
that the pilot list of securities should be expanded.
    In consultation with other markets, the Exchange proposes to add 
the securities included in the Russell 1000 and specified ET Products 
to the pilot beginning in July 2010, subject to Commission approval. 
The Exchange believes that adding these securities would begin to 
address concerns that the scope of the pilot may be too narrow, while 
at the same time recognizing that during the pilot period, the markets 
will continue to review whether and when to add additional securities 
to the pilot and whether the parameters of the rule should be adjusted 
for different securities.
    In particular, the Exchange, in conjunction with other markets, 
proposes to add securities included in the Russell 1000 because the 
Exchange believes that the securities included in that index have 
similar trading characteristics to securities included in the S&P 500 
(many of which are the same securities) and therefore the existing 10% 
price movement applicable before invoking a trading pause would be 
appropriate for the Russell 1000 securities. Because the Exchange does 
not propose to modify the 10% price movement at this time, the Exchange 
believes that expanding to the Russell 1000 is an appropriate next 
step. Based on our analysis, the number of times that the Trading Pause 
would be triggered for Russell 1000 securities would be similar to the 
instances for the S&P 500 securities.
    In addition, the Exchange, in consultation with other markets, 
proposes to add to the pilot a selected list of ET Products. The 
proposed pilot list of ET Products was developed, first, by identifying 
all ET Products across multiple asset classes and issuers, including 
domestic equity, international equity, fixed income, currency, and 
commodities and futures. Leveraged ET Products were excluded and the 
list was then sorted by notional consolidated average daily volume 
(``CADV'') using year-to date CADV ending May 5, 2010, multiplied by 
closing price on May 5, 2010. Those symbols, including inverse ET 
Products, that trade over $2,000,000 of CADV year-to-date through May 
5, 2010 were then selected. To ensure that all ET Products that track 
similar benchmarks but do not meet this volume criterion do not become 
subject to pricing volatility when a component security is the subject 
of a trading pause, the Exchange proposes to include certain non-
leveraged ET Products that have traded below this volume criterion, but 
that track the same benchmark as an ET Product that does meet the 
volume criterion.

[[Page 39064]]

    The Exchange believes that the proposed list of ET Products is 
appropriate because it identifies those ET Products that have component 
securities that largely track the securities included in the S&P 500 
and Russell 1000. Accordingly, if an S&P 500 or Russell 1000 security 
experiences a trading pause, any resulting price volatility in a 
related ET Product, regardless of the CADV of the ET Product, would 
also be subject to a trading pause trigger. As with the proposal to add 
the Russell 1000 securities, the proposed ET Products were selected 
because of the belief that the existing 10% price movement would be an 
appropriate price movement before invoking a trading pause for ET 
Products with these characteristics. There is a belief that the 10% 
price movement is not an appropriate threshold for leveraged ET 
Products because by definition, leveraged ET Products are based on 
multiples of price movements in the underlying index. Accordingly, a 
10% percent price movement in a leveraged ET Product may not signify 
extraordinary volatility. Because the Exchange is not proposing to 
adopt revised price movement thresholds at this time, the Exchange is 
therefore not proposing to include leveraged ET Products for now.
    As proposed, the list includes broad-based ET Products, which the 
Exchange recognizes has raised some debate. In particular, concerns 
have been raised about whether halting an index-based ET Product may 
impact an index-based option or future. However, the Exchange believes 
that including broad-based ET Products is appropriate so that ET 
Product investors are protected should the component securities 
experience such volatility that trading in the broad-based ET Product 
is impacted, as it was on May 6, 2010. Because this is a pilot rule, 
the markets can continue to assess whether it is appropriate to have a 
trading pause in broad-based ET Products when there is not a similar 
trading pause in related index-based options or futures.
    As noted above, during the pilot, the Exchange will continue to re-
assess whether specific ET Products should be added or removed from the 
pilot list. The Exchange believes that all ET Products should 
eventually be included in the pilot list as soon as it is practical to 
do so. The Exchange will also assess whether the parameters for 
invoking a trading pause continue to be the appropriate standard and 
whether the parameters should be modified.
    To effect this change, the Exchange proposes to amend Commentary 
.05 to Rule 11.20 to provide that the pilot applies to all securities 
in the S&P 500, securities in the Russell 1000, as well as specified ET 
Products. The pilot list of ET Products is identified in Exhibit 3.
2. Statutory Basis
    The statutory basis for the proposed rule change is Section 6(b)(5) 
of the Act,\7\ 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 
proposed rule change also is designed to support the principles of 
Section 11A(a)(1) \8\ of the Act in that it seeks to assure fair 
competition among brokers and dealers and among exchange markets. The 
Exchange believes that the proposed rule meets these requirements in 
that it promotes uniformity across markets concerning decisions to 
pause trading in a security when there are significant price movements.
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    \7\ 15 U.S.C. 78f(b)(5).
    \8\ 15 U.S.C. 78k-1(a)(1).
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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 Exchange Act.

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

    Within 35 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 such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.\9\
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    \9\ The Commission notes that the Exchange has requested 
accelerated approval of the filing.
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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.
    The Commission notes that ETF trades constituted a substantial 
majority of the trades that were cancelled on May 6, and the proposed 
amendments would bring certain ETFs within the scope of the trading 
pause pilot for the first time. The Commission solicits comment 
regarding the inclusion of ETFs within the trading pause pilot. The 
Commission requests comment in particular on the implications of 
including in the trading pause pilot ETFs on broad-based indices that 
also underlie options and futures products. What are the potential 
benefits and risks of including those ETFs in the pilot under 
circumstances where other products based on the same index may not be 
subject to any trading pause, or may be subject to a different type of 
trading pause? Are existing mechanisms available in the markets for 
those other products sufficient to address any cross-market linkage 
concerns? What are the potential effects on price discovery and trading 
behavior in the different markets?
    Similarly, the Commission solicits comments on the potential 
benefits and risks of excluding such ETFs from the pilot, particularly 
under circumstances where the securities underlying the ETF are 
included in the pilot. If there are trading pauses for the component 
securities of an index but not for an ETF based on that index, what 
consequences might that have for the ETF or for other products based on 
that index? If there are trading pauses in an ETF but not in the stocks 
that underlie that ETF, what consequences might that have for the 
underlying stocks or other products? What are the potential effects on 
price discovery for the ETF, the underlying stocks and other products?
    Are there other market-based characteristics or metrics that should 
be considered for purposes of determining which ETFs should be included 
in the trading pause pilot, or for re-calibrating particular features 
of the trading pause?
    In addition, the Commission solicits comments regarding the 
operation of the trading pause pilot to date with respect to stocks in 
the S&P 500.
    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

[[Page 39065]]

     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NSX-2010-08 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-NSX-2010-08. 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 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 a.m. and 3 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-NSX-2010-08, and should be submitted on or before July 
19, 2010.\10\
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    \10\ The Commission believes that a 10-day comment period is 
reasonable, given the urgency of the matter. It will provide 
adequate time for comment.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-16404 Filed 7-6-10; 8:45 am]
BILLING CODE 8010-01-P