Document ID: SEC-2014-1057-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: BATS Exchange, Inc.; BATS-Y Exchange, Inc.; NASDAQ OMX BX, Inc.; et al.
Posted Date: 2014-06-25T04:00Z

[Federal Register Volume 79, Number 122 (Wednesday, June 25, 2014)]
[Notices]
[Pages 36110-36112]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-14779]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72434; File No. SR-BATS-2014-014; SR-BX-2014-021; SR-
BYX-2014-007; SR-CHX-2014-06; SR-EDGA-2014-11; SR-EDGX-2014-12; SR-
FINRA-2014-021; SR-ISE-2014-25; SR-NASDAQ-2014-044; SR-NSX-2014-08; SR-
NYSE-2014-22; SR-NYSEArca-2014-48; SR-NYSEMKT-2014-37; SR-Phlx-2014-27]

Self-Regulatory Organizations; BATS Exchange, Inc.; BATS-Y 
Exchange, Inc.; NASDAQ OMX BX, Inc.; Chicago Stock Exchange, Inc.; EDGA 
Exchange, Inc.; EDGX Exchange, Inc.; Financial Industry Regulatory 
Authority, Inc.; International Securities Exchange LLC; The NASDAQ 
Stock Market LLC; National Stock Exchange, Inc.; New York Stock 
Exchange LLC; NYSE Arca, Inc.; NYSE MKT LLC; NASDAQ OMX PHLX LLC; Order 
Granting Approval of Proposed Rule Changes Relating to Clearly 
Erroneous Executions

June 19, 2014.

I. Introduction

    On April 17, 2014, BATS Exchange, Inc. (``BATS''), BATS-Y Exchange, 
Inc. (``BATS-Y''), NASDAQ OMX BX, Inc. (``BX''), EDGA Exchange, Inc. 
(``EDGA''), EDGX Exchange, Inc. (``EDGX''), Financial Industry 
Regulatory Authority, Inc. (``FINRA''), International Securities 
Exchange LLC (``ISE''), The NASDAQ Stock Market LLC (``Nasdaq''), 
National Stock Exchange, Inc. (``NSX''), and NASDAQ OMX PHLX LLC 
(``Phlx'') filed with the Securities and Exchange Commission 
(``Commission'') pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ 
proposed rule changes to amend certain of their respective rules 
relating to clearly erroneous transactions. On April 21, 2014, New York 
Stock Exchange LLC (``NYSE''), NYSE Arca, Inc. (``NYSE Arca'') and NYSE 
MKT LLC (``NYSE MKT'') filed with the Commission pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \3\ and Rule 
19b-4 thereunder,\4\ proposed rule changes to amend certain of their 
respective rules relating to clearly erroneous transactions. On April 
22, 2014, Chicago Stock Exchange, Inc. (``CHX'') filed with the 
Commission pursuant to Section 19(b)(1) of the Securities Exchange Act 
of 1934 (``Act'') \5\ and Rule 19b-4 thereunder,\6\ proposed rule 
changes to amend certain of its respective rules relating to clearly 
erroneous transactions. The proposed rule changes were published for 
comment in the Federal Register on May 6, 2014.\7\ The Commission 
received no comments on the proposed changes. This order approves the 
proposed rule changes.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(1).
    \4\ 17 CFR 240.19b-4.
    \5\ 15 U.S.C. 78s(b)(1).
    \6\ 17 CFR 240.19b-4.
    \7\ See Securities Exchange Act Release Nos. 72044 (April 30, 
2014), 79 FR 25919; 72045 (April 30, 2014), 79 FR 25943; 72046 
(April 30, 2014), 79 FR 25972; 72047 (April 30, 2014), 79 FR 25940; 
72048 (April 30, 2014), 79 FR 25976; 72049 (April 30, 2014), 79 FR 
25951; 72050 (April 30, 2014), 79 FR 25933; 72051 (April 30, 2014), 
79 FR 25954; 72052 (April 30, 2014), 79 FR 25958; 72053 (April 30, 
2014), 79 FR 25965; 72054 (April 30, 2014), 79 FR 25947; 72055 
(April 30, 2014), 79 FR 25961; 72056 (April 30, 2014), 79 FR 25968; 
and 72057 (April 30, 2014), 79 FR 25937 (collectively, the 
``Notices'').
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II. Description of the Proposal

A. Background

    The U.S. equity markets experienced a severe disruption on May 6, 
2010.\8\ 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. BATS, BX, CHX, 
EDGA, EDGX, ISE, Nasdaq, NSX, NYSE, NYSE Arca, NYSE MKT (collectively, 
and, together with BATS-Y and Phlx, the ``Exchanges'') and FINRA 
(collectively, the ``self-regulatory organizations'' or the ``SROs'') 
exercised their authority under their clearly erroneous executions 
rules to break trades that were effected at prices 60% or more away 
from pre-decline prices, using a process that was not sufficiently 
clear or transparent to market participants. To clarify the clearly 
erroneous execution review process across all SROs, and reduce the 
discretion of the Exchanges and FINRA to deviate from the objective 
standards in their respective rules when dealing with clearly erroneous 
transactions, the Exchanges and FINRA filed proposed rule changes to, 
among other things, establish clear thresholds for when

[[Page 36111]]

trades should be broken and to limit the discretion to deviate from 
specified percentage thresholds at which trades would 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.\9\ These proposed rule changes were approved on a 
pilot basis by the Commission.\10\
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    \8\ The events of May 6, 2010 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.
    \9\ See Securities Exchange Act Release Nos. 62330 (June 21, 
2010), 75 FR 36725 (June 28, 2010); 62331 (June 21, 2010), 75 FR 
36746 (June 28, 2010); 62332 (June 21, 2010), 75 FR 36749 (June 28, 
2010); 62333 (June 21, 2010), 75 FR 36759 (June 28, 2010); 62334 
(June 21, 2010), 75 FR 36732 (June 28, 2010); 62335 (June 21, 2010), 
75 FR 37494 (June 29, 2010); 62336 (June 21, 2010), 75 FR 36743 
(June 28, 2010); 62337 (June 21, 2010), 75 FR 36739 (June 28, 2010); 
62338 (June 21, 2010), 75 FR 36762 (June 28, 2010); 62339 (June 21, 
2010), 75 FR 36765 (June 28, 2010); 62340 (June 21, 2010), 75 FR 
36768 (June 28, 2010); 62341 (June 21, 2010), 75 FR 36756 (June 28, 
2010); and 62342 (June 21, 2010), 75 FR 36752 (June 28, 2010).
    \10\ See Securities Exchange Act Release Nos. 62885 (September 
10, 2010), 75 FR 56641 (September 16, 2010); 62886 (September 10, 
2010), 75 FR 56613 (September 16, 2010).
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    In January 2013, the Exchanges and FINRA adopted a provision in 
their clearly erroneous executions rules designed to address the 
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'').\11\ Subsequently, the Exchanges and FINRA removed 
the specific provisions in the clearly erroneous executions rules 
related to individual stock trading pauses,\12\ and recently extended 
the pilot program to coincide with the pilot period for the Limit Up-
Limit Down Plan, including any extensions to the pilot period for the 
Limit Up-Limit Down Plan.\13\
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    \11\ See Securities Exchange Release Nos. 68797 (January 31, 
2013), 78 FR 8635 (February 6, 2013); 68798 (January 31, 2013), 78 
FR 8628 (February 6, 2013); 68801 (February 1, 2013), 78 FR 8630 
(February 6, 2013); 68802 (February 1, 2013), 78 FR 9092 (February 
7, 2013); 68803 (February 1, 2013), 78 FR 9078 (February 7, 2013); 
68804 (February 1, 2013), 78 FR 8677 (February 6, 2013); 68808 
(February 1, 2013), 78 FR 9083 (February 7, 2013); 68809 (February 
1, 2013), 78 FR 9081 (February 7, 2013); 68813 (February 1, 2013), 
78 FR 9073 (February 7, 2013); 68814 (February 1, 2013), 78 FR 9086 
(February 7, 2013); 68818 (February 1, 2013), 78 FR 9100 (February 
7, 2013); 68819 (February 1, 2013), 78 FR 9438 (February 8, 2013); 
68820 (February 1, 2013), 78 FR 9436 (February 8, 2013); and 68822 
(February 4, 2013), 78 FR 9440 (February 8, 2013).
    \12\ See Securities Exchange Act Release Nos. 70510 (September 
26, 2013), 78 FR 60991 (October 2, 2013); 70511 (September 26, 
2013), 78 FR 60941 (October 2, 2013); 70512 (September 26, 2013), 78 
FR 60965 (October 2, 2013); 70513 (September 26, 2013), 78 FR 60973 
(October 2, 2013); 70514 (September 26, 2013), 78 FR 60963 (October 
2, 2013); 70515 (September 26, 2013), 78 FR 60945 (October 2, 2013); 
70516 (September 26, 2013), 78 FR 60952 (October 2, 2013); 70517 
(September 26, 2013), 78 FR 60943 (October 2, 2013); 70518 
(September 26, 2013), 78 FR 60950 (October 2, 2013); 70519 
(September 26, 2013), 78 FR 60969 (October 2, 2013); 70529 
(September 26, 2013), 78 FR 60977 (October 2, 2013); 70541 
(September 27, 2013), 78 FR 61431 (October 3, 2013); 70542 
(September 27, 2013), 78 FR 61427 (October 3, 2013); and 70589 
(October 1, 2013), 78 FR 62782 (October 22, 2013).
    \13\ See Securities Exchange Act Release Nos. 71781 (March 24, 
2014), 79 FR 17615 (March 28, 2014); 71782 (March 24, 2014), 79 FR 
17630 (March 28, 2014); 71783 (March 24, 2014), 79 FR 17617 (March 
28, 2014); 71784 (March 24, 2014), 79 FR 17610 (March 28, 2014); 
71785 (March 24, 2014), 79 FR 17621 (March 28, 2014); 71795 (March 
25, 2014), 79 FR 18089 (March 31, 2014); 71796 (March 25, 2014), 79 
FR 18099 (March 31, 2014); 71797 (March 25, 2014), 79 FR 18108 
(March 31, 2014); 71806 (March 26, 2014), 79 FR 18375 (April 1, 
2014); 71807 (March 26, 2014), 79 FR 18087 (March 31, 2014); 71808 
(March 26, 2014), 79 FR 18355 (April 1, 2014); 71809 (March 26, 
2014), 79 FR 18353 (April 1, 2014); 71820 (March 27, 2014), 79 FR 
18595 (April 2, 2014); and 71821 (March 27, 2014), 79 FR 18592 
(April 2, 2014).
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B. The Proposed Rule Changes

    The Exchanges and FINRA now propose to adopt two new provisions in 
their respective clearly erroneous executions rules, as discussed 
below. Additionally, the SROs propose to update certain cross-
references in their clearly erroneous executions rules to reflect the 
addition of the new proposed rules. The proposals of each of the 
Exchanges and FINRA are substantially similar.\14\
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    \14\ While certain Exchanges only propose to permit an Exchange 
officer to declare transactions null and void for purposes of the 
proposed rules, BATS, BATS-Y, CHX, EDGA, EDGX, ISE, NSX and Phlx 
each propose to permit a senior level designee to act as an officer 
for purposes of the proposed rules and FINRA proposes to permit the 
executive vice president of its Market Regulation Department or 
Transparency Service Department or any officer designated by such 
executive vice president to act as a FINRA officer for purposes of 
the proposed rules. In addition, FINRA proposes to make additional 
changes to its rule addressing clearly erroneous transactions in 
exchange-listed securities, including replacing ``market centers'' 
and ``markets'' with ``other self-regulatory organizations'' to 
categorize the Exchanges and FINRA in the same manner (as self-
regulatory organizations); and other technical or clarifying 
changes.
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1. Multi-Day Event Based on Fundamentally Incorrect or Grossly 
Misinterpreted Issuance Information
    The Exchanges and FINRA propose to adopt a new paragraph in their 
respective clearly erroneous executions rules that would provide that a 
series of transactions in a particular security on one or more trading 
days may be viewed as one event if all such transactions were effected 
based on the same fundamentally incorrect or grossly misinterpreted 
issuance information (e.g., with respect to a stock split or corporate 
dividend) resulting in a severe valuation error for all such 
transactions (the ``Multi-Day Event'').\15\
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    \15\ As an example of a Multi-Day Event contemplated by the 
proposed paragraph, the Notices refer to a specific event involving 
an exchange offer made by U.S. Bancorp on the NYSE in 2010, in which 
depositary shares of U.S. Bancorp traded over the course of a period 
of days at a price approximately one-tenth the actual value of the 
security (the ``U.S. Bancorp Event''). The NYSE filed an emergency 
rule filing to nullify all trades occurring after the exchange offer 
at severely dislocated prices. See Notices, supra note 7 (describing 
Securities Exchange Act Release No. 62609 (July 30, 2010), 75 FR 
47327 (August 5, 2010)).
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    The Exchanges and FINRA propose that an officer of an Exchange or 
FINRA, or a senior level employee designee (as applicable) 
(collectively, ``Officer''), acting on his or her own motion, shall 
take action to declare all transactions that occurred during the Multi-
Day Event null and void not later than the start of trading on the day 
following the last transaction in the Multi-Day Event. If trading in 
the security is halted before the valuation error is corrected, the 
Officer shall take action to declare all transactions that occurred 
during the Multi-Day Event null and void prior to the resumption of 
trading. However, no action would be permitted pursuant to the proposed 
paragraph with respect to any transactions that have reached the 
settlement date for the security or that result from an initial public 
offering (``IPO'') of a security.
    Further, the Exchanges and FINRA propose that to the extent 
transactions related to a Multi-Day Event involve one or more other 
SROs, the affected SROs would be required to promptly coordinate with 
each other to ensure consistent treatment of the transactions related 
to the Multi-Day Event, if practicable. The Exchanges and FINRA also 
propose that any action taken in connection with the proposed paragraph 
would be required to be taken without regard to the numerical 
guidelines set forth in the clearly erroneous executions rules of each 
Exchange and FINRA.\16\
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    \16\ See e.g., BATS Rule 11.17(c)(3); Nasdaq Rule 
11890(a)(2)(C)(1); FINRA Rule 11892(b)(1). For example, an Officer 
would have the authority to nullify transactions resulting from a 
stock split that were based on fundamentally incorrect or grossly 
misinterpreted issuance information, even if such transactions were 
effected at prices consistent with the price at which the security 
was previously trading. The transactions in this particular example 
would not meet the applicable numerical guidelines, but would be 
considered clearly erroneous for purposes of the proposed paragraph 
because they should have been effected at prices well away from the 
actual execution prices.
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    The Exchanges and FINRA also propose to include a provision stating 
that each party involved in a transaction subject to the proposed 
paragraph would be required to be notified as soon as practicable of a 
determination to declare such transaction null and void, and that the 
party aggrieved by such action may appeal in accordance with the 
applicable appeals provision of each

[[Page 36112]]

Exchange or FINRA's clearly erroneous executions rules.\17\
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    \17\ See e.g., BATS Rule 11.17(e)(2); Nasdaq Rule 11890(c); 
FINRA Rule 11894.
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2. Trading Halts
    The Exchanges and FINRA also propose to adopt an additional 
paragraph in their respective clearly erroneous executions rules 
relating to transactions resulting from certain disruptions or 
malfunctions in connection with a regulatory trading halt, suspension 
or pause (``trading halt'') in a security. Specifically, in the event 
of any disruption or malfunction in the operation of the electronic 
communications and trading facilities of an Exchange, another SRO, or 
responsible single plan processor in connection with the transmittal or 
receipt of a trading halt, an Officer, acting on his or her own motion, 
shall nullify any transaction that occurs after a trading halt has been 
declared by the primary listing market for a security and before such 
trading halt has officially ended according to the primary listing 
market. In addition, the Exchanges and FINRA propose that, in the event 
a trading halt is declared, then prematurely lifted in error, and then 
re-instituted, an Officer, acting on his or her own motion shall 
nullify transactions that occur before the official, final end of the 
trading halt according to the primary listing market. In the event that 
a trading halt is declared as of a future time, the Exchanges and FINRA 
would nullify only those transactions occurring after the time the 
trading halt was supposed to be in place until the official end of the 
trading halt according to the primary listing market.
    The Exchanges and FINRA propose that any action taken in connection 
with the proposed paragraph would be taken in a timely fashion, 
generally within thirty minutes of the detection of the erroneous 
transaction and in no circumstances later than the start of regular 
market hours, generally between 9:30 a.m. EST to 4:00 p.m. EST, on the 
trading day following the date of execution(s) under review. The 
Exchanges and FINRA also propose that any action taken in connection 
with the proposed rule would be required to be taken without regard to 
the numerical guidelines set forth in their respective clearly 
erroneous executions rules \18\ because such transactions should not 
have occurred during a trading halt, and thus, nullifying them, or 
declaring them null and void would not put the parties in a different 
position. Lastly, the Exchanges and FINRA also propose to include a 
provision stating that each party involved in a transaction subject to 
the proposed paragraph would be required to be notified as soon as 
practicable of a determination to nullify such transaction, and that 
the party aggrieved by such action may appeal in accordance with the 
applicable appeals provision of each Exchange or FINRA's clearly 
erroneous executions rules.\19\
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    \18\ See supra note 16.
    \19\ See supra note 17.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
changes are consistent with the requirements of the Act and the rules 
and regulations thereunder applicable to national securities exchanges 
and national securities associations.\20\ In particular, the Commission 
finds that the proposed rule changes submitted by the Exchanges and 
FINRA are consistent with the requirements of Section 6(b)(5) of the 
Act \21\ (in the case of the Exchanges) and Section 15A(b)(6) of the 
Act \22\ (in the case of FINRA) which require, among other things, that 
the rules of national securities exchanges and FINRA, respectively, 
must be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, 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.
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    \20\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \21\ 15 U.S.C. 78f(b)(5).
    \22\ 15 U.S.C. 78o-3(b)(6).
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    In the Commission's view, the proposed rule changes will continue 
to 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 changes also should help 
continue to assure consistent results in handling erroneous trades 
across the U.S. markets, thus furthering fair and orderly markets and 
the protection of investors and the public interest. Specifically, the 
Commission believes that the provision relating to the handling of 
Multi-Day Events effected based on the same fundamentally incorrect or 
grossly misinterpreted issuance information that results in a severe 
valuation error should contribute to a more transparent process, and 
help achieve a fair and equitable result, on the very rare occasions 
such events occur. The Commission believes that the proposed trading 
halt provision should help to increase certainty and transparency with 
respect to transactions that inadvertently occur during trading halts 
due to a technology failure. The Commission notes that these 
transactions should not have occurred in the first place, and that the 
proposed rule change provides certainty to market participants that 
these transactions will be nullified promptly through an objective and 
transparent process.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\23\ that the proposed rule changes, SR-BATS-2014-014; SR-BX-2014-
021; SR-BYX-2014-007; SR-CHX-2014-06; SR-EDGA-2014-11; SR-EDGX-2014-12; 
SR-FINRA-2014-021; SR-ISE-2014-25; SR-NASDAQ-2014-044; SR-NSX-2014-08; 
SR-NYSE-2014-22; SR-NYSEArca-2014-48; SR-NYSEMKT-2014-37; SR-Phlx-2014-
27, be, and hereby are, approved.
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    \23\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-14779 Filed 6-24-14; 8:45 am]
BILLING CODE 8011-01-P