Document ID: SEC-2013-0263-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2013-02-07T05:00Z

[Federal Register Volume 78, Number 26 (Thursday, February 7, 2013)]
[Notices]
[Pages 9081-9083]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-02710]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68809; File No. SR-NYSEArca-2013-12]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Amending NYSE Arca 
Equities Rule 7.10, Which Governs Clearly Erroneous Executions, 
Extending the Effective Date of the Pilot Until September 30, 2013 and 
Adopting New Paragraph (i) to NYSE Arca Equities Rule 7.10 In 
Connection With the Upcoming Operation of the Plan To Address 
Extraordinary Market Volatility Pursuant to Rule 608 of Regulation NMS 
Under the Act

February 1, 2013.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on January 30, 2013, NYSE Arca, Inc. (the ``Exchange'' or 
``NYSE Arca'') 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\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to to [sic] amend NYSE Arca Equities Rule 
7.10, which governs clearly erroneous executions, to extend the 
effective date of the pilot by which portions of such Rule operate 
until September 30, 2013. The pilot is currently scheduled to expire on 
February 4, 2013. The Exchange also proposes to adopt new paragraph (i) 
to NYSE Arca Equities Rule 7.10 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'').\4\ The text of the proposed rule change 
is available on the Exchange's Web site at www.nyse.com, at the 
principal office of the Exchange, and at the Commission's Public 
Reference Room.
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    \4\ 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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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 those 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 NYSE Arca Equities Rule 7.10, which 
governs clearly erroneous executions, to extend the effective date of 
the pilot by which portions of such Rule operate, until September 30, 
2013. The pilot is currently scheduled to expire on February 4, 
2013.\5\ The Exchange also proposes to add new paragraph (i) to NYSE 
Arca Equities Rule 7.10 in connection with the upcoming implementation 
of the Limit Up-Limit Down Plan.
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    \5\ See Securities Exchange Act Release No. 62886 (September 10, 
2010), 75 FR 56613 (September 16, 2010) (SR-NYSEArca-2010-58). See 
also Securities Exchange Act Release Nos. 63482 (December 9, 2010), 
75 FR 78331 (December 15, 2010) (SR-NYSEArca-2010-113); 64234 (April 
7, 2011), 76 FR 20399 (April 12, 2011) (SR-NYSEArca-2011-15); 65065 
(August 9, 2011), 76 FR 50502 (August 15, 2011) (SR-NYSEArca-2011-
56); 66135 (January 11, 2012), 77 FR 2590 (January 18, 2012) (SR-
NYSEArca-2011-100); and 67566 (August 1, 2012), 77 FR 47142 (August 
7, 2012) (SR-NYSEArca-2012-79).
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    On September 10, 2010, the Commission approved, on a pilot basis, 
market-wide amendments to exchanges' rules for clearly erroneous 
executions to set forth clearer standards and curtail discretion with 
respect to breaking erroneous trades. In connection with this pilot 
initiative, the Exchange amended NYSE Arca Equities Rule 7.10(c), 
(e)(2), (f), and (g). The amendments provide for uniform treatment of 
clearly erroneous execution reviews (1) in Multi-Stock Events \6\ 
involving twenty or more securities, and (2) in the event transactions 
occur that result in the issuance of an individual security trading 
pause by the primary market and subsequent transactions that occur 
before the trading pause is in effect on the Exchange.\7\ The 
amendments also eliminated appeals of certain rulings made in 
conjunction with other exchanges with respect to clearly erroneous 
transactions and limited the Exchange's discretion to deviate from 
Numerical Guidelines set forth in the Rule in the event of system 
disruptions or malfunctions.
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    \6\ Terms not defined herein are defined in NYSE Arca Equities 
Rule 7.10.
    \7\ Separately, the Exchange has proposed to extend the 
effective date of the trading pause pilot under NYSE Arca Equities 
Rule 7.11, which requires to the Exchange to pause trading in an 
individual security listed on the Exchange if the price moves by a 
specified percentage as compared to prices of that security in the 
preceding five-minute period during a trading day. See Securities 
Exchange Act Release No. 68748 (January 28, 2013) (SR-NYSEArca-2012-
02) [sic].
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    If the pilot were not extended, the prior versions of paragraphs 
(c), (e)(2), (f), and (g) of NYSE Arca Equities Rule 7.10 would be in 
effect, and NYSE Arca would have different rules than other exchanges 
and greater discretion in connection with breaking clearly erroneous 
transactions. 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

[[Page 9082]]

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 NYSE Arca Equities Rule 7.10 that currently operate as a pilot.

Proposed Limit Up-Limit Down Provision to NYSE Arca Equities Rule 7.10

    The Exchange proposes to adopt new paragraph (i) to NYSE Arca 
Equities Rule 7.10, to provide that the existing provisions of NYSE 
Arca Equities Rule 7.10 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 7.10 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 
7.10(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.\8\ The possibility remains 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 the Core 
Trading Hours \9\ 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 7.10(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 7.10(a)-(h).
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    \8\ See Limit Up-Limit Down Release, supra note 4.
    \9\ Core Trading Hours commence at 9:30 a.m. Eastern Time, 6:30 
a.m. Pacific Time. See NYSE Arca Equities Rule 1.1(j).
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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 proposed rule change is consistent with Section 6(b) \10\ of 
the Act, in general, and furthers the objectives of Section 6(b)(5) 
\11\ in particular in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, 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 promote just and equitable principles of 
trade because it would help assure that the determination of whether a 
clearly erroneous trade has occurred will be based on clear and 
objective criteria. Additionally, resolution of the incident will occur 
promptly through a transparent process, which the Exchange believes 
would protect investors and the public interest. The proposed rule 
change would also foster cooperation and coordination with persons 
engaged in facilitating transactions in securities and to remove 
impediments to, and perfect the mechanism of, a free and open market 
and a national market system because it would 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.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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    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 NYSE

[[Page 9083]]

Arca Equities Rule 7.10 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.

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. To the contrary, the 
Exchange believes that the Financial Industry Regulatory Authority and 
other national securities exchanges are also filing similar proposals, 
and thus, that the proposal will help to ensure consistent rules across 
market centers.

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

    No written comments were solicited or received with respect to 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 \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-NYSEArca-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-NYSEArca-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. 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-NYSEArca-2013-12, and should be submitted on or before 
February 28, 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. 2013-02710 Filed 2-6-13; 8:45 am]
BILLING CODE 8011-01-P