Document ID: SEC-2010-0934-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX BX, Inc.
Posted Date: 2010-06-28T04:00Z

[Federal Register: June 28, 2010 (Volume 75, Number 123)]
[Notices]               
[Page 36752-36756]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28jn10-140]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62342; File No. SR-BX-2010-040]

 
Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of 
Filing of a Proposed Rule Change, as Modified by Amendments Nos. 1 and 
2, To Amend NASDAQ OMX BX Rule 11890 Governing Clearly Erroneous 
Executions

June 21, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 17, 2010, NASDAQ OMX BX, Inc. (the ``Exchange'' or ``BX'') 
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 substantially prepared by the Exchange. On June 18, 
2010, the Exchange submitted Amendment No. 1 to the proposed rule 
change. On June 21, 2010, the Exchange submitted Amendment No. 2 to the 
proposed rule change. The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, 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 the 
Substance of the Proposed Rule Change

    The Exchange is filing with the Commission to amend BX Rule 11890, 
entitled Clearly Erroneous Transactions.
    The text of the proposed rule change is available from BX's Web 
site at http://nasdaqomxbx.cchwallstreet.com/NASDAQOMXBX/Filings/, at 
the Exchange's principal office, and at the Commission's Public 
Reference Room.

[[Page 36753]]

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 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 is proposing modifications to its Rule 11890, entitled 
Clearly Erroneous Transactions. First, the Exchange proposes replacing 
existing paragraph (C)(2) of Rule 11890, entitled ``Unusual 
Circumstances and Joint Market Rulings'' with a new paragraph, entitled 
``Multi-Stock Events Involving Twenty or More Securities.'' Second, the 
Exchange is replacing existing paragraph (C)(4) of Rule 11890, entitled 
``Numerical Guidelines Applicable to Volatile Market Opens'' with a new 
paragraph, entitled ``Individual Stock Trading Pauses.'' Third, the 
Exchange is proposing changes to existing paragraph (b) of Rule 11890 
to eliminate the ability of the Exchange to deviate from the Numerical 
Guidelines contained in paragraph (C)(1) (other than under limited 
circumstances set forth in paragraph (b)(i)) when deciding which 
transactions will be reviewed by the Exchange as potentially clearly 
erroneous. Finally, the Exchange proposes modifications to paragraphs 
(C)(1) and (C)(3) of Rule 11890 consistent with the proposed changes to 
paragraphs (C)(2) and (C)(4). As proposed, the provisions of paragraphs 
(C), (c)(1), (b)(i), and (b)(ii) of Rule 11890 as amended pursuant to 
this filing, would be in effect during a pilot period set to end on 
December 10, 2010. If the pilot is not either extended or approved 
permanent by December 10, 2010, the prior versions of paragraphs (C), 
(c)(1), and (b) of Rule 11890 would be in effect.
    The Exchange is proposing the rule changes described below in 
consultation with other markets and Commission staff 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. The 
Exchange has also proposed additional changes to Rule 11890 that reduce 
the ability of the Exchange to deviate from the objective standards set 
forth in the Rule. In addition, the Exchange is modifying certain 
defined terms in the rule to match definitions used by other exchanges 
in order to avoid the risk of confusion. The proposed changes are 
described in further detail below.
Revised Paragraph (C)(2) Related to Multi-Stock Events Involving Twenty 
or More Securities
    The Exchange proposes to eliminate the majority of existing 
paragraph (C)(2), which provides flexibility to the Exchange to use 
different Numerical Guidelines or Reference Prices in various ``Unusual 
Circumstances.'' The Exchange proposes to replace this paragraph with 
new language that would apply to Multi-Stock Events involving twenty or 
more securities whose executions occurred within a period of five 
minutes or less. The revised paragraph would retain language making 
clear that during Multi-Stock Events involving twenty or more 
securities the number of affected transactions may be such that 
immediate finality is necessary to maintain a fair and orderly market 
and to protect investors and the public interest. Accordingly, in such 
circumstances, decisions made by the Exchange in consultation with 
other markets could not be appealed. Further, as proposed, in 
connection with reviews of Multi-Stock Events involving twenty or more 
securities, the Exchange may use a Reference Price other than 
consolidated last sale in its review of potentially clearly erroneous 
executions. With the exception of those securities under review that 
are subject to an individual stock trading pause as described in 
proposed paragraph (C)(4), and to ensure consistent application across 
market centers when proposed paragraph (C)(2) is invoked, the Exchange 
will promptly coordinate with the other market centers to determine the 
appropriate review period, which may be greater than the period of five 
minutes or less that triggered application of proposed paragraph 
(C)(2), as well as select one or more specific points in time prior to 
the transactions in question and use transaction prices at or 
immediately prior to the one or more specific points in time selected 
as the Reference Price. The Exchange will nullify as clearly erroneous 
all transactions that are at prices equal to or greater than 30% away 
from the Reference Price in each affected security during the review 
period selected by the Exchange and other markets consistent with the 
proposed paragraph (C)(2).
    Because the Exchange and other market centers are adopting a 
different threshold and standards to handle large-scale market events, 
which would include events occurring during times of high volatility at 
the beginning of regular trading hours, the Exchange proposes deletion 
of paragraph (C)(4) (``Numerical Guidelines Applicable to Volatile 
Market Opens'') of the existing rule. The Exchange believes that this 
provision is no longer necessary, and if maintained, could result in 
extremely high Numerical Guidelines (up to 90%) in certain 
circumstances.
Revised Paragraph (C)(4) Related to Individual Stock Trading Pauses
    The Exchange and other primary listing markets for U.S. stocks 
recently amended their rules so that they may, from time to time, issue 
a trading pause for an individual security if the price of such 
security moves 10% or more from a sale in a preceding five-minute 
period. In this regard, the Exchange recently amended its rules to 
pause trading in an individual stock when the primary listing market 
for such stock issues a trading pause triggered pursuant to Rule 
4120(a)(11), as approved.\3\ As described above, the Exchange is 
proposing to eliminate existing paragraph (C)(4) (``Numerical 
Guidelines Applicable to Volatile Market Opens''). The Exchange 
proposes adopting a rule, numbered as (C)(4) following such 
elimination, which will provide for uniform treatment of clearly 
erroneous execution reviews in the event transactions occur that result 
in the issuance of an individual stock trading pause by the primary 
listing market and subsequent transactions that occur before the 
trading pause is in effect on the Exchange. The proposed rule change is 
necessary to provide greater certainty of the clearly erroneous 
Reference Price for transactions that trigger a trading pause (the 
``Trigger Trade'') and subsequent transactions occurring between the 
time of the Trigger Trade and the time the trading pause message is 
received by the Exchange from the single plan processor responsible for 
consolidation and dissemination of information for the security and put 
into effect on the

[[Page 36754]]

Exchange, especially under highly volatile and active market 
conditions.
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    \3\ See Securities Exchange Act Release No. 62252 (June 10, 
2010), 75 FR 34186 (June 16, 2010) (SR-BX-2010-037).
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    The Exchange proposes to revise paragraph (C)(4) of BX Rule 11890 
to allow the Exchange to use the price that triggered a trading pause 
in an individual stock (the ``Trading Pause Trigger Price'') as the 
Reference Price for clearly erroneous execution reviews of a Trigger 
Trade and transactions that occur immediately after a Trigger Trade but 
before a trading pause is in effect on the Exchange. As proposed, the 
phrase ``Trading Pause Trigger Price'' shall mean the price that 
triggered a trading pause in any Securities as defined in BX Rule 
4120(a)(11). The Trading Pause Trigger Price reflects a price 
calculated by the primary listing market over a rolling five-minute 
period and may differ from the execution price of a transaction that 
triggered a trading pause. The Exchange will rely on the primary 
listing market that issued an individual stock trading pause to 
determine and communicate the Trading Pause Trigger Price for such 
stock. The Exchange proposes to make clear in the text that the 
proposed standards in paragraph (C)(4) apply regardless of whether the 
security at issue is part of a Multi-Stock Event involving five or more 
securities as described in proposed paragraphs (C)(1) and (C)(2).
    As proposed, the Numerical Guidelines set forth in BX Rule 
11890(C)(1), other than those Numerical Guidelines applicable to Multi-
Stock Events, would apply to reviews of Trigger Trades and subsequent 
transactions. The Exchange proposes to review, on its own motion 
pursuant to paragraph (b)(ii) of the Rule, all transactions that 
trigger a trading pause and subsequent transactions occurring before 
the trading pause is in effect on the Exchange. The Exchange has 
proposed to limit such reviews to reviews of transactions that executed 
at a price lower than the Trading Pause Trigger Price in the event of a 
price decline and higher than the Trading Pause Trigger Price in the 
event of a price rise. Because the proposed rules for trading pauses 
would only apply within Regular Trading Hours,\4\ an execution would be 
reviewed and nullified as clearly erroneous if it exceeds the following 
thresholds:
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    \4\ The term ``Regular Trading Hours'' is being renamed from 
``Core Session'' in BX Rule 11890(a)(2)(B) as the time between 9:30 
a.m. and 4 p.m. Eastern Time. According to rules of the primary 
listing markets, an individual stock trading pause can be issued 
based on a Trigger Trade that occurs at any time between 9:45 a.m. 
and 3:35 p.m. Eastern Time.

------------------------------------------------------------------------
                                          Numerical guidelines (subject
                                            transaction's % difference
       Reference price or product         from the trading pause trigger
                                                      price)
------------------------------------------------------------------------
Greater than $0.00 up to and including   10
 $25.00.
Greater than $25.00 up to and including  5
 $50.00.
Greater than $50.00....................  3
Leveraged ETF/ETN securities...........  Regular Trading Hours Numerical
                                          Guidelines multiplied by the
                                          leverage multiplier (i.e.,
                                          2x).
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Revisions to Paragraph (b)
    The Exchange to be consistent with other exchanges is eliminating 
paragraph (b) and adding new paragraphs (b)(i) and (b)(ii) to separate 
the System Disruptions from Own Motion situations. Consistent with 
other proposals made in this filing, the Exchange proposes modifying 
paragraph (b)(ii) to eliminate the ability of a Senior Official to 
deviate from the Numerical Guidelines contained in the Rule other than 
under very limited circumstances set forth in paragraph (C)(3).
    New paragraph (b)(i) provides a Senior Official of the Exchange the 
ability on his or her own motion, to review and rule on executions that 
result from ``any disruption or a malfunction in the operation of any 
electronic communications and trading facilities of the Exchange, or 
extraordinary market conditions or other circumstances in which the 
nullification of transactions may be necessary for the maintenance of a 
fair and orderly market or the protection of investors and the public 
interest exist.''
    New paragraph (b)(ii) is similar to existing Rule 11890(b) and 
covers other situations where the Exchange may act on its own motion. 
Without modification, the language ``extraordinary market conditions or 
other circumstances * * *'' in current Rule 11890(b) would leave the 
Exchange with broad discretion to deviate from the Numerical Guidelines 
set forth in paragraph (C)(1). Thus, the Exchange proposes narrowing 
the scope of paragraph (b) so that it only permits the Exchange to 
nullify transactions consistent with that paragraph (including at a 
lower Numerical Guideline) if there is a disruption or malfunction in 
the use of the Exchange's system covered by proposed Rule 11890(b)(i).
    For the same reason, the Exchange proposes eliminating the words 
``use or'' from the language in paragraph (b) to make clear that the 
provision only applies to a disruption or malfunction of the Exchange's 
system (and not of an Exchange user's systems).
    Paragraph (b)(ii) gives a Senior Official of the Exchange the 
ability on his or her own motion to review transactions as potentially 
clearly erroneous. Consistent with the goal of achieving more objective 
and standard results, the Exchange proposes deleting language in 
existing paragraph (b) that would allow the Exchange to deviate from 
the Numerical Guidelines contained in paragraph (C)(1). In addition, 
the Exchange proposes to make clear that any Senior Official reviewing 
transactions on his or her own motion must follow the guidelines set 
forth in proposed paragraph (C)(4), if applicable. Accordingly, the 
Exchange proposes to modify paragraph (b)(ii) to state that an officer 
must rely on paragraphs (C)(1)-(4) of Rule 11890 when reviewing 
transactions on his or her own motion.
Additional Conforming Revisions to Paragraphs (C)(1) and (C)(3)
    Based on proposed paragraph (C)(2), the Exchange has proposed 
certain conforming changes to paragraphs (C)(1) and (C)(3) of the 
existing Rule, as described below.
    Under current BX Rule 11890, a transaction may be found to be 
clearly erroneous only if the price of the transaction to buy (sell) 
that is the subject of the complaint is greater than (less than) the 
Reference Price by an amount that equals or exceeds the Numerical 
Guidelines set forth in paragraph (C)(1) of the Rule. The ``Reference 
Price'' is currently defined as ``the consolidated last sale 
immediately prior to the execution(s) under review except for in 
Unusual Circumstances as described in paragraph (C)(2)'' of BX Rule 
11890. The Exchange proposes modifying paragraph (C)(1) consistent with 
the changes described above such that the Exchange shall use the

[[Page 36755]]

consolidated last sale immediately prior to the execution(s) under 
review as the Reference Price except for: (A) Multi-Stock Events 
involving twenty or more securities, as described in proposed paragraph 
(C)(2); (B) transactions not involving a Multi-Stock Event as described 
in proposed paragraph (C)(2) that trigger a trading pause and 
subsequent transactions, as described in proposed paragraph (C)(4), in 
which case the Reference Price shall be determined in accordance with 
that paragraph (C)(4); and (C) in other circumstances, such as, for 
example, relevant news impacting a security or securities, periods of 
extreme market volatility, sustained illiquidity, or widespread system 
issues, where use of a different Reference Price is necessary for the 
maintenance of a fair and orderly market and the protection of 
investors and the public interest. The Exchange also proposes modifying 
paragraph (C)(1) to reduce uncertainty as to the applicability of the 
Numerical Guidelines, by requiring a finding that an execution was 
clearly erroneous if such execution exceeds the Numerical Guidelines, 
subject only to the Additional Factors included in paragraph (C)(3). 
Moreover, the Exchange proposes revising the existing description for 
Multi-Stock Events that is contained on the Numerical Guidelines chart 
to make clear that different Numerical Guidelines apply for Multi-Stock 
Events involving five or more, but less than twenty, securities whose 
executions occurred within a period of five minutes or less. In 
addition, the Exchange proposes adding to the Numerical Guidelines 
chart a row that contains the Numerical Guidelines (30%) for Multi-
Stock Events involving twenty or more securities whose executions 
occurred within a period of five minutes or less.
    The Exchange proposes clarifying paragraph (C)(3) to make clear 
that the additional factors set forth in that paragraph are not 
intended to provide any discretion to an Exchange official to deviate 
from the guidelines that apply to Multi-Stock Events or to transactions 
in securities subject to individual stock trading pauses.
    Finally, the Exchange proposes amending paragraph (c)(1), related 
to appeals of clearly erroneous execution decisions by the Exchange, to 
preserve non-appealability of all joint rulings between the Exchange 
and one or more other market centers. The Exchange believes that 
certainty and consistency is critical to reviews of related executions 
that span multiple market centers. Accordingly, although the Exchange 
has proposed deletion of such language from existing paragraph (C)(3), 
the Exchange proposes adding such language back in to paragraph (c)(1) 
to make clear that joint market rulings are not appealable.
2. Statutory Basis
    Approval of the rule change proposed in this submission is 
consistent with the requirements of the Act and the rules and 
regulations thereunder that are applicable to a national securities 
exchange, and, in particular, with the requirements of Section 6(b) of 
the Act.\5\ In particular, the proposed change is consistent with 
Section 6(b)(5) of the Act,\6\ because it would 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, protect investors and the public interest. The proposed 
rule change is also designed to support the principles of Section 
11A(a)(1) \7\ 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 transparency and uniformity across markets concerning reviews 
of potentially clearly erroneous executions in various contexts, 
including reviews in the context of a Multi-Stock Event involving 
twenty or more securities and reviews resulting from a Trigger Trade 
and any executions occurring immediately after a Trigger Trade but 
before a trading pause is in effect on the Exchange. Further, the 
Exchange believes that the proposed changes enhance the objectivity of 
decisions made by the Exchange with respect to clearly erroneous 
executions.
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    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
    \7\ 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 imposes 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

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.

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 e-mail to rule-comments@sec.gov. Please include 
File No. SR-BX-2010-040 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 No. SR-BX-2010-040. 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, 100 F Street, NE., 
Washington, DC 20549, on official

[[Page 36756]]

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 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 No. SR-BX-2010-040 and should be submitted on or before July 19, 
2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
Florence E. Harmon,
Deputy Secretary.
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    \8\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2010-15550 Filed 6-25-10; 8:45 am]
BILLING CODE 8010-01-P