Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), and Rule 19b-4 thereunder, notice is hereby given that on June 30, 2010, The NASDAQ Stock Market LLC (the “Exchange” or “Nasdaq”) 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 comments on the proposed rule change from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The Exchange is filing with the Commission a proposed rule change to amend NASDAQ Rule 4120(a)(11) to add securities included in the Russell 1000® Index (“Russell 1000”) and specified Exchange Traded Products (“ETP”) to the pilot rule.
The text of the proposed rule change is below. Proposed new language is underlined and proposed deletions are in brackets.
4120. Trading Halts
(a) Authority To Initiate Trading Halts or Pauses
In circumstances in which Nasdaq deems it necessary to protect investors and the public interest, Nasdaq, pursuant to the procedures set forth in paragraph (c):
(1)-(10) No Change.
(11) shall, between 9:45 a.m. and 3:35 p.m., immediately pause trading for 5 minutes in any Nasdaq-listed security when the price of such security moves 10 percent or more within a 5-minute period. At the end of the trading pause, Nasdaq will re-open the security using the Halt Cross process set forth in Nasdaq Rule 4753. In the event of a significant imbalance at the end of a trading pause, Nasdaq may delay the re-opening of a security.
Nasdaq will issue a notification if it cannot resume trading for a reason other than a significant imbalance.
Price moves under this paragraph will be calculated by changes in each consolidated last-sale price disseminated by a network processor over a five minute rolling period measured continuously. Only regular way in-sequence transactions qualify for use in calculations of price moves. Nasdaq can exclude a transaction price from use if it concludes that the transaction price resulted from an erroneous trade.
If a trading pause is triggered under this paragraph, Nasdaq shall immediately notify the single plan processor responsible for consolidation of information for the security pursuant to Rule 603 of Regulation NMS under the Securities Exchange Act of 1934. If a primary listing market issues an individual stock trading pause, Nasdaq will pause trading in that security until trading has resumed on the primary listing market or notice has been received from the primary listing market that trading may resume. If the primary listing market does not reopen within 10 minutes of notification of a trading pause, Nasdaq may resume trading the security.
The provisions of this paragraph shall only apply to securities in the Standard & Poor's 500 Index , the Russell 1000 Index, as well as a pilot list of Exchange Traded Products.
The provisions of this paragraph shall be in effect during a pilot set to end on December 10, 2010.
(b)-(c) No Change.
(b) Not applicable.
(c) Not applicable.
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
The Exchange proposes to amend NASDAQ Rule 4120(a)(11) to add securities included in the Russell 1000® Index (“Russell 1000”) and specified Exchange Traded Products (“ETP”) to the pilot rule. For purposes of this filing, ETPs include Exchange Traded Funds (“ETF”), Exchange Traded Vehicles (“ETV”), and Exchange Traded Notes (“ETN”).
NASDAQ Rule 4120(a)(11) was approved by the Commission on June 10, 2010 on a pilot basis to end on December 10, 2010. Currently, the pilot list of securities is all securities included in the S&P 500® Index (“S&P 500”). As noted in comment letters to the original NASDAQ filing to adopt NASDAQ Rule 4120(a)(11), concerns were raised that including only securities in the S&P 500 in the pilot rule was too narrow. In particular, commenter's noted that securities that experienced volatility on May 6, 2010, including ETFs, should be included in Start Printed Page 39082the pilot. The Exchange agrees with the commenter's 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 ETPs 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 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 ETPs. The Exchange developed the proposed pilot list of ETPs first by identifying all ETPs across multiple asset classes and issuers, including domestic equity, international equity, fixed income, currency, and commodities and futures. The Exchange next excluded the leveraged ETPs and sorted the list by notional consolidated average daily volume (“CADV”) using year-to-date CADV ending May 5, 2010, multiplied by the closing price on May 5, 2010. The Exchange then selected those symbols, including inverse ETPs, that trade over $2,000,000 CADV year to date through May 5, 2010. To ensure that ETPs that track similar benchmarks but that 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 ETPs that have traded below this volume criterion, but that track the same benchmark as an ETP that does meet the volume criterion.
The Exchange believes that the proposed list of ETPs is appropriate because it identifies those ETPs 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 ETP, regardless of the CADV of the ETP, would also be subject to a trading pause trigger. As with the proposal to add the Russell 1000 securities, the Exchange selected the proposed ETPs because it believes that the existing 10% price movement would be an appropriate price movement before invoking a trading pause for ETPs with these characteristics. The Exchange does not believe that the 10% price movement is an appropriate threshold for leveraged ETPs because by definition, leveraged ETPs are based on multiples of price movements in the underlying index. Accordingly, a 10% percent price movement in a leveraged ETP 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 ETPs for now.
As proposed, the list includes broad-based ETPs, which the Exchange recognizes has raised some debate. In particular, concerns have been raised about whether halting an index-based ETP may impact an index-based option or future. However, the Exchange believes that including broad-based ETPs is appropriate so that ETP investors are protected should the component securities experience such volatility that trading in the broad-based ETP 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 ETPs when there is not a similar trading pause in related index-based options or futures.
During the pilot, the Exchange will continue to re-assess whether specific ETPs should be added or removed from the pilot list. 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 Rule 4120(a)(11) to provide that the pilot applies to all securities in the S&P 500 and/or the Russell 1000. The Exchange notes that because there is overlap between the two indices, the “and/or” construction is intended to capture all such securities, regardless of which index the security may be included. The Exchange further proposes to add that the pilot applies to specified ETPs, which are identified in Exhibit 3.
2. Statutory Basis
The statutory basis for the proposed rule change is Section 6(b)(5) of the Securities Exchange Act of 1934 (the “Act”), 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)  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 decisions to pause trading in a security when there are significant price movements.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will result in 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
Written comments on the proposed rule change were neither solicited nor received.
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.Start Printed Page 39083
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:
- Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
- Send an e-mail to email@example.com. Please include File Number SR-NASDAQ-2010-079 on the subject line.
- 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-NASDAQ-2010-079. 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-NASDAQ-2010-079, and should be submitted on or before July 19, 2010.Start Signature
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Florence E. Harmon,
3. Changes are marked to the rule text that appears in the electronic manual of NASDAQ found at http://nasdaqomx.cchwallstreet.com.Back to Citation
4. See Securities Exchange Act Release No. 62252 (June 10, 2010) (SR-NASDAQ-2010-061).Back to Citation
7. The Commission notes that the Exchange has requested accelerated approval of the filing.Back to Citation
8. The Commission believes that a 10-day comment period is reasonable, given the urgency of the matter. It will provide adequate time for comment.Back to Citation
[FR Doc. 2010-16408 Filed 7-6-10; 8:45 am]
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