[Federal Register Volume 76, Number 192 (Tuesday, October 4, 2011)]
[Notices]
[Pages 61429-61432]
[FR Doc No: 2011-25511]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65430; File No. SR-FINRA-2011-054]

Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change To Update
Rule 6121 (Trading Halts Due to Extraordinary Market Volatility) and
Amend Rule 6440 (Trading and Quotation Halt in OTC Equity Securities)

September 28, 2011.
    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 September 27, 2011, Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I,
II, and III below, which Items have been prepared by FINRA. 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\ 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

    FINRA is proposing to update Rule 6121 (Trading Halts Due to
Extraordinary Market Volatility) (i) To reflect changes to market-wide
circuit breaker triggers for NMS stocks, and (ii) amend Rule 6440
(Trading and Quotation Halt in OTC Equity Securities) to provide
specifically for a halt in trading in all OTC Equity Securities when a
market-wide circuit breaker is in effect for NMS stocks.
    The text of the proposed rule change is available on FINRA's Web
site at http://www.finra.org, at the principal office of FINRA 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, FINRA 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. FINRA 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
    FINRA is proposing to amend Rule 6121 (Trading Halts Due to
Extraordinary Market Volatility) to update the methodology for
determining when to halt trading due to extraordinary market volatility
and Rule 6440 (Trading and Quotation Halt in OTC Equity Securities) to
provide specifically that FINRA will halt trading in all OTC Equity
Securities pursuant to its authority under Rule 6440(a)(3) \3\ until
the market-wide circuit breaker no longer is in effect for NMS
stocks.\4\ FINRA is proposing this rule change in consultation with the
self-regulatory organizations (``SROs'') and staffs of the Commission
and the Commodity Futures Trading Commission (``CFTC'').
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    \3\ Rule 6440(a)(3) provides that FINRA may halt quoting and
trading in an OTC Equity Security if it determines that an
``extraordinary event'' has occurred or is ongoing that has had a
material effect on the market for the OTC Equity Security or has
caused or has the potential to cause major disruption to the
marketplace and/or significant uncertainty in the settlement and
clearance process.
    \4\ On October 7, 2008, FINRA filed a Uniform Practice Code
Advisory that provides notice that FINRA will halt trading in OTC
Equity Securities under Rule 6440(a)(3) (formerly Rule 6460(a)(3))
if there is a market-wide halt in trading in NMS stocks. See
Securities Exchange Act Release No. 58754 (October 8, 2008); 73 FR
61178 (October 15, 2008) (Notice of Filing and Immediate
Effectiveness of SR-FINRA-2008-049) (``OTC Circuit Breaker
Filing''). In the OTC Circuit Breaker Filing, FINRA stated that
FINRA considers a market-wide halt in the trading of exchange-listed
securities to be an ``extraordinary event'' under paragraph (a)(3)
and, therefore, FINRA will halt quoting and trading in OTC Equity
Securities under these circumstances. The instant proposed rule
change codifies this interpretation in the text of FINRA Rule 6440.
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    Since May 6, 2010, when the markets experienced excessive
volatility in an abbreviated time period, i.e., the ``flash crash,''
FINRA and the national securities exchanges (``other SROs'') have
implemented market-wide measures designed to restore investor
confidence by reducing the potential for excessive market volatility.
The measures adopted include pilot plans for stock-by-stock trading
pauses \5\ and related changes to the clearly erroneous rules.\6\ In
addition, on April 5, 2011, FINRA and the other SROs filed a plan
pursuant to Rule 608 of SEC Regulation NMS to address extraordinary
market volatility (the ``Limit Up-Limit Down Plan'').\7\ As proposed,
the Limit Up-Limit Down Plan is designed to prevent trades in
individual NMS stocks from occurring outside specified price bands.
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    \5\ See FINRA Rule 6121.01 (Trading Pauses); See Securities
Exchange Act Release No. 62251 (June 10, 2010), 75 FR 34183 (June
16, 2010) (Order Approving SR-FINRA-2010-025); See Securities
Exchange Act Release No. 62883 (September 10, 2010); 75 FR 56608
(September 16, 2010) (Order Approving SR-FINRA-2010-033); See
Securities Exchange Act Release No. 64735 (June 23, 2011), 76 FR
38243 (June 29, 2011) (Order Approving SR-FINRA-2011-023).
    \6\ See FINRA Rule 11892 (Clearly Erroneous Transactions in
Exchange-Listed Securities); See Securities Exchange Act Release No.
62885 (September 10, 2010); 75 FR 56641 (September 16, 2010) (Order
Approving SR-FINRA-2010-032); See Securities Exchange Act Release
No. 65101 (August 11, 2011), 76 FR 51097 (August 17, 2011) (Order
Approving SR-FINRA-2011-039).
    \7\ See Securities Exchange Act Release No. 64547 (May 25,
2011), 76 FR 31647 (June 1, 2011).
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    The Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues
(``Committee'') has recommended that, in addition to the initiatives
already adopted or proposed, the SROs consider reforming the existing
market-wide circuit breakers. Among other things, the Committee noted
that the interrelatedness of today's highly electronic markets warrants
a review of the present operation of the system-wide circuit breakers
now in place. Specifically, the Committee recommended that the SROs
consider replacing the Dow Jones Industrial Average (``DJIA'') with the
S&P 500[reg] Index (``S&P 500''), revising the 10%, 20% and 30% decline
percentages, reducing the length of trading halts, and allowing halts
to be triggered up to 3:30 p.m.\8\
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    \8\ See Summary Report of the Committee, Recommendations
Regarding Regulatory Responses to the Market Events of May 6, 2010
(February 18, 2011).
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    FINRA and the other SROs have taken into consideration the
Committee's recommendations and, with some modifications, are proposing
changes to address market-wide circuit breakers. FINRA believes that
this proposal will provide for a more meaningful measure in today's
faster, more electronic markets, of when to halt stocks on a market-
wide basis as a result of rapid market declines.
Background
    In 1988, the SEC approved several SRO rule proposals that provided
for market-wide circuit breakers at specified levels to promote
stability and investor confidence during a period of significant
stress, along with a policy statement by FINRA (then known as NASD)
that provided trading halt authority in the event of severe market
declines.\9\ These measures were adopted

as part of an effort by the securities and futures markets to implement
a coordinated means to address potentially destabilizing market
volatility.\10\
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    \9\ See Securities Exchange Act Release No. 26198 (October 19,
1988), 53 FR 41637 (October 24, 1988) (Order Approving SR-NASD-88-
46). FINRA's Policy Statement on Market Closings (``Policy
Statement'') provided, among other things, that when other major
securities markets initiate market-wide trading halts in response to
extraordinary market conditions, FINRA will, upon SEC request, halt
domestic trading in all securities in equity and equity-related
securities in the OTC market. As part of the approval order, the SEC
requested that FINRA impose a trading halt as quickly as practicable
whenever the NYSE and other equity markets have suspended trading.
The language in the Policy Statement was subsequently codified, on a
pilot basis, in Interpretive Material (IM) 4120-3 (later renumbered
IM-4120-4). See Securities Exchange Act Release No. 39846 (April 9,
1998), 63 FR 18477 (April 15, 1998) (Order Approving SR-NASD-98-27).
The IM-4120-3 pilot, which also was extended numerous times, expired
on April 30, 2002.
    \10\ See Order Approving SR-NASD-88-46.
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    On October 7, 2008, FINRA permanently adopted a new rule--Rule
6121--that authorizes FINRA to halt over-the-counter trading in NMS
stocks if other major U.S. securities markets initiate market-wide
trading halts in response to their rules or extraordinary market
conditions, or if otherwise directed by the SEC.\11\ Rule 6121 provides
for a halt in trading otherwise than on an exchange in any NMS stock to
promote stability and investor confidence during a period of
significant stress.
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    \11\ See Securities Exchange Act Release No. 58753 (October 8,
2008), 73 FR 61177 (October 15, 2008) (Order Approving SR-FINRA-
2008-048).
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    As the Commission noted in the Order Approving SR-NASD-88-46,
circuit breakers were intended to enable market participants to
establish an equilibrium between buying and selling interest and to
ensure that market participants have an opportunity to become aware of
and respond to significant price movements. Importantly, the circuit
breakers were not intended to prevent markets from adjusting to new
price levels; rather, they provide a speed bump for extremely rapid
market declines.\12\
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    \12\ See Order Approving SR-NASD-88-46.
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Proposed Amendments
    As noted above, FINRA and the other SROs are proposing amendments
to their respective rules to take into consideration the
recommendations of the Committee, and to provide for more meaningful
measures in today's markets in determining when to halt trading in
stocks on a market-wide basis. Accordingly, FINRA is proposing, in
coordination with the other SROs, to update the methodology for
determining the trigger for market-wide circuit breakers for trading
otherwise than on an exchange in all NMS stocks and to provide
specifically that FINRA will halt trading in all OTC Equity Securities
until the market-wide circuit breaker no longer is in effect for NMS
stocks. FINRA's proposed parameters and thresholds for market-wide
circuit breakers for trading otherwise than on an exchange would track
those being proposed by the other SROs.
    First, FINRA and the other SROs propose to use the S&P 500 as the
benchmark index for the market-wide circuit breakers.\13\ FINRA
believes that because the S&P 500 is based on the trading prices of 500
stocks, it represents a broader base of securities against which to
measure whether extraordinary market-wide volatility is occurring.
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    \13\ The current rules of the exchanges use the DJIA, not the
S&P 500. The Committee noted that using an index that correlates
closely with derivative products, such as the E-Mini and SPY, will
allow for a better cross-market measure of market volatility.
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    Second, FINRA proposes to reference the triggers by the primary
markets that establish a Level 1 Market Decline of 7%, a Level 2 Market
Decline of 13% and a Level 3 Market Decline of 20%. As demonstrated by
the May 6, 2010 flash crash, the SROs believe that the current Level 1
10% decline may be too high a threshold before determining whether to
halt trading across all securities. Since adoption, the exchanges have
halted only once, on October 27, 1997.\14\ Accordingly, to reflect the
potential that a lower, yet still significant decline may warrant a
market-wide trading halt, the SROs are proposing to lower the decline
percentage thresholds.
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    \14\ At that time, the triggers were based on absolute declines
in the DJIA (350 point decrease for a Level 1 halt and 550 point
decrease for a Level 2 halt).
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    FINRA and the other SROs would halt trading based on a Level 1 or a
Level 2 Market Decline only once per day. For example, if a Level 1
Market Decline was to occur and trading otherwise than on an exchange
in all NMS stocks and all OTC Equity Securities was halted, following
the reopening of trading on the primary listing market or the
commencement of trading by another national securities exchange, FINRA
would not halt market-wide trading again unless a Level 2 Market
Decline was to occur. Likewise, following the resumption of trading
after a Level 2 Market Decline, FINRA would not halt trading otherwise
than on an exchange in all NMS stocks and all OTC Equity Securities
again unless a Level 3 Market Decline was to occur, at which point all
trading otherwise than on an exchange in all NMS stocks and all OTC
Equity Securities would be halted until the primary listing market
opens the next trading day. As proposed, a Level 1 or a Level 2 Market
Decline may trigger a market-wide circuit breaker after 9:30 a.m.
Eastern and up to and including 3:25 p.m. Eastern, or in the case of an
early scheduled close, 12:25 p.m. Eastern.\15\ The proposed rule would
require that members halt quoting and trading otherwise than on an
exchange in any NMS stock as of the time the market-wide trading halt
is publicly disseminated.
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    \15\ As the markets experienced on May 6, 2010, even if the
Level 1 decline had occurred that day, because the market decline
occurred after 2:30 p.m., it would not have triggered a market-wide
circuit breaker under the other SROs' existing rules. The Committee
recommended that trading halts be triggered up to 3:30 p.m and FINRA
and the other SROs agree that the proposed amendments must strike
the appropriate balance between permitting trading halts as late in
the day as feasible, without interrupting the closing process. The
SROs are proposing 3:25 p.m. as the cut-off time so that there is
time following the 15-minute trading halt for the markets to reopen
before the 3:45 cut-off for entry and cancellation of certain orders
under other SROs' rules.
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    Third, as proposed, a Level 1 or a Level 2 Market Decline would
result in a market-wide circuit breaker in trading otherwise than on an
exchange in all NMS stocks and all OTC Equity Securities for the
duration of 15 minutes. When a primary listing market halts trading in
all NMS stocks for a Level 1 or a Level 2 Market Decline, FINRA's halt
on trading otherwise than on an exchange in all NMS stocks would
continue until trading has resumed on the primary listing market. If,
however, the primary listing market does not reopen trading within 15
minutes following the end of the 15-minute halt period, FINRA may
permit the resumption of trading otherwise than on an exchange in that
security if trading in the security has commenced on at least one other
national securities exchange.
    Following a market-wide circuit breaker due to a Level 1 or a Level
2 Market Decline, trading in OTC Equity Securities would remain halted
until the market-wide circuit breaker no longer is in effect for NMS
stocks, even if some individual NMS stocks have not yet resumed
trading, for example, due to significant imbalances in those
securities. The proposed rule would require that members halt quoting
and trading in all OTC Equity Securities as of the time the market-wide
trading halt in NMS stocks is publicly disseminated.
    FINRA and the other SROs believe that the proposed percentage
thresholds--coupled with the proposed duration of the market-wide
circuit breakers for Level 1 and Level 2 Market Declines--allows for
trading halts for serious market declines, while at the

same time minimizing disruption to the markets by allowing for trading
to continue after the halt. FINRA and the other SROs believe that in
today's markets, where trading information may travel at a speed of
micro-seconds, a 15-minute trading halt for a Level 1 and a Level 2
Market Decline strikes the appropriate balance between halting trading
for market participants to assess the market and minimizing the time
needed for an effective halt.
    Upon the occurrence of a Level 3 Market Decline occurring at any
time during the trading day, FINRA would halt trading otherwise than on
an exchange in all NMS stocks until the primary listing market opens
the next trading day. As is the case with a Level 1 or Level 2 Market
Decline, upon the occurrence of a Level 3 Market Decline, the proposed
rule would require members to halt quoting and trading in all OTC
Equity Securities as of the time the market-wide trading halt in NMS
stocks is publicly disseminated. FINRA would halt trading in all OTC
Equity Securities until such time that the market-wide circuit breaker
no longer is in effect for NMS stocks, even if some individual NMS
stocks have not yet resumed trading, for example, due to significant
imbalances in those securities.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\16\ which requires, among
other things, that FINRA rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade and, in general, to protect investors and the
public interest. Specifically, this proposal promotes uniformity
concerning when and how to halt trading in all stocks as a result of
extraordinary market volatility. FINRA believes that the proposed rule
change is consistent with the market-wide circuit breaker rules of
other SROs and will promote the goal of investor protection by further
providing for a coordinated means to address potentially destabilizing
market volatility.
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    \16\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA 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.

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

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

    Within 45 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 or disapprove 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
changes to the market-wide circuit breaker regime are consistent with
the Act. The Commission specifically requests comment on the following:
     As discussed above, the proposed rule change would narrow
the percentage market declines that would trigger a market-wide halt in
trading. How would the proposed changes interact with the existing
single-stock circuit breaker pilot program \17\ or, if approved, the
proposed NMS Plan to establish a limit-up/limit-down mechanism for
individual securities? \18\
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    \17\ See Securities Exchange Act Release No. 64735 (June 23,
2011), 76 FR 38243 (June 29, 2011) (SR-BATS-2011-016; SR-BYX-2011-
011; SR-BX-2011-025; SR-CBOE-2011-049; SR-CHX-2011-09; SR-EDGA-2011-
15; SR-EDGX-2011-14; SR-FINRA-2011-023; SR-ISE-2011-028; SR-NASDAQ-
2011-067; SR-NYSE-2011-21; SR-NYSEAmex-2011-32; SR-NYSEArca-2011-26;
SR-NSX-2011-06; SR-Phlx-2011-64) (approving the ``Phase III Pilot
Program''). The Phase III Pilot Program has been extended through
January 2012. See, e.g., Securities Exchange Act Release 65094
(August 10, 2011), 76 FR 50779 (August 16, 2011) (SR-NASDAQ-2011-
011).
    \18\ See Securities Exchange Act Release No. 64547 (May 25,
2011), 76 FR 31647 (June 1, 2011).
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     To what extent could the concurrent triggering of single
stock circuit breakers in many S&P 500 Index stocks lead to
difficulties in calculating the index? Would the triggering of many
single stock circuit breakers in a general market downturn cause the
index calculation to become stale and thereby delay the triggering of
the market-wide circuit breaker?
     Should the market-wide circuit breaker be triggered if a
sufficient number of single-stock circuit breakers or price limits are
triggered, and materially affect calculations of the S&P 500 Index?
     Should market centers implement rules that mandate
cancellation of pending orders in the event a market-wide circuit
breaker is triggered? If so, should such a rule require cancellation of
all orders or only certain order types (e.g., limit orders)? Should all
trading halts trigger such cancellation policies or should the
cancellation policies apply only to a Level 3 Market Decline?
     Should some provision be made to end the regular trading
session if a market decline suddenly occurs after 3:25 p.m. but does
not reach the 20% level?
     In the event of a Level 3 Market Decline, should some
provision be made for the markets to hold a closing auction?
     Should the primary market have a longer period (e.g., 30
minutes) to reopen trading following a Level 2 Market Decline before
trading resumes in other venues?
     In the event of a Level 3 Market Decline, should the
markets wait for the primary market to reopen trading in a particular
security on the next trading day before trading in that security
resumes?
    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<EMAIL_ADDRESS>Please include
File Number SR-FINRA-2011-054 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-FINRA-2011-054. 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
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 FINRA. 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 publicly available. All submissions should refer to File Number
SR-FINRA-2011-054 and should be submitted on or before October 25,
2011.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-25511 Filed 10-3-11; 8:45 am]
BILLING CODE 8011-01-P