Self-Regulatory Organizations; BATS Exchange, Inc.; BATS Y-Exchange, Inc.; NASDAQ OMX BX, Inc.; Chicago Board Options Exchange, Incorporated; Chicago Stock Exchange, Inc.; EDGA Exchange, Inc.; EDGX Exchange, Inc.; Financial Industry Regulatory Authority, Inc.; International Securities Exchange LLC; The NASDAQ Stock Market LLC; New York Stock Exchange LLC; NYSE Amex LLC; NYSE Arca, Inc.; National Stock Exchange, Inc.; NASDAX OMX PHLX LLC; Order Approving Proposed Rule Changes Relating To Expanding the Pilot Rule for Trading Pauses Due to Extraordinary Market Volatility to All NMS Stocks

I. Introduction

On May 4, 2011 and May 5, 2011, each of BATS Exchange, Inc. (“BATS”), BATS Y-Exchange, Inc. (“BYX”), NASDAQ OMX BX, Inc. (“BX”), Chicago Board Options Exchange, Incorporated (“CBOE”), Chicago Stock Exchange, Inc. (“CHX”), 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”), New York Stock Exchange LLC (“NYSE”), NYSE Amex LLC (“NYSE Amex”), NYSE Arca, Inc. (“NYSE Arca”), National Stock Exchange, Inc. (“NSX”), and NASDAX 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”), and Rule 19b-4 thereunder, proposed rule changes to amend certain of their respective rules to expand the trading pause pilot in individual stocks to include all remaining NMS stocks, but to require wider percentage price moves before a trading pause is triggered for the newly added securities. The current trading pause pilot applies only to securities that are included in the S&P 500® Index (“S&P 500”), the Russell 1000® Index (“Russell 1000”) or a select group of Exchange Traded Products (“ETPs”). The proposed rule changes were published for comment in the Federal Register on May 12, 2011. The Commission received no comments on the proposed rule changes. On June 20, 2011 and June 21, 2011, the Exchanges and FINRA filed amendments to their respective proposed rule changes. This order approves the proposed rule changes, as amended.

II. Description of the Proposals

On May 6, 2010, the U.S. equity markets experienced a severe disruption. Among other things, the prices of a large number of individual securities suddenly declined by significant amounts in a very short time period, before suddenly reversing to prices consistent with their pre-decline levels. This severe price volatility led to a large number of trades being executed at temporarily depressed prices, including many that were more than 60% away from pre-decline prices and were broken by the Exchanges and FINRA. The Commission is concerned that events such as those that occurred on May 6 can seriously undermine the integrity of the U.S. securities markets. Accordingly, it has worked over the past year to identify and assess the causes and contributing factors of the May 6 market disruption and to fashion policy responses that will help prevent a recurrence.

On June 10, 2010, the Commission granted accelerated approval for proposed rule changes by the Exchanges and FINRA to pause trading during periods of extraordinary market volatility in S&P 500 stocks. On September 10, 2010, the Commission approved the Exchanges' and FINRA's proposals to add securities included in the Russell 1000, as well as specified ETPs, to the pilot.

The rules require the primary listing market for a security (“Listing Market”) to issue a five-minute trading pause if the transaction price of the security moves ten percent or more from a price in the preceding five-minute period. The Listing Market is required to notify the other Exchanges, FINRA and market participants of the imposition of a trading pause by immediately disseminating a special indicator over the Consolidated Tape. Under the rules, once the Listing Market issues a trading pause, the other Exchanges and FINRA are required to pause trading in the security on their markets.

At the end of the five-minute pause, the Listing Market reopens trading in the security in accordance with its procedures for doing so. Trading resumes on other Exchanges and in the over-the-counter market once trading has resumed on the Listing Market. In the event of a significant imbalance on the Listing Market at the end of the trading pause, the Listing Market may delay reopening. If the Listing Market has not reopened within ten minutes from the initiation of the trading pause, however, the other Exchanges and FINRA may resume trading.

Under the current proposal (the “Phase III Circuit Breaker Pilot”), the Exchanges and FINRA propose to include all remaining NMS stocks (“Phase III securities”) in the existing pilot program shortly after the Commission approves the proposed rule changes. The Exchanges and FINRA believe that adding these securities to the pilot would have the beneficial effect of applying the circuit breaker's protections against excessive volatility to a larger group of securities, while at the same time allowing the opportunity, during the pilot period, for continued review of the operation of the circuit breaker and an assessment of whether the parameters should be further expanded or modified.

In addition, the Exchanges and FINRA propose that, for Phase III securities, the price move required to trigger a trading pause shall be 30% or more for such securities priced at $1 or higher, and 50% or more for such securities priced less than $1. The Exchanges and FINRA believe that these percentages are commensurate with the characteristics shared by the Phase III securities within the applicable range given that the proposed additional stocks are more likely to be less liquid securities or securities with lower trading volumes. Accordingly, the Exchanges and FINRA believe that broader price move percentages would be appropriate for the Phase III securities, and would promote the objectives of the pilot by reducing the negative impact of unanticipated price movements in a security. The Exchanges and FINRA believe that applying a broader percentage to securities priced less than $1 compared to those priced above $1 is appropriate given that lower-priced securities may tend to be more volatile, and price movements of lower-priced securities equate to a higher percentage move than a similar price change for a higher-priced security.

The Exchanges and FINRA also propose to adjust the market maker quoting requirements, as necessary, to assure they remain within a narrower range than the new thresholds. Currently, market makers may fulfill their quoting obligations by maintaining a quote 30% away from the National Best Bid and Offer (“NBBO”) in a security that is not included in the S&P 500, Russell 1000, or in the list of ETPs. Accordingly, the Exchanges and FINRA propose to revise this quoting obligation for Phase III securities trading at or above $1 (for which the proposed trading pause trigger is 30%) to 28% away from the NBBO. The quoting obligation for Phase III securities trading below $1 (which would be subject to the 50% threshold) would remain unchanged.

III. Discussion and Commission Findings

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. In particular, the Commission finds that the proposals submitted by the Exchanges are consistent with Section 6(b)(5) of the Act, which requires, among other things, that the rules of national securities exchanges be designed to prevent fraudulent and manipulative acts and practices, 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.

Additionally, the Commission finds that the FINRA proposal is consistent with Section 15A(b)(6) of the Act, which requires, among other things, that FINRA rules 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. The Commission also believes that the proposals submitted by the Exchanges and FINRA are consistent with Section 11A(a)(1) of the Act in that they seek to assure fair competition among brokers and dealers and among exchange markets.

The proposed rule changes will expand the trading pause pilot to include all remaining NMS stocks, but will apply wider price move percentages to the newly added securities to reflect their general higher volatility, lower liquidity, and other trading characteristics. The Commission believes that the proposed trigger percentages of 30% and 50% are reasonable and appropriate for the purposes of the pilot. The Commission also believes that expanding the market-wide trading pauses to include all remaining NMS stocks will serve to reduce the risk of potentially destabilizing price volatility and thereby help promote the goals of investor protection and fair and orderly markets. Further, expanding the pilot will promote uniformity across markets concerning decisions to pause trading in a security when there are significant price movements.

Finally, on April 5, 2011, thirteen of the Exchanges and FINRA filed a proposed NMS Plan to create a market-wide limit up-limit down mechanism to address extraordinary market volatility in NMS stocks. By its terms, the circuit breaker pilot will expire on the earlier of August 11, 2011, or the date on which this limit up-limit down mechanism, if approved by the Commission, applies.

The Commission also believes that the proposed change to the market maker quoting obligations is consistent with the Act. This aspect of the proposal would adjust the market maker quoting obligations to assure they remain within a narrower range than the new trading pause percentage thresholds for Phase III securities, which is consistent with the original design of the market maker quoting obligations.

IV. Conclusion

It Is Therefore Ordered, pursuant to Section 19(b)(2) of the Act, that the proposed rule changes (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) be, and hereby are, approved, as amended.