Notice2022-05980
Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1 To Adopt on a Permanent Basis the Pilot Program for Market-Wide Circuit Breakers in Rule 7.12
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
March 22, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 55 (Tuesday, March 22, 2022)</title>
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[Federal Register Volume 87, Number 55 (Tuesday, March 22, 2022)]
[Notices]
[Pages 16286-16296]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-05980]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-94441; File No. SR-NYSE-2021-40]
Self-Regulatory Organizations; New York Stock Exchange LLC;
Notice of Filing of Amendment No. 1 and Order Granting Accelerated
Approval of a Proposed Rule Change, as Modified by Amendment No. 1 To
Adopt on a Permanent Basis the Pilot Program for Market-Wide Circuit
Breakers in Rule 7.12
March 16, 2022.
I. Introduction
On July 2, 2021, New York Stock Exchange LLC (``NYSE'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposal to make its rules governing the operation of Market-Wide
Circuit Breakers (``MWCB'') permanent. The proposed rule change was
published for comment in the Federal Register on July 22, 2021.\3\ On
August 27, 2021, the Commission designated a longer period within which
to either approve the proposed rule changes, disapprove the proposed
rule changes, or institute proceedings to determine whether to
disapprove the proposed changes.\4\ On September 30, 2021, the
Commission instituted proceedings to determine whether to approve or
disapprove the proposed rule change.\5\ On January 7, 2022, the
Commission again designated a longer period within which to either
approve the proposed rule changes, disapprove the proposed rule
changes, or institute proceedings to determine whether to disapprove
the proposed changes.\6\ On February 28, 2022, the Exchange filed
Amendment No. 1 to the proposed rule change.\7\ The
[[Page 16287]]
Commission has received no comments on the proposed rule change. The
Commission is approving the proposed rule change, as modified by
Amendment No. 1, on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 92428 (July 16,
2021), 86 FR 38776 (SR-NYSE-2021-40) (``Notice'').
\4\ See Securities Exchange Act Release No. 92785A, 86 FR 50202
(September 7, 2021).
\5\ See Securities and Exchange Act Release No. 93212, 86 FR
50566 (October 5, 2021). The Commission instituted these proceedings
to request comments regarding the Exchange's proposed testing
requirement, which did not contemplate an ongoing assessment of
whether the MWCB design remains appropriate over time, nor require
the Exchange to participate in testing.
\6\ See Securities Exchange Act Release No. 93933, 87 FR 2189
(January 13, 2022).
\7\ In Amendment No. 1, the Exchange revised the proposal to:
(1) Explain options market enhancements following the March 2020
MWCBs events to eliminate latency in their responses to MWCB halt
messages; (2) reflect that the pilot period of the Rule 7.12 (MWCB
Rule) expires on March 18, 2022; (3) require that the Exchange
participate in all industry-wide tests of the MWCBs; (4) require
members participating in MWCB tests to notify the Exchange of any
inability to process messages relating to the MWCB test, records of
which would be retained by the Exchange along with records of the
Exchange's own participation in the test; (5) require the Exchange,
along with the other SROs, to prepare and submit a report containing
an analysis of any MWCB event and recommendations to the Commission
within six months of a halt being triggered following a Level 1,
Level 2, or Level 3 Market Decline; and (6) require the Exchange,
together with the other SROs, to review the MWCB in the event of 5%
market declines and any time an SRO makes changes to MWCB reopening
processes, and provide a report to the Commission concerning such
review should a modification to the MWCB be recommended. Amendment
No. 1 is available on the Commission's website at <a href="https://www.sec.gov/comments/sr-nyse-2021-40/srnyse202140.htm">https://www.sec.gov/comments/sr-nyse-2021-40/srnyse202140.htm</a>.
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II. Background
MWCBs are coordinated, cross-market trading halts designed to
operate during extreme market-wide declines to provide opportunities
for markets and market participants to assess market conditions and
systemic stress. Each cash equity exchange and options exchange have
rules that govern the operation of these MWCBs. The Commission first
approved MWCB rules on a pilot basis in 1988 \8\ following the market
crash in October 1987.\9\ These rules provided for a one-hour halt
across all securities markets if the Dow Jones Industrial Average
(``DJIA'') declined 250 points from the previous day's closing level
and for a two-hour halt if the DJIA declined 400 points from the
previous day's close.\10\ The Commission approved amendments to MWCB
rules in July 1996 to reduce the duration of the 250- and 400- point
halts to 30 minutes and 60 minutes from one hour and two hours,
respectively.\11\ Subsequently, the Commission approved modifications
to raise the point triggers to 350 points and 550 points in 1997.\12\
In its order approving these changes, the Commission noted the
importance of revisiting these triggers over time and stated that it
would work with the markets and the Commodities and Futures Trading
Commission (``CFTC'') to develop procedures for reevaluating the
triggers on at least an annual basis.\13\
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\8\ See Securities Exchange Act Release Nos. 26198 (October 19,
1988), 53 FR 41637 (October 24, 1988) (approving MWCB rules for
Amex, CBOE, NASD, and NYSE); 26218 (October 26, 1988), 53 FR 44127
(November 1, 1988) (approving rules for CHX); 26357 (December 14,
1988), 53 FR 51182 (December 20, 1988) (approving rules for BSE);
26368 (December 16, 1988), 53 FR 51942 (December 23, 1988)
(approving rules for PSE); 26386 (December 22, 1988), 53 FR 52904
(December 29, 1998) (approving rules for PHLX); and 26440 (January
10, 1989), 54 FR 1830 (January 17, 1989) (approving rules for CSE).
\9\ The events of October 19, 1987 are described more fully in a
report by the staff of the Commission's Division of Market
Regulation. See ``The October 1987 Market Break, A Report by the
Division of Market Regulation'' (February 1988).
\10\ See supra note 8.
\11\ See Securities Exchange Act Release Nos. 37457 (July 19,
1996), 61 FR 39176 (July 26, 1996) (SR-NYSE-96-09); 37458 (July 19,
1996), 61 FR 39167 (July 26, 1996) (SR-Amex-96-13); and 37459 (July
19, 1996), 61 FR 39172 (July 26, 1996) (SR-BSE-96-4; SR-CBOE-96-27;
SR-CHX-96-20; SR-Phlx-96-12).
\12\ See Securities Exchange Act Release No. 38221 (January 31,
1997), 62 FR 5871 (February 7, 1997).
\13\ See id. at 5875.
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An MWCB was triggered for the first time on October 27, 1997, when
the market dropped 350 points, representing a decline of 4.5%.\14\
After a 30-minute halt, the market declined again, reaching the 550-
point trigger, representing a total decline of 7%.\15\ After studying
the events of that day, the Commission approved revised MCWB rules on a
pilot basis. These rules established trading halts following one-day
declines in the DJIA of 10%, 20%, and 30%, rather than at specific
point declines, to be calculated at the beginning of each calendar
quarter using the average closing value of the DJIA for the previous
month to establish specific point values for the quarter.\16\ Under
these revised MWCB rules, trading would halt for one hour if the DJIA
declined 10% prior to 2:00 p.m., and for one-half hour if the DJIA
declined 10% between 2:00 p.m. and 2:30 p.m.\17\ If the DJIA declined
by 10% at or after 2:30 p.m., trading would not halt at the 10%
level.\18\ If the DJIA declined 20% prior to 1:00 p.m., trading would
halt for two hours; trading would halt for one hour if the DJIA
declined 20% between 1:00 p.m. and 2:00 p.m., and for the remainder of
the day if a 20% decline occurred at or after 2:00 p.m.\19\ If the DJIA
declined 30% at any time, trading will halt for the remainder of the
day.\20\
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\14\ The events of October 27, 1997 are described more fully in
a report by the staff of the Commission's Division of Market
Regulation. See ``Trading Analysis Findings of October 27 and
October 28, 1997'' (Sept. 1998), available at <a href="https://www.sec.gov/news/studies/tradrep.htm#FOOTNOTE_24">https://www.sec.gov/news/studies/tradrep.htm#FOOTNOTE_24</a>.
\15\ See id.
\16\ See Securities Exchange Act Release No. 39846 (April 9,
1998), 63 FR 18477 (April 15, 1998), at 18478.
\17\ See id.
\18\ See id.
\19\ See id.
\20\ See id.
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On May 6, 2010, the markets sharply dropped 9%, but did not reach
the 10% MWCB, before rebounding (the ``Flash Crash''). Following these
events, in 2012 the Commission approved several modifications to MWCB
rules (the ``Pilot Rules'') that were designed to make them more
meaningful in high-speed, electronic trading environments.\21\ The MWCB
triggers were lowered to 7% (``Level 1''), 13% (``Level 2''), and 20%
(``Level 3''); the DJIA was replaced with the S&P 500[supreg] Index
(``S&P 500'') as the reference index; the recalculation of the values
of the triggers was changed to daily instead of each calendar quarter;
the length of the trading halts associated with each market decline
level was shortened from 30 minutes to 15 minutes; and the times when a
trading halt may be triggered were modified.\22\ Specifically, these
rules provided that if a Level 1 or Level 2 trigger was hit before 3:25
p.m., trading would halt for 15 minutes, and if a Level 1 or Level 2
trigger was hit at or after 3:25 p.m., trading would continue, unless a
Level 3 trigger was hit.\23\ If a Level 3 trigger was hit at any time,
trading would halt for the rest of the day.\24\
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\21\ See Securities Exchange Act Release No. 67090 (May 31,
2012), 77 FR 33531 (June 6, 2012).
\22\ See id. at 33532.
\23\ See id.
\24\ See id.
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The modified thresholds in the Pilot Rules were not triggered for
the first time until March 2020 when MWCB Level 1 halts occurred on
March 9, 12, 16, and 18, 2020.\25\ In response to these events, a task
force comprised of the SROs and industry participants \26\ reviewed the
events and concluded that the MWCBs had performed as expected and
recommended that no changes be made to the MWCB rules.\27\ In 2020, the
SROs conducted a more complete study of the design and operation of the
Pilot Rules and the National Market System (``NMS'') Plan to Address
Extraordinary Market Volatility (``Limit Up-Limit Down'' or ``LULD'')
during the period of volatility in the Spring of 2020. The SROs created
an MWCB ``Working Group'' composed of SRO
[[Page 16288]]
representatives and industry advisers that included members of the
advisory committees to both the LULD Plan and the NMS Plans governing
the collection, consolidation, and dissemination of last-sale
transaction reports and quotations in NMS Stocks. The Working Group
prepared a study (the ``Study''),\28\ which includes a timeline of the
MWCB events in March 2020; a summary of the analysis and
recommendations of the MWCB Task Force; an evaluation of the operation
of the Pilot Rules during the March 2020 events; an evaluation of the
design of the current MWCB system; and the Working Group's conclusions
and recommendations.
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\25\ For a full description of the trading halts on March 9, 12,
14, and 16, see Notice at 38777-78.
\26\ This task force was formed in late 2019, prior to the MWCB
events in 2020, to evaluate the operation and design of the MWCB
mechanism. See Securities Exchange Act Release No. 85560 (April 9,
2019), 84 FR 15247 (April 15, 2019) (SR-NYSE-2019-19). The task
force made two recommendations after reviewing the MWCB events in
2020: (1) Futures markets should change the S&P 500 futures market
volatility threshold from 5% to 7% to better align with the
securities market MWCB Level 1 threshold of 7% and 2) futures
markets should resume trading in S&P 500 futures contracts 5 minutes
before end of MWCB halt. The futures markets have made changes to
address these two recommendations, as discussed further below. See
supra note 96.
\27\ See id. at 38778.
\28\ See ``Report of the Market-Wide Circuit Breaker (``MWCB'')
Working Group Regarding the March 2020 MWCB Events,'' submitted
March 31, 2021 (the ``Study''), attached hereto as Exhibit 3 [sic]
and available at Exhibit 3 [sic] (<a href="http://sec.gov">sec.gov</a>).
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III. Description of the Proposal, as Modified by Amendment No. 1
Based on the conclusions and recommendations reached by the Working
Group after analyzing how the MWCBs performed in March 2020, the
Exchange is proposing to transition the Pilot Rules \29\ to operate on
a permanent basis, as modified by Amendment No. 1.
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\29\ NYSE Rule 7.12.
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IV. Discussion and Commission Findings
After careful consideration, the Commission finds that the
Exchange's proposed rule change is 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
Exchange's proposed rule change is consistent with Section 6(b)(5) of
the Act,\30\ which requires that the rules of an exchange be designed,
among other things, 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, and to remove impediments to and perfect
the mechanism of a free and open market and a national market
system.\31\
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\30\ 15 U.S.C. 78f(b)(5).
\31\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f). See also, supra
Sections IV(A)(2)(f), IV(B), IV(C), and IV(D).
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In its proposal to make the MWCB rules permanent in their current
form, the Exchange considered whether the MWCBs functioned as designed,
and whether the MWCBs calmed volatility without causing harm. The
Exchange also examined the specific characteristics of the MWCBs: (1)
Trigger levels; (2) trading halt times; and (3) use of the S&P 500
Index (``SPX'') as the reference for the MWCB mechanism. Further, the
Exchange evaluated the impact of LULD Amendment 10 on the MWCB
mechanism, whether changes should be made to MWCBs to prevent the
market from halting shortly after the beginning of regular trading
hours, and whether excessive LULD pauses should trigger a MWCB halt.
Finally, the Exchange discussed the requirements for industry
participants to test the operation of the MWCBs at least annually. Each
of these elements are discussed in greater detail below.
A. MWCB Operation and Effect on Market Volatility
The Exchange finds that the MWCBs (1) operated as intended during
the period in March considered in the Study \32\ and (2) had the
intended effect of calming volatility in the market without causing
harm.\33\ The Exchange considered the findings of the Study, including
the effectiveness of communications instructing market participants to
initiate an MWCB Halt, volatility and liquidity preceding and following
the MWCB Halts, various measures of liquidity during MWCB Halts, and
additional LULD halts following MWCB reopening auctions. As discussed
further below, the Commission believes that the MWCBs operated as
designed, appropriately halting trading and facilitating reopening
auctions in NMS stocks. The Commission believes that the evidence,
however, is not conclusive regarding the MWCB's effect on calming
market volatility, although the Commission does believe that the MWCBs
did not appear to harm the market.
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\32\ See Notice, supra note 3, at 10.
\33\ See id. at 12.
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1. MWCB Operated as Designed
On March 9, 12, 16, and 18, 2020, market conditions indicated that
a Level 1 MWCB halt was likely to occur.\34\ On each of these days, the
Exchange activated an ``Intermarket Bridge'' call and sent an email
alert to a pre-existing distribution list comprising multiple staff
from securities and futures exchanges, FINRA, the Commission, the CFTC,
the Depository Trust & Clearing Corporation, and the Options Clearing
Corporation.\35\ On each day when a Level 1 MWCB Halt was triggered,
the call opened before the halt was triggered and remained open during
the entire period of the halt, until trading in all symbols was
reopened.\36\ When SPX declined 7% from the previous day's closing
value, breaching the MWCB Level 1 trigger, breach messages and
regulatory halt messages were sent to relevant market participants.\37\
Following these messages, all 9,000+ equity symbols were halted in a
timely manner.\38\ Further, approximately 900,000 options series were
halted once regulatory halt messages were received by the options
markets.\39\ However, a relatively small number of options traded
following the MWCB Halt messages.\40\ Finally, on each of the four days
where MWCB Halts were triggered, all SPX stocks reopened within 15
minutes of the end of the MWCB Halt.\41\
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\34\ See id. at 10.
\35\ See id.
\36\ See id.
\37\ See id.
\38\ See id.
\39\ As noted by the Exchange, options markets are required to
halt trading in options if there is an MWCB Halt in the cash
equities market. See Study, supra note 27, at 3.
\40\ Approximately 5,000 options trades that were sent to OPRA
after the time of the four MWCB Halts were nullified. See id.
Additionally, approximately 4,400 futures and options on futures
traded for one minute following the initiation of the MWCB Halt. See
id. at 11. The Exchange states that it understands that the Nasdaq
options markets made a number of enhancements to internal systems to
eliminate latency in the Nasdaq options markets' response to MWCB
halt messages. See Amendment No. 1, supra note 7, at 3.
\41\ See Notice, supra note 3, at 17.
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The Commission believes that the mechanism for communicating and
initiating MWCB Halts worked as intended during March 2020. Prior to
the triggering of the MWCB Halts, the SROs and industry members were
actively monitoring market conditions in anticipation of an MWCB Halt.
Before, during, and after the MWCB Halts occurred, the relevant SROs
and regulators remained in communication about the implementation of an
MWCB Halt and reopening. Additionally, all equity symbols subject to
the MWCB were successfully halted in a timely manner, and while a small
percentage of options continued trading during the MWCBs, the vast
majority of affected options series halted following the initiation of
the MWCBs. Furthermore, remedial steps have been taken by options
exchanges to prevent trades from occurring following a future MWCB
Halt.\42\ Finally, all SPX symbols reopened within 15 minutes of the
end of the MWCB Halts, and all securities had reopened within 30
minutes of the end of the MWCB Halt.\43\
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\42\ See Amendment No. 1, supra note 7, at 3.
\43\ The MWCB Pilot Rules do not prescribe a time in which
securities trading must resume following the halt. These rules
require that trading halt for 15 minutes, after which exchanges may
resume trading based on their rules governing reopening auctions and
trade resumption. See NYSE Rules 7.12 and 7.35A.
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[[Page 16289]]
2. Effect of MWCB Halts on Volatility and Market Functioning
The Study evaluated the effects of the MWCB Halts in March 2020 on
market volatility and functioning by examining various measurements of
liquidity and volatility following each of the March 2020 MWCB Halts
and comparing them to liquidity and volatility measurements of other
trading periods.\44\ In particular, the Study reviewed: (1) Activity
before the opening of regular trading hours and the number of
securities opening on a trade vs. opening on a quote; (2) size and
liquidity in the opening auctions and post-MWCB halt reopening
auctions; (3) quote volatility as measured by the median mid-point to
mid-point price change every second in basis points; (4) liquidity at
the national best bid and offer (``NBBO''); and (5) LULD Trading Pauses
following MWCB reopening auctions.\45\ The Exchange concludes that,
based on the liquidity and volatility measures reviewed in the Study
and discussed below, the MWCBs had the intended effect of calming
volatility in the market, without causing harm.\46\
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\44\ See Study, supra note 27, at 12. The other trading periods
include the month of January 2020 and the period from February 24
through May 1, 2020, excluding the four days with MWCB Halts
(``High-Volatility Period'')
\45\ See id.
\46\ See Notice, supra note 3, at 12.
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a. Activity Before the Opening of Regular Trading Hours and the Number
of Securities Opening on a Trade vs. Opening on a Quote
The Study examined liquidity and volatility in the SPDR S&P 500
Trust ETF (``SPY'') prior to the market open on the four days where
MWCB Halts occurred.\47\ Generally, pre-market early morning trading
activity is fairly limited. However, during the High-Volatility
Period,\48\ and particularly during the four days where an MWCB Halt
was triggered, pre-market trading activity was significantly
higher.\49\ On the four MWCB Halt days, roughly five to nine times the
number of shares traded in pre-market trading, relative to January 2020
levels.\50\ Further, SPYs pre-market price range on those four days was
up to ten times larger than what was typical in January 2020.\51\ These
levels indicate that markets were experiencing significant volatility
prior to the MWCB being triggered.
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\47\ See Study, supra note 27, at 13.
\48\ Capitalized terms used but not defined herein have the
meanings specified in the Study.
\49\ See Study, supra note 27, at 13
\50\ See id.
\51\ See id.
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The Study also reviewed whether there were any differences between
the number of securities opened on a trade vs. opened on a quote during
the four days with MWCB Halts.\52\ The Study found that there was no
meaningful difference in the percentage of securities opening on a
trade versus quote during January 2020, MWCB Halt days, or the High-
Volatility Period.\53\ The one exception to this, however, was with
respect to Tier 2 ETPs, which had a higher percentage of openings on a
trade on each of the four MWCB Halt days than in January or during the
High-Volatility Period.\54\ Further, for most groups of securities,
there was not a significant difference in the percentage of securities
opening on a trade during reopening versus the open.\55\ To the extent
a difference did exist for certain classes of securities, this does not
necessarily reflect inferior market function, as the reopening auctions
examined were for securities that had opened prior to the MWCB
Halts.\56\ Therefore, the Study noted that it would expect there to be
less interest represented in those reopening auctions.
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\52\ See id. at 14-15. The Exchange notes that it does not
express any opinion about whether opening on a trade is preferable
to opening on a quote.
\53\ See id.
\54\ See id.
\55\ See id. The Commission notes that the Study does show a
notable difference in the percentage of securities opening on a
trade during the reopen versus the open for certain Tier 2
securities including ETPs and Non-ETPs. See id. at 14 (Chart 2, G4
and G5 graphs). However, as discussed in the Study, this does not
necessarily reflect inferior market functioning. See Id.
\56\ See id.
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b. Size and Liquidity of Opening and Reopening Auction
To assess the effect of MWCB Halts on available liquidity, the
Study reviewed the liquidity available in the reopening auctions
following an MWCB Halt and compared it to the average volume in opening
auctions during other trading periods. The Study first compared (i) the
median opening auction in share volume in January 2020, (ii) the median
opening auction volumes in the High-Volatility Period, and (iii) the
median volumes in shares traded in the reopening auctions following the
MWCB Halts for symbols that had already executed opening auctions.\57\
The Study found that given how many securities had already opened
before the four MWCB Halts, the size of the reopening auctions were
somewhat smaller than the opening auctions.
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\57\ See id at 15.
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The Study also compared the size of the opening auctions plus
reopening auctions following the MWCB Halts on the MWCB Halt days to
the size of opening auctions in January 2020. The Study concluded that
the MWCB Halts did not result in a loss of liquidity overall in the
opening and reopening auctions. This was demonstrated, according to the
Study, because the opening auction plus MWCB reopening auction volumes
on the MWCB Halt days hewed closely to the January 2020 auction
volumes.\58\
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\58\ See id. at 15-16. The Study notes that the March 18 MWCB
event was excluded from this analysis since the MWCB Halt that day
occurred midday rather than the early morning. Id.
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The Study also reviewed the March 16 MWCB Halt (which took place
almost immediately upon the market open at 9:30:01 a.m.) and
reopen.\59\ The Study found that the size of the reopening auctions
after the March 16 MWCB Halt were similar to opening auction volumes in
January 2020.\60\ This suggests, according to the Study, that MWCB
Halts did not cause a significant deterioration in market liquidity.
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\59\ See id.
\60\ The Study noted that when the March 16 Halt occurred, many
securities had not yet started trading or quoting. Despite this, the
size of the reopening auctions were similar to the opening auction
volumes in January 2020. See id.
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The Study also assessed the nature of participation in reopening
auctions. First, the Study assessed the participation of market makers
in reopening auctions following MWCB Halts by reviewing principal
versus agency activity in opening and MWCB reopening auctions.\61\ In
particular, the Study showed that the share of principal transactions
in opening auctions on MWCB days was higher as compared to control
periods.\62\ Furthermore, the Study showed that while principal
activity was lower in the MWCB reopening auctions, principal auction
participation generally increased with each MWCB event.\63\
[[Page 16290]]
Second, the Study looked at the top five market participants by volume
during January 2020 and reviewed their involvement in MWCB reopening
auctions.\64\ The Study found that, compared to January 2020, their
share of transactions in reopening auctions was higher than their share
of opening auctions on days where an MWCB Halt was triggered.\65\
According to the Study, these results suggest that the most active
market participants were important providers of liquidity in the MWCB
reopening auctions.\66\
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\61\ See id. The Study noted that liquidity providers typically
act as principal on such transactions and therefore principal trades
are a proxy for trading by liquidity providers. See id. at 17. The
Commission notes that the Study does not distinguish riskless
principal trading by market makers and therefore some of the
``principal'' market maker interest may have represented as either
retail or institutional customer interest. However, the Commission
believes that this distinction does not significantly alter the
broader analysis showing that the market appropriately reopened
following each of the events, and market participants were able to
resume trading in a normal fashion without apparent harmful impacts
to either the auction processes or market liquidity.
\62\ See id. at 17-18.
\63\ See id.
\64\ See id.
\65\ See id.
\66\ The Commission notes, however, that it is not clear from
the Study whether the reopening liquidity represented by the top
five firms was due to their principal trading interest or agency
customer orders (whether retail or institutional) routed to
participate in the reopening auctions. However, the Commission
believes that this distinction does not significantly alter the
broader analysis showing that the market appropriately reopened
following each of the events, and market participants were able to
resume trading in a normal fashion without apparent harmful impacts
to either the auction processes or market liquidity.
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c. Quote Volatility
The Study also reviewed the volatility of quoted equity prices
before and after MWCB Halts were initiated as another method of testing
the effects of MWCB Halts on liquidity and volatility.\67\ As discussed
above, following an MWCB Halt, if MWCBs perform as intended, volatility
should decline as markets and market participants have the opportunity
to assess market conditions and systemic stress. The Study concluded
that MWCB Halts performed in this manner.
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\67\ See id at 22.
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The Study reviewed the median second-to-second quote volatility
before and after the MWCB Halts, as well as second-to-second quote
volatility during January 2020 and the High-Volatility Period.\68\ The
Study stated that although second-to-second quote volatility was higher
on the four MWCB days as compared to during January 2020 and the High-
Volatility Period, volatility fell or stabilized following MWCB
Halts.\69\ Further, The Study concluded that during the four days where
an MWCB was triggered, volatility fell to a level similar with the
High-Volatility Period.\70\ For Tier 1 and Tier 2 ETPs, volatility fell
further and stabilized near January 2020 levels, although the Study
recognized brief spikes in volatility midday on March 12 and March
18.\71\ The Study asserted that market stabilization may be an
indication that the MWCB Halts helped to calm the market, since
volatility did not continue to escalate throughout the day.\72\
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\68\ See id.
\69\ See id.
\70\ See id at 23.
\71\ See id.
\72\ See id.
---------------------------------------------------------------------------
d. Liquidity at the NBBO
The Working Group also examined the intraday median quoted size
(i.e., number of shares) at the NBBO on days when MWCB Halts were
triggered to understand the impact of the MWCB Halts on liquidity.\73\
Specifically, the Study looked at two time periods: (1) 9:30 a.m.-9:34
a.m. and (2) 12:50 p.m.-12:55 p.m. Generally, when compared to January
2020 and the High-Volatility Period, the median size at the NBBO in the
9:30 a.m.-9:34 a.m. was smaller on days where an MWCB Halt was
triggered.\74\ However, on the three days with early morning MWCB
Halts, many stocks did not open at 9:30 a.m. and many stocks also did
not open on primary exchanges until after trading resumed following
MWCB Halts, possibly explaining the relatively small size at the median
NBBO.\75\ Further, on March 18, when there was no early morning MWCB
Halt and the only MWCB Halt took place in the afternoon, early morning
liquidity was similar to the High-Volatility Period, and liquidity
during the 12:50 p.m.-12:55 p.m. period was similar to January 2020
levels in most groups of securities.\76\
---------------------------------------------------------------------------
\73\ See id at 25.
\74\ See id. The Commission notes, however, that the Study shows
that for G1 securities, median size at the NBBO was larger on March
9 than both January 2020 and the High-Volatility Period. G2
securities median size at the NBBO on March 12 was higher than the
January period but lower than the High-Volatility Period. See id.
\75\ See id.
\76\ See id.
---------------------------------------------------------------------------
e. LULD Trading Pauses Following MWCB Reopening Auctions
Finally, the Study reviewed the number of LULD pauses following
reopenings after MWCB Halts.\77\ A significant increase in the number
of LULD pauses may suggest that MWCBs did not serve their purpose of
reducing volatility, or that adjustments need to be made to the
reopening process, according to the Study.\78\ A large number of LULD
pauses may also suggest that reopenings occurred too quickly and the
market did not have sufficient time to reprice.\79\ The Study also
distinguished limit up and limit down LULD pauses.\80\ Generally, there
were more limit up LULD pauses than limit down following MWCB reopening
auctions.\81\ This result is unsurprising as markets bounced back
following large drops at the open, according to the Study.\82\
---------------------------------------------------------------------------
\77\ See id at 20.
\78\ See id.
\79\ See id.
\80\ See id.
\81\ The March 18 MWCB reopening auction was the one exception
to this trend, where the levels of limit up and limit down LULD
pauses were similar. See id.
\82\ See id.
---------------------------------------------------------------------------
Having reviewed the findings of the Study, the Exchange concludes
that the MWCB Halts triggered in March 2020 appeared to have the
intended effect of calming volatility.\83\ Specifically the Exchange
found that (i) there was not a significant difference in the percentage
of securities opening on a trade vs. quote during the MWCB days versus
other periods reviewed; (ii) the size of MWCB reopening plus the
initial opening for those days were on average equal to opening auction
sizes during January 2020; (iii) securities in SPX opened relatively
quickly following the MWCB Halt; (iv) volatility stabilized following
MWCB Halt days and reached levels similar to other periods studied; and
(v) the LULD mechanisms following MWCB Halts worked as designed to
address intra-day volatility.\84\ Based on the Exchange's conclusion
that the MWCBs worked as intended, and calmed volatility without
causing harm, it is proposing to make the MWCB rules permanent, as
modified by Amendment No. 1. The MWCB rules include three main
operational components, the trigger levels, halt times, and reference
value, and a testing requirement. The Exchange addressed each of these
in its proposed rule change, discussed further below.
---------------------------------------------------------------------------
\83\ See id. at 22.
\84\ See id. at 23.
---------------------------------------------------------------------------
f. Commission Assessment of MWCB Effect on Market Volatility and Market
Functioning
While the Commission believes that the mechanism for communicating
and initiating MWCB Halts and resumption of trading worked as intended
during March 2020 as discussed above, we believe the evidence is less
conclusive regarding the MWCB's effect on calming market volatility.
For example, the Commission believes that the analysis regarding quote
volatility is inconclusive. First, because three events occurred at the
beginning of the trading day, the Study could not compare U.S. equity
quote volatility before and after the MWCB event; rather it could only
describe quote volatility after the MWCB event. Second, while the
Study's analysis shows quote volatility decreasing following the MWCB
halts, it does not necessarily lead to the conclusion that the MWCB
halts caused
[[Page 16291]]
quote volatility to decrease. Indeed, the quote volatility metrics
described in the study are broadly consistent with the natural and
well-known volatility dynamic in the U.S. equity market where
volatility tends to be highest at the beginning of the trading day,
decreases as the trading day progresses, and then increases again as
the trading day approaches the close.\85\ Third, the Study does
describe some volatility analysis that shows volatility increasing for
some stocks after some of the MWCB events and market reopenings,
although again, it is not clear whether that volatility increase was
caused by the MWCB.\86\ The analysis is complicated further by the fact
that three of the MWCB events in March occurred at the beginning of the
trading day, preventing any comparison of the volatility of securities
trading before the MWCB event with volatility after the MWCB event.\87\
---------------------------------------------------------------------------
\85\ See, e.g., Robert A. Wood, Thomas H. McInish, and J. Keith
Ord., ``Investigation of Transactions Data for NYSE Stocks,'' 40 The
Journal of Finance (1985).
\86\ See Study, supra note 27, at 23-25. For example, when
comparing Charts 8 and 10 of the Study, volatility appears to
increase for Tier 2 securities after the three morning MWCB Halts
when compared to the 9:30-9:35 a.m. periods. Additionally, after the
midday March 18 MWCB Halt, it appears from Chart 9 of the Study that
volatility rose in some securities. Id. We note, however, that the
Study does not demonstrate a causal link between the MWCB Halts and
the volatility increases in these instances.
\87\ The Commission recognizes the challenges in empirically
demonstrating a statistically significant causal relationship
between MWCBs and volatility because MWCBs are rare events that
occur during times of heightened volatility.
---------------------------------------------------------------------------
Based on information available to analyze the MWCB's impact on
market volatility, the Commission believes that the evidence provided
in the Study generally indicates that the MWCB did not cause harm to
the market. One concern with the three MWCB events occurring at the
open of the trading day was that it could harm the opening process for
equity securities, for example. The Study provides evidence that the
size of the opening and MWCB reopening auctions, in tandem, was similar
in size to the opening auction in other time periods considered.\88\
Furthermore, on each of the four MWCB event days, the Study showed that
there was no meaningful difference in the percentage of securities
opening on a trade versus opening on a quote, with the exception of
Tier 2 ETPs, which had a higher percentage opening on a trade on each
of those days.\89\ The Study's look at liquidity by measuring size at
the NBBO does not present evidence which indicates the MWCB Halts had a
significant impact on the liquidity available at the NBBO. While the
Study showed that there was less size at the NBBO on the three MWCB
event days that occurred at the beginning of the trading day, that
result is not surprising given many stocks did not open until trading
resumed after the MWCB reopening.\90\ Additionally, the Study's
observation of a drop in size at the NBBO around 1:30 p.m. for G4 and
G5 securities on March 18 is not particularly concerning, given that by
2 p.m. size at the NBBO in these securities were back to normal.\91\
Finally, the March 18 event analysis shows that on the day the MWCB was
triggered in the middle of the trading day, size at the NBBO leading up
to the MWCB event was similar to January 2020 levels and was slightly
larger for non-ETPs when compared to the remainder of the High-
Volatility Period.\92\
---------------------------------------------------------------------------
\88\ See id. at 16.
\89\ See id. at 14.
\90\ See id. at 25.
\91\ See id. at 25-27.
\92\ See id.
---------------------------------------------------------------------------
In sum, the Commission believes that the MWCB operated
appropriately as designed. While the MWCB impact on volatility is
inconclusive, evidence shows that the MWCB effectively halted the
market after the Level 1 threshold was reached on each of the four days
in March 2020. The market appropriately reopened following each of the
events, and market participants were able to resume trading in a normal
fashion without apparent harmful impacts to either the auction
processes or market liquidity. It is also notable that while the Pilot
Rules approved in 2012 had never previously been triggered, the four
events in March 2020 have provided market participants with significant
experience with the current MWCB design. This familiarity with how the
mechanism operates should further support a fair and orderly market
function in the event of a future MWCB halt.\93\ Finally, the
Exchange's proposed testing provisions, along with the provisions
requiring an analysis and report to the Commission should future MWCB
events occur and a commitment to review the MWCB in the event of 5%
market declines and changes to MWCB reopening processes, will help
ensure that the MWCB design remains appropriate as market conditions
and structure change over time. For these reasons, the Commission finds
that the Exchange's proposed rule change is 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 Exchange's proposed rule change is consistent
with Section 6(b)(5) of the Act,\94\ which requires that the rules of
an exchange be designed, among other things, 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, and to
remove impediments to and perfect the mechanism of a free and open
market and a national market system. The Commission discusses below
each of the key elements of the MWCB in more detail.
---------------------------------------------------------------------------
\93\ See id. at 18-21 (showing some evidence of increasing
principal participation with each MWCB event).
\94\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
B. MWCB Threshold Levels
Under the Pilot Rules, a market-wide trading halt will be triggered
if SPX declines in price by specified percentages from the prior day's
closing price of that index. The triggers are set at three circuit
breaker thresholds: 7% (Level 1), 13% (Level 2), and 20% (Level 3).\95\
Based on the analysis of these levels, the Exchange is proposing to
make this aspect of the MWCB rules permanent.\96\ In conducting its
Study following the March 2020 MWCB trading halts, the Working Group
examined historical data on large-scale market declines. It also
considered the recommendation of the Equity Market Structure Advisory
Committee's (``EMSAC'') Subcommittee on Market Quality from 2016
suggesting that the Level 1 trigger should be adjusted to 10% based on
evidence from the Chinese markets that indicated that when markets
began to approach a 7% band, selling pressure increase as market
participants tried to complete trades before trading halted.\97\
---------------------------------------------------------------------------
\95\ See NYSE Rule 7.12(a)(i)-(iii).
\96\ See Notice, supra note 3, at 38778. The Exchange also noted
that the Chicago Mercantile Exchange (``CME'') considered whether
changes could be made to better align the cash and futures market.
See Study, supra note 27, at 7. Specifically, CME considered whether
the futures limit-down percentage should be widened to 7% from a 5%
level. Id. Ultimately, on October 12, 2020, CME decided to implement
a 7% price limit for overnight trading hours in certain futures and
options on futures. See CME Submission No. 20-392, dated September
25, 2020.
\97\ See EMSAC Recommendations for Rulemaking on Issues of
Market Quality, July 25, 2016, available at <a href="https://www.sec.gov/spotlight/emsac/emsac-market-quality-subcommittee-recomendation-072516.pdf">https://www.sec.gov/spotlight/emsac/emsac-market-quality-subcommittee-recomendation-072516.pdf</a>.
---------------------------------------------------------------------------
The Study observed that since 1962, intraday losses as large as 7%
in SPX have occurred only 16 times, and that the four times that such
losses did occur since the implementation of the LULD Plan were the
four dates in March 2020
[[Page 16292]]
that triggered the MWCB Halts.\98\ The Study further noted that since
the LULD Plan was implemented, there have been only five days where SPX
fell as much as 6%, and all took place during the March 9-March 18,
2020 time period.\99\ The Study observed that on March 11, 2020 the
index fell as much as 6.07%, but did not continue lower to trigger a
Level 1 MWCB halt at 7%.\100\ On March 16, 2020, SPX declined enough to
trigger a Level 1 halt, and continued to fall after reopening down
12.18%, but did not fall to the 13% trigger for a Level 2 halt,
according to the Study.\101\ The Study also noted that on March 9, 12,
and 18, 2020, SPX also declined further after the Level 1 halt, with
intraday lows of -8.01%, -9.58%, and -9.83%.\102\ The Study concluded
that the fact that SPX continued to decline after the halt at 7%
suggests that ``the market found an equilibrium level that was not
particularly tied to the 7% Level 1 trigger or the 13% Level 2
trigger.'' \103\ The Study further concluded that the available
evidence supports a conclusion that the current 7% and 13% triggers did
not create a ``magnet effect.'' \104\ The Exchange has represented that
it agrees with this analysis and therefore is proposing that the MWCB
trigger levels be permanently approved without change.\105\
---------------------------------------------------------------------------
\98\ See Study, supra note 27, at 38.
\99\ See id.
\100\ See id.
\101\ See id.
\102\ See id.
\103\ Id.
\104\ Id. The Study did not draw any conclusions about whether a
``magnet effect'' exists when market declines approach 20% (the
Level 3 MWCB trigger that would end trading for the remainder of the
day), given the lack of data. See id.
\105\ See Notice, supra note 3, at 38782.
---------------------------------------------------------------------------
The Commission believes that the Level 1 (7%), Level 2 (13%), and
Level 3 (20%) thresholds are appropriate levels of market decline at
which the MWCB halts are triggered. The Commission has reviewed the
levels at which the MWCBs are triggered on several occasions following
sharp declines in the markets and has made adjustments over the last
three decades to ensure the thresholds remain meaningful as the markets
evolve. The initial MWCB rules, approved in 1988, established
thresholds based on DJIA point values of 250 and 400, which at the time
represented market declines of 12% and 19%, respectively.\106\ Years
later, it became clear that the thresholds needed to be updated to keep
up with changes in the market. Stock prices had risen substantially
since the MWCBs were first approved, such that by July 1996, a 250-
point decline and a 400-point decline, represented declines of the DJIA
of only 4.5% and 7%, respectively.\107\ In 1997, the Commission
approved proposals to increase the thresholds to 350 points and 550
points.\108\ After the MWCB halts were triggered in October 1997, the
industry concluded that the thresholds were too low, as they were
triggered at declines of only 4.54% and 7.18%, which the industry
believed did not justify halts in trading.\109\ The Commission
subsequently approved modifications to base the thresholds on a
percentage of market decline instead of a point decline and set them at
10%, 20% and 30%.\110\ The market sharply declined 9% in the Flash
Crash on May 6, 2010, which was not enough to trigger a Level 1 MWCB
halt. Amidst concerns that events such as the Flash Crash could
seriously undermine the integrity of the U.S. securities markets, in
2012, as discussed above, the Commission again approved modification to
the thresholds, and lowered the Level 1 and Level 2 thresholds to 7%
and 13%, respectively.\111\
---------------------------------------------------------------------------
\106\ See supra note 6.
\107\ See ``Trading Analysis of October 27 and 28, 1997,'' A
Report by the Division of Market Regulation U.S. Securities and
Exchange Commission, dated September 1998, available at <a href="https://www.sec.gov/news/studies/tradrep.htm#cbs">https://www.sec.gov/news/studies/tradrep.htm#cbs</a> (``1997 Trading
Analysis'').
\108\ See supra, note 10.
\109\ See 1997 Trading Report, supra note 118.
\110\ See supra note 14.
\111\ See supra note 19.
---------------------------------------------------------------------------
The MWCB thresholds set in 2012 have been in place on a pilot basis
since their approval and were not reached until the market declines
experienced in March 2020.\112\ Over the last 18 months, the SROs,
Industry Members, and the Commission have had an opportunity to study
data from these events and consider whether the current trigger levels
are appropriately set. The Commission believes that data and analysis
in the Study, in addition to the lessons learned since the original
implementation of circuit breakers in 1988, support a conclusion that
the current MWCB threshold levels represent appropriate levels of
decline in NMS stocks that warrant a temporary halt, in the case of a
Level 1 and Level 2 decline, or a halt for the remainder of the day, in
the event of a Level 3. Furthermore, as discussed above, the Exchange's
proposed testing provisions, along with the provisions requiring an
analysis and report to the Commission should future MWCB events occur
and a commitment to review the MWCB in the event of 5% market declines
and changes to MWCB reopening processes, will help ensure that the MWCB
design remains appropriate as market conditions and structure change
over time.
---------------------------------------------------------------------------
\112\ See Notice, supra note 3, at 38777-78.
---------------------------------------------------------------------------
C. Trading Halt Times
The Pilot Rules provide that in the event an MWCB Level 1 or Level
2 halt is triggered after 9:30 a.m. but before 3:25 p.m., trading will
halt for 15 minutes. If the threshold for a Level 1 or Level 2 MWCB
halt is triggered after 3:25 p.m., trading will continue unless a Level
3 halt is triggered.\113\ If the threshold to trigger a Level 3 MWCB is
reached at any time, trading will halt for the remainder of the
day.\114\ The Exchange has represented that it agrees with the
conclusion in the Study that a 15-minute trading halt following a Level
1 or Level 2 MWCB is appropriate, and is proposing to make this aspect
of the Pilot Rules permanent, along with the provision that provides
that trading will halt for the remainder of the day following a Level 3
circuit breaker.\115\
---------------------------------------------------------------------------
\113\ See NYSE Rule 7.12(b).
\114\ See id.
\115\ See Notice, supra note 3, at 38783-84. The Exchange also
proposed no changes be made to the MWCB to prevent the market from
halting shortly after the open of regular trading at 9:30 a.m.,
despite the three MWCB events that occurred near the open of regular
trading. See Study, supra note 27, at 2. As noted in the Study,
after considering this potential change, it was determined that (1)
there was no simple way to design an alternative that would prevent
a halt at the open, (2) the markets should be protected at the open
in any event, as it tends to be the most volatile period of the
trading day and different future scenarios such as breaking news at
the open would merit a halt, (3) market participants are now
accustomed to how the MWCBs operate at the open of regular trading,
and (4) the MWCB Halts at the open of regular trading did not harm
the market functioning, including the conduct of opening and
reopening auctions. See Study, supra note 27, at 43-44.
---------------------------------------------------------------------------
In reaching its conclusion, the Study noted that in October 2020,
CME implemented a change to reopen the E-mini S&P 500 futures five
minutes before the end of a 15-minute Level 1 or Level 2 MWCB halt, in
order to enhance the equity market price discovery process leading into
an MWCB reopening auction process, which begin after the end of the 15-
minute MWCB halts.\116\ The Study noted, however, that a similar change
to the length of the Level 1 and 2 MWCB Halts was unnecessary, and
recommended the 15-minute length of the Level 1 and Level 2 MWCB halts
be approved on a permanent basis without change.\117\
---------------------------------------------------------------------------
\116\ See Study, supra note 25, at 38.
\117\ See id.
---------------------------------------------------------------------------
The Commission believes that a trading halt of 15 minutes following
a triggering of a Level 1 or Level 2 MWCB halt between 9:30-3:25 p.m.
is appropriate to allow market participants
[[Page 16293]]
to assess the state of the market. Regarding the application of MWCB
shortly after the open of regular trading, the Commission agrees that
on balance it remains appropriate. In particular, the Commission
believes that the MWCB protections are an important protection at the
beginning of regular trading. Furthermore, as discussed above, the
Commission believes that the Study provides evidence that the three
MWCB events at or near the open of regular trading did not cause harm
to the market, including the conduct of the opening and reopening
auctions.\118\ Finally, market participants now have substantial
experience with how the MWCB operates at or near the open of regular
trading, and any changes to the MWCB at the time of day would introduce
new uncertainty that is not necessary at this time, given the benefit
of opening protections and the market's experience thus far.
Additionally, the Commission believes that the CME's modification to
resume trading in the E-mini S&P 500 futures should further improve the
function of the MWCB, as market participants will have a better sense
of market valuations leading into the MWCB reopening auction for equity
securities. The Commission further believes that permitting trading to
continue after 3:25 p.m. despite a decline in the markets, unless a
Level 3 MWCB threshold is reached remains appropriate as this will help
ensure a fair and orderly closing at 4 p.m. Finally, the declines in
SPX in March 2020 did not approach the 20% threshold for triggering a
Level 3 MWCB halt. Therefore, there is no data available to analyze how
the markets would respond in the event SPX drops 20% and markets close
for the day. The Commission believes, however, that any disruption in
the markets that would cause a 20% decline in SPX would require market
participants to make significant adjustments to their trading
strategies, and thus halting trading for the remainder of the day is
appropriate in such a situation. Furthermore, as discussed above, the
Exchange's proposed testing provisions, along with the provisions
requiring an analysis and report to the Commission should future MWCB
events occur and a commitment to review the MWCB in the event of 5%
market declines and changes to MWCB reopening processes, will help
ensure that the MWCB design remains appropriate as market conditions
and structure change over time.
---------------------------------------------------------------------------
\118\ See supra Section IV(2)(f).
---------------------------------------------------------------------------
D. SPX as Reference Value <SUP>119</SUP>
---------------------------------------------------------------------------
\119\ The Exchange also considered the question of whether or
not the MWCB should be triggered if there is a sufficient number of
LULD price limits triggered. See Study, supra note 25, at 44.
According to the Study, the LULD trading pause data prior to the
MWCB Halts did not shed light on this question, as the March MWCB
Halts were proceeded by very few LULD Halts. While the MWCB Halts
did not provide evidence in support of this alternative MWCB
trigger, the Exchange and the Study note that future events may
merit looking at this potential modification again. See Study, supra
note 25, at 44.
---------------------------------------------------------------------------
The Pilot Rules provide that SPX shall be used as the reference
value for determining any percentage decline in the markets.\120\ Based
on the conclusion in the Study that SPX is the best measure for this
purpose, the Exchange is proposing that the Pilot Rule designating SPX
as the reference value be approved on a permanent basis.\121\
---------------------------------------------------------------------------
\120\ See NYSE Rule 7.12(a)(i).
\121\ See Notice, supra note 3, at 38784-85.
---------------------------------------------------------------------------
In analyzing whether to retain SPX as the reference for triggering
MWCB halts, the Study examined criteria for considering an instrument
or methodology to replace SPX and compared a number of potential
alternatives to SPX. The Study considered the DJIA, S&P 100, Nasdaq
100, Russell 1000, Russell 3000, Wilshire 5000, E-Mini S&P 500 Futures,
Exchange Trading Products-related SPX (i.e., SPY, IVV, VOO) as
potential alternatives to SPX and for each alternative considered: The
breath of securities in an index or an index or in the index underlying
a specific product; breadth of sectors represented by product/index;
breadth of listing exchanges represented by product/index; correlation
with related products, including derivatives and ETPs; does the
reference value demonstrate dislocations from the underlying value;
industry awareness of the index/product level; activity level in/
liquidity generally present in the product (or correlated products if
reference value is an index); if reference value is a traded product,
susceptibility of that product to short term liquidity imbalances that
might erroneously trigger an MWCB; potential concerns regarding cross-
market coordination; whose regulatory purview does the reference value
fall under; reference calculation method; and the index
methodology.\122\
---------------------------------------------------------------------------
\122\ See Study, supra note 27, at 39-40.
---------------------------------------------------------------------------
The Study reflected the view of industry practitioners that it is
important that the reference price be based an index rather than an
individual tradable product because individual product are vulnerable
to temporary order imbalances or price shocks, which may result in
transient premiums or discounts.\123\ In addition, the Study considered
that individual products may be subject to single stock price bands or
circuit breakers, but an index has less potential to be influenced by
these factors than an individual product.\124\
---------------------------------------------------------------------------
\123\ See id. at 40-41.
\124\ See id. at 41.
---------------------------------------------------------------------------
Of the indices the Study examined, it found that SPX contains a
large number of securities with a high degree of breadth, an extremely
high correlation with the liquidity of its underlying securities, and a
well-understood calculation methodology. S&P DJI disseminates
documentation regarding the calculation of SPX, especially at and
around market open and reopen that addresses technical questions
regarding the index calculation and value dissemination.\125\
---------------------------------------------------------------------------
\125\ See id. at 41.
---------------------------------------------------------------------------
Based on the Study's review of the potential alternatives to SPX
and the Exchange's own observations of the product, the Exchange
believes that SPX is an appropriate product to use as the reference for
the MWCB mechanism, and is proposing to make this aspect of the Pilot
Rules permanent without change.\126\ The Exchange acknowledges that
non-traded products are not subject to regulatory oversight, but due to
the safeguards provided by S&P DJI the Exchange nevertheless believes
that SPX is an appropriate reference.\127\ In particular, the Exchange
notes that S&P DJI periodically improves its calculation methods for
SPX.\128\ The Exchange also considered that S&P DJI was forthcoming and
transparent in responding to the Working Group's questions about the
resiliency and redundancy of the SPX calculation.\129\ In meetings with
the Working Group, S&P DJI explained that three geographically disperse
data centers independently calculate the SPX, and S&P DJI monitors for
consistency of values.\130\ The Exchange also considered however that,
while S&P DJI's index computations are conducted and made available
from three geographic locations with delivery through separate
communications lines, there is no completely independent backup
maintained for SPX, which remains a
[[Page 16294]]
single point of failure.\131\ S&P DJI addressed this concern by
explaining that it intends to establish an independent index
calculation to be conducted and maintained by a separate, independent
entity to further reinforce redundancy and resiliency of the
calculation.\132\
---------------------------------------------------------------------------
\126\ See Notice, supra note 3, at 38785.
\127\ See id.
\128\ See id. at 38784-5. For example, following the events of
August 24, 2015, S&P DJI changed its methodology for calculating SPX
to use consolidates prices. The Exchange believes that this change
likely helped to ensure that SPX accurately reflected market
conditions preceding the MWCB Halts in March 2020. See id.
\129\ See id. at 38785.
\130\ See id.
\131\ See id.
\132\ See id.
---------------------------------------------------------------------------
The Commission believes that SPX is the best reference for gauging
a decline in the markets overall. The Commission agrees that at this
time an index is a more reliable reference than a single tradable
product as it is not subject to same degree of temporary volatility or
liquidity gaps and remains more in-line with a large number of
products. Additionally, SPX's number and breadth of securities, high
correlation to those underlying securities, and its well-understood
calculation methodology makes it an appropriate benchmark for the MWCB.
The SPX calculation is performed at separate, geographically diverse
locations to help ensure the integrity of the index calculation.
Further, as noted by the Exchange, S&P DJI has been transparent and
responsive to the Exchange and the other Working Group members about
the calculation of SPX, and has committed to further enhance the
redundancy and resiliency of the SPX calculation by establishing an
independent index calculation to be conducted and maintained by a
separate, independent entity.\133\ Finally, as discussed above, the
Exchange's proposed testing provisions, along with the provisions
requiring an analysis and report to the Commission should future MWCB
events occur and a commitment to review the MWCB in the event of 5%
market declines and changes to MWCB reopening processes, will help
ensure that the MWCB design remain appropriate as market conditions and
structure change over time
---------------------------------------------------------------------------
\133\ The Commission believes that further efforts to enhance
the redundancy and resiliency of the SPX calculation is appropriate.
---------------------------------------------------------------------------
E. Testing Requirement
The Exchange's Rules require that the Exchange participate in all
industry wide tests of the MWCB Mechanism. Further, the Rules also
provide that all designated Regulation SCI firms participate in at
least one MWCB test each year.\134\ This test is designed to ensure
that relevant systems function as intended in the event an MWCB is
triggered.\135\ Each of these firms must also verify their
participation in a MWCB test by attesting that they are able to or have
attempted to: (1) Receive and process MWCB halt messages from the
securities information processors (``SIPs''); (2) receive and process
resume messages from the SIP following a MWCB Halt; (3) receive and
process market data from the SIPs relevant to MWCB Halts; and (4) send
orders following a Level 1 or Level 2 MWCB halt in a manner consistent
with their usual trading behavior.\136\ To the extent that a member
organization that participated in a MWCB test is unable to receive and
process any of these messages, its attestation should notify the
Exchange which messages it was unable to process and any known reason
why the messages could not be received or processed.\137\ Member
organizations not designated pursuant to standards established in
paragraphs (b)(1) and (3) of Rule 48 are permitted to participate in
any MWCB test.\138\
---------------------------------------------------------------------------
\134\ See Study, supra note 27, at 9.
\135\ See id.
\136\ See Notice, supra note 3, at 42.
\137\ See Amendment No. 1, supra note 7.
\138\ See supra note 137.
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In addition to testing of MWCB technical functionalities, the
Exchange has also proposed a mandatory review of the performance of
MWCBs generally, should certain events occur. In the event of a MWCB
Halt, the Working Group will analyze the MWCB performance and prepare a
report that documents its analysis and recommendations.\139\ This
report will be provided to the Commission within 6 months of MWCB
Halt.\140\ In the event that there is (1) a market decline of more than
5% or (2) an SRO implements a rule change that effects its reopening
process following a MWCB Halt, the Exchange and the Working Group will
review such event and consider when any modification should be made to
the MWCB rules.\141\ If the Working Group recommends that a
modification be made, the Working Group will prepare a report that
documents its analysis and recommendations and provide that report to
the Commission.\142\
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\139\ See supra note 138.
\140\ See id.
\141\ See id.
\142\ See id.
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The Exchange believes that these testing obligations remove
impediments to and perfect the mechanism of a free and open market and
a national market system.\143\ Specifically, the Exchange contends that
adding specificity by requiring SCI firms to attest to their
participation in the MWCB will promote stability and investor
confidence in the MWCB mechanism.\144\ Further, the Exchange believes
that requiring firms to identify any inability to process any messages
related to the MWCB mechanism will contribute to a fair and orderly
market by flagging potential issues that should be corrected.\145\ The
Exchange also notes that the attestations, as well as the Exchange's
own records regarding the MWCB test, will be preserved and retained by
the Exchange.\146\
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\143\ See Notice, supra note 3, at 47.
\144\ See id.
\145\ See supra note 138, at 6.
\146\ See id.
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The Exchange is also of the opinion that the ``event driven'' MWCB
review described in the MWCB Rules would benefit market participants,
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 protect investors and the public interest.\147\ The
Exchange believes that requiring the Working Group to review any halt
triggered under the MWCB Rules and prepare a report on of its analysis
and recommendations, would permit the Working Group and the Commission
to evaluate the efficacy of the MWCB mechanism and whether any
modifications should be made.\148\ The Exchange also contends that
having the Working Group review instances of a market decline of more
than 5% or an SRO rule that changes its reopening process following a
MWCB Halt will allow the Working Group to identify situations where it
recommends that the MWCB Rules should be modified. Finally, the
Exchange notes that in those situations where the Working Group
recommends that a modification should be made and a report is submitted
to the Commission, providing this report to the Commission will help
protect investors and the public interest.\149\
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\147\ See id.
\148\ See id. at 7.
\149\ See id.
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The Commission believes that these testing and ongoing assessment
provisions will allow the Commission and the SROs to evaluate the MWCB
mechanism going forward. As noted by the Exchange, by requiring
Regulation SCI firms and the Exchange to participate in yearly tests of
certain basic messaging functionalities, the SROs and the Commission
can help ensure that important technical aspects of the MWCB mechanism
will function properly should a MWCB Halt occur. Additionally, as the
Exchange noted, the results of this testing will be retained by the
Exchange pursuant to its obligation to keep books and records. This
will allow the Commission to review the results of the MWCB test to
ensure that the MWCB mechanism continues to operate as intended.
[[Page 16295]]
The Commission also believes that the proposed ``event driven''
reviews of the MWCB mechanism will allow the Commission and the SROs to
evaluate whether any modification to the MWCB mechanism is necessary.
Specifically, should a MWCB Halt occur, the SROs will examine how the
MWCBs functioned and report this to the Commission. If the SROs or the
Commission finds that the MWCB mechanism did not work as intended
during a future MWCB Halt, then the MWCB mechanism can be further
refined to address this deficiency. The Commission also supports the
proposal concerning review of the MWCB when either (1) a market decline
of more than 5% or (2) an SRO implements a rule that changes its
reopening process following a MWCB Halt. A review of a market decline
of more than 5% will allow the Working Group to evaluate significant
market events that do not reach the threshold for initiating a MWCB,
and determine whether any alterations to the MWCB mechanism should be
made. Further, a review of any changes to reopening processes following
a MWCB Halt will allow the Working Group to evaluate the implications
of the proposed changes on the effectiveness of the MWCB mechanism.
Finally, the Commission believes that the requirement to report any
proposed modification following the Working Group's review will give
the Commission an opportunity to study the event that preceded the
Working Group's review and any potential modification that the Working
Group recommends.
In conclusion, the Commission believes that the analysis presented
by the Exchange demonstrates that the MWCBs operated effectively in
accomplishing the goal of providing a trading halt during extreme
market-wide declines to provide opportunities for markets and market
participants to assess market conditions and systemic stress. Further,
the Commission believes that the proposal sets forth testing and
ongoing assessment requirements for industry members and the Exchange
that should allow market participants and the Exchange to detect issues
with the MWCB design or their internal system in response to MWCB halts
and recommend modifications. For these reasons, the Commission finds
that it is appropriate to approve the Exchange's MWCB rules on a
permanent basis.
V. 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
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#86f4f3eae3abe5e9ebebe3e8f2f5c6bae7a6eef4e3e0bb" http: sec.gov">sec.gov</a>">rule-comments@<a href="http://sec.gov">sec.gov</a></a>. Please include
File Number SR-NYSE-2021-40 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSE-2021-40. 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 website (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
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 website 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 10:00 a.m. and
3:00 p.m. Copies of the 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 Number SR-NYSE-2021-40 and should be
submitted on or before April 12, 2022.
VI. Accelerated Approval of Proposed Rule Change, as Modified by
Amendment No. 1
The Commission finds good cause, pursuant to Section 19(b)(2) of
the Act,\150\ to approve the proposed rule change, as modified by
Amendment No. 1, prior to the 30th day after the date of publication of
Amendment No. 1, in the Federal Register. As discussed above, Amendment
No. 1 requires Exchange participation in all industry-wide testing of
the MWCBs, and further requires the Exchange, together with the other
SROs, to provide the Commission with a report that documents its
analysis and recommendations following a halt that is triggered
following a Level 1, Level 2, or Level 3 Market Decline. The amendment
also requires the Exchange, together with the other SROs, to review the
MWCB in the event of 5% market declines and any time an SRO makes
changes to MWCB reopening processes, and provide a report to the
Commission concerning such review should a modification to the MWCB be
recommended. Amendment No. 1 also requires an industry member to notify
the Exchange in its attestation following testing if it was unable to
process any messages and, if known, why. In Amendment No. 1, the
Exchange commits to maintain records documenting its participation in
MWCB testing. Amendment No. 1 also provides additional detail on
actions taken by SROs in response to the March 2020 MWCB halts.\151\
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\150\ 15 U.S.C.78s(b)(2).
\151\ Amendment No. 1 also makes technical changes to the
proposal to update the dates on which the MWCB Pilot Rule expires
and the proposed rule would take effect.
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The Commission believes that the revisions to the proposal in
Amendment No. 1 raise no novel regulatory issues. The amendment
proposes additional protections that will help ensure that the MWCB
design is appropriate over time. In particular, it provides for more
robust ongoing testing processes and assessments of the operation of
the MWCBs. The tests will be conducted on an industry-wide basis with
Exchange participation and will require the creation and retention of
records concerning testing effectiveness. Furthermore, the amendment
provides for MWCB assessments in key events that will provide an
opportunity for the Exchange, along with the other SROs, to more
effectively evaluate the MWCB design. Accordingly, the Commission finds
good cause, pursuant to Section 19(b)(2) of the Act,\152\ to approve
the proposed rule change, as modified by Amendment No. 1, on an
accelerated basis.
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\152\ 15 U.S.C. 78s(b)(2).
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VII. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\153\ that the proposed rule change, as modified by Amendment No.
1, (SR-NYSE-2021-40), be, and hereby is, approved on an accelerated
basis.
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\153\ 15 U.S.C. 78s(b)(2).
[[Page 16296]]
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By the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\154\
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\154\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-05980 Filed 3-21-22; 8:45 am]
BILLING CODE 8011-01-P
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