Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of Filing of Amendment No. 2, and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1 and 2 Thereto, to BATS Rules 20.3 and 20.6, 16031-16040 [2015-06890]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 80, Number 58 (Thursday, March 26, 2015)]
[Notices]
[Pages 16031-16040]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-06890]


=======================================================================
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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74556; File No. SR-BATS-2014-067]


Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing of Amendment No. 2, and Order Granting Accelerated Approval of a 
Proposed Rule Change, as Modified by Amendment Nos. 1 and 2 Thereto, to 
BATS Rules 20.3 and 20.6

March 20, 2015.

I. Introduction

    On December 4, 2014, BATS Exchange, Inc. (the ``Exchange'' or

[[Page 16032]]

``BATS'') 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 
proposed rule change to Exchange Rule 20.6 (relating to the adjustment 
and nullification of transactions that occur on the Exchange's equity 
options platform) and Exchange Rule 20.3 (relating to trading halts). 
On December 17, 2014, the Exchange submitted Amendment No. 1 to the 
proposed rule change, which amended and replaced the proposed rule 
change in its entirety. The proposed rule change, as modified by 
Amendment No. 1, was published for comment in the Federal Register on 
December 24, 2014.\3\ The Commission received two comment letters on 
the proposed rule change.\4\ On March 4, 2015, the Exchange submitted a 
response to the comment letters.\5\ On March 13, 2015, the Exchange 
submitted Amendment No. 2 to the proposed rule change.\6\ The 
Commission is publishing this notice to solicit comment on Amendment 
No. 2 to the proposed rule change from interested persons and is 
approving the proposed rule change, as modified by Amendment Nos. 1 and 
2, on an accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 73884 (December 18, 
2014), 79 FR 77557 (``Notice'').
    \4\ See letters to Brent J. Fields, Secretary, Commission, from 
Paul M. Russo, Managing Director, Goldman Sachs & Co., dated January 
13, 2015 (``Goldman Letter''); and Ellen Greene, Managing Director, 
Securities Industry and Financial Markets Association, dated January 
28, 2015 (``SIFMA Letter'').
    \5\ See letter to Brent J. Fields, Secretary, Commission, from 
Anders W. Franzon, Vice President and Associate General Counsel, 
BATS Exchange, Inc., dated March 4, 2015 (``BATS Response Letter'').
    \6\ In Amendment No. 2, the Exchange: (1) Made technical, non-
substantive corrections to the definition of ``Size Adjustment 
Modifier'' in paragraph (a)(4) of Proposed Rule 20.6 and the 
criterion used to measure the occurrence of a Significant Market 
Event in paragraph (e)(1) of Proposed Rule 20.6; (2) amended the 
description in paragraph (b) of Proposed Rule 20.6 to use the last 
NBB and last NBO prior to the Exchange's receipt of an order as the 
Theoretical Price for determining the execution price at all price 
levels when a single order is executed at multiple price levels; (3) 
updated the expiration date of the pilot program related to the 
suspension of certain provisions of the Proposed Rule to October 23, 
2015 in connection with the Limit Up-Limit Down Plan and made clear 
that it would provide a publicly available assessment of the 
operation of this portion of the Proposed Rule by May 29, 2015; and 
(4) proposed an implementation date of May 8, 2015, to allow all the 
other options exchanges the time necessary to harmonize their 
obvious error rules with the Proposed Rule.
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

    The Exchange proposes to replace current Exchange Rule 20.6 
(``Current Rule''), entitled ``Obvious Error,'' with new Exchange Rule 
20.6 (``Proposed Rule''), entitled ``Nullification and Adjustment of 
Options Transactions including Obvious Errors.'' Exchange Rule 20.6 
relates to the adjustment and nullification of transactions that occur 
on the Exchange's equity options platform (``BATS Options'').

A. Background

    The Exchange has been working with other options exchanges to 
identify ways to improve the process related to the adjustment and 
nullification of erroneous options transactions. The Proposed Rule is 
the culmination of a coordinated effort by the options exchanges to 
address the August 22, 2013, halt of trading in Nasdaq-listed 
securities (``Nasdaq SIP Failure''). Following the Nasdaq SIP Failure, 
the Chair of the Commission met with the heads of the securities 
exchanges to discuss potential initiatives aimed at addressing market 
resilience.\7\ The Proposed Rule responds to the Chair's initiative, 
and reflects discussions by the options exchanges to universally adopt: 
(1) Certain provisions already in place on one or more options 
exchanges; and (2) new provisions that the options exchanges 
collectively believe will improve the handling of erroneous options 
transactions.
---------------------------------------------------------------------------

    \7\ See SEC Press Release No. 2013-178 (September 12, 2013), 
available at https://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539804861.
---------------------------------------------------------------------------

B. Proposed Rule

1. Definitions
    The Exchange proposes to adopt various definitions that will be 
used in the Proposed Rule, as described below.
    First, the Exchange proposes to adopt a definition of ``Customer,'' 
to make clear that this term would not include any broker-dealer or 
Professional Customer.\8\
---------------------------------------------------------------------------

    \8\ A ``Professional'' is any person or entity that (A) is not a 
broker or dealer in securities; and (B) places more than 390 orders 
in listed options per day on average during a calendar month for its 
own beneficial account(s). See Exchange Rule 16.1(a)(45).
---------------------------------------------------------------------------

    Second, the Exchange proposes to adopt definitions for both an 
``erroneous sell transaction'' and an ``erroneous buy transaction.'' As 
proposed, an erroneous sell transaction is one in which the price 
received by the person selling the option is erroneously low, and an 
erroneous buy transaction is one in which the price paid by the person 
purchasing the option is erroneously high.
    Third, the Exchange proposes to adopt a definition of ``Official,'' 
which would mean an Officer of the Exchange or such other employee 
designee of the Exchange that is trained in the application of the 
Proposed Rule.
    Fourth, the Exchange proposes to adopt a new term, a ``Size 
Adjustment Modifier,'' which would apply to individual transactions and 
would modify the applicable adjustment for transactions under certain 
circumstances, as discussed in further detail below. As proposed, the 
Size Adjustment Modifier will be applied to individual transactions as 
follows:

------------------------------------------------------------------------
                                          Adjustment: Theoretical price
  Number of  contracts per  execution     (as defined below) plus/minus
------------------------------------------------------------------------
1-50..................................  N/A.
51-250................................  2 times adjustment amount.
251-1000..............................  2.5 times adjustment amount.
1001 or more..........................  3 times adjustment amount.
------------------------------------------------------------------------

2. Calculation of Theoretical Price
a. Theoretical Price in Normal Circumstances
    When reviewing a transaction as potentially erroneous, the Exchange 
needs to first determine the ``Theoretical Price'' of the option, i.e., 
the Exchange's estimate of the correct market price for the option. 
Pursuant to the Proposed Rule, if the applicable option series is 
traded on at least one other options exchange, then the Theoretical 
Price of an option series is the last national best bid (``NBB'') just 
prior to the trade in question with respect to an erroneous sell 
transaction or the last national best offer (``NBO'') just prior to the 
trade in question with respect to an erroneous buy transaction unless 
one of the exceptions described below exists. Thus, the Exchange 
proposes that whenever the Exchange has a reliable NBB or NBO, as 
applicable, just prior to the transaction, then the Exchange will use 
this NBB or NBO as the Theoretical Price for determining the execution 
price at all price levels.
    The Exchange also proposes to set forth in the Proposed Rule 
various provisions governing specific situations where the NBB or NBO 
is not available or may not be reliable. Specifically, the Exchange is 
proposing additional detail specifying situations in which there are no 
quotes or no valid quotes (as defined below), when the national best 
bid or offer (``NBBO'') is determined to be too

[[Page 16033]]

wide to be reliable, and at the open of trading on each trading day.
b. No Valid Quotes
    The Exchange proposes to determine the Theoretical Price if there 
are no quotes or no valid quotes for comparison purposes. As proposed, 
quotes that are not valid are all quotes in the applicable option 
series published at a time where the last NBB is higher than the last 
NBO in such series (a ``crossed market''), quotes published by the 
Exchange that were submitted by either party to the transaction in 
question, and quotes published by another options exchange against 
which the Exchange has declared self-help. Thus, in addition to 
scenarios where there are literally no quotes to be used as Theoretical 
Price, the Exchange will exclude quotes in certain circumstances if 
such quotes are not deemed valid.
c. Wide Quotes
    The Exchange proposes to determine the Theoretical Price if the 
bid/ask differential of the NBB and NBO for the affected series just 
prior to the erroneous transaction was equal to or greater than the 
Minimum Amount set forth below and there was a bid/ask differential 
less than the Minimum Amount during the 10 seconds prior to the 
transaction. If there was no bid/ask differential less than the Minimum 
Amount during the 10 seconds prior to the transaction then the 
Theoretical Price of an option series is the last NBB or NBO just prior 
to the transaction in question. The Exchange proposes to use the 
following chart (``Wide Quote Chart'') to determine whether a quote is 
too wide to be reliable:

------------------------------------------------------------------------
                                                               Minimum
                 Bid price at time of trade                     amount
------------------------------------------------------------------------
Below $2.00................................................        $0.75
$2.00 to $5.00.............................................         1.25
Above $5.00 to $10.00......................................         1.50
Above $10.00 to $20.00.....................................         2.50
Above $20.00 to $50.00.....................................         3.00
Above $50.00 to $100.00....................................         4.50
Above $100.00..............................................         6.00
------------------------------------------------------------------------

    As described above, while the Exchange proposes to determine 
Theoretical Price when the bid/ask differential equals or exceeds the 
amount set forth in the chart above and within the previous 10 seconds 
there was a bid/ask differential smaller than such amount, if a quote 
has been persistently wide for at least 10 seconds the Exchange will 
use such quote for purposes of Theoretical Price.
d. Transactions at the Open
    The Exchanges proposes that, for a transaction occurring as part of 
the Opening Process,\9\ the Exchange will determine the Theoretical 
Price where there is no NBB or NBO for the affected series just prior 
to the erroneous transaction or if the bid/ask differential of the NBBO 
just prior to the erroneous transaction is equal to or greater than the 
Minimum Amount set forth in the Wide Quote Chart. If, however, there 
are valid quotes and the bid/ask differential of the NBBO is less than 
the Minimum Amount set forth in the Wide Quote Chart, then the Exchange 
proposes to use the NBB or NBO just prior to the transaction as it 
would in any other normal review scenario.
---------------------------------------------------------------------------

    \9\ See Exchange Rule 21.7 for a description of the Exchange's 
Opening Process.
---------------------------------------------------------------------------

3. Obvious Errors
    The Exchange proposes to adopt numerical thresholds similar to 
those in place under the Current Rule that would qualify transactions 
as ``Obvious Errors.'' As proposed, a transaction will qualify as an 
Obvious Error if the Exchange receives a properly submitted filing and 
the execution price of a transaction is higher or lower than the 
Theoretical Price for the series by an amount equal to at least the 
amount shown below:

------------------------------------------------------------------------
                                                               Minimum
                     Theoretical price                          amount
------------------------------------------------------------------------
Below $2.00................................................        $0.25
$2.00 to $5.00.............................................         0.40
Above $5.00 to $10.00......................................         0.50
Above $10.00 to $20.00.....................................         0.80
Above $20.00 to $50.00.....................................         1.00
Above $50.00 to $100.00....................................         1.50
Above $100.00..............................................         2.00
------------------------------------------------------------------------

    Under the Proposed Rule, a party that believes that it participated 
in a transaction that was the result of an Obvious Error must notify 
the Exchange's Trade Desk in the manner specified from time to time by 
the Exchange in a circular distributed to Members.
    The Exchange also proposes to adopt notification timeframes that 
must be met in order for a transaction to qualify as an Obvious Error. 
Specifically, as proposed, a filing must be received by the Exchange 
within 30 minutes of the execution with respect to an execution of a 
Customer order and within 15 minutes of the execution for any other 
participant. The Exchange also proposes to provide additional time for 
trades that are routed through other options exchanges to the Exchange. 
Under the Proposed Rule, any other options exchange will have a total 
of 45 minutes for Customer orders and 30 minutes for non-Customer 
orders, measured from the time of execution on the Exchange, to file 
with the Exchange for review of transactions routed to the Exchange 
from that options exchange and executed on the Exchange (``linkage 
trades''). This includes filings on behalf of another options exchange 
filed by a third-party routing broker if such third-party broker 
identifies the affected transactions as linkage trades. In order to 
facilitate timely reviews of linkage trades, the Exchange will accept 
filings from either the other options exchange or, if applicable, the 
third-party routing broker that routed the applicable order(s). The 
additional 15 minutes provided with respect to linkage trades shall 
only apply to the extent the options exchange that originally received 
and routed the order to the Exchange itself received a timely filing 
from the entering participant (i.e., within 30 minutes if a Customer 
order or 15 minutes if a non-Customer order).
    Pursuant to the Proposed Rule, an Official may review a transaction 
believed to be erroneous on his/her own motion in the interest of 
maintaining a fair and orderly market and for the protection of 
investors. A transaction reviewed pursuant to the proposed provision 
may be nullified or adjusted only if it is determined by the Official 
that the transaction is erroneous in accordance with the provisions of 
the Proposed Rule, provided that the time deadlines for filing a 
request for review described above shall not apply. The Proposed Rule 
would require the Official to act as soon as possible after becoming 
aware of the transaction; action by the Official would ordinarily be 
expected on the same day that the transaction occurred. However, 
because a transaction under review may have occurred near the close of 
trading or due to unusual circumstances, the Proposed Rule provides 
that the Official shall act no later than 8:30 a.m. Eastern Time on the 
next trading day following the date of the transaction in question.
    The Exchange also proposes to state that a party affected by a 
determination to nullify or adjust a transaction after an Official's 
review on his or her own motion may appeal such determination, as 
described below. The Proposed Rule would make clear that a 
determination by an Official not to review a transaction or 
determination not to nullify or adjust a transaction for which a review 
was conducted on an Official's own motion is not appealable and further 
that if a transaction is reviewed and a determination is rendered 
pursuant to another provision of the

[[Page 16034]]

Proposed Rule, no additional relief may be granted by an Official.
    If it is determined that an Obvious Error has occurred based on the 
objective numeric criteria and time deadlines described above, the 
Exchange will adjust or nullify the transaction as described below and 
promptly notify both parties to the trade electronically or via 
telephone. The Exchange proposes different adjustment and nullification 
criteria for Customers and non-Customers.
    As proposed, where neither party to the transaction is a Customer, 
the execution price of the transaction will be adjusted by the Official 
pursuant to the table below.

------------------------------------------------------------------------
                                                    Buy          Sell
                                                transaction  transaction
            Theoretical price (TP)              adjustment:  adjustment:
                                                  TP Plus      TP Minus
------------------------------------------------------------------------
Below $3.00...................................        $0.15        $0.15
At or above $3.00.............................         0.30         0.30
------------------------------------------------------------------------

    Further, as proposed, any non-Customer Obvious Error exceeding 50 
contracts will be subject to the Size Adjustment Modifier described 
above.
    In contrast to non-Customer orders, where trades will be adjusted 
if they qualify as Obvious Errors, pursuant the Proposed Rule, a trade 
that qualifies as an Obvious Error will be nullified where at least one 
party to the Obvious Error is a Customer. The Exchange also proposes, 
however, that if any Member submits requests to the Exchange for review 
of transactions pursuant to the Proposed Rule, and in aggregate that 
Member has 200 or more Customer transactions under review concurrently 
and the orders resulting in such transactions were submitted during the 
course of 2 minutes or less, where at least one party to the Obvious 
Error is a non-Customer, the Exchange will apply the non-Customer 
adjustment criteria described above to such transactions.
4. Catastrophic Errors
    The Exchange further proposes to adopt separate numerical 
thresholds for review of transactions for which the Exchange does not 
receive a filing requesting review within the Obvious Error timeframes 
set forth above. Based on this review, these transactions may qualify 
as ``Catastrophic Errors.'' As proposed, a Catastrophic Error will be 
deemed to have occurred when the execution price of a transaction is 
higher or lower than the Theoretical Price for the series by an amount 
equal to at least the amount shown below:

------------------------------------------------------------------------
                                                               Minimum
                     Theoretical price                          amount
------------------------------------------------------------------------
Below $2.00................................................        $0.50
$2.00 to $5.00.............................................         1.00
Above $5.00 to $10.00......................................         1.50
Above $10.00 to $20.00.....................................         2.00
Above $20.00 to $50.00.....................................         2.50
Above $50.00 to $100.00....................................         3.00
Above $100.00..............................................         4.00
------------------------------------------------------------------------

    Under the Proposed Rule, parties have additional time to submit 
transactions for review as Catastrophic Errors. As proposed, 
notification requesting review must be received by the Exchange's Trade 
Desk by 8:30 a.m. Eastern Time on the first trading day following the 
execution. For transactions in an expiring options series that take 
place on an expiration day, a party must notify the Exchange's Trade 
Desk within 45 minutes after the close of trading that same day. As is 
true for requests for review under the Obvious Error provision of the 
Proposed Rule, a party requesting review of a transaction as a 
Catastrophic Error must notify the Exchange's Trade Desk in the manner 
specified from time to time by the Exchange in a circular distributed 
to Members. By definition, any execution that qualifies as a 
Catastrophic Error is also an Obvious Error.
    The Proposed Rule would specify the action to be taken by the 
Exchange if it is determined that a Catastrophic Error has occurred, as 
described above, and would require the Exchange to promptly notify both 
parties to the trade electronically or via telephone. In the event of a 
Catastrophic Error, the execution price of the transaction will be 
adjusted by the Official pursuant to the table below.

------------------------------------------------------------------------
                                                    Buy          Sell
                                                transaction  transaction
            Theoretical price  (TP)
                                                adjustment:  adjustment:
                                                   TP plus     TP minus
------------------------------------------------------------------------
Below $2.00...................................        $0.50        $0.50
$2.00 to $5.00................................         1.00         1.00
Above $5.00 to $10.00.........................         1.50         1.50
Above $10.00 to $20.00........................         2.00         2.00
Above $20.00 to $50.00........................         2.50         2.50
Above $50.00 to $100.00.......................         3.00         3.00
Above $100.00.................................         4.00         4.00
------------------------------------------------------------------------

Although Customer orders would be adjusted in the same manner as non-
Customer orders, any Customer order that qualifies as a Catastrophic 
Error will be nullified if the adjustment would result in an execution 
price higher (for buy transactions) or lower (for sell transactions) 
than the Customer's limit price.
5. Significant Market Events
    Furthermore, the Exchange proposes to adopt a new provision that 
calls for coordination between the options exchanges in certain 
circumstances and provides limited flexibility in the application of 
other provisions of the Proposed Rule in order to promptly respond to a 
widespread market event.\10\ The Exchange proposes to describe such an 
event as a Significant Market Event (``SME''), and to set forth certain 
objective criteria that will determine whether such an event has 
occurred. The Exchange developed these objective criteria in 
consultation with the other options exchanges by reference to 
historical patterns and events with a goal of setting thresholds that 
very rarely will be triggered so as to limit the application of the 
provision to truly significant market events. As proposed, an SME will 
be deemed to have occurred when proposed criterion (A) below is met or 
exceeded or the sum of all applicable event statistics, where each is 
expressed as a percentage of the relevant threshold in criteria (A) 
through (D) below, is greater than or equal to 150%, and at least one 
of the event statistics reaches 75% or more of the category, provided 
that no single category can contribute more than 100% to the sum of 
categories (A) through (D). All categories set forth below will be 
measured in aggregate across all exchanges. Any category satisfying 
more than 100% will be rounded down to 100%.
---------------------------------------------------------------------------

    \10\ Although the Exchange has proposed a specific provision 
related to coordination amongst options exchanges in the context of 
a widespread event, the Exchange does not believe that the SME 
provision or any other provision of the proposed rule alters the 
Exchange's ability to coordinate with other options exchanges in the 
normal course of business with respect to market events or activity. 
The Exchange does already coordinate with other options exchanges to 
the extent possible if such coordination is necessary to maintain a 
fair and orderly market and/or to fulfill the Exchange's duties as a 
self-regulatory organization.
---------------------------------------------------------------------------

    The proposed criteria for determining an SME are as follows:
    (A) Transactions that are potentially erroneous would result in a 
total Worst-Case Adjustment Penalty of $30,000,000, where the Worst-
Case Adjustment Penalty is computed as the sum, across all potentially 
erroneous trades, of: (i) $0.30 (i.e., the largest Transaction 
Adjustment value listed in sub-paragraph (e)(3)(A) below); times; (ii) 
the contract multiplier for each traded contract; times (iii) the 
number of contracts for each trade; times (iv) the appropriate Size 
Adjustment Modifier for each trade, if any, as defined in sub-paragraph 
(e)(3)(A) below;

[[Page 16035]]

    (B) Transactions involving 500,000 options contracts are 
potentially erroneous;
    (C) Transactions with a notional value (i.e., number of contracts 
traded multiplied by the option premium multiplied by the contract 
multiplier) of $100,000,000 are potentially erroneous;
    (D) 10,000 transactions are potentially erroneous.
    As described above, the Exchange proposes to adopt the Worst Case 
Adjustment Penalty, proposed as criterion (A), which is the only 
criterion that can on its own result in an event being designated as a 
significant market event. If the Worst Case Adjustment criterion is 
equal to or exceeds $30,000,000, then an event is an SME.
    As described above, under the Proposed Rule, if the Worst Case 
Adjustment Penalty is less than $30,000,000, then an SME has occurred 
if the sum of all applicable event statistics (expressed as a 
percentage of the relevant thresholds in criteria (A) through (D) 
above), is greater than or equal to 150% and 75% or more of at least 
one category is reached. The Proposed Rule further provides that no 
single category can contribute more than 100% to the sum and any 
category contributing more than 100% will be rounded down to 100%.
    To ensure consistent application across options exchanges, in the 
event of a suspected SME, the Exchange shall initiate a coordinated 
review of potentially erroneous transactions with all other affected 
options exchanges to determine the full scope of the event. Under the 
Proposed Rule, the Exchange will promptly coordinate with the other 
options exchanges to determine the appropriate review period as well as 
select one or more specific points in time prior to the transactions in 
question and use one or more specific points in time to determine 
Theoretical Price. Other than the selected points in time, if 
applicable, the Exchange will determine Theoretical Price as described 
above.
    If it is determined that an SME has occurred then, using the 
parameters agreed with respect to the times from which Theoretical 
Price will be calculated, if applicable, an Official will determine 
whether any or all transactions under review qualify as Obvious Errors. 
The Proposed Rule would require the Exchange to use the criteria for 
determining whether an Obvious Error has occurred, as described above, 
for each transaction that was part of the SME. Upon taking any final 
action, the Exchange would be required to promptly notify both parties 
to the trade electronically or via telephone.
    The execution price of each affected transaction will be adjusted 
by an Official to the price provided below, unless both parties agree 
to adjust the transaction to a different price or agree to bust the 
trade.

------------------------------------------------------------------------
                                                    Buy          Sell
                                                transaction  transaction
            Theoretical price  (TP)
                                                adjustment:  adjustment:
                                                   TP plus     TP minus
------------------------------------------------------------------------
Below $3.00...................................        $0.15        $0.15
At or above $3.00.............................         0.30         0.30
------------------------------------------------------------------------

    Thus, the proposed adjustment criteria for SMEs are identical to 
the proposed adjustment levels for Obvious Errors generally. In 
addition, in the context of an SME, any error exceeding 50 contracts 
will be subject to the Size Adjustment Modifier described above. Also, 
the adjustment criteria would apply equally to all market participants 
(i.e., Customers and non-Customers) in an SME. However, as is true for 
the proposal with respect to Catastrophic Errors, under the Proposed 
Rule where at least one party to the transaction is a Customer, the 
trade will be nullified if the adjustment would result in an execution 
price higher (for buy transactions) or lower (for sell transactions) 
than the Customer's limit price.
    Another significant distinction between the proposed Obvious Error 
provision and the proposed SME provision is that if the Exchange, in 
consultation with other options exchanges, determines that timely 
adjustment is not feasible due to the extraordinary nature of the 
situation, then the Exchange will nullify some or all transactions 
arising out of the SME during the review period selected by the 
Exchange and other options exchanges. To the extent the Exchange, in 
consultation with other options exchanges, determines to nullify less 
than all transactions arising out of the SME, those transactions 
subject to nullification will be selected based upon objective criteria 
with a view toward maintaining a fair and orderly market and the 
protection of investors and the public interest. Furthermore, the 
Proposed Rule provides that rulings by the Exchange pursuant to the SME 
provision would be non-appealable.
6. Mutual Agreement
    The Proposed Rule also proposes to make clear that the 
determination as to whether a trade was executed at an erroneous price 
may be made by mutual agreement of the affected parties to a particular 
transaction. The Proposed Rule provides that a trade may be nullified 
or adjusted on the terms that all parties to a particular transaction 
agree, provided, however, that such agreement to nullify or adjust must 
be conveyed to the Exchange in a manner prescribed by the Exchange 
prior to 8:30 a.m. Eastern Time on the first trading day following the 
execution. The Exchange also proposes to explicitly state that it is 
considered conduct inconsistent with just and equitable principles of 
trade for any Member to use the mutual adjustment process to circumvent 
any applicable Exchange rule, the Act or any of the rules and 
regulations thereunder.
7. Trading Halts
    The Exchange additionally proposes to modify Interpretation and 
Policy .01 to Exchange Rule 20.3 (Trading Halts), which describes the 
Exchange's authority to declare trading halts in one or more options 
traded on the Exchange. Currently, Interpretation and Policy .01 states 
that the Exchange ``may'' nullify any transaction that occurs: (a) 
During a trading halt in the affected option on the Exchange; or (b) 
with respect to equity options (including options overlying ETFs), 
during a trading halt on the primary listing market for the underlying 
security. To ensure consistency with the trading halt provision of 
Proposed Rule 20.6, the Exchange proposes to modify Interpretation and 
Policy .01 to Exchange Rule 20.3 to state that in either situation 
described above, the Exchange ``shall'' nullify such transactions.
8. Erroneous Print and Quotes in Underlying Security
    The Exchange proposes to adopt language in the Proposed Rule 
stating that a trade resulting from an erroneous print(s) disseminated 
by the underlying market that is later nullified by that underlying 
market shall be adjusted or busted as set forth in the Obvious Error 
provisions of the Proposed Rule, provided a party notifies the 
Exchange's Trade Desk in a timely manner, as further described below. 
The Exchange proposes to define a trade resulting from an erroneous 
print(s) as any options trade executed during a period of time for 
which one or more executions in the underlying security are nullified 
and for one second thereafter. The Exchange also proposes to require 
that if a party believes that it participated in an erroneous 
transaction resulting from an erroneous print(s) pursuant to the 
proposed erroneous print provision it must notify the Exchange's Trade 
Desk

[[Page 16036]]

within the timeframes set forth in the Obvious Error provision 
described above. The Exchange has also proposed to state that the 
allowed notification timeframe commences at the time of notification by 
the underlying market(s) of nullification of transactions in the 
underlying security. Further, the Exchange proposes that if multiple 
underlying markets nullify trades in the underlying security, the 
allowed notification timeframe will commence at the time of the first 
market's notification.
    The Exchange also proposes to add a provision stating that a trade 
resulting from an erroneous quote(s) in the underlying security shall 
be adjusted or busted as set forth in the Obvious Error provisions of 
the Proposed Rule, provided a party notifies the Exchange's Trade Desk 
in a timely manner, as further described below. Pursuant to the 
Proposed Rule, an erroneous quote occurs when the underlying security 
has a width of at least $1.00 and has a width at least five times 
greater than the average quote width for such underlying security 
during the time period encompassing two minutes before and after the 
dissemination of such quote. For purposes of the Proposed Rule, the 
average quote width will be determined by adding the quote widths of 
sample quotations at regular 15-second intervals during the four-minute 
time period referenced above (excluding the quote(s) in question) and 
dividing by the number of quotes during such time period (excluding the 
quote(s) in question).\11\ Similar to the proposal with respect to 
erroneous prints described above, if a party believes that it 
participated in an erroneous transaction resulting from an erroneous 
quote(s) it must notify the Exchange's Trade Desk in accordance with 
the notification provisions of the Obvious Error provision described 
above.
---------------------------------------------------------------------------

    \11\ The Exchange has proposed the price and time parameters for 
quote width and average quote width used to determine whether an 
erroneous quote has occurred based on established rules of options 
exchanges that currently apply such parameters. See, e.g., CBOE Rule 
6.25(a)(5); NYSE Arca Rule 6.87(a)(5).
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9. Stop (and Stop-Limit) Order Trades Triggered by Erroneous Trades
    As proposed, transactions resulting from the triggering of a stop 
or stop-limit order by an erroneous trade in an option contract shall 
be nullified by the Exchange, provided a party notifies the Exchange's 
Trade Desk in a timely manner as set forth below. If a party believes 
that it participated in an erroneous transaction pursuant to the 
Proposed Rule it must notify the Exchange's Trade Desk within the 
timeframes set forth in the Obvious Error rule above, with the allowed 
notification timeframe commencing at the time of notification of the 
nullification of transaction(s) that triggered the stop or stop-limit 
order.
10. Linkage Trades
    The Exchange also proposes to adopt language that provides the 
Exchange with authority to take necessary actions when another options 
exchange nullifies or adjusts a transaction pursuant to its respective 
rules and the transaction resulted from an order that has passed 
through the Exchange and been routed on to another options exchange on 
behalf of the Exchange. Specifically, if the Exchange routes an order 
pursuant to the Intermarket Option Linkage Plan \12\ that results in a 
transaction on another options exchange (a ``Linkage Trade'') and such 
options exchange subsequently nullifies or adjusts the Linkage Trade 
pursuant to its rules, the Exchange will perform all actions necessary 
to complete the nullification or adjustment of the Linkage Trade. 
Although the Exchange is not utilizing its own authority to nullify or 
adjust a transaction related to an action taken on a Linkage Trade by 
another options exchange, the Exchange does have to assist in the 
processing of the adjustment or nullification of the order, such as 
notification to the Member and the OCC of the adjustment or 
nullification.
---------------------------------------------------------------------------

    \12\ As defined in Exchange Rule 27.1(17).
---------------------------------------------------------------------------

11. Appeals
    The Exchange proposes to maintain its current appeals process in 
connection with the Proposed Rule. Specifically, if a member of BATS 
Options (``Options Member'') affected by a determination made under the 
Proposed Rule requests within the time permitted below, the Obvious 
Error Panel will review decisions made by the BATS Official, including 
whether an obvious error occurred and whether the correct determination 
was made.
    The Obvious Error Panel will be comprised of the Exchange's Chief 
Regulatory Officer (``CRO'') or a designee of the CRO, a representative 
of one (1) Options Member engaged in market making (any such 
representative, a ``MM Representative'') and representatives from two 
(2) Options Members satisfying one or both of the criteria set forth 
below (any such representative, a ``Non-MM Representative''). To 
qualify as a Non-MM Representative a person must: Be employed by an 
Options Member whose revenues from options market making activity do 
not exceed ten percent (10%) of its total revenues; or have as his or 
her primary responsibility the handling of Public Customer orders or 
supervisory responsibility over persons with such responsibility, and 
not have any responsibilities with respect to market making activities.
    The Exchange shall further designate at least ten (10) MM 
Representatives and at least ten (10) Non-MM Representatives to be 
called upon to serve on the Obvious Error Panel as needed. To assure 
fairness, in no case shall an Obvious Error Panel include a person 
affiliated with a party to the trade in question. Also, to the extent 
reasonably possible, the Exchange shall call upon the designated 
representatives to participate on an Obvious Error Panel on an equally 
frequent basis.
    Under the Proposed Rule a request for review on appeal must be made 
in writing via email or other electronic means specified from time to 
time by the Exchange in a circular distributed to Options Members 
within thirty (30) minutes after the party making the appeal is given 
notification of the initial determination being appealed. The Obvious 
Error Panel shall review the facts and render a decision as soon as 
practicable, but generally on the same trading day as the execution(s) 
under review. On requests for appeal received after 3:00 p.m. Eastern 
Time, a decision will be rendered as soon as practicable, but in no 
case later than the trading day following the date of the execution 
under review.
    The Obvious Error Panel may overturn or modify an action taken by 
the BATS Official under this Rule. All determinations by the Obvious 
Error Panel shall constitute final action by the Exchange on the matter 
at issue.
    If the Obvious Error Panel votes to uphold the decision made 
pursuant to the Proposed Rule, the Exchange will assess a $500.00 fee 
against the Options Member(s) who initiated the request for appeal. In 
addition, in instances where the Exchange, on behalf of an Options 
Member, requests a determination by another market center that a 
transaction is clearly erroneous, the Exchange will pass any resulting 
charges through to the relevant Options Member.
    Any determination by an Officer or by the Obvious Error Panel shall 
be rendered without prejudice as to the rights of the parties to the 
transaction to submit their dispute to arbitration.
12. Limit Up-Limit Down Plan
    The Exchange is proposing to adopt Interpretation and Policy .01 to 
Proposed Rule 20.6 (``LULD Options

[[Page 16037]]

Pilot'') to provide for how the Exchange will treat Obvious and 
Catastrophic Errors in response to the Regulation NMS Plan to Address 
Extraordinary Market Volatility Pursuant to Rule 608 of Regulation NMS 
under the Act (the ``Limit Up-Limit Down Plan'' or the ``Plan''),\13\ 
which is applicable to all NMS stocks, as defined in Regulation NMS 
Rule 600(b)(47).\14\ Under the Proposed Rule, during a pilot period to 
coincide with the pilot period for the Plan,\15\ including any 
extensions to the pilot period for the Plan, an execution will not be 
subject to review as an Obvious Error or Catastrophic Error pursuant to 
paragraph (c) or (d) of the Proposed Rule if it occurred while the 
underlying security was in a ``Limit State'' or ``Straddle State,'' as 
defined in the Plan. The Exchange, however, proposes to retain 
authority to review transactions on an Official's own motion pursuant 
to sub-paragraph (c)(3) of the Proposed Rule and to bust or adjust 
transactions pursuant to the proposed SME provision, the proposed 
trading halts provision, the proposed provisions with respect to 
erroneous prints and quotes in the underlying security, or the proposed 
provision related to stop and stop limit orders that have been 
triggered by an erroneous execution.
---------------------------------------------------------------------------

    \13\ Securities Exchange Act Release No. 67091 (May 31, 2012), 
77 FR 33498 (June 6, 2012) (order approving the Plan on a pilot 
basis).
    \14\ 17 CFR 242.600(b)(47).
    \15\ The Commission notes that the Exchange has amended its LULD 
Options Pilot date from August 20, 2015 to October 23, 2015. See 
Amendment No. 2, supra note 6.
---------------------------------------------------------------------------

    During a Limit or Straddle State, options prices may deviate 
substantially from those available immediately prior to or following 
such States. Thus, determining a Theoretical Price in such situations 
would often be very subjective, creating unnecessary uncertainty and 
confusion for investors. Because of this uncertainty, the Exchange is 
proposing to amend Rule 20.6 to provide that the Exchange will not 
review transactions as Obvious Errors or Catastrophic Errors when the 
underlying security is in a Limit or Straddle State.
    The Exchange notes that there are additional protections in place 
outside of the Obvious and Catastrophic Error Rule that will continue 
to safeguard customers. First, the Exchange rejects all un-priced 
options orders received by the Exchange (i.e., Market Orders) during a 
Limit or Straddle State for the underlying security. Second, SEC Rule 
15c3-5 requires that, ``financial risk management controls and 
supervisory procedures must be reasonably designed to prevent the entry 
of orders that exceed appropriate pre-set credit or capital thresholds, 
or that appear to be erroneous.'' \16\ Third, the Exchange has price 
checks applicable to limit orders that reject limit orders that are 
priced sufficiently far through the national best bid or national best 
offer (``NBBO'') that it seems likely an error occurred. The rejection 
of Market Orders, the requirements placed upon broker dealers to adopt 
controls to prevent the entry of orders that appear to be erroneous, 
and Exchange functionality that filters out orders that appear to be 
erroneous, will all serve to sharply reduce the incidence of erroneous 
transactions.
---------------------------------------------------------------------------

    \16\ See Securities and Exchange Act Release No. 63241 (November 
3, 2010), 75 FR 69791 (November 15, 2010) (File No. S7-03-10).
---------------------------------------------------------------------------

    The Exchange has agreed to provide the Commission with relevant 
data to assess the impact of this proposed rule change. As part of its 
analysis, the Exchange will evaluate (1) the options market quality 
during Limit and Straddle States, (2) assess the character of incoming 
order flow and transactions during Limit and Straddle States, and (3) 
review any complaints from Members and their customers concerning 
executions during Limit and Straddle States. The Exchange has also 
agreed to provide to the Commission data requested to evaluate the 
impact of the inapplicability of the Obvious Error and Catastrophic 
Error provisions, including data relevant to assessing the various 
analyses noted above.
    In connection with this proposed rule change, the Exchange will 
provide to the Commission and the public a dataset containing the data 
for each Straddle State and Limit State in NMS Stocks underlying 
options traded on the Exchange beginning in the month during which the 
proposed rule change is approved, limited to those option classes that 
have at least one (1) trade on the Exchange during a Straddle State or 
Limit State. For each of those option classes affected, each data 
record will contain the following information:
     Stock symbol, option symbol, time at the start of the 
Straddle or Limit State, an indicator for whether it is a Straddle or 
Limit State.
     for activity on the Exchange:
     executed volume, time-weighted quoted bid-ask spread, 
time-weighted average quoted depth at the bid, time-weighted average 
quoted depth at the offer;
     high execution price, low execution price;
     number of trades for which a request for review for error 
was received during Straddle and Limit States;
     an indicator variable for whether those options outlined 
above have a price change exceeding 30% during the underlying stock's 
Limit or Straddle State compared to the last available option price as 
reported by OPRA before the start of the Limit or Straddle State (1 if 
observe 30% and 0 otherwise). Another indicator variable for whether 
the option price within five minutes of the underlying stock leaving 
the Limit or Straddle state (or halt if applicable) is 30% away from 
the price before the start of the Limit or Straddle State.
    In addition, by May 29, 2015, the Exchange shall provide to the 
Commission and the public assessments relating to the impact of the 
operation of the Obvious Error rules during Limit and Straddle States 
as follows: (1) Evaluate the statistical and economic impact of Limit 
and Straddle States on liquidity and market quality in the options 
markets; and (2) Assess whether the lack of Obvious Error rules in 
effect during the Straddle and Limit States are problematic. The timing 
of this submission would coordinate with Participants' proposed time 
frame to submit to the Commission assessments as required under 
Appendix B of the Plan. The Exchange notes that the pilot program is 
intended to run concurrent with the pilot period of the Plan, which has 
been extended to October 23, 2015. The Exchange proposes to reflect 
this date in the Proposed Rule.
13. No Adjustments to a Worse Price
    Finally, the Exchange proposes to include Interpretation and Policy 
.02 to the Proposed Rule, which would make clear that to the extent the 
provisions of the proposed Rule would result in the Exchange applying 
an adjustment of an erroneous sell transaction to a price lower than 
the execution price or an erroneous buy transaction to a price higher 
than the execution price, the Exchange will not adjust or nullify the 
transaction, but rather, the execution price will stand.
    Additional information relating to the proposed rule change can be 
found in the Notice.\17\ The Exchange has proposed that this proposed 
rule change become effective on May 8, 2015. The Exchange notes that 
this delayed implementation is to ensure that other options exchanges 
will have sufficient time to adopt similar rules consistent with the 
proposed rule change and to coordinate the effectiveness of such 
harmonized rules.
---------------------------------------------------------------------------

    \17\ See supra note 3.

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[[Page 16038]]

III. Discussion of Comment Letters and Commission Findings

    As noted previously, the Commission received two comment letters on 
the proposed rule change and a response letter from the Exchange.\18\ 
Both commenters generally support the principles underlying the 
proposed rule change, including greater transparency and more 
consistent results for investors, market participants, and the public 
regarding the handling of nullification and adjustment of options 
transactions including obvious erroneous transactions.\19\ Both 
commenters applaud the Exchange's effort to adopt a harmonized rule 
related to the adjustment of erroneous options transactions, as well as 
a specific provision related to coordination in connection with 
SMEs.\20\ However, both commenters provide additional suggestions for 
the proposed rule change and further encourage the Commission to 
continue to work with the Exchange and the other options exchanges and 
market participants to consider ways to develop increased pre-trade 
risk controls on exchanges, which could prevent erroneous trades before 
they occur.\21\ The Exchange has responded to the commenters, as 
discussed below.\22\
---------------------------------------------------------------------------

    \18\ See supra notes 4-5.
    \19\ See Goldman Letter, supra note 4; SIFMA Letter, supra note 
4.
    \20\ See id.
    \21\ See id.
    \22\ See BATS Response Letter, supra note 5.
---------------------------------------------------------------------------

A. Summary of Comment Letters Received

    The Goldman Letter supports the goal and much of the substance of 
the Proposed Rule, including the efforts to ensure predictability in 
the case of an SME.\23\ However, the Goldman Letter believes that, in 
the case of an SME, BATS and other impacted exchanges should nullify 
all affected trades.\24\ The Goldman Letter argues that providing a 
higher degree of certainty in the outcome during such an event would 
reduce residual economic harm to the parties involved and would promote 
a timely remediation of the event without unnecessary delay and 
uncertainty.\25\
---------------------------------------------------------------------------

    \23\ See Goldman Letter, supra note 4, at 1-2.
    \24\ See id. at 3.
    \25\ See id.
---------------------------------------------------------------------------

    The SIFMA Letter generally supports the proposed rule change, but 
notes that there are critical aspects that will require additional time 
to allow for exchange and industry discussion, including the 
development of a method to ensure greater objectivity and uniformity 
with respect to the calculation of Theoretical Price.\26\ SIFMA also 
supports the use of a third party vendor system that would generate 
theoretical values, and encourages the exchanges to work expeditiously 
towards accomplishing such a goal.\27\
---------------------------------------------------------------------------

    \26\ See SIFMA Letter, supra note 4, at 3.
    \27\ See id.
---------------------------------------------------------------------------

    The Goldman and SIFMA Letters both advocate for the Commission and 
the exchanges to work towards the establishment of pre-trade controls 
designed to prevent erroneous trades before they occur.\28\ Both 
commenters believe this can be accomplished through a set of pre-trade 
risk controls (e.g., kill switches), and SIFMA also believes this can 
be further accomplished with post-trade risk controls, both designed to 
reduce the frequency and magnitude of market disruptions.\29\
---------------------------------------------------------------------------

    \28\ See Goldman Letter, supra note 4, at 3-4; and SIFMA Letter, 
supra note 4, at 3.
    \29\ See id.
---------------------------------------------------------------------------

    In its response to commenters, the Exchange reiterates its belief 
that the Proposed Rule will provide greater transparency and finality 
with respect to the adjustment and nullification of erroneous options 
transactions.\30\ The Exchange notes that it agrees with the 
commenters' suggestions that it continue to work towards additional 
objectivity and uniformity with respect to the calculation of 
Theoretical Price and that it pursue other tools to prevent erroneous 
transactions, including pre-trade risk functionality.\31\ In addition, 
the Exchange emphasizes its commitment to working with other options 
exchanges, SIFMA, and market participants in connection with such 
initiatives.\32\
---------------------------------------------------------------------------

    \30\ See BATS Response Letter, supra note 5, at 1-2.
    \31\ See id. at 2.
    \32\ See id.
---------------------------------------------------------------------------

    With respect to the proposal to adjust or nullify erroneous 
transactions in connection with an SME, the Exchange notes that the 
Proposed Rule would permit the Exchange to coordinate with other 
options exchanges in certain circumstances and would provide limited 
flexibility in the application of the general obvious error provisions 
of the Proposed Rule in order to allow the Exchange to promptly respond 
to a widespread market event that meets the criteria of an SME.\33\ 
Such coordination would be used to determine the specific points in 
time to be used to determine Theoretical Price, as well as whether or 
not timely adjustment of affected transactions would be feasible.\34\ 
The Exchange acknowledges the concern presented in the Goldman Letter 
and reiterates that the Proposed Rule allows the Exchange to nullify 
some or all transactions arising out of an SME if timely adjustments 
are not feasible.\35\ However, the Exchange notes its belief that long-
standing principles in the options market support the need for 
adjustments when they can reasonably be provided.\36\ The Exchange 
states that because market participants, and particularly liquidity 
providers, commonly engage in hedging transactions, adjustments are 
necessary when possible to limit the potential negative economic impact 
to such participants, which is magnified during an SME.\37\ Moreover, 
the Exchange believes the Proposed Rule adequately balances the 
competing interests of mitigating harm through the longstanding 
practice of timely adjusting erroneous options trades and the need for 
certainty when timely adjustments are not feasible by preserving the 
discretion to nullify some or all transactions arising out of an 
SME.\38\
---------------------------------------------------------------------------

    \33\ See id. at 2-3.
    \34\ See id.
    \35\ See id. at 3.
    \36\ See id.
    \37\ See id.
    \38\ See id.
---------------------------------------------------------------------------

B. Commission Findings

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\39\ In 
particular, the Commission finds that the proposed rule change, as 
amended, is consistent with the requirements of Section 6(b) of the Act 
\40\ and with Section 6(b)(5) of the Act,\41\ which requires, among 
other things, that the Exchange's rules 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.
---------------------------------------------------------------------------

    \39\ In approving this proposed rule change, as amended, the 
Commission notes that it has considered the proposed rule's impact 
on efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \40\ 15 U.S.C. 78f(b).
    \41\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission believes that the proposal to adopt Rule 20.6 will 
help assure greater objectivity, transparency, and clarity with respect 
to the adjustment and nullification of erroneous options transactions. 
The Commission notes that the Proposed

[[Page 16039]]

Rule is designed to achieve more consistent results for participants 
across U.S. options exchanges than under the current rules while 
maintaining a fair and orderly market, protecting investors, and 
protecting the public interest. In the Commission's view, the proposed 
rule change will help assure that the determination of whether an 
erroneous options transaction has occurred will generally be based on 
clear and objective criteria, and that the resolution of the incident 
will occur promptly through a transparent process. Based on the 
foregoing, the Commission believes that the proposed rule change is 
consistent with Section 6(b)(5) of the Act \42\ in that Proposed Rule 
20.6 will foster cooperation and coordination with persons engaged in 
regulating and facilitating transactions.
---------------------------------------------------------------------------

    \42\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission notes that the Exchange represented in its filing 
that the Exchange and all other options exchanges have been working to 
further improve the review of potentially erroneous transactions as 
well as their subsequent adjustment by creating a more objective and 
uniform way to determine Theoretical Price in the event a reliable NBBO 
is not available, as in, for example, such cases where there is a wide 
quote or no valid quote, as described above.\43\ Specifically, the 
Exchange and all other options exchanges are considering utilizing an 
independent third party to calculate and disseminate or make available 
Theoretical Price in order to better achieve uniform results during an 
event in which a potentially erroneous transaction involving the same 
option is under review at more than one exchange.\44\ The Exchange 
notes, however, that this initiative requires additional Exchange and 
industry discussion as well as additional time for development and 
implementation.\45\ The Commission expects the Exchange and the other 
national securities exchanges to continue to work with other options 
exchanges and the options industry towards the goal of additional 
objectivity and uniformity with respect to the calculation of 
Theoretical Price in these circumstances.
---------------------------------------------------------------------------

    \43\ See Notice, supra note 3, at 77558.
    \44\ See id.
    \45\ See id.
---------------------------------------------------------------------------

    The Commission appreciates the suggestions and responses offered by 
both commenters to improve the process by which the Exchange addresses 
the harmonization of rules related to the adjustment and nullification 
of erroneous options transactions.\46\ The Commission believes that the 
proposed rule changes represent a significant first step by the options 
exchanges to bring greater clarity and transparency to the process for 
the adjustment and nullification of erroneous options transactions, and 
that these improvements should not be delayed pending consideration of 
further initiatives. The Commission notes that the Exchange intends to 
continue to work with other options exchanges and market participants 
to further develop, as appropriate, additional objectivity with respect 
to their processes for the adjustment and nullification of erroneous 
options transactions.\47\ Regarding the comment that the Exchange 
should nullify all affected transactions when an SME has occurred,\48\ 
the Commission believes that the Exchange's approach to permit 
transactions that occur during an SME to be adjusted in certain 
circumstances is reasonable, as adjustments may limit the potential 
negative impact to market participants who commonly engage in hedging 
transactions.
---------------------------------------------------------------------------

    \46\ See SIFMA Letter, supra note 4, at 3; and Goldman Letter, 
supra note 4, at 3-4. In addition, the Commission acknowledges the 
comment that the Commission and the exchanges work towards the 
establishment of pre-trade controls designed to prevent erroneous 
trades before they occur but believes that such comment is outside 
the scope of the proposed rule change. See id.
    \47\ See Notice, supra note 3, at 77558; BATS Response Letter, 
supra note 5, at 2.
    \48\ See Goldman Letter, supra note 4, at 3.
---------------------------------------------------------------------------

    Finally, the Commission notes that the proposed rule change will 
become operative on May 8, 2015. This delayed implementation is to 
ensure that other options exchanges will have sufficient time to put in 
place similar rules consistent with this proposed rule change and to 
coordinate the date of implementation of such harmonized rules.

IV. Solicitation of Comments on Amendment No. 2

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment No. 2 
to the proposed rule change is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-BATS-2014-067 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-BATS-2014-067. 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 Web site (https://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 
10:00 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-BATS-2014-067 and should be 
submitted on or before April 16, 2015.

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 2

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment Nos. 1 and 2, prior to the 30th day 
after the date of publication of notice of Amendment No. 2 in the 
Federal Register. As discussed above, Amendment No. 2 revised the 
proposed rule change by: (1) Making technical, non-substantive 
corrections to the definition of ``Size Adjustment Modifier'' in 
paragraph (a)(4) of Proposed Rule 20.6 and the criterion used to 
measure the occurrence of a Significant Market Event in paragraph 
(e)(1) of Proposed Rule 20.6; (2) amending the description in paragraph 
(b) of Proposed Rule 20.6 to use the last NBB and last NBO prior to the 
Exchange's receipt of an order as the Theoretical Price for determining 
the

[[Page 16040]]

execution price at all price levels when a single order is executed at 
multiple price levels; (3) updating the expiration date of the pilot 
program related to the suspension of certain provisions of the Proposed 
Rule to October 23, 2015 in connection with the Limit Up-Limit Down 
Plan and making clear that the Exchange would provide a publicly 
available assessment of the operation of this portion of the Proposed 
Rule by May 29, 2015; and (4) proposing an implementation date of May 
8, 2015 to allow all the other options exchanges the time necessary to 
harmonize their rules with the Proposed Rule.\49\
---------------------------------------------------------------------------

    \49\ See Amendment No. 2, supra note 6.
---------------------------------------------------------------------------

    The Commission believes Amendment No. 2 would provide market 
participants with additional clarity by making technical, non-
substantive corrections to certain portions of the filing.\50\ The 
Commission believes the amendment to the determination of Theoretical 
Price when a single order is executed at multiple price levels is 
consistent with the protection of investors because the revised 
provision provides additional certainty to market participants and 
eliminates the discretion of the Exchange to determine Theoretical 
Price in certain circumstances.\51\ The Commission further believes 
that approval of the proposed rule change, as modified by Amendment 
Nos. 1 and 2, on an accelerated basis would permit other options 
exchanges to complete the process of filing similar proposals to adopt 
the new, harmonized rule on a timely basis.\52\
---------------------------------------------------------------------------

    \50\ See id.
    \51\ See id.
    \52\ See id.
---------------------------------------------------------------------------

    As discussed above, the Commission believes that the revisions in 
Amendment No. 2 are being made to provide additional clarity to the 
proposed rule change and to provide additional certainty and 
consistency by eliminating the discretion of the Exchange to determine 
Theoretical Price in certain circumstances. The Commission believes 
Amendment No. 2 is consistent with the purpose of the proposed rule 
change and is consistent with the protection of investors and the 
public interest. Accordingly, the Commission finds good cause, pursuant 
to Section 19(b)(2) of the Act,\53\ to approve the proposed rule 
change, as modified by Amendment Nos. 1 and 2, on an accelerated basis.
---------------------------------------------------------------------------

    \53\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\54\ that the proposed rule change, as modified by Amendment Nos. 1 
and 2 (SR-BATS-2014-067) be, and hereby is, approved on an accelerated 
basis.
---------------------------------------------------------------------------

    \54\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\55\
---------------------------------------------------------------------------

    \55\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Brent J. Fields,
Secretary.
[FR Doc. 2015-06890 Filed 3-25-15; 8:45 am]
 BILLING CODE 8011-01-P