Self-Regulatory Organizations; International Securities Exchange, LLC; Notice of Filing of a Proposed Rule Change, as Modified by Amendment No. 1 Thereto, Relating to Obvious Errors, 2967-2969 [E8-647]
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Federal Register / Vol. 73, No. 11 / Wednesday, January 16, 2008 / Notices
3. ISE would require its members to
deliver a prospectus or product
description to investors purchasing the
Shares prior to or concurrently with a
transaction in the Shares.
This approval order is based on these
representations.
The Commission finds good cause for
approving this proposal before the 30th
day after the publication of notice
thereof in the Federal Register. As
noted previously, the Commission
previously found that the listing and
trading of the Shares on Amex is
consistent with the Act. Additionally,
the Commission has approved the
trading of the Shares pursuant to UTP
on another national securities
exchange.18 The Commission presently
is not aware of any regulatory issue that
should cause it to revisit those findings
or would preclude the trading of the
Shares on the Exchange pursuant to
UTP. Therefore, accelerating approval of
this proposal should benefit investors
by creating, without undue delay,
additional competition in the market for
the Shares.
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,19 that the
proposed rule change (SR–ISE–2007–
103), as modified by Amendment No. 1
thereto, be, and it hereby is, approved
on an accelerated basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.20
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8–646 Filed 1–15–08; 8:45 am]
SECURITIES AND EXCHANGE
COMMISSION
Self-Regulatory Organizations;
International Securities Exchange,
LLC; Notice of Filing of a Proposed
Rule Change, as Modified by
Amendment No. 1 Thereto, Relating to
Obvious Errors
January 10, 2008.
jlentini on PROD1PC65 with NOTICES
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
18 See Securities Exchange Act Release No. 56601
(October 2, 2007), 72 FR 51625 (October 10, 2007)
(SR–NYSEArca–2007–79).
19 Id.
20 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
Jkt 214001
The Exchange proposes to amend its
Obvious Error rule to address
‘‘Catastrophic Errors.’’ The text of the
proposed rule change is available at the
Exchange, the Commission’s Public
Reference Room, and https://
www.ise.com.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of, and basis for,
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in Sections A, B, and C below, of
the most significant aspects of such
statements.
1. Purpose
[Release No. 34–57127; File No. SR–ISE–
2007–112]
17:55 Jan 15, 2008
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
BILLING CODE 8011–01–P
VerDate Aug<31>2005
notice is hereby given that on November
29, 2007, the International Securities
Exchange, LLC (‘‘ISE’’ or ‘‘Exchange’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been substantially prepared by the
Exchange. On January 4, 2008, the ISE
submitted Amendment No. 1 to the
proposed rule change. The Commission
is publishing this notice to solicit
comments on the proposed rule change,
as amended, from interested persons.
The Exchange states that the purpose
of the proposed rule change is to amend
ISE Rule 720 (the ‘‘Obvious Error Rule’’)
to address certain extreme
circumstances. In particular, the
Exchange proposes to add criteria for
identifying ‘‘Catastrophic Errors’’ and
making adjustments when Catastrophic
Errors occur, as well as a streamlined
procedure for reviewing actions taken in
these extreme circumstances.
The Exchange notes that, currently
under the Obvious Error Rule, trades
that result from an Obvious Error may
be adjusted or busted according to
objective standards. Under the rule,
whether an Obvious Error has occurred
is determined by comparing the
execution price to the theoretical price
of the option. The rule requires that
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2967
members notify ISE Market Control
within a short time period following the
execution of a trade (five minutes for
market makers and 20 minutes for
Electronic Access Members (‘‘EAMs’’))
if they believe the trade qualifies as an
Obvious Error. Trades that qualify for
adjustment are adjusted under the rule
to a price that matches the theoretical
price plus or minus an adjustment
value, which is $.15 if the theoretical
value is under $3 and $.30 if the
theoretical value is at or above $3. By
adjusting trades above or below the
theoretical price, the rule assesses a
‘‘penalty’’ in that the adjustment price is
not as favorable as what the party
making the error would have received
had it not made the error.
In formulating the Obvious Error
Rule, the Exchange has weighed
carefully the need to assure that one
market participant is not permitted to
receive a wind-fall at the expense of
another market participant that made an
Obvious Error, against the need to
assure that market participants are not
simply being given an opportunity to
reconsider poor trading decisions. The
Exchange states that, while it believes
that the Obvious Error Rule strikes the
correct balance in most situations, in
some extreme situations, members may
not be aware of errors that result in very
large losses within the time periods
required under the rule. In this type of
extreme situation, ISE believes members
should be given more time to seek relief
so that there is a greater opportunity to
mitigate very large losses and reduce the
corresponding large wind-falls.
However, to maintain the appropriate
balance, the Exchange believes members
should only be given more time when
the execution price is much further
away from the theoretical price than is
required for Obvious Errors, and that the
adjustment ‘‘penalty’’ should be much
greater, so that relief is only provided in
extreme circumstances.3
Accordingly, the Exchange proposes
to amend the Obvious Error Rule to
address ‘‘Catastrophic Errors.’’ Under
the proposed rule, Members will have
until 8:30 a.m. Eastern Time on the day
following the trade to notify Market
Control of a potential Catastrophic
Error. For trades that take place in an
expiring series on expiration Friday,
Members must notify Market Control of
a potential Catastrophic Error by 5 p.m.
Eastern Time that same day. Once a
3 The Exchange does not believe the type of
extreme situation that is covered by the proposed
rule would occur in the normal course of trading.
Rather, this type of situation could potentially
occur as a result of, for example, an error in a
member’s quotation system that causes a market
maker to severely misprice an option.
E:\FR\FM\16JAN1.SGM
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Federal Register / Vol. 73, No. 11 / Wednesday, January 16, 2008 / Notices
member has notified Market Control of
a Catastrophic Error within the required
time period, a tribunal comprised of two
representatives from market makers and
two representatives from EAMs that are
unrelated to the transaction in question
(the ‘‘Tribunal’’) will review the
Catastrophic Error claim. In the event
the Tribunal determines that a
Catastrophic Error did not occur, the
member that initiated the review will be
charged $5,000 to reimburse the
Exchange for the costs associated with
reviewing the claim.
A Catastrophic Error would be
deemed to have occurred when the
execution price of a transaction is
higher or lower than the theoretical
price for the option by an amount equal
to at least the amount shown in the
second column of the chart below (the
‘‘Minimum Amount’’), and the
adjustment would be made plus or
minus the amount shown in column
three of the chart below (the
‘‘Adjustment Value’’). At all price
levels, the Minimum Amount and the
Adjustment Value for Catastrophic
Errors would be significantly higher
than for Obvious Errors, which the
Exchange believes, would limit the
application of the proposed rule to
situations where the losses are very
large.
Minimum
amount
Theoretical price
Below $2 ............................................................................................................................................................................
$2 to $5 ..............................................................................................................................................................................
Above $5 to $10 ................................................................................................................................................................
Above $10 to $50 ..............................................................................................................................................................
Above $50 to $100 ............................................................................................................................................................
Above $100 ........................................................................................................................................................................
jlentini on PROD1PC65 with NOTICES
The following example demonstrates
how the proposed Catastrophic Error
provisions would operate within the
Obvious Error framework. Assume a
member notifies ISE Market Control
within 2 minutes of a trade where 100
contracts of an option with a theoretical
price of $9 were purchased for $17,
resulting in an $80,000 error.4 The trade
would qualify as an Obvious Error
because the purchase price is more than
$.50 above the theoretical price and the
member notified ISE Market Control
within the required time period. Market
Control would review the trade and
either bust it or adjust it to a purchase
price of $9.30,5 which reduces the cost
of the error to $3,000.6 If, however, the
member failed to identify the same error
and notify Market Control until four
hours after the trade, it could not be
reviewed under the current Obvious
Error Rule. Under the proposal, this
trade would qualify as a Catastrophic
Error because the purchase price is more
than $5 above the theoretical price.
Under the proposal, the Tribunal would
review the trade and adjust the purchase
price to $12, which reduces the cost of
the error to $30,000.7
The Exchange believes that the
proposed longer time period is
appropriate to allow members to
discover, and seek relief from, trading
errors that result in extreme losses. At
the same time, the Exchange believes
that the proposed Minimum Amounts
4 One hundred contracts equal 10,000 shares, and
the purchase price is $8 per share above the
theoretical price. Therefore, the purchaser paid
$80,000 over the theoretical value.
5 ISE Rule 720(c)(2).
6 10,000 shares at $.30 per share over the
theoretical value.
7 10,000 shares at $3.00 per share over the
theoretical value.
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17:55 Jan 15, 2008
Jkt 214001
required for a trade to qualify as a
Catastrophic Error, in combination with
the large Adjustment Values, assures
that only those transactions where the
price of the execution results in very
high losses will be eligible for
adjustment under the new provisions.
While the Exchange believes it is
important to identify and resolve
trading errors quickly, it also believes it
is important to the integrity of the
marketplace to have the authority to
mitigate extreme losses resulting from
errors. In this respect, the Exchange
believes that the above example
illustrates how market participants
would continue to be encouraged to
identify errors quickly, as losses will be
significantly lower if the erroneous
trades are busted or adjusted under the
Obvious Error provisions of the rule.
In consideration of the extreme nature
of situations that will be addressed
under the proposed Catastrophic Error
provisions, the Exchange proposes a
streamlined procedure for making
determinations and adjustments. Under
the current rule for Obvious Errors, ISE
Market Control makes determinations
that can then be appealed to a panel of
member representatives. For
Catastrophic Errors, the Exchange
proposes to have a one-step process
where the Tribunal makes
determinations and adjustments.
Additionally, given the burden that
reviews under the Catastrophic Error
provisions of the rule will have on
exchange staff and member
representatives, the Exchange proposes
to include a $5000 fee in the event that
the Tribunal determines that a
Catastrophic Error did not occur. The
Exchange believes that this is reasonable
to encourage Members to requests
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$1
$2
$5
$10
$20
$30
Adjustment
value
$1
$2
$3
$5
$7
$10
reviews only in appropriate situations,
particularly given the objective criteria
used to determine whether a
Catastrophic Error occurred and the
considerable amount of time members
are given under the proposal to assess
whether a trade falls within that criteria.
The Exchange also amended
Supplementary Material .02, .03, and
.04 to ISE Rule 720 to reflect the
proposed creation of the Tribunal.
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with Section
6(b) of the Act,8 in general, and furthers
the objectives of Section 6(b)(5) of the
Act,9 in particular, in that it is designed
to prevent fraudulent and manipulative
acts, 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. In particular, the
proposal will allow members a longer
opportunity to seek relief from errors
that result in large losses.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
No written comments were solicited
or received by the Exchange with
respect to the proposed rule change.
8 15
9 15
E:\FR\FM\16JAN1.SGM
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
16JAN1
Federal Register / Vol. 73, No. 11 / Wednesday, January 16, 2008 / Notices
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding, or
(ii) as to which the Exchange consents,
the Commission will:
A. By order approve the proposed rule
change or
B. Institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
jlentini on PROD1PC65 with NOTICES
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–ISE–2007–112 on the
subject line.
Copies of such 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–ISE–2007–112 and should
be submitted on or before February 6,
2008.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.10
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8–647 Filed 1–15–08; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–57128; File No. SR–ISE–
2008–02]
Self-Regulatory Organizations;
International Securities Exchange,
LLC; Notice of Filing and Immediate
Effectiveness of Proposed Rule
Change Relating to Fee Changes
January 10, 2008.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
Paper Comments
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on January 2,
• Send paper comments in triplicate
2008, the International Securities
to Nancy M. Morris, Secretary,
Exchange, LLC (‘‘Exchange’’ or ‘‘ISE’’)
Securities and Exchange Commission,
filed with the Securities and Exchange
100 F Street, NE., Washington, DC
Commission (‘‘Commission’’) the
20549–1090.
proposed rule change as described in
All submissions should refer to File
Items I, II, and III below, which Items
Number SR–ISE–2007–112. This file
have been substantially prepared by the
number should be included on the
subject line if e-mail is used. To help the ISE. The ISE has designated this
proposal as one establishing or changing
Commission process and review your
a due, fee, or other charge imposed by
comments more efficiently, please use
only one method. The Commission will the ISE under section 19(b)(3)(A)(ii) of
3
post all comments on the Commission’s the Act, and Rule 19b–4(f)(2)
thereunder,4 which renders the proposal
Internet Web site (https://www.sec.gov/
effective upon filing with the
rules/sro.shtml). Copies of the
Commission. The Commission is
submission, all subsequent
publishing this notice to solicit
amendments, all written statements
comments on the proposed rule change
with respect to the proposed rule
from interested persons.
change that are filed with the
Commission, and all written
I. Self-Regulatory Organization’s
communications relating to the
Statement of the Terms of Substance of
proposed rule change between the
the Proposed Rule Change
Commission and any person, other than
The ISE is proposing to amend its
those that may be withheld from the
Schedule of Fees to increase the
public Accordance with the provisions
surcharge fee for transactions in options
of 5 U.S.C. 552, will be available for
inspection and copying in the
10 17 CFR 200.30–3(a)(12).
Commission’s Public Reference Room,
1 15 U.S.C. 78s(b)(1).
100 F Street, NE., Washington, DC
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(ii).
20549, on official business days
4 17 CFR 240.19b–4(f)(2).
between the hours of 10 a.m. and 3 p.m.
VerDate Aug<31>2005
17:55 Jan 15, 2008
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2969
on the Nasdaq–100 Stock Index. The
text of the proposed rule change is
available on the Exchange’s Web site
(www.ise.com), at the principal office of
the Exchange, and at the Commission’s
Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
ISE included statements concerning the
purpose of, and basis for, the proposed
rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. The ISE has prepared
summaries, set forth in Sections A, B,
and C below, of the most significant
aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange is proposing to amend
its Schedule of Fees to increase the
surcharge fee for transactions in options
on the Nasdaq–100 Stock Index, both
full value (‘‘NDX’’) and 1/10 value
(‘‘MNX’’).5 The Exchange currently
charges an execution fee and a
comparison fee for all transactions in
options on NDX and MNX.6
Specifically, the amount of the
execution fee and comparison fee for
transactions in options on NDX and
MNX is $0.15 and $0.03 per contract,
respectively, for all Public Customer
Orders 7 and Firm Proprietary orders.
The current amount of the execution fee
and comparison fee for all ISE Market
Maker transactions in options on NDX
and MNX is equal to the execution fee
and comparison fee currently charged
by the Exchange for ISE Market Maker
5 See Securities Exchange Act Release No. 51121
(February 1, 2005), 70 FR 6476 (February 7, 2005),
(SR–ISE–2005–01) (Order approving the trading of
options on full and reduced values of the Nasdaq–
100 Stock Index).
6 See Securities Exchange Act Release No. 51397
(March 18, 2005), 70 FR 15372 (March 25, 2005),
(SR–ISE–2005–13) (Notice of Filing and Immediate
Effectiveness of proposed fee changes related to
NDX and MNX options). These fees are charged
only to Exchange members. Under a pilot program
that is set to expire on July 31, 2008, these fees will
also be charged to Linkage Orders (as defined in ISE
Rule 1900). See Securities Exchange Act Release
No. 56128 (July 24, 2007), 72 FR 42161 (August 1,
2007) (SR–ISE–2007–55).
7 Public Customer Order is defined in Exchange
Rule 100(a)(39) as an order for the account of a
Public Customer. Public Customer is defined in
Exchange Rule 100(a)(38) as a person that is not a
broker or dealer in securities.
E:\FR\FM\16JAN1.SGM
16JAN1
]]>Agencies
[Federal Register Volume 73, Number 11 (Wednesday, January 16, 2008)]
[Notices]
[Pages 2967-2969]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-647]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-57127; File No. SR-ISE-2007-112]
Self-Regulatory Organizations; International Securities Exchange,
LLC; Notice of Filing of a Proposed Rule Change, as Modified by
Amendment No. 1 Thereto, Relating to Obvious Errors
January 10, 2008.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on November 29, 2007, the International Securities Exchange, LLC
(``ISE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been substantially
prepared by the Exchange. On January 4, 2008, the ISE submitted
Amendment No. 1 to the proposed rule change. The Commission is
publishing this notice to solicit comments on the proposed rule change,
as amended, from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend its Obvious Error rule to address
``Catastrophic Errors.'' The text of the proposed rule change is
available at the Exchange, the Commission's Public Reference Room, and
https://www.ise.com.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of, and basis for, the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
Sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange states that the purpose of the proposed rule change is
to amend ISE Rule 720 (the ``Obvious Error Rule'') to address certain
extreme circumstances. In particular, the Exchange proposes to add
criteria for identifying ``Catastrophic Errors'' and making adjustments
when Catastrophic Errors occur, as well as a streamlined procedure for
reviewing actions taken in these extreme circumstances.
The Exchange notes that, currently under the Obvious Error Rule,
trades that result from an Obvious Error may be adjusted or busted
according to objective standards. Under the rule, whether an Obvious
Error has occurred is determined by comparing the execution price to
the theoretical price of the option. The rule requires that members
notify ISE Market Control within a short time period following the
execution of a trade (five minutes for market makers and 20 minutes for
Electronic Access Members (``EAMs'')) if they believe the trade
qualifies as an Obvious Error. Trades that qualify for adjustment are
adjusted under the rule to a price that matches the theoretical price
plus or minus an adjustment value, which is $.15 if the theoretical
value is under $3 and $.30 if the theoretical value is at or above $3.
By adjusting trades above or below the theoretical price, the rule
assesses a ``penalty'' in that the adjustment price is not as favorable
as what the party making the error would have received had it not made
the error.
In formulating the Obvious Error Rule, the Exchange has weighed
carefully the need to assure that one market participant is not
permitted to receive a wind-fall at the expense of another market
participant that made an Obvious Error, against the need to assure that
market participants are not simply being given an opportunity to
reconsider poor trading decisions. The Exchange states that, while it
believes that the Obvious Error Rule strikes the correct balance in
most situations, in some extreme situations, members may not be aware
of errors that result in very large losses within the time periods
required under the rule. In this type of extreme situation, ISE
believes members should be given more time to seek relief so that there
is a greater opportunity to mitigate very large losses and reduce the
corresponding large wind-falls. However, to maintain the appropriate
balance, the Exchange believes members should only be given more time
when the execution price is much further away from the theoretical
price than is required for Obvious Errors, and that the adjustment
``penalty'' should be much greater, so that relief is only provided in
extreme circumstances.\3\
---------------------------------------------------------------------------
\3\ The Exchange does not believe the type of extreme situation
that is covered by the proposed rule would occur in the normal
course of trading. Rather, this type of situation could potentially
occur as a result of, for example, an error in a member's quotation
system that causes a market maker to severely misprice an option.
---------------------------------------------------------------------------
Accordingly, the Exchange proposes to amend the Obvious Error Rule
to address ``Catastrophic Errors.'' Under the proposed rule, Members
will have until 8:30 a.m. Eastern Time on the day following the trade
to notify Market Control of a potential Catastrophic Error. For trades
that take place in an expiring series on expiration Friday, Members
must notify Market Control of a potential Catastrophic Error by 5 p.m.
Eastern Time that same day. Once a
[[Page 2968]]
member has notified Market Control of a Catastrophic Error within the
required time period, a tribunal comprised of two representatives from
market makers and two representatives from EAMs that are unrelated to
the transaction in question (the ``Tribunal'') will review the
Catastrophic Error claim. In the event the Tribunal determines that a
Catastrophic Error did not occur, the member that initiated the review
will be charged $5,000 to reimburse the Exchange for the costs
associated with reviewing the claim.
A Catastrophic Error would be deemed to have occurred when the
execution price of a transaction is higher or lower than the
theoretical price for the option by an amount equal to at least the
amount shown in the second column of the chart below (the ``Minimum
Amount''), and the adjustment would be made plus or minus the amount
shown in column three of the chart below (the ``Adjustment Value''). At
all price levels, the Minimum Amount and the Adjustment Value for
Catastrophic Errors would be significantly higher than for Obvious
Errors, which the Exchange believes, would limit the application of the
proposed rule to situations where the losses are very large.
------------------------------------------------------------------------
Minimum Adjustment
Theoretical price amount value
------------------------------------------------------------------------
Below $2....................................... $1 $1
$2 to $5....................................... $2 $2
Above $5 to $10................................ $5 $3
Above $10 to $50............................... $10 $5
Above $50 to $100.............................. $20 $7
Above $100..................................... $30 $10
------------------------------------------------------------------------
The following example demonstrates how the proposed Catastrophic
Error provisions would operate within the Obvious Error framework.
Assume a member notifies ISE Market Control within 2 minutes of a trade
where 100 contracts of an option with a theoretical price of $9 were
purchased for $17, resulting in an $80,000 error.\4\ The trade would
qualify as an Obvious Error because the purchase price is more than
$.50 above the theoretical price and the member notified ISE Market
Control within the required time period. Market Control would review
the trade and either bust it or adjust it to a purchase price of
$9.30,\5\ which reduces the cost of the error to $3,000.\6\ If,
however, the member failed to identify the same error and notify Market
Control until four hours after the trade, it could not be reviewed
under the current Obvious Error Rule. Under the proposal, this trade
would qualify as a Catastrophic Error because the purchase price is
more than $5 above the theoretical price. Under the proposal, the
Tribunal would review the trade and adjust the purchase price to $12,
which reduces the cost of the error to $30,000.\7\
---------------------------------------------------------------------------
\4\ One hundred contracts equal 10,000 shares, and the purchase
price is $8 per share above the theoretical price. Therefore, the
purchaser paid $80,000 over the theoretical value.
\5\ ISE Rule 720(c)(2).
\6\ 10,000 shares at $.30 per share over the theoretical value.
\7\ 10,000 shares at $3.00 per share over the theoretical value.
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The Exchange believes that the proposed longer time period is
appropriate to allow members to discover, and seek relief from, trading
errors that result in extreme losses. At the same time, the Exchange
believes that the proposed Minimum Amounts required for a trade to
qualify as a Catastrophic Error, in combination with the large
Adjustment Values, assures that only those transactions where the price
of the execution results in very high losses will be eligible for
adjustment under the new provisions. While the Exchange believes it is
important to identify and resolve trading errors quickly, it also
believes it is important to the integrity of the marketplace to have
the authority to mitigate extreme losses resulting from errors. In this
respect, the Exchange believes that the above example illustrates how
market participants would continue to be encouraged to identify errors
quickly, as losses will be significantly lower if the erroneous trades
are busted or adjusted under the Obvious Error provisions of the rule.
In consideration of the extreme nature of situations that will be
addressed under the proposed Catastrophic Error provisions, the
Exchange proposes a streamlined procedure for making determinations and
adjustments. Under the current rule for Obvious Errors, ISE Market
Control makes determinations that can then be appealed to a panel of
member representatives. For Catastrophic Errors, the Exchange proposes
to have a one-step process where the Tribunal makes determinations and
adjustments. Additionally, given the burden that reviews under the
Catastrophic Error provisions of the rule will have on exchange staff
and member representatives, the Exchange proposes to include a $5000
fee in the event that the Tribunal determines that a Catastrophic Error
did not occur. The Exchange believes that this is reasonable to
encourage Members to requests reviews only in appropriate situations,
particularly given the objective criteria used to determine whether a
Catastrophic Error occurred and the considerable amount of time members
are given under the proposal to assess whether a trade falls within
that criteria.
The Exchange also amended Supplementary Material .02, .03, and .04
to ISE Rule 720 to reflect the proposed creation of the Tribunal.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
Section 6(b) of the Act,\8\ in general, and furthers the objectives of
Section 6(b)(5) of the Act,\9\ in particular, in that it is designed to
prevent fraudulent and manipulative acts, 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.
In particular, the proposal will allow members a longer opportunity to
seek relief from errors that result in large losses.
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\8\ 15 U.S.C. 78f(b).
\9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
No written comments were solicited or received by the Exchange with
respect to the proposed rule change.
[[Page 2969]]
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding, or (ii) as to
which the Exchange consents, the Commission will:
A. By order approve the proposed rule change or
B. Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed 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 e-mail to rule-comments@sec.gov. Please include
File Number SR-ISE-2007-112 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-ISE-2007-112. This file
number should be included on the subject line if e-mail is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (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 Accordance with the
provisions of 5 U.S.C. 552, will be available for inspection and
copying in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of such filing also will be available for
inspection and copying at the principal office of 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-ISE-2007-112 and should be
submitted on or before February 6, 2008.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-647 Filed 1-15-08; 8:45 am]
BILLING CODE 8011-01-P
