Self-Regulatory Organizations; the Boston Stock Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend BOX Rules Relating to Obvious Error Provisions To Address Catastrophic Errors, Erroneous Quotes or Prints in the Underlying Security, and Some Additional Modifications, 969-972 [E9-158]
Download as PDF
<![CDATA[
Federal Register / Vol. 74, No. 6 / Friday, January 9, 2009 / Notices
Shagufta_Ahmed@omb.eop.gov; and (ii)
Charles Boucher, Director/CIO,
Securities and Exchange Commission,
C/O Shirley Martinson, 6432 General
Green Way, Alexandria, VA 22312; or
send an e-mail to:
PRA_Mailbox@sec.gov. Comments must
be submitted to OMB within 30 days of
this notice.
underlying security and some additional
modifications to this section. The text of
the proposed rule change is available
from the principal office of the
Exchange, at the Commission’s Public
Reference Room and also on the
Exchange’s Internet Web site at https://
nasdaqtrader.com/Trader.aspx?id=
Boston_Stock_Exchange.
January 5, 2009.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9–160 Filed 1–8–09; 8:45 am]
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
BILLING CODE 8011–01–P
In its filing with the Commission, the
self-regulatory organization 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 self-regulatory organization has
prepared summaries, set forth in
Sections A, B, and C below, of the most
significant aspects of such statements.
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–59197; File No. SR–BSE–
2008–52]
Self-Regulatory Organizations; the
Boston Stock Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of
a Proposed Rule Change To Amend
BOX Rules Relating to Obvious Error
Provisions To Address Catastrophic
Errors, Erroneous Quotes or Prints in
the Underlying Security, and Some
Additional Modifications
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
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 December
24, 2008, the Boston Stock Exchange,
Inc.) (‘‘BSE’’ or the ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by BSE. The Exchange
filed the proposed rule change as a
‘‘non-controversial’’ proposed rule
change pursuant to Section 19(b)(3)(A)
of the Act 3 and Rule 19b-4(f)(6)
thereunder,4 which renders the proposal
effective upon filing with the
Commission. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
mstockstill on PROD1PC66 with NOTICES
January 5, 2009.
The purpose of the proposed rule
change is to amend Chapter V, Section
20 of the BOX Rules (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. This
proposed rule change also seeks to
incorporate provisions within the BOX
Obvious Error Rule which will allow for
the nullification or adjustment of trades
that are the result of either an erroneous
quote or print in the underlying
security. In addition, the proposed rule
also amends the Supplementary
Material to remove references to a $.05
offer and to provide that executions may
be busted, if at least one strike below
(for calls) or above (for puts), rather than
the three strikes.
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
participants notify the Market
Operations Center ) (‘‘MOC’’) within a
short time period following the
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Chapter V, Section 20 (Obvious Errors)
of the Rules of the Boston Options
Exchange Group, LLC ) (‘‘BOX’’) to
address catastrophic errors )
(‘‘Catastrophic Errors’’) as well as
erroneous quotes or prints in the
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A).
4 17 CFR 240.19b–4(f)(6).
2 17
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969
execution of a trade (five minutes for
market makers and 20 minutes for nonmarket makers) 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, participants
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, the Exchange believes
participants 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 participants 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.5
Accordingly, the Exchange proposes
to amend the Obvious Error Rule to
address ‘‘Catastrophic Errors.’’ Under
the proposed rule, participants will
have until 8:30 a.m. Eastern Time on the
day following the trade to notify the
MOC of a potential Catastrophic Error.
For trades that take place in an expiring
series on expiration Friday, participants
must notify the MOC of a potential
Catastrophic Error by 5 p.m. Eastern
Time that same day. Once a participant
has notified the MOC of a Catastrophic
Error within the required time period,
5 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
paticipant’s quotation system that causes a market
maker to severly misprice an option.
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Federal Register / Vol. 74, No. 6 / Friday, January 9, 2009 / Notices
the Market Regulation Center ) (‘‘MRC’’)
will review the Catastrophic Error
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 ......................................................................................................................................................................
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The following example demonstrates
how the proposed Catastrophic Error
provisions would operate within the
Obvious Error framework. Assume a
participant notifies the MOC 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.6 The trade would
qualify as an Obvious Error because the
purchase price is more than $.50 above
the Theoretical Price and the participant
notified the MOC within the required
time period. The Exchange would
review the trade and either bust it or
adjust it to a purchase price of $9.30,7
which reduces the cost of the error to
$3,000.8 If, however, the participant
failed to identify the same error and
notify the MOC until four hours after
the trade, it may 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 MRC would review the
trade and adjust the purchase price to
$12, which reduces the cost of the error
to $30,000.9
The Exchange believes that the
proposed longer time period is
appropriate to allow participants 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
6 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.
7 See Proposed Chapter V, Section 20(g)(ii) of the
BOX Rules.
8 10,000 shares at $.30 per share over the
theoretical value.
9 10,000 shares at $3.00 per share over the
theoretical value.
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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, the
MRC makes determinations that can
then be appealed to the Boston Options
Exchange Regulation (‘‘BOXR’’) Chief
Regulatory Officer (‘‘CRO’’). For
Catastrophic Errors, the Exchange
proposes to have a one-step process
where the MRC, with the approval of
the CRO or an Options Official,10 who
is not a participant, designated by the
CRO (‘‘CRO or designee’’) makes
determinations and adjustments. If it is
determined that a Catastrophic Error has
occurred, the CRO or its designee will
instruct the MRC to adjust the execution
price of the transaction(s) according to
proposed subparagraph (g)(iii). All
determinations by the CRO or its
designee shall constitute final Exchange
action on the matter at issue. The
10 See BOX Rules Chapter I, Section 1(43) which
defines ‘‘Options Official’’ as an officer of BOX
Regulation vested by the BOX Regulation Board
with certain authority to supervise option trading
on BOX.
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$1
2
5
10
20
30
Adjustment
value
$1
2
3
5
7
10
Exchange encourages participants to
request reviews only in appropriate
situations, particularly given the
objective criteria used to determine
whether a Catastrophic Error occurred
and the considerable amount of time
participants are given under the
proposal to assess whether a trade falls
within that criteria.
Additionally, the Exchange proposes
to amend the Obvious Error Rule to
address an occurrence of an erroneous
quote or print in the underlying
security. Participants on BOX base the
value of their quotes and orders off of
the price of underlying security. The
two provisions which the Exchange
proposes to add to the BOX Obvious
Error Rule cover instances where the
information that the participants are
using to price options is erroneous,
through no fault of their own. An
erroneous quote or print in an
underlying security, which is
disseminated by the Primary Market 11
for that security, means that participants
are receiving erroneous information
which they then incorporate into
trading decisions. In these instances,
participants have little if any chance of
pricing options accurately. In order to
provide relief from transactions that
occur as a result of these erroneous
quotes and/or prints, the Exchange
proposes the following provisions.
Chapter V, Section 20(d) Erroneous
Print in Underlying
An electronic trade resulting from an
erroneous print disseminated by the
Primary Market which is later cancelled
or corrected by that Primary Market may
be nullified. In order to be nullified,
however, the trade must be the result of
an erroneous print that is higher or
lower than the average trade in the
11 See BOX Rules Chapter I, Section 1(50) which
defines ‘‘Primary Market’’ as the principal market
where the underlying security is traded.
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mstockstill on PROD1PC66 with NOTICES
underlying security during a twominute period before and after the
erroneous print by an amount at least
five times greater than the average quote
width for such underlying security
during the same period. For purposes of
this paragraph, the average trade in the
underlying security shall be determined
by adding the prices of each trade
during the four minute time period
referenced above (excluding the trade in
question) and dividing by the number of
trades during such time period
(excluding the trade in question). For
purposes of this paragraph, the average
quote width shall be determined by
adding the quote widths of each
separate quote during the four minute
time period referenced above (excluding
the quote in question) and dividing by
the number of quotes during such time
period (excluding the quote in
question).
Chapter V, Section 20(e) Erroneous
Quote in Underlying
Trades resulting from an erroneous
quote in the underlying security may be
adjusted or nullified as set forth in
Chapter V, Section 20(f). 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 on the Primary
Market (as defined in BOX Rules
Chapter I, Section 1(50)) during the time
period encompassing two minutes
before and after the dissemination of
such quote. For purposes of this
paragraph, the average quote width shall
be determined by adding the quote
widths of each separate quote during the
four minute time period referenced
above (excluding the quote in question)
and dividing by the number of quotes
during such time period (excluding the
quote in question) and dividing by the
number of quotes during such time
period (excluding the quote in
question).
These proposed rule changes will
provide participants on BOX with the
same opportunities for price adjustment
or trade nullification that are available
on other options exchanges. The
Exchange notes that these provisions are
similar in all respects to rules already
approved for use at The Chicago Board
Options Exchange (‘‘CBOE’’),12 The
American Stock Exchange (‘‘Amex’’),13
and NYSE Arca.14
In addition, the proposed rule also
amends the Supplementary Material to
remove references to a $.05 offer. The
12 See
CBOE Rules 6.25(a)(4)–(5).
13 See Amex Rules 936–ANTE(a)(4)–(5).
14 See NYSE Arca Rules 6.87(a)(4)–(5).
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Exchange also proposes to provide that
buyers of options with a zero bid may
request their execution be busted, if at
least one strike below (for calls) or
above (for puts), in the same options
class were quoted with a zero bid at the
time of execution rather than the three
strikes, which is currently in the rule.
Removing the references to a $.05 offer
will allow errors resulting from trades in
penny pilot issues be treated in the
same manner as non-penny classes.
Moreover, these proposed changes will
provide participants on BOX with
similar opportunities for price
adjustment or trade nullification that are
available on other options exchanges.15
2. Statutory Basis
The Exchange believes that the
proposal is consistent with the
requirements of Section 6(b) of the
Act,16 in general, and Section 6(b)(5) of
the Act,17 in particular, in that it is
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
facilitating transactions in securities, 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. Specifically, the
proposal will, under certain
circumstances, provide participants
with the opportunity for a longer period
within which to seek relief from errors
that result in large losses. The proposal
is also appropriate given that it provides
for the adjustment or nullification of
trades which are executed at clearly
erroneous prices due to no fault of the
parties to the trade. Finally, removing
the references to a $.05 offer in the
Supplementary Material will allow
errors resulting from trades in penny
pilot issues be treated in the same
manner as non-penny classes.
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 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
The Exchange has neither solicited
nor received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A) of the Act 18 and Rule 19b–
4(f)(6) thereunder.19
At any time within 60 days of the
filing of the proposed rule change, the
Commission may summarily abrogate
such rule change if it appears to the
Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Act.
A proposed rule change filed
pursuant to Rule 19b–4(f)(6) under the
Act 20 normally does not become
operative for 30 days after the date of its
filing. However, Rule 19b–4(f)(6) 21
permits the Commission to designate a
shorter time if such action is consistent
with the protection of investors and the
public interest. BSE requests that the
Commission waive the 30-day operative
delay to immediately offer market
participants on BSE the same potential
for relief that is available at other
options exchanges for certain obvious
errors, catastrophic errors, or erroneous
quotes or prints in the underlying
security. The Exchange stated that the
proposed changes are not novel and are
necessary to eliminate any confusion
among members of multiple exchanges
regarding the handling and treatment of
requests for review of Catastrophic
Errors and instances of erroneous quotes
or prints in the underlying security and
for purposes of maintaining a fair and
orderly market. The Commission
believes that waiving the 30-day
18 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6) requires a self-regulatory organization to give
the Commission written notice of its intent to file
the proposed rule change at least five business days
prior to the date of filing of the proposed rule
change, or such shorter time as designated by the
Commission. BSE has satisfied this requirement.
20 17 CFR 240.19b–4(f)(6).
21 Id.
19 17
15 See e.g. CBOE Rules 6.25(a)(2); Amex Rules
936–ANTE(a)(2).
16 15 U.S.C. 78f(b).
17 15 U.S.C. 78f(b)(5).
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Federal Register / Vol. 74, No. 6 / Friday, January 9, 2009 / Notices
operative delay 22 is consistent with the
protection of investors and the public
interest. Given that the Exchange’s
proposed rule change is substantially
similar to the rules of other exchanges
previously approved by the
Commission, the proposal does not
appear to present any novel regulatory
issues. Therefore, the Commission
designates the proposal as operative
upon filing.
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:
mstockstill on PROD1PC66 with NOTICES
Electronic Comments
• 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–BSE–2008–52 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–BSE–2008–52. 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 in 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
22 For purposes only of waiving the 30-day
operative delay, the Commission has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
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16:16 Jan 08, 2009
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comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make publicly available. All
submissions should refer to File
Number SR–BSE–2008–52 and should
be submitted on or before January 30,
2009.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.23
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9–158 Filed 1–8–09; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–59193; File No. SR–CBOE–
2008–128]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change Relating to Exchange
Fees for Fiscal Year 2009
January 2, 2009.
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 December
24, 2008, the Chicago Board Options
Exchange, Incorporated (‘‘CBOE’’ 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
prepared by the Exchange. CBOE has
designated this proposal as one
establishing or changing a due, fee, or
other charge applicable only to a
member under Section 19(b)(3)(A)(ii) of
the Act 3 and Rule 19b–4(f)(2)
thereunder,4 which renders the proposal
effective upon filing with the
Commission. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Chicago Board Options Exchange,
Incorporated (‘‘CBOE’’ or ‘‘Exchange’’)
proposes to amend its Fees Schedule to
make various changes for Fiscal Year
23 17
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b-4.
3 15 U.S.C. 78s(b)(3)(A)(ii).
4 17 CFR 240.19b-4(f)(2).
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2009. The text of the proposed rule
change is available on the Exchange’s
Web site (https://www.cboe.org/legal), at
the Exchange’s Office of the Secretary
and at the Commission.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
CBOE 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. CBOE 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 purpose of this proposed rule
change is to amend the CBOE Fees
Schedule to make various fee changes.
The proposed changes are the product
of the Exchange’s annual budget review.
The fee changes were approved by the
Exchange’s Board of Directors pursuant
to CBOE Rule 2.22 and will take effect
on January 1, 2009.
The Exchange proposes to amend the
following fees:
A. Liquidity Provider Sliding Scale
The Exchange’s Liquidity Provider
Sliding Scale program reduces a
Liquidity Provider’s per contract
transaction fee based on the number of
contracts the Liquidity Provider trades
in a month.5 The sliding scale applies to
all Liquidity Providers (CBOE MarketMaker, Designated Primary MarketMaker (‘‘DPM’’), Electronic DPM (‘‘eDPM’’) and Lead Market-Maker
(‘‘LMM’’)) for transactions in all
products.6
Under the current program, a
Liquidity Provider’s standard $.20 per
contract transaction fee is reduced if the
Liquidity Provider reaches the volume
thresholds set forth in the sliding scale
in a month. As a Liquidity Provider’s
monthly volume increases, its per
contract transaction fee decreases. The
first 75,000 contracts traded in a month
(first tier) are assessed at $.20 per
5 See Section 1 and Footnote 10 of the CBOE Fees
Schedule.
6 Contract volume resulting from dividend,
merger and short stock interest strategies as defined
in Footnote 13 of the Fees Schedule does not apply
towards reaching the sliding scale volume
thresholds.
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]]>Agencies
[Federal Register Volume 74, Number 6 (Friday, January 9, 2009)]
[Notices]
[Pages 969-972]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-158]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-59197; File No. SR-BSE-2008-52]
Self-Regulatory Organizations; the Boston Stock Exchange, Inc.;
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change
To Amend BOX Rules Relating to Obvious Error Provisions To Address
Catastrophic Errors, Erroneous Quotes or Prints in the Underlying
Security, and Some Additional Modifications
January 5, 2009.
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 December 24, 2008, the Boston Stock Exchange, Inc.) (``BSE'' or
the ``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by BSE. The Exchange filed the
proposed rule change as a ``non-controversial'' proposed rule change
pursuant to Section 19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(6)
thereunder,\4\ which renders the proposal effective upon filing with
the Commission. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Chapter V, Section 20 (Obvious
Errors) of the Rules of the Boston Options Exchange Group, LLC )
(``BOX'') to address catastrophic errors ) (``Catastrophic Errors'') as
well as erroneous quotes or prints in the underlying security and some
additional modifications to this section. The text of the proposed rule
change is available from the principal office of the Exchange, at the
Commission's Public Reference Room and also on the Exchange's Internet
Web site at https://nasdaqtrader.com/Trader.aspx?id=Boston_Stock_
Exchange.
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 self-regulatory organization
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 self-regulatory organization
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 purpose of the proposed rule change is to amend Chapter V,
Section 20 of the BOX Rules (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.
This proposed rule change also seeks to incorporate provisions within
the BOX Obvious Error Rule which will allow for the nullification or
adjustment of trades that are the result of either an erroneous quote
or print in the underlying security. In addition, the proposed rule
also amends the Supplementary Material to remove references to a $.05
offer and to provide that executions may be busted, if at least one
strike below (for calls) or above (for puts), rather than the three
strikes.
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
participants notify the Market Operations Center ) (``MOC'') within a
short time period following the execution of a trade (five minutes for
market makers and 20 minutes for non-market makers) 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, participants 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, the
Exchange believes participants 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 participants 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.\5\
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\5\ 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 paticipant's
quotation system that causes a market maker to severly misprice an
option.
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Accordingly, the Exchange proposes to amend the Obvious Error Rule
to address ``Catastrophic Errors.'' Under the proposed rule,
participants will have until 8:30 a.m. Eastern Time on the day
following the trade to notify the MOC of a potential Catastrophic
Error. For trades that take place in an expiring series on expiration
Friday, participants must notify the MOC of a potential Catastrophic
Error by 5 p.m. Eastern Time that same day. Once a participant has
notified the MOC of a Catastrophic Error within the required time
period,
[[Page 970]]
the Market Regulation Center ) (``MRC'') will review the Catastrophic
Error 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.
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Minimum Adjustment
Theoretical price amount value
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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
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The following example demonstrates how the proposed Catastrophic
Error provisions would operate within the Obvious Error framework.
Assume a participant notifies the MOC 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.\6\ The trade would
qualify as an Obvious Error because the purchase price is more than
$.50 above the Theoretical Price and the participant notified the MOC
within the required time period. The Exchange would review the trade
and either bust it or adjust it to a purchase price of $9.30,\7\ which
reduces the cost of the error to $3,000.\8\ If, however, the
participant failed to identify the same error and notify the MOC until
four hours after the trade, it may 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 MRC would review the trade
and adjust the purchase price to $12, which reduces the cost of the
error to $30,000.\9\
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\6\ 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.
\7\ See Proposed Chapter V, Section 20(g)(ii) of the BOX Rules.
\8\ 10,000 shares at $.30 per share over the theoretical value.
\9\ 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 participants 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, the MRC makes
determinations that can then be appealed to the Boston Options Exchange
Regulation (``BOXR'') Chief Regulatory Officer (``CRO''). For
Catastrophic Errors, the Exchange proposes to have a one-step process
where the MRC, with the approval of the CRO or an Options Official,\10\
who is not a participant, designated by the CRO (``CRO or designee'')
makes determinations and adjustments. If it is determined that a
Catastrophic Error has occurred, the CRO or its designee will instruct
the MRC to adjust the execution price of the transaction(s) according
to proposed subparagraph (g)(iii). All determinations by the CRO or its
designee shall constitute final Exchange action on the matter at issue.
The Exchange encourages participants to request reviews only in
appropriate situations, particularly given the objective criteria used
to determine whether a Catastrophic Error occurred and the considerable
amount of time participants are given under the proposal to assess
whether a trade falls within that criteria.
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\10\ See BOX Rules Chapter I, Section 1(43) which defines
``Options Official'' as an officer of BOX Regulation vested by the
BOX Regulation Board with certain authority to supervise option
trading on BOX.
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Additionally, the Exchange proposes to amend the Obvious Error Rule
to address an occurrence of an erroneous quote or print in the
underlying security. Participants on BOX base the value of their quotes
and orders off of the price of underlying security. The two provisions
which the Exchange proposes to add to the BOX Obvious Error Rule cover
instances where the information that the participants are using to
price options is erroneous, through no fault of their own. An erroneous
quote or print in an underlying security, which is disseminated by the
Primary Market \11\ for that security, means that participants are
receiving erroneous information which they then incorporate into
trading decisions. In these instances, participants have little if any
chance of pricing options accurately. In order to provide relief from
transactions that occur as a result of these erroneous quotes and/or
prints, the Exchange proposes the following provisions.
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\11\ See BOX Rules Chapter I, Section 1(50) which defines
``Primary Market'' as the principal market where the underlying
security is traded.
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Chapter V, Section 20(d) Erroneous Print in Underlying
An electronic trade resulting from an erroneous print disseminated
by the Primary Market which is later cancelled or corrected by that
Primary Market may be nullified. In order to be nullified, however, the
trade must be the result of an erroneous print that is higher or lower
than the average trade in the
[[Page 971]]
underlying security during a two-minute period before and after the
erroneous print by an amount at least five times greater than the
average quote width for such underlying security during the same
period. For purposes of this paragraph, the average trade in the
underlying security shall be determined by adding the prices of each
trade during the four minute time period referenced above (excluding
the trade in question) and dividing by the number of trades during such
time period (excluding the trade in question). For purposes of this
paragraph, the average quote width shall be determined by adding the
quote widths of each separate quote during the four minute time period
referenced above (excluding the quote in question) and dividing by the
number of quotes during such time period (excluding the quote in
question).
Chapter V, Section 20(e) Erroneous Quote in Underlying
Trades resulting from an erroneous quote in the underlying security
may be adjusted or nullified as set forth in Chapter V, Section 20(f).
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 on the Primary Market
(as defined in BOX Rules Chapter I, Section 1(50)) during the time
period encompassing two minutes before and after the dissemination of
such quote. For purposes of this paragraph, the average quote width
shall be determined by adding the quote widths of each separate quote
during the four minute time period referenced above (excluding the
quote in question) and dividing by the number of quotes during such
time period (excluding the quote in question) and dividing by the
number of quotes during such time period (excluding the quote in
question).
These proposed rule changes will provide participants on BOX with
the same opportunities for price adjustment or trade nullification that
are available on other options exchanges. The Exchange notes that these
provisions are similar in all respects to rules already approved for
use at The Chicago Board Options Exchange (``CBOE''),\12\ The American
Stock Exchange (``Amex''),\13\ and NYSE Arca.\14\
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\12\ See CBOE Rules 6.25(a)(4)-(5).
\13\ See Amex Rules 936-ANTE(a)(4)-(5).
\14\ See NYSE Arca Rules 6.87(a)(4)-(5).
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In addition, the proposed rule also amends the Supplementary
Material to remove references to a $.05 offer. The Exchange also
proposes to provide that buyers of options with a zero bid may request
their execution be busted, if at least one strike below (for calls) or
above (for puts), in the same options class were quoted with a zero bid
at the time of execution rather than the three strikes, which is
currently in the rule. Removing the references to a $.05 offer will
allow errors resulting from trades in penny pilot issues be treated in
the same manner as non-penny classes. Moreover, these proposed changes
will provide participants on BOX with similar opportunities for price
adjustment or trade nullification that are available on other options
exchanges.\15\
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\15\ See e.g. CBOE Rules 6.25(a)(2); Amex Rules 936-ANTE(a)(2).
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2. Statutory Basis
The Exchange believes that the proposal is consistent with the
requirements of Section 6(b) of the Act,\16\ in general, and Section
6(b)(5) of the Act,\17\ in particular, in that it is designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to foster cooperation and
coordination with persons engaged in facilitating transactions in
securities, 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. Specifically, the proposal
will, under certain circumstances, provide participants with the
opportunity for a longer period within which to seek relief from errors
that result in large losses. The proposal is also appropriate given
that it provides for the adjustment or nullification of trades which
are executed at clearly erroneous prices due to no fault of the parties
to the trade. Finally, removing the references to a $.05 offer in the
Supplementary Material will allow errors resulting from trades in penny
pilot issues be treated in the same manner as non-penny classes.
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\16\ 15 U.S.C. 78f(b).
\17\ 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 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
The Exchange has neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \18\ and Rule 19b-
4(f)(6) thereunder.\19\
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\18\ 15 U.S.C. 78s(b)(3)(A).
\19\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
BSE has satisfied this requirement.
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At any time within 60 days of the filing of the proposed rule
change, the Commission may summarily abrogate such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Act.
A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the
Act \20\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6) \21\ permits the Commission to
designate a shorter time if such action is consistent with the
protection of investors and the public interest. BSE requests that the
Commission waive the 30-day operative delay to immediately offer market
participants on BSE the same potential for relief that is available at
other options exchanges for certain obvious errors, catastrophic
errors, or erroneous quotes or prints in the underlying security. The
Exchange stated that the proposed changes are not novel and are
necessary to eliminate any confusion among members of multiple
exchanges regarding the handling and treatment of requests for review
of Catastrophic Errors and instances of erroneous quotes or prints in
the underlying security and for purposes of maintaining a fair and
orderly market. The Commission believes that waiving the 30-day
[[Page 972]]
operative delay \22\ is consistent with the protection of investors and
the public interest. Given that the Exchange's proposed rule change is
substantially similar to the rules of other exchanges previously
approved by the Commission, the proposal does not appear to present any
novel regulatory issues. Therefore, the Commission designates the
proposal as operative upon filing.
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\20\ 17 CFR 240.19b-4(f)(6).
\21\ Id.
\22\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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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-BSE-2008-52 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-BSE-2008-52. 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 in 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 publicly available. All
submissions should refer to File Number SR-BSE-2008-52 and should be
submitted on or before January 30, 2009.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-158 Filed 1-8-09; 8:45 am]
BILLING CODE 8011-01-P
