Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of Filing of Proposed Rule Change With Respect to the Authority of the Exchange or NASDAQ Execution Services to Cancel Orders When a Technical or System Issue Occurs on the Exchange's NASDAQ OMX PSX Facility and To Describe the Operation of an Error Account for NES, 40684-40688 [2012-16765]

Download as PDF 40684 Federal Register / Vol. 77, No. 132 / Tuesday, July 10, 2012 / Notices more automated trading by an increasing number of non-Floor based member organizations. 2. Statutory Basis The Exchange believes that the proposed rule change is consistent with the provisions of Section 6 of the Act,5 in general, and Section 6(b)(4) of the Act,6 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, and to remove impediments to and perfect the mechanism of a free and open market and a national market system. Specifically, the Exchange believes that the proposed rule changes support the objectives of the Act by amending and/ or delegating duties and responsibilities once assigned to Floor Officials to better comport with the Exchange’s current market structure and to reflect rapidly changing market technology and the development of automated systems. 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. mstockstill on DSK4VPTVN1PROD with NOTICES 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 with respect to the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The Exchange has filed the proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act 7 and Rule 19b–4(f)(6) thereunder.8 Because the 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 prior to 30 days from the date on which it was filed the proposed rule change has become effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b–4(f)(6)(iii) thereunder.9 5 15 U.S.C. 78f(b). U.S.C. 78f(b)(4). 7 15 U.S.C. 78s(b)(3)(A)(iii). 8 17 CFR 240.19b–4(f)(6). 9 17 CFR 240.19b–4(f)(6). In addition, Rule 19b– 4(f)(6)(iii) requires the Exchange to give the Commission written notice of the Exchange’s intent 6 15 VerDate Mar<15>2010 16:28 Jul 09, 2012 Jkt 226001 The Exchange has requested that the Commission waive the 30-day operative delay. The Commission believes that waiver of the operative delay is consistent with the protection of investors and the public interest because the proposal will assist the Exchange in maintaining a fair and orderly market by allowing market participants who agree to cancel a transaction to do so more efficiently, thereby potentially reducing the likelihood that transactions will be printed to the Tape incorrectly. Therefore, the Commission designates the proposal operative upon filing.10 At any time within 60 days of the filing of such proposed rule change, the Commission summarily may temporarily suspend 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. 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 email to rule-comments@ sec.gov. Please include File Number SR– NYSE–2012–20 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–NYSE–2012–20. 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 to file the proposed rule change, along with a brief description and text of 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. The Exchange has satisfied this requirement. 10 For purposes only of waiving the 30-day operative delay, the Commission has considered the proposed rules impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). PO 00000 Frm 00121 Fmt 4703 Sfmt 4703 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 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–NYSE– 2012–20 and should be submitted on or before July 31, 2012. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.11 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2012–16767 Filed 7–9–12; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–67343; File No. SR–Phlx– 2012–81] Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of Filing of Proposed Rule Change With Respect to the Authority of the Exchange or NASDAQ Execution Services to Cancel Orders When a Technical or System Issue Occurs on the Exchange’s NASDAQ OMX PSX Facility and To Describe the Operation of an Error Account for NES July 3, 2012. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 2 thereunder, notice is hereby given that on June 27, 2012, NASDAQ OMX PHLX LLC (‘‘Phlx’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I, II, and III, below, which Items have been prepared by the Exchange. The 11 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 E:\FR\FM\10JYN1.SGM 10JYN1 Federal Register / Vol. 77, No. 132 / Tuesday, July 10, 2012 / Notices 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 The Exchange proposes to file with the Commission a proposal with respect to the authority of the Exchange or NASDAQ Execution Services (‘‘NES’’) to cancel orders when a technical or system issue occurs on the Exchange’s NASDAQ OMX PSX facility (‘‘PSX’’) and to describe the operation of an error account for NES. The text of the proposed rule change is available on the Exchange’s Web site at https://www.nasdaqtrader.com/ micro.aspx?id=PHLXRulefilings, 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 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 mstockstill on DSK4VPTVN1PROD with NOTICES 1. Purpose The Exchange proposes to amend Rule 3315 by adding a new paragraph (d) that addresses the authority of the Exchange or NES to cancel orders when a technical or systems issue occurs on PSX and to describe the operation of an error account for NES.3 NES is the 3 NES is a facility of the Exchange. Accordingly, under Rule 3315, the Exchange is responsible for filing with the Commission rule changes and fees relating to NES’s functions. In addition, the Exchange is using the phrase ‘‘NES or the Exchange’’ in this rule filing to reflect the fact that a decision to take action with respect to orders affected by a technical or systems issue may be made in the capacity of NES or the Exchange depending on where those orders are located at the time of that decision. This filing applies only to transactions in cash equities. From time to time, the Exchange also uses nonaffiliate third-party broker-dealers to provide outbound routing services (i.e., third-party Routing Brokers). In those cases, orders are submitted to the third-party Routing Broker through NES, the thirdparty Routing Broker routes the orders to the VerDate Mar<15>2010 16:28 Jul 09, 2012 Jkt 226001 approved [sic] routing broker of PSX, subject to the conditions listed in Rule 3315. The Exchange relies on NES to provide outbound routing services from itself to routing destinations of NES (‘‘routing destinations’’).4 When NES routes orders to a routing destination, it does so by sending a corresponding order in its own name to the routing destination. In the normal course, routed orders that are executed at routing destinations are submitted for clearance and settlement in the name of NES, and NES arranges for any resulting securities positions to be delivered to the member that submitted the corresponding order to the Exchange. From time to time, however, the Exchange and NES encounter situations in which it becomes necessary to cancel orders and resolve error positions.5 Examples of Circumstances That May Lead to Canceled Orders A technical or systems issue may arise at NES, a routing destination, or the Exchange that may cause the Exchange or NES to take steps to cancel orders if the Exchange or NES determines that such action is necessary to maintain a fair and orderly market. The examples set forth below describe some of the circumstances in which the Exchange or NES may decide to cancel orders. routing destination in its name, and any executions are submitted for clearance and settlement in the name of NES so that any resulting positions are delivered to NES upon settlement. As described above, NES normally arranges for any resulting securities positions to be delivered to the member that submitted the corresponding order to the Exchange. If error positions (as defined in proposed Rule 3315(d)(2)) result in connection with the Exchange’s use of a third-party Routing Broker for outbound routing, and those positions are delivered to NES through the clearance and settlement process, NES would be permitted to resolve those positions in accordance with proposed Rule 3315(d). If the third-party Routing Broker received error positions in connection with its role as a routing broker for the Exchange, and the error positions were not delivered to NES through the clearance and settlement process, then the thirdparty Routing Broker would resolve the error positions itself, and NES would not be permitted to accept the error positions, as set forth in proposed Rule 3315(d)(2)(B). 4 The Exchange has authority to receive inbound routes of equities orders by NES from The NASDAQ Stock Market (‘‘NASDAQ’’) and NASDAQ OMX BX, Inc. (‘‘BX’’). See Securities Exchange Act Release Nos. 66178 (January 18, 2012), 77 FR 3539 (January 24, 2012) (SR–Phlx–2011–170); 65553 (October 13, 2011), 76 FR 64987 (October 19, 2011) (SR–Phlx– 2011–138). 5 The examples described in this filing are not intended to be exclusive. Proposed Rule 3315(d) would provide general authority for the Exchange or NES to cancel orders in order to maintain fair and orderly markets when technical and systems issues are occurring, and Rule 3315(d) also would set forth the manner in which error positions may be handled by the Exchange or NES. The proposed rule change is not limited to addressing order cancellation or error positions resulting only from the specific examples described in this filing. PO 00000 Frm 00122 Fmt 4703 Sfmt 4703 40685 Example 1. If NES or a routing destination experiences a technical or systems issue that results in NES not receiving responses to immediate or cancel (‘‘IOC’’) orders that it sent to the routing destination, and that issue is not resolved in a timely manner, NES or the Exchange would seek to cancel the routed orders affected by the issue.6 For instance, if NES experiences a connectivity issue affecting the manner in which it sends or receives order messages to or from routing destinations, it may be unable to receive timely execution or cancellation reports from the routing destinations, and NES or the Exchange may consequently seek to cancel the affected routed orders. Once the decision is made to cancel those routed orders, any cancellation that a member submitted to the Exchange on its initial order during such a situation would be honored.7 Example 2. If the Exchange experiences a systems issue, the Exchange may take steps to cancel all outstanding orders affected by that issue and notify affected members of the cancellations. In those cases, the Exchange would seek to cancel any routed orders related to the members’ initial orders. Examples of Circumstances That May Lead to Error Positions In some instances, the technical or systems issue at NES, a routing destination, the Exchange, or a nonaffiliate third party Routing Broker may also result in NES acquiring an error position that it must resolve. The examples set forth below describe some of the circumstances in which error positions may arise. Example A. Error positions may result from routed orders that the Exchange or NES attempts to cancel but that are executed before the routing destination receives the cancellation message or that are executed because the routing destination is unable to process the cancellation message. Using the situation described in Example 1 above, assume that the Exchange seeks to cancel orders routed to a routing destination because it is not receiving timely execution or cancellation reports from the routing destination. In such a situation, NES may still receive executions from the routing destination after connectivity is restored, which it would not then allocate to members because of the earlier decision to cancel the 6 In a normal situation (i.e., one in which a technical or systems issue does not exist), NES should receive an immediate response to an IOC order from a routing destination, and would pass the resulting fill or cancellation on to the Exchange member. After submitting an order that is routed to a routing destination, if a member sends an instruction to cancel that order, the cancellation is held by the Exchange until a response is received from the routing destination. For instance, if the routing destination executes that order, the execution would be passed on to the member and the cancellation instruction would be disregarded. 7 If a member did not submit a cancellation to the Exchange, however, that initial order would remain ‘‘live’’ and thus be eligible for execution or posting on the Exchange, and neither the Exchange nor NES would treat any execution of that initial order or any subsequent routed order related to that initial order as an error. E:\FR\FM\10JYN1.SGM 10JYN1 mstockstill on DSK4VPTVN1PROD with NOTICES 40686 Federal Register / Vol. 77, No. 132 / Tuesday, July 10, 2012 / Notices affected routed orders. Instead, NES would post those positions into its error account and resolve the positions in the manner described below. Example B. Error positions may result from an order processing issue at a routing destination. For instance, if a routing destination experienced a systems problem that affects its order processing, it may transmit back a message purporting to cancel a routed order, but then subsequently submit an execution of that same order (i.e., a locked-in trade) to The Depository Trust & Clearing Corporation (‘‘DTCC’’) for clearance and settlement. In such a situation, the Exchange would not then allocate the execution to the member because of the earlier cancellation message from the routing destination. Instead, NES would post those positions into its error account and resolve the positions in the manner described below. Example C. Error positions may result if NES receives an execution report from a routing destination but does not receive clearing instructions for the execution from the routing destination. For instance, assume that a member sends the Exchange an order to buy 100 shares of ABC stock, which causes NES to send an order to a routing destination that is subsequently executed, cleared, and closed out by that routing destination, and the execution is ultimately communicated back to that member. On the next trading day (T+1), if the routing destination does not provide clearing instructions for that execution, NES would still be responsible for settling that member’s purchase, but would be left with a short position in its error account.8 NES would resolve the position in the manner described below. Example D. Error positions may result from a technical or systems issue that causes orders to be executed in the name of NES that are not related to NES’s function as the Exchange’s routing broker and are not related to any corresponding orders of members. As a result, NES would not be able to assign any positions resulting from such an issue to members. Instead, NES would post those positions into its error account and resolve the positions in the manner described below. Example E. Error positions may result from a technical or systems issue through which the Exchange does not receive sufficient notice that a member that has executed trades on the Exchange has lost the ability to clear trades through DTCC. In such a situation, the Exchange would not have valid clearing information, which would prevent the trade from being automatically processed for clearance and settlement on a locked-in basis. Accordingly, NES would assume that member’s side of the trades so that the counterparties can settle the trades. NES would post those positions into its error account and resolve the positions in the manner described below. Example F. Error positions may result from a technical or systems issue at the Exchange that does not involve routing of orders through NES. For example, a situation may arise in which a posted quote/order was 8 To the extent that NES incurred a loss in covering its short position, it would submit a reimbursement claim to that routing destination. VerDate Mar<15>2010 16:28 Jul 09, 2012 Jkt 226001 validly cancelled but the system erroneously matched that quote/order with an order that was seeking to access it. In such a situation, NES would have to assume the side of the trade opposite the order seeking to access the cancelled quote/order. NES would post the position in its error account and resolve the position in the manner described below. In the circumstances described above, neither the Exchange nor NES may learn about an error position until T+1, either: (1) During the clearing process when a routing destination has submitted to DTCC a transaction for clearance and settlement for which NES never received an execution confirmation; or (2) when a routing destination does not recognize a transaction submitted by NES to DTCC for clearance and settlement. Moreover, the affected members’ trade may not be nullified absent express authority under Exchange rules.9 Proposed Amendments to Rule 3315 The Exchange proposes to amend Rule 3315 to add new paragraph (d) to address the cancellation of orders due to technical or systems issues and the use of an error account by NES. Specifically, under paragraph (d)(1) of the proposed rule, the Exchange or NES would be expressly authorized to cancel orders as may be necessary to maintain fair and orderly markets if a technical or systems issue occurred at the Exchange, NES, or a routing destination.10 The Exchange or NES would be required to provide notice of the cancellation to affected members as soon as practicable. Paragraph (d)(2) of the proposed rule would permit NES to maintain an error account for the purpose of addressing positions that result from a technical or systems issue at NES, the Exchange, a routing destination, or a non-affiliate third-party Routing Broker that affects one or more orders (‘‘error positions’’). By definition, an error position would not include any position that results from an order submitted by a member to the Exchange that is executed on the Exchange and automatically processed for clearance and settlement on a locked-in basis. NES also would not be permitted to accept any positions in its error account from an account of a member and could not permit any member to transfer any positions from 9 See, e.g., Rule 3312 (regarding clearly erroneous executions). 10 Such a situation may not cause the Exchange to declare self-help against the routing destination pursuant to Rule 611 of Regulation NMS. If the Exchange or NES determines to cancel orders routed to a routing destination under proposed Rule 3315(d), but does not declare self-help against that routing destination, the Exchange would continue to be subject to the trade-through requirements in Rule 611 with respect to that routing destination. PO 00000 Frm 00123 Fmt 4703 Sfmt 4703 the member’s account to NES’s error account under the proposed rule.11 However, if a technical or systems issue results in the Exchange not having valid clearing instructions for a member to a trade, NES may assume that member’s side of the trade so that the trade can be processed for clearance and settlement on a locked-in basis.12 Under paragraph (d)(3), in connection with a particular technical or systems issue, NES or the Exchange would be permitted to either (i) assign all resulting error positions to members, or (ii) have all resulting error positions liquidated, as described below. Any determination to assign or liquidate error positions, as well as any resulting assignments, would be required to be made in a nondiscriminatory fashion. NES or the Exchange would be required to assign all error positions resulting from a particular technical or systems issue to the applicable members affected by that technical or systems issue if NES or the Exchange: • Determined that it has accurate and sufficient information (including valid clearing information) to assign the positions to all of the applicable members affected by that technical or systems issue; • Determined that it has sufficient time pursuant to normal clearance and settlement deadlines to evaluate the information necessary to assign the positions to all of the applicable members affected by that technical or systems issue; and 11 The purpose of this provision is to clarify that NES may address error positions under the proposed rule that are caused by a technical or systems issue, but that NES may not accept from a member positions that are delivered to the member through the clearance and settlement process, even if those positions may have been related to a technical or systems issue at NES, the Exchange, a routing destination of NES, or a non-affiliate thirdparty Routing Broker. This provision would not apply, however, to situations like the one described in Example C in which NES incurred a short position to settle a member’s purchase, as the member did not yet have a position in its account as a result of the purchase at the time of NES’s action (i.e., NES’s action was necessary for the purchase to settle into the member’s account). Similarly, the provision would not apply to situations like the one described in Example F, where a system issue caused one member to receive an execution for which there was not an available contraparty, in which case action by NES would be necessary for the position to settle into that member’s account. Moreover, to the extent a member receives locked-in positions in connection with a technical or systems issue, that member may seek to rely on Phlx Rule 3226 if it experiences a loss. That rule provides members with the ability to file claims against the Exchange for ‘‘losses directly resulting from the [PSX] System’s actual failure to correctly process an order, message, or other data, provided PSX has acknowledged receipt of the order, message, or data.’’ 12 See Example E above. E:\FR\FM\10JYN1.SGM 10JYN1 Federal Register / Vol. 77, No. 132 / Tuesday, July 10, 2012 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES • Had not determined to cancel all orders affected by that technical or systems issue. For example, a technical or systems issue of limited scope or duration may occur at a routing destination, and the resulting trades may be submitted for clearance and settlement by such routing destination to DTCC. If there were a small number of trades, there may be sufficient time to match positions with member orders and avoid using the error account. There may be scenarios, however, where NES determines that it is unable to assign all error positions resulting from a particular technical or systems issue to all of the affected members, or determines to cancel all affected routed orders. For example, in some cases, the volume of questionable executions and positions resulting from a technical or systems issue might be such that the research necessary to determine which members to assign those executions to could be expected to extend past the normal settlement cycle for such executions. Furthermore, if a routing destination experiences a technical or systems issue after NES has transmitted IOC orders to it that prevents NES from receiving responses to those orders, NES or the Exchange may determine to cancel all routed orders affected by that issue. In such a situation, NES or the Exchange would not pass on to the members any executions on the routed orders received from the routing destination. The proposed rule also would require NES to liquidate error positions as soon as practicable.13 In liquidating error positions, NES would be required to provide complete time and price discretion for the trading to liquidate the error positions to a third-party broker-dealer and could not attempt to exercise any influence or control over the timing or methods of trading to liquidate the error positions.14 NES also would be required to establish and enforce policies and procedures reasonably designed to restrict the flow of confidential and proprietary information between the third-party 13 If NES determines in connection with a particular technical or systems issue that some error positions can be assigned to some affected members but other error positions cannot be assigned, NES would be required under the proposed rule to liquidate all such error positions (including those positions that could be assigned to the affected members). 14 This provision is not intended to preclude NES from providing the third-party broker with standing instructions with respect to the manner in which it should handle all error account transactions. For example, NES might instruct the broker to treat all orders as ‘‘not held’’ and to attempt to minimize any market impact on the price of the stock being traded. VerDate Mar<15>2010 16:28 Jul 09, 2012 Jkt 226001 broker-dealer and NES/the Exchange associated with the liquidation of the error positions. Under proposed paragraph (d)(4), NES and the Exchange would be required to make and keep records to document all determinations to treat positions as error positions and all determinations for the assignment of error positions to members or the liquidation of error positions, as well as records associated with the liquidation of error positions through the third-party broker-dealer. 2. Statutory Basis The proposed rule change is consistent with Section 6(b) 15 of the Securities Exchange Act of 1934 (the ‘‘Act’’), in general, and furthers the objectives of Section 6(b)(5),16 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, and it is not designed to permit unfair discrimination among customers, brokers, or dealers. The Exchange believes that this proposal is in keeping with those principles since NES’s or the Exchange’s ability to cancel orders during a technical and systems issue and to maintain an error account facilitates the smooth and efficient operations of the market. Specifically, the Exchange believes that allowing NES or the Exchange to cancel orders during a technical or systems issue would allow the Exchange to maintain fair and orderly markets. Moreover, the Exchange believes that allowing NES to assume error positions in an error account and to liquidate those positions, subject to the conditions set forth in the proposed amendments to Rule 3315, would be the least disruptive means to correct these errors, except in cases where NES can assign all such error positions to all affected members of the Exchange. Overall, the proposed amendments are designed to ensure full trade certainty for market participants and to avoid disrupting the clearance and settlement process. The proposed amendments are also designed to provide a consistent methodology for handling error positions in a manner that does not discriminate among members. The proposed amendments are also consistent with Section 6 of the PO 00000 15 15 16 15 U.S.C. 78f(b). U.S.C. 78f(b)(5). Frm 00124 Fmt 4703 Sfmt 4703 40687 Act insofar as they would require NES to establish controls to restrict the flow of any confidential information between the third-party broker and NES/the Exchange associated with the liquidation of error positions. 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 No written comments were either solicited or received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 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 self-regulatory organization consents, the Commission shall: (a) By order approve or disapprove such 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 email to rule-comments@ sec.gov. Please include File Number SR– Phlx–2012–81 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–Phlx–2012–81. 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 E:\FR\FM\10JYN1.SGM 10JYN1 40688 Federal Register / Vol. 77, No. 132 / Tuesday, July 10, 2012 / Notices 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 a.m. and 3 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–Phlx– 2012–81, and should be submitted on or before July 31, 2012. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.17 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2012–16765 Filed 7–9–12; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION the Commission’s Public Reference Room. [Release No. 34–67339; File No. SR–BX– 2012–043] II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt Transaction and Routing Fees July 3, 2012. 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 June 26, 2012, NASDAQ OMX BX, Inc. (‘‘BX’’ 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. 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 The Exchange proposes to amend Chapter XV, Section 2 entitled ‘‘BX Options Market—Fees and Rebates’’ to adopt rebates and fees relating to various options, including during the Opening Cross, and establish Routing Fees. While the changes proposed herein are effective upon filing, the Exchange has designated these changes to be operative on July 2, 2012. The text of the proposed rule change is available on the Exchange’s Web site at https://www.nasdaqtrader.com/ micro.aspx?id=BXRulefilings, at the principal office of the Exchange, and at 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 filed and received approval to operate a new options market.3 The new market, called NASDAQ OMX BX Options, or BX Options, is an all-electronic trading platform with no physical trading floor. At this time BX proposes to adopt various fees and rebates which would be effective as of July 2, 2012. There are no fees or rebates for transacting an options business on BX prior to this date, except for membership, services and equipment charges, which may be applicable, as noted in the 7000 Rules. BX proposes to amend Chapter XV, Section 2(1) to adopt rebates and fees for Customers, BX Options Market Makers 4 and Non-Customers 5 in various options 6 as follows: FEES AND REBATES [Per executed contract] BX Options market maker mstockstill on DSK4VPTVN1PROD with NOTICES Customer IWM, QQQ, SPY: Rebate to Add Liquidity ............................................................................................ Fee to Add Liquidity ................................................................................................. Rebate to Remove Liquidity ..................................................................................... Fee to Remove Liquidity .......................................................................................... BAC, C, CSCO, F, INTC, MSFT, JPM, GLD, SLV, USO: Rebate to Add Liquidity ............................................................................................ Fee to Add Liquidity ................................................................................................. Rebate to Remove Liquidity ..................................................................................... Fee to Remove Liquidity .......................................................................................... 17 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 67256 (June 26, 2012) (SR–BX–2012–030). 4 A BX Options Market Makers must be registered as such pursuant to Chapter VII, Section 2 of the 1 15 VerDate Mar<15>2010 16:28 Jul 09, 2012 Jkt 226001 BX Options Rules, and must also remain in good standing pursuant to Chapter VII, Section 4. 5 A Non-Customer includes a Professional, Firm, Broker-Dealer and Non-BX Options Market Maker. 6 The Exchange is proposing to adopt fees and rebates for options overlying iShares Russell 2000 (‘‘IWM’’), PowerShares QQQ Trust (‘‘QQQ’’)®; Standard and Poor’s Depositary Receipts/SPDRs PO 00000 Frm 00125 Fmt 4703 Sfmt 4703 2 $0.15 2 $0.15 3 0.15 3 0.15 0.12 0.00 0.00 0.43 2 0.15 2 0.15 3 0.37 3 0.37 0.32 0.00 0.00 0.43 Non-Customer 1 $0.00 0.43 0.00 0.43 0.00 0.43 0.00 0.43 (‘‘SPY’’), Bank of America Corporation (‘‘BAC’’), Citigroup, Inc. (‘‘C’’), Cisco Systems, Inc. (‘‘CSCO’’), Ford Motor Company Common Stock (‘‘F’’), Intel Corp (‘‘INTC’’), Microsoft Corporation (‘‘MSFT’’), JP Morgan Chase & Co. (‘‘JPM’’), SPDR Gold Shares (‘‘GLD’’), iShares Silver Trust (‘‘SLV’’), United States Oil Fund LP Units (‘‘USO’’) and all other Penny Pilot Options. E:\FR\FM\10JYN1.SGM 10JYN1

Agencies

[Federal Register Volume 77, Number 132 (Tuesday, July 10, 2012)]
[Notices]
[Pages 40684-40688]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-16765]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67343; File No. SR-Phlx-2012-81]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing of Proposed Rule Change With Respect to the Authority of the 
Exchange or NASDAQ Execution Services to Cancel Orders When a Technical 
or System Issue Occurs on the Exchange's NASDAQ OMX PSX Facility and To 
Describe the Operation of an Error Account for NES

July 3, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on June 27, 2012, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in Items I, II, 
and III, below, which Items have been prepared by the Exchange. The

[[Page 40685]]

Commission is publishing this notice to solicit comments on the 
proposed rule change 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 file with the Commission a proposal with 
respect to the authority of the Exchange or NASDAQ Execution Services 
(``NES'') to cancel orders when a technical or system issue occurs on 
the Exchange's NASDAQ OMX PSX facility (``PSX'') and to describe the 
operation of an error account for NES.
    The text of the proposed rule change is available on the Exchange's 
Web site at https://www.nasdaqtrader.com/micro.aspx?id=PHLXRulefilings, 
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 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 proposes to amend Rule 3315 by adding a new paragraph 
(d) that addresses the authority of the Exchange or NES to cancel 
orders when a technical or systems issue occurs on PSX and to describe 
the operation of an error account for NES.\3\ NES is the approved [sic] 
routing broker of PSX, subject to the conditions listed in Rule 3315. 
The Exchange relies on NES to provide outbound routing services from 
itself to routing destinations of NES (``routing destinations'').\4\ 
When NES routes orders to a routing destination, it does so by sending 
a corresponding order in its own name to the routing destination. In 
the normal course, routed orders that are executed at routing 
destinations are submitted for clearance and settlement in the name of 
NES, and NES arranges for any resulting securities positions to be 
delivered to the member that submitted the corresponding order to the 
Exchange. From time to time, however, the Exchange and NES encounter 
situations in which it becomes necessary to cancel orders and resolve 
error positions.\5\
---------------------------------------------------------------------------

    \3\ NES is a facility of the Exchange. Accordingly, under Rule 
3315, the Exchange is responsible for filing with the Commission 
rule changes and fees relating to NES's functions. In addition, the 
Exchange is using the phrase ``NES or the Exchange'' in this rule 
filing to reflect the fact that a decision to take action with 
respect to orders affected by a technical or systems issue may be 
made in the capacity of NES or the Exchange depending on where those 
orders are located at the time of that decision. This filing applies 
only to transactions in cash equities.
    From time to time, the Exchange also uses non-affiliate third-
party broker-dealers to provide outbound routing services (i.e., 
third-party Routing Brokers). In those cases, orders are submitted 
to the third-party Routing Broker through NES, the third-party 
Routing Broker routes the orders to the routing destination in its 
name, and any executions are submitted for clearance and settlement 
in the name of NES so that any resulting positions are delivered to 
NES upon settlement. As described above, NES normally arranges for 
any resulting securities positions to be delivered to the member 
that submitted the corresponding order to the Exchange. If error 
positions (as defined in proposed Rule 3315(d)(2)) result in 
connection with the Exchange's use of a third-party Routing Broker 
for outbound routing, and those positions are delivered to NES 
through the clearance and settlement process, NES would be permitted 
to resolve those positions in accordance with proposed Rule 3315(d). 
If the third-party Routing Broker received error positions in 
connection with its role as a routing broker for the Exchange, and 
the error positions were not delivered to NES through the clearance 
and settlement process, then the third-party Routing Broker would 
resolve the error positions itself, and NES would not be permitted 
to accept the error positions, as set forth in proposed Rule 
3315(d)(2)(B).
    \4\ The Exchange has authority to receive inbound routes of 
equities orders by NES from The NASDAQ Stock Market (``NASDAQ'') and 
NASDAQ OMX BX, Inc. (``BX''). See Securities Exchange Act Release 
Nos. 66178 (January 18, 2012), 77 FR 3539 (January 24, 2012) (SR-
Phlx-2011-170); 65553 (October 13, 2011), 76 FR 64987 (October 19, 
2011) (SR-Phlx-2011-138).
    \5\ The examples described in this filing are not intended to be 
exclusive. Proposed Rule 3315(d) would provide general authority for 
the Exchange or NES to cancel orders in order to maintain fair and 
orderly markets when technical and systems issues are occurring, and 
Rule 3315(d) also would set forth the manner in which error 
positions may be handled by the Exchange or NES. The proposed rule 
change is not limited to addressing order cancellation or error 
positions resulting only from the specific examples described in 
this filing.
---------------------------------------------------------------------------

Examples of Circumstances That May Lead to Canceled Orders
    A technical or systems issue may arise at NES, a routing 
destination, or the Exchange that may cause the Exchange or NES to take 
steps to cancel orders if the Exchange or NES determines that such 
action is necessary to maintain a fair and orderly market. The examples 
set forth below describe some of the circumstances in which the 
Exchange or NES may decide to cancel orders.

    Example 1. If NES or a routing destination experiences a 
technical or systems issue that results in NES not receiving 
responses to immediate or cancel (``IOC'') orders that it sent to 
the routing destination, and that issue is not resolved in a timely 
manner, NES or the Exchange would seek to cancel the routed orders 
affected by the issue.\6\ For instance, if NES experiences a 
connectivity issue affecting the manner in which it sends or 
receives order messages to or from routing destinations, it may be 
unable to receive timely execution or cancellation reports from the 
routing destinations, and NES or the Exchange may consequently seek 
to cancel the affected routed orders. Once the decision is made to 
cancel those routed orders, any cancellation that a member submitted 
to the Exchange on its initial order during such a situation would 
be honored.\7\
---------------------------------------------------------------------------

    \6\ In a normal situation (i.e., one in which a technical or 
systems issue does not exist), NES should receive an immediate 
response to an IOC order from a routing destination, and would pass 
the resulting fill or cancellation on to the Exchange member. After 
submitting an order that is routed to a routing destination, if a 
member sends an instruction to cancel that order, the cancellation 
is held by the Exchange until a response is received from the 
routing destination. For instance, if the routing destination 
executes that order, the execution would be passed on to the member 
and the cancellation instruction would be disregarded.
    \7\ If a member did not submit a cancellation to the Exchange, 
however, that initial order would remain ``live'' and thus be 
eligible for execution or posting on the Exchange, and neither the 
Exchange nor NES would treat any execution of that initial order or 
any subsequent routed order related to that initial order as an 
error.
---------------------------------------------------------------------------

    Example 2. If the Exchange experiences a systems issue, the 
Exchange may take steps to cancel all outstanding orders affected by 
that issue and notify affected members of the cancellations. In 
those cases, the Exchange would seek to cancel any routed orders 
related to the members' initial orders.
Examples of Circumstances That May Lead to Error Positions
    In some instances, the technical or systems issue at NES, a routing 
destination, the Exchange, or a non-affiliate third party Routing 
Broker may also result in NES acquiring an error position that it must 
resolve. The examples set forth below describe some of the 
circumstances in which error positions may arise.

    Example A. Error positions may result from routed orders that 
the Exchange or NES attempts to cancel but that are executed before 
the routing destination receives the cancellation message or that 
are executed because the routing destination is unable to process 
the cancellation message. Using the situation described in Example 1 
above, assume that the Exchange seeks to cancel orders routed to a 
routing destination because it is not receiving timely execution or 
cancellation reports from the routing destination. In such a 
situation, NES may still receive executions from the routing 
destination after connectivity is restored, which it would not then 
allocate to members because of the earlier decision to cancel the

[[Page 40686]]

affected routed orders. Instead, NES would post those positions into 
its error account and resolve the positions in the manner described 
below.
    Example B. Error positions may result from an order processing 
issue at a routing destination. For instance, if a routing 
destination experienced a systems problem that affects its order 
processing, it may transmit back a message purporting to cancel a 
routed order, but then subsequently submit an execution of that same 
order (i.e., a locked-in trade) to The Depository Trust & Clearing 
Corporation (``DTCC'') for clearance and settlement. In such a 
situation, the Exchange would not then allocate the execution to the 
member because of the earlier cancellation message from the routing 
destination. Instead, NES would post those positions into its error 
account and resolve the positions in the manner described below.
    Example C. Error positions may result if NES receives an 
execution report from a routing destination but does not receive 
clearing instructions for the execution from the routing 
destination. For instance, assume that a member sends the Exchange 
an order to buy 100 shares of ABC stock, which causes NES to send an 
order to a routing destination that is subsequently executed, 
cleared, and closed out by that routing destination, and the 
execution is ultimately communicated back to that member. On the 
next trading day (T+1), if the routing destination does not provide 
clearing instructions for that execution, NES would still be 
responsible for settling that member's purchase, but would be left 
with a short position in its error account.\8\ NES would resolve the 
position in the manner described below.
---------------------------------------------------------------------------

    \8\ To the extent that NES incurred a loss in covering its short 
position, it would submit a reimbursement claim to that routing 
destination.
---------------------------------------------------------------------------

    Example D. Error positions may result from a technical or 
systems issue that causes orders to be executed in the name of NES 
that are not related to NES's function as the Exchange's routing 
broker and are not related to any corresponding orders of members. 
As a result, NES would not be able to assign any positions resulting 
from such an issue to members. Instead, NES would post those 
positions into its error account and resolve the positions in the 
manner described below.
    Example E. Error positions may result from a technical or 
systems issue through which the Exchange does not receive sufficient 
notice that a member that has executed trades on the Exchange has 
lost the ability to clear trades through DTCC. In such a situation, 
the Exchange would not have valid clearing information, which would 
prevent the trade from being automatically processed for clearance 
and settlement on a locked-in basis. Accordingly, NES would assume 
that member's side of the trades so that the counterparties can 
settle the trades. NES would post those positions into its error 
account and resolve the positions in the manner described below.
    Example F.  Error positions may result from a technical or 
systems issue at the Exchange that does not involve routing of 
orders through NES. For example, a situation may arise in which a 
posted quote/order was validly cancelled but the system erroneously 
matched that quote/order with an order that was seeking to access 
it. In such a situation, NES would have to assume the side of the 
trade opposite the order seeking to access the cancelled quote/
order. NES would post the position in its error account and resolve 
the position in the manner described below.

    In the circumstances described above, neither the Exchange nor NES 
may learn about an error position until T+1, either: (1) During the 
clearing process when a routing destination has submitted to DTCC a 
transaction for clearance and settlement for which NES never received 
an execution confirmation; or (2) when a routing destination does not 
recognize a transaction submitted by NES to DTCC for clearance and 
settlement. Moreover, the affected members' trade may not be nullified 
absent express authority under Exchange rules.\9\
---------------------------------------------------------------------------

    \9\ See, e.g., Rule 3312 (regarding clearly erroneous 
executions).
---------------------------------------------------------------------------

Proposed Amendments to Rule 3315
    The Exchange proposes to amend Rule 3315 to add new paragraph (d) 
to address the cancellation of orders due to technical or systems 
issues and the use of an error account by NES.
    Specifically, under paragraph (d)(1) of the proposed rule, the 
Exchange or NES would be expressly authorized to cancel orders as may 
be necessary to maintain fair and orderly markets if a technical or 
systems issue occurred at the Exchange, NES, or a routing 
destination.\10\ The Exchange or NES would be required to provide 
notice of the cancellation to affected members as soon as practicable.
---------------------------------------------------------------------------

    \10\ Such a situation may not cause the Exchange to declare 
self-help against the routing destination pursuant to Rule 611 of 
Regulation NMS. If the Exchange or NES determines to cancel orders 
routed to a routing destination under proposed Rule 3315(d), but 
does not declare self-help against that routing destination, the 
Exchange would continue to be subject to the trade-through 
requirements in Rule 611 with respect to that routing destination.
---------------------------------------------------------------------------

    Paragraph (d)(2) of the proposed rule would permit NES to maintain 
an error account for the purpose of addressing positions that result 
from a technical or systems issue at NES, the Exchange, a routing 
destination, or a non-affiliate third-party Routing Broker that affects 
one or more orders (``error positions''). By definition, an error 
position would not include any position that results from an order 
submitted by a member to the Exchange that is executed on the Exchange 
and automatically processed for clearance and settlement on a locked-in 
basis. NES also would not be permitted to accept any positions in its 
error account from an account of a member and could not permit any 
member to transfer any positions from the member's account to NES's 
error account under the proposed rule.\11\ However, if a technical or 
systems issue results in the Exchange not having valid clearing 
instructions for a member to a trade, NES may assume that member's side 
of the trade so that the trade can be processed for clearance and 
settlement on a locked-in basis.\12\
---------------------------------------------------------------------------

    \11\ The purpose of this provision is to clarify that NES may 
address error positions under the proposed rule that are caused by a 
technical or systems issue, but that NES may not accept from a 
member positions that are delivered to the member through the 
clearance and settlement process, even if those positions may have 
been related to a technical or systems issue at NES, the Exchange, a 
routing destination of NES, or a non-affiliate third-party Routing 
Broker. This provision would not apply, however, to situations like 
the one described in Example C in which NES incurred a short 
position to settle a member's purchase, as the member did not yet 
have a position in its account as a result of the purchase at the 
time of NES's action (i.e., NES's action was necessary for the 
purchase to settle into the member's account). Similarly, the 
provision would not apply to situations like the one described in 
Example F, where a system issue caused one member to receive an 
execution for which there was not an available contraparty, in which 
case action by NES would be necessary for the position to settle 
into that member's account. Moreover, to the extent a member 
receives locked-in positions in connection with a technical or 
systems issue, that member may seek to rely on Phlx Rule 3226 if it 
experiences a loss. That rule provides members with the ability to 
file claims against the Exchange for ``losses directly resulting 
from the [PSX] System's actual failure to correctly process an 
order, message, or other data, provided PSX has acknowledged receipt 
of the order, message, or data.''
    \12\ See Example E above.
---------------------------------------------------------------------------

    Under paragraph (d)(3), in connection with a particular technical 
or systems issue, NES or the Exchange would be permitted to either (i) 
assign all resulting error positions to members, or (ii) have all 
resulting error positions liquidated, as described below. Any 
determination to assign or liquidate error positions, as well as any 
resulting assignments, would be required to be made in a 
nondiscriminatory fashion.
    NES or the Exchange would be required to assign all error positions 
resulting from a particular technical or systems issue to the 
applicable members affected by that technical or systems issue if NES 
or the Exchange:
     Determined that it has accurate and sufficient information 
(including valid clearing information) to assign the positions to all 
of the applicable members affected by that technical or systems issue;
     Determined that it has sufficient time pursuant to normal 
clearance and settlement deadlines to evaluate the information 
necessary to assign the positions to all of the applicable members 
affected by that technical or systems issue; and

[[Page 40687]]

     Had not determined to cancel all orders affected by that 
technical or systems issue.
    For example, a technical or systems issue of limited scope or 
duration may occur at a routing destination, and the resulting trades 
may be submitted for clearance and settlement by such routing 
destination to DTCC. If there were a small number of trades, there may 
be sufficient time to match positions with member orders and avoid 
using the error account.
    There may be scenarios, however, where NES determines that it is 
unable to assign all error positions resulting from a particular 
technical or systems issue to all of the affected members, or 
determines to cancel all affected routed orders. For example, in some 
cases, the volume of questionable executions and positions resulting 
from a technical or systems issue might be such that the research 
necessary to determine which members to assign those executions to 
could be expected to extend past the normal settlement cycle for such 
executions. Furthermore, if a routing destination experiences a 
technical or systems issue after NES has transmitted IOC orders to it 
that prevents NES from receiving responses to those orders, NES or the 
Exchange may determine to cancel all routed orders affected by that 
issue. In such a situation, NES or the Exchange would not pass on to 
the members any executions on the routed orders received from the 
routing destination.
    The proposed rule also would require NES to liquidate error 
positions as soon as practicable.\13\ In liquidating error positions, 
NES would be required to provide complete time and price discretion for 
the trading to liquidate the error positions to a third-party broker-
dealer and could not attempt to exercise any influence or control over 
the timing or methods of trading to liquidate the error positions.\14\ 
NES also would be required to establish and enforce policies and 
procedures reasonably designed to restrict the flow of confidential and 
proprietary information between the third-party broker-dealer and NES/
the Exchange associated with the liquidation of the error positions.
---------------------------------------------------------------------------

    \13\ If NES determines in connection with a particular technical 
or systems issue that some error positions can be assigned to some 
affected members but other error positions cannot be assigned, NES 
would be required under the proposed rule to liquidate all such 
error positions (including those positions that could be assigned to 
the affected members).
    \14\ This provision is not intended to preclude NES from 
providing the third-party broker with standing instructions with 
respect to the manner in which it should handle all error account 
transactions. For example, NES might instruct the broker to treat 
all orders as ``not held'' and to attempt to minimize any market 
impact on the price of the stock being traded.
---------------------------------------------------------------------------

    Under proposed paragraph (d)(4), NES and the Exchange would be 
required to make and keep records to document all determinations to 
treat positions as error positions and all determinations for the 
assignment of error positions to members or the liquidation of error 
positions, as well as records associated with the liquidation of error 
positions through the third-party broker-dealer.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) \15\ of 
the Securities Exchange Act of 1934 (the ``Act''), in general, and 
furthers the objectives of Section 6(b)(5),\16\ 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, and it is not 
designed to permit unfair discrimination among customers, brokers, or 
dealers. The Exchange believes that this proposal is in keeping with 
those principles since NES's or the Exchange's ability to cancel orders 
during a technical and systems issue and to maintain an error account 
facilitates the smooth and efficient operations of the market. 
Specifically, the Exchange believes that allowing NES or the Exchange 
to cancel orders during a technical or systems issue would allow the 
Exchange to maintain fair and orderly markets. Moreover, the Exchange 
believes that allowing NES to assume error positions in an error 
account and to liquidate those positions, subject to the conditions set 
forth in the proposed amendments to Rule 3315, would be the least 
disruptive means to correct these errors, except in cases where NES can 
assign all such error positions to all affected members of the 
Exchange. Overall, the proposed amendments are designed to ensure full 
trade certainty for market participants and to avoid disrupting the 
clearance and settlement process. The proposed amendments are also 
designed to provide a consistent methodology for handling error 
positions in a manner that does not discriminate among members. The 
proposed amendments are also consistent with Section 6 of the Act 
insofar as they would require NES to establish controls to restrict the 
flow of any confidential information between the third-party broker and 
NES/the Exchange associated with the liquidation of error positions.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 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 self-regulatory organization consents, the Commission shall: 
(a) By order approve or disapprove such 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 email to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2012-81 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-Phlx-2012-81. 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

[[Page 40688]]

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 a.m. and 3 
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-Phlx-2012-81, and should be submitted on 
or before July 31, 2012.
---------------------------------------------------------------------------

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

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-16765 Filed 7-9-12; 8:45 am]
BILLING CODE 8011-01-P
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