Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of Filing of Proposed Rule Change Regarding Catastrophic Errors, 11705-11709 [2013-03706]
Download as PDF
<![CDATA[
11705
TKELLEY on DSK3SPTVN1PROD with NOTICES
Federal Register / Vol. 78, No. 33 / Tuesday, February 19, 2013 / Notices
6. Whenever a Sub-Advisor change is
proposed for a Fund with an Affiliated
Sub-Advisor, the Board, including a
majority of the Independent Trustees,
will make a separate finding, reflected
in the applicable Board minutes, that
such change is in the best interests of
such Fund and its shareholders and
does not involve a conflict of interest
from which the Advisor or an Affiliated
Sub-Advisor derives an inappropriate
advantage.
7. The Advisor will provide general
management services to each Fund
relying on the order, including overall
supervisory responsibility for the
general management and investment of
the Fund’s assets and, subject to review
and approval by the Board, will: (a) set
the Fund’s overall investment strategies;
(b) evaluate, select and recommend SubAdvisors to provide purchase and sale
recommendations to the Advisor or
investment advice to all or a portion of
the Fund’s assets; (c) allocate and, when
appropriate, reallocate the Fund’s assets
among multiple Sub-Advisors; (d)
monitor and evaluate the Sub-Advisors’
performance; and (e) implement
procedures reasonably designed to
ensure that Sub-Advisor(s) comply with
the relevant Fund’s investment
objectives, policies and restrictions.
8. No trustee or officer of a Fund
relying on the order or director or officer
of the Advisor will own directly or
indirectly (other than through a pooled
investment vehicle that is not controlled
by such person) any interest in a SubAdvisor except for (a) ownership of
interests in the Advisor or any entity
that controls, is controlled by or is
under common control with the
Advisor; or (b) ownership of less than
1% of the outstanding securities of any
class of equity or debt of a publicly
traded company that is either a SubAdvisor or an entity that controls, is
controlled by or is under common
control with a Sub-Advisor.
9. For any Fund that utilizes a SubAdvisor and pays fees to a Sub-Advisor
directly from Fund assets, any changes
to a Sub-Advisory Agreement that
would result in an increase in the total
management and advisory fees payable
by that Fund will be required to be
approved by the shareholders of the
Fund.
10. In the event the Commission
adopts a rule under the Act providing
substantially similar relief to that
requested in the application, the
requested order will expire on the
effective date of that rule.
11. Each Fund relying on the order
will disclose in its registration statement
the Aggregate Fee Disclosure.
VerDate Mar<15>2010
17:49 Feb 15, 2013
Jkt 229001
12. Independent legal counsel, as
defined in rule 0–1(a)(6) under the Act,
will be engaged to represent the
Independent Trustees. The selection of
such counsel will be within the
discretion of the then-existing
Independent Trustees.
13. The Advisor will provide the
Board, no less frequently than quarterly,
with information about the profitability
of the Advisor on a per-Fund basis for
each Fund relying on the order. The
information will reflect the impact on
profitability of the hiring or termination
of any Sub-Advisor during the
applicable quarter.
14. Whenever a Sub-Advisor is hired
or terminated, the Advisor will provide
the Board with information showing the
expected impact on the profitability of
the Advisor.
An adjudicatory matter.
At times, changes in Commission
priorities require alterations in the
scheduling of meeting items.
For further information and to
ascertain what, if any, matters have been
added, deleted or postponed, please
contact the Office of the Secretary at
(202) 551–5400.
Dated: February 14, 2013.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013–03829 Filed 2–14–13; 4:15 pm]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–68907; File No. SR–PHLX–
2013–05]
For the Commission, by the Division of
Investment Management, under delegated
authority.
Kevin M. O’Neill,
Deputy Secretary.
Self-Regulatory Organizations;
NASDAQ OMX PHLX LLC; Notice of
Filing of Proposed Rule Change
Regarding Catastrophic Errors
[FR Doc. 2013–03686 Filed 2–15–13; 8:45 am]
February 12, 2013.
BILLING CODE 8011–01–P
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 January
31, 2013, NASDAQ OMX PHLX LLC
(‘‘PHLX’’ 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.
SECURITIES AND EXCHANGE
COMMISSION
Sunshine Act Meeting.
Notice is hereby given, pursuant to
the provisions of the Government in the
Sunshine Act, Public Law 94–409, that
the Securities and Exchange
Commission will hold a Closed Meeting
on Thursday, February 21, 2013 at 2:00
p.m.
Commissioners, Counsel to the
Commissioners, the Secretary to the
Commission, and recording secretaries
will attend the Closed Meeting. Certain
staff members who have an interest in
the matters also may be present.
The General Counsel of the
Commission, or his designee, has
certified that, in his opinion, one or
more of the exemptions set forth in 5
U.S.C. 552b(c)(3), (5), (7), 9(B) and (10)
and 17 CFR 200.402(a)(3), (5), (7), 9(ii)
and (10), permit consideration of the
scheduled matters at the Closed
Meeting.
Commissioner Aguilar, as duty
officer, voted to consider the items
listed for the Closed Meeting in a closed
session.
The subject matter of the Closed
Meeting will be:
Institution and settlement of injunctive
actions;
Institution and settlement of
administrative proceedings;
Other matters relating to enforcement
proceedings; and
PO 00000
Frm 00084
Fmt 4703
Sfmt 4703
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is filing with the
Commission a proposal to amend Rule
1092, Obvious Errors and Catastrophic
Errors. Specifically, Phlx proposes to
amend Rule 1092(f)(ii) to permit the
nullification of trades involving
catastrophic errors in certain situations
specified below.
The text of the proposed rule change
is set forth below. Proposed new
language is italics; proposed deletions
are in brackets.
*
*
*
*
*
Rule 1092. Obvious Errors and Catastrophic
Errors
The Exchange shall either nullify a
transaction or adjust the execution price of a
transaction that results in an Obvious Error
as provided in this Rule.
1 15
2 17
E:\FR\FM\19FEN1.SGM
U.S.C. 78s(b)(1).
CFR 240.19b–4.
19FEN1
11706
Federal Register / Vol. 78, No. 33 / Tuesday, February 19, 2013 / Notices
(a)–(e) No change.
(f) Catastrophic Error Procedure.
(i) Notification. If an Exchange member
believes that it participated in a transaction
that qualifies as a Catastrophic Error
pursuant to paragraph (a)(ii) above, it must
notify the Exchange’s Regulatory staff by 8:30
a.m. ET, on the first trading day following the
date on which the Catastrophic Error
occurred. For transactions in an expiring
options series that take place on an
expiration day, an Exchange member must
notify the Exchange by 5:00 p.m. ET that
same day. Relief will not be granted under
this paragraph: (i) unless notification is made
within the prescribed time period; and (ii) if
an Options Exchange Official has previously
rendered a decision with respect to the
transaction in question pursuant to Rule
1092(e).
(ii) Catastrophic Error determination. An
Options Exchange Official will determine
whether the transaction(s) qualifies as a
Catastrophic Error. If it is determined that a
Catastrophic Error has occurred, the Options
Exchange Official will adjust the execution
price(s) of the transaction(s) according to
subparagraph (f)(iii) below, as long as the
adjusted price would not exceed the limit
price of a non-broker-dealer customer’s limit
order, in which case the non-broker-dealer
customer would have 20 minutes from
notification of the proposed adjusted price to
accept it or else the trade will be nullified.
If it is determined that a Catastrophic Error
has not occurred, the member requesting the
determination will be subject to a charge of
$5,000.
(iii)–(iv) No change.
(g) No change.
Commentary: lllllllllllll
.01–.02 No change.
*
*
*
*
*
TKELLEY on DSK3SPTVN1PROD with NOTICES
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 purpose of the proposal is to help
market participants better manage their
risk by addressing the situation where,
under current rules, a trade can be
adjusted to a price outside of a
customer’s limit. Specifically, the
VerDate Mar<15>2010
17:49 Feb 15, 2013
Jkt 229001
Exchange proposes to amend Rule
1092(f) to enable a non-broker-dealer
customer who is the contra-side to a
trade that is deemed to be a catastrophic
error to have the trade nullified in
instances where the adjusted price
would violate the customer’s limit price.
Only if the customer, or his agent,
affirms the customer’s willingness to
accept the adjusted price through the
customer’s limit price within 20
minutes of notification of the
catastrophic error ruling would the
trade be adjusted; otherwise it would be
nullified. Today, all catastrophic error
trades are adjusted, not nullified, on all
of the options exchanges.
Background
Currently, Rule 1092 governs obvious
and catastrophic errors. Obvious errors
are calculated under the rule by
determining a theoretical price and
determining, based on objective
standards, whether the trade should be
nullified or adjusted. The rule also
contains a process for requesting an
obvious error review. Certain more
substantial errors may fall under the
category of a catastrophic error, for
which a longer time period is permitted
to request a review and for which trades
can only be adjusted (not nullified).
Trades are adjusted pursuant to an
adjustment table that, in effect, assesses
an adjustment penalty. By adjusting
trades above or below the theoretical
price, the Rule assesses a ‘‘penalty’’ in
that the adjustment price is not as
favorable as the amount the party
making the error would have received
had it not made the error.
Proposal
At this time, the Exchange proposes to
change the catastrophic error process to
permit certain trades to be nullified. The
definition and calculation of a
catastrophic error would not change.3
Once a catastrophic error is determined
by Exchange staff, then if both parties to
the trade are not a non-broker-dealer
customer (‘‘customer’’),4 then the trade
would be adjusted under the current
rule. If one of the parties is a nonbroker-dealer customer, then the
adjusted price would be compared to
the limit price of the order. If the
adjusted price would violate the limit
price (in other words, be higher than the
limit price if it is a buy and lower than
the limit price if it is a sell order), then
the customer would be offered an
opportunity to nullify the trade. If the
3 Nor is the definition or process for obvious
errors changing.
4 Professional customers are customers for
purposes of Rule 1092. See Rule 1000(b)(x).
PO 00000
Frm 00085
Fmt 4703
Sfmt 4703
customer (or the customer’s brokerdealer agent) does not respond within
20 minutes, the trade would be adjusted
under the current rule.
These changes should ensure that a
customer is not forced into a situation
where the original limit price is violated
and thereby the customer is forced to
spend additional dollars for a trade at a
price the customer had no interest in
trading and may not be able to afford.
Example 1—Resting Customer forced to
adjust through his limit price and would
prefer nullification
Day 1
8:00:00 a.m. (pre-market)—Customer A
enters order on PHLX to buy 10 GOOG
May 750 puts for $25 (cost of $25,000,
Customer has $50,000 in his trading
account).
10:00:00 a.m.
GOOG trading at $750
May 750 puts $29.00–$31.00 (100 × 100) on
all exchanges
10:04:00 a.m.
GOOG drops to $690
May 750 puts $25–$100 (10 × 10) PHLX
May 750 puts $20–$125 (10 × 10) CBOE
May 750 puts $10–$200 (100 × 100) on all
other exchanges
10:04:01 a.m.
Customer B enters order to sell 10 May 750
puts for $25 (credit of $25,000)
10:04:01 a.m.
10 May 750 puts execute at $25 ($35 under
parity)5 with Customer A buying and
Customer B selling.
10:04:02 a.m. (1 second later)
GOOG trading $690
May 750 puts $75–$78 (100 × 100) PHLX
May 750 puts $75–$80 (10 × 10) CBOE
May 750 puts $70–$80 (100 × 100) All
other exchanges
No obvious error is filed within 20 minute
notification time required by rule. If this
had been an obvious error review, the
trade would have been nullified in
accordance with Rule 1092 because one
of the parties to the trade was a nonmarket maker.
4:00:00 p.m. (the close)
GOOG trading $710
May 750 puts $60–$63 (100 × 100) PHLX
May 750 puts $55–$70 (10 × 10) CBOE
May 750 puts $50–$70 (100 × 100) All
other exchanges
Day 2
8:00:00 a.m. (pre-market)
Customer B, submits S10 GOOG May 750
puts at $25 under Catastrophic Review.
Trade meets the criteria of Catastrophic
Error and is adjusted to $68 ($75 (the
10:04:02 a.m. price less $7 adjustment
penalty).
9:30:00 a.m. (the opening)
GOOG trading $725
5 Parity is the intrinsic value of an option when
it is in-the-money. With respect to puts, it is
calculated by subtracting the price of the
underlying from the strike price of the put. With
respect to calls, it is calculated by subtracting the
strike price from the price of the underlying.
E:\FR\FM\19FEN1.SGM
19FEN1
TKELLEY on DSK3SPTVN1PROD with NOTICES
Federal Register / Vol. 78, No. 33 / Tuesday, February 19, 2013 / Notices
May 750 puts open $48.00–$51.00 (100 ×
100) on all exchanges
Under current rule:
Without a choice, Customer A is forced to
spend $68 (cost of $68,000, with only
$25,000 in his account)
Puts are now trading $48, so Customer A
shows a loss of $20,000 ($68 less $48 ×
10 contracts × 100 multiplier)
Under proposed rule:
Customer A would be able to choose to
have the B10 GOOG May 750 puts
nullified avoiding both a loss, and an
expenditure of capital exceeding the
amount in his account. Customer B
would be relieved of the obligation to
sell the puts at 25 because the trade
would be nullified.
Example 2—Resting Customer trades, sells
out his position, thus would choose to keep
the adjusted trade and avoid nullification
Day 1
8:00:00 a.m. (pre-market)—Customer A
enters order on PHLX to Buy 10 BAC
April 7.00 calls for $.01 (cost of $10 total.
(Customer has $3,000 in his account).
10:00:00 a.m.
BAC trading $11
April 7 calls $4.50–$4.70 (100 × 100) on all
exchanges
10:04:00 a.m.
BAC Trading $11
April 7 calls $.01–$4.70 (10 × 10) PHLX
April 7 calls $4.50–$4.70 (10 × 10) CBOE
April 7 calls $4.50–$4.70 (10 × 10)) All
other exchanges
10:04:01 a.m.
Customer B enters order to sell 10 April 7
calls at $.01 on PHLX with an ISO
indicator (which allows trade through)
10:04:01 a.m.
10 April 7 calls execute at $.01 on PHLX
Customer A buying and Customer B
selling.
10:04:02 a.m. (1 second later)
BAC is $11
April 7 calls $4.50–$4.70 (10 × 10) PHLX
April 7 calls $4.50–$4.70 (10 × 10) CBOE
April 7 calls $4.50–$4.70 (10 × 10)) All
other exchanges
No obvious error is filed within 20 minute
notification time required by rule. If this
had been an obvious error review, the
trade would have been nullified.
11:00:00 a.m.
BAC trading $9.60
April 7 calls $3.00–$3.25 (10 × 10) PHLX
April 7 calls $.3.00–$3.25 (10 × 10) CBOE
April 7 calls $3.00–$3.25 (10 × 10) All
other exchanges
Customer A sells 10 April 7 calls at $3.00
(a total credit of $3,000 for a $2,990
profit)
3:00:00 p.m.
BAC trading $12.80
April 7 calls $5.80–$6.00 (10 × 10) PHLX
April 7 calls $5.80–$6.00 (10 × 10) CBOE
April 7 calls $5.80–$6.00 (10 × 10) All
other exchanges
Customer A has now no position and
would be at risk of a loss if nullified.
3:20:00 p.m.
Customer B submits S10 BAC April 7 calls
at $.01 under Catastrophic Error Review.
Trade meets the criteria of Catastrophic
Error and is adjusted to $2.50 ($4.50 (the
VerDate Mar<15>2010
17:49 Feb 15, 2013
Jkt 229001
10:04:02 a.m. price) less $2 adjustment
penalty).
Impact:
Under current Rule: Customer A would be
adjusted to $2.50 ($4.50 (the 10:04:02
a.m. price) less $2 adjustment penalty.
Under Proposed rule:
Illustrating the need for a choice, Customer
A chooses within 20 minutes to accept
an adjustment to $2.50 instead of a
nullification, locking in a gain of $500
instead of $2.990 (B 10 at $2.50 vs. S10
at $3.00).
If not given a choice, Customer A would
be naked short 10 calls at $3.00 that are
now offered at $6.00 (a $3,000 loss).
These examples illustrate the need for
the non-broker dealer customer to have
a choice in order to manage his risk. By
applying a notification time limit of 20
minutes, it lessens the likelihood that
the customer will try to let the direction
of the market for that option dictate his
decision for a long period of time, thus
exposing the contra side to more risk.
This 20 minute time period is akin to
the notification period currently used in
the rule respecting the notification
period for starting the obvious error
process for member organizations that
initiated the order from off the floor of
the Exchange (as opposed to on-floor
specialists and ROTs).6
For a market maker or a broker-dealer,
the penalty that is part of the price
adjustment process is usually enough to
offset the additional dollars spent, and
they can often trade out of the position
with little risk and a potential profit. For
a customer who is not immersed in the
day-to-day trading of the markets, this
risk may be unacceptable. A customer is
also less likely to be watching trading
activity in a particular option
throughout the day and less likely to be
closely focused on the execution reports
the customer receives after a trade is
executed. Accordingly, the Exchange
believes that it is fair and reasonable,
and consistent with statutory standards,
to change the procedure for catastrophic
errors for customers and not for other
participants.
The Exchange believes that the
proposal is a fair way to address the
issue of a customer’s limit price, yet still
balance the competing interests of
certainty that trades stand versus
dealing with true errors. When Rule
1092 was first adopted, the Commission
stated that it ‘‘* * * considers that in
most circumstances trades that are
executed between parties should be
honored. On rare occasions, the price of
the executed trade indicates an ‘obvious
error’ may exist, suggesting that it is
unrealistic to expect that the parties to
the trade had come to a meeting of the
6 See
PO 00000
Phlx Rule 1092(e)(i)(A).
Frm 00086
Fmt 4703
Sfmt 4703
11707
minds regarding the terms of the
transaction. In the Commission’s view,
the determination of whether an
‘obvious error’ has occurred, and the
adjustment or nullification of a
transaction because an obvious error is
considered to exist, should be based on
specific and objective criteria and
subject to specific and objective
procedures’’. * * * The Commission
believes that Phlx’s proposed obvious
error rule establishes specific and
objective criteria for determining when
a trade is an ‘‘obvious error.’’ Moreover,
the Commission believes that the
Exchange’s proposal establishes specific
and objective procedures governing the
adjustment or nullification of a trade
that resulted from an ‘‘obvious error.’’ 7
Since 2004, Phlx has been administering
this rule with respect to options trading.
In 2008, the Exchange amended Rule
1092 to adopt the catastrophic error
provision. In doing so, the Exchange
stated that it had ‘‘weighed carefully the
need to assure that one market
participant is not permitted to receive a
windfall 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, trade
participants may not be aware of errors
that result in very large losses within
the time periods currently required
under the rule. In this type of extreme
situation, the Exchange believes its
members should be given more time to
seek relief so that there is a greater
opportunity to mitigate very large losses
and reduce the corresponding large
wind-falls. However, to maintain the
appropriate balance, the Exchange
believes members should only be given
more time when the execution price is
much further away from the theoretical
price than is required for Obvious Errors
so that relief is only provided in
extreme circumstances.’’ 8
The Exchange believes that this
proposal is consistent with those
principles because it strikes the
aforementioned balance. The Exchange
is proposing to amend Exchange Rule
1092 to eliminate the risk associated
with (non-broker-dealer) customers
7 See Securities Exchange Act Release No. 49785
(May 28, 2004), 69 FR 32090 (June 8, 2004) (SR–
Phlx–2003–68).
8 See Securities Exchange Act Release No. 58002
(June 23, 2008), 73 FR 36581 (June 27, 2008)(SR–
Phlx–2008–42)(Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change Relating to
Catastrophic Errors).
E:\FR\FM\19FEN1.SGM
19FEN1
11708
Federal Register / Vol. 78, No. 33 / Tuesday, February 19, 2013 / Notices
TKELLEY on DSK3SPTVN1PROD with NOTICES
receiving an adjustment to a trade that
is outside of the limit price of their
order, when there is a catastrophic error
ruling respecting their trade. The new
provision would continue to entail
specific and objective procedures.
Furthermore, the new provision more
fairly balances the potential windfall to
one market participant against the
potential reconsideration of a trading
decision under the guise of an error.
The obvious and catastrophic error
rules of the options exchanges are
similar, especially with respect to only
adjusting trades that result in a
catastrophic error. Nevertheless, the
Exchange believes, based on the
aforementioned example and member
requests, that this aspect of the
catastrophic error process should
change, as explained above. The
Exchange staff has focused on this
particular situation because of a recent
catastrophic error ruling that resulted in
an appeal pursuant to Rule 1092(f)(iv).
On appeal, the committee was
concerned whether market participants
are aware of how options exchange
catastrophic errors are handled and
whether the rule should be revisited.
Relatedly, members of SIFMA’s Options
Committee also expressed concern
during a recent meeting that this
particular outcome may not be
appropriate. Accordingly, the Exchange
has determined to amend the rule.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act 9 in general, and furthers the
objectives of Section 6(b)(5) of the Act 10
in particular, in that it is designed to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, and, in general to protect
investors and the public interest, by
helping Exchange members better
manage the risk associated with
potential erroneous trades. Specifically,
the Exchange believes that the proposal
is consistent with these principles
because it provides a fair process for
customers to address catastrophic errors
involving a limit order. In particular, the
proposal still permits nullification in
certain situations. Further, it gives
customers a choice. For two reasons, the
Exchange does not believe that the
proposal is unfairly discriminatory,
even though it offers some participants
(customers) a choice as to whether a
trade is nullified or adjusted, while
other participants will continue to have
9 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
10 15
VerDate Mar<15>2010
17:49 Feb 15, 2013
Jkt 229001
all of their catastrophic errors adjusted.
First, the rule currently differentiates
among Participants: The notification
period to begin the obvious error
process is different for specialists and
Registered Options Traders,11 and
whether a trade is adjusted or busted
also differs.12 Second, options rules
often treat customers in a special way,13
recognizing that customers are not
necessarily immersed in the day-to-day
trading of the markets, less likely to be
watching trading activity in a particular
option throughout the day and may
have limited funds in their trading
accounts. Accordingly, differentiating
among Participant types by permitting
customers to have a choice as to
whether to nullify a trade involving a
catastrophic error is not unfairly
discriminatory, because it is reasonable
and fair to provide non-professional
customers with additional options to
protect themselves against the
consequences of obvious errors.
The Exchange acknowledges that the
proposal contains some uncertainty
regarding whether a trade will be
adjusted or nullified, depending on
whether one of the parties is a customer,
because a person would not know,
when entering into the trade, whether
the other party is or is not a customer.
The Exchange believes that the proposal
nevertheless promotes just and
equitable principles of trade and
protects investors and the public
interest, because it eliminates a more
serious uncertainty in the rule’s
operation today, which is price
uncertainty. Today, a customer’s order
can be adjusted to a significantly
different price, as the examples above
illustrate, which is more impactful than
the possibility of nullification.
Furthermore, there is uncertainty in the
current obvious error portion of Rule
1092 (as well as the rules of other
options exchanges), which Participants
have dealt with for a number of years.
Specifically, Rule 1092(e)(ii) provides
that if it is determined that an Obvious
Error has occurred: (A) Where each
party to the transaction is either a
specialist or ROT on the Exchange, the
execution price of the transaction will
be adjusted by an Options Exchange
Official, unless both parties agree to
nullify the transaction within ten
minutes of being notified by Regulatory
staff of the Obvious Error; or (B) where
at least one party to the transaction in
11 See
Rule 1092(e)(i)(A).
Rule 1092(e)(i)(A).
13 For example, many options exchange priority
rules treat customer orders differently and some
options exchanges only accept certain types of
orders from customers. Most options exchanges
charge different fees for customers.
12 See
PO 00000
Frm 00087
Fmt 4703
Sfmt 4703
which an Obvious Error occurred is not
a specialist or ROT on the Exchange, an
Options Exchange Official will nullify
the transaction, unless both parties
agree to adjust the price of the
transaction within 30 minutes of being
notified by Regulatory staff of the
Obvious Error. Therefore, a specialist
who prefers adjustments over
nullification cannot guarantee that
outcome, because, if he trades with a
customer, a resulting obvious error
would only be adjusted if the customer
agreed to an adjustment. This
uncertainty has been embedded in the
rule and accepted by market
participants. The Exchange believes that
this proposal, despite the uncertainty
based on whether a customer is
involved in a trade, is nevertheless
consistent with the Act, because the
ability to nullify a customer’s trade
involving a catastrophic error should
prevent the price uncertainty that
mandatory adjustment under the current
rule creates, which should promote just
and equitable principles of trade and
protect investors and the public interest.
The proposal sets forth an objective
process based on specific and objective
criteria and subject to specific and
objective procedures. In addition, the
Exchange has again weighed carefully
the need to assure that one market
participant is not permitted to receive a
windfall at the expense of another
market participant that made a
catastrophic error, against the need to
assure that market participants are not
simply being given an opportunity to
reconsider poor trading decisions.
Accordingly, the Exchange has
determined that introducing a
nullification procedure for catastrophic
errors is appropriate and consistent with
the Act.
Consistent with Section 6(b)(8),14 the
Exchange also believes that the proposal
does not impose a burden on
competition not necessary or
appropriate in furtherance of the
purposes of the Act, as described further
below.
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. Currently,
most options exchanges have similar,
although not identical, rules regarding
catastrophic errors. To the extent that
this proposal would result in Phlx’s rule
being different, market participants may
choose to route orders to Phlx, helping
14 15
E:\FR\FM\19FEN1.SGM
U.S.C. 78f(b)(5).
19FEN1
Federal Register / Vol. 78, No. 33 / Tuesday, February 19, 2013 / Notices
Phlx compete against other options
exchanges for order flow based on its
customer service by having a process
more responsive to current market
needs. Of course, other options
exchanges may choose to adopt similar
rules. The proposal does not impose a
burden on intra-market competition not
necessary or appropriate in furtherance
of the purposes of the Act, because,
even though it treats different market
participants differently, the Obvious
Errors and Catastrophic Errors rule has
always been structured that way and
adding the ability for customers to
choose whether a catastrophic error
trade is nullified does not materially
alter the risks faced by other market
participants in managing the
consequences of obvious errors. Overall,
the proposal is intended to help market
participants better manage the risk
associated with potential erroneous
options trades and does not impose a
burden on competition.
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 Exchange 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:
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–2013–05. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of 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–PHLX–
2013–05 and should be submitted on or
before March 12, 2013.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.15
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–03706 Filed 2–15–13; 8:45 am]
BILLING CODE 8011–01–P
TKELLEY on DSK3SPTVN1PROD with NOTICES
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–PHLX–2013–05 on the
subject line.
VerDate Mar<15>2010
17:49 Feb 15, 2013
Jkt 229001
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–68913; File No. SR–
NASDAQ–2013–024]
Self-Regulatory Organizations; the
NASDAQ Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Clarify the
Measure Used To Determine Whether
the Price of a Stock Is Equal to or
Greater Than One Dollar Under Rule
4120(a)(11)
February 12, 2013.
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 January
31, 2013 The NASDAQ Stock Market
LLC (‘‘NASDAQ’’ or ‘‘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 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 clarify the
measure used to determine whether the
price of a stock is equal to or greater
than $1 dollar under Rule 4120(a)(11).
The text of the proposed rule change
is below. Proposed new language is in
italics; proposed deletions are in
brackets.
*
*
*
*
*
4120. Trading Halts
(a) Authority To Initiate Trading Halts
or Pauses
In circumstances in which Nasdaq
deems it necessary to protect investors
and the public interest, Nasdaq,
pursuant to the procedures set forth in
paragraph (c):
(1)–(10) No change.
(11) Shall, between 9:45 a.m. and 3:35
p.m., or in the case of an early
scheduled close, 25 minutes before the
close of trading, immediately pause
trading for 5 minutes in any Nasdaqlisted security, other than rights and
warrants, when the price of such
security moves a percentage specified
below within a 5-minute period.
(A) The price move shall be 10% or
more with respect to securities included
in the S&P 500® Index, Russell 1000®
Index, and a pilot list of Exchange
Traded Products;
1 15
15 17
PO 00000
CFR 200.30–3(a)(12).
Frm 00088
Fmt 4703
Sfmt 4703
11709
2 17
E:\FR\FM\19FEN1.SGM
U.S.C. 78s(b)(1).
CFR 240.19b–4.
19FEN1
]]>Agencies
[Federal Register Volume 78, Number 33 (Tuesday, February 19, 2013)]
[Notices]
[Pages 11705-11709]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-03706]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68907; File No. SR-PHLX-2013-05]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of
Filing of Proposed Rule Change Regarding Catastrophic Errors
February 12, 2013.
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 January 31, 2013, NASDAQ OMX PHLX LLC (``PHLX'' 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.
---------------------------------------------------------------------------
\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 is filing with the Commission a proposal to amend Rule
1092, Obvious Errors and Catastrophic Errors. Specifically, Phlx
proposes to amend Rule 1092(f)(ii) to permit the nullification of
trades involving catastrophic errors in certain situations specified
below.
The text of the proposed rule change is set forth below. Proposed
new language is italics; proposed deletions are in brackets.
* * * * *
Rule 1092. Obvious Errors and Catastrophic Errors
The Exchange shall either nullify a transaction or adjust the
execution price of a transaction that results in an Obvious Error as
provided in this Rule.
[[Page 11706]]
(a)-(e) No change.
(f) Catastrophic Error Procedure.
(i) Notification. If an Exchange member believes that it
participated in a transaction that qualifies as a Catastrophic Error
pursuant to paragraph (a)(ii) above, it must notify the Exchange's
Regulatory staff by 8:30 a.m. ET, on the first trading day following
the date on which the Catastrophic Error occurred. For transactions
in an expiring options series that take place on an expiration day,
an Exchange member must notify the Exchange by 5:00 p.m. ET that
same day. Relief will not be granted under this paragraph: (i)
unless notification is made within the prescribed time period; and
(ii) if an Options Exchange Official has previously rendered a
decision with respect to the transaction in question pursuant to
Rule 1092(e).
(ii) Catastrophic Error determination. An Options Exchange
Official will determine whether the transaction(s) qualifies as a
Catastrophic Error. If it is determined that a Catastrophic Error
has occurred, the Options Exchange Official will adjust the
execution price(s) of the transaction(s) according to subparagraph
(f)(iii) below, as long as the adjusted price would not exceed the
limit price of a non-broker-dealer customer's limit order, in which
case the non-broker-dealer customer would have 20 minutes from
notification of the proposed adjusted price to accept it or else the
trade will be nullified. If it is determined that a Catastrophic
Error has not occurred, the member requesting the determination will
be subject to a charge of $5,000.
(iii)-(iv) No change.
(g) No change.
Commentary:-----------------------------------------------------------
.01-.02 No change.
* * * * *
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 purpose of the proposal is to help market participants better
manage their risk by addressing the situation where, under current
rules, a trade can be adjusted to a price outside of a customer's
limit. Specifically, the Exchange proposes to amend Rule 1092(f) to
enable a non-broker-dealer customer who is the contra-side to a trade
that is deemed to be a catastrophic error to have the trade nullified
in instances where the adjusted price would violate the customer's
limit price. Only if the customer, or his agent, affirms the customer's
willingness to accept the adjusted price through the customer's limit
price within 20 minutes of notification of the catastrophic error
ruling would the trade be adjusted; otherwise it would be nullified.
Today, all catastrophic error trades are adjusted, not nullified, on
all of the options exchanges.
Background
Currently, Rule 1092 governs obvious and catastrophic errors.
Obvious errors are calculated under the rule by determining a
theoretical price and determining, based on objective standards,
whether the trade should be nullified or adjusted. The rule also
contains a process for requesting an obvious error review. Certain more
substantial errors may fall under the category of a catastrophic error,
for which a longer time period is permitted to request a review and for
which trades can only be adjusted (not nullified). Trades are adjusted
pursuant to an adjustment table that, in effect, assesses an adjustment
penalty. By adjusting trades above or below the theoretical price, the
Rule assesses a ``penalty'' in that the adjustment price is not as
favorable as the amount the party making the error would have received
had it not made the error.
Proposal
At this time, the Exchange proposes to change the catastrophic
error process to permit certain trades to be nullified. The definition
and calculation of a catastrophic error would not change.\3\ Once a
catastrophic error is determined by Exchange staff, then if both
parties to the trade are not a non-broker-dealer customer
(``customer''),\4\ then the trade would be adjusted under the current
rule. If one of the parties is a non-broker-dealer customer, then the
adjusted price would be compared to the limit price of the order. If
the adjusted price would violate the limit price (in other words, be
higher than the limit price if it is a buy and lower than the limit
price if it is a sell order), then the customer would be offered an
opportunity to nullify the trade. If the customer (or the customer's
broker-dealer agent) does not respond within 20 minutes, the trade
would be adjusted under the current rule.
---------------------------------------------------------------------------
\3\ Nor is the definition or process for obvious errors
changing.
\4\ Professional customers are customers for purposes of Rule
1092. See Rule 1000(b)(x).
---------------------------------------------------------------------------
These changes should ensure that a customer is not forced into a
situation where the original limit price is violated and thereby the
customer is forced to spend additional dollars for a trade at a price
the customer had no interest in trading and may not be able to afford.
Example 1--Resting Customer forced to adjust through his limit
price and would prefer nullification
Day 1
8:00:00 a.m. (pre-market)--Customer A enters order on PHLX to buy 10
GOOG May 750 puts for $25 (cost of $25,000, Customer has $50,000 in
his trading account).
10:00:00 a.m.
GOOG trading at $750
May 750 puts $29.00-$31.00 (100 x 100) on all exchanges
10:04:00 a.m.
GOOG drops to $690
May 750 puts $25-$100 (10 x 10) PHLX
May 750 puts $20-$125 (10 x 10) CBOE
May 750 puts $10-$200 (100 x 100) on all other exchanges
10:04:01 a.m.
Customer B enters order to sell 10 May 750 puts for $25 (credit
of $25,000)
10:04:01 a.m.
10 May 750 puts execute at $25 ($35 under parity)\5\ with
Customer A buying and Customer B selling.
---------------------------------------------------------------------------
\5\ Parity is the intrinsic value of an option when it is in-
the-money. With respect to puts, it is calculated by subtracting the
price of the underlying from the strike price of the put. With
respect to calls, it is calculated by subtracting the strike price
from the price of the underlying.
---------------------------------------------------------------------------
10:04:02 a.m. (1 second later)
GOOG trading $690
May 750 puts $75-$78 (100 x 100) PHLX
May 750 puts $75-$80 (10 x 10) CBOE
May 750 puts $70-$80 (100 x 100) All other exchanges
No obvious error is filed within 20 minute notification time
required by rule. If this had been an obvious error review, the
trade would have been nullified in accordance with Rule 1092 because
one of the parties to the trade was a non-market maker.
4:00:00 p.m. (the close)
GOOG trading $710
May 750 puts $60-$63 (100 x 100) PHLX
May 750 puts $55-$70 (10 x 10) CBOE
May 750 puts $50-$70 (100 x 100) All other exchanges
Day 2
8:00:00 a.m. (pre-market)
Customer B, submits S10 GOOG May 750 puts at $25 under
Catastrophic Review.
Trade meets the criteria of Catastrophic Error and is adjusted
to $68 ($75 (the 10:04:02 a.m. price less $7 adjustment penalty).
9:30:00 a.m. (the opening)
GOOG trading $725
[[Page 11707]]
May 750 puts open $48.00-$51.00 (100 x 100) on all exchanges
Under current rule:
Without a choice, Customer A is forced to spend $68 (cost of
$68,000, with only $25,000 in his account)
Puts are now trading $48, so Customer A shows a loss of $20,000
($68 less $48 x 10 contracts x 100 multiplier)
Under proposed rule:
Customer A would be able to choose to have the B10 GOOG May 750
puts nullified avoiding both a loss, and an expenditure of capital
exceeding the amount in his account. Customer B would be relieved of
the obligation to sell the puts at 25 because the trade would be
nullified.
Example 2--Resting Customer trades, sells out his position, thus
would choose to keep the adjusted trade and avoid nullification
Day 1
8:00:00 a.m. (pre-market)--Customer A enters order on PHLX to Buy 10
BAC April 7.00 calls for $.01 (cost of $10 total. (Customer has
$3,000 in his account).
10:00:00 a.m.
BAC trading $11
April 7 calls $4.50-$4.70 (100 x 100) on all exchanges
10:04:00 a.m.
BAC Trading $11
April 7 calls $.01-$4.70 (10 x 10) PHLX
April 7 calls $4.50-$4.70 (10 x 10) CBOE
April 7 calls $4.50-$4.70 (10 x 10)) All other exchanges
10:04:01 a.m.
Customer B enters order to sell 10 April 7 calls at $.01 on PHLX
with an ISO indicator (which allows trade through)
10:04:01 a.m.
10 April 7 calls execute at $.01 on PHLX Customer A buying and
Customer B selling.
10:04:02 a.m. (1 second later)
BAC is $11
April 7 calls $4.50-$4.70 (10 x 10) PHLX
April 7 calls $4.50-$4.70 (10 x 10) CBOE
April 7 calls $4.50-$4.70 (10 x 10)) All other exchanges
No obvious error is filed within 20 minute notification time
required by rule. If this had been an obvious error review, the
trade would have been nullified.
11:00:00 a.m.
BAC trading $9.60
April 7 calls $3.00-$3.25 (10 x 10) PHLX
April 7 calls $.3.00-$3.25 (10 x 10) CBOE
April 7 calls $3.00-$3.25 (10 x 10) All other exchanges
Customer A sells 10 April 7 calls at $3.00 (a total credit of
$3,000 for a $2,990 profit)
3:00:00 p.m.
BAC trading $12.80
April 7 calls $5.80-$6.00 (10 x 10) PHLX
April 7 calls $5.80-$6.00 (10 x 10) CBOE
April 7 calls $5.80-$6.00 (10 x 10) All other exchanges
Customer A has now no position and would be at risk of a loss if
nullified.
3:20:00 p.m.
Customer B submits S10 BAC April 7 calls at $.01 under
Catastrophic Error Review.
Trade meets the criteria of Catastrophic Error and is adjusted
to $2.50 ($4.50 (the 10:04:02 a.m. price) less $2 adjustment
penalty).
Impact:
Under current Rule: Customer A would be adjusted to $2.50 ($4.50
(the 10:04:02 a.m. price) less $2 adjustment penalty.
Under Proposed rule:
Illustrating the need for a choice, Customer A chooses within 20
minutes to accept an adjustment to $2.50 instead of a nullification,
locking in a gain of $500 instead of $2.990 (B 10 at $2.50 vs. S10
at $3.00).
If not given a choice, Customer A would be naked short 10 calls
at $3.00 that are now offered at $6.00 (a $3,000 loss).
These examples illustrate the need for the non-broker dealer
customer to have a choice in order to manage his risk. By applying a
notification time limit of 20 minutes, it lessens the likelihood that
the customer will try to let the direction of the market for that
option dictate his decision for a long period of time, thus exposing
the contra side to more risk. This 20 minute time period is akin to the
notification period currently used in the rule respecting the
notification period for starting the obvious error process for member
organizations that initiated the order from off the floor of the
Exchange (as opposed to on-floor specialists and ROTs).\6\
---------------------------------------------------------------------------
\6\ See Phlx Rule 1092(e)(i)(A).
---------------------------------------------------------------------------
For a market maker or a broker-dealer, the penalty that is part of
the price adjustment process is usually enough to offset the additional
dollars spent, and they can often trade out of the position with little
risk and a potential profit. For a customer who is not immersed in the
day-to-day trading of the markets, this risk may be unacceptable. A
customer is also less likely to be watching trading activity in a
particular option throughout the day and less likely to be closely
focused on the execution reports the customer receives after a trade is
executed. Accordingly, the Exchange believes that it is fair and
reasonable, and consistent with statutory standards, to change the
procedure for catastrophic errors for customers and not for other
participants.
The Exchange believes that the proposal is a fair way to address
the issue of a customer's limit price, yet still balance the competing
interests of certainty that trades stand versus dealing with true
errors. When Rule 1092 was first adopted, the Commission stated that it
``* * * considers that in most circumstances trades that are executed
between parties should be honored. On rare occasions, the price of the
executed trade indicates an `obvious error' may exist, suggesting that
it is unrealistic to expect that the parties to the trade had come to a
meeting of the minds regarding the terms of the transaction. In the
Commission's view, the determination of whether an `obvious error' has
occurred, and the adjustment or nullification of a transaction because
an obvious error is considered to exist, should be based on specific
and objective criteria and subject to specific and objective
procedures''. * * * The Commission believes that Phlx's proposed
obvious error rule establishes specific and objective criteria for
determining when a trade is an ``obvious error.'' Moreover, the
Commission believes that the Exchange's proposal establishes specific
and objective procedures governing the adjustment or nullification of a
trade that resulted from an ``obvious error.'' \7\ Since 2004, Phlx has
been administering this rule with respect to options trading.
---------------------------------------------------------------------------
\7\ See Securities Exchange Act Release No. 49785 (May 28,
2004), 69 FR 32090 (June 8, 2004) (SR-Phlx-2003-68).
---------------------------------------------------------------------------
In 2008, the Exchange amended Rule 1092 to adopt the catastrophic
error provision. In doing so, the Exchange stated that it had ``weighed
carefully the need to assure that one market participant is not
permitted to receive a windfall 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, trade participants may not
be aware of errors that result in very large losses within the time
periods currently required under the rule. In this type of extreme
situation, the Exchange believes its members should be given more time
to seek relief so that there is a greater opportunity to mitigate very
large losses and reduce the corresponding large wind-falls. However, to
maintain the appropriate balance, the Exchange believes members should
only be given more time when the execution price is much further away
from the theoretical price than is required for Obvious Errors so that
relief is only provided in extreme circumstances.'' \8\
---------------------------------------------------------------------------
\8\ See Securities Exchange Act Release No. 58002 (June 23,
2008), 73 FR 36581 (June 27, 2008)(SR-Phlx-2008-42)(Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change Relating to
Catastrophic Errors).
---------------------------------------------------------------------------
The Exchange believes that this proposal is consistent with those
principles because it strikes the aforementioned balance. The Exchange
is proposing to amend Exchange Rule 1092 to eliminate the risk
associated with (non-broker-dealer) customers
[[Page 11708]]
receiving an adjustment to a trade that is outside of the limit price
of their order, when there is a catastrophic error ruling respecting
their trade. The new provision would continue to entail specific and
objective procedures. Furthermore, the new provision more fairly
balances the potential windfall to one market participant against the
potential reconsideration of a trading decision under the guise of an
error.
The obvious and catastrophic error rules of the options exchanges
are similar, especially with respect to only adjusting trades that
result in a catastrophic error. Nevertheless, the Exchange believes,
based on the aforementioned example and member requests, that this
aspect of the catastrophic error process should change, as explained
above. The Exchange staff has focused on this particular situation
because of a recent catastrophic error ruling that resulted in an
appeal pursuant to Rule 1092(f)(iv). On appeal, the committee was
concerned whether market participants are aware of how options exchange
catastrophic errors are handled and whether the rule should be
revisited. Relatedly, members of SIFMA's Options Committee also
expressed concern during a recent meeting that this particular outcome
may not be appropriate. Accordingly, the Exchange has determined to
amend the rule.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \9\ in general, and furthers the objectives of Section
6(b)(5) of the Act \10\ in particular, in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general to protect investors and the public
interest, by helping Exchange members better manage the risk associated
with potential erroneous trades. Specifically, the Exchange believes
that the proposal is consistent with these principles because it
provides a fair process for customers to address catastrophic errors
involving a limit order. In particular, the proposal still permits
nullification in certain situations. Further, it gives customers a
choice. For two reasons, the Exchange does not believe that the
proposal is unfairly discriminatory, even though it offers some
participants (customers) a choice as to whether a trade is nullified or
adjusted, while other participants will continue to have all of their
catastrophic errors adjusted. First, the rule currently differentiates
among Participants: The notification period to begin the obvious error
process is different for specialists and Registered Options
Traders,\11\ and whether a trade is adjusted or busted also
differs.\12\ Second, options rules often treat customers in a special
way,\13\ recognizing that customers are not necessarily immersed in the
day-to-day trading of the markets, less likely to be watching trading
activity in a particular option throughout the day and may have limited
funds in their trading accounts. Accordingly, differentiating among
Participant types by permitting customers to have a choice as to
whether to nullify a trade involving a catastrophic error is not
unfairly discriminatory, because it is reasonable and fair to provide
non-professional customers with additional options to protect
themselves against the consequences of obvious errors.
---------------------------------------------------------------------------
\9\ 15 U.S.C. 78f(b).
\10\ 15 U.S.C. 78f(b)(5).
\11\ See Rule 1092(e)(i)(A).
\12\ See Rule 1092(e)(i)(A).
\13\ For example, many options exchange priority rules treat
customer orders differently and some options exchanges only accept
certain types of orders from customers. Most options exchanges
charge different fees for customers.
---------------------------------------------------------------------------
The Exchange acknowledges that the proposal contains some
uncertainty regarding whether a trade will be adjusted or nullified,
depending on whether one of the parties is a customer, because a person
would not know, when entering into the trade, whether the other party
is or is not a customer. The Exchange believes that the proposal
nevertheless promotes just and equitable principles of trade and
protects investors and the public interest, because it eliminates a
more serious uncertainty in the rule's operation today, which is price
uncertainty. Today, a customer's order can be adjusted to a
significantly different price, as the examples above illustrate, which
is more impactful than the possibility of nullification. Furthermore,
there is uncertainty in the current obvious error portion of Rule 1092
(as well as the rules of other options exchanges), which Participants
have dealt with for a number of years. Specifically, Rule 1092(e)(ii)
provides that if it is determined that an Obvious Error has occurred:
(A) Where each party to the transaction is either a specialist or ROT
on the Exchange, the execution price of the transaction will be
adjusted by an Options Exchange Official, unless both parties agree to
nullify the transaction within ten minutes of being notified by
Regulatory staff of the Obvious Error; or (B) where at least one party
to the transaction in which an Obvious Error occurred is not a
specialist or ROT on the Exchange, an Options Exchange Official will
nullify the transaction, unless both parties agree to adjust the price
of the transaction within 30 minutes of being notified by Regulatory
staff of the Obvious Error. Therefore, a specialist who prefers
adjustments over nullification cannot guarantee that outcome, because,
if he trades with a customer, a resulting obvious error would only be
adjusted if the customer agreed to an adjustment. This uncertainty has
been embedded in the rule and accepted by market participants. The
Exchange believes that this proposal, despite the uncertainty based on
whether a customer is involved in a trade, is nevertheless consistent
with the Act, because the ability to nullify a customer's trade
involving a catastrophic error should prevent the price uncertainty
that mandatory adjustment under the current rule creates, which should
promote just and equitable principles of trade and protect investors
and the public interest.
The proposal sets forth an objective process based on specific and
objective criteria and subject to specific and objective procedures. In
addition, the Exchange has again weighed carefully the need to assure
that one market participant is not permitted to receive a windfall at
the expense of another market participant that made a catastrophic
error, against the need to assure that market participants are not
simply being given an opportunity to reconsider poor trading decisions.
Accordingly, the Exchange has determined that introducing a
nullification procedure for catastrophic errors is appropriate and
consistent with the Act.
Consistent with Section 6(b)(8),\14\ the Exchange also believes
that the proposal does not impose a burden on competition not necessary
or appropriate in furtherance of the purposes of the Act, as described
further below.
---------------------------------------------------------------------------
\14\ 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. Currently, most options
exchanges have similar, although not identical, rules regarding
catastrophic errors. To the extent that this proposal would result in
Phlx's rule being different, market participants may choose to route
orders to Phlx, helping
[[Page 11709]]
Phlx compete against other options exchanges for order flow based on
its customer service by having a process more responsive to current
market needs. Of course, other options exchanges may choose to adopt
similar rules. The proposal does not impose a burden on intra-market
competition not necessary or appropriate in furtherance of the purposes
of the Act, because, even though it treats different market
participants differently, the Obvious Errors and Catastrophic Errors
rule has always been structured that way and adding the ability for
customers to choose whether a catastrophic error trade is nullified
does not materially alter the risks faced by other market participants
in managing the consequences of obvious errors. Overall, the proposal
is intended to help market participants better manage the risk
associated with potential erroneous options trades and does not impose
a burden on competition.
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 Exchange 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-2013-05 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-2013-05. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of 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-PHLX-2013-05 and should be
submitted on or before March 12, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\15\
---------------------------------------------------------------------------
\15\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-03706 Filed 2-15-13; 8:45 am]
BILLING CODE 8011-01-P
