Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change Amending Rule 6.87 in Part and Adding a New Section To Address Errors That Involve Complex Orders, 12117-12119 [2013-03966]

Download as PDF Federal Register / Vol. 78, No. 35 / Thursday, February 21, 2013 / Notices Section 19(b)(2) of the Act 7 provides that, within 45 days of the publication of notice of the filing of a proposed rule change—or within such longer period up to 90 days (i) as the Commission may designate if it finds the longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the selfregulatory organization consents—the Commission shall either approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether the proposed rule change should be disapproved. The 45th day for this filing is February 14, 2013. The Commission is extending this 45-day period. The Commission finds that it is appropriate to designate a longer period within which to take action on the proposed rule change so that the Commission has sufficient time to consider the proposed rule change and the comments received. The proposed rule change would, among other things, add new Rule 5950 to establish the Market Quality Program and exempt the Market Quality Program from NASDAQ Rule 2460 (Payment for Market Making). Accordingly, the Commission, pursuant to Section 19(b)(2) of the Act,8 designates March 31, 2013, as the date by which the Commission should either approve or disapprove or institute proceedings to determine whether to disapprove the proposed rule change (File Number SR–NASDAQ–2012–137). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.9 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–03964 Filed 2–20–13; 8:45 am] erowe on DSK2VPTVN1PROD with NOTICES BILLING CODE 8011–01–P proposed rule change, and because it does not materially affect the substance of the proposed rule change, Amendment No. 3 does not require notice and comment. All terms relating to the MQP that are referred to, but not defined in, this Notice of Designation of a Longer Period for Commission Action are defined in the proposed rule change, as amended. 7 15 U.S.C. 78s(b)(2). 8 Id. 9 17 CFR 200.30–3(a)(31). VerDate Mar<15>2010 14:47 Feb 20, 2013 Jkt 229001 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–68927; File No. SR– NYSEARCA–2013–15] 12117 A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change Amending Rule 6.87 in Part and Adding a New Section To Address Errors That Involve Complex Orders The Exchange is proposing to amend certain existing provisions of Rule 6.87 (‘‘Obvious Error Rule’’).4 In addition, the Exchange is proposing to add new language to Rule 6.87 specific to how errors involving Complex Orders will be addressed. February 14, 2013. Proposed Amendments to Existing Provisions of Rule 6.87 Pursuant to Section 19(b)(1) 1 of the Securities Exchange Act of 1934 (the ‘‘Act’’) 2 and Rule 19b–4 thereunder,3 notice is hereby given that, on February 1, 2013, NYSE Arca, Inc. (the ‘‘Exchange’’ or ‘‘NYSE Arca’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the selfregulatory organization. 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 Rule 6.87 in part and add a new section to address errors that involve Complex Orders. The text of the proposed rule change is available on the Exchange’s Web site at www.nyse.com, at the principal office of the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of those 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 parts of such statements. 1 15 U.S.C.78s(b)(1). U.S.C. 78a. 3 17 CFR 240.19b–4. 2 15 PO 00000 Frm 00087 Fmt 4703 Sfmt 4703 The Exchange adopted the Obvious Error Rule to handle situations where an order receives an erroneous execution, such as receiving a price that is higher or lower than the Theoretical Price by a specified amount.5 The Exchange is proposing several amendments to the Obvious Error Rule. First, the Exchange is proposing to change the portion of the rule that addresses errors in series with zero or no bid. Specifically, the Exchange proposes replacing reference to ‘‘series quoted no bid on the Exchange’’ with ‘‘series where the NBBO bid is zero.’’ This is being done to ensure consistency in the language with other aspects of the existing rule that reference NBBO for determination of whether a transaction is deemed eligible for obvious error treatment. The Exchange believes the NBBO provides greater accuracy in determining the value or valueless of an option because it takes into account interest from all market participants and not just those active on the Exchange. The Exchange also believes that ensuring consistency throughout the rule text is important to help avoid investor confusion. Second, the Exchange proposes to amend the times in which certain OTP Holders are required to notify the 4 See Exchange Rule 6.87. e.g. Securities Exchange Act Release Nos. 34–48538 (September 25, 2003), 68 FR 56858 (October 2, 2003) (PCX–2002–01); 49718 (May 17, 2004), 69 FR 29611 (May 24, 2004) (PCX–2004–08); 51723 (May 20, 2005), 70 FR 30988 (May 31, 2005) (PCX–2005–52); 52008 (July 11, 2005), 70 FR 41069 (July 15, 2005) (PCX–2005–78); 53221 (February 3, 2006), 71 FR 6811 (February 9, 2006) (PCX–2005– 102); 55330 (February 21, 2007), 72 FR 9052 (February 28, 2007) (NYSEArca–2007–06); 57103 (January 4, 2008), 73 FR 1903 (January 10, 2008) (NYSEArca–2007–115); 57653 (April 11, 2008), 73 FR 20996 (April 17, 2008) (NYSEArca–2008–41); 58717 (October 2, 2008), 73 FR 60386 (October 10, 2008) (NYSEArca–2008–106); 59556 (March 11, 2009), 74 FR 11396 (March 17, 2009) (NYSEArca– 2009–17); 61393 (January 21, 2010), 75 FR 4887 (January 29, 2010) (NYSEArca–2010–03); 62019 (April 30, 2010), 75 FR 25889 (May 10, 2010) (NYSEArca–2010–16); 62052 (May 6, 2010), 75 FR 26832 (May 12, 2010) (NYSEArca–2010–38); 65504 (October 6, 2011), 76 FR 63980 (October 14, 2011) (NYSEArca–2011–71). 5 See E:\FR\FM\21FEN1.SGM 21FEN1 erowe on DSK2VPTVN1PROD with NOTICES 12118 Federal Register / Vol. 78, No. 35 / Thursday, February 21, 2013 / Notices Exchange in order to have transactions reviewed under Rule 6.87. Specifically the Exchange is proposing to extend the time Market Makers have to notify the Exchange of a potential error from five minutes to ten minutes. The Exchange believes that the change is appropriate given the increase in the number of options series, as well as the number of exchanges in operation today. Market Makers providing liquidity on multiple exchanges potentially need to call and speak with someone at each of the nine exchanges to have transactions reviewed. As such, the existing five minute time limit makes this impractical if not impossible and therefore it is appropriate to extend the time limit to ten minutes. The Exchange notes that at least one other exchange already provides Market Makers with more than five minutes to request a review under their obvious error rules.6 In addition, the Exchange is proposing to extend the time OTP Holders acting as agent for Customer orders have to notify the Exchange of a potential error from twenty minutes to thirty minutes. The Exchange believes that extending the time limit for Customer orders is warranted due to the degree in which many Customers are removed from the operation of the execution. For a Customer order, the brokerage firm with which the customer has an account may not actually be the routing or execution broker for the Customer’s options trades. It is fairly common for brokerage firms to route their Customer order flow through a different Broker Dealer that employs a router that weighs various best execution factors in arriving at a routing decision. In such situations, Customers who receive a fill they want reviewed under the obvious error rule must first call their brokerage firm, who will in turn contact the broker-dealer that routed the order to the Exchange for execution. OTP Holders have indicated to the Exchange that Customers may need more than 20 minutes for their requests for review to reach the Exchange. Other market participants, such as Firms, non-member Market Makers, and Professional Customers tend to route their own order flow directly to the Exchange and are not as far removed from the actual execution. Hence the Exchange believes it is appropriate to extend the time to request a review for OTP Holders acting as agent for Customer orders given these facts.7 6 See CBOE Rule 6.25(b)(1). 7 While the Exchange acknowledges that extending the time a party can notify the Exchange of a potential error can increase uncertainty VerDate Mar<15>2010 14:47 Feb 20, 2013 Jkt 229001 Proposed Amendments To Address Complex Orders The Exchange also proposes adding new language to address Complex Orders in the context of Rule 6.87. Presently, the Obvious Error Rule is silent on how Complex Orders are handled under the bust and adjust provisions of the rule. The Exchange wants to include language that will give participants some degree of certainty regarding what they should expect when legs of a Complex Order are eligible for obvious error treatment. There are several scenarios in which Complex Orders may be involved in a transaction that is reviewed under the Obvious Error Rule. Each of those scenarios and the proposed approach will be covered below: Scenario 1: A Complex Order trades with another Complex Order in the Complex Order Book. Under this scenario, should any leg(s) upon review qualify for obvious error treatment under the provisions of Rule 6.87, then all legs of the Complex Order will be busted unless both parties mutually agree to an adjustment price. The Exchange believes that this approach is similar to rules of other markets 8 and appropriate due to several aspects unique to Complex Orders. In particular, the Exchange notes that Complex Orders often are used by participants to enter positions known as spreads that entail limited risk relative to an outright naked sale of a put or call. For example, buying 1 XYZ Dec 55 call and selling 1 XYZ Dec 50 call has risk limited to $5, less the premium received for the spread. If the leg of the Complex Order consisting of the long 1 XYZ Dec 55 call was eligible to be busted, the OTP Holder would be left with a riskier, naked short position in the single remaining leg of the spread. Given this, the Exchange has decided that the best approach for dealing with Complex Orders in the context of the Obvious Error Rule will be to preserve the spread whenever possible. Therefore, when a trade eligible for obvious error treatment has occurred that involves a Complex Order trading with another Complex Order in the COB, the Exchange believes it is appropriate to bust all legs of the trade involved unless both parties to the trade mutually agree to an adjustment price. Scenario 2: A Complex Order trades with another Complex Order in the Complex Order Book where one leg regarding the standing of a trade, it believes that such uncertainty will be limited only to those trades that are so outside of normal trading that they might qualify for obvious error treatment. 8 See PHLX Rule 1092(c)(v). PO 00000 Frm 00088 Fmt 4703 Sfmt 4703 qualifies for the no-bid provision of Rule 6.87(a)(6). If the only leg(s) of the Complex Order that qualifies for obvious error treatment is pursuant to the no-bid provisions of Rule 6.87(a)(6), then no legs of the Complex Order will be busted (the trade stands as executed), unless both parties to the trade mutually agree otherwise. The Exchange believes that busting trades solely the result of a leg(s) of a Complex Order executing in a no-bid series could result in abuse. In particular, by entering a spread priced slightly away from the market, the entering party can increase the chance that one of the legs will qualify for nobid treatment upon execution. In such a scenario, the entity entering the Complex Order would have a window of time (equal to the notification provisions of the rule) to evaluate the market before claiming relief under the Obvious Error Rule (which would result in the busting of all legs). In order to prevent manipulation and a potential increase in nullified trades, the Exchange believes it is appropriate to not permit obvious error treatment for those situations where the only error occurred in a no-bid series. Scenario 3: A Complex Order trades with individual orders or quotes in the Consolidated Book. In such situations, each executed leg will be reviewed separately under Rule 6.87. As a result, it is possible that after such a trade, only one leg of a Complex Order may meet the Obvious Error threshold (resulting in a residual position of a single leg). When a Complex Order receives executions in the Consolidated Order Book, it is likely to involve multiple OTP Holders. Although the Exchange prefers to avoid partial execution of a Complex Order, it does not seek to nullify a valid execution in the Consolidated Order Book of an OTP Holder who unknowingly interacted with a leg of a Complex Order. While this is not a change from how the Exchange currently handles all Complex Orders, language is being added to the Obvious Error Rule for purposes of clarification. 2. Statutory Basis The Exchange believes that this proposed rule change is consistent with Section 6(b) of the Securities Exchange Act of 1934 (‘‘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 prevent fraudulent and manipulative acts and practices, promote just and equitable principles of 9 15 U.S.C. 78f(b). U.S.C. 78f(b)(5). 10 15 E:\FR\FM\21FEN1.SGM 21FEN1 erowe on DSK2VPTVN1PROD with NOTICES Federal Register / Vol. 78, No. 35 / Thursday, February 21, 2013 / Notices trade, remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. In particular, the proposed rule change relating to the handling of transactions in series quoted no bid at the NBBO will promote just and equitable principles of trade by adding more certainty and consistency to the obvious error. The proposed rule change to increase the time limit for both Market Makers and OTP Holders acting as agent for Customers to request a review of a transaction under the provisions of Rule 6.87 is designed to protect investors and the public interest. Granting Market Makers more time to request a review of a trade for obvious error treatment will ensure they are comfortable they can meet the deadline. This comfort level should allow Market Makers to continue to aggressively provide that liquidity in a transparent and non-discriminatory manner to all participants which is in the public interest. Further, ensuring Customers sufficient time to request a review for trades is also consistent with investor protection and furthering the public interest as it allows those market participants furthest removed from the point of execution time to evaluate each trade and have adequate time to notify the Exchange of a potential error. The Exchange believes that the proposed rule changes that address the handling of Complex Orders involved in obvious errors are also consistent with Section 6(b) of the Act, in general, and furthers the objectives of Section 6(b)(5), in particular, in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. Detailing how Complex Orders involved in obvious errors will be busted and/or adjusted is important since it grants investors greater certainty. Preventing a market participant from busting trades solely the result of a leg(s) of a Complex Order executing in a no-bid series furthers the protection of investors and the public interest by preventing potential abuse. In the Exchange’s view, the determination of whether an ‘‘obvious error’’ has occurred should be based on specific and objective criteria and subject to specific and objective procedures. The Exchange believes that the proposed rule change provides such objective guidelines for the determination of whether an obvious price error has occurred. VerDate Mar<15>2010 14:47 Feb 20, 2013 Jkt 229001 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. To the contrary, the proposal further promotes competition on the Exchange which should lead to tighter, more efficient markets to the benefit of market participants including public investors that engage in trading and hedging on the Exchange, and thereby make the Exchange a desirable market vis a vis other options exchanges. 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 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 will: (A) By order approve or disapprove the proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments 12119 All submissions should refer to File Number SR–NYSEARCA–2013–15. 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– NYSEARCA–2013–15 and should be submitted on or before March 14, 2013. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.11 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–03966 Filed 2–20–13; 8:45 am] 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 BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–68932; File No. SR–CBOE– 2013–021] • 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–NYSEARCA–2013–15 on the subject line. Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the Text in the Exchange Fees Schedule Paper Comments Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. PO 00000 Frm 00089 Fmt 4703 Sfmt 4703 February 14, 2013. 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\21FEN1.SGM 21FEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 78, Number 35 (Thursday, February 21, 2013)]
[Notices]
[Pages 12117-12119]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-03966]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68927; File No. SR-NYSEARCA-2013-15]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change Amending Rule 6.87 in Part and Adding a New
Section To Address Errors That Involve Complex Orders

February 14, 2013.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on February 1, 2013, NYSE Arca, Inc. (the ``Exchange'' or
``NYSE Arca'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the self-regulatory
organization. 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\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

The Exchange proposes to amend Rule 6.87 in part and add a new
section to address errors that involve Complex Orders. The text of the
proposed rule change is available on the Exchange's Web site at
www.nyse.com, at the principal office of the Exchange, and at the
Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those 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 parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change

1. Purpose
The Exchange is proposing to amend certain existing provisions of
Rule 6.87 (``Obvious Error Rule'').\4\ In addition, the Exchange is
proposing to add new language to Rule 6.87 specific to how errors
involving Complex Orders will be addressed.
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\4\ See Exchange Rule 6.87.
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Proposed Amendments to Existing Provisions of Rule 6.87
The Exchange adopted the Obvious Error Rule to handle situations
where an order receives an erroneous execution, such as receiving a
price that is higher or lower than the Theoretical Price by a specified
amount.\5\ The Exchange is proposing several amendments to the Obvious
Error Rule. First, the Exchange is proposing to change the portion of
the rule that addresses errors in series with zero or no bid.
Specifically, the Exchange proposes replacing reference to ``series
quoted no bid on the Exchange'' with ``series where the NBBO bid is
zero.'' This is being done to ensure consistency in the language with
other aspects of the existing rule that reference NBBO for
determination of whether a transaction is deemed eligible for obvious
error treatment. The Exchange believes the NBBO provides greater
accuracy in determining the value or valueless of an option because it
takes into account interest from all market participants and not just
those active on the Exchange. The Exchange also believes that ensuring
consistency throughout the rule text is important to help avoid
investor confusion.
---------------------------------------------------------------------------

\5\ See e.g. Securities Exchange Act Release Nos. 34-48538
(September 25, 2003), 68 FR 56858 (October 2, 2003) (PCX-2002-01);
49718 (May 17, 2004), 69 FR 29611 (May 24, 2004) (PCX-2004-08);
51723 (May 20, 2005), 70 FR 30988 (May 31, 2005) (PCX-2005-52);
52008 (July 11, 2005), 70 FR 41069 (July 15, 2005) (PCX-2005-78);
53221 (February 3, 2006), 71 FR 6811 (February 9, 2006) (PCX-2005-
102); 55330 (February 21, 2007), 72 FR 9052 (February 28, 2007)
(NYSEArca-2007-06); 57103 (January 4, 2008), 73 FR 1903 (January 10,
2008) (NYSEArca-2007-115); 57653 (April 11, 2008), 73 FR 20996
(April 17, 2008) (NYSEArca-2008-41); 58717 (October 2, 2008), 73 FR
60386 (October 10, 2008) (NYSEArca-2008-106); 59556 (March 11,
2009), 74 FR 11396 (March 17, 2009) (NYSEArca-2009-17); 61393
(January 21, 2010), 75 FR 4887 (January 29, 2010) (NYSEArca-2010-
03); 62019 (April 30, 2010), 75 FR 25889 (May 10, 2010) (NYSEArca-
2010-16); 62052 (May 6, 2010), 75 FR 26832 (May 12, 2010) (NYSEArca-
2010-38); 65504 (October 6, 2011), 76 FR 63980 (October 14, 2011)
(NYSEArca-2011-71).
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Second, the Exchange proposes to amend the times in which certain
OTP Holders are required to notify the

[[Page 12118]]

Exchange in order to have transactions reviewed under Rule 6.87.
Specifically the Exchange is proposing to extend the time Market Makers
have to notify the Exchange of a potential error from five minutes to
ten minutes. The Exchange believes that the change is appropriate given
the increase in the number of options series, as well as the number of
exchanges in operation today. Market Makers providing liquidity on
multiple exchanges potentially need to call and speak with someone at
each of the nine exchanges to have transactions reviewed. As such, the
existing five minute time limit makes this impractical if not
impossible and therefore it is appropriate to extend the time limit to
ten minutes. The Exchange notes that at least one other exchange
already provides Market Makers with more than five minutes to request a
review under their obvious error rules.\6\
---------------------------------------------------------------------------

\6\ See CBOE Rule 6.25(b)(1).
---------------------------------------------------------------------------

In addition, the Exchange is proposing to extend the time OTP
Holders acting as agent for Customer orders have to notify the Exchange
of a potential error from twenty minutes to thirty minutes. The
Exchange believes that extending the time limit for Customer orders is
warranted due to the degree in which many Customers are removed from
the operation of the execution. For a Customer order, the brokerage
firm with which the customer has an account may not actually be the
routing or execution broker for the Customer's options trades. It is
fairly common for brokerage firms to route their Customer order flow
through a different Broker Dealer that employs a router that weighs
various best execution factors in arriving at a routing decision. In
such situations, Customers who receive a fill they want reviewed under
the obvious error rule must first call their brokerage firm, who will
in turn contact the broker-dealer that routed the order to the Exchange
for execution. OTP Holders have indicated to the Exchange that
Customers may need more than 20 minutes for their requests for review
to reach the Exchange. Other market participants, such as Firms, non-
member Market Makers, and Professional Customers tend to route their
own order flow directly to the Exchange and are not as far removed from
the actual execution. Hence the Exchange believes it is appropriate to
extend the time to request a review for OTP Holders acting as agent for
Customer orders given these facts.\7\
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\7\ While the Exchange acknowledges that extending the time a
party can notify the Exchange of a potential error can increase
uncertainty regarding the standing of a trade, it believes that such
uncertainty will be limited only to those trades that are so outside
of normal trading that they might qualify for obvious error
treatment.
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Proposed Amendments To Address Complex Orders
The Exchange also proposes adding new language to address Complex
Orders in the context of Rule 6.87. Presently, the Obvious Error Rule
is silent on how Complex Orders are handled under the bust and adjust
provisions of the rule. The Exchange wants to include language that
will give participants some degree of certainty regarding what they
should expect when legs of a Complex Order are eligible for obvious
error treatment. There are several scenarios in which Complex Orders
may be involved in a transaction that is reviewed under the Obvious
Error Rule. Each of those scenarios and the proposed approach will be
covered below:
Scenario 1: A Complex Order trades with another Complex Order in
the Complex Order Book. Under this scenario, should any leg(s) upon
review qualify for obvious error treatment under the provisions of Rule
6.87, then all legs of the Complex Order will be busted unless both
parties mutually agree to an adjustment price.
The Exchange believes that this approach is similar to rules of
other markets \8\ and appropriate due to several aspects unique to
Complex Orders. In particular, the Exchange notes that Complex Orders
often are used by participants to enter positions known as spreads that
entail limited risk relative to an outright naked sale of a put or
call. For example, buying 1 XYZ Dec 55 call and selling 1 XYZ Dec 50
call has risk limited to $5, less the premium received for the spread.
If the leg of the Complex Order consisting of the long 1 XYZ Dec 55
call was eligible to be busted, the OTP Holder would be left with a
riskier, naked short position in the single remaining leg of the
spread. Given this, the Exchange has decided that the best approach for
dealing with Complex Orders in the context of the Obvious Error Rule
will be to preserve the spread whenever possible. Therefore, when a
trade eligible for obvious error treatment has occurred that involves a
Complex Order trading with another Complex Order in the COB, the
Exchange believes it is appropriate to bust all legs of the trade
involved unless both parties to the trade mutually agree to an
adjustment price.
---------------------------------------------------------------------------

\8\ See PHLX Rule 1092(c)(v).
---------------------------------------------------------------------------

Scenario 2: A Complex Order trades with another Complex Order in
the Complex Order Book where one leg qualifies for the no-bid provision
of Rule 6.87(a)(6). If the only leg(s) of the Complex Order that
qualifies for obvious error treatment is pursuant to the no-bid
provisions of Rule 6.87(a)(6), then no legs of the Complex Order will
be busted (the trade stands as executed), unless both parties to the
trade mutually agree otherwise.
The Exchange believes that busting trades solely the result of a
leg(s) of a Complex Order executing in a no-bid series could result in
abuse. In particular, by entering a spread priced slightly away from
the market, the entering party can increase the chance that one of the
legs will qualify for no-bid treatment upon execution. In such a
scenario, the entity entering the Complex Order would have a window of
time (equal to the notification provisions of the rule) to evaluate the
market before claiming relief under the Obvious Error Rule (which would
result in the busting of all legs). In order to prevent manipulation
and a potential increase in nullified trades, the Exchange believes it
is appropriate to not permit obvious error treatment for those
situations where the only error occurred in a no-bid series.
Scenario 3: A Complex Order trades with individual orders or quotes
in the Consolidated Book. In such situations, each executed leg will be
reviewed separately under Rule 6.87. As a result, it is possible that
after such a trade, only one leg of a Complex Order may meet the
Obvious Error threshold (resulting in a residual position of a single
leg). When a Complex Order receives executions in the Consolidated
Order Book, it is likely to involve multiple OTP Holders. Although the
Exchange prefers to avoid partial execution of a Complex Order, it does
not seek to nullify a valid execution in the Consolidated Order Book of
an OTP Holder who unknowingly interacted with a leg of a Complex Order.
While this is not a change from how the Exchange currently handles all
Complex Orders, language is being added to the Obvious Error Rule for
purposes of clarification.
2. Statutory Basis
The Exchange believes that this proposed rule change is consistent
with Section 6(b) of the Securities Exchange Act of 1934 (``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 prevent fraudulent and
manipulative acts and practices, promote just and equitable principles
of

[[Page 12119]]

trade, 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.
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\9\ 15 U.S.C. 78f(b).
\10\ 15 U.S.C. 78f(b)(5).
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In particular, the proposed rule change relating to the handling of
transactions in series quoted no bid at the NBBO will promote just and
equitable principles of trade by adding more certainty and consistency
to the obvious error. The proposed rule change to increase the time
limit for both Market Makers and OTP Holders acting as agent for
Customers to request a review of a transaction under the provisions of
Rule 6.87 is designed to protect investors and the public interest.
Granting Market Makers more time to request a review of a trade for
obvious error treatment will ensure they are comfortable they can meet
the deadline. This comfort level should allow Market Makers to continue
to aggressively provide that liquidity in a transparent and non-
discriminatory manner to all participants which is in the public
interest. Further, ensuring Customers sufficient time to request a
review for trades is also consistent with investor protection and
furthering the public interest as it allows those market participants
furthest removed from the point of execution time to evaluate each
trade and have adequate time to notify the Exchange of a potential
error.
The Exchange believes that the proposed rule changes that address
the handling of Complex Orders involved in obvious errors are also
consistent with Section 6(b) of the Act, in general, and furthers the
objectives of Section 6(b)(5), in particular, in that it is designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, and, in general, to protect
investors and the public interest. Detailing how Complex Orders
involved in obvious errors will be busted and/or adjusted is important
since it grants investors greater certainty. Preventing a market
participant from busting trades solely the result of a leg(s) of a
Complex Order executing in a no-bid series furthers the protection of
investors and the public interest by preventing potential abuse. In the
Exchange's view, the determination of whether an ``obvious error'' has
occurred should be based on specific and objective criteria and subject
to specific and objective procedures. The Exchange believes that the
proposed rule change provides such objective guidelines for the
determination of whether an obvious price error has occurred.

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. To the contrary, the proposal
further promotes competition on the Exchange which should lead to
tighter, more efficient markets to the benefit of market participants
including public investors that engage in trading and hedging on the
Exchange, and thereby make the Exchange a desirable market vis a vis
other options exchanges.

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

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 will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-NYSEARCA-2013-15 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-NYSEARCA-2013-15. 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-NYSEARCA-2013-15 and should
be submitted on or before March 14, 2013.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-03966 Filed 2-20-13; 8:45 am]
BILLING CODE 8011-01-P

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