Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing of Proposed Rule Change, as Modified by Amendment No. 1, Adopting Exchange Rule 953.1NY To Provide for How the Exchange Proposes To Treat Orders, Market-Making Quoting Obligations, and Errors in Response to the Regulation NMS Plan To Address Extraordinary Market Volatility; and Amending Exchange Rule 953NY To Codify That the Exchange Shall Halt Trading in All Options Overlying NMS Stocks When the Equities Markets Initiate a Market-Wide Trading Halt Due to Extraordinary Market Volatility, 15067-15073 [2013-05419]
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Federal Register / Vol. 78, No. 46 / Friday, March 8, 2013 / Notices
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 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 offices of the
Exchange. All comments received will
be posted without change; the
Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–NSX–
2013–08, and should be submitted on or
before March 29, 2013.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.15
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–05415 Filed 3–7–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–69033; File No. SR–
NYSEMKT–2013–10]
Self-Regulatory Organizations; NYSE
MKT LLC; Notice of Filing of Proposed
Rule Change, as Modified by
Amendment No. 1, Adopting Exchange
Rule 953.1NY To Provide for How the
Exchange Proposes To Treat Orders,
Market-Making Quoting Obligations,
and Errors in Response to the
Regulation NMS Plan To Address
Extraordinary Market Volatility; and
Amending Exchange Rule 953NY To
Codify That the Exchange Shall Halt
Trading in All Options Overlying NMS
Stocks When the Equities Markets
Initiate a Market-Wide Trading Halt Due
to Extraordinary Market Volatility
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March 4, 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
26, 2013, NYSE MKT LLC (the
‘‘Exchange’’ or ‘‘NYSE MKT’’) filed with
the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the self-regulatory
15 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
18:44 Mar 07, 2013
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to adopt (i)
Exchange Rule 953.1NY to provide for
how the Exchange proposes to treat
orders, market-making quoting
obligations, and errors in response to
the Regulation NMS Plan to Address
Extraordinary Market Volatility; and (ii)
to amend Exchange Rule 953NY to
codify that the Exchange shall halt
trading in all options overlying NMS
stocks when the equities markets
initiate a market-wide trading halt due
to extraordinary market volatility. 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, on the Commission’s Web
site at www.sec.gov, 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
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes (i) to adopt
Exchange Rule 953.1NY to provide for
how the Exchange proposes to treat
orders, market-making quoting
obligations, and errors in response to
the Regulation NMS Plan to Address
Extraordinary Market Volatility (the
‘‘Plan’’), which is applicable to all NMS
stocks, as defined in Regulation NMS
Rule 600(b)(47); and (ii) to amend
Exchange Rule 953NY to codify that the
Exchange shall halt trading in all
4 See email from Brian O’Neill, Chief Counsel,
NYSE Regulation, to Andrew Madar, Assistant
Director, Division of Trading and Markets, dated
March 1, 2013 (‘‘Amendment No. 1’’).
1 15
VerDate Mar<15>2010
organization. On March 1, 2013, the
Exchange submitted Amendment No. 1
to the proposed rule change.4 The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
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15067
options when the equities markets
initiate a market-wide trading halt due
to extraordinary market volatility. The
Exchange proposes to adopt new Rule
953.1NY for a pilot period that
coincides with the pilot period for the
Plan, which is currently scheduled as a
one-year pilot to begin on February 4,
2013 [sic].
Background
Since May 6, 2010, when the markets
experienced excessive volatility in an
abbreviated time period, i.e., the ‘‘flash
crash,’’ the equities exchanges and
FINRA have implemented market-wide
measures designed to restore investor
confidence by reducing the potential for
excessive market volatility. The
measures adopted include pilot plans
for stock-by-stock trading pauses,5
related changes to the equities market
clearly erroneous execution rules,6 and
more stringent equities market maker
quoting requirements.7 On May 31,
2012, the Commission approved the
Plan, as amended, on a one-year pilot
basis.8 In addition, the Commission
approved changes to the equities
market-wide circuit breaker rules on a
pilot basis to coincide with the pilot
period for the Plan.9
The Plan is designed to prevent trades
in individual NMS stocks from
occurring outside of specified Price
Bands.10 As described more fully below,
the requirements of the Plan are coupled
with Trading Pauses to accommodate
more fundamental price moves (as
opposed to erroneous trades or
momentary gaps in liquidity). All
trading centers in NMS stocks,
including both those operated by
Participants and those operated by
members of Participants, are required to
establish, maintain, and enforce written
policies and procedures that are
5 See,
e.g., NYSE Rule 80C, Exchange Rule 80C.
e.g., NYSE Rule 128, Exchange Rule 128.
7 See, e.g., NYSE Rule 104(a)(1)(B), Exchange Rule
104(a)(1)(B).
8 See Securities Exchange Act Release No. 67091
(May 31, 2012), 77 FR 33498 (June 6, 2012) (File
No. 4–631) (Order Approving, on a Pilot Basis, the
Plan).
9 See Securities Exchange Act Release No. 67090
(May 31, 2012), 77 FR 33531 (June 6, 2012) (SR–
BATS–2011–038; SR–BYX–2011–025; SR–BX–
2011–068; SR–CBOE–2011–087; SR–C2–2011–024;
SR–CHX–2011–30; SR–EDGA–2011–31; SR–EDGX–
2011–30; SR–FINRA–2011–054; SR–ISE–2011–61;
SR–NASDAQ–2011–131; SR–NSX–2011–11; SR–
NYSE–2011–48; SR–NYSEAmex–2011–73; SR–
NYSEArca–2011–68; SR–Phlx–2011–129).
10 Unless otherwise specified, capitalized terms
used in this rule filing are based on the defined
terms of the Plan.
6 See,
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reasonably designed to comply with the
requirements specified in the Plan.11
As set forth in more detail in the Plan,
Price Bands consisting of a Lower Price
Band and an Upper Price Band for each
NMS Stock are calculated by the
Processors.12 When the National Best
Bid (Offer) is below (above) the Lower
(Upper) Price Band, the Processors shall
disseminate such National Best Bid
(Offer) with an appropriate flag
identifying it as unexecutable. When the
National Best Bid (Offer) is equal to the
Upper (Lower) Price Band, the
Processors shall distribute such
National Best Bid (Offer) with an
appropriate flag identifying it as a Limit
State Quotation.13 All trading centers in
NMS stocks must maintain written
policies and procedures that are
reasonably designed to prevent the
display of offers below the Lower Price
Band and bids above the Upper Price
Band for NMS stocks. Notwithstanding
this requirement, the Processor shall
display an offer below the Lower Price
Band or a bid above the Upper Price
Band, but with a flag that it is nonexecutable. Such bids or offers shall not
be included in the National Best Bid or
National Best Offer calculations.14
Trading in an NMS stock immediately
enters a Limit State if the National Best
Offer (Bid) equals but does not cross the
Lower (Upper) Price Band.15 Trading for
an NMS stock exits a Limit State if,
within 15 seconds of entering the Limit
State, all Limit State Quotations were
executed or canceled in their entirety. If
the market does not exit a Limit State
within 15 seconds, then the Primary
Listing Exchange would declare a fiveminute trading pause pursuant to
Section VII of the LULD Plan, which
would be applicable to all markets
trading the security.16 In addition, the
Plan defines a Straddle State as when
the National Best Bid (Offer) is below
(above) the Lower (Upper) Price Band
and the NMS stock is not in a Limit
State. For example, assume the Lower
Price Band for an NMS Stock is $9.50
and the Upper Price Band is $10.50,
such NMS stock would be in a Straddle
State if the National Best Bid were
below $9.50, and therefore non11 The Exchange is a participant in the Plan
through its wholly-owned subsidiary, NYSE MKT
LLC, which operates an equities market.
12 See Section V(A) of the Plan.
13 See Section VI(A) of the Plan.
14 See Section VI(A)(3) of the Plan.
15 See Section VI(B)(1) of the Plan.
16 The primary listing market would declare a
Trading Pause in an NMS stock; upon notification
by the primary listing market, the Processor would
disseminate this information to the public. No
trades in that NMS stock could occur during the
trading pause, but all bids and offers may be
displayed. See Section VII(A) of the Plan.
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18:44 Mar 07, 2013
Jkt 229001
executable, and the National Best Offer
were above $9.50 (including a National
Best Offer that could be above $10.50).
If an NMS stock is in a Straddle State
and trading in that stock deviates from
normal trading characteristics, the
Primary Listing Exchange may declare a
trading pause for that NMS stock if such
Trading Pause would support the Plan’s
goal to address extraordinary market
volatility.
Proposed Rule 953.1NY
The Exchange proposes to adopt new
Exchange Rule 953.1NY to provide for
how the Exchange shall treat orders and
quotes in options overlying NMS stocks
when the Plan is in effect.
First, the Exchange proposes rules
regarding the treatment of certain orders
or quotes if the underlying NMS stock
is in a Limit State and Straddle State.
Whenever an NMS stock is in a Limit
State or Straddle State, trading
continues, however, there will not be a
reliable price for a security to serve as
a benchmark for the price of the option.
For example, if the underlying NMS
stock is in a Limit State, while trading
in that stock continues, by being in a
Limit State, there will be either
cancellations or executions at that price,
and if the Limit State is not resolved in
15 seconds, the NMS Stock will enter a
Trading Pause. If an NMS stock is in a
Straddle State, that means that there is
either a National Best Bid or National
Best Offer that is non-executable, which
could result in limited price discovery
in the underlying NMS stock. In
addition to the lack of a reliable
underlying reference price, the
Exchange is concerned about the width
of the markets and quality of the
execution for market participants during
Limit or Straddle States. While the
Exchange recognizes the importance of
continued trading in options overlying
NMS stocks during Limit States and
Straddle States, the Exchange believes
that certain types of orders increase the
risk of errors and poor executions and
therefore should be not allowed during
these times when there may not be a
reliable underlying reference price,
there may be a wide bid/ask quotation
differential, and lower trading liquidity
in the options markets. Specifically, the
Exchange proposes that if the
underlying NMS stock is in a Limit
State or Straddle State, the Exchange
shall reject all incoming Market Orders
and will not elect Stop Orders.17 The
Exchange believes that permitting these
order types to execute when the
underlying NMS stock is in a Limit
State or Straddle State would add to the
volatility in the options markets during
times of extraordinary market volatility
and could have the potential to lead to
unwanted executions. The Exchange
believes that adding certainty to the
treatment of Market Orders and Stop
Orders when the underlying NMS stock
is in these situations will encourage
market participants to continue to
provide liquidity to the Exchange and
thus promote a fair and orderly market.
Second, the Exchange proposes to
adopt subsection (b) to provide that
when evaluating whether a Specialist
has met its market-making quoting
requirement pursuant to Rule
925.1NY(b) or a Market Maker has met
its market-making quoting requirement
pursuant to Rule 925.1NY(c) in options
overlying NMS stocks, the Exchange
shall consider as a mitigating
circumstance the frequency and
duration of occurrences when an
underlying NMS stock is in a Limit
State or a Straddle State. This is
necessary given the direct relationship
between an options price and the price
of the underlying security. During a
Limit or Straddle State, the bid price,
offer price or both of the underlying
security will be unexecutable [sic]. With
the bid and or offer flagged
unexecutable, the ability to hedge the
purchase or sale of an option will be
jeopardized and in fact it may not be
possible to purchase or sell shares of the
underlying security at any price to offset
the risk created by either buying or
selling calls and/or put options during
a Limit State or a Straddle State. The
Exchange expects that its Market Makers
will as need to modify their quoting
behavior a result. For the reasons
described below the Exchange feels that
the proposed change to consider as a
mitigating circumstance the frequency
and duration of periods during which
an underlying NMS stock is in a Limit
State or a Straddle State is the
appropriate approach until such a time
as the Exchange has more experience
with the impact of the Plan on the
options marketplace, particularly the
impact on Market Makers ability to
provide liquidity in an option when
unknown (and possibly very limited)
liquidity exists in the underlying
security.
17 See Rule 900.3NY(d)(1). Stop Orders when
elected create a Market Order to buy or sell the
option. In contrast, the Exchange is not proposing
to prohibit the election of Stop Limit Orders. Stop
Limit Orders when elected create a Limit Order to
buy or sell the option at a specific price. See
900.3NY(d)(2). The Exchange believes that Stop
Limit Orders do not raise the same risks during
periods of extraordinary volatility, because once
elected the associated limit orders would not race
through the order book in the manner that an
elected Market Order would.
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The Exchange has settled on this
approach after analyzing in detail the
alternatives. An undesirable alternative
for the Exchange would be to propose to
relax the quoting obligations. The
relaxed quoting obligations could apply
to the full trading day or just during the
periods of extraordinary market
volatility in the underlying NMS stock
during a Straddle State or Limit State.
The Exchange could, for example, have
proposed to adopt the same market
maker quoting obligations that apply to
market makers on another options
market that only requires its market
makers to provide a two-sided
continuous quote, without any
requirement for a $5 or tighter bid-ask
differential.18 Absent the $5 bid-ask
differential requirement, the Exchange
believes there would be no issue with
Market Makers meeting their continuous
quoting obligations during periods of
extraordinary market volatility in the
underlying stock because Market
Markers could continuously quote a
$.01 bid and a $1000 offer, for example.
However, the Exchange believes that
relaxing the quoting obligations only
during Straddle States and Limit States
would cause significant technical
problems for Market Makers, Exchange
systems, and surveillance monitoring.
Underlying NMS stocks will likely
flicker in and out of a Straddle State or
Limit State throughout the day.
Programming systems to adjust the
quoting obligations to constant changes
in a Straddle State or Limit State would
likely be technologically difficult and
economically prohibitive. The only real
practical solution would be for the
Exchange to relax the quoting
obligations for the full trading day by
eliminating the $5 bid-ask differential
requirement. The Exchange believes that
eliminating the $5 bid-ask differential
requirement is also an undesirable
alternative. The Exchange values the
role of Market Makers in the options
market and believes that existing
quoting requirements should be
maintained in order to facilitate
transactions, preserve market liquidity,
and ensure the fair and orderly trading
of options on the Exchange.
Therefore, in lieu of these
alternatives, the Exchange proposes to
adopt subsection (b) to provide that
when evaluating whether a Specialist
has met its market-making quoting
requirement pursuant to Rule
925.1NY(b) or a Market Maker has met
its market-making quoting requirement
pursuant to Rule 925.1NY(c) in options
overlying NMS stocks, the Exchange
shall consider as a mitigating
18 See
BATS Options Rule 22.6(d).
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18:44 Mar 07, 2013
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circumstance the frequency and
duration that an underlying NMS stock
is in a Limit State or a Straddle State.
For example, if an ATP Holder fails to
meet its monthly quoting obligations,
and during the review, it is determined
that the quoting that failed to meet the
obligation was for options that overlay
NMS stocks with a significant number
of Straddle States and Limit States, then
pursuant to proposed Rule 953.1NY(c),
that would be considered a mitigating
circumstance that would entitle the OTP
Holder to relief. The Exchange will
work with FINRA to monitor the impact
of Straddle States and Limit States on a
Specialist or Market Marker’s ability to
meet its market-maker quoting
requirements. The Exchange notes that
it does not believe that it needs to
modify the existing quoting obligations
for Market Markers in Rules 925NY and
925.1NY to reflect how such quoting
requirements may interact with how
underlying NMS stocks trade during a
Straddle State or Limit State. Rather,
during periods of extraordinary market
volatility in the underlying NMS stock,
the Exchange believes that the existing
quoting requirements should be
maintained in order to facilitate
transactions, preserve market liquidity,
and ensure the fair and orderly trading
of options on the Exchange. This change
is also designed to eliminate the
technologically difficult and
economically prohibitive systems
programming that would be required if
the Exchange eliminated the $5 bid-ask
differential requirement only during
Straddle States or Limit States.
Finally, the Exchange proposed to
adopt subsection (c) to provide that
electronic transactions in stock options
that occur during a Limit State or a
Straddle State would not be subject to
review under Rule 975NY(a) for
Obvious Errors or Rule 975NY(d) for
Catastrophic Errors. In addition,
subsection (c) will provide that
electronic transactions in options that
overlay an NMS stock that occur during
a Limit State or a Straddle State may be
reviewed on Exchange motion pursuant
to 975NY(b)(3).19 For the reasons
19 Rule 975NY(b)(3) provides that in the interest
of maintaining a fair and orderly market and for the
protection of investors, the Exchange’s Chief
Executive Officer (‘‘CEO’’) or designee thereof, who
is an officer of the Exchange (collectively
‘‘Exchange officer’’), may, on his or her own motion
or upon request, determine to review any
transaction occurring on the Exchange that is
believed to be erroneous. A transaction reviewed
pursuant to this provision may be nullified or
adjusted only if it is determined by the Exchange
officer that the transaction is erroneous as provided
in Rule 975NY(a)(3), (a)(4), (a)(5) or (a)(6). A
transaction would be adjusted or nullified in
accordance with the provision under which it is
deemed an erroneous transaction. The Exchange
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15069
described below the Exchange feels that
the proposal to allow review of
electronic transactions in options that
overlay an NMS stock that occur during
a Limit State or a Straddle State only on
Exchange motion is the appropriate
approach until such a time as the
Exchange has more experience with the
impact of the Plan on the options
marketplace. In particular, the Exchange
notes that other protections will
continue to exist to safeguard Customers
as discussed further below. The
Exchange proposes to review the
operation of this provision during the
one year Pilot period for the proposal
and analyze the impact of Limit and
Straddle States accordingly.20 In
addition, the Exchange will provide
data analysis during the duration of the
Pilot to the Commission so that the
Commission may analysis the operation
of the Pilot and evaluate with the
Exchange whether the Pilot should be
continued or be modified.21
The Exchange has settled on this
approach after analyzing in detail the
alternatives. An undesirable alternative
for the Exchange would be to maintain
the current operation of Rule 975NY(a)
for Obvious Errors or Rule 975NY(d) for
Catastrophic Errors during the Limit
State or Straddle State. Pursuant to
Rules 975NY(a), market participants
may have up to 30 minutes to review a
transaction as an Obvious Error.
Pursuant to 975NY(d), market
participants may have up to 8:30 a.m.
ET on the first trading day following a
transaction to review it as a Catastrophic
Error. The Exchange believes that
during periods of extraordinary
volatility, the review period for
transactions under the Obvious Error
and Catastrophic Error provisions
would allow market participants a
second look at transactions during a
Limit State or a Straddle State that is
potentially unfair to other market
participants. For example, thirty
officer may be assisted by a Trading Official in
reviewing a transaction. In addition, the Exchange
officer shall act pursuant to 975NY(b)(3) as soon as
possible after receiving notification of the
transaction, and ordinarily would be expected to act
on the same day as the transaction occurred. In no
event shall the Exchange officer act later than 9:30
a.m. (ET) on the next trading day following the date
of the transaction in question. An ATP Holder
affected by a determination to nullify or adjust a
transaction pursuant to this paragraph (3) may
appeal such determination in accordance with Rule
975NY(c); however, a determination by an
Exchange officer not to review a transaction, or a
determination not to nullify or adjust a transaction
for which a review was requested or conducted, is
not appealable. If a transaction is reviewed and a
determination is rendered pursuant to Rules
975NY(a)(3), (a)(4), (a)(5) or (a)(6), no additional
relief may be granted under this provision.
20 See Amendment No. 1, supra note 4.
21 Id.
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minutes after a transaction that occurs
during extraordinary volatility that
triggers a Limit State or a Straddle State
the market could look drastically
different from a price and liquidity
level. The Exchange believes that
market participants should not be able
to benefit from the time frame to review
their transactions in these situations.
This change would ensure that limit
orders that were filled during a Limit or
Straddle State would have certainty of
execution. As noted above with respect
to the treatment of Market Orders and
Stop Orders when the underlying NMS
Stock is in a Limit or Straddle State, the
Exchange believes that adding certainty
to the execution of orders in these
situations will encourage market
participants to continue to provide
liquidity to the Exchange and thus
promote a fair and orderly market.
Barring this change, the provisions of
Rule 975NY(a)(2)(B) would likely apply
in many instances during Limit or
Straddle States. This Rule provides that,
‘‘if there are not quotes for comparison
purposes, or if bid/ask differential for
the national best bid or offer for the
effected series just prior to the
transaction was at least two times the
permitted bid/ask differential pursuant
to Rule 925NY(b)(4), as determined by
a designated trading official.’’ The
Exchange believes this provision would
give rise to much uncertainty for market
participants as there is no bright line
definition of what ‘‘theoretical value’’
should be for an option when the
underlying NMS stock has an
unexecutable bid or offer or both.
Determining ‘‘theoretical value’’ in such
a situation would be often times very
subjective as opposed to an objective
determination giving rise to additional
uncertainty and confusion for investors.
For example:
• A $500 security enters a Straddle
State resulting in un-executable bids
and offers.
• Consequently the market for the
options on that security widens to
reflect the uncertainty surrounding what
price the stock may be sold at to hedge
the sale of puts or purchase of calls.
Prior to entering the Straddle State, the
22 day at the money $500 strike put
options were trading at $24.45–
$24.65.22 Upon entering the Straddle
State the market for those options
widens to $24.45–$35.00.
• A limit order to pay $32 for 10 is
entered resulting in a new market of
$32.00–$35.00. 14 seconds after entering
the Limit State in the underlying
security, a limit order to sell 10
contracts at $32 is received and trades
with the posted $32 limit order to buy.
Immediately after the trade is
consummated, the Straddle State in the
underlying security has not resolved
and consequently the underlying
security is halted. Upon resumption of
trading in the underlying security,
consider two possible scenarios:
• Scenario 1—The market for the
security is $450–$452. The puts which
traded immediately prior to the trading
halt are now worth at least their
intrinsic value of $50 and quite likely
are trading with some time premium as
well. The seller of 10 contracts at $32
immediately requests an Obvious Error
review under the provisions of Rule
975NY.
• Scenario 2—The market for the
security is now $550–$552. The puts
which traded immediately prior to the
trading halt are now worth an estimated
$8.23 The buyer of 10 contracts at $32
immediately requests an Obvious Error
review under the provisions of Rule
965NY [sic].
Under both scenarios the bid/ask
spread in the option was $2 at the time
of the trade and as such it now falls to
a designated trading official to
determine what the ‘‘theoretical value’’
of the option is. Absent the ability to
ascertain prices at which the stock
could have been bought or sold at the
Exchange
Bid size
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NYSE Arca ...............................................................................................................................
NYSE Amex .............................................................................................................................
An NYSE Amex Market Maker is
offering 100 contracts at $15. Another
NYSE Amex Market Maker enters an
ISO order to buy 100 contracts at $15.
Immediately after the execution the
same NYSE Amex Market Maker
requests a review under Rule 975NY.
Simply using the NBBO, in this case $7,
would mean that as required under Rule
975NY, the Exchange would rule to
adjust that trade to $7.30, essentially
forcing the NYSE Amex Options Market
22 Calculated using a binomial pricing model for
American style options with an interest rate of
.25%, no dividends, and an implied volatility of 50.
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18:44 Mar 07, 2013
Jkt 229001
time the option traded, the designated
official would be at best guessing what
the ‘‘theoretical value’’ should have
been. Such uncertainty in how the
transaction will be resolved will only
discourage participants from entering
executable interest during Limit and
Straddle States. The impossibility of
ascribing ‘‘theoretical value’’ to an
option, whose price is directly affected
by the ability to buy and sell shares of
the underlying security, gives rise to the
Exchange need to make clear that trades
during Limit and Straddle states will
stand irrespective of subsequent price
moves in the underlying security.
Absent this bright line guidance, the
Exchange expects the entry of
executable interest in the options
market to be severely curtailed as
securities approach and enter Limit and
Straddle States, decreasing the
opportunity to foster price discovery
and transparency at a time when it is
most needed. In contrast, if participants
know in advance that trades they effect
with quotes and/or orders having limit
prices will stand irrespective of
subsequent moves in the underlying
security, they will be much more likely
to submit such limit prices.
Another undesirable alternative for
the Exchange would be to propose to
always use the prevailing NBBO as the
metric to decide whether an error has
occurred, irrespective of how wide the
NBBO was at the time of the execution.
This approach alleviates the burden on
the Exchange of having to ascribe a
Theoretical Price to an option when the
stock has an un-executable bid, offer or
both but it still presents significant
problems. For example, in a Limit or
Straddle State it is likely that there will
be less depth of book—both on an intra
as well as an inter-market basis. This
gives rise to the potential for gaming of
the Obvious Error Rule which mandates
that Market Maker to Market Maker
trades are always adjusted. For example,
consider this scenario:
23 See
PO 00000
Bid price
50
5
$5
6
Fmt 4703
Sfmt 4703
$7
15
Ask size
1
100
Maker who was willing to provide
liquidity at $15 to instead provide
liquidity at the much worse price of
$7.30. Such an outcome would
undoubtedly result in fewer Market
Makers willing to post any liquidity for
supra note 19.
Frm 00112
Ask price
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fear of having the same thing happen to
them. The Exchange notes that, if
instead of a Market Maker offering 100
contracts at $15, it was a Customer with
a resting order in the Consolidated Book
the outcome of a review under Rule
975NY would have been to bust the
trade. The time permitted to request a
review, conduct the review and issue
notification to the affected parties can
be substantial, particularly in light of a
Limit or Straddle State where the
underlying security price is likely to be
moving considerably. So we have a
Customer who having sold options at
$15 which (for example) they bought
earlier for $10 finds themselves without
a profit but instead with an open
position. Obviously should the stock
move adversely during the time taken to
review the trade it is even possible for
the option to be worth less than where
the Customer who was offering at $15
purchased it. The Exchange strongly
believes that certainty of trade during
periods of market volatility is vital in
order to operate a fair and orderly
market.
Therefore, in lieu of these
alternatives, the Exchange proposes to
provide that the electronic transactions
in stock options that occur during a
Limit State or a Straddle State would
not be subject to review under Rule
975NY(a) for Obvious Errors or Rule
975NY(d) for Catastrophic Errors. The
Exchange would still review
transactions in the interest of
maintaining a fair and orderly market
and for the protection of investors, on
its own motion, determine to review any
transaction occurring on the Exchange
that is believed to be erroneous that
occurs during a Limit State or a Straddle
State in accordance with Rule
975NY(b)(3). The Exchange believes that
this safeguard will provide the
flexibility for the Exchange to act when
necessary and appropriate to nullify or
adjust a transaction, while also
providing market participants with
certainty that trades they effect with
quotes and/or orders having limit prices
will stand irrespective of subsequent
moves in the underlying security. By
limiting the erroneous trade review to
only via Exchange motion, the Exchange
believes that the proposal mitigates two
of the undesirable aspects of the
alternatives described above—(i) the
moral hazard associated with granting a
second look to trades that went against
the market participant after market
conditions have changed and (ii) gaming
of the Obvious Error Rule to adjust
Market Makers—while also limiting the
discretion of determining Theoretical
Value to only those situations that the
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Exchange determines is necessary in the
interest of maintaining a fair and orderly
market and for the protection of
investors. The right to review on
Exchange motion electronic transactions
that occur during a Limit State or
Straddle State under this provision
would also allow the Exchange to
account for unforeseen circumstances
that result in Obvious Errors such as
technological or systems malfunctions
of which a nullification or adjustment
may be necessary in order to preserve
the interest of maintaining a fair and
orderly market and for the protection of
investors.
The Exchange notes that there are
additional protections in place outside
of the Obvious Error Rule, specifically
pre-trade protections. First, SEC Rule
15c3–5 requires that, ‘‘financial risk
management controls and supervisory
procedures must be reasonably designed
to prevent the entry of orders that
exceed appropriate pre-set credit or
capital thresholds, or that appear to be
erroneous.’’ 24 Secondly, the Exchange
has price checks applicable to limit
orders that rejects limit orders that are
priced sufficiently far through the
NBBO that it seems likely an error
occurred. The requirements placed
upon broker dealers to adopt controls to
prevent the entry of orders that appear
to be erroneous, coupled with Exchange
functionality that filters out orders that
appear to be erroneous serve to sharply
reduce the incidence of errors arising
from situations, for example, where
participants mistakenly enter an order
to pay $20 for an option that is offered
at $2.
Proposed Amendment to Rule 953NY
The Exchange proposes to amend
Rule 953NY so that the Exchange, as an
options market, can better respond to
the manner by which the equities
markets declare a market-wide trading
halt, also known as a market-wide
circuit breaker.25 As noted above, the
Commission has approved changes to
the equities exchanges and FINRA rules
regarding market-wide trading halt
rules, which are currently scheduled to
go into effect on a one-year pilot basis
beginning February 4, 2013 [sic]. The
proposed Rule 953NY is similar to a
24 See Securities Exchange Act Release No. 63241,
75 FR 69791 (November 15, 2010) (S7–03–10).
25 Market-wide circuit breakers in the equities
market are different than trading halt during a
Trading Pause in the underlying pursuant to the
LULD Plan. Market-wide circuit breakers for
equities are currently covered by NYSE MKT Rule
80B—Equities. See NYSE MKT Rule 80B—Equities.
The Exchange’s Rule regarding trading pauses (also
known as ‘‘single stock circuit breakers’’) is found
in Rule 953NY(b) for options and NYSE MKT Rule
80C(b)—Equities for equities.
PO 00000
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15071
recently approved rule adopted by
CBOE.26 However, unlike the CBOE
rule, the Exchange does not need to
restate the equities rule on halting
trading in stocks in the Exchange’s Rule
set for options trading, because NYSE
MKT Rules for equities trading already
cover market-wide trading halts in
stocks.27 In addition, the Exchange is
proposing to add Commentary .05 to
provide that reopening of trading
following a trading halt under this Rule
shall be conducted pursuant to
procedures adopted by the Exchange
and communicated by notice to its ATP
Holders and ATP Firms. This
Commentary is nearly identical to that
found in CBOE Rule 6.3B and
Commentary .03 to NYSE Arca Options
Rule 7.5.28
The proposed rule change provides
that whenever the equities markets halt
trading in all NMS stocks due to
extraordinary market volatility, the
Exchange will similarly halt trading in
all options. The Exchange believes that
the proposed rule change can be
adopted on a permanent basis
notwithstanding that the equities market
version of the market-wide circuit
breakers has been adopted on a pilot
basis. In particular, the Exchange
believes that the proposed rule provides
the Exchange with flexibility to halt
trading in options whenever the equities
markets halt trading in all stocks,
regardless of what triggers that the
equities markets may use for halting
trading in all stocks. Accordingly, if the
equities market pilot rules were to
expire and revert back to the preFebruary 4, 2013 [sic] version of marketwide trading halts, or if the equities
markets again amend the triggers for
their market-wide circuit breaker rule,
the proposed Exchange rule would have
sufficient flexibility to work with the
revised equities rule without requiring
an additional rule change by the
Exchange. The Exchange also notes that
in addition to amended Rule 953NY,
that the remaining provisions in existing
Rule 953NY regarding Trading Halts
and Suspensions remain unchanged and
provides a means to halt or suspend
trading in options contracts whenever
the Exchange deems such action
appropriate in the interests of a fair and
orderly market and to protect investors.
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with Section
26 See
CBOE Rule 6.3B.
NYSE MKT Rule 80B—Equities.
28 See CBOE Rule 6.3B and NYSE Arca Options
Rule 7.5.
27 See
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6(b) of the Act 29 in general, and furthers
the objectives of Section 6(b)(5),30 in
particular, in that it is designed to
promote just and equitable principles of
trade, remove impediments to and
perfect the mechanisms of a free and
open market and a national market
system and, in general, to protect
investors and the public interest.
Specifically, this rule proposal supports
the objectives of perfecting the
mechanism of a free and open market
and the national market system because
it promotes uniformity across markets
concerning when and how to halt
trading in all stock options as a result
of extraordinary market volatility.
The proposal to add Rule 953.1NY
will ensure that trading in options that
overlay NMS stocks is appropriately
modified to reflect market conditions
that occur during a Limit State or a
Straddle States in a manner that
promotes just and equitable principles
of trade and removes impediments to,
and perfects the mechanism of, a free
and open market and a national market
system. Specifically, the proposal will
help allow market participants to
continue to trade stock options during
times of extraordinary market
conditions without the added risk of
certain orders that may increase
volatility in the options markets during
times of extraordinary market volatility
and may potentially lead to errors and
poor executions due to the lack of
reliable reference prices for the options
and the width of the markets. Thus,
reducing these risks should help
encourage market participants to
continue to provide liquidity during
extraordinary market volatility.
The proposal to consider the
frequency and duration of Straddle
States and/or Limit States in the
underlying NMS stock as mitigating
circumstance in determining whether
the Market Maker has met their quoting
obligations will help ensure Market
Markers continue to provide their
necessary role in helping to facilitate
transactions, to preserve market
liquidity, and to help ensure the fair and
orderly trading of stock options on the
Exchange during periods of
extraordinary market volatility while
also providing reasonable relief when
necessary.
In addition, the proposal to not allow
electronic transactions in stock options
that occur during a Limit State or a
Straddle State to be subject to review
under Rule 975NY(a) for Obvious Errors
or Rule 975NY(d) for Catastrophic
Errors is designed to promote just and
29 15
30 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
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18:44 Mar 07, 2013
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equitable principles of trade, remove
impediments to and perfect the
mechanisms of a free and open market
and a national market system and, in
general, to protect investors and the
public interest, by ensuring that
Exchange officials do not have
discretion to cancel trades. This change
would ensure that limit orders that are
filled during a Limit or Straddle State
would have certainty of execution in a
manner that promotes just and equitable
principles of trade and removes
impediments to, and perfects the
mechanism of, a free and open market
and a national market system. The
proposal to allow electronic transactions
in options that occur during a Limit
State or a Straddle State may be
reviewed on Exchange motion pursuant
to 975NY(b)(3) is designed to promote
just and equitable principles of trade,
remove impediments to and perfect the
mechanisms of a free and open market
and a national market system and, in
general, to protect investors and the
public interest, by providing the
flexibility for the Exchange to still
review transactions for Obvious Error
treatment when in the interest of
maintaining a fair and orderly market
and for the protection of investors.
Finally, the proposal to amend Rule
953NY will ensure that the Exchange
halts trading in all options whenever the
equities markets initiate a market-wide
trading halt circuit breaker in response
to extraordinary market conditions in a
manner that promotes just and equitable
principles of trade and removes
impediments to, and perfects the
mechanism of, a free and open market
and a national market system because
the proposed rule change will assure
that the Exchange will halt options
trading regardless of the triggers that the
equities markets use to initiate a marketwide halt in trading.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
proposed changes are being made to
provide for how the Exchange shall treat
orders and quotes in options overlying
NMS stocks when the Plan is in effect
and will not impose any burden on
competition while providing certainty
of treatment and execution of options
orders during periods of extraordinary
volatility in the underlying NMS stock,
and facilitating appropriate liquidity
during a Limit State or Straddle State.
PO 00000
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Fmt 4703
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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
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 rulecomments@sec.gov. Please include File
Number SR–NYSEMKT–2013–10 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–NYSEMKT–2013–10. 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
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Federal Register / Vol. 78, No. 46 / Friday, March 8, 2013 / Notices
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 the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–
NYSEMKT–2013–10 and should be
submitted on or before March 29, 2013.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.31
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–05419 Filed 3–7–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–69031; File No. SR–Phlx–
2013–18]
Self-Regulatory Organizations;
NASDAQ OMX PHLX LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change Relating to
Long-Term Index Options
1101A (Terms of Option Contracts) to
clarify that long-term index options
series (‘‘long-term options series’’) must
have a term of not less than nine months
to expiration,3 and to reflect that certain
rules will not apply to such long-term
options series until the time to
expiration is less than nine months.
The Exchange requests that the
Commission waive the 30-day operative
delay period contained in Exchange Act
Rule 19b–4(f)(6)(iii).4
The text of the proposed rule change
is available on the Exchange’s Web site
at https://
nasdaqomxphlx.cchwallstreet.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 the
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 the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1, and Rule 19b–4 2 thereunder,
notice is hereby given that on February
20, 2013, NASDAQ OMX PHLX LLC
(‘‘Phlx’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I, II,
and III, below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
mstockstill on DSK4VPTVN1PROD with NOTICES
March 4, 2013.
The purpose of the proposed rule
change is to amend subsection (b) of
Rule 1101A to clarify that long-term
options series must have a term of not
less than nine months to expiration, and
to reflect that certain rules will not
apply to such long-term options series
until the time to expiration is less than
nine months. These changes are
proposed to the limited extent needed to
make subsection (b) regarding long-term
options series consistent with the
established rule language of Chicago
Board Options Exchange, Inc. (‘‘CBOE’’)
(e.g. CBOE Rule 24.9 regarding
LEAPS 5), as well as with the
established rule language of the
Exchange (e.g. Rule 1012 regarding long-
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange is filing with the
Commission a proposal to amend
Exchange Rule 1101A (Terms of Option
Contracts) to amend Exchange Rule
31 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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3 In addition to a term of not less than nine
months, long-term options series may have up to 60
months to expiration. Rule 1101A.
4 17 CFR 240.19b–4(f)(6)(iii).
5 CBOE refers to long-term options series as
LEAPS, or Long-Term Equity Anticipation
Securities.
PO 00000
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15073
term equity and exchange traded fund
(‘‘ETF’’) options).
The Exchange believes that its
proposal is proper, and indeed
desirable, in light of its objective to
continue to harmonize the listing rules
for options products offered for trading
on the Exchange, particularly in light of
the symbiotic hedging and trading
relationship between index options and
other option classes on Phlx, such as
stock and ETF options, as well as with
options classes on other options
exchanges.
Rule 1101A has been developed to
discuss, among other things, when and
how the Exchange may open months
and series (including long-term series)
in classes of index options that have
been approved for listing and trading on
the Exchange. The rule also discusses
the price intervals for index option
products that include quarterly options,
short term options, and currency
options. Rule 1101A(b) indicates how
the Exchange initially fixes expiration
months and series in index options.
Rule 1101A(b) currently states that at
the commencement of trading on the
Exchange of a particular class of stock
index options, the Exchange will open
at least one expiration month and series
for each class of options open for
trading on the Exchange.6 The proposal
to open at least one month and one
series of index options was filed and
approved almost two years ago,7 in large
part in the recognition that trading and
hedging strategies work most efficiently
across various types of option classes
trading on the Exchange (e.g. equity
options and index options) when the
rules for these classes are in sync. This
proposal is a continuation of the
6 Rule 1101A(b) states, in relevant part: (b) After
a particular class of stock index options has been
approved for listing and trading on the Exchange,
the Exchange shall from time to time open for
trading series of options therein. Within each
approved class of stock index options, the Exchange
shall open for trading a minimum of one expiration
month and series for each class of approved stock
index options and/or series of options having up to
60 months to expiration (‘‘long-term options
series’’) as provided in subparagraph (b)(iii). Prior
to the opening of trading in any series of stock
index options, the Exchange shall fix the expiration
month and exercise price of option contracts
included in each such series.
7 See Securities Exchange Act Release No. 64741
(June 24, 2011), 76 FR 38444 (June 30, 2011)(order
approving SR–Phlx–2011–65). To further conform
its equity and index option rules, in the filing the
Exchange also deleted obsolete references to
consecutive month and cycle month series in Rule
1101A and added language to state that it may open
additional option series when the Exchange deems
it necessary to maintain an orderly market, to meet
customer demand or when the market price of the
underlying stock moves more than five strike prices
from the initial exercise price or prices.
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]]>Agencies
[Federal Register Volume 78, Number 46 (Friday, March 8, 2013)]
[Notices]
[Pages 15067-15073]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-05419]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69033; File No. SR-NYSEMKT-2013-10]
Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing of
Proposed Rule Change, as Modified by Amendment No. 1, Adopting Exchange
Rule 953.1NY To Provide for How the Exchange Proposes To Treat Orders,
Market-Making Quoting Obligations, and Errors in Response to the
Regulation NMS Plan To Address Extraordinary Market Volatility; and
Amending Exchange Rule 953NY To Codify That the Exchange Shall Halt
Trading in All Options Overlying NMS Stocks When the Equities Markets
Initiate a Market-Wide Trading Halt Due to Extraordinary Market
Volatility
March 4, 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 26, 2013, NYSE MKT LLC (the ``Exchange'' or
``NYSE MKT'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I and II
below, which Items have been prepared by the self-regulatory
organization. On March 1, 2013, the Exchange submitted Amendment No. 1
to the proposed rule change.\4\ 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.
\4\ See email from Brian O'Neill, Chief Counsel, NYSE
Regulation, to Andrew Madar, Assistant Director, Division of Trading
and Markets, dated March 1, 2013 (``Amendment No. 1'').
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to adopt (i) Exchange Rule 953.1NY to provide
for how the Exchange proposes to treat orders, market-making quoting
obligations, and errors in response to the Regulation NMS Plan to
Address Extraordinary Market Volatility; and (ii) to amend Exchange
Rule 953NY to codify that the Exchange shall halt trading in all
options overlying NMS stocks when the equities markets initiate a
market-wide trading halt due to extraordinary market volatility. 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, on the
Commission's Web site at www.sec.gov, 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
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes (i) to adopt Exchange Rule 953.1NY to provide
for how the Exchange proposes to treat orders, market-making quoting
obligations, and errors in response to the Regulation NMS Plan to
Address Extraordinary Market Volatility (the ``Plan''), which is
applicable to all NMS stocks, as defined in Regulation NMS Rule
600(b)(47); and (ii) to amend Exchange Rule 953NY to codify that the
Exchange shall halt trading in all options when the equities markets
initiate a market-wide trading halt due to extraordinary market
volatility. The Exchange proposes to adopt new Rule 953.1NY for a pilot
period that coincides with the pilot period for the Plan, which is
currently scheduled as a one-year pilot to begin on February 4, 2013
[sic].
Background
Since May 6, 2010, when the markets experienced excessive
volatility in an abbreviated time period, i.e., the ``flash crash,''
the equities exchanges and FINRA have implemented market-wide measures
designed to restore investor confidence by reducing the potential for
excessive market volatility. The measures adopted include pilot plans
for stock-by-stock trading pauses,\5\ related changes to the equities
market clearly erroneous execution rules,\6\ and more stringent
equities market maker quoting requirements.\7\ On May 31, 2012, the
Commission approved the Plan, as amended, on a one-year pilot basis.\8\
In addition, the Commission approved changes to the equities market-
wide circuit breaker rules on a pilot basis to coincide with the pilot
period for the Plan.\9\
---------------------------------------------------------------------------
\5\ See, e.g., NYSE Rule 80C, Exchange Rule 80C.
\6\ See, e.g., NYSE Rule 128, Exchange Rule 128.
\7\ See, e.g., NYSE Rule 104(a)(1)(B), Exchange Rule
104(a)(1)(B).
\8\ See Securities Exchange Act Release No. 67091 (May 31,
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631) (Order Approving,
on a Pilot Basis, the Plan).
\9\ See Securities Exchange Act Release No. 67090 (May 31,
2012), 77 FR 33531 (June 6, 2012) (SR-BATS-2011-038; SR-BYX-2011-
025; SR-BX-2011-068; SR-CBOE-2011-087; SR-C2-2011-024; SR-CHX-2011-
30; SR-EDGA-2011-31; SR-EDGX-2011-30; SR-FINRA-2011-054; SR-ISE-
2011-61; SR-NASDAQ-2011-131; SR-NSX-2011-11; SR-NYSE-2011-48; SR-
NYSEAmex-2011-73; SR-NYSEArca-2011-68; SR-Phlx-2011-129).
---------------------------------------------------------------------------
The Plan is designed to prevent trades in individual NMS stocks
from occurring outside of specified Price Bands.\10\ As described more
fully below, the requirements of the Plan are coupled with Trading
Pauses to accommodate more fundamental price moves (as opposed to
erroneous trades or momentary gaps in liquidity). All trading centers
in NMS stocks, including both those operated by Participants and those
operated by members of Participants, are required to establish,
maintain, and enforce written policies and procedures that are
[[Page 15068]]
reasonably designed to comply with the requirements specified in the
Plan.\11\
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\10\ Unless otherwise specified, capitalized terms used in this
rule filing are based on the defined terms of the Plan.
\11\ The Exchange is a participant in the Plan through its
wholly-owned subsidiary, NYSE MKT LLC, which operates an equities
market.
---------------------------------------------------------------------------
As set forth in more detail in the Plan, Price Bands consisting of
a Lower Price Band and an Upper Price Band for each NMS Stock are
calculated by the Processors.\12\ When the National Best Bid (Offer) is
below (above) the Lower (Upper) Price Band, the Processors shall
disseminate such National Best Bid (Offer) with an appropriate flag
identifying it as unexecutable. When the National Best Bid (Offer) is
equal to the Upper (Lower) Price Band, the Processors shall distribute
such National Best Bid (Offer) with an appropriate flag identifying it
as a Limit State Quotation.\13\ All trading centers in NMS stocks must
maintain written policies and procedures that are reasonably designed
to prevent the display of offers below the Lower Price Band and bids
above the Upper Price Band for NMS stocks. Notwithstanding this
requirement, the Processor shall display an offer below the Lower Price
Band or a bid above the Upper Price Band, but with a flag that it is
non-executable. Such bids or offers shall not be included in the
National Best Bid or National Best Offer calculations.\14\
---------------------------------------------------------------------------
\12\ See Section V(A) of the Plan.
\13\ See Section VI(A) of the Plan.
\14\ See Section VI(A)(3) of the Plan.
---------------------------------------------------------------------------
Trading in an NMS stock immediately enters a Limit State if the
National Best Offer (Bid) equals but does not cross the Lower (Upper)
Price Band.\15\ Trading for an NMS stock exits a Limit State if, within
15 seconds of entering the Limit State, all Limit State Quotations were
executed or canceled in their entirety. If the market does not exit a
Limit State within 15 seconds, then the Primary Listing Exchange would
declare a five-minute trading pause pursuant to Section VII of the LULD
Plan, which would be applicable to all markets trading the
security.\16\ In addition, the Plan defines a Straddle State as when
the National Best Bid (Offer) is below (above) the Lower (Upper) Price
Band and the NMS stock is not in a Limit State. For example, assume the
Lower Price Band for an NMS Stock is $9.50 and the Upper Price Band is
$10.50, such NMS stock would be in a Straddle State if the National
Best Bid were below $9.50, and therefore non-executable, and the
National Best Offer were above $9.50 (including a National Best Offer
that could be above $10.50). If an NMS stock is in a Straddle State and
trading in that stock deviates from normal trading characteristics, the
Primary Listing Exchange may declare a trading pause for that NMS stock
if such Trading Pause would support the Plan's goal to address
extraordinary market volatility.
---------------------------------------------------------------------------
\15\ See Section VI(B)(1) of the Plan.
\16\ The primary listing market would declare a Trading Pause in
an NMS stock; upon notification by the primary listing market, the
Processor would disseminate this information to the public. No
trades in that NMS stock could occur during the trading pause, but
all bids and offers may be displayed. See Section VII(A) of the
Plan.
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Proposed Rule 953.1NY
The Exchange proposes to adopt new Exchange Rule 953.1NY to provide
for how the Exchange shall treat orders and quotes in options overlying
NMS stocks when the Plan is in effect.
First, the Exchange proposes rules regarding the treatment of
certain orders or quotes if the underlying NMS stock is in a Limit
State and Straddle State. Whenever an NMS stock is in a Limit State or
Straddle State, trading continues, however, there will not be a
reliable price for a security to serve as a benchmark for the price of
the option. For example, if the underlying NMS stock is in a Limit
State, while trading in that stock continues, by being in a Limit
State, there will be either cancellations or executions at that price,
and if the Limit State is not resolved in 15 seconds, the NMS Stock
will enter a Trading Pause. If an NMS stock is in a Straddle State,
that means that there is either a National Best Bid or National Best
Offer that is non-executable, which could result in limited price
discovery in the underlying NMS stock. In addition to the lack of a
reliable underlying reference price, the Exchange is concerned about
the width of the markets and quality of the execution for market
participants during Limit or Straddle States. While the Exchange
recognizes the importance of continued trading in options overlying NMS
stocks during Limit States and Straddle States, the Exchange believes
that certain types of orders increase the risk of errors and poor
executions and therefore should be not allowed during these times when
there may not be a reliable underlying reference price, there may be a
wide bid/ask quotation differential, and lower trading liquidity in the
options markets. Specifically, the Exchange proposes that if the
underlying NMS stock is in a Limit State or Straddle State, the
Exchange shall reject all incoming Market Orders and will not elect
Stop Orders.\17\ The Exchange believes that permitting these order
types to execute when the underlying NMS stock is in a Limit State or
Straddle State would add to the volatility in the options markets
during times of extraordinary market volatility and could have the
potential to lead to unwanted executions. The Exchange believes that
adding certainty to the treatment of Market Orders and Stop Orders when
the underlying NMS stock is in these situations will encourage market
participants to continue to provide liquidity to the Exchange and thus
promote a fair and orderly market.
---------------------------------------------------------------------------
\17\ See Rule 900.3NY(d)(1). Stop Orders when elected create a
Market Order to buy or sell the option. In contrast, the Exchange is
not proposing to prohibit the election of Stop Limit Orders. Stop
Limit Orders when elected create a Limit Order to buy or sell the
option at a specific price. See 900.3NY(d)(2). The Exchange believes
that Stop Limit Orders do not raise the same risks during periods of
extraordinary volatility, because once elected the associated limit
orders would not race through the order book in the manner that an
elected Market Order would.
---------------------------------------------------------------------------
Second, the Exchange proposes to adopt subsection (b) to provide
that when evaluating whether a Specialist has met its market-making
quoting requirement pursuant to Rule 925.1NY(b) or a Market Maker has
met its market-making quoting requirement pursuant to Rule 925.1NY(c)
in options overlying NMS stocks, the Exchange shall consider as a
mitigating circumstance the frequency and duration of occurrences when
an underlying NMS stock is in a Limit State or a Straddle State. This
is necessary given the direct relationship between an options price and
the price of the underlying security. During a Limit or Straddle State,
the bid price, offer price or both of the underlying security will be
unexecutable [sic]. With the bid and or offer flagged unexecutable, the
ability to hedge the purchase or sale of an option will be jeopardized
and in fact it may not be possible to purchase or sell shares of the
underlying security at any price to offset the risk created by either
buying or selling calls and/or put options during a Limit State or a
Straddle State. The Exchange expects that its Market Makers will as
need to modify their quoting behavior a result. For the reasons
described below the Exchange feels that the proposed change to consider
as a mitigating circumstance the frequency and duration of periods
during which an underlying NMS stock is in a Limit State or a Straddle
State is the appropriate approach until such a time as the Exchange has
more experience with the impact of the Plan on the options marketplace,
particularly the impact on Market Makers ability to provide liquidity
in an option when unknown (and possibly very limited) liquidity exists
in the underlying security.
[[Page 15069]]
The Exchange has settled on this approach after analyzing in detail
the alternatives. An undesirable alternative for the Exchange would be
to propose to relax the quoting obligations. The relaxed quoting
obligations could apply to the full trading day or just during the
periods of extraordinary market volatility in the underlying NMS stock
during a Straddle State or Limit State. The Exchange could, for
example, have proposed to adopt the same market maker quoting
obligations that apply to market makers on another options market that
only requires its market makers to provide a two-sided continuous
quote, without any requirement for a $5 or tighter bid-ask
differential.\18\ Absent the $5 bid-ask differential requirement, the
Exchange believes there would be no issue with Market Makers meeting
their continuous quoting obligations during periods of extraordinary
market volatility in the underlying stock because Market Markers could
continuously quote a $.01 bid and a $1000 offer, for example. However,
the Exchange believes that relaxing the quoting obligations only during
Straddle States and Limit States would cause significant technical
problems for Market Makers, Exchange systems, and surveillance
monitoring. Underlying NMS stocks will likely flicker in and out of a
Straddle State or Limit State throughout the day. Programming systems
to adjust the quoting obligations to constant changes in a Straddle
State or Limit State would likely be technologically difficult and
economically prohibitive. The only real practical solution would be for
the Exchange to relax the quoting obligations for the full trading day
by eliminating the $5 bid-ask differential requirement. The Exchange
believes that eliminating the $5 bid-ask differential requirement is
also an undesirable alternative. The Exchange values the role of Market
Makers in the options market and believes that existing quoting
requirements should be maintained in order to facilitate transactions,
preserve market liquidity, and ensure the fair and orderly trading of
options on the Exchange.
---------------------------------------------------------------------------
\18\ See BATS Options Rule 22.6(d).
---------------------------------------------------------------------------
Therefore, in lieu of these alternatives, the Exchange proposes to
adopt subsection (b) to provide that when evaluating whether a
Specialist has met its market-making quoting requirement pursuant to
Rule 925.1NY(b) or a Market Maker has met its market-making quoting
requirement pursuant to Rule 925.1NY(c) in options overlying NMS
stocks, the Exchange shall consider as a mitigating circumstance the
frequency and duration that an underlying NMS stock is in a Limit State
or a Straddle State. For example, if an ATP Holder fails to meet its
monthly quoting obligations, and during the review, it is determined
that the quoting that failed to meet the obligation was for options
that overlay NMS stocks with a significant number of Straddle States
and Limit States, then pursuant to proposed Rule 953.1NY(c), that would
be considered a mitigating circumstance that would entitle the OTP
Holder to relief. The Exchange will work with FINRA to monitor the
impact of Straddle States and Limit States on a Specialist or Market
Marker's ability to meet its market-maker quoting requirements. The
Exchange notes that it does not believe that it needs to modify the
existing quoting obligations for Market Markers in Rules 925NY and
925.1NY to reflect how such quoting requirements may interact with how
underlying NMS stocks trade during a Straddle State or Limit State.
Rather, during periods of extraordinary market volatility in the
underlying NMS stock, the Exchange believes that the existing quoting
requirements should be maintained in order to facilitate transactions,
preserve market liquidity, and ensure the fair and orderly trading of
options on the Exchange. This change is also designed to eliminate the
technologically difficult and economically prohibitive systems
programming that would be required if the Exchange eliminated the $5
bid-ask differential requirement only during Straddle States or Limit
States.
Finally, the Exchange proposed to adopt subsection (c) to provide
that electronic transactions in stock options that occur during a Limit
State or a Straddle State would not be subject to review under Rule
975NY(a) for Obvious Errors or Rule 975NY(d) for Catastrophic Errors.
In addition, subsection (c) will provide that electronic transactions
in options that overlay an NMS stock that occur during a Limit State or
a Straddle State may be reviewed on Exchange motion pursuant to
975NY(b)(3).\19\ For the reasons described below the Exchange feels
that the proposal to allow review of electronic transactions in options
that overlay an NMS stock that occur during a Limit State or a Straddle
State only on Exchange motion is the appropriate approach until such a
time as the Exchange has more experience with the impact of the Plan on
the options marketplace. In particular, the Exchange notes that other
protections will continue to exist to safeguard Customers as discussed
further below. The Exchange proposes to review the operation of this
provision during the one year Pilot period for the proposal and analyze
the impact of Limit and Straddle States accordingly.\20\ In addition,
the Exchange will provide data analysis during the duration of the
Pilot to the Commission so that the Commission may analysis the
operation of the Pilot and evaluate with the Exchange whether the Pilot
should be continued or be modified.\21\
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\19\ Rule 975NY(b)(3) provides that in the interest of
maintaining a fair and orderly market and for the protection of
investors, the Exchange's Chief Executive Officer (``CEO'') or
designee thereof, who is an officer of the Exchange (collectively
``Exchange officer''), may, on his or her own motion or upon
request, determine to review any transaction occurring on the
Exchange that is believed to be erroneous. A transaction reviewed
pursuant to this provision may be nullified or adjusted only if it
is determined by the Exchange officer that the transaction is
erroneous as provided in Rule 975NY(a)(3), (a)(4), (a)(5) or (a)(6).
A transaction would be adjusted or nullified in accordance with the
provision under which it is deemed an erroneous transaction. The
Exchange officer may be assisted by a Trading Official in reviewing
a transaction. In addition, the Exchange officer shall act pursuant
to 975NY(b)(3) as soon as possible after receiving notification of
the transaction, and ordinarily would be expected to act on the same
day as the transaction occurred. In no event shall the Exchange
officer act later than 9:30 a.m. (ET) on the next trading day
following the date of the transaction in question. An ATP Holder
affected by a determination to nullify or adjust a transaction
pursuant to this paragraph (3) may appeal such determination in
accordance with Rule 975NY(c); however, a determination by an
Exchange officer not to review a transaction, or a determination not
to nullify or adjust a transaction for which a review was requested
or conducted, is not appealable. If a transaction is reviewed and a
determination is rendered pursuant to Rules 975NY(a)(3), (a)(4),
(a)(5) or (a)(6), no additional relief may be granted under this
provision.
\20\ See Amendment No. 1, supra note 4.
\21\ Id.
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The Exchange has settled on this approach after analyzing in detail
the alternatives. An undesirable alternative for the Exchange would be
to maintain the current operation of Rule 975NY(a) for Obvious Errors
or Rule 975NY(d) for Catastrophic Errors during the Limit State or
Straddle State. Pursuant to Rules 975NY(a), market participants may
have up to 30 minutes to review a transaction as an Obvious Error.
Pursuant to 975NY(d), market participants may have up to 8:30 a.m. ET
on the first trading day following a transaction to review it as a
Catastrophic Error. The Exchange believes that during periods of
extraordinary volatility, the review period for transactions under the
Obvious Error and Catastrophic Error provisions would allow market
participants a second look at transactions during a Limit State or a
Straddle State that is potentially unfair to other market participants.
For example, thirty
[[Page 15070]]
minutes after a transaction that occurs during extraordinary volatility
that triggers a Limit State or a Straddle State the market could look
drastically different from a price and liquidity level. The Exchange
believes that market participants should not be able to benefit from
the time frame to review their transactions in these situations. This
change would ensure that limit orders that were filled during a Limit
or Straddle State would have certainty of execution. As noted above
with respect to the treatment of Market Orders and Stop Orders when the
underlying NMS Stock is in a Limit or Straddle State, the Exchange
believes that adding certainty to the execution of orders in these
situations will encourage market participants to continue to provide
liquidity to the Exchange and thus promote a fair and orderly market.
Barring this change, the provisions of Rule 975NY(a)(2)(B) would likely
apply in many instances during Limit or Straddle States. This Rule
provides that, ``if there are not quotes for comparison purposes, or if
bid/ask differential for the national best bid or offer for the
effected series just prior to the transaction was at least two times
the permitted bid/ask differential pursuant to Rule 925NY(b)(4), as
determined by a designated trading official.'' The Exchange believes
this provision would give rise to much uncertainty for market
participants as there is no bright line definition of what
``theoretical value'' should be for an option when the underlying NMS
stock has an unexecutable bid or offer or both. Determining
``theoretical value'' in such a situation would be often times very
subjective as opposed to an objective determination giving rise to
additional uncertainty and confusion for investors. For example:
A $500 security enters a Straddle State resulting in un-
executable bids and offers.
Consequently the market for the options on that security
widens to reflect the uncertainty surrounding what price the stock may
be sold at to hedge the sale of puts or purchase of calls. Prior to
entering the Straddle State, the 22 day at the money $500 strike put
options were trading at $24.45-$24.65.\22\ Upon entering the Straddle
State the market for those options widens to $24.45-$35.00.
---------------------------------------------------------------------------
\22\ Calculated using a binomial pricing model for American
style options with an interest rate of .25%, no dividends, and an
implied volatility of 50.
---------------------------------------------------------------------------
A limit order to pay $32 for 10 is entered resulting in a
new market of $32.00-$35.00. 14 seconds after entering the Limit State
in the underlying security, a limit order to sell 10 contracts at $32
is received and trades with the posted $32 limit order to buy.
Immediately after the trade is consummated, the Straddle State in the
underlying security has not resolved and consequently the underlying
security is halted. Upon resumption of trading in the underlying
security, consider two possible scenarios:
Scenario 1--The market for the security is $450-$452. The
puts which traded immediately prior to the trading halt are now worth
at least their intrinsic value of $50 and quite likely are trading with
some time premium as well. The seller of 10 contracts at $32
immediately requests an Obvious Error review under the provisions of
Rule 975NY.
Scenario 2--The market for the security is now $550-$552.
The puts which traded immediately prior to the trading halt are now
worth an estimated $8.\23\ The buyer of 10 contracts at $32 immediately
requests an Obvious Error review under the provisions of Rule 965NY
[sic].
---------------------------------------------------------------------------
\23\ See supra note 19.
---------------------------------------------------------------------------
Under both scenarios the bid/ask spread in the option was $2 at the
time of the trade and as such it now falls to a designated trading
official to determine what the ``theoretical value'' of the option is.
Absent the ability to ascertain prices at which the stock could have
been bought or sold at the time the option traded, the designated
official would be at best guessing what the ``theoretical value''
should have been. Such uncertainty in how the transaction will be
resolved will only discourage participants from entering executable
interest during Limit and Straddle States. The impossibility of
ascribing ``theoretical value'' to an option, whose price is directly
affected by the ability to buy and sell shares of the underlying
security, gives rise to the Exchange need to make clear that trades
during Limit and Straddle states will stand irrespective of subsequent
price moves in the underlying security. Absent this bright line
guidance, the Exchange expects the entry of executable interest in the
options market to be severely curtailed as securities approach and
enter Limit and Straddle States, decreasing the opportunity to foster
price discovery and transparency at a time when it is most needed. In
contrast, if participants know in advance that trades they effect with
quotes and/or orders having limit prices will stand irrespective of
subsequent moves in the underlying security, they will be much more
likely to submit such limit prices.
Another undesirable alternative for the Exchange would be to
propose to always use the prevailing NBBO as the metric to decide
whether an error has occurred, irrespective of how wide the NBBO was at
the time of the execution. This approach alleviates the burden on the
Exchange of having to ascribe a Theoretical Price to an option when the
stock has an un-executable bid, offer or both but it still presents
significant problems. For example, in a Limit or Straddle State it is
likely that there will be less depth of book--both on an intra as well
as an inter-market basis. This gives rise to the potential for gaming
of the Obvious Error Rule which mandates that Market Maker to Market
Maker trades are always adjusted. For example, consider this scenario:
----------------------------------------------------------------------------------------------------------------
Exchange Bid size Bid price Ask price Ask size
----------------------------------------------------------------------------------------------------------------
NYSE Arca....................................................... 50 $5 $7 1
NYSE Amex....................................................... 5 6 15 100
----------------------------------------------------------------------------------------------------------------
An NYSE Amex Market Maker is offering 100 contracts at $15. Another
NYSE Amex Market Maker enters an ISO order to buy 100 contracts at $15.
Immediately after the execution the same NYSE Amex Market Maker
requests a review under Rule 975NY. Simply using the NBBO, in this case
$7, would mean that as required under Rule 975NY, the Exchange would
rule to adjust that trade to $7.30, essentially forcing the NYSE Amex
Options Market Maker who was willing to provide liquidity at $15 to
instead provide liquidity at the much worse price of $7.30. Such an
outcome would undoubtedly result in fewer Market Makers willing to post
any liquidity for
[[Page 15071]]
fear of having the same thing happen to them. The Exchange notes that,
if instead of a Market Maker offering 100 contracts at $15, it was a
Customer with a resting order in the Consolidated Book the outcome of a
review under Rule 975NY would have been to bust the trade. The time
permitted to request a review, conduct the review and issue
notification to the affected parties can be substantial, particularly
in light of a Limit or Straddle State where the underlying security
price is likely to be moving considerably. So we have a Customer who
having sold options at $15 which (for example) they bought earlier for
$10 finds themselves without a profit but instead with an open
position. Obviously should the stock move adversely during the time
taken to review the trade it is even possible for the option to be
worth less than where the Customer who was offering at $15 purchased
it. The Exchange strongly believes that certainty of trade during
periods of market volatility is vital in order to operate a fair and
orderly market.
Therefore, in lieu of these alternatives, the Exchange proposes to
provide that the electronic transactions in stock options that occur
during a Limit State or a Straddle State would not be subject to review
under Rule 975NY(a) for Obvious Errors or Rule 975NY(d) for
Catastrophic Errors. The Exchange would still review transactions in
the interest of maintaining a fair and orderly market and for the
protection of investors, on its own motion, determine to review any
transaction occurring on the Exchange that is believed to be erroneous
that occurs during a Limit State or a Straddle State in accordance with
Rule 975NY(b)(3). The Exchange believes that this safeguard will
provide the flexibility for the Exchange to act when necessary and
appropriate to nullify or adjust a transaction, while also providing
market participants with certainty that trades they effect with quotes
and/or orders having limit prices will stand irrespective of subsequent
moves in the underlying security. By limiting the erroneous trade
review to only via Exchange motion, the Exchange believes that the
proposal mitigates two of the undesirable aspects of the alternatives
described above--(i) the moral hazard associated with granting a second
look to trades that went against the market participant after market
conditions have changed and (ii) gaming of the Obvious Error Rule to
adjust Market Makers--while also limiting the discretion of determining
Theoretical Value to only those situations that the Exchange determines
is necessary in the interest of maintaining a fair and orderly market
and for the protection of investors. The right to review on Exchange
motion electronic transactions that occur during a Limit State or
Straddle State under this provision would also allow the Exchange to
account for unforeseen circumstances that result in Obvious Errors such
as technological or systems malfunctions of which a nullification or
adjustment may be necessary in order to preserve the interest of
maintaining a fair and orderly market and for the protection of
investors.
The Exchange notes that there are additional protections in place
outside of the Obvious Error Rule, specifically pre-trade protections.
First, SEC Rule 15c3-5 requires that, ``financial risk management
controls and supervisory procedures must be reasonably designed to
prevent the entry of orders that exceed appropriate pre-set credit or
capital thresholds, or that appear to be erroneous.'' \24\ Secondly,
the Exchange has price checks applicable to limit orders that rejects
limit orders that are priced sufficiently far through the NBBO that it
seems likely an error occurred. The requirements placed upon broker
dealers to adopt controls to prevent the entry of orders that appear to
be erroneous, coupled with Exchange functionality that filters out
orders that appear to be erroneous serve to sharply reduce the
incidence of errors arising from situations, for example, where
participants mistakenly enter an order to pay $20 for an option that is
offered at $2.
---------------------------------------------------------------------------
\24\ See Securities Exchange Act Release No. 63241, 75 FR 69791
(November 15, 2010) (S7-03-10).
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Proposed Amendment to Rule 953NY
The Exchange proposes to amend Rule 953NY so that the Exchange, as
an options market, can better respond to the manner by which the
equities markets declare a market-wide trading halt, also known as a
market-wide circuit breaker.\25\ As noted above, the Commission has
approved changes to the equities exchanges and FINRA rules regarding
market-wide trading halt rules, which are currently scheduled to go
into effect on a one-year pilot basis beginning February 4, 2013 [sic].
The proposed Rule 953NY is similar to a recently approved rule adopted
by CBOE.\26\ However, unlike the CBOE rule, the Exchange does not need
to restate the equities rule on halting trading in stocks in the
Exchange's Rule set for options trading, because NYSE MKT Rules for
equities trading already cover market-wide trading halts in stocks.\27\
In addition, the Exchange is proposing to add Commentary .05 to provide
that reopening of trading following a trading halt under this Rule
shall be conducted pursuant to procedures adopted by the Exchange and
communicated by notice to its ATP Holders and ATP Firms. This
Commentary is nearly identical to that found in CBOE Rule 6.3B and
Commentary .03 to NYSE Arca Options Rule 7.5.\28\
---------------------------------------------------------------------------
\25\ Market-wide circuit breakers in the equities market are
different than trading halt during a Trading Pause in the underlying
pursuant to the LULD Plan. Market-wide circuit breakers for equities
are currently covered by NYSE MKT Rule 80B--Equities. See NYSE MKT
Rule 80B--Equities. The Exchange's Rule regarding trading pauses
(also known as ``single stock circuit breakers'') is found in Rule
953NY(b) for options and NYSE MKT Rule 80C(b)--Equities for
equities.
\26\ See CBOE Rule 6.3B.
\27\ See NYSE MKT Rule 80B--Equities.
\28\ See CBOE Rule 6.3B and NYSE Arca Options Rule 7.5.
---------------------------------------------------------------------------
The proposed rule change provides that whenever the equities
markets halt trading in all NMS stocks due to extraordinary market
volatility, the Exchange will similarly halt trading in all options.
The Exchange believes that the proposed rule change can be adopted on a
permanent basis notwithstanding that the equities market version of the
market-wide circuit breakers has been adopted on a pilot basis. In
particular, the Exchange believes that the proposed rule provides the
Exchange with flexibility to halt trading in options whenever the
equities markets halt trading in all stocks, regardless of what
triggers that the equities markets may use for halting trading in all
stocks. Accordingly, if the equities market pilot rules were to expire
and revert back to the pre-February 4, 2013 [sic] version of market-
wide trading halts, or if the equities markets again amend the triggers
for their market-wide circuit breaker rule, the proposed Exchange rule
would have sufficient flexibility to work with the revised equities
rule without requiring an additional rule change by the Exchange. The
Exchange also notes that in addition to amended Rule 953NY, that the
remaining provisions in existing Rule 953NY regarding Trading Halts and
Suspensions remain unchanged and provides a means to halt or suspend
trading in options contracts whenever the Exchange deems such action
appropriate in the interests of a fair and orderly market and to
protect investors.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
Section
[[Page 15072]]
6(b) of the Act \29\ in general, and furthers the objectives of Section
6(b)(5),\30\ in particular, in that it is designed to promote just and
equitable principles of trade, remove impediments to and perfect the
mechanisms of a free and open market and a national market system and,
in general, to protect investors and the public interest. Specifically,
this rule proposal supports the objectives of perfecting the mechanism
of a free and open market and the national market system because it
promotes uniformity across markets concerning when and how to halt
trading in all stock options as a result of extraordinary market
volatility.
---------------------------------------------------------------------------
\29\ 15 U.S.C. 78f(b).
\30\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The proposal to add Rule 953.1NY will ensure that trading in
options that overlay NMS stocks is appropriately modified to reflect
market conditions that occur during a Limit State or a Straddle States
in a manner that promotes just and equitable principles of trade and
removes impediments to, and perfects the mechanism of, a free and open
market and a national market system. Specifically, the proposal will
help allow market participants to continue to trade stock options
during times of extraordinary market conditions without the added risk
of certain orders that may increase volatility in the options markets
during times of extraordinary market volatility and may potentially
lead to errors and poor executions due to the lack of reliable
reference prices for the options and the width of the markets. Thus,
reducing these risks should help encourage market participants to
continue to provide liquidity during extraordinary market volatility.
The proposal to consider the frequency and duration of Straddle
States and/or Limit States in the underlying NMS stock as mitigating
circumstance in determining whether the Market Maker has met their
quoting obligations will help ensure Market Markers continue to provide
their necessary role in helping to facilitate transactions, to preserve
market liquidity, and to help ensure the fair and orderly trading of
stock options on the Exchange during periods of extraordinary market
volatility while also providing reasonable relief when necessary.
In addition, the proposal to not allow electronic transactions in
stock options that occur during a Limit State or a Straddle State to be
subject to review under Rule 975NY(a) for Obvious Errors or Rule
975NY(d) for Catastrophic Errors is designed to promote just and
equitable principles of trade, remove impediments to and perfect the
mechanisms of a free and open market and a national market system and,
in general, to protect investors and the public interest, by ensuring
that Exchange officials do not have discretion to cancel trades. This
change would ensure that limit orders that are filled during a Limit or
Straddle State would have certainty of execution in a manner that
promotes just and equitable principles of trade and removes impediments
to, and perfects the mechanism of, a free and open market and a
national market system. The proposal to allow electronic transactions
in options that occur during a Limit State or a Straddle State may be
reviewed on Exchange motion pursuant to 975NY(b)(3) is designed to
promote just and equitable principles of trade, remove impediments to
and perfect the mechanisms of a free and open market and a national
market system and, in general, to protect investors and the public
interest, by providing the flexibility for the Exchange to still review
transactions for Obvious Error treatment when in the interest of
maintaining a fair and orderly market and for the protection of
investors.
Finally, the proposal to amend Rule 953NY will ensure that the
Exchange halts trading in all options whenever the equities markets
initiate a market-wide trading halt circuit breaker in response to
extraordinary market conditions in a manner that promotes just and
equitable principles of trade and removes impediments to, and perfects
the mechanism of, a free and open market and a national market system
because the proposed rule change will assure that the Exchange will
halt options trading regardless of the triggers that the equities
markets use to initiate a market-wide halt in trading.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The proposed changes are
being made to provide for how the Exchange shall treat orders and
quotes in options overlying NMS stocks when the Plan is in effect and
will not impose any burden on competition while providing certainty of
treatment and execution of options orders during periods of
extraordinary volatility in the underlying NMS stock, and facilitating
appropriate liquidity during a Limit State or Straddle State.
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 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-NYSEMKT-2013-10 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-NYSEMKT-2013-10. 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
[[Page 15073]]
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
the filing also will be available for inspection and copying at the
principal office of the Exchange. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-NYSEMKT-2013-10 and should be submitted on or before
March 29, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\31\
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\31\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-05419 Filed 3-7-13; 8:45 am]
BILLING CODE 8011-01-P
