Self-Regulatory Organizations; Miami International Securities Exchange LLC; Notice of Filing of a Proposed Rule Change Relating to Obvious Errors in Limit or Straddle States, 18637-18642 [2013-07062]

Download as PDF mstockstill on DSK4VPTVN1PROD with NOTICES Federal Register / Vol. 78, No. 59 / Wednesday, March 27, 2013 / Notices proposed Substitution. Applicants anticipate that the replacement of the Existing Fund will result in a Contract that is administered and managed more efficiently, and one that is more competitive with other variable products. As described in the application, the Replacement Fund will be managed according to similar investment objectives and policies as the Existing Fund. Moreover, the overall net fees of the Replacement Fund are less than those of the Existing Fund. 3. Applicants assert that the proposed substitution is not of the type that Section 26(c) was designed to prevent. Unlike traditional unit investment trusts where a depositor could only substitute an investment security in a manner which permanently affected all the investors in the trust, the Contracts provide each Contract owner with the right to exercise his or her own judgment and transfer Contract or cash values into other subaccounts. Moreover, the Contracts will offer Contract owners the opportunity to transfer amounts out of the affected subaccounts into any of the remaining subaccounts without cost or other disadvantage. The proposed Substitution, therefore, will not result in the type of costly forced redemptions that Section 26(c) was designed to prevent. Applicants maintain that the proposed Substitution also is unlike the type of substitution which Section 26(c) was designed to prevent in that by purchasing a Contract, Contract owners select much more than a particular investment company in which to invest their account values. They also select the specific types of insurance coverage offered by the various Companies under the Contracts as well as numerous other rights and privileges set forth in each Contract. 4. The Applicants agree that for two years following the implementation of the Substitution described herein, the net annual expenses of the Replacement Fund will not exceed the net annual expenses of the Existing Fund as of December 31, 2012 (net annual expenses will not exceed 0.64% for the ING Large Cap Growth Portfolio—Class I, and 0.89% for Class S). To achieve this limitation, DSL will waive fees or reimburse the Replacement Fund in certain amounts to maintain expenses at or below the limit. Any adjustments will be made at least on a quarterly basis. In addition, the Companies will not increase the Contract fees and charges, including asset based charges such as mortality and expense risk charges deducted from the Subaccounts that would otherwise be assessed under the terms of the Contracts for a period of at VerDate Mar<15>2010 18:10 Mar 26, 2013 Jkt 229001 least two years following the Substitution. 5. Under the manager-of-managers relief granted to the ING Investors Trust, a vote of the shareholders is not necessary to change a sub-adviser, except for changes involving an affiliated sub-adviser. Notwithstanding, after the effective date of the Substitutions the Applicants agree not to change the Replacement Fund’s subadviser without first obtaining shareholder approval of either (1) the sub-adviser change or (2) the parties continued ability to rely on their manager-of-managers relief. 6. The Applicants submit that the proposed substitution meets the standards set forth in Section 26(c) and assert that the replacement of the Existing Fund with the Replacement Fund is consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the 1940 Act. Conclusion For the reasons and upon the facts set forth above and in the application, the Applicants assert that the requested order meets the standards set forth in Section 26(c) of the Act and should therefore, be granted. For the Commission, by the Division of Investment Management, under delegated authority. Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–07012 Filed 3–26–13; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–69210; File No. SR–MIAX– 2013–12] Self-Regulatory Organizations; Miami International Securities Exchange LLC; Notice of Filing of a Proposed Rule Change Relating to Obvious Errors in Limit or Straddle States March 22, 2013. Pursuant to the provisions of Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that, on March 22, 2013, Miami International Securities Exchange LLC (‘‘MIAX’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) a proposed rule change as described in Items I, II and III below, which Items have been prepared by the self-regulatory orgnaization. The 1 15 2 17 PO 00000 U.S.C. 78s(b)(1). CFR 240.19b–4. Frm 00079 Fmt 4703 Sfmt 4703 18637 Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange is filing a proposal to amend Exchange Rule 530, Limit UpLimit Down (‘‘LULD’’), and to amend Exchange Rule 521, Obvious and Catastrophic Errors to provide for how the Exchange proposes to treat erroneous options transactions in response to the Plan to Address Extraordinary Market Volatility Pursuant to Rule 608 of Regulation NMS, as it may be amended from time to time (the ‘‘Plan’’). The text of the proposed rule change is provided in Exhibit 5. The text of the proposed rule change is also available on the Exchange’s Web site at http:// www.miaxoptions.com/filter/wotitle/ rule_filing, at MIAX’s principal office, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose The purpose of the proposed rule change is to amend MIAX Rules 530 and 521 to provide for how the Exchange proposes to treat erroneous options transactions in response to the Plan. 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 The Financial Industry Regulatory Authority (‘‘FINRA’’) have implemented marketwide measures designed to restore investor confidence by reducing the potential for excessive market volatility. Among the measures adopted include pilot plans for stock-by-stock trading pauses, related changes to the equities E:\FR\FM\27MRN1.SGM 27MRN1 18638 Federal Register / Vol. 78, No. 59 / Wednesday, March 27, 2013 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES market clearly erroneous execution rules, and more stringent equities market maker quoting requirements. On May 31, 2012, the Commission approved the Plan, as amended, on a one-year pilot basis. 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. The Plan is designed to prevent trades in individual NMS stocks from occurring outside of specified Price Bands. The instant proposed rule change is intended to adopt MIAX rules that address the trading of options overlying NMS Stocks that are the subject of the Plan and its provisions during times of unusual volatility in the markets. 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 reasonably designed to comply with the requirements specified in the Plan. Limit State and Straddle State 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. 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. 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 indicating that it is non-executable. Such bids or offers shall not be included in the National Best Bid or National Best Offer calculations. 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. Trading for an NMS stock exits a Limit State if, within 15 seconds of VerDate Mar<15>2010 18:10 Mar 26, 2013 Jkt 229001 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 Plan, which would be applicable to all markets trading the security. 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 nonexecutable 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. Obvious Error The Exchange analyzed in detail the operation of current Exchange Rule 521 (Obvious and Catastrophic Errors) and determined that it would be undesirable to apply that Rule to options when the underlying NMS Stock has entered either a Limit or Straddle State. However, the Exchange does not believe that it should operate without any protection against erroneous transactions during these periods. Therefore, the Exchange proposes that proposed Rule 530(j) apply to erroneous transactions in options when the underlying NMS Stock has entered either a Limit or Straddle State only when an erroneous transaction is due to a verifiable disruption or malfunction of the MIAX System. The Exchange proposes to exclude transactions executed during a Limit or Straddle State from the provisions of MIAX Rule 521, on a one-year pilot basis, beginning on the date of implementation of the Plan, except in situations where the affected trade resulted from a verifiable disruption or malfunction of an Exchange execution, dissemination, or communication system, as discussed below. Current Rule 521 provides a process by which a transaction may be busted or adjusted when the execution price of a transaction deviates from the option’s theoretical price 3 by a certain amount. 3 The PO 00000 Theoretical Price of an option is: Frm 00080 Fmt 4703 Sfmt 4703 As discussed above, during a Limit or Straddle State, options prices may deviate substantially from those available prior to or following the limit state. The Exchange believes that the application of this provision to all erroneous transactions that occur during a Limit or Straddle State would give rise to much uncertainty for market participants as there is no bright line definition of what the theoretical price should be for an option when the underlying NMS stock has an unexecutable bid or offer or both. Determining theoretical price in such a situation would be often times very subjective as opposed to an objective determination giving rise to additional uncertainty, and Rule 521 provides that if there are no quotes from other options exchanges for comparison purposes, the theoretical price will be determined by an Exchange Official. However, given that options market makers and other industry professionals will have difficulty pricing options during Limit and Straddle States, the Exchange does not believe it would be reasonable for an Exchange Official to derive theoretical prices to be applied to transactions executed during such unusual market conditions. Accordingly, the Exchange does not believe that the approach employed under Rule 521, which by definition depends on a reliable national best bid and offer in the option, is appropriate for all transactions that occur during a Limit or Straddle State. The Exchange believes that there is no reliable basis on which to determine the Theoretical Price of transactions that occur during a Limit or Straddle State. Accordingly, proposed Rule 530(j) will not include any provision to adjust the price of trades that occur during a Limit or Straddle State. Proposed Rule 530(j) will only apply to transactions occurring during Limit and Straddle States that resulted from a verifiable disruption or malfunction of an Exchange execution, dissemination, or communication system, and thus proposed Rule 530(j) will not include (1) If the series is traded on at least one other options exchange the last National Best Bid price with respect to an erroneous sell transaction and the last National Best Offer price with respect to an erroneous buy transaction, just prior to the trade; (2) if there are no quotes for comparison purposes, or if the bid/ask differential of the NBBO for the affected series, just prior to the erroneous transaction, was at least two times the standard bid/ ask differential as permitted for pre-opening quotes under Rule 603(b)(4), as determined by an Exchange Official; or (3) for transactions occurring as part of the Exchange’s automated opening system, the Theoretical Price shall be the first quote after the transaction(s) in question that does not reflect the erroneous transaction(s). See Exchange Rule 521(b). E:\FR\FM\27MRN1.SGM 27MRN1 Federal Register / Vol. 78, No. 59 / Wednesday, March 27, 2013 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES the numerical tables defining Obvious and Catastrophic Errors found in Rule 521(a). Moreover, the Exchange proposes to exclude the description of conditions other than a verifiable disruption or malfunction of an Exchange execution, dissemination, or communication system that give rise to a review that are included in current Rules 521(c)(2)(v) and (vi).4 After careful consideration, the Exchange believes the application of the current rule to all transactions occurring during a Limit or Straddle State would be impracticable during Limit and Straddle States, and could produce undesirable effects. The Exchange believes that market participants should not be able to benefit from the time frames allotted to them from the time of the affected transaction within which they may request a review of their transactions in these situations. Suspending application of Rule 521 for all transactions occurring during a Limit or Straddle State (except for erroneous transactions that resulted from a verifiable disruption or malfunction of an Exchange execution, dissemination, or communication system, or due to an erroneous quote or print in the underlying NMS Stock as discussed below) would mitigate two of the undesirable aspects 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 the obvious error rule to retroactively adjust market maker quotes by adjusting the execution price at a later time. The Exchange notes that there are additional protections in place outside of Rule 521 that will continue to safeguard customers. 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 4 Under these rules, which will not be incorporated into proposed Rule 530(j), parties to a trade may have a trade nullified or its price adjusted if: (v) The trade resulted in an execution price in a series quoted no bid and for 5 seconds prior to the execution remained no bid (excluding the quote in question; bids and offers of the parties to the subject trade that are in any of the series in the same options class shall not be considered) and at least one strike price below (for calls) or above (for puts) in the same class were quoted no bid at the time of the erroneous execution (in which case the trade shall be nullified); or (vi) The trade occurred at a price that is deemed to be an Obvious Error as defined in Paragraph (a)(1) of this Rule 521. VerDate Mar<15>2010 18:10 Mar 26, 2013 Jkt 229001 capital thresholds, or that appear to be erroneous.’’ 5 Secondly, as noted above, the Exchange will cancel unexecuted market orders in the MIAX System, and will reject market orders received during a Limit or Straddle State. Additionally, the MIAX System is designed with a built-in protection mechanism that will never trade through the NBBO price at the time of receipt of an order by more than one Minimum Price Variation (‘‘MPV’’).6 Thus, Exchange functionality that filters out orders that appear to be erroneous or are at risk of execution at an erroneous price enhances the protections provided through LULD Functionality. Reviewable Transactions As stated above, the Exchange will review all erroneous transactions occurring during Limit and Straddle States that resulted from a verifiable disruption or malfunction of an Exchange execution, dissemination, or communication system. Accordingly, the Exchange is proposing to incorporate the relevant portions of Rule 521 into proposed Rule 530(j) to establish the process for such review. The Exchange proposes to adopt Commentary .06 to Rule 521, which provides that transactions in MIAX options that overly an NMS Stock that occur during a Limit or Straddle State are not subject to review under Rule 521. The Exchange shall apply proposed Rule 530(j) to such transactions. Proposed Rule 530(j)(1)(ii) states that trades will continue to be subject to an obvious error or catastrophic error review in a Limit or Straddle State if (A) the trade resulted from a verifiable disruption or malfunction of an Exchange execution, dissemination, or communication system that caused a quote/order to trade in excess of its disseminated size (e.g. a quote/order that is frozen, because of an Exchange system error, and repeatedly traded) in which case trades in excess of the disseminated size may be nullified, or (B) the trade resulted from a verifiable disruption or malfunction of an Exchange dissemination or communication system that prevented a member from updating or canceling a 5 See Securities and Exchange Act Release No. 63241, 75 FR 69791 (November 15, 2010) (S7–03– 10). 6 This would only happen in the event that the Exchange receives an Intermarket Search Order (‘‘ISO’’) routed to the Exchange by an away market, in which the sending away market indicates that it has exhausted its efforts to trade at a better price than the Exchange’s disseminated price and that such ISO can be executed at a price that is inferior to the then-disseminated NBBO. PO 00000 Frm 00081 Fmt 4703 Sfmt 4703 18639 quote/order for which the member is responsible where there is Exchange documentation providing that the member sought to update or cancel the quote/order; (C) the trade resulted from an erroneous print disseminated by the underlying market which is later cancelled or corrected by the underlying market where such erroneous print resulted in a trade higher or lower than the average trade in the underlying security during the time period encompassing two minutes before and after the erroneous print, by an amount at least five times greater than the average quote width for such underlying security during the time period encompassing two minutes before and after the erroneous print. For purposes of this Rule, the average trade in the underlying security shall be determined by adding the prices of each trade during the four minute time period referenced above (excluding the trade in question) and dividing by the number of trades during such time period (excluding the trade in question); or (D) the trade resulted from an erroneous quote in the primary market for the underlying security that has a width of at least $1.00 and that width is at least five times greater than the average quote width for such underlying security during the time period encompassing two minutes before and after the dissemination of such quote. For the purposes of this Rule, the average quote width shall be determined by adding the quote widths of sample quotations at regular 15-second intervals during the four minute time period referenced above (excluding the quote in question) and dividing by the number of quotes during such time period (excluding the quote in question). Currently, under Rule 521(a)(1) and (2), obvious and catastrophic errors are calculated by determining a theoretical price and applying such price, based on objective standards, to ascertain whether the trade should be nullified or adjusted. While the rule contains a notification process for requesting an obvious error review, certain more substantial errors may fall under the category of a catastrophic error, for which a longer time period is permitted to request a review and for which trades can currently only be adjusted (not nullified). Trades are adjusted pursuant to an adjustment table that, in effect, assesses an adjustment penalty. By adjusting trades above or below the theoretical price, the Rule assesses a ‘‘penalty’’ in that the adjustment price is not as favorable as the amount the party making the error would have received had it not made the error. E:\FR\FM\27MRN1.SGM 27MRN1 mstockstill on DSK4VPTVN1PROD with NOTICES 18640 Federal Register / Vol. 78, No. 59 / Wednesday, March 27, 2013 / Notices Pursuant to current Rule 521(b), the theoretical price of an option is determined in one of three ways: (1) If the series is traded on at least one other options exchange, the last National Best Bid price with respect to an erroneous sell transaction and the last National Best Offer price with respect to an erroneous buy transaction, just prior to the trade; (2) if there are no quotes for comparison purposes, or if the bid/ask differential of the National Best Bid and Offer (‘‘NBBO’’) for the affected series, just prior to the erroneous transaction, was at least two times the permitted bid/ask differential under Rule 1014(c)(i)(A)(1)(a) [sic], as determined by an Exchange Official; or (3) for transactions occurring as part of the Exchange’s automated opening system, the theoretical price shall be the first quote after the transaction(s) in question that does not reflect the erroneous transaction(s). The Exchange believes that none of these three methods is appropriate during a Limit or Straddle State. Specifically, under Rule 521(b)(1), the theoretical price is determined with respect to the NBBO for an option series just prior to the trade. As discussed above, during a Limit or Straddle State, options prices may deviate substantially from those available prior to or following the State. The Exchange believes this provision would give rise to much uncertainty for market participants as there is no bright line definition of what the theoretical price should be for an option when the underlying NMS stock has an unexecutable bid or offer or both. Determining theoretical price 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. Accordingly, the Exchange does not believe that the approach employed under current Rule 521(b)(1), which by definition depends on a reliable NBBO in the option, is appropriate during a Limit or Straddle State. The Exchange believes that excluding this from proposed Rule 530(j) is appropriate because while in a Limit or Straddle State, only limit orders will be accepted by the Exchange, affirming that the participant is willing to accept an execution up to the limit price. Further, because the Exchange system will only trade through the theoretical bid or offer if the Exchange or the participant (via an ISO order) has accessed all better priced interest away in accordance the Options Order Protection and Locked/ Crossed Markets Plan, the Exchange believes potential trade reviews of VerDate Mar<15>2010 18:10 Mar 26, 2013 Jkt 229001 executions that occurred at the participant’s limit price and also in compliance with aforementioned Plan could result in uncertainty that could harm liquidity and also could create an advantage to either side of an execution depending on the future movement of the underlying stock. The Exchange recognizes that the second method (in Rule 521(b)(2)) affords discretion to the Options Exchange Official in determining the theoretical price and thereby, ultimately, whether a trade is busted or adjusted and to what price. The Exchange has determined that it would be difficult to exercise such discretion in periods of extraordinary market volatility and in particular when the price of the underlying security is unreliable. Moreover, the theoretical price would be subjective. Thus, the Exchange has determined not to permit an obvious or catastrophic error review if there are no quotes for comparison purposes, or if the bid/ask differential of the NBBO for the affected series, just prior to the erroneous transaction, was at least two times the permitted bid/ask differential. The Exchange believes that adding certainty to the execution of orders in these situations should encourage market participants to continue to provide liquidity to the Exchange and thus promote a fair and orderly market. The Exchange notes that current Rule 521(b)(3) applies to trades executed during openings. Because the Exchange does not intend to open an option during a Limit or Straddle State, this provision, on its face, will not apply. For the same reasons, the Exchange is proposing that Rule 521(c)(2)(vi) not apply during a Limit or Straddle State. In addition, the Exchange proposes that trades are not subject to an obvious error and catastrophic error review if pursuant to the provisions of Rule 521(c)(2)(vi) the trade resulted from an execution price in a series quoted no bid. A zero bid option refers to an option where the bid price is $0.00. Series of options quoted zero bid are usually deep out-of-the-money series that are perceived as having little if any chance of expiring in-the-money. For this reason, relatively few transactions occur in these series and those that do are usually the result of a momentary pricing error. Specifically, under this provision, where the trade resulted in an execution price in a series quoted no bid and for 5 seconds prior to the execution remained no bid (excluding the quote in question; bids and offers of the parties to the subject trade that are in any of the series in the same options class shall not PO 00000 Frm 00082 Fmt 4703 Sfmt 4703 be considered) and at least one strike price below (for calls) or above (for puts) in the same class were quoted no bid at the time of the erroneous execution (in which case the trade shall be nullified). The Exchange believes that these situations are not appropriate for an error review because they are more likely to result in a windfall to one party at the expense of another in a Limit or Straddle State, because the criteria for meeting the no-bid provision are more likely to be met in a Limit or Straddle State, and unlike normal circumstances, may not be a true reflection of the value of the series being quoted. For example, in a series quoted $1.95–$2.00 on multiple exchanges prior to the Limit or Straddle State, an order to B10@ $2.00 is likely a reasonably priced trade because the buyer attempted to pay $2.00 with a limit price. However, if that series and the series one strike below are both quoted $0.00- $5.00, then both the seller and the buyer at $2.00 would have an opportunity to dispute the trade. This would create uncertainty to both parties and an advantage to one participant if the underlying stock moved significantly in their direction. Regarding Obvious Errors, the Commission has stated previously that it ‘‘* * * considers that in most circumstances trades that are executed between parties should be honored. On rare occasions, the price of the executed trade indicates an ‘obvious error’ may exist, suggesting that it is unrealistic to expect that the parties to the trade had come to a meeting of the minds regarding the terms of the transaction. In the Commission’s view, the determination of whether an ‘obvious error’ has occurred, and the adjustment or nullification of a transaction because an obvious error is considered to exist, should be based on specific and objective criteria and subject to specific and objective procedures * * *’’ 7 The Exchange believes that, in some extreme situations, trade participants may not be aware of errors that result in very large losses within the time periods currently required under the rule. In this type of extreme situation, the Exchange believes its members should be given more time to seek relief so that there is a greater opportunity to mitigate very large losses and reduce the corresponding large wind-falls. However, to maintain the appropriate balance, the Exchange believes members should only be given more time when the execution price is much further 7 See Securities Exchange Act Release No. 49785 (May 28, 2004), 69 FR 32090 (June 8, 2004) (SR– Phlx–2003–68). E:\FR\FM\27MRN1.SGM 27MRN1 mstockstill on DSK4VPTVN1PROD with NOTICES Federal Register / Vol. 78, No. 59 / Wednesday, March 27, 2013 / Notices away from the theoretical price than is required for Obvious Errors so that relief is only provided in extreme circumstances. The Exchange believes that this proposal strikes the aforementioned balance. The Exchange is proposing to decline to review certain trades, which is specific and objective. Furthermore, the proposal more fairly balances the potential windfall to one market participant against the potential reconsideration of a trading decision under the guise of an error, and thereby results in more certainty during periods of extreme market volatility. Trades can nevertheless be considered erroneous under other sections of the Rule, because those continue to be an objective method of determining whether an error occurred, even during periods of extraordinary market volatility. Because the Exchange intends to continue to review trades pursuant to proposed Rules 521(j)(1)(A)–(D) [sic], the Exchange believes that this continues to provide some protection to market participants. The Exchange believes that, in addition to the built-in customer protections discussed above, it is necessary to protect investors from erroneous transactions resulting from a verifiable disruption or malfunction of an Exchange execution, dissemination, or communication system. Proposed Rule 530(j) will also include identical language to that used in current Rule 521 regarding mutual agreement by the parties to an erroneous transaction during a trading halt, i.e., trades on the Exchange will be nullified when the trade occurred during a trading halt in the affected option on the Exchange, or respecting equity options (including options overlying ETFs), the trade occurred during a trading halt on the primary market for the underlying security. Proposed Rule 530(j) will also incorporate the relevant elements of Rule 521 regarding the review procedure, requests for review, and appeals from decisions to bust a trade. The Exchange has engaged in informal discussions with its members, and has received generally favorable feedback concerning its proposed handling of Obvious Errors during Limit and Straddle States, given the aforementioned built-in protections in the MIAX System. During the one-year pilot period beginning on the date of implementation of the Plan, the Exchange will conduct its own analysis concerning the elimination of obvious error rules during limit and straddle states and agrees to provide the Commission with relevant data to assess VerDate Mar<15>2010 18:10 Mar 26, 2013 Jkt 229001 the impact of this proposed rule change. As part of its analysis, the Exchange will evaluate (1) the options market quality during limit and straddle states, (2) assess the character of incoming order flow and transactions during limit and straddle states, and (3) review any complaints from members and their customers concerning executions during limit and straddle states. Additionally, the Exchange agrees to provide to the Commission data requested to evaluate the impact of the elimination of the obvious error rule, including data relevant to assessing the various analyses noted above. 2. Statutory Basis MIAX believes that its proposed rule change is consistent with Section 6(b) of the Act 8 in general, and furthers the objectives of Section 6(b)(5) of the Act 9 in particular, in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to 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, and it is not designed to permit unfair discrimination among customers, brokers, or dealers. The Exchange believes the application of the current Obvious Error rule will be impracticable given the lack of a reliable NBBO in the options market during Limit and Straddle States, and that the resulting actions (i.e., nullified trades or adjusted prices) may not be appropriate given market conditions. 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, removes impediments to, and perfects the mechanism of a free and open market and a national market system. Moreover, given that options prices during brief Limit or Straddle States may deviate substantially from those available shortly following the Limit or Straddle State, the Exchange believes giving market participants time to reevaluate a transaction would create an unreasonable adverse selection opportunity that would discourage participants from providing liquidity during Limit or Straddle States. In this respect, the Exchange notes that by 8 15 9 15 PO 00000 U.S.C. 78f(b). U.S.C. 78f(b)(5). Frm 00083 Fmt 4703 Sfmt 4703 18641 rejecting market orders and cancelling pending market orders, only those orders with a limit price will be executed during a Limit or Straddle State. Therefore, on balance, the Exchange believes that removing the potential inequity of nullifying or adjusting executions occurring during Limit or Straddle States outweighs any potential benefits from applying certain provisions during such unusual market conditions. Additionally, as discussed above, there are additional pre-trade protections in place on the MIAX System that will continue to safeguard customers. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. Specifically, the Exchange believes the proposed changes will not impose any burden on intra-market competition because it applies to all MIAX participants equally. The Exchange does not believe the proposed rules will impose any burden on inter-market competition as the proposed rules are intended to protect investors with the implementation of the Plan. In addition, the proposed changes will provide certainty of treatment and execution of options orders during periods of extraordinary market volatility. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments were neither solicited nor received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the Exchange consents, the Commission shall: (a) By order approve or disapprove such proposed rule change, or (b) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule E:\FR\FM\27MRN1.SGM 27MRN1 18642 Federal Register / Vol. 78, No. 59 / Wednesday, March 27, 2013 / Notices 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 (http://www.sec.gov/ rules/sro.shtml); or • Send an email to rulecomments@sec.gov. Please include File Number SR–MIAX–2013–12 on the subject line. mstockstill on DSK4VPTVN1PROD with NOTICES 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–MIAX–2013–12. 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 (http://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, located at 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 will also 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–MIAX– 2013–12 and should be submitted on or before April 8, 2013.10 10 The Commission believes that a 10-day comment period is reasonable, given the urgency of the matter. It will provide adequate time for comment. The Commission also notes that this proposal is substantially similar to proposals from NASDAQ OMX PHLX LLC, The NASDAQ Stock Market LLC, and NASDAQ OMX BX, Inc. which were published for comment in the Federal Register on March 20, 2013. See Securities Exchange Act Release Nos. 69141 (March 15, 2013), 78 FR 17262 (March 20, 2013) (SR–Phlx–2013–29); 69142 (March 15, 2013), 78 FR 17251 (March 20, VerDate Mar<15>2010 18:10 Mar 26, 2013 Jkt 229001 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.11 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–07062 Filed 3–26–13; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION Self-Regulatory Organizations; BOX Options Exchange LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the Fee Schedule To Establish Fees for Mini Options on BOX March 21, 2013. Pursuant to Section 19(b)(1) under the Securities Exchange Act of 1934 (the ‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on March 15, 2013, BOX Options Exchange LLC (the ‘‘Exchange’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The Exchange filed the proposed rule change pursuant to Section 19(b)(3)(A)(ii) of the Act,3 and Rule 19b–4(f)(2) thereunder,4 which renders the proposal effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange is filing with the Securities and Exchange Commission (‘‘Commission’’) a proposed rule change to amend the Fee Schedule to establish fees for Mini Options on the BOX Market LLC (‘‘BOX’’) options facility. While changes to the fee schedule pursuant to this proposal will be effective upon filing, the changes will become operative on March 18, 2013. The text of the proposed rule change is available from the principal office of the Exchange, at the Commission’s Public Reference Room and also on the Exchange’s Internet Web site at http:// boxexchange.com. 2013) (SR–NASDAQ–2013–048); and 69140 (March 15, 2013), 78 FR 17255 (March 20, 2013) (SR–BX– 2013–026). 11 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A)(ii). 4 17 CFR 240.19b–4(f)(2). PO 00000 Frm 00084 Fmt 4703 Sfmt 4703 II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, Proposed Rule Change 1. Purpose The Exchange proposes to amend the Fee Schedule for trading on BOX to establish fees for option contracts overlying 10 shares of a security (‘‘Mini Options’’). The Exchange represented in its filing with the Securities and Exchange Commission (‘‘SEC’’ or the ‘‘Commission’’) to establish Mini Options that, ‘‘the current Fee Schedule will not apply to the trading of minioptions contracts. The Exchange will not commence trading of mini-options contracts until specific fees for minioptions contracts trading have been filed with the Commission.’’ 5 As the Exchange intends to begin trading Mini Options on March 18, 2013 it is submitting this filing to describe the transaction fees that will be applicable to the trading of Mini Options. Mini Options have a smaller exercise and assignment value due to the reduced number of shares they deliver as compared to standard option contracts. Despite the smaller exercise and assignment value of Mini Options, the cost to the Exchange to process quotes and orders in Mini Options, perform regulatory surveillance and retain quotes and orders for archival purposes is the same as for a standard contract. This leaves the Exchange in a position of trying to strike the right balance of fees applicable to Mini Options. The Exchange, therefore, believes that adopting fees for Mini Options that are in some cases the same, in some cases proportionally lower, and in other cases exempt from the fees for standard contracts, is appropriate, reasonable, not unfairly discriminatory 5 See Securities Exchange Act Release No. 68771 (January 30, 2013), 79 [sic] FR 8208 (February 5, 2013) (SR–BOX–2013–07). E:\FR\FM\27MRN1.SGM 27MRN1

Agencies

[Federal Register Volume 78, Number 59 (Wednesday, March 27, 2013)]
[Notices]
[Pages 18637-18642]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-07062]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69210; File No. SR-MIAX-2013-12]


Self-Regulatory Organizations; Miami International Securities 
Exchange LLC; Notice of Filing of a Proposed Rule Change Relating to 
Obvious Errors in Limit or Straddle States

March 22, 2013.
    Pursuant to the provisions of Section 19(b)(1) of the Securities 
Exchange Act of 1934 (the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ 
notice is hereby given that, on March 22, 2013, Miami International 
Securities Exchange LLC (``MIAX'' or ``Exchange'') filed with the 
Securities and Exchange Commission (``SEC'' or ``Commission'') a 
proposed rule change as described in Items I, II and III below, which 
Items have been prepared by the self-regulatory orgnaization. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is filing a proposal to amend Exchange Rule 530, Limit 
Up-Limit Down (``LULD''), and to amend Exchange Rule 521, Obvious and 
Catastrophic Errors to provide for how the Exchange proposes to treat 
erroneous options transactions in response to the Plan to Address 
Extraordinary Market Volatility Pursuant to Rule 608 of Regulation NMS, 
as it may be amended from time to time (the ``Plan'').
    The text of the proposed rule change is provided in Exhibit 5. The 
text of the proposed rule change is also available on the Exchange's 
Web site at http://www.miaxoptions.com/filter/wotitle/rule_filing, at 
MIAX's principal office, and at the Commission's Public Reference Room.

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    The purpose of the proposed rule change is to amend MIAX Rules 530 
and 521 to provide for how the Exchange proposes to treat erroneous 
options transactions in response to the Plan.
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 The Financial Industry Regulatory Authority 
(``FINRA'') have implemented market-wide measures designed to restore 
investor confidence by reducing the potential for excessive market 
volatility.
    Among the measures adopted include pilot plans for stock-by-stock 
trading pauses, related changes to the equities

[[Page 18638]]

market clearly erroneous execution rules, and more stringent equities 
market maker quoting requirements. On May 31, 2012, the Commission 
approved the Plan, as amended, on a one-year pilot basis. 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. The Plan is designed to prevent trades in individual NMS 
stocks from occurring outside of specified Price Bands. The instant 
proposed rule change is intended to adopt MIAX rules that address the 
trading of options overlying NMS Stocks that are the subject of the 
Plan and its provisions during times of unusual volatility in the 
markets.
    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 
reasonably designed to comply with the requirements specified in the 
Plan.
Limit State and Straddle State
    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. 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. 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 indicating 
that it is non-executable. Such bids or offers shall not be included in 
the National Best Bid or National Best Offer calculations. 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. 
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 Plan, which 
would be applicable to all markets trading the security.
    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 nonexecutable 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.
Obvious Error
    The Exchange analyzed in detail the operation of current Exchange 
Rule 521 (Obvious and Catastrophic Errors) and determined that it would 
be undesirable to apply that Rule to options when the underlying NMS 
Stock has entered either a Limit or Straddle State. However, the 
Exchange does not believe that it should operate without any protection 
against erroneous transactions during these periods. Therefore, the 
Exchange proposes that proposed Rule 530(j) apply to erroneous 
transactions in options when the underlying NMS Stock has entered 
either a Limit or Straddle State only when an erroneous transaction is 
due to a verifiable disruption or malfunction of the MIAX System.
    The Exchange proposes to exclude transactions executed during a 
Limit or Straddle State from the provisions of MIAX Rule 521, on a one-
year pilot basis, beginning on the date of implementation of the Plan, 
except in situations where the affected trade resulted from a 
verifiable disruption or malfunction of an Exchange execution, 
dissemination, or communication system, as discussed below.
    Current Rule 521 provides a process by which a transaction may be 
busted or adjusted when the execution price of a transaction deviates 
from the option's theoretical price \3\ by a certain amount.
---------------------------------------------------------------------------

    \3\ The Theoretical Price of an option is:
    (1) If the series is traded on at least one other options 
exchange the last National Best Bid price with respect to an 
erroneous sell transaction and the last National Best Offer price 
with respect to an erroneous buy transaction, just prior to the 
trade;
    (2) if there are no quotes for comparison purposes, or if the 
bid/ask differential of the NBBO for the affected series, just prior 
to the erroneous transaction, was at least two times the standard 
bid/ask differential as permitted for pre-opening quotes under Rule 
603(b)(4), as determined by an Exchange Official; or
    (3) for transactions occurring as part of the Exchange's 
automated opening system, the Theoretical Price shall be the first 
quote after the transaction(s) in question that does not reflect the 
erroneous transaction(s).
    See Exchange Rule 521(b).
---------------------------------------------------------------------------

    As discussed above, during a Limit or Straddle State, options 
prices may deviate substantially from those available prior to or 
following the limit state. The Exchange believes that the application 
of this provision to all erroneous transactions that occur during a 
Limit or Straddle State would give rise to much uncertainty for market 
participants as there is no bright line definition of what the 
theoretical price should be for an option when the underlying NMS stock 
has an unexecutable bid or offer or both.
    Determining theoretical price in such a situation would be often 
times very subjective as opposed to an objective determination giving 
rise to additional uncertainty, and Rule 521 provides that if there are 
no quotes from other options exchanges for comparison purposes, the 
theoretical price will be determined by an Exchange Official. However, 
given that options market makers and other industry professionals will 
have difficulty pricing options during Limit and Straddle States, the 
Exchange does not believe it would be reasonable for an Exchange 
Official to derive theoretical prices to be applied to transactions 
executed during such unusual market conditions. Accordingly, the 
Exchange does not believe that the approach employed under Rule 521, 
which by definition depends on a reliable national best bid and offer 
in the option, is appropriate for all transactions that occur during a 
Limit or Straddle State. The Exchange believes that there is no 
reliable basis on which to determine the Theoretical Price of 
transactions that occur during a Limit or Straddle State. Accordingly, 
proposed Rule 530(j) will not include any provision to adjust the price 
of trades that occur during a Limit or Straddle State. Proposed Rule 
530(j) will only apply to transactions occurring during Limit and 
Straddle States that resulted from a verifiable disruption or 
malfunction of an Exchange execution, dissemination, or communication 
system, and thus proposed Rule 530(j) will not include

[[Page 18639]]

the numerical tables defining Obvious and Catastrophic Errors found in 
Rule 521(a). Moreover, the Exchange proposes to exclude the description 
of conditions other than a verifiable disruption or malfunction of an 
Exchange execution, dissemination, or communication system that give 
rise to a review that are included in current Rules 521(c)(2)(v) and 
(vi).\4\
---------------------------------------------------------------------------

    \4\ Under these rules, which will not be incorporated into 
proposed Rule 530(j), parties to a trade may have a trade nullified 
or its price adjusted if:
    (v) The trade resulted in an execution price in a series quoted 
no bid and for 5 seconds prior to the execution remained no bid 
(excluding the quote in question; bids and offers of the parties to 
the subject trade that are in any of the series in the same options 
class shall not be considered) and at least one strike price below 
(for calls) or above (for puts) in the same class were quoted no bid 
at the time of the erroneous execution (in which case the trade 
shall be nullified); or
    (vi) The trade occurred at a price that is deemed to be an 
Obvious Error as defined in Paragraph (a)(1) of this Rule 521.
---------------------------------------------------------------------------

    After careful consideration, the Exchange believes the application 
of the current rule to all transactions occurring during a Limit or 
Straddle State would be impracticable during Limit and Straddle States, 
and could produce undesirable effects.
    The Exchange believes that market participants should not be able 
to benefit from the time frames allotted to them from the time of the 
affected transaction within which they may request a review of their 
transactions in these situations. Suspending application of Rule 521 
for all transactions occurring during a Limit or Straddle State (except 
for erroneous transactions that resulted from a verifiable disruption 
or malfunction of an Exchange execution, dissemination, or 
communication system, or due to an erroneous quote or print in the 
underlying NMS Stock as discussed below) would mitigate two of the 
undesirable aspects 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 the 
obvious error rule to retroactively adjust market maker quotes by 
adjusting the execution price at a later time.
    The Exchange notes that there are additional protections in place 
outside of Rule 521 that will continue to safeguard customers. 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.'' \5\
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    \5\ See Securities and Exchange Act Release No. 63241, 75 FR 
69791 (November 15, 2010) (S7-03-10).
---------------------------------------------------------------------------

    Secondly, as noted above, the Exchange will cancel unexecuted 
market orders in the MIAX System, and will reject market orders 
received during a Limit or Straddle State. Additionally, the MIAX 
System is designed with a built-in protection mechanism that will never 
trade through the NBBO price at the time of receipt of an order by more 
than one Minimum Price Variation (``MPV'').\6\ Thus, Exchange 
functionality that filters out orders that appear to be erroneous or 
are at risk of execution at an erroneous price enhances the protections 
provided through LULD Functionality.
---------------------------------------------------------------------------

    \6\ This would only happen in the event that the Exchange 
receives an Intermarket Search Order (``ISO'') routed to the 
Exchange by an away market, in which the sending away market 
indicates that it has exhausted its efforts to trade at a better 
price than the Exchange's disseminated price and that such ISO can 
be executed at a price that is inferior to the then-disseminated 
NBBO.
---------------------------------------------------------------------------

Reviewable Transactions
    As stated above, the Exchange will review all erroneous 
transactions occurring during Limit and Straddle States that resulted 
from a verifiable disruption or malfunction of an Exchange execution, 
dissemination, or communication system. Accordingly, the Exchange is 
proposing to incorporate the relevant portions of Rule 521 into 
proposed Rule 530(j) to establish the process for such review. The 
Exchange proposes to adopt Commentary .06 to Rule 521, which provides 
that transactions in MIAX options that overly an NMS Stock that occur 
during a Limit or Straddle State are not subject to review under Rule 
521. The Exchange shall apply proposed Rule 530(j) to such 
transactions.
    Proposed Rule 530(j)(1)(ii) states that trades will continue to be 
subject to an obvious error or catastrophic error review in a Limit or 
Straddle State if (A) the trade resulted from a verifiable disruption 
or malfunction of an Exchange execution, dissemination, or 
communication system that caused a quote/order to trade in excess of 
its disseminated size (e.g. a quote/order that is frozen, because of an 
Exchange system error, and repeatedly traded) in which case trades in 
excess of the disseminated size may be nullified, or (B) the trade 
resulted from a verifiable disruption or malfunction of an Exchange 
dissemination or communication system that prevented a member from 
updating or canceling a quote/order for which the member is responsible 
where there is Exchange documentation providing that the member sought 
to update or cancel the quote/order; (C) the trade resulted from an 
erroneous print disseminated by the underlying market which is later 
cancelled or corrected by the underlying market where such erroneous 
print resulted in a trade higher or lower than the average trade in the 
underlying security during the time period encompassing two minutes 
before and after the erroneous print, by an amount at least five times 
greater than the average quote width for such underlying security 
during the time period encompassing two minutes before and after the 
erroneous print. For purposes of this Rule, the average trade in the 
underlying security shall be determined by adding the prices of each 
trade during the four minute time period referenced above (excluding 
the trade in question) and dividing by the number of trades during such 
time period (excluding the trade in question); or (D) the trade 
resulted from an erroneous quote in the primary market for the 
underlying security that has a width of at least $1.00 and that width 
is at least five times greater than the average quote width for such 
underlying security during the time period encompassing two minutes 
before and after the dissemination of such quote. For the purposes of 
this Rule, the average quote width shall be determined by adding the 
quote widths of sample quotations at regular 15-second intervals during 
the four minute time period referenced above (excluding the quote in 
question) and dividing by the number of quotes during such time period 
(excluding the quote in question).
    Currently, under Rule 521(a)(1) and (2), obvious and catastrophic 
errors are calculated by determining a theoretical price and applying 
such price, based on objective standards, to ascertain whether the 
trade should be nullified or adjusted. While the rule contains a 
notification process for requesting an obvious error review, certain 
more substantial errors may fall under the category of a catastrophic 
error, for which a longer time period is permitted to request a review 
and for which trades can currently only be adjusted (not nullified). 
Trades are adjusted pursuant to an adjustment table that, in effect, 
assesses an adjustment penalty. By adjusting trades above or below the 
theoretical price, the Rule assesses a ``penalty'' in that the 
adjustment price is not as favorable as the amount the party making the 
error would have received had it not made the error.

[[Page 18640]]

    Pursuant to current Rule 521(b), the theoretical price of an option 
is determined in one of three ways: (1) If the series is traded on at 
least one other options exchange, the last National Best Bid price with 
respect to an erroneous sell transaction and the last National Best 
Offer price with respect to an erroneous buy transaction, just prior to 
the trade; (2) if there are no quotes for comparison purposes, or if 
the bid/ask differential of the National Best Bid and Offer (``NBBO'') 
for the affected series, just prior to the erroneous transaction, was 
at least two times the permitted bid/ask differential under Rule 
1014(c)(i)(A)(1)(a) [sic], as determined by an Exchange Official; or 
(3) for transactions occurring as part of the Exchange's automated 
opening system, the theoretical price shall be the first quote after 
the transaction(s) in question that does not reflect the erroneous 
transaction(s).
    The Exchange believes that none of these three methods is 
appropriate during a Limit or Straddle State. Specifically, under Rule 
521(b)(1), the theoretical price is determined with respect to the NBBO 
for an option series just prior to the trade. As discussed above, 
during a Limit or Straddle State, options prices may deviate 
substantially from those available prior to or following the State. The 
Exchange believes this provision would give rise to much uncertainty 
for market participants as there is no bright line definition of what 
the theoretical price should be for an option when the underlying NMS 
stock has an unexecutable bid or offer or both. Determining theoretical 
price 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. Accordingly, the Exchange does 
not believe that the approach employed under current Rule 521(b)(1), 
which by definition depends on a reliable NBBO in the option, is 
appropriate during a Limit or Straddle State. The Exchange believes 
that excluding this from proposed Rule 530(j) is appropriate because 
while in a Limit or Straddle State, only limit orders will be accepted 
by the Exchange, affirming that the participant is willing to accept an 
execution up to the limit price. Further, because the Exchange system 
will only trade through the theoretical bid or offer if the Exchange or 
the participant (via an ISO order) has accessed all better priced 
interest away in accordance the Options Order Protection and Locked/
Crossed Markets Plan, the Exchange believes potential trade reviews of 
executions that occurred at the participant's limit price and also in 
compliance with aforementioned Plan could result in uncertainty that 
could harm liquidity and also could create an advantage to either side 
of an execution depending on the future movement of the underlying 
stock.
    The Exchange recognizes that the second method (in Rule 521(b)(2)) 
affords discretion to the Options Exchange Official in determining the 
theoretical price and thereby, ultimately, whether a trade is busted or 
adjusted and to what price. The Exchange has determined that it would 
be difficult to exercise such discretion in periods of extraordinary 
market volatility and in particular when the price of the underlying 
security is unreliable. Moreover, the theoretical price would be 
subjective. Thus, the Exchange has determined not to permit an obvious 
or catastrophic error review if there are no quotes for comparison 
purposes, or if the bid/ask differential of the NBBO for the affected 
series, just prior to the erroneous transaction, was at least two times 
the permitted bid/ask differential. The Exchange believes that adding 
certainty to the execution of orders in these situations should 
encourage market participants to continue to provide liquidity to the 
Exchange and thus promote a fair and orderly market.
    The Exchange notes that current Rule 521(b)(3) applies to trades 
executed during openings. Because the Exchange does not intend to open 
an option during a Limit or Straddle State, this provision, on its 
face, will not apply.
    For the same reasons, the Exchange is proposing that Rule 
521(c)(2)(vi) not apply during a Limit or Straddle State.
    In addition, the Exchange proposes that trades are not subject to 
an obvious error and catastrophic error review if pursuant to the 
provisions of Rule 521(c)(2)(vi) the trade resulted from an execution 
price in a series quoted no bid. A zero bid option refers to an option 
where the bid price is $0.00. Series of options quoted zero bid are 
usually deep out-of-the-money series that are perceived as having 
little if any chance of expiring in-the-money. For this reason, 
relatively few transactions occur in these series and those that do are 
usually the result of a momentary pricing error.
    Specifically, under this provision, where the trade resulted in an 
execution price in a series quoted no bid and for 5 seconds prior to 
the execution remained no bid (excluding the quote in question; bids 
and offers of the parties to the subject trade that are in any of the 
series in the same options class shall not be considered) and at least 
one strike price below (for calls) or above (for puts) in the same 
class were quoted no bid at the time of the erroneous execution (in 
which case the trade shall be nullified). The Exchange believes that 
these situations are not appropriate for an error review because they 
are more likely to result in a windfall to one party at the expense of 
another in a Limit or Straddle State, because the criteria for meeting 
the no-bid provision are more likely to be met in a Limit or Straddle 
State, and unlike normal circumstances, may not be a true reflection of 
the value of the series being quoted. For example, in a series quoted 
$1.95-$2.00 on multiple exchanges prior to the Limit or Straddle State, 
an order to B10@ $2.00 is likely a reasonably priced trade because the 
buyer attempted to pay $2.00 with a limit price. However, if that 
series and the series one strike below are both quoted $0.00- $5.00, 
then both the seller and the buyer at $2.00 would have an opportunity 
to dispute the trade. This would create uncertainty to both parties and 
an advantage to one participant if the underlying stock moved 
significantly in their direction.
    Regarding Obvious Errors, the Commission has stated previously that 
it ``* * * considers that in most circumstances trades that are 
executed between parties should be honored. On rare occasions, the 
price of the executed trade indicates an `obvious error' may exist, 
suggesting that it is unrealistic to expect that the parties to the 
trade had come to a meeting of the minds regarding the terms of the 
transaction. In the Commission's view, the determination of whether an 
`obvious error' has occurred, and the adjustment or nullification of a 
transaction because an obvious error is considered to exist, should be 
based on specific and objective criteria and subject to specific and 
objective procedures * * *'' \7\
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    \7\ See Securities Exchange Act Release No. 49785 (May 28, 
2004), 69 FR 32090 (June 8, 2004) (SR-Phlx-2003-68).
---------------------------------------------------------------------------

    The Exchange believes that, in some extreme situations, trade 
participants may not be aware of errors that result in very large 
losses within the time periods currently required under the rule. In 
this type of extreme situation, the Exchange believes its members 
should be given more time to seek relief so that there is a greater 
opportunity to mitigate very large losses and reduce the corresponding 
large wind-falls. However, to maintain the appropriate balance, the 
Exchange believes members should only be given more time when the 
execution price is much further

[[Page 18641]]

away from the theoretical price than is required for Obvious Errors so 
that relief is only provided in extreme circumstances.
    The Exchange believes that this proposal strikes the aforementioned 
balance. The Exchange is proposing to decline to review certain trades, 
which is specific and objective. Furthermore, the proposal more fairly 
balances the potential windfall to one market participant against the 
potential reconsideration of a trading decision under the guise of an 
error, and thereby results in more certainty during periods of extreme 
market volatility. Trades can nevertheless be considered erroneous 
under other sections of the Rule, because those continue to be an 
objective method of determining whether an error occurred, even during 
periods of extraordinary market volatility. Because the Exchange 
intends to continue to review trades pursuant to proposed Rules 
521(j)(1)(A)-(D) [sic], the Exchange believes that this continues to 
provide some protection to market participants.
    The Exchange believes that, in addition to the built-in customer 
protections discussed above, it is necessary to protect investors from 
erroneous transactions resulting from a verifiable disruption or 
malfunction of an Exchange execution, dissemination, or communication 
system.
    Proposed Rule 530(j) will also include identical language to that 
used in current Rule 521 regarding mutual agreement by the parties to 
an erroneous transaction during a trading halt, i.e., trades on the 
Exchange will be nullified when the trade occurred during a trading 
halt in the affected option on the Exchange, or respecting equity 
options (including options overlying ETFs), the trade occurred during a 
trading halt on the primary market for the underlying security. 
Proposed Rule 530(j) will also incorporate the relevant elements of 
Rule 521 regarding the review procedure, requests for review, and 
appeals from decisions to bust a trade.
    The Exchange has engaged in informal discussions with its members, 
and has received generally favorable feedback concerning its proposed 
handling of Obvious Errors during Limit and Straddle States, given the 
aforementioned built-in protections in the MIAX System.
    During the one-year pilot period beginning on the date of 
implementation of the Plan, the Exchange will conduct its own analysis 
concerning the elimination of obvious error rules during limit and 
straddle states and agrees to provide the Commission with relevant data 
to assess the impact of this proposed rule change. As part of its 
analysis, the Exchange will evaluate (1) the options market quality 
during limit and straddle states, (2) assess the character of incoming 
order flow and transactions during limit and straddle states, and (3) 
review any complaints from members and their customers concerning 
executions during limit and straddle states. Additionally, the Exchange 
agrees to provide to the Commission data requested to evaluate the 
impact of the elimination of the obvious error rule, including data 
relevant to assessing the various analyses noted above.
2. Statutory Basis
    MIAX believes that its proposed rule change is consistent with 
Section 6(b) of the Act \8\ in general, and furthers the objectives of 
Section 6(b)(5) of the Act \9\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, to 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, and it is not designed to 
permit unfair discrimination among customers, brokers, or dealers.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes the application of the current Obvious Error 
rule will be impracticable given the lack of a reliable NBBO in the 
options market during Limit and Straddle States, and that the resulting 
actions (i.e., nullified trades or adjusted prices) may not be 
appropriate given market conditions. 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, removes impediments to, and perfects the 
mechanism of a free and open market and a national market system. 
Moreover, given that options prices during brief Limit or Straddle 
States may deviate substantially from those available shortly following 
the Limit or Straddle State, the Exchange believes giving market 
participants time to reevaluate a transaction would create an 
unreasonable adverse selection opportunity that would discourage 
participants from providing liquidity during Limit or Straddle States. 
In this respect, the Exchange notes that by rejecting market orders and 
cancelling pending market orders, only those orders with a limit price 
will be executed during a Limit or Straddle State. Therefore, on 
balance, the Exchange believes that removing the potential inequity of 
nullifying or adjusting executions occurring during Limit or Straddle 
States outweighs any potential benefits from applying certain 
provisions during such unusual market conditions.
    Additionally, as discussed above, there are additional pre-trade 
protections in place on the MIAX System that will continue to safeguard 
customers.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.
    Specifically, the Exchange believes the proposed changes will not 
impose any burden on intra-market competition because it applies to all 
MIAX participants equally. The Exchange does not believe the proposed 
rules will impose any burden on inter-market competition as the 
proposed rules are intended to protect investors with the 
implementation of the Plan. In addition, the proposed changes will 
provide certainty of treatment and execution of options orders during 
periods of extraordinary market volatility.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall: (a) By order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule

[[Page 18642]]

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 (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-MIAX-2013-12 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-MIAX-2013-12. 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 (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, located at 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 will also 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-
MIAX-2013-12 and should be submitted on or before April 8, 2013.\10\
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    \10\ The Commission believes that a 10-day comment period is 
reasonable, given the urgency of the matter. It will provide 
adequate time for comment. The Commission also notes that this 
proposal is substantially similar to proposals from NASDAQ OMX PHLX 
LLC, The NASDAQ Stock Market LLC, and NASDAQ OMX BX, Inc. which were 
published for comment in the Federal Register on March 20, 2013. See 
Securities Exchange Act Release Nos. 69141 (March 15, 2013), 78 FR 
17262 (March 20, 2013) (SR-Phlx-2013-29); 69142 (March 15, 2013), 78 
FR 17251 (March 20, 2013) (SR-NASDAQ-2013-048); and 69140 (March 15, 
2013), 78 FR 17255 (March 20, 2013) (SR-BX-2013-026).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-07062 Filed 3-26-13; 8:45 am]
BILLING CODE 8011-01-P