Self-Regulatory Organizations; NYSE Arca LLC; Order Approving, on an Accelerated Basis, Proposed Rule Change, as Modified by Amendment No. 1, Adopting New Exchange Rule 6.65A 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 6.65 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, 22004-22009 [2013-08604]
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market participants additional time to
review trades submitted during a Limit
State or Straddle State.
Finally, the Commission notes that
the Plan, to which these rules relate,
will be implemented on April 8, 2013.
Accordingly, for the reasons stated
above, and in consideration of the April
8, 2013 implementation date of the Plan,
the Commission finds good cause,
pursuant to Section 19(b)(2) of the
Act,13 for approving the Exchange’s
proposal prior to the 30th day after the
publication of the notice in the Federal
Register.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,14 that the
proposed rule change (SR–Phlx–2013–
29), be, and hereby is, approved on an
accelerated basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.15
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–08612 Filed 4–11–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–69340; File No. SR–
NYSEArca–2013–10]
Self-Regulatory Organizations; NYSE
Arca LLC; Order Approving, on an
Accelerated Basis, Proposed Rule
Change, as Modified by Amendment
No. 1, Adopting New Exchange Rule
6.65A 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 6.65 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
April 8, 2013.
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I. Introduction
On February 26, 2013, NYSE Arca,
Inc. (the ‘‘Exchange’’ or ‘‘NYSE Arca’’)
filed with the Securities and Exchange
13 15 U.S.C. 78s(b)(2). The Commission noticed
substantially similar rules proposed by NYSE MKT
LLC and NYSE Arca, Inc. with a full 21 day
comment period. See Securities Exchange Act
Release No. 69033, 78 FR 15067 (March 8, 2013)
and Securities Exchange Act Release No. 69032, 78
FR 15080 (March 8, 2013).
14 15 U.S.C. 78s(b)(2).
15 17 CFR 200.30–3(a)(12).
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Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) 1 of the Securities
Exchange Act of 1934 (‘‘Act’’),2 and
Rule 19b–4 thereunder,3 a proposed rule
change 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 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
proposed rule change was published for
comment in the Federal Register on
March 4, 2013.4 On April 1, 2013, the
Exchange submitted Amendment No. 1
to the proposed rule change.5 The
Commission received one comment
letters on the proposal.6 This order
approves the proposed rule change on
an accelerated basis.
II. Background
On May 6, 2010, the U.S. equity
markets experienced a severe disruption
that, among other things, resulted in the
prices of a large number of individual
securities suddenly declining by
significant amounts in a very short time
period before suddenly reversing to
prices consistent with their pre-decline
levels.7 This severe price volatility led
to a large number of trades being
executed at temporarily depressed
prices, including many that were more
than 60% away from pre-decline prices.
One response to the events of May 6,
2010, was the development of the
single-stock circuit breaker pilot
program, which was implemented
1 15
U.S.C. 78s(b)(1).
U.S.C. 78a.
3 17 CFR 240.19b–4.
4 See Securities Exchange Act Release No. 69032,
78 FR 15080 (March 8, 2013).
5 In Amendment No. 1, the Exchange expanded
upon its rationale for its proposed changes
regarding the nullification and adjustment of
options transactions, agreed to provide the
Commission with relevant data to assess the impact
of the proposal, and clarified the length of the pilot
period related to such changes. Because the changes
made in Amendment No. 1 do not materially alter
the substance of the proposed rule change or raise
any novel regulatory issues, Amendment No. 1 is
not subject to notice and comment.
6 See Letter to Elizabeth M. Murphy, Secretary,
Commission, from Janet McGinness, Executive Vice
President and Corporate Secretary, General
Counsel, NYSE Markets, dated April 5, 2013
(‘‘NYSE Letter’’).
7 The events of May 6 are described more fully
in a joint report by the staffs of the Commodity
Futures Trading Commission (‘‘CFTC’’) and the
Commission. See Report of the Staffs of the CFTC
and SEC to the Joint Advisory Committee on
Emerging Regulatory Issues, ‘‘Findings Regarding
the Market Events of May 6, 2010,’’ dated
September 30, 2010, available at https://
www.sec.gov/news/studies/2010/marketeventsreport.pdf.
2 15
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through a series of rule filings by the
equity exchanges and by FINRA.8 The
single-stock circuit breaker was
designed to reduce extraordinary market
volatility in NMS stocks by imposing a
five-minute trading pause when a trade
was executed at a price outside of a
specified percentage threshold.9
To replace the single-stock circuit
breaker pilot program, the equity
exchanges filed a National Market
System Plan 10 pursuant to Section 11A
of the Act,11 and Rule 608 thereunder,12
which featured a ‘‘limit up-limit down’’
mechanism (as amended, the ‘‘Limit UpLimit Down Plan’’ or ‘‘Plan’’).
The Plan sets forth requirements that
are designed to prevent trades in
individual NMS stocks from occurring
outside of the specified price bands. The
price bands consist of a lower price
band and an upper price band for each
NMS stock. When one side of the
market for an individual security is
outside the applicable price band, i.e.,
the National Best Bid is below the
Lower Price Band, or the National Best
Offer is above the Upper Price band, the
Processors 13 are required to disseminate
such National Best Bid or National Best
Offer 14 with a flag identifying that quote
as non-executable. When the other side
of the market reaches the applicable
8 For further discussion on the development of
the single-stock circuit breaker pilot program, see
Securities Exchange Act Release No. 67091 (May
31, 2012), 77 FR 33498 (June 6, 2012) (‘‘Limit UpLimit Down Plan’’ or ‘‘Plan’’).
9 See Securities Exchange Act Release Nos. 62884
(September 10, 2010), 75 FR 56618 (September 16,
2010) and Securities Exchange Act Release No.
62883 (September 10, 2010), 75 FR 56608
(September 16, 2010) (SR–FINRA–2010–033)
(describing the ‘‘second stage’’ of the single-stock
circuit breaker pilot) and Securities Exchange Act
Release No. 64735 (June 23, 2011), 76 FR 38243
(June 29, 2011) (describing the ‘‘third stage’’ of the
single-stock circuit breaker pilot).
10 NYSE Euronext filed on behalf of New York
Stock Exchange LLC (‘‘NYSE’’), NYSE Amex LLC
(‘‘NYSE Amex’’), and NYSE Arca, Inc. (‘‘NYSE
Arca’’), and the parties to the proposed National
Market System Plan, BATS Exchange, Inc., BATS
Y-Exchange, Inc., Chicago Board Options Exchange,
Incorporated (‘‘CBOE’’), Chicago Stock Exchange,
Inc., EDGA Exchange, Inc., EDGX Exchange, Inc.,
Financial Industry Regulatory Authority, Inc.,
NASDAQ OMX BX, Inc., NASDAQ OMX PHLX
LLC, the Nasdaq Stock Market LLC, and National
Stock Exchange, Inc. (collectively with NYSE,
NYSE MKT, and NYSE Arca, the ‘‘Participants’’).
On May 14, 2012, NYSE Amex filed a proposed rule
change on an immediately effective basis to change
its name to NYSE MKT LLC (‘‘NYSE MKT’’). See
Securities Exchange Act Release No. 67037 (May
21, 2012) (SR–NYSEAmex–2012–32).
11 15 U.S.C. 78k–1.
12 17 CFR 242.608.
13 As used in the Plan, the Processor refers to the
single plan processor responsible for the
consolidation of information for an NMS Stock
pursuant to Rule 603(b) of Regulation NMS under
the Exchange Act. See id.
14 ‘‘National Best Bid’’ and ‘‘National Best Offer’’
has the meaning provided in Rule 600(b)(42) of
Regulation NMS under the Exchange Act. See id.
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price band, i.e., the National Best Offer
reaches the lower price band, or the
National Best Bid reaches the upper
price band, the market for an individual
security enters a 15-second Limit State,
and the Processors are required
disseminate such National Best Offer or
National Best Bid with an appropriate
flag identifying it as a Limit State
Quotation. Trading in that stock would
exit the 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 will declare a five-minute
trading pause, which is applicable to all
markets trading the security.
The Primary Listing Exchange may
also declare a trading pause when the
stock is in a Straddle State, i.e., the
National Best Bid (Offer) is below
(above) the Lower (Upper) Price Band
and the NMS Stock is not in a Limit
State. In order to declare a trading pause
in this scenario, the Primary Listing
Exchange must determine that trading
in that stock deviates from normal
trading characteristics such that
declaring a trading pause would support
the Plan’s goal to address extraordinary
market volatility.15
On May 31, 2012, the Commission
approved the Plan as a one-year pilot,
which shall be implemented in two
phases.16 The first phase of the Plan
shall be implemented beginning April 8,
2013.17
15 As set forth in more detail in the Plan, all
trading centers would be required to establish,
maintain, and enforce written policies and
procedures reasonably designed to prevent the
display of offers below the Lower Price Band and
bids above the Upper Price Band for an NMS Stock.
The Processors would be able to disseminate an
offer below the Lower Price Band or bid above the
Upper Price Band that nevertheless may be
inadvertently submitted despite such reasonable
policies and procedures, but with an appropriate
flag identifying it as non-executable; such bid or
offer would not be included in National Best Bid
or National Best Offer calculations. In addition, all
trading centers would be required to develop,
maintain, and enforce policies and procedures
reasonably designed to prevent trades at prices
outside the price bands, with the exception of
single-priced opening, reopening, and closing
transactions on the Primary Listing Exchange.
16 See ‘‘Limit Up-Limit Down Plan,’’ supra note
8. See also Securities Exchange Act Release No.
68953 (February 20, 2013), 78 FR 13113 (February
26, 2013) (Second Amendment to Limit Up-Limit
Down Plan by BATS Exchange, Inc., BATS
Y-Exchange, Inc., Chicago Board Options Exchange,
Inc., et al.) and Securities Exchange Act Release No.
69062 (March 7, 2013), 78 FR 15757 (March 12,
2013) (Third Amendment to Limit Up-Limit Down
Plan by BATS Exchange, Inc., BATS Y-Exchange,
Inc., Chicago Board Options Exchange, Inc., et al.)
17 See ‘‘Second Amendment to Limit Up-Limit
Down Plan,’’ supra note 16.
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III. Description of the Proposal
1. Treatment of Market and Stop Orders
The Exchange proposes to adopt new
Exchange Rule 6.65A to provide for how
the Exchange shall treat orders and
quotes in options overlying NMS stocks
if the underlying NMS stock is in a
Limit State and Straddle State.
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.18 According to the Exchange,
when the underlying enters a Limit or
Straddle State, there may not be a
reliable underlying reference price,
there may be a wide bid/ask quotation
differential in the option, and there may
be less liquidity in the options markets.
For these reasons, the Exchange stated
that permitting these order types to
execute when the underlying NMS stock
is in a Limit or Straddle State could lead
to executions at prices that may inferior
to the NBBO immediately before the
underlying entered the Limit or Straddle
State, and could add to volatility in the
options markets during times of
extraordinary market volatility.
22005
circumstance that would entitle that
Market Maker to relief.
The Exchange represented that this
change is necessary given the direct
relationship between the price of an
option and the price of the underlying
security, which may affect the quoting
behavior of Lead Market Makers and
Market Makers. For example, when the
underlying is in a Limit or Straddle
State, the ability of a Lead Market Maker
or Market Maker to hedge an options
position may be impaired, and they
modify their quoting behavior
accordingly. The Exchange also stated
that this aspect of its proposal would
facilitate transactions and preserve
market liquidity.
3. Declaration of Trading Halts
The Exchange also proposes to modify
its rules governing quoting obligations
for Lead Market Makers and Market
Makers. Specifically, the Exchange will
provide that, when evaluating whether
a Lead Market Maker has met its marketmaking quoting requirement pursuant to
Rule 6.37B(b) or a Market Maker has
met its market-making quoting
requirement pursuant to Rule 6.37B(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. For example,
if a Market Maker failed to meet its
monthly quoting obligations, and during
the review, it was determined that the
quoting that failed to meet the
obligation was for options on NMS
stocks with a significant number of
Straddle States and Limit States, then
that would be considered a mitigating
The Exchange also proposes to amend
Rule 6.65 to provide that the Exchange
would halt trading in all options
whenever the equities markets halt
trading in all NMS stocks due to
extraordinary market volatility, i.e.,
when a market-wide circuit breaker is
triggered.19 As part of this proposal, the
Exchange will also delete Rule 7.5,
which restates the equities rule
regarding market-wide trading halts
without reference to halting trading in
options. The Exchange noted that this
provision, which explicitly provides for
a trading halt when the equities market
is halted due to the market-wide circuit
breaker, is similar to a rule recently
amended by CBOE.20 The Exchange also
represented that the remaining
provisions in existing Rule 6.65
regarding Trading Halts and
Suspensions remain unchanged and
provide 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.
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 OTP
Holders and OTP Firms. The Exchange
represented that this Commentary is
nearly identical to that found in CBOE
18 See Rule 6.62(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 Rule 6.62(d)(2). The
Exchange stated 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.
19 Market-wide circuit breakers in the equities
market are different than a 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 Arca
Equities Rule 7.12. See NYSE Arca Equities Rule
7.12. The Exchange’s Rule regarding trading pauses
(also known as ‘‘single stock circuit breakers’’) is
found in Rule 6.65(b) for options and NYSE Arca
Equities Rule 7.11(b) for equities.
20 See CBOE Rule 6.3B.
2. Specialist and Market Maker Quoting
Obligations
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Rule 6.3B and current Commentary .03
to Exchange Rule 7.5.21
4. Obvious Error
In connection with the
implementation of the Plan, the
Exchange proposes to adopt new Rule
6.65A(c) to exclude electronic
transactions in stock options that
overlay an NMS stock that occur during
a Limit State or Straddle State from the
provisions of Rule 6.87(a) for Obvious
Errors or Rule 6.87(d) for Catastrophic
Errors. Additionally, the Exchange
proposes to retain the ability to review
electronic transactions that occur during
a Limit State or Straddle State by
Exchange motion pursuant to Rule
6.87(b)(3).22
Rule 6.87 provides a process by which
a transaction may be nullified or
adjusted when the execution price of a
transaction deviates from the option’s
theoretical price by a certain amount.
Generally, the theoretical price of an
option is the National Best Bid and
Offer (‘‘NBBO’’) of the option. In certain
circumstances, Trading Officials have
the discretion to determine the
theoretical price.23
21 See
CBOE Rule 6.3B.
6.87(b)(3) provides that in the interest of
maintaining a fair and orderly market and for the
protection of investors, the Chief Executive Officer
of NYSE Arca, Inc. (‘‘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 Rules 6.87(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 Rule 6.87(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 OTP Holder
affected by a determination to nullify or adjust a
transaction pursuant to this paragraph (3) may
appeal such determination in accordance with Rule
6.87(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
6.87(a)(3), (a)(4), (a)(5) or (a)(6), no additional relief
may be granted under this provision.
23 Specifically, under Rules 6.87(a)(2) and
6.87(d)(2), the theoretical price is determined in one
of two ways: (i) If the series is traded on at least
one other options exchange, the last bid price with
respect to an erroneous sell transaction and the last
offer price with respect to an erroneous buy
transaction, just prior to the trade, that comprise the
NBBO as disseminated by the Options Price
Reporting Authority; or (ii) as determined by a
designated Trading Official, if there are not quotes
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22 Rule
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The Exchange believes maintaining
the current operation of Rules 6.87(a)
and 6.87(d) during a Limit State or
Straddle State would be undesirable.
According to the Exchange, during
periods of extraordinary volatility, the
review period 24 for transactions under
the Obvious Error and Catastrophic
Error provisions would allow market
participants to re-evaluate a transaction
that occurred during a Limit State or
Straddle State at a later time, which is
potentially unfair to other market
participants and would discourage
market participants from providing
liquidity during Limit States or Straddle
States. The Exchange believes that
market participants should not be able
to benefit from the time frame to review
their transactions in these situations.
The Exchange also noted that, barring
this proposed rule change, the
provisions of Rule 6.87(a)(2)(B) and
6.87(d)(2)(B) 25 would likely apply in
many instances during Limit or Straddle
States. 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 value should be for an
option when the underlying NMS stock
has an unexecutable bid or offer or both.
The Exchange notes that the theoretical
price in this context would be
subjective. Ultimately, 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, thus promoting fair and
orderly markets.
In Amendment No. 1, the Exchange
also noted that application of current
Rules 6.87(a) and 6.87(d) would be
unreliable during a Limit State or
Straddle State. The Exchange believes
that application of Rules 6.87(a) and
6.87(d) to electronic transactions
occurring during a Limit or Straddle
State would be impracticable given the
lack of a reliable national best bid or
offer in the options market during Limit
States and Straddle States and that the
for comparison purposes, or if the bid/ask
differential of the national best bid and offer for the
affected series just prior to the erroneous
transaction was at least two times the permitted
bid/ask differential pursuant to Rule 6.37(b)(1)(A)–
(E).
24 Pursuant to Rule 6.87(b), market participants
may have up to 20 minutes to notify the Exchange
of a transaction that may be an Obvious Error.
Pursuant to Rule 6.87(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.
25 These provisions give the Exchange Trading
Official the discretion to determine the theoretical
price of an option for purposes of analyzing
whether a transaction qualifies for nullification or
adjustment under Rule 6.87.
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resulting actions may not be appropriate
given market conditions. On balance,
the Exchange believes that removing the
potential inequity of nullifying or
adjusting executions occurring during
Limit States or Straddle States
outweighs any potential benefits from
applying Rules 6.87(a) and 6.87(d)
during such unusual market conditions.
In response to these concerns, the
Exchange proposes to adopt Rule
6.65A(c) to provide that electronic
transactions are not subject to an
obvious error or catastrophic error
review pursuant to Rules 6.87(a) and
6.87(d) during a Limit State or Straddle
State. Proposed Rule 6.65A(c) will also
include a qualification that nothing in
the proposed rule change will prevent
electronic trades from being reviewed
on Exchange motion pursuant to Rule
6.87(b)(3).26 According to the Exchange,
this safeguard will provide the
flexibility to act when necessary and
appropriate, 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. The right to review
on Exchange motion electronic
transactions that occur during a Limit
State or Straddle State under this
provision, according to the Exchange,
would enable the Exchange to account
for unforeseen circumstances that result
in obvious or catastrophic errors for
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 also noted that its
existing order protections that reject
limit orders that are priced too far
through the NBBO would continue to
apply during Limit and Straddle States.
Additionally, the Exchange notes that
while in Limit States and Straddle
States, only limit orders will be
accepted, affirming that the participant
is willing to accept an execution up to
the limit price. Further, according to the
Exchange, 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 with
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 in
compliance with the aforementioned
26 The Exchange stated that it received informal
feedback from a number of market participants,
including liquidity providers and order flow
providers, that has generally been supportive of the
Exchange’s proposed rule change.
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Plan could harm liquidity and also
create an advantage to either side of an
execution depending on the future
movement of the underlying stock.
IV. Discussion and Commission
Findings
After careful review, the Commission
finds that the proposed rule change is
consistent with the requirements of the
Act and rules and regulations
thereunder applicable to a national
securities exchange.27 In particular, the
Commission finds that the proposed
rule change is consistent with Section
6(b)(5) of the Act,28 which, among other
things, requires a national securities
exchange to be so organized and have
the capacity to be able to carry out the
purposes of the Act and to enforce
compliance by its members and persons
associated with its members with the
provisions of the Act, the rules and
regulations thereunder, and the rules of
the exchange, and 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 regulation, clearing, settling,
processing information with respect to,
and facilitating transactions in
securities, to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.
With respect to the proposal to reject
market orders and to not elect Stop
Orders when the underlying is in a
Limit or Straddle State, the Exchange
stated that permitting these order types
to execute during these times could
contribute to market volatility and could
have the potential to lead to poor
executions, as spreads in the options
markets might have widened in
response to the underlying entering a
Limit or Straddle State. The
Commission believes that rejecting
market orders and not electing Stop
Orders during these times will provide
certainty to the treatment of Market
Orders and Stop Orders during these
times. To the extent that the spreads in
the options market may widen as a
result of the underlying entering a Limit
or Straddle State, this proposal may also
prevent market and Stop Orders from
receiving executions at unintended
prices during these times.
With respect to deeming the
frequency and duration with which the
underlying security is in a Limit or
27 In approving the proposed rule changes, the
Commission has considered their impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
28 15 U.S.C. 78f(b).
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16:47 Apr 11, 2013
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Straddle State a mitigating circumstance
when evaluating the adherence of
Specialists and Market Makers to their
respective quoting obligations, the
Commission believes that this proposal
represents an appropriate response to
the potential effect on the options
markets of the underlying entering a
Limit or Straddle State. During a limit
up-limit down state, there may not be a
reliable price for the underlying security
to serve as a benchmark for market
makers to price options. In addition, the
absence of an executable bid or offer for
the underlying security will make it
more difficult for market makers to
hedge the purchase or sale of an option.
Given these significant changes to the
normal operating conditions of market
makers, the Commission finds that the
Exchange’s proposal in these limited
circumstances is consistent with the
Act.
The Commission notes, however, that
the Plan was approved on a pilot basis
and its Participants will monitor how it
is functioning in the equity markets
during the pilot period. To this end, the
Commission expects that, upon
implementation of the Plan, the
Exchange will continue monitoring this
amendment to its rules and determine if
any necessary adjustments are required
to ensure that they remain consistent
with the Act.
The Commission also believes that the
proposal to halt trading in the options
market when trading in the equities
markets has been halted as a result of
the market-wide circuit breaker being
triggered, the provision addressing reopening of trading following such a halt,
and the corresponding deletion of Rule
7.5, is consistent with the Act. The
proposal to halt trading as a result of the
underlying triggering a market-wide
circuit breaker is reasonably designed to
ensure that the Exchange halts trading
in all options whenever the equities
markets initiate a trading halt as a result
of the market-wide circuit breaker,
thereby minimizing volatility in the
options markets. This provision is also
similar to a corresponding CBOE rule.
Rule 7.5 restates the equities rule
regarding market-wide trading halts
without reference to halting trading in
options, and the adoption of Rule
6.65(e) should address how the
exchange handles trading in response to
the market-wide circuit breaker being
triggered in the equities markets.
Finally, the provision addressing reopening of trading following such a halt
is substantively similar to CBOE Rule
6.3B, and the commentary contained in
Rule 7.5.
The Commission finds that the
Exchange’s proposal to suspend certain
PO 00000
Frm 00103
Fmt 4703
Sfmt 4703
22007
aspects of Rule 6.87 during a Limit State
or Straddle State is consistent with the
requirements of the Act and the rules
and regulations thereunder applicable to
a national securities exchange.29
Specifically, the Commission finds that
the proposal is consistent with Section
6(b)(5) of the Act,30 in that it is designed
to prevent fraudulent and manipulative
acts and practices, promote just and
equitable principles of trade, foster
cooperation and coordination with
persons engaged in regulating, clearing,
settling, processing information with
respect to, and facilitating transactions
in securities, remove impediments to
and perfect the mechanism of a free and
open market and a national market
system, and, in general, protect
investors and the public interest.
In Amendment No. 1, the Exchange
notes its belief that suspending certain
aspects of Rule 6.87 during a Limit State
or Straddle State will ensure that limit
orders that are filled during a Limit or
Straddle State will 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 Exchange states that it
believes the application of the current
rule would be impracticable given what
it perceives will be the lack of a reliable
NBBO in the options market during
Limit States and Straddle States, and
that the resulting actions (i.e., nullified
trades or adjusted prices) may not be
appropriate given market conditions. In
addition, given the Exchange’s view that
options prices during Limit States or
Straddle States may deviate
substantially from those available
shortly following the Limit State or
Straddle State, the Exchange believes
that providing market participants time
to re-evaluate a transaction executed
during a Limit or Straddle State will
create an unreasonable adverse selection
opportunity that will discourage
participants from providing liquidity
during Limit States or Straddle States.
Ultimately, 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 during Limit States and
Straddle States, thus promoting fair and
orderly markets.
The Exchange, however, has proposed
this rule change based on its
29 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
30 15 U.S.C. 78f(b)(5).
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Federal Register / Vol. 78, No. 71 / Friday, April 12, 2013 / Notices
expectations about the quality of the
options market during Limit States and
Straddle States. In Amendment No. 1,
the Exchange states, for example, that it
believes that application of the obvious
and catastrophic error rules would be
impracticable given the potential for
lack of a reliable NBBO in the options
market during Limit States and Straddle
States. Given the Exchange’s recognition
of the potential for unreliable NBBOs in
the options markets during Limit States
and Straddle States, the Commission is
concerned about the extent to which
investors may rely to their detriment on
the quality of quotations and price
discovery in the options markets during
these periods. This concern is
heightened by the Exchange’s proposal
to exclude trades that occur during a
Limit State or Straddle State from the
obvious error or catastrophic error
review procedures pursuant to Rules
6.87(a) or 6.87(d). The Commission
urges investors and market professionals
to exercise caution when considering
trading options under these
circumstances. Broker-dealers also
should be mindful of their obligations to
customers that may or may not be aware
of specific options market conditions or
the underlying stock market conditions
when placing their orders.
While the Commission remains
concerned about the quality of the
options market during the Limit and
Straddle States, and the potential
impact on investors of executing in this
market without the protections of the
obvious or catastrophic error rules that
are being suspended during the Limit
and Straddle States, it believes that
certain aspects of the proposal could
help mitigate those concerns.
First, despite the removal of obvious
and catastrophic error protection during
Limit States and Straddle States, the
Exchange states that there are additional
measures in place designed to protect
investors. For example, the Exchange
states that by rejecting market orders
and stop orders, and cancelling pending
market orders and stop orders, only
those orders with a limit price will be
executed during a Limit State or
Straddle State. Additionally, the
Exchange notes the existence of SEC
Rule 15c3–5 requiring broker-dealers to
have controls and procedures in place
that are reasonably designed to prevent
the entry of erroneous orders. Finally,
with respect to limit orders that will be
executable during Limit States and
Straddle States, the Exchange states that
it applies price checks to limit orders
that are priced sufficiently far through
the NBBO. Therefore, on balance, the
Exchange believes that removing the
potential inequity of nullifying or
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16:47 Apr 11, 2013
Jkt 229001
adjusting executions occurring during
Limit States or Straddle States
outweighs any potential benefits from
applying certain provisions during such
unusual market conditions.
The Exchange also believes that the
aspect of the proposed rule change that
will continue to allow the Exchange to
review on its own motion electronic
trades that occur during a Limit State or
a Straddle State is consistent with the
Act because it would provide flexibility
for the Exchange to act when necessary
and appropriate to nullify or adjust a
transaction and will enable the
Exchange to account for unforeseen
circumstances that result in obvious or
catastrophic errors for 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. In Amendment No. 1, the
Exchange represents that it recognizes
that this provision is limited and that it
will administer the provision in a
manner that is consistent with the
principles of the Act. In addition, the
Exchange represents that it will create
and maintain records relating to the use
of the authority to act on its own motion
during a Limit State or Straddle State.
Finally, the Exchange has proposed
that the changes be implemented on a
one year pilot basis. The Commission
believes that it is important to
implement the proposal as a pilot. The
one year pilot period will allow the
Exchange time to assess the impact of
the Plan on the options marketplace and
allow the Commission to further
evaluate the effect of the proposal prior
to any proposal or determination to
make the changes permanent. To this
end, pursuant to Amendment No. 1, the
Exchange has committed to: (1) Evaluate
the options market quality during Limit
States and Straddle States; (2) assess the
character of incoming order flow and
transactions during Limit States and
Straddle States; and (3) review any
complaints from members and their
customers concerning executions during
Limit States and Straddle States.
Additionally, the Exchange has agreed
to provide to the Commission with data
requested to evaluate the impact of the
elimination of the obvious error rule,
including data relevant to assessing the
various analyses noted above. On April
5, 2013, NYSE Euronext submitted a
letter on behalf of the Exchange, stating
that the Exchange will provide specific
data to the Commission and the public
and certain analysis to the Commission
to evaluate the impact of Limit States
and Straddle States on liquidity and
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Frm 00104
Fmt 4703
Sfmt 4703
market quality in the options markets.31
This will allow the Commission, the
Exchange, and other interested parties
to evaluate the quality of the options
markets during Limit States and
Straddle States and to assess whether
the additional protections noted by the
Exchange are sufficient safeguards
against the submission of erroneous
trades, and whether the Exchange’s
proposal appropriately balances the
protection afforded to an erroneous
order sender against the potential
hazards associated with providing
market participants additional time to
review trades submitted during a Limit
State or Straddle State.
In addition, the Commission finds
good cause, pursuant to Section 19(b)(2)
of the Act 32 for approving the proposed
rule change on an accelerated basis.
This proposal is related to the Plan,
which will become operative on April 8,
2013, and aspects of the proposal, such
as rejecting market orders and not
electing Stop Orders during the Limit
and Straddle States, are designed to
31 In particular, the Exchange represented that, at
least two months prior to the end of the one year
pilot period of proposed Rule 6.65A(c), it would
provide to the Commission an evaluation of (i) the
statistical and economic impact of Straddle States
on liquidity and market quality in the options
market and (ii) whether the lack of obvious error
rules in effect during the Limit States and Straddle
States are problematic. In addition, the Exchange
represented that each month following the adoption
of the proposed rule change it would provide to the
Commission and the public a dataset containing
certain data elements for each Limit State and
Straddle State in optionable stocks. The Exchange
stated that the options included in the dataset will
be those that meet the following conditions: (i) The
options are more than 20% in the money (strike
price remains greater than 80% of the last stock
trade price for calls and strike price remains greater
than 120% of the last stock trade price for puts
when the Limit State or Straddle State is reached);
(ii) the option has at least two trades during the
Limit State or Straddle State; and (iii) the top ten
options (as ranked by overall contract volume on
that day) meeting the conditions listed above. For
each of those options affected, each dataset will
include, among other information: stock symbol,
option symbol, time at the start of the Limit State
or Straddle State and an indicator for whether it is
a Limit State or Straddle State. For activity on the
Exchange in the relevant options, the Exchange has
agreed to provide executed volume, time-weighted
quoted bid-ask spread, time-weighted average
quoted depth at the bid, time-weighted average
quoted depth at the offer, high execution price, low
execution price, number of trades for which a
request for review for error was received during
Limit States and Straddle States, an indicator
variable for whether those options outlined above
have a price change exceeding 30% during the
underlying stock’s Limit State or Straddle State
compared to the last available option price as
reported by OPRA before the start of the Limit or
Straddle state (1 if observe 30% and 0 otherwise),
and another indicator variable for whether the
option price within five minutes of the underlying
stock leaving the Limit State or Straddle State (or
halt if applicable) is 30% away from the price
before the start of the Limit State or Straddle State.
See NYSE Letter, supra note 6.
32 15 U.S.C. 78s(b)(2)
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Federal Register / Vol. 78, No. 71 / Friday, April 12, 2013 / Notices
prevent such orders from receiving poor
executions during those times.33 In
granting accelerated approval, the
proposed rule change, and any
attendant benefits, will take effect upon
the Plan’s implementation date.
Accordingly, the Commission finds that
good cause exists for approving the
proposed rule change on an accelerated
basis.
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act 34 that the
proposed rule change (SR–NYSEArca–
2013–10) is approved on an accelerated
basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.35
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–08604 Filed 4–11–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–69332; File No. SR–Phlx–
2013–21]
Self-Regulatory Organizations;
NASDAQ OMX PHLX LLC; Order
Approving, on an Accelerated Basis,
Proposed Rule Change To Adopt New
Exchange Rule 1047(f)(iv) Regarding
Quoting Obligations
April 5, 2013.
I. Introduction
On March 5, 2013, NASDAQ OMX
PHLX LLC (‘‘Phlx’’ or ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1)1 of the Securities
Exchange Act of 1934 (‘‘Act’’),2 and
Rule 19b–4 thereunder,3 a proposed rule
change to adopt new Exchange Rule
1047(f)(iv) regarding quoting
obligations. The proposed rule change
was published for comment in the
Federal Register on March 13, 2013.4
The Commission received no comment
letters on the proposal. This order
approves the proposed rule change on
an accelerated basis.
mstockstill on DSK6TPTVN1PROD with NOTICES
II. Background
On May 6, 2010, the U.S. equity
markets experienced a severe disruption
33 See
supra note 17.
U.S.C. 78f(b)(2).
35 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b-4.
4 See Securities Exchange Act Release No. 69068
(March 7, 2013), 78 FR 16001.
34 15
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16:47 Apr 11, 2013
Jkt 229001
that, among other things, resulted in the
prices of a large number of individual
securities suddenly declining by
significant amounts in a very short time
period before suddenly reversing to
prices consistent with their pre-decline
levels.5 This severe price volatility led
to a large number of trades being
executed at temporarily depressed
prices, including many that were more
than 60% away from pre-decline prices.
One response to the events of May 6,
2010, was the development of the
single-stock circuit breaker pilot
program, which was implemented
through a series of rule filings by the
equity exchanges and by FINRA.6 The
single-stock circuit breaker was
designed to reduce extraordinary market
volatility in NMS stocks by imposing a
five-minute trading pause when a trade
was executed at a price outside of a
specified percentage threshold.7
To replace the single-stock circuit
breaker pilot program, the equity
exchanges filed a National Market
System Plan 8 pursuant to Section 11A
of the Act,9 and Rule 608 thereunder,10
which featured a ‘‘limit up-limit down’’
5 The events of May 6 are described more fully
in a joint report by the staffs of the Commodity
Futures Trading Commission (‘‘CFTC’’) and the
Commission. See Report of the Staffs of the CFTC
and SEC to the Joint Advisory Committee on
Emerging Regulatory Issues, ‘‘Findings Regarding
the Market Events of May 6, 2010,’’ dated
September 30, 2010, available at https://
www.sec.gov/news/studies/2010/marketeventsreport.pdf.
6 For further discussion on the development of
the single-stock circuit breaker pilot program, see
Securities Exchange Act Release No. 67091 (May
31, 2012), 77 FR 33498 (June 6, 2012) (‘‘Limit UpLimit Down Plan’’ or ‘‘Plan’’).
7 See Securities Exchange Act Release Nos. 62884
(September 10, 2010), 75 FR 56618 (September 16,
2010) and Securities Exchange Act Release No.
62883 (September 10, 2010), 75 FR 56608
(September 16, 2010) (SR–FINRA–2010–033)
(describing the ‘‘second stage’’ of the single-stock
circuit breaker pilot) and Securities Exchange Act
Release No. 64735 (June 23, 2011), 76 FR 38243
(June 29, 2011) (describing the ‘‘third stage’’ of the
single-stock circuit breaker pilot).
8 NYSE Euronext filed on behalf of New York
Stock Exchange LLC (‘‘NYSE’’), NYSE Amex LLC
(‘‘NYSE Amex’’), and NYSE Arca, Inc. (‘‘NYSE
Arca’’), and the parties to the proposed National
Market System Plan, BATS Exchange, Inc., BATS YExchange, Inc., Chicago Board Options Exchange,
Incorporated (‘‘CBOE’’), Chicago Stock Exchange,
Inc., EDGA Exchange, Inc., EDGX Exchange, Inc.,
Financial Industry Regulatory Authority, Inc.,
NASDAQ OMX BX, Inc., NASDAQ OMX PHLX
LLC, the Nasdaq Stock Market LLC, and National
Stock Exchange, Inc. (collectively with NYSE,
NYSE MKT, and NYSE Arca, the ‘‘Participants’’).
On May 14, 2012, NYSE Amex filed a proposed rule
change on an immediately effective basis to change
its name to NYSE MKT LLC (‘‘NYSE MKT’’). See
Securities Exchange Act Release No. 67037 (May
21, 2012) (SR–NYSEAmex–2012–32).
9 15 U.S.C. 78k–1.
10 17 CFR 242.608.
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Frm 00105
Fmt 4703
Sfmt 4703
22009
mechanism (as amended, the ‘‘Limit UpLimit Down Plan’’ or ‘‘Plan’’).
The Plan sets forth requirements that
are designed to prevent trades in
individual NMS stocks from occurring
outside of the specified price bands. The
price bands consist of a lower price
band and an upper price band for each
NMS stock. When one side of the
market for an individual security is
outside the applicable price band, i.e.,
the National Best Bid is below the
Lower Price Band, or the National Best
Offer is above the Upper Price band, the
Processors 11 are required to disseminate
such National Best Bid or National Best
Offer 12 with a flag identifying that quote
as non-executable. When the other side
of the market reaches the applicable
price band, i.e., the National Best Offer
reaches the lower price band, or the
National Best Bid reaches the upper
price band, the market for an individual
security enters a 15-second Limit State,
and the Processors are required
disseminate such National Best Offer or
National Best Bid with an appropriate
flag identifying it as a Limit State
Quotation. Trading in that stock would
exit the 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 will declare a five-minute
trading pause, which is applicable to all
markets trading the security.
The Primary Listing Exchange may
also declare a trading pause when the
stock is in a Straddle State, i.e., the
National Best Bid (Offer) is below
(above) the Lower (Upper) Price Band
and the NMS Stock is not in a Limit
State. In order to declare a trading pause
in this scenario, the Primary Listing
Exchange must determine that trading
in that stock deviates from normal
trading characteristics such that
declaring a trading pause would support
the Plan’s goal to address extraordinary
market volatility.13
11 As used in the Plan, the Processor refers to the
single plan processor responsible for the
consolidation of information for an NMS Stock
pursuant to Rule 603(b) of Regulation NMS under
the Exchange Act. See id.
12 ‘‘National Best Bid’’ and ‘‘National Best Offer’’
has the meaning provided in Rule 600(b)(42) of
Regulation NMS under the Exchange Act. See id.
13 As set forth in more detail in the Plan, all
trading centers would be required to establish,
maintain, and enforce written policies and
procedures reasonably designed to prevent the
display of offers below the Lower Price Band and
bids above the Upper Price Band for an NMS Stock.
The Processors would be able to disseminate an
offer below the Lower Price Band or bid above the
Upper Price Band that nevertheless may be
inadvertently submitted despite such reasonable
E:\FR\FM\12APN1.SGM
Continued
12APN1
]]>Agencies
[Federal Register Volume 78, Number 71 (Friday, April 12, 2013)]
[Notices]
[Pages 22004-22009]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-08604]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69340; File No. SR-NYSEArca-2013-10]
Self-Regulatory Organizations; NYSE Arca LLC; Order Approving, on
an Accelerated Basis, Proposed Rule Change, as Modified by Amendment
No. 1, Adopting New Exchange Rule 6.65A 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 6.65 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
April 8, 2013.
I. Introduction
On February 26, 2013, NYSE Arca, Inc. (the ``Exchange'' or ``NYSE
Arca'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) \1\ of the Securities
Exchange Act of 1934 (``Act''),\2\ and Rule 19b-4 thereunder,\3\ a
proposed rule change 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
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 proposed rule change
was published for comment in the Federal Register on March 4, 2013.\4\
On April 1, 2013, the Exchange submitted Amendment No. 1 to the
proposed rule change.\5\ The Commission received one comment letters on
the proposal.\6\ This order approves the proposed rule change on an
accelerated basis.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
\4\ See Securities Exchange Act Release No. 69032, 78 FR 15080
(March 8, 2013).
\5\ In Amendment No. 1, the Exchange expanded upon its rationale
for its proposed changes regarding the nullification and adjustment
of options transactions, agreed to provide the Commission with
relevant data to assess the impact of the proposal, and clarified
the length of the pilot period related to such changes. Because the
changes made in Amendment No. 1 do not materially alter the
substance of the proposed rule change or raise any novel regulatory
issues, Amendment No. 1 is not subject to notice and comment.
\6\ See Letter to Elizabeth M. Murphy, Secretary, Commission,
from Janet McGinness, Executive Vice President and Corporate
Secretary, General Counsel, NYSE Markets, dated April 5, 2013
(``NYSE Letter'').
---------------------------------------------------------------------------
II. Background
On May 6, 2010, the U.S. equity markets experienced a severe
disruption that, among other things, resulted in the prices of a large
number of individual securities suddenly declining by significant
amounts in a very short time period before suddenly reversing to prices
consistent with their pre-decline levels.\7\ This severe price
volatility led to a large number of trades being executed at
temporarily depressed prices, including many that were more than 60%
away from pre-decline prices. One response to the events of May 6,
2010, was the development of the single-stock circuit breaker pilot
program, which was implemented through a series of rule filings by the
equity exchanges and by FINRA.\8\ The single-stock circuit breaker was
designed to reduce extraordinary market volatility in NMS stocks by
imposing a five-minute trading pause when a trade was executed at a
price outside of a specified percentage threshold.\9\
---------------------------------------------------------------------------
\7\ The events of May 6 are described more fully in a joint
report by the staffs of the Commodity Futures Trading Commission
(``CFTC'') and the Commission. See Report of the Staffs of the CFTC
and SEC to the Joint Advisory Committee on Emerging Regulatory
Issues, ``Findings Regarding the Market Events of May 6, 2010,''
dated September 30, 2010, available at https://www.sec.gov/news/studies/2010/marketevents-report.pdf.
\8\ For further discussion on the development of the single-
stock circuit breaker pilot program, see Securities Exchange Act
Release No. 67091 (May 31, 2012), 77 FR 33498 (June 6, 2012)
(``Limit Up-Limit Down Plan'' or ``Plan'').
\9\ See Securities Exchange Act Release Nos. 62884 (September
10, 2010), 75 FR 56618 (September 16, 2010) and Securities Exchange
Act Release No. 62883 (September 10, 2010), 75 FR 56608 (September
16, 2010) (SR-FINRA-2010-033) (describing the ``second stage'' of
the single-stock circuit breaker pilot) and Securities Exchange Act
Release No. 64735 (June 23, 2011), 76 FR 38243 (June 29, 2011)
(describing the ``third stage'' of the single-stock circuit breaker
pilot).
---------------------------------------------------------------------------
To replace the single-stock circuit breaker pilot program, the
equity exchanges filed a National Market System Plan \10\ pursuant to
Section 11A of the Act,\11\ and Rule 608 thereunder,\12\ which featured
a ``limit up-limit down'' mechanism (as amended, the ``Limit Up-Limit
Down Plan'' or ``Plan'').
---------------------------------------------------------------------------
\10\ NYSE Euronext filed on behalf of New York Stock Exchange
LLC (``NYSE''), NYSE Amex LLC (``NYSE Amex''), and NYSE Arca, Inc.
(``NYSE Arca''), and the parties to the proposed National Market
System Plan, BATS Exchange, Inc., BATS Y-Exchange, Inc., Chicago
Board Options Exchange, Incorporated (``CBOE''), Chicago Stock
Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial
Industry Regulatory Authority, Inc., NASDAQ OMX BX, Inc., NASDAQ OMX
PHLX LLC, the Nasdaq Stock Market LLC, and National Stock Exchange,
Inc. (collectively with NYSE, NYSE MKT, and NYSE Arca, the
``Participants''). On May 14, 2012, NYSE Amex filed a proposed rule
change on an immediately effective basis to change its name to NYSE
MKT LLC (``NYSE MKT''). See Securities Exchange Act Release No.
67037 (May 21, 2012) (SR-NYSEAmex-2012-32).
\11\ 15 U.S.C. 78k-1.
\12\ 17 CFR 242.608.
---------------------------------------------------------------------------
The Plan sets forth requirements that are designed to prevent
trades in individual NMS stocks from occurring outside of the specified
price bands. The price bands consist of a lower price band and an upper
price band for each NMS stock. When one side of the market for an
individual security is outside the applicable price band, i.e., the
National Best Bid is below the Lower Price Band, or the National Best
Offer is above the Upper Price band, the Processors \13\ are required
to disseminate such National Best Bid or National Best Offer \14\ with
a flag identifying that quote as non-executable. When the other side of
the market reaches the applicable
[[Page 22005]]
price band, i.e., the National Best Offer reaches the lower price band,
or the National Best Bid reaches the upper price band, the market for
an individual security enters a 15-second Limit State, and the
Processors are required disseminate such National Best Offer or
National Best Bid with an appropriate flag identifying it as a Limit
State Quotation. Trading in that stock would exit the 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 will declare a five-minute trading pause, which is applicable
to all markets trading the security.
---------------------------------------------------------------------------
\13\ As used in the Plan, the Processor refers to the single
plan processor responsible for the consolidation of information for
an NMS Stock pursuant to Rule 603(b) of Regulation NMS under the
Exchange Act. See id.
\14\ ``National Best Bid'' and ``National Best Offer'' has the
meaning provided in Rule 600(b)(42) of Regulation NMS under the
Exchange Act. See id.
---------------------------------------------------------------------------
The Primary Listing Exchange may also declare a trading pause when
the stock is in a Straddle State, i.e., the National Best Bid (Offer)
is below (above) the Lower (Upper) Price Band and the NMS Stock is not
in a Limit State. In order to declare a trading pause in this scenario,
the Primary Listing Exchange must determine that trading in that stock
deviates from normal trading characteristics such that declaring a
trading pause would support the Plan's goal to address extraordinary
market volatility.\15\
---------------------------------------------------------------------------
\15\ As set forth in more detail in the Plan, all trading
centers would be required to establish, maintain, and enforce
written policies and procedures reasonably designed to prevent the
display of offers below the Lower Price Band and bids above the
Upper Price Band for an NMS Stock. The Processors would be able to
disseminate an offer below the Lower Price Band or bid above the
Upper Price Band that nevertheless may be inadvertently submitted
despite such reasonable policies and procedures, but with an
appropriate flag identifying it as non-executable; such bid or offer
would not be included in National Best Bid or National Best Offer
calculations. In addition, all trading centers would be required to
develop, maintain, and enforce policies and procedures reasonably
designed to prevent trades at prices outside the price bands, with
the exception of single-priced opening, reopening, and closing
transactions on the Primary Listing Exchange.
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On May 31, 2012, the Commission approved the Plan as a one-year
pilot, which shall be implemented in two phases.\16\ The first phase of
the Plan shall be implemented beginning April 8, 2013.\17\
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\16\ See ``Limit Up-Limit Down Plan,'' supra note 8. See also
Securities Exchange Act Release No. 68953 (February 20, 2013), 78 FR
13113 (February 26, 2013) (Second Amendment to Limit Up-Limit Down
Plan by BATS Exchange, Inc., BATS Y-Exchange, Inc., Chicago Board
Options Exchange, Inc., et al.) and Securities Exchange Act Release
No. 69062 (March 7, 2013), 78 FR 15757 (March 12, 2013) (Third
Amendment to Limit Up-Limit Down Plan by BATS Exchange, Inc., BATS
Y-Exchange, Inc., Chicago Board Options Exchange, Inc., et al.)
\17\ See ``Second Amendment to Limit Up-Limit Down Plan,'' supra
note 16.
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III. Description of the Proposal
1. Treatment of Market and Stop Orders
The Exchange proposes to adopt new Exchange Rule 6.65A to provide
for how the Exchange shall treat orders and quotes in options overlying
NMS stocks if the underlying NMS stock is in a Limit State and Straddle
State. 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.\18\
According to the Exchange, when the underlying enters a Limit or
Straddle State, there may not be a reliable underlying reference price,
there may be a wide bid/ask quotation differential in the option, and
there may be less liquidity in the options markets. For these reasons,
the Exchange stated that permitting these order types to execute when
the underlying NMS stock is in a Limit or Straddle State could lead to
executions at prices that may inferior to the NBBO immediately before
the underlying entered the Limit or Straddle State, and could add to
volatility in the options markets during times of extraordinary market
volatility.
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\18\ See Rule 6.62(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 Rule 6.62(d)(2). The Exchange stated
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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2. Specialist and Market Maker Quoting Obligations
The Exchange also proposes to modify its rules governing quoting
obligations for Lead Market Makers and Market Makers. Specifically, the
Exchange will provide that, when evaluating whether a Lead Market Maker
has met its market-making quoting requirement pursuant to Rule 6.37B(b)
or a Market Maker has met its market-making quoting requirement
pursuant to Rule 6.37B(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. For example, if a Market Maker failed to meet its
monthly quoting obligations, and during the review, it was determined
that the quoting that failed to meet the obligation was for options on
NMS stocks with a significant number of Straddle States and Limit
States, then that would be considered a mitigating circumstance that
would entitle that Market Maker to relief.
The Exchange represented that this change is necessary given the
direct relationship between the price of an option and the price of the
underlying security, which may affect the quoting behavior of Lead
Market Makers and Market Makers. For example, when the underlying is in
a Limit or Straddle State, the ability of a Lead Market Maker or Market
Maker to hedge an options position may be impaired, and they modify
their quoting behavior accordingly. The Exchange also stated that this
aspect of its proposal would facilitate transactions and preserve
market liquidity.
3. Declaration of Trading Halts
The Exchange also proposes to amend Rule 6.65 to provide that the
Exchange would halt trading in all options whenever the equities
markets halt trading in all NMS stocks due to extraordinary market
volatility, i.e., when a market-wide circuit breaker is triggered.\19\
As part of this proposal, the Exchange will also delete Rule 7.5, which
restates the equities rule regarding market-wide trading halts without
reference to halting trading in options. The Exchange noted that this
provision, which explicitly provides for a trading halt when the
equities market is halted due to the market-wide circuit breaker, is
similar to a rule recently amended by CBOE.\20\ The Exchange also
represented that the remaining provisions in existing Rule 6.65
regarding Trading Halts and Suspensions remain unchanged and provide 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.
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\19\ Market-wide circuit breakers in the equities market are
different than a 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 Arca Equities Rule 7.12.
See NYSE Arca Equities Rule 7.12. The Exchange's Rule regarding
trading pauses (also known as ``single stock circuit breakers'') is
found in Rule 6.65(b) for options and NYSE Arca Equities Rule
7.11(b) for equities.
\20\ See CBOE Rule 6.3B.
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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 OTP Holders and OTP Firms. The
Exchange represented that this Commentary is nearly identical to that
found in CBOE
[[Page 22006]]
Rule 6.3B and current Commentary .03 to Exchange Rule 7.5.\21\
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\21\ See CBOE Rule 6.3B.
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4. Obvious Error
In connection with the implementation of the Plan, the Exchange
proposes to adopt new Rule 6.65A(c) to exclude electronic transactions
in stock options that overlay an NMS stock that occur during a Limit
State or Straddle State from the provisions of Rule 6.87(a) for Obvious
Errors or Rule 6.87(d) for Catastrophic Errors. Additionally, the
Exchange proposes to retain the ability to review electronic
transactions that occur during a Limit State or Straddle State by
Exchange motion pursuant to Rule 6.87(b)(3).\22\
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\22\ Rule 6.87(b)(3) provides that in the interest of
maintaining a fair and orderly market and for the protection of
investors, the Chief Executive Officer of NYSE Arca, Inc. (``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 Rules 6.87(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 Rule 6.87(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 OTP Holder
affected by a determination to nullify or adjust a transaction
pursuant to this paragraph (3) may appeal such determination in
accordance with Rule 6.87(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 6.87(a)(3), (a)(4),
(a)(5) or (a)(6), no additional relief may be granted under this
provision.
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Rule 6.87 provides a process by which a transaction may be
nullified or adjusted when the execution price of a transaction
deviates from the option's theoretical price by a certain amount.
Generally, the theoretical price of an option is the National Best Bid
and Offer (``NBBO'') of the option. In certain circumstances, Trading
Officials have the discretion to determine the theoretical price.\23\
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\23\ Specifically, under Rules 6.87(a)(2) and 6.87(d)(2), the
theoretical price is determined in one of two ways: (i) If the
series is traded on at least one other options exchange, the last
bid price with respect to an erroneous sell transaction and the last
offer price with respect to an erroneous buy transaction, just prior
to the trade, that comprise the NBBO as disseminated by the Options
Price Reporting Authority; or (ii) as determined by a designated
Trading Official, if there are not quotes for comparison purposes,
or if the bid/ask differential of the national best bid and offer
for the affected series just prior to the erroneous transaction was
at least two times the permitted bid/ask differential pursuant to
Rule 6.37(b)(1)(A)-(E).
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The Exchange believes maintaining the current operation of Rules
6.87(a) and 6.87(d) during a Limit State or Straddle State would be
undesirable. According to the Exchange, during periods of extraordinary
volatility, the review period \24\ for transactions under the Obvious
Error and Catastrophic Error provisions would allow market participants
to re-evaluate a transaction that occurred during a Limit State or
Straddle State at a later time, which is potentially unfair to other
market participants and would discourage market participants from
providing liquidity during Limit States or Straddle States. The
Exchange believes that market participants should not be able to
benefit from the time frame to review their transactions in these
situations.
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\24\ Pursuant to Rule 6.87(b), market participants may have up
to 20 minutes to notify the Exchange of a transaction that may be an
Obvious Error. Pursuant to Rule 6.87(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.
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The Exchange also noted that, barring this proposed rule change,
the provisions of Rule 6.87(a)(2)(B) and 6.87(d)(2)(B) \25\ would
likely apply in many instances during Limit or Straddle States. 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 value should be for an option when the underlying NMS
stock has an unexecutable bid or offer or both. The Exchange notes that
the theoretical price in this context would be subjective. Ultimately,
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, thus promoting fair and orderly
markets.
---------------------------------------------------------------------------
\25\ These provisions give the Exchange Trading Official the
discretion to determine the theoretical price of an option for
purposes of analyzing whether a transaction qualifies for
nullification or adjustment under Rule 6.87.
---------------------------------------------------------------------------
In Amendment No. 1, the Exchange also noted that application of
current Rules 6.87(a) and 6.87(d) would be unreliable during a Limit
State or Straddle State. The Exchange believes that application of
Rules 6.87(a) and 6.87(d) to electronic transactions occurring during a
Limit or Straddle State would be impracticable given the lack of a
reliable national best bid or offer in the options market during Limit
States and Straddle States and that the resulting actions may not be
appropriate given market conditions. On balance, the Exchange believes
that removing the potential inequity of nullifying or adjusting
executions occurring during Limit States or Straddle States outweighs
any potential benefits from applying Rules 6.87(a) and 6.87(d) during
such unusual market conditions.
In response to these concerns, the Exchange proposes to adopt Rule
6.65A(c) to provide that electronic transactions are not subject to an
obvious error or catastrophic error review pursuant to Rules 6.87(a)
and 6.87(d) during a Limit State or Straddle State. Proposed Rule
6.65A(c) will also include a qualification that nothing in the proposed
rule change will prevent electronic trades from being reviewed on
Exchange motion pursuant to Rule 6.87(b)(3).\26\ According to the
Exchange, this safeguard will provide the flexibility to act when
necessary and appropriate, 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. The right to review on Exchange motion electronic
transactions that occur during a Limit State or Straddle State under
this provision, according to the Exchange, would enable the Exchange to
account for unforeseen circumstances that result in obvious or
catastrophic errors for 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.
---------------------------------------------------------------------------
\26\ The Exchange stated that it received informal feedback from
a number of market participants, including liquidity providers and
order flow providers, that has generally been supportive of the
Exchange's proposed rule change.
---------------------------------------------------------------------------
The Exchange also noted that its existing order protections that
reject limit orders that are priced too far through the NBBO would
continue to apply during Limit and Straddle States. Additionally, the
Exchange notes that while in Limit States and Straddle States, only
limit orders will be accepted, affirming that the participant is
willing to accept an execution up to the limit price. Further,
according to the Exchange, 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
with 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 in compliance with the aforementioned
[[Page 22007]]
Plan could harm liquidity and also create an advantage to either side
of an execution depending on the future movement of the underlying
stock.
IV. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and rules and
regulations thereunder applicable to a national securities
exchange.\27\ In particular, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act,\28\ which,
among other things, requires a national securities exchange to be so
organized and have the capacity to be able to carry out the purposes of
the Act and to enforce compliance by its members and persons associated
with its members with the provisions of the Act, the rules and
regulations thereunder, and the rules of the exchange, and 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 regulation, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest.
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\27\ In approving the proposed rule changes, the Commission has
considered their impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\28\ 15 U.S.C. 78f(b).
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With respect to the proposal to reject market orders and to not
elect Stop Orders when the underlying is in a Limit or Straddle State,
the Exchange stated that permitting these order types to execute during
these times could contribute to market volatility and could have the
potential to lead to poor executions, as spreads in the options markets
might have widened in response to the underlying entering a Limit or
Straddle State. The Commission believes that rejecting market orders
and not electing Stop Orders during these times will provide certainty
to the treatment of Market Orders and Stop Orders during these times.
To the extent that the spreads in the options market may widen as a
result of the underlying entering a Limit or Straddle State, this
proposal may also prevent market and Stop Orders from receiving
executions at unintended prices during these times.
With respect to deeming the frequency and duration with which the
underlying security is in a Limit or Straddle State a mitigating
circumstance when evaluating the adherence of Specialists and Market
Makers to their respective quoting obligations, the Commission believes
that this proposal represents an appropriate response to the potential
effect on the options markets of the underlying entering a Limit or
Straddle State. During a limit up-limit down state, there may not be a
reliable price for the underlying security to serve as a benchmark for
market makers to price options. In addition, the absence of an
executable bid or offer for the underlying security will make it more
difficult for market makers to hedge the purchase or sale of an option.
Given these significant changes to the normal operating conditions of
market makers, the Commission finds that the Exchange's proposal in
these limited circumstances is consistent with the Act.
The Commission notes, however, that the Plan was approved on a
pilot basis and its Participants will monitor how it is functioning in
the equity markets during the pilot period. To this end, the Commission
expects that, upon implementation of the Plan, the Exchange will
continue monitoring this amendment to its rules and determine if any
necessary adjustments are required to ensure that they remain
consistent with the Act.
The Commission also believes that the proposal to halt trading in
the options market when trading in the equities markets has been halted
as a result of the market-wide circuit breaker being triggered, the
provision addressing re-opening of trading following such a halt, and
the corresponding deletion of Rule 7.5, is consistent with the Act. The
proposal to halt trading as a result of the underlying triggering a
market-wide circuit breaker is reasonably designed to ensure that the
Exchange halts trading in all options whenever the equities markets
initiate a trading halt as a result of the market-wide circuit breaker,
thereby minimizing volatility in the options markets. This provision is
also similar to a corresponding CBOE rule. Rule 7.5 restates the
equities rule regarding market-wide trading halts without reference to
halting trading in options, and the adoption of Rule 6.65(e) should
address how the exchange handles trading in response to the market-wide
circuit breaker being triggered in the equities markets. Finally, the
provision addressing re-opening of trading following such a halt is
substantively similar to CBOE Rule 6.3B, and the commentary contained
in Rule 7.5.
The Commission finds that the Exchange's proposal to suspend
certain aspects of Rule 6.87 during a Limit State or Straddle State is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
exchange.\29\ Specifically, the Commission finds that the proposal is
consistent with Section 6(b)(5) of the Act,\30\ in that it is designed
to prevent fraudulent and manipulative acts and practices, promote just
and equitable principles of trade, foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, remove impediments to and perfect the mechanism of a free
and open market and a national market system, and, in general, protect
investors and the public interest.
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\29\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\30\ 15 U.S.C. 78f(b)(5).
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In Amendment No. 1, the Exchange notes its belief that suspending
certain aspects of Rule 6.87 during a Limit State or Straddle State
will ensure that limit orders that are filled during a Limit or
Straddle State will 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 Exchange states that it believes the
application of the current rule would be impracticable given what it
perceives will be the lack of a reliable NBBO in the options market
during Limit States and Straddle States, and that the resulting actions
(i.e., nullified trades or adjusted prices) may not be appropriate
given market conditions. In addition, given the Exchange's view that
options prices during Limit States or Straddle States may deviate
substantially from those available shortly following the Limit State or
Straddle State, the Exchange believes that providing market
participants time to re-evaluate a transaction executed during a Limit
or Straddle State will create an unreasonable adverse selection
opportunity that will discourage participants from providing liquidity
during Limit States or Straddle States. Ultimately, 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 during Limit States and Straddle States, thus
promoting fair and orderly markets.
The Exchange, however, has proposed this rule change based on its
[[Page 22008]]
expectations about the quality of the options market during Limit
States and Straddle States. In Amendment No. 1, the Exchange states,
for example, that it believes that application of the obvious and
catastrophic error rules would be impracticable given the potential for
lack of a reliable NBBO in the options market during Limit States and
Straddle States. Given the Exchange's recognition of the potential for
unreliable NBBOs in the options markets during Limit States and
Straddle States, the Commission is concerned about the extent to which
investors may rely to their detriment on the quality of quotations and
price discovery in the options markets during these periods. This
concern is heightened by the Exchange's proposal to exclude trades that
occur during a Limit State or Straddle State from the obvious error or
catastrophic error review procedures pursuant to Rules 6.87(a) or
6.87(d). The Commission urges investors and market professionals to
exercise caution when considering trading options under these
circumstances. Broker-dealers also should be mindful of their
obligations to customers that may or may not be aware of specific
options market conditions or the underlying stock market conditions
when placing their orders.
While the Commission remains concerned about the quality of the
options market during the Limit and Straddle States, and the potential
impact on investors of executing in this market without the protections
of the obvious or catastrophic error rules that are being suspended
during the Limit and Straddle States, it believes that certain aspects
of the proposal could help mitigate those concerns.
First, despite the removal of obvious and catastrophic error
protection during Limit States and Straddle States, the Exchange states
that there are additional measures in place designed to protect
investors. For example, the Exchange states that by rejecting market
orders and stop orders, and cancelling pending market orders and stop
orders, only those orders with a limit price will be executed during a
Limit State or Straddle State. Additionally, the Exchange notes the
existence of SEC Rule 15c3-5 requiring broker-dealers to have controls
and procedures in place that are reasonably designed to prevent the
entry of erroneous orders. Finally, with respect to limit orders that
will be executable during Limit States and Straddle States, the
Exchange states that it applies price checks to limit orders that are
priced sufficiently far through the NBBO. Therefore, on balance, the
Exchange believes that removing the potential inequity of nullifying or
adjusting executions occurring during Limit States or Straddle States
outweighs any potential benefits from applying certain provisions
during such unusual market conditions.
The Exchange also believes that the aspect of the proposed rule
change that will continue to allow the Exchange to review on its own
motion electronic trades that occur during a Limit State or a Straddle
State is consistent with the Act because it would provide flexibility
for the Exchange to act when necessary and appropriate to nullify or
adjust a transaction and will enable the Exchange to account for
unforeseen circumstances that result in obvious or catastrophic errors
for 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. In Amendment No. 1, the Exchange
represents that it recognizes that this provision is limited and that
it will administer the provision in a manner that is consistent with
the principles of the Act. In addition, the Exchange represents that it
will create and maintain records relating to the use of the authority
to act on its own motion during a Limit State or Straddle State.
Finally, the Exchange has proposed that the changes be implemented
on a one year pilot basis. The Commission believes that it is important
to implement the proposal as a pilot. The one year pilot period will
allow the Exchange time to assess the impact of the Plan on the options
marketplace and allow the Commission to further evaluate the effect of
the proposal prior to any proposal or determination to make the changes
permanent. To this end, pursuant to Amendment No. 1, the Exchange has
committed to: (1) Evaluate the options market quality during Limit
States and Straddle States; (2) assess the character of incoming order
flow and transactions during Limit States and Straddle States; and (3)
review any complaints from members and their customers concerning
executions during Limit States and Straddle States. Additionally, the
Exchange has agreed to provide to the Commission with data requested to
evaluate the impact of the elimination of the obvious error rule,
including data relevant to assessing the various analyses noted above.
On April 5, 2013, NYSE Euronext submitted a letter on behalf of the
Exchange, stating that the Exchange will provide specific data to the
Commission and the public and certain analysis to the Commission to
evaluate the impact of Limit States and Straddle States on liquidity
and market quality in the options markets.\31\ This will allow the
Commission, the Exchange, and other interested parties to evaluate the
quality of the options markets during Limit States and Straddle States
and to assess whether the additional protections noted by the Exchange
are sufficient safeguards against the submission of erroneous trades,
and whether the Exchange's proposal appropriately balances the
protection afforded to an erroneous order sender against the potential
hazards associated with providing market participants additional time
to review trades submitted during a Limit State or Straddle State.
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\31\ In particular, the Exchange represented that, at least two
months prior to the end of the one year pilot period of proposed
Rule 6.65A(c), it would provide to the Commission an evaluation of
(i) the statistical and economic impact of Straddle States on
liquidity and market quality in the options market and (ii) whether
the lack of obvious error rules in effect during the Limit States
and Straddle States are problematic. In addition, the Exchange
represented that each month following the adoption of the proposed
rule change it would provide to the Commission and the public a
dataset containing certain data elements for each Limit State and
Straddle State in optionable stocks. The Exchange stated that the
options included in the dataset will be those that meet the
following conditions: (i) The options are more than 20% in the money
(strike price remains greater than 80% of the last stock trade price
for calls and strike price remains greater than 120% of the last
stock trade price for puts when the Limit State or Straddle State is
reached); (ii) the option has at least two trades during the Limit
State or Straddle State; and (iii) the top ten options (as ranked by
overall contract volume on that day) meeting the conditions listed
above. For each of those options affected, each dataset will
include, among other information: stock symbol, option symbol, time
at the start of the Limit State or Straddle State and an indicator
for whether it is a Limit State or Straddle State. For activity on
the Exchange in the relevant options, the Exchange has agreed to
provide executed volume, time-weighted quoted bid-ask spread, time-
weighted average quoted depth at the bid, time-weighted average
quoted depth at the offer, high execution price, low execution
price, number of trades for which a request for review for error was
received during Limit States and Straddle States, an indicator
variable for whether those options outlined above have a price
change exceeding 30% during the underlying stock's Limit State or
Straddle State compared to the last available option price as
reported by OPRA before the start of the Limit or Straddle state (1
if observe 30% and 0 otherwise), and another indicator variable for
whether the option price within five minutes of the underlying stock
leaving the Limit State or Straddle State (or halt if applicable) is
30% away from the price before the start of the Limit State or
Straddle State. See NYSE Letter, supra note 6.
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In addition, the Commission finds good cause, pursuant to Section
19(b)(2) of the Act \32\ for approving the proposed rule change on an
accelerated basis. This proposal is related to the Plan, which will
become operative on April 8, 2013, and aspects of the proposal, such as
rejecting market orders and not electing Stop Orders during the Limit
and Straddle States, are designed to
[[Page 22009]]
prevent such orders from receiving poor executions during those
times.\33\ In granting accelerated approval, the proposed rule change,
and any attendant benefits, will take effect upon the Plan's
implementation date. Accordingly, the Commission finds that good cause
exists for approving the proposed rule change on an accelerated basis.
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\32\ 15 U.S.C. 78s(b)(2)
\33\ See supra note 17.
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\34\ that the proposed rule change (SR-NYSEArca-2013-10) is approved on
an accelerated basis.
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\34\ 15 U.S.C. 78f(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\35\
---------------------------------------------------------------------------
\35\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-08604 Filed 4-11-13; 8:45 am]
BILLING CODE 8011-01-P
