Self-Regulatory Organizations; Miami International Securities Exchange LLC; Order Granting Accelerated Approval of a Proposed Rule Change Relating to Obvious Errors in Limit or Straddle States, 22017-22020 [2013-08611]

Download as PDF Federal Register / Vol. 78, No. 71 / Friday, April 12, 2013 / Notices 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.16 In particular, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act,17 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. The Commission finds that the proposal to suspend a Market Maker’s obligations when the underlying security is in a limit up-limit down state is consistent with the Act. When the underlying is in a Limit or Straddle State or is subject to a Trading Halt,18 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 decision to suspend a Market Maker’s obligations 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 the quoting requirements that are being amended in this proposed rule change and determine if any necessary adjustments are required to ensure that they remain consistent with the Act. In addition, the Commission finds good cause, pursuant to Section 19(b)(2) of the Act 19 for approving the proposed rule change on an accelerated basis. The proposal is in part related to the Plan, which will become operative on April 8, 2013.20 Without accelerated approval, the proposed rule change, and any attendant benefits, would take effect after 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 21 that the proposed rule change (SR–BATS–2013– 016) is approved on an accelerated basis. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.22 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–08556 Filed 4–11–13; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–69342; File No. SR–MIAX– 2013–12] Self-Regulatory Organizations; Miami International Securities Exchange LLC; Order Granting Accelerated Approval of a Proposed Rule Change Relating to Obvious Errors in Limit or Straddle States April 8, 2013. mstockstill on DSK6TPTVN1PROD with NOTICES 16 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). 17 15 U.S.C. 78f(b). 18 The Commission notes that, pursuant to BATS Rule 20.5, BATS will halt trading in the option when the trading in the underlying is halted as a result of a circuit breaker. Therefore, the proposal to suspend market maker quoting obligations when the underlying is subject to a trading halt would apply to other, non-circuit breaker-related instances when the underlying is no longer trading, but, pursuant to Rule 20.3, BATS has elected to continue trading the overlying option. VerDate Mar<15>2010 16:47 Apr 11, 2013 Jkt 229001 I. Introduction On March 22, 2013, Miami International Securities Exchange LLC (‘‘MIAX’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act 19 15 U.S.C. 78s(b)(2). supra note 15. 21 15 U.S.C. 78f(b)(2). 22 17 CFR 200.30–3(a)(12). 20 See PO 00000 Frm 00113 Fmt 4703 Sfmt 4703 22017 of 1934 (the ‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to provide for how the Exchange proposes to treat erroneous options transactions in response to the Regulation NMS Plan to Address Extraordinary Market Volatility (the ‘‘Plan’’). The proposed rule change was published for comment in the Federal Register on March 27, 2013.3 The Commission received one comment letter on the proposal.4 This order approves the proposed rule change on an accelerated basis. II. Description of the Proposed Rule Change Since May 6, 2010, when the financial markets experienced a severe disruption, the equities exchanges and the Financial Industry Regulatory Authority have developed market-wide measures to help prevent a recurrence. In particular, on May 31, 2012, the Commission approved the Plan, as amended, on a one-year pilot basis.5 The Plan is designed to prevent trades in individual NMS stocks from occurring outside of specified Price Bands, creating a market-wide limit uplimit down mechanism that is intended to address extraordinary market volatility in NMS Stocks.6 In connection with the implementation of the Plan, the Exchange proposes to adopt Commentary .06 to Rule 521 to exclude trades that occur during a Limit State or Straddle State from the obvious error or catastrophic error review procedures pursuant to Rule 521 for a one year pilot basis following the adoption of the proposed rule change.7 The Exchange proposes to adopt new Rule 530(j) to apply to erroneous transactions in options when the underlying NMS Stock has entered either a Limit or Straddle State. In addition, the Exchange proposes to retain the ability to review all erroneous transactions that occur during Limit States and Straddle 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 Securities Exchange Act Release No. 69210 (March 22, 2013), 78 FR 18637 (‘‘Notice’’). 4 See Letter to Elizabeth M. Murphy, Secretary, Commission, from Douglas M. Schafer, Executive Vice President, Chief Information Officer, MIAX, dated February [sic] 5, 2013 (‘‘MIAX Letter’’). 5 Securities Exchange Act Release No. 67091 (May 31, 2012), 77 FR 33498. 6 Unless otherwise specified, capitalized terms used in this rule filing are based on the defined terms of the Plan. 7 The Exchange stated that members of the Exchange staff have spoken to its member organizations about obvious and catastrophic errors during a Limit State or Straddle State and that the Exchange has received generally favorable feedback concerning its proposed rule change, given the built-in customer protections in the Exchange system. 2 17 E:\FR\FM\12APN1.SGM 12APN1 22018 Federal Register / Vol. 78, No. 71 / Friday, April 12, 2013 / Notices mstockstill on DSK6TPTVN1PROD with NOTICES States resulting only from a verifiable disruption or malfunction of an Exchange execution, dissemination or communication system pursuant to new Rule 530(j). Rule 521 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, Exchange officials have the discretion to determine the theoretical price.8 The Exchange believes that none of these methods is appropriate during a Limit State or Straddle State. Under Rule 521(b)(1), the theoretical price is determined with respect to the NBBO for an option series just prior to the trade. According to the Exchange, during a Limit State or Straddle State, options prices may deviate substantially from those available prior to or following the state. The Exchange believes this provision would give rise to much uncertainty for market participants as there is no bright line definition of what the theoretical price should be for an option when the underlying NMS stock has an unexecutable bid or offer or both. Because the approach under Rule 521(b)(1) by definition depends on a reliable NBBO, the Exchange does not believe that approach is appropriate during a Limit State or Straddle State. Additionally, because the Exchange system will only trade through the theoretical bid or offer if the Exchange or the participant (via an ISO order) has accessed all better priced interest away in accordance 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 and also in compliance with the aforementioned Plan could harm liquidity and also create an advantage to either side of an execution depending 8 Specifically, under Rule 521, the theoretical price is determined in one of three ways: (i) If the series is traded on at least one other options exchange the last National Best Bid price with respect to an erroneous sell transaction and the last National Best Offer price with respect to an erroneous buy transaction, just prior to the trade; (ii) as determined by an Exchange Official, if there are no quotes for comparison purposes, or if the bid/ask differential of the NBBO for the affected series, just prior to the erroneous transaction, was at least two times the standard bid/ask differential as permitted for pre-opening quotes under Rule 603(b)(4); or (iii) for transactions occurring as part of the Exchange’s automated opening system, the Theoretical Price shall be the first quote after the transaction(s) in question that does not reflect the erroneous transaction(s). VerDate Mar<15>2010 16:47 Apr 11, 2013 Jkt 229001 on the future movement of the underlying stock. With respect to Rule 521(b)(2), affording discretion to the Exchange Official to determine the theoretical price and thereby, ultimately, whether a trade is busted or adjusted and to what price, the Exchange notes that it would be difficult to exercise such discretion in periods of extraordinary market volatility and, in particular, when the price of the underlying security is unreliable. The Exchange again notes that the theoretical price in this context would be subjective.9 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. 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 these provisions during such unusual market conditions. In response to these concerns, the Exchange proposes to adopt Commentary .06 to Rule 521, which provides that transactions in MIAX options that overly an NMS stock are not subject to obvious error or catastrophic error review under Rule 521 during a Limit State or Straddle State. In addition, the Exchange proposes to adopt new Rule 530(j) to allow the Exchange to review all erroneous transactions occurring during Limit States and Straddle States that resulted only from a verifiable disruption or malfunction of an Exchange execution, dissemination or communication system. Accordingly, the Exchange is proposing to incorporate the relevant portions of Rule 521 into proposed Rule 530(j) to establish the process for such review. Proposed Rule 530(j) also will include analogous language to that used in current Rule 521 regarding mutual agreement by the parties to an erroneous transaction during a trading halt (i.e., trades on the Exchange will be nullified when (i) the trade occurred during a trading halt in the affected option on the Exchange, or (ii) respecting equity options, the trade occurred during a trading halt on the primary market for the underlying security) and the relevant elements of Rule 521 regarding the review procedure, requests for 9 The Exchange also notes that the determination of theoretical price under Rule 521(b)(3) applies to trades executed during openings. Because the Exchange does not intend to open an option during a Limit State or Straddle State, this provision will not apply. PO 00000 Frm 00114 Fmt 4703 Sfmt 4703 review and appeals from decisions to bust a trade. III. Discussion The Commission finds that the Exchange’s proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.10 Specifically, the Commission finds that the proposal is consistent with Section 6(b)(5) of the Act,11 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 the filing, the Exchange notes its belief that suspending certain aspects of Rule 521 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 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 10 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). 11 15 U.S.C. 78f(b)(5). E:\FR\FM\12APN1.SGM 12APN1 mstockstill on DSK6TPTVN1PROD with NOTICES Federal Register / Vol. 78, No. 71 / Friday, April 12, 2013 / Notices Straddle States, thus promoting fair and orderly markets. The Exchange, however, has proposed this rule change based on its expectations about the quality of the options market during Limit States and Straddle States. 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 electronic trades that occur during a Limit State or Straddle State from the obvious error or catastrophic error review procedures pursuant to Rule 521. 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 cancelling pending market 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. The Exchange will also continue to review erroneous transactions occurring during Limit or Straddle States that resulted from a verifiable disruption or malfunction of an Exchange execution, VerDate Mar<15>2010 16:47 Apr 11, 2013 Jkt 229001 dissemination or communication system under proposed Rule 530(j). Finally, the Exchange states that the MIAX System is designed with built-in protection mechanisms to prevent trade through the NBBO price at the time of receipt of an order by more than one Minimum Price Variation. 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. 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, 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 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, the Exchange submitted a letter stating that it would 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.12 This 12 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 PO 00000 Frm 00115 Fmt 4703 Sfmt 4703 22019 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. 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–MIAX–2013– 12), be, and hereby is, approved on an accelerated basis. 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 MIAX Letter, supra note 4. 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). E:\FR\FM\12APN1.SGM 12APN1 22020 Federal Register / Vol. 78, No. 71 / Friday, April 12, 2013 / Notices For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.15 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–08611 Filed 4–11–13; 8:45 am] BILLING CODE 8011–01–P DEPARTMENT OF STATE [Public Notice 8272] State Department Advisory Committee on Private International Law; Closed Meeting In accordance with section 10(a) of the Federal Advisory Committee Act, 5 U.S.C. App § 10(a), the Department of State announces a meeting of the full Advisory Committee on Private International Law (ACPIL) to take place on May 13, 2013, at the Department of State, Washington, DC. Pursuant to section 10(d) of the Federal Advisory Committee Act, 5 U.S.C. App § 10(d), and 5 U.S.C. 552b(c)(9)(B), it has been determined that this ACPIL meeting will be closed to the public because the ACPIL will be discussing matters the public disclosure of which would be likely to significantly frustrate Department negotiations in an upcoming international forum. For more information, contact Tricia Smeltzer at 202–776–8423 or smeltzertk@state.gov, or Niesha Toms at 202–776–8420, tomsnn@state.gov. Dated: April 5, 2013. Michael Coffee, Attorney-Adviser, Private International Law. [FR Doc. 2013–08663 Filed 4–11–13; 8:45 am] BILLING CODE 4710–08–P DEPARTMENT OF TRANSPORTATION Federal Aviation Administration Agency Information Collection Activities: Requests for Comments; Clearance of New Approval of Information Collection: Critical Parts for Airplane Propellers Federal Aviation Administration (FAA), DOT. ACTION: Notice and request for comments. mstockstill on DSK6TPTVN1PROD with NOTICES AGENCY: In accordance with the Paperwork Reduction Act of 1995, FAA invites public comments about our intention to request the Office of Management and Budget (OMB) approval for a new information collection. The Federal Register Notice with a 60-day comment period soliciting SUMMARY: VerDate Mar<15>2010 16:47 Apr 11, 2013 Jkt 229001 comments on the following collection of information was published on January 28, 2013, vol. 78, no. 18, pages 5859– 5860. The Federal Aviation Administration (FAA) is amending the airworthiness standards for airplane propellers. This action will define what a propeller critical part is, require the identification of propeller critical parts by the manufacturer, and establish engineering, manufacture, and maintenance processes for those parts. These processes will be required to be recorded and maintained within company manuals. The intended effect of this rule is to ensure the continued airworthiness of propeller critical parts by requiring a system of processes to identify and manage these parts throughout their service life. Adopting this rule will eliminate regulatory differences between part 35 and European Aviation Safety Agency (EASA) propeller critical parts requirements, thereby simplifying airworthiness approvals for exports. DATES: Written comments should be submitted by June 11, 2013. FOR FURTHER INFORMATION CONTACT: Kathy DePaepe at (405) 954–9362, or by email at: Kathy.A.DePaepe@faa.gov. SUPPLEMENTARY INFORMATION: OMB Control Number: 2120–XXXX. Title: Critical Parts for Airplane Propellers. Form Numbers: There are no forms associated with this information collection activity. Type of Review: Clearance of a new information collection. Background: On December 1, 2011, FAA published a notice of proposed rulemaking titled ‘‘Critical Parts for Airplane Propellers’’ (76 FR 74749). This activity contains new Paperwork Reduction Act recordkeeping requirements that were not addressed in that notice of proposed rulemaking, and which are addressed here. The rule will require that U.S. companies who manufacture critical parts for airplane propellers update their manuals to record engineering, manufacture, and maintenance processes for propeller critical parts. The required manual updates will be used by the propeller manufacturer to show compliance with the propeller critical parts requirements. There are currently three U.S. companies who will be required to revise their manuals to include these processes. Respondents: Three manufacturers. Frequency: This is a one time requirement. Estimated Average Burden per Response: 40 hours. Estimated Total Annual Burden: 120 hours. PO 00000 Frm 00116 Fmt 4703 Sfmt 4703 Interested persons are invited to submit written comments on the proposed information collection to the Office of Information and Regulatory Affairs, Office of Management and Budget. Comments should be addressed to the attention of the Desk Officer, Department of Transportation/FAA, and sent via electronic mail to oira_submission@omb.eop.gov, or faxed to (202) 395–6974, or mailed to the Office of Information and Regulatory Affairs, Office of Management and Budget, Docket Library, Room 10102, 725 17th Street NW., Washington, DC 20503. Public Comments Invited: You are asked to comment on any aspect of this information collection, including (a) whether the proposed collection of information is necessary for FAA’s performance; (b) the accuracy of the estimated burden; (c) ways for FAA to enhance the quality, utility and clarity of the information collection; and (d) ways that the burden could be minimized without reducing the quality of the collected information. The agency will summarize and/or include your comments in the request for OMB’s clearance of this information collection. ADDRESSES: Issued in Washington, DC, on April 8, 2013. Albert R. Spence, FAA Assistant Information Collection Clearance Officer, IT Enterprises Business Services Division, AES–200. [FR Doc. 2013–08623 Filed 4–11–13; 8:45 am] BILLING CODE 4910–13–P DEPARTMENT OF TRANSPORTATION Federal Aviation Administration Agency Information Collection Activities: Requests for Comments; Clearance of New Approval of Information Collection: Safety Awareness, Feedback, and Evaluation (SAFE) Program Federal Aviation Administration (FAA), DOT. AGENCY: Notice and request for comments. ACTION: In accordance with the Paperwork Reduction Act of 1995, FAA invites public comments about our intention to request the Office of Management and Budget (OMB) approval for a new information collection. The information collected will be used by FAA Flight Standards Service to improve the quality and delivery of the services and products provided to their stakeholders. SUMMARY: E:\FR\FM\12APN1.SGM 12APN1

Agencies

[Federal Register Volume 78, Number 71 (Friday, April 12, 2013)]
[Notices]
[Pages 22017-22020]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-08611]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69342; File No. SR-MIAX-2013-12]


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

April 8, 2013.

I. Introduction

    On March 22, 2013, Miami International Securities Exchange LLC 
(``MIAX'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (the ``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to provide for how the Exchange 
proposes to treat erroneous options transactions in response to the 
Regulation NMS Plan to Address Extraordinary Market Volatility (the 
``Plan''). The proposed rule change was published for comment in the 
Federal Register on March 27, 2013.\3\ The Commission received one 
comment letter on the proposal.\4\ This order approves the proposed 
rule change on an accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 69210 (March 22, 2013), 
78 FR 18637 (``Notice'').
    \4\ See Letter to Elizabeth M. Murphy, Secretary, Commission, 
from Douglas M. Schafer, Executive Vice President, Chief Information 
Officer, MIAX, dated February [sic] 5, 2013 (``MIAX Letter'').
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

    Since May 6, 2010, when the financial markets experienced a severe 
disruption, the equities exchanges and the Financial Industry 
Regulatory Authority have developed market-wide measures to help 
prevent a recurrence. In particular, on May 31, 2012, the Commission 
approved the Plan, as amended, on a one-year pilot basis.\5\ The Plan 
is designed to prevent trades in individual NMS stocks from occurring 
outside of specified Price Bands, creating a market-wide limit up-limit 
down mechanism that is intended to address extraordinary market 
volatility in NMS Stocks.\6\
---------------------------------------------------------------------------

    \5\ Securities Exchange Act Release No. 67091 (May 31, 2012), 77 
FR 33498.
    \6\ Unless otherwise specified, capitalized terms used in this 
rule filing are based on the defined terms of the Plan.
---------------------------------------------------------------------------

    In connection with the implementation of the Plan, the Exchange 
proposes to adopt Commentary .06 to Rule 521 to exclude trades that 
occur during a Limit State or Straddle State from the obvious error or 
catastrophic error review procedures pursuant to Rule 521 for a one 
year pilot basis following the adoption of the proposed rule change.\7\ 
The Exchange proposes to adopt new Rule 530(j) to apply to erroneous 
transactions in options when the underlying NMS Stock has entered 
either a Limit or Straddle State. In addition, the Exchange proposes to 
retain the ability to review all erroneous transactions that occur 
during Limit States and Straddle

[[Page 22018]]

States resulting only from a verifiable disruption or malfunction of an 
Exchange execution, dissemination or communication system pursuant to 
new Rule 530(j).
---------------------------------------------------------------------------

    \7\ The Exchange stated that members of the Exchange staff have 
spoken to its member organizations about obvious and catastrophic 
errors during a Limit State or Straddle State and that the Exchange 
has received generally favorable feedback concerning its proposed 
rule change, given the built-in customer protections in the Exchange 
system.
---------------------------------------------------------------------------

    Rule 521 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, Exchange officials 
have the discretion to determine the theoretical price.\8\
---------------------------------------------------------------------------

    \8\ Specifically, under Rule 521, the theoretical price is 
determined in one of three ways: (i) If the series is traded on at 
least one other options exchange the last National Best Bid price 
with respect to an erroneous sell transaction and the last National 
Best Offer price with respect to an erroneous buy transaction, just 
prior to the trade; (ii) as determined by an Exchange Official, if 
there are no quotes for comparison purposes, or if the bid/ask 
differential of the NBBO for the affected series, just prior to the 
erroneous transaction, was at least two times the standard bid/ask 
differential as permitted for pre-opening quotes under Rule 
603(b)(4); or (iii) for transactions occurring as part of the 
Exchange's automated opening system, the Theoretical Price shall be 
the first quote after the transaction(s) in question that does not 
reflect the erroneous transaction(s).
---------------------------------------------------------------------------

    The Exchange believes that none of these methods is appropriate 
during a Limit State or Straddle State. Under Rule 521(b)(1), the 
theoretical price is determined with respect to the NBBO for an option 
series just prior to the trade. According to the Exchange, during a 
Limit State or Straddle State, options prices may deviate substantially 
from those available prior to or following the state. The Exchange 
believes this provision would give rise to much uncertainty for market 
participants as there is no bright line definition of what the 
theoretical price should be for an option when the underlying NMS stock 
has an unexecutable bid or offer or both. Because the approach under 
Rule 521(b)(1) by definition depends on a reliable NBBO, the Exchange 
does not believe that approach is appropriate during a Limit State or 
Straddle State. Additionally, because the Exchange system will only 
trade through the theoretical bid or offer if the Exchange or the 
participant (via an ISO order) has accessed all better priced interest 
away in accordance 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 and also in 
compliance with the aforementioned Plan could harm liquidity and also 
create an advantage to either side of an execution depending on the 
future movement of the underlying stock.
    With respect to Rule 521(b)(2), affording discretion to the 
Exchange Official to determine the theoretical price and thereby, 
ultimately, whether a trade is busted or adjusted and to what price, 
the Exchange notes that it would be difficult to exercise such 
discretion in periods of extraordinary market volatility and, in 
particular, when the price of the underlying security is unreliable. 
The Exchange again notes that the theoretical price in this context 
would be subjective.\9\ 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. 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 these provisions during 
such unusual market conditions.
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    \9\ The Exchange also notes that the determination of 
theoretical price under Rule 521(b)(3) applies to trades executed 
during openings. Because the Exchange does not intend to open an 
option during a Limit State or Straddle State, this provision will 
not apply.
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    In response to these concerns, the Exchange proposes to adopt 
Commentary .06 to Rule 521, which provides that transactions in MIAX 
options that overly an NMS stock are not subject to obvious error or 
catastrophic error review under Rule 521 during a Limit State or 
Straddle State. In addition, the Exchange proposes to adopt new Rule 
530(j) to allow the Exchange to review all erroneous transactions 
occurring during Limit States and Straddle States that resulted only 
from a verifiable disruption or malfunction of an Exchange execution, 
dissemination or communication system. Accordingly, the Exchange is 
proposing to incorporate the relevant portions of Rule 521 into 
proposed Rule 530(j) to establish the process for such review. Proposed 
Rule 530(j) also will include analogous language to that used in 
current Rule 521 regarding mutual agreement by the parties to an 
erroneous transaction during a trading halt (i.e., trades on the 
Exchange will be nullified when (i) the trade occurred during a trading 
halt in the affected option on the Exchange, or (ii) respecting equity 
options, the trade occurred during a trading halt on the primary market 
for the underlying security) and the relevant elements of Rule 521 
regarding the review procedure, requests for review and appeals from 
decisions to bust a trade.

III. Discussion

    The Commission finds that the Exchange's proposed rule change is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\10\ Specifically, the Commission finds that the proposal is 
consistent with Section 6(b)(5) of the Act,\11\ 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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    \10\ 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).
    \11\ 15 U.S.C. 78f(b)(5).
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    In the filing, the Exchange notes its belief that suspending 
certain aspects of Rule 521 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 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

[[Page 22019]]

Straddle States, thus promoting fair and orderly markets.
    The Exchange, however, has proposed this rule change based on its 
expectations about the quality of the options market during Limit 
States and Straddle States. 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 electronic trades that occur during a 
Limit State or Straddle State from the obvious error or catastrophic 
error review procedures pursuant to Rule 521. 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 cancelling pending market 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. The 
Exchange will also continue to review erroneous transactions occurring 
during Limit or Straddle States that resulted from a verifiable 
disruption or malfunction of an Exchange execution, dissemination or 
communication system under proposed Rule 530(j). Finally, the Exchange 
states that the MIAX System is designed with built-in protection 
mechanisms to prevent trade through the NBBO price at the time of 
receipt of an order by more than one Minimum Price Variation. 
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.
    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, 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 
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, the 
Exchange submitted a letter stating that it would 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.\12\ 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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    \12\ 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 MIAX Letter, supra note 4.
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    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.
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    \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).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-MIAX-2013-12), be, and 
hereby is, approved on an accelerated basis.
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    \14\ 15 U.S.C. 78s(b)(2).


[[Page 22020]]


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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-08611 Filed 4-11-13; 8:45 am]
BILLING CODE 8011-01-P
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