Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of Filing of a Proposed Rule Change, as Modified by Amendment No. 1, to Rule 20.6 of BATS Exchange, Inc., 77557-77573 [2014-30127]
Download as PDF
Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Notices
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
under section 19(b)(2)(B) 13 of the Act to
determine whether the proposed rule
change should be approved or
disapproved.
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–BYX–
2014–039, and should be submitted on
or before January 14, 2015.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.14
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–30118 Filed 12–23–14; 8:45 am]
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
BYX–2014–039 on the subject line.
mstockstill on DSK4VPTVN1PROD with NOTICES
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Self-Regulatory Organizations; BATS
Exchange, Inc.; Notice of Filing of a
Proposed Rule Change, as Modified by
Amendment No. 1, to Rule 20.6 of
BATS Exchange, Inc.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–BYX–2014–039. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room at 100 F Street NE.,
Washington, DC 20549–1090 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–73884; File No. SR–BATS–
2014–067]
December 18, 2014.
Pursuant to section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on December
4, 2014, BATS Exchange, Inc. (the
‘‘Exchange’’ or ‘‘BATS’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. On December 17,
2014, the Exchange filed Amendment
No. 1 to the proposed rule change,
which amended and replaced the
proposed rule change in its entirety. The
Commission is publishing this notice to
solicit comments on the proposed rule
change, as amended, from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange filed a proposal to
replace current Rule 20.6 (‘‘Current
Rule’’), entitled ‘‘Obvious Error,’’ with
new Rule 20.6 (‘‘Proposed Rule’’),
entitled ‘‘Nullification and Adjustment
of Options Transactions including
Obvious Errors.’’ Rule 20.6 relates to the
adjustment and nullification of
transactions that occur on the
Exchange’s equity options platform
(‘‘BATS Options’’).
The text of the proposed rule change
is available at the Exchange’s Web site
14 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
13 15
U.S.C. 78s(b)(2)(B).
VerDate Sep<11>2014
16:34 Dec 23, 2014
Jkt 235001
PO 00000
Frm 00117
Fmt 4703
Sfmt 4703
77557
at https://www.batstrading.com/, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Background
For several months the Exchange has
been working with other options
exchanges to identify ways to improve
the process related to the adjustment
and nullification of erroneous options
transactions. The goal of the process
that the options exchanges have
undertaken is to adopt harmonized rules
related to the adjustment and
nullification of erroneous options
transactions as well as a specific
provision related to coordination in
connection with large-scale events
involving erroneous options
transactions. As described below, the
Exchange believes that the changes the
options exchanges and the Exchange
have agreed to propose will provide
transparency and finality with respect to
the adjustment and nullification of
erroneous options transactions.
Particularly, the proposed changes seek
to achieve consistent results for
participants across U.S. options
exchanges while maintaining a fair and
orderly market, protecting investors and
protecting the public interest.
The Proposed Rule is the culmination
of this coordinated effort and reflects
discussions by the options exchanges to
universally adopt: (1) Certain provisions
already in place on one or more options
exchanges; and (2) new provisions that
the options exchanges collectively
believe will improve the handling of
erroneous options transactions. Thus,
although the Proposed Rule is in many
ways similar to and based on the
Exchange’s Current Rule, the Exchange
is adopting various provisions to
E:\FR\FM\24DEN1.SGM
24DEN1
mstockstill on DSK4VPTVN1PROD with NOTICES
77558
Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Notices
conform with existing rules of one or
more options exchanges and also to
adopt rules that are not currently in
place on any options exchange. As
noted above, in order to adopt a rule
that is similar in most material respects
to the rules adopted by other options
exchanges, the Exchange proposes to
delete the Current Rule in its entirety
and to replace it with the Proposed
Rule.
The Exchange notes that it has
proposed additional objective standards
in the Proposed Rule as compared to the
Current Rule. The Exchange also notes
that the Proposed Rule will ensure that
the Exchange will have the same
standards as all other options
exchanges. However, there are still areas
under the Proposed Rule where
subjective determinations need to be
made by Exchange personnel with
respect to the calculation of Theoretical
Price. The Exchange notes that the
Exchange and all other options
exchanges have been working to further
improve the review of potentially
erroneous transactions as well as their
subsequent adjustment by creating an
objective and universal way to
determine Theoretical Price in the event
a reliable NBBO is not available. For
instance, the Exchange and all other
options exchanges may utilize an
independent third party to calculate and
disseminate or make available
Theoretical Price. However, this
initiative requires additional exchange
and industry discussion as well as
additional time for development and
implementation. The Exchange will
continue to work with other options
exchanges and the options industry
towards the goal of additional
objectivity and uniformity with respect
to the calculation of Theoretical Price.
As additional background, the
Exchange believes that the Proposed
Rule supports an approach consistent
with long-standing principles in the
options industry under which the
general policy is to adjust rather than
nullify transactions. The Exchange
acknowledges that adjustment of
transactions is contrary to the operation
of analogous rules applicable to the
equities markets, where erroneous
transactions are typically nullified
rather than adjusted and where there is
no distinction between the types of
market participants involved in a
transaction. For the reasons set forth
below, the Exchange believes that the
distinctions in market structure between
equities and options markets continue
to support these distinctions between
the rules for handling obvious errors in
the equities and options markets. The
Exchange also believes that the
VerDate Sep<11>2014
16:34 Dec 23, 2014
Jkt 235001
Proposed Rule properly balances several
competing concerns based on the
structure of the options markets.
Various general structural differences
between the options and equities
markets point toward the need for a
different balancing of risks for options
market participants and are reflected in
the Proposed Rule. Option pricing is
formulaic and is tied to the price of the
underlying stock, the volatility of the
underlying security and other factors.
Because options market participants can
generally create new open interest in
response to trading demand, as new
open interest is created, correlated
trades in the underlying or related series
are generally also executed to hedge a
market participant’s risk. This pairing of
open interest with hedging interest
differentiates the options market
specifically (and the derivatives markets
broadly) from the cash equities markets.
In turn, the Exchange believes that the
hedging transactions engaged in by
market participants necessitates
protection of transactions through
adjustments rather than nullifications
when possible and otherwise
appropriate.
The options markets are also quote
driven markets dependent on liquidity
providers to an even greater extent than
equities markets. In contrast to the
approximately 7,000 different securities
traded in the U.S. equities markets each
day, there are more than 500,000
unique, regularly quoted option series.
Given this breadth in options series the
options markets are more dependent on
liquidity providers than equities
markets; such liquidity is provided most
commonly by registered market makers
but also by other professional traders.
With the number of instruments in
which registered market makers must
quote and the risk attendant with
quoting so many products
simultaneously, the Exchange believes
that those liquidity providers should be
afforded a greater level of protection. In
particular, the Exchange believes that
liquidity providers should be allowed
protection of their trades given the fact
that they typically engage in hedging
activity to protect them from significant
financial risk to encourage continued
liquidity provision and maintenance of
the quote-driven options markets.
In addition to the factors described
above, there are other fundamental
differences between options and
equities markets which lend themselves
to different treatment of different classes
of participants that are reflected in the
Proposed Rule. For example, there is no
trade reporting facility in the options
markets. Thus, all transactions must
occur on an options exchange. This
PO 00000
Frm 00118
Fmt 4703
Sfmt 4703
leads to significantly greater retail
customer participation directly on
exchanges than in the equities markets,
where a significant amount of retail
customer participation never reaches
the Exchange but is instead executed in
off-exchange venues such as alternative
trading systems, broker-dealer market
making desks and internalizers. In turn,
because of such direct retail customer
participation, the exchanges have taken
steps to afford those retail customers—
generally Priority Customers—more
favorable treatment in some
circumstances.
Definitions
The Exchange proposes to adopt
various definitions that will be used in
the Proposed Rule, as described below.
First, the Exchange proposes to adopt
a definition of ‘‘Customer,’’ to make
clear that this term would not include
any broker-dealer or Professional
Customer.3 Although other portions of
the Exchange’s rules address the
capacity of market participants,
including customers, the proposed
definition is consistent with such rules
and the Exchange believes it is
important for all options exchanges to
have the same definition of Customer in
the context of nullifying and adjusting
trades in order to have harmonized
rules. As set forth in detail below,
orders on behalf of a Customer are in
many cases treated differently than nonCustomer orders in light of the fact that
Customers are not necessarily immersed
in the day-to-day trading of the markets,
are less likely to be watching trading
activity in a particular option
throughout the day, and may have
limited funds in their trading accounts.
Second, the Exchange proposes to
adopt definitions for both an ‘‘erroneous
sell transaction’’ and an ‘‘erroneous buy
transaction.’’ As proposed, an erroneous
sell transaction is one in which the
price received by the person selling the
option is erroneously low, and an
erroneous buy transaction is one in
which the price paid by the person
purchasing the option is erroneously
high. This provision helps to reduce the
possibility that a party can intentionally
submit an order hoping for the market
to move in their favor while knowing
that the transaction will be nullified or
adjusted if the market does not. For
instance, when a market participant
who is buying options in a particular
series sees an aggressively priced sell
order posted on the Exchange, and the
3 A ‘‘Professional’’ is any person or entity that (A)
is not a broker or dealer in securities; and (B) places
more than 390 orders in listed options per day on
average during a calendar month for its own
beneficial account(s). See Rule 16.1(a)(45).
E:\FR\FM\24DEN1.SGM
24DEN1
Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Notices
buyer believes that the price of the
options is such that it might qualify for
obvious error, the option buyer can
trade with the aggressively priced order,
then wait to see which direction the
market moves. If the market moves in
their direction, the buyer keeps the
trade and if it moves against them, the
buyer calls the Exchange hoping to get
the trade adjusted or busted.
Third, the Exchange proposes to
adopt a definition of ‘‘Official,’’ which
would mean an Officer of the Exchange
or such other employee designee of the
Exchange that is trained in the
application of the Proposed Rule. The
Exchange notes that this definition is
consistent with the definition of Official
currently contained in the Exchange’s
Current Rule.
Fourth, the Exchange proposes to
adopt a new term, a ‘‘Size Adjustment
Modifier,’’ which would apply to
individual transactions and would
modify the applicable adjustment for
orders under certain circumstances, as
discussed in further detail below. As
proposed, the Size Adjustment Modifier
will be applied to individual orders as
follows:
Adjustment—TP plus/minus
1–50 ............
51–250 ........
251–1000 ....
1001 or more
mstockstill on DSK4VPTVN1PROD with NOTICES
Number of
contracts per
execution
N/A.
2 times adjustment amount.
2.5 times adjustment amount.
3 times adjustment amount.
Calculation of Theoretical Price
The Size Adjustment Modifier
attempts to account for the additional
risk that the parties to the trade
undertake for transactions that are larger
in scope. The Exchange believes that the
Size Adjustment Modifier creates
additional incentives to prevent more
impactful Obvious Errors and it lessens
the impact on the contra-party to an
adjusted trade. The Exchange notes that
these contra-parties may have preferred
to only trade the size involved in the
transaction at the price at which such
trade occurred, and in trading larger size
has committed a greater level of capital
and bears a larger hedge risk.
When setting the proposed size
adjustment modifier thresholds the
Exchange has tried to correlate the size
breakpoints with typical small and
larger ‘‘block’’ execution sizes of
underlying stock. For instance, SEC
Rule 10b–18(a)(5)(ii) defines a ‘‘block’’
as a quantity of stock that is at least
5,000 shares and a purchase price of at
least $50,000, among others.4 Similarly,
NYSE Rule 72 defines a ‘‘block’’ as an
order to buy or sell ‘‘at least 10,000
4 See
17 CFR 240.10b–18(a)(5)(ii).
VerDate Sep<11>2014
shares or a quantity of stock having a
market value of $200,000 or more,
whichever is less.’’ Thus, executions of
51 to 100 option contracts, which are
generally equivalent to executions of
5,100 and 10,000 shares of underlying
stock, respectively, are proposed to be
subject to the lowest size adjustment
modifier. An execution of over 1,000
contracts is roughly equivalent to a
block transaction of more than 100,000
shares of underlying stock, and is
proposed to be subject to the highest
size adjustment modifier. The Exchange
has correlated the proposed size
adjustment modifier thresholds to
smaller and larger scale blocks because
the Exchange believes that the execution
cost associated with transacting in block
sizes scales according to the size of the
block. In other words, in the same way
that executing a 100,000 share stock
order will have a proportionately larger
market impact and will have a higher
overall execution cost than executing a
500, 1,000 or 5,000 share order in the
same stock, all other market factors
being equal, executing a 1,000 option
contract order will have a larger market
impact and higher overall execution
cost than executing a 5, 10 or 50
contract option order.
16:34 Dec 23, 2014
Jkt 235001
Theoretical Price in Normal
Circumstances
Under both the Current Rule and the
Proposed Rule, when reviewing a
transaction as potentially erroneous, the
Exchange needs to first determine the
‘‘Theoretical Price’’ of the option, i.e.,
the Exchange’s estimate of the correct
market price for the option. Pursuant to
the Proposed Rule, if the applicable
option series is traded on at least one
other options exchange, then the
Theoretical Price of an option series is
the last national best bid (‘‘NBB’’) just
prior to the trade in question with
respect to an erroneous sell transaction
or the last national best offer (‘‘NBO’’)
just prior to the trade in question with
respect to an erroneous buy transaction
unless one of the exceptions described
below exists. Thus, the Exchange
proposes that whenever the Exchange
has a reliable NBB or NBO, as
applicable, just prior to the transaction,
then the Exchange will use this NBB or
NBO as the Theoretical Price.
The Exchange also proposes to specify
in the Proposed Rule that when a single
order received by the Exchange is
executed at multiple price levels, the
Theoretical Price for the execution at
the initial price level will be the last
NBB and last NBO just prior to the
Exchange’s receipt of the order, and the
PO 00000
Frm 00119
Fmt 4703
Sfmt 4703
77559
Theoretical Price for all subsequent
executions at other price levels will be
determined by the Exchange. The
Exchange believes that it is necessary to
retain discretion for the handling of an
order that drills-through several price
levels consistent with the reasons for
the wide quote provision described
below, where the Exchange too has
proposed to retain discretion. The
Exchange believes this is important,
among other reasons, to ensure that a
market participant is not intentionally
targeting quotations that it knows are at
other price levels in order to get an
adjustment to a better price. For
example, if the market in an option is
$1.00 x $1.05 and a member sends a
large erroneously aggressively priced
buy order that will execute at multiple
price points while driving the price
from $1.05 to $2.50, the Exchange
believes that it needs discretion in order
to determine whether executions that
occurred as the order made it through
various price levels were erroneous or if
they should be upheld. If, during the
handling of the order, executions took
place originally at $1.05 and then at
$1.06, $1.08, $1.50, $2.00 and $2.50,
these price levels were the result of the
handling of the order in question. The
Exchange would consider the
Theoretical Price of the option to be
$1.05 for the initial execution and
would determine Theoretical Price for
executions at all other price levels. If the
market participant sending the order
aggressively priced the order in a way
that it would drill-through all available
liquidity and buy at a price up to $2.50,
then the Exchange does not believe that
the market participants providing
liquidity in the option on the Exchange
that are on the other side of such
transactions should be forced to accept
an adjustment to a different price level.
The Exchange believes that this
situation is different than, for example,
an order received during a momentary
gap in liquidity.
The Exchange also proposes to set
forth in the Proposed Rule various
provisions governing specific situations
where the NBB or NBO is not available
or may not be reliable. Specifically, the
Exchange is proposing additional detail
specifying situations in which there are
no quotes or no valid quotes (as defined
below), when the national best bid or
offer (‘‘NBBO’’) is determined to be too
wide to be reliable, and at the open of
trading on each trading day.
No Valid Quotes
As is true under the Current Rule,
pursuant to the Proposed Rule the
Exchange will determine the Theoretical
Price if there are no quotes or no valid
E:\FR\FM\24DEN1.SGM
24DEN1
77560
Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Notices
quotes for comparison purposes. As
proposed, quotes that are not valid are
all quotes in the applicable option series
published at a time where the last NBB
is higher than the last NBO in such
series (a ‘‘crossed market’’), quotes
published by the Exchange that were
submitted by either party to the
transaction in question, and quotes
published by another options exchange
against which the Exchange has
declared self-help. Thus, in addition to
scenarios where there are literally no
quotes to be used as Theoretical Price,
the Exchange will exclude quotes in
certain circumstances if such quotes are
not deemed valid. The Proposed Rule is
consistent with the Exchange’s
application of the Current Rule but the
descriptions of the various scenarios
where the Exchange considers quotes to
be invalid represent additional detail
that is not included in the Current Rule.
The Exchange notes that Exchange
personnel currently are required to
determine Theoretical Price in certain
circumstances. While the Exchange
continues to pursue alternative
solutions that might further enhance the
objectivity and consistency of
determining Theoretical Price, the
Exchange believes that the discretion
currently afforded to Exchange Officials
is appropriate in the absence of a
reliable NBBO that can be used to set
the Theoretical Price. Under the current
Rule, Exchange personnel will generally
consult and refer to data such as the
prices of related series, especially the
closest strikes in the option in question.
Exchange personnel may also take into
account the price of the underlying
security and the volatility
characteristics of the option as well as
historical pricing of the option and/or
similar options.
mstockstill on DSK4VPTVN1PROD with NOTICES
Wide Quotes
Similarly, pursuant to the Proposed
Rule the Exchange will determine the
Theoretical Price if the bid/ask
differential of the NBB and NBO for the
affected series just prior to the
erroneous transaction was equal to or
greater than the Minimum Amount set
forth below and there was a bid/ask
differential less than the Minimum
Amount during the 10 seconds prior to
the transaction. If there was no bid/ask
differential less than the Minimum
Amount during the 10 seconds prior to
the transaction then the Theoretical
Price of an option series is the last NBB
or NBO just prior to the transaction in
question. The Exchange proposes to use
the following chart to determine
whether a quote is too wide to be
reliable:
VerDate Sep<11>2014
16:34 Dec 23, 2014
Jkt 235001
the wide quote provision off of bid price
in order to provide a relatively
straightforward beginning point for the
Below $2.00 ..........................
$0.75 analysis.
$2.00 to $5.00 ......................
1.25
As an example, assume an option is
Above $5.00 to $10.00 .........
1.50
quoted $3.00 by $6.00 with 50 contracts
Above $10.00 to $20.00 .......
2.50
Above $20.00 to $50.00 .......
3.00 posted on each side of the market for an
Above $50.00 to $100.00 .....
4.50 extended period of time. If a market
Above $100.00 .....................
6.00 participant were to enter a market order
to buy 20 contracts the Exchange
believes that the buyer should have a
The Exchange notes that the values
reasonable expectation of paying $6.00
set forth above generally represent a
for the contracts which they are buying.
multiple of 3 times the bid/ask
This should be the case even if
differential requirements of other
immediately after the purchase of those
options exchanges, with certain
options, the market conditions change
rounding applied (e.g., $1.25 as
and the same option is then quoted at
proposed rather than $1.20).5 The
$3.75 by $4.25. Although the quote was
Exchange believes that basing the Wide
wide according to the table above at the
Quote table on a multiple of the
time immediately prior to and the time
permissible bid/ask differential rule
of the execution of the market order, it
provides a reasonable baseline for
was also well established and well
quotations that are indeed so wide that
known. The Exchange believes that an
they cannot be considered reliable for
execution at the then prevailing market
purposes of determining Theoretical
Price unless they have been consistently price should not in and of itself
wide. As described above, while the
constitute an erroneous trade.
Exchange will determine Theoretical
Transactions at the Open
Price when the bid/ask differential
Under the Proposed Rule, for a
equals or exceeds the amount set forth
transaction occurring as part of the
in the chart above and within the
previous 10 seconds there was a bid/ask Opening Process 7 the Exchange will
differential smaller than such amount, if determine the Theoretical Price where
there is no NBB or NBO for the affected
a quote has been persistently wide for
series just prior to the erroneous
at least 10 seconds the Exchange will
transaction or if the bid/ask differential
use such quote for purposes of
of the NBBO just prior to the erroneous
Theoretical Price. The Exchange
transaction is equal to or greater than
believes that there should be a greater
the Minimum Amount set forth in the
level of protection afforded to market
chart proposed for the wide quote
participants that enter the market when
provision described above. The
there are liquidity gaps and price
Exchange believes that this discretion is
fluctuations. The Exchange does not
believe that a similar level of protection necessary because it is consistent with
other scenarios in which the Exchange
is warranted when market participants
will determine the Theoretical Price if
choose to enter a market that is wide
and has been consistently wide for some there are no quotes or no valid quotes
for comparison purposes, including the
time. The Exchange notes that it has
wide quote provision proposed by the
previously determined that, given the
Exchange as described above. If,
largely electronic nature of today’s
however, there are valid quotes and the
markets, as little as one second (or less)
bid/ask differential of the NBBO is less
is a long enough time for market
than the Minimum Amount set forth in
participants to receive, process and
the chart proposed for the wide quote
account for and respond to new market
provision described above, then the
information.6 While introducing this
Exchange will use the NBB or NBO just
new provision the Exchange believes it
prior to the transaction as it would in
is being appropriately cautious by
any other normal review scenario.
selecting a time frame that is an order
As an example of an erroneous
of magnitude above and beyond what
the Exchange has previously determined transaction for which the NBBO is wide
at the open, assume the NBBO at the
is sufficient for information
time of the opening transaction is $1.00
dissemination. The table above bases
x $5.00 and the opening transaction
takes place at $1.25. The Exchange
5 See, e.g., NYSE Arca Options Rule 6.37(b)(1).
6 See, e.g., Exchange Rule 22.12, which requires
would be responsible for determining
certain orders to be exposed on BATS Options for
the Theoretical Price because the NBBO
at least one second before they can be executed; see
was wider than the applicable minimum
also Securities Exchange Act Release No. 66306
amount set forth in the wide quote
(February 2, 2012), 77 FR 6608 (February 8, 2012)
Bid price at time of trade
Minimum
amount
(SR–BX–2011–084) (order granting approval of
proposed rule change to reduce the duration of the
PIP from one second to one hundred milliseconds).
PO 00000
Frm 00120
Fmt 4703
Sfmt 4703
7 See Exchange Rule 21.7 for a description of the
Exchange’s Opening Process.
E:\FR\FM\24DEN1.SGM
24DEN1
Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Notices
levels for options with Theoretical
Prices above $50.00.
Under the Proposed Rule, a party that
believes that it participated in a
transaction that was the result of an
Obvious Error must notify the
Exchange’s Trade Desk in the manner
specified from time to time by the
Exchange in a circular distributed to
Members. The Exchange currently
requires electronic notification through
a web-based application but believes
that maintaining flexibility in the Rule
is important to allow for changes to the
process.
Obvious Errors
The Exchange also proposes to adopt
notification timeframes that must be met
The Exchange proposes to adopt
in order for a transaction to qualify as
numerical thresholds that would qualify
an Obvious Error. Specifically, as
transactions as ‘‘Obvious Errors.’’ These
proposed a filing must be received by
thresholds are similar to those in place
the Exchange within thirty (30) minutes
under the Current Rule. As proposed, a
of the execution with respect to an
transaction will qualify as an Obvious
execution of a Customer order and
Error if the Exchange receives a properly
within fifteen (15) minutes of the
submitted filing and the execution price
execution for any other participant. The
of a transaction is higher or lower than
Exchange also proposes to provide
the Theoretical Price for the series by an
additional time for trades that are routed
amount equal to at least the amount
through other options exchanges to the
shown below:
Exchange. Under the Proposed Rule,
any other options exchange will have a
Minimum
Theoretical price
total of forty-five (45) minutes for
amount
Customer orders and thirty (30) minutes
Below $2.00 ..........................
$0.25 for non-Customer orders, measured from
$2.00 to $5.00 ......................
0.40 the time of execution on the Exchange,
Above $5.00 to $10.00 .........
0.50 to file with the Exchange for review of
Above $10.00 to $20.00 .......
0.80 transactions routed to the Exchange
Above $20.00 to $50.00 .......
1.00 from that options exchange and
Above $50.00 to $100.00 .....
1.50
executed on the Exchange (‘‘linkage
Above $100.00 .....................
2.00
trades’’). This includes filings on behalf
of another options exchange filed by a
Applying the Theoretical Price, as
third-party routing broker if such thirddescribed above, to determine the
party broker identifies the affected
applicable threshold and comparing the transactions as linkage trades. In order
Theoretical Price to the actual execution to facilitate timely reviews of linkage
price provides the Exchange with an
trades the Exchange will accept filings
objective methodology to determine
from either the other options exchange
whether an Obvious Error occurred. The or, if applicable, the third-party routing
Exchange believes that the proposed
broker that routed the applicable
amounts are reasonable as they are
order(s). The additional fifteen (15)
generally consistent with the standards
minutes provided with respect to
of the Current Rule and reflect a
linkage trades shall only apply to the
significant disparity from Theoretical
extent the options exchange that
Price. The Exchange notes that the
originally received and routed the order
Minimum Amounts in the Proposed
to the Exchange itself received a timely
Rule and as set forth above are identical filing from the entering participant (i.e.,
to the Current Rule except for the last
within 30 minutes if a Customer order
two categories, for options where the
or 15 minutes if a non-Customer order).
Theoretical Price is above $50.00 to
The Exchange believes that additional
$100.00 and above $100.00. The
time for filings related to Customer
Exchange believes that this additional
orders is appropriate in light of the fact
granularity is reasonable because given
that Customers are not necessarily
the proliferation of additional strikes
immersed in the day-to-day trading of
that have been created in the past
the markets and are less likely to be
several years there are many more high- watching trading activity in a particular
priced options that are trading with
option throughout the day. The
open interest for extended periods. The
Exchange believes that the additional
Exchange believes that it is appropriate
time afforded to linkage trades is
to account for these high-priced options appropriate given the interconnected
with additional Minimum Amount
nature of the markets today and the
mstockstill on DSK4VPTVN1PROD with NOTICES
provision as described above. The
Exchange believes that it is necessary to
determine theoretical price at the open
in the event of a wide quote at the open
for the same reason that the Exchange
has proposed to determine theoretical
price during the remainder of the
trading day pursuant to the proposed
wide quote provision, namely that a
wide quote cannot be reliably used to
determine Theoretical Price because the
Exchange does not know which of the
two quotes, the NBB or the NBO, is
closer to the real value of the option.
VerDate Sep<11>2014
16:34 Dec 23, 2014
Jkt 235001
PO 00000
Frm 00121
Fmt 4703
Sfmt 4703
77561
practical difficulty that an end user may
face in getting requests for review filed
in a timely fashion when the transaction
originated at a different exchange than
where the error took place. Without this
additional time the Exchange believes it
would be common for a market
participant to satisfy the filing deadline
at the original exchange to which an
order was routed but that requests for
review of executions from orders routed
to other options exchanges would not
qualify for review as potential Obvious
Errors by the time filings were received
by such other options exchanges, in turn
leading to potentially disparate results
under the applicable rules of options
exchanges to which the orders were
routed.
Pursuant to the Proposed Rule, an
Official may review a transaction
believed to be erroneous on his/her own
motion in the interest of maintaining a
fair and orderly market and for the
protection of investors. This proposed
provision is designed to give an Official
the ability to provide parties relief in
those situations where they have failed
to report an apparent error within the
established notification period. A
transaction reviewed pursuant to the
proposed provision may be nullified or
adjusted only if it is determined by the
Official that the transaction is erroneous
in accordance with the provisions of the
Proposed Rule, provided that the time
deadlines for filing a request for review
described above shall not apply. The
Proposed Rule would require the
Official to act as soon as possible after
becoming aware of the transaction;
action by the Official would ordinarily
be expected on the same day that the
transaction occurred. However, because
a transaction under review may have
occurred near the close of trading or due
to unusual circumstances, the Proposed
Rule provides that the Official shall act
no later than 8:30 a.m. Eastern Time on
the next trading day following the date
of the transaction in question.
The Exchange also proposes to state
that a party affected by a determination
to nullify or adjust a transaction after an
Official’s review on his or her own
motion may appeal such determination
in accordance with paragraph (k), which
is described below. The Proposed Rule
would make clear that a determination
by an Official not to review a
transaction or determination not to
nullify or adjust a transaction for which
a review was conducted on an Official’s
own motion is not appealable and
further that if a transaction is reviewed
and a determination is rendered
pursuant to another provision of the
Proposed Rule, no additional relief may
be granted by an Official.
E:\FR\FM\24DEN1.SGM
24DEN1
77562
Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Notices
connection with this example are nonCustomer orders.
• Assume Exchange A’s quoted bid at
$2.50 is either executed or cancelled.
• Assume Exchange B immediately
thereafter receives an incoming market
order to sell 100 contracts.
• The incoming order would be
executed against Exchange B’s resting
bid at $2.05 for 100 contracts.
• Because the 100 contract execution
of the incoming sell order was priced at
$2.05, which is $0.45 below the
Theoretical Price of $2.50, the 100
contract execution would qualify for
adjustment as an Obvious Error.
• The normal adjustment process
would adjust the execution of the 100
Buy
Sell
transaction
transaction contracts to $2.35 per contract, which is
Theoretical price
the Theoretical Price minus $0.15.
adjustadjust(TP)
• However, because the execution
ment—
ment—
TP plus
TP minus
would qualify for the Size Adjustment
Modifier of 2 times the adjustment
Below $3.00 ......
$0.15
$0.15 price, the adjusted transaction would
At or above
instead be to $2.20 per contract, which
$3.00 .............
0.30
0.30
is the Theoretical Price minus $0.30.
By reference to the example above,
The Exchange believes that it is
the Exchange reiterates that it believes
appropriate to adjust to prices a
that a Size Adjustment Modifier is
specified amount away from Theoretical appropriate, as the buyer in this
Price rather than to adjust to Theoretical example was originally willing to buy
Price because even though the Exchange 100 contracts at $2.05 and ended up
has determined a given trade to be
paying $2.20 per contract for such
erroneous in nature, the parties in
execution. Without the Size Adjustment
question should have had some
Modifier the buyer would have paid
expectation of execution at the price or
$2.35 per contract. Such buyer may be
prices submitted. Also, it is common
advantaged by the trade if the
that by the time it is determined that an Theoretical Price is indeed closer to
obvious error has occurred additional
$2.50 per contract, however the buyer
hedging and trading activity has already may not have wanted to buy so many
occurred based on the executions that
contracts at a higher price and does
previously happened. The Exchange is
incur increasing cost and risk due to the
concerned that an adjustment to
additional size of their quote. Thus, the
Theoretical Price in all cases would not
proposed rule is attempting to strike a
appropriately incentivize market
balance between various competing
participants to maintain appropriate
objectives, including recognition of cost
controls to avoid potential errors.
and risk incurred in quoting larger size
Further, as proposed any nonand incentivizing market participants to
Customer Obvious Error exceeding 50
maintain appropriate controls to avoid
contracts will be subject to the Size
errors.
Adjustment Modifier described above.
In contrast to non-Customer orders,
The Exchange believes that it is
where trades will be adjusted if they
appropriate to apply the Size
qualify as Obvious Errors, pursuant the
Adjustment Modifier to non-Customer
Proposed Rule a trade that qualifies as
orders because the hedging cost
an Obvious Error will be nullified where
associated with trading larger sized
at least one party to the Obvious Error
options orders and the market impact of is a Customer. The Exchange also
larger blocks of underlying can be
proposes, however, that if any Member
significant.
submits requests to the Exchange for
As an example of the application of
review of transactions pursuant to the
the Size Adjustment Modifier, assume
Proposed Rule, and in aggregate that
Exchange A has a quoted bid to buy 50
Member has 200 or more Customer
contracts at $2.50, Exchange B has a
transactions under review concurrently
quoted bid to buy 100 contracts at $2.05 and the orders resulting in such
and there is no other options exchange
transactions were submitted during the
quoting a bid priced higher than $2.00.
course of 2 minutes or less, where at
Assume that the NBBO is $2.50 by
least one party to the Obvious Error is
$3.00. Finally, assume that all orders
a non-Customer, the Exchange will
quoted and submitted to Exchange B in
apply the non-Customer adjustment
mstockstill on DSK4VPTVN1PROD with NOTICES
If it is determined that an Obvious
Error has occurred based on the
objective numeric criteria and time
deadlines described above, the
Exchange will adjust or nullify the
transaction as described below and
promptly notify both parties to the trade
electronically or via telephone. The
Exchange proposes different adjustment
and nullification criteria for Customers
and non-Customers.
As proposed, where neither party to
the transaction is a Customer, the
execution price of the transaction will
be adjusted by the Official pursuant to
the table below.
VerDate Sep<11>2014
16:34 Dec 23, 2014
Jkt 235001
PO 00000
Frm 00122
Fmt 4703
Sfmt 4703
criteria described above to such
transactions. The Exchange based its
proposal of 200 transactions on the fact
that the proposed level is reasonable as
it is representative of an extremely large
number of orders submitted to the
Exchange that are, in turn, possibly
erroneous. Similarly, the Exchange
based its proposal of orders received in
2 minutes or less on the fact that this is
a very short amount of time under
which one Member could generate
multiple erroneous transactions. In
order for a participant to have more than
200 transactions under review
concurrently when the orders triggering
such transactions were received in 2
minutes or less, the market participant
will have far exceeded the normal
behavior of customers deserving
protected status.8 While the Exchange
continues to believe that it is
appropriate to nullify transactions in
such a circumstance if both participants
to a transaction are Customers, the
Exchange does not believe it is
appropriate to place the overall risk of
a significant number of trade breaks on
non-Customers that in the normal
course of business may have engaged in
additional hedging activity or trading
activity based on such transactions.
Thus, the Exchange believes it is
necessary and appropriate to protect
non-Customers in such a circumstance
by applying the non-Customer
adjustment criteria, and thus adjusting
transactions as set forth above, in the
event a Member has more than 200
transactions under review concurrently.
Catastrophic Errors
Consistent with the Current Rule, the
Exchange proposes to adopt separate
numerical thresholds for review of
transactions for which the Exchange
does not receive a filing requesting
review within the Obvious Error
timeframes set forth above. Based on
this review these transactions may
qualify as ‘‘Catastrophic Errors.’’ As
proposed, a Catastrophic Error will be
deemed to have occurred when the
execution price of a transaction is
higher or lower than the Theoretical
Price for the series by an amount equal
to at least the amount shown below:
Theoretical price
Below $2.00 ..........................
$2.00 to $5.00 ......................
Minimum
amount
$0.50
1.00
8 The Exchange notes that in the third quarter of
this year across all options exchanges the average
number of valid Customer orders received and
executed was less than 38 valid orders every two
minutes. The number of obvious errors resulting
from valid orders is, of course, a very small fraction
of such orders.
E:\FR\FM\24DEN1.SGM
24DEN1
Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Notices
by 8:30 a.m. Eastern Time on the first
trading day following the execution. For
transactions in an expiring options
Above $5.00 to $10.00 .........
1.50 series that take place on an expiration
Above $10.00 to $20.00 .......
2.00
day, a party must notify the Exchange’s
Above $20.00 to $50.00 .......
2.50
Above $50.00 to $100.00 .....
3.00 Trade Desk within 45 minutes after the
Above $100.00 .....................
4.00 close of trading that same day. As is true
for requests for review under the
Obvious Error provision of the Proposed
Based on industry feedback on the
Rule, a party requesting review of a
Catastrophic Error thresholds set forth
transaction as a Catastrophic Error must
under the Current Rule, the thresholds
notify the Exchange’s Trade Desk in the
proposed as set forth above are more
manner specified from time to time by
granular and lower (i.e., more likely to
qualify) than the thresholds under the
the Exchange in a circular distributed to
Current Rule. As noted above, under the Members. By definition, any execution
Proposed Rule as well as the Current
that qualifies as a Catastrophic Error is
Rule, parties have additional time to
also an Obvious Error. However, the
submit transactions for review as
Exchange believes it is appropriate to
Catastrophic Errors. As proposed,
maintain these two types of errors
notification requesting review must be
because the Catastrophic Error
received by the Exchange’s Trade Desk
provisions provide market participants
Theoretical price
Minimum
amount
with a longer notification period under
which they may file a request for review
with the Exchange of a potential
Catastrophic Error than a potential
Obvious Error. This provides an
additional level of protection for
transactions that are severely erroneous
even in the event a participant does not
submit a request for review in a timely
fashion.
The Proposed Rule would specify the
action to be taken by the Exchange if it
is determined that a Catastrophic Error
has occurred, as described below, and
would require the Exchange to promptly
notify both parties to the trade
electronically or via telephone. In the
event of a Catastrophic Error, the
execution price of the transaction will
be adjusted by the Official pursuant to
the table below.
Buy
transaction
adjustment—
TP plus
Theoretical price (TP)
mstockstill on DSK4VPTVN1PROD with NOTICES
Below $2.00 .............................................................................................................................................................
$2.00 to $5.00 ..........................................................................................................................................................
Above $5.00 to $10.00 ............................................................................................................................................
Above $10.00 to $20.00 ..........................................................................................................................................
Above $20.00 to $50.00 ..........................................................................................................................................
Above $50.00 to $100.00 ........................................................................................................................................
Above $100.00 .........................................................................................................................................................
Although Customer orders would be
adjusted in the same manner as nonCustomer orders, any Customer order
that qualifies as a Catastrophic Error
will be nullified if the adjustment
would result in an execution price
higher (for buy transactions) or lower
(for sell transactions) than the
Customer’s limit price. Based on
industry feedback, the levels proposed
above with respect to adjustment
amounts are the same levels as the
thresholds at which a transaction may
be deemed a Catastrophic Error
pursuant to the chart set forth above.
As is true for Obvious Errors as
described above, the Exchange believes
that it is appropriate to adjust to prices
a specified amount away from
Theoretical Price rather than to adjust to
Theoretical Price because even though
the Exchange has determined a given
trade to be erroneous in nature, the
parties in question should have had
some expectation of execution at the
price or prices submitted. Also, it is
common that by the time it is
determined that a Catastrophic Error has
occurred additional hedging and trading
activity has already occurred based on
the executions that previously
happened. The Exchange is concerned
that an adjustment to Theoretical Price
VerDate Sep<11>2014
16:34 Dec 23, 2014
Jkt 235001
in all cases would not appropriately
incentivize market participants to
maintain appropriate controls to avoid
potential errors. Further, the Exchange
believes it is appropriate to maintain a
higher adjustment level for Catastrophic
Errors than Obvious Errors given the
significant additional time that can
potentially pass before an adjustment is
requested and applied and the amount
of hedging and trading activity that can
occur based on the executions at issue
during such time. For the same reasons,
other than honoring the limit prices
established for Customer orders, the
Exchange has proposed to treat all
market participants the same in the
context of the Catastrophic Error
provision. Specifically, the Exchange
believes that treating market
participants the same in this context
will provide additional certainty to
market participants with respect to their
potential exposure and hedging
activities, including comfort that even if
a transaction is later adjusted (i.e., past
the standard time limit for filing under
the Obvious Error provision), such
transaction will not be fully nullified.
However, as noted above, under the
Proposed Rule where at least one party
to the transaction is a Customer, the
trade will be nullified if the adjustment
PO 00000
Frm 00123
Fmt 4703
Sfmt 4703
77563
$0.50
1.00
1.50
2.00
2.50
3.00
4.00
Sell
transaction
adjustment—
TP minus
$0.50
1.00
1.50
2.00
2.50
3.00
4.00
would result in an execution price
higher (for buy transactions) or lower
(for sell transactions) than the
Customer’s limit price. The Exchange
has retained the protection of a
Customer’s limit price in order to avoid
a situation where the adjustment could
be to a price that the Customer could
not afford, which is less likely to be an
issue for a market professional.
Significant Market Events
In order to improve consistency for
market participants in the case of a
widespread market event and in light of
the interconnected nature of the options
exchanges, the Exchange proposes to
adopt a new provision that calls for
coordination between the options
exchanges in certain circumstances and
provides limited flexibility in the
application of other provisions of the
Proposed Rule in order to promptly
respond to a widespread market event.9
9 Although the Exchange has proposed a specific
provision related to coordination amongst options
exchanges in the context of a widespread event, the
Exchange does not believe that the Significant
Market Event provision or any other provision of
the proposed rule alters the Exchange’s ability to
coordinate with other options exchanges in the
normal course of business with respect to market
events or activity. The Exchange does already
coordinate with other options exchanges to the
E:\FR\FM\24DEN1.SGM
Continued
24DEN1
mstockstill on DSK4VPTVN1PROD with NOTICES
77564
Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Notices
The Exchange proposes to describe such
an event as a Significant Market Event,
and to set forth certain objective criteria
that will determine whether such an
event has occurred. The Exchange
developed these objective criteria in
consultation with the other options
exchanges by reference to historical
patterns and events with a goal of
setting thresholds that very rarely will
be triggered so as to limit the
application of the provision to truly
significant market events. As proposed,
a Significant Market Event will be
deemed to have occurred when
proposed criterion (A) below is met or
the sum of all applicable event statistics,
where each is expressed as a percentage
of the relevant threshold in criteria (A)
through (D) below, is greater than or
equal to 150% and 75% or more of at
least one category is reached, provided
that no single category can contribute
more than 100% to the sum. All criteria
set forth below will be measured in
aggregate across all exchanges.
The proposed criteria for determining
a Significant Market Event are as
follows:
(A) Transactions that are potentially
erroneous would result in a total WorstCase Adjustment Penalty greater than or
equal to $30,000,000, where the WorstCase Adjustment Penalty is computed as
the sum, across all potentially erroneous
trades, of: (i) $0.30 (i.e., the largest
Transaction Adjustment value listed in
sub-paragraph (e)(3)(A) below); times;
(ii) the contract multiplier for each
traded contract; times (iii) the number of
contracts for each trade; times (iv) the
appropriate Size Adjustment Modifier
for each trade, if any, as defined in subparagraph (e)(3)(A) below;
(B) Transactions involving over
500,000 options contracts are
potentially erroneous;
(C) Transactions with a notional value
(i.e., number of contracts traded
multiplied by the option premium
multiplied by the contract multiplier) of
more than $100,000,000 are potentially
erroneous;
(D) Over 10,000 transactions are
potentially erroneous.
As described above, the Exchange
proposes to adopt a Worst Case
Adjustment Penalty, proposed as
criterion (A), which is the only criterion
that can on its own result in an event
being designated as a significant market
event. The Worst Case Adjustment
Penalty is intended to develop an
objective criterion that can be quickly
extent possible if such coordination is necessary to
maintain a fair and orderly market and/or to fulfill
the Exchange’s duties as a self-regulatory
organization.
VerDate Sep<11>2014
16:34 Dec 23, 2014
Jkt 235001
determined by the Exchange in
consultation with other options
exchanges that approximates the total
overall exposure to market participants
on the negatively impacted side of each
transaction that occurs during an event.
If the Worst Case Adjustment criterion
exceeds $30,000,000, then an event is a
Significant Market Event. As an
example of the Worst Case Adjustment
Penalty, assume that a single potentially
erroneous transaction in an event is as
follows: Sale of 100 contracts of a
standard option (i.e., an option with a
100 share multiplier). The highest
potential adjustment penalty for this
single transaction would be $6,000,
which would be calculated as $0.30
times 100 (contract multiplier) times
100 (number of contracts) times 2
(applicable Size Adjustment Modifier).
The Exchange would calculate the
highest potential adjustment penalty for
each of the potentially erroneous
transactions in the event and the Worst
Case Adjustment Penalty would be the
sum of such penalties on the Exchange
and all other options exchanges with
affected transactions.
As described above, under the
Proposed Rule if the Worst Case
Adjustment Penalty does not exceed
$30,000,000, then a Significant Market
Event has occurred if the sum of all
applicable event statistics (expressed as
a percentage of the relevant thresholds),
is greater than or equal to 150% and
75% or more of at least one category is
reached. The Proposed Rule further
provides that no single category can
contribute more than 100% to the sum.
As an example of the application of this
provision, assume that in a given event
across all options exchanges that: (A)
The Worst Case Adjustment Penalty is
$12,000,000 (40% of $30,000,000), (B)
300,000 options contracts are
potentially erroneous (60% of 500,000),
(C) the notional value of potentially
erroneous transactions is $30,000,000
(30% of $100,000,000), and (D) 12,000
transactions are potentially erroneous
(120% of 10,000). This event would
qualify as a Significant Market Event
because the sum of all applicable event
statistics would be 230%, far exceeding
the 150% threshold. The 230% sum is
reached by adding 40%, 60%, 30% and
last, 100% (i.e., rounded down from
120%) for the number of transactions.
The Exchange notes that no single
category can contribute more than 100%
to the sum and any category
contributing more than 100% will be
rounded down to 100%.
As an alternative example, assume a
large-scale event occurs involving lowpriced options with a small number of
contracts in each execution. Assume in
PO 00000
Frm 00124
Fmt 4703
Sfmt 4703
this event across all options exchanges
that: (A) The Worst Case Adjustment
Penalty is $600,000 (2% of
$30,000,000), (B) 20,000 options
contracts are potentially erroneous (4%
of 500,000), (C) the notional value of
potentially erroneous transactions is
$20,000,000 (20% of $100,000,000), and
(D) 20,000 transactions are potentially
erroneous (200% of 10,000, but rounded
down to 100%). This event would not
qualify as a Significant Market Event
because the sum of all applicable event
statistics would be 126%, below the
150% threshold. The Exchange
reiterates that as proposed, even when
a single category other than criterion (A)
is fully met, that does not necessarily
qualify an event as a Significant Market
Event.
The Exchange believes that the
breadth and scope of the obvious error
rules are appropriate and sufficient for
handling of typical and common
obvious errors. Coordination between
and among the exchanges should
generally not be necessary even when a
member has an error that results in
executions on more than one exchange.
In setting the thresholds above the
Exchange believes that the requirements
will be met only when truly widespread
and significant errors happen and the
benefits of coordination and information
sharing far outweigh the costs of the
logistics of additional intra-exchange
coordination. The Exchange notes that
in addition to its belief that the
proposed thresholds are sufficiently
high, the Exchange has proposed the
requirement that either criterion (A) is
met or the sum of applicable event
statistics for proposed (A) through (D)
equals or exceeds 150% in order to
ensure that an event is sufficiently large
but also to avoid situations where an
event is extremely large but just misses
potential qualifying thresholds. For
instance, the proposal is designed to
help avoid a situation where the Worst
Case Adjustment Penalty is $15,000,000,
so the event does not qualify based on
criterion (A) alone, but there are
transactions in 490,000 options
contracts that are potentially erroneous
(missing criterion (B) by 10,000
contracts), there transactions with a
notional value of $99,000,000 (missing
criterion (C) by $1,000,000), and there
are 9,000 potentially erroneous
transactions overall (missing criterion
(D) by 1,000 transactions). The
Exchange believes that the proposed
formula, while slightly more
complicated than simply requiring a
certain threshold to be met in each
category, may help to avoid
inapplicability of the proposed
E:\FR\FM\24DEN1.SGM
24DEN1
mstockstill on DSK4VPTVN1PROD with NOTICES
Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Notices
provisions in the context of an event
that would be deemed significant by
most subjective measures but that barely
misses each of the objective criteria
proposed by the Exchange.
To ensure consistent application
across options exchanges, in the event
of a suspected Significant Market Event,
the Exchange shall initiate a
coordinated review of potentially
erroneous transactions with all other
affected options exchanges to determine
the full scope of the event. Under the
Proposed Rule, the Exchange will
promptly coordinate with the other
options exchanges to determine the
appropriate review period as well as
select one or more specific points in
time prior to the transactions in
question and use one or more specific
points in time to determine Theoretical
Price. Other than the selected points in
time, if applicable, the Exchange will
determine Theoretical Price as
described above. For example, around
the start of a SME that is triggered by a
large and aggressively priced buy order,
three exchanges have multiple orders on
the offer side of the market: Exchange A
has offers priced at $2.20, $2.25, $2.30
and several other price levels to $3.00,
Exchange B has offers at $2.45, $2.30
and several other price levels to $3.00,
Exchange C has offers at price levels
between $2.50 and $3.00. Assume an
event occurs starting at 10:05:25 a.m. ET
and in this particular series the
executions begin on Exchange A and
subsequently begin to occur on
Exchanges B and C. Without
coordination and information sharing
between the exchanges, Exchange B and
Exchange C cannot know with certainty
that whether or not the execution at
Exchange A that happened at $2.20
immediately prior to their executions at
$2.45 and $2.50 is part of the same
erroneous event or not. With proper
coordination, the exchanges can
determine that in this series, the proper
point in time from which the event
should be analyzed is 10:05:25 a.m. ET,
and thus, the NBO of $2.20 should be
used as the Theoretical Price for
purposes of all buy transactions in such
options series that occurred during the
event.
If it is determined that a Significant
Market Event has occurred then, using
the parameters agreed with respect to
the times from which Theoretical Price
will be calculated, if applicable, an
Official will determine whether any or
all transactions under review qualify as
Obvious Errors. The Proposed Rule
would require the Exchange to use the
criteria in Proposed Rule 20.6(c), as
described above, to determine whether
an Obvious Error has occurred for each
VerDate Sep<11>2014
16:34 Dec 23, 2014
Jkt 235001
transaction that was part of the
Significant Market Event. Upon taking
any final action, the Exchange would be
required to promptly notify both parties
to the trade electronically or via
telephone.
The execution price of each affected
transaction will be adjusted by an
Official to the price provided below,
unless both parties agree to adjust the
transaction to a different price or agree
to bust the trade.
Theoretical
price (TP)
Buy
transaction
adjustment—
TP plus
Below
$3.00 .....
At or above
$3.00 .....
Sell
transaction
adjustment—
TP minus
$0.15
$0.15
$0.30
$0.30
Thus, the proposed adjustment criteria
for Significant Market Events are
identical to the proposed adjustment
levels for Obvious Errors generally. In
addition, in the context of a Significant
Market Event, any error exceeding 50
contracts will be subject to the Size
Adjustment Modifier described above.
Also, the adjustment criteria would
apply equally to all market participants
(i.e., Customers and non-Customers) in
a Significant Market Event. However, as
is true for the proposal with respect to
Catastrophic Errors, under the Proposed
Rule where at least one party to the
transaction is a Customer, the trade will
be nullified if the adjustment would
result in an execution price higher (for
buy transactions) or lower (for sell
transactions) than the Customer’s limit
price. The Exchange has retained the
protection of a Customer’s limit price in
order to avoid a situation where the
adjustment could be to a price that the
Customer could not afford, which is less
likely to be an issue for a market
professional. The Exchange has
otherwise proposed to treat all market
participants the same in the context of
a Significant Market Event to provide
additional certainty to market
participants with respect to their
potential exposure as soon as an event
has occurred.
Another significant distinction
between the proposed Obvious Error
provision and the proposed Significant
Market Event provision is that if the
Exchange, in consultation with other
options exchanges, determines that
timely adjustment is not feasible due to
the extraordinary nature of the situation,
then the Exchange will nullify some or
all transactions arising out of the
Significant Market Event during the
review period selected by the Exchange
and other options exchanges. To the
PO 00000
Frm 00125
Fmt 4703
Sfmt 4703
77565
extent the Exchange, in consultation
with other options exchanges,
determines to nullify less than all
transactions arising out of the
Significant Market Event, those
transactions subject to nullification will
be selected based upon objective criteria
with a view toward maintaining a fair
and orderly market and the protection of
investors and the public interest. For
example, assume a Significant Market
Event causes 25,000 potentially
erroneous transactions and impacts 51
options classes. Of the 25,000
transactions, 24,000 of them are
concentrated in a single options class.
The exchanges may decide the most
appropriate solution because it will
provide the most certainty to
participants and allow for the prompt
resumption of regular trading is to bust
all trades in the most heavily affected
class between two specific points in
time, while the other 1,000 trades across
the other 50 classes are reviewed and
adjusted as appropriate. A similar
situation might arise directionally
where a Customer submits both
erroneous buy and sell orders and the
number of errors that happened that
were erroneously low priced (i.e.,
erroneous sell orders) were 50,000 in
number but the number of errors that
were erroneously high (i.e., erroneous
buy orders) were only 500 in number.
The most effective and efficient
approach that provides the most
certainty to the marketplace in a
reasonable amount of time while most
closely following the generally
prescribed obvious error rules could be
to bust all of the erroneous sell
transactions but to adjust the erroneous
buy transactions.
With respect to rulings made pursuant
to the proposed Significant Market
Event provision the Exchange believes
that the number of affected transactions
is such that immediate finality is
necessary to maintain a fair and orderly
market and to protect investors and the
public interest. Accordingly, rulings by
the Exchange pursuant to the Significant
Market Event provision would be nonappealable pursuant to the Proposed
Rule.
Additional Provisions
Mutual Agreement
In addition to the objective criteria
described above, the Proposed Rule also
proposes to make clear that the
determination as to whether a trade was
executed at an erroneous price may be
made by mutual agreement of the
affected parties to a particular
transaction. The Proposed Rule would
state that a trade may be nullified or
E:\FR\FM\24DEN1.SGM
24DEN1
77566
Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Notices
mstockstill on DSK4VPTVN1PROD with NOTICES
adjusted on the terms that all parties to
a particular transaction agree, provided,
however, that such agreement to nullify
or adjust must be conveyed to the
Exchange in a manner prescribed by the
Exchange prior to 8:30 a.m. Eastern
Time on the first trading day following
the execution.
The Exchange also proposes to
explicitly state that it is considered
conduct inconsistent with just and
equitable principles of trade for any
Member to use the mutual adjustment
process to circumvent any applicable
Exchange rule, the Act or any of the
rules and regulations thereunder. Thus,
for instance, a Member is precluded
from seeking to avoid applicable tradethrough rules by executing a transaction
and then adjusting such transaction to a
price at which the Exchange would not
have allowed it to execute at the time of
the execution because it traded through
the quotation of another options
exchange. The Exchange notes that in
connection with its obligations as a selfregulatory organization, the Exchange’s
Regulatory Department reviews
adjustments to transactions to detect
potential violations of Exchange rules or
the Act and the rules and regulations
thereunder.
Trading Halts
Exchange Rule 20.3 describes the
Exchange’s authority to declare trading
halts in one or more options traded on
the Exchange. The Exchange proposes to
make clear in the Proposed Rule that it
will nullify any transaction that occurs
during a trading halt in the affected
option on the Exchange pursuant to
Rule 20.3. If any trades occur
notwithstanding a trading halt then the
Exchange believes it appropriate to
nullify such transactions. While the
Exchange may halt options trading for
various reasons, such a scenario almost
certainly is due to extraordinary
circumstances and is potentially the
result of market-wide coordination to
halt options trading or trading generally.
Accordingly, the Exchange does not
believe it is appropriate to allow trades
to stand if such trades should not have
occurred in the first place.
The Exchange proposes to modify
Interpretation and Policy .01 to Rule
20.3. Currently, Interpretation and
Policy .01 states that the Exchange
‘‘may’’ nullify any transaction that
occurs: (a) During a trading halt in the
affected option on the Exchange; or (b)
with respect to equity options
(including options overlying ETFs),
during a trading halt on the primary
listing market for the underlying
security. To ensure consistency with the
trading halt provision of the Proposed
VerDate Sep<11>2014
16:34 Dec 23, 2014
Jkt 235001
Rule, the Exchange proposes to modify
Interpretation and Policy .01 to Rule
20.3 to state that in either situation the
Exchange ‘‘shall’’ nullify transactions.
Erroneous Print and Quotes in
Underlying Security
Market participants on the Exchange
likely base the pricing of their orders
submitted to the Exchange on the price
of the underlying security for the
option. Thus, the Exchange believes it is
appropriate to adopt provisions that
allow adjustment or nullification of
transactions based on erroneous prints
or erroneous quotes in the underlying
security.
The Exchange proposes to adopt
language in the Proposed Rule stating
that a trade resulting from an erroneous
print(s) disseminated by the underlying
market that is later nullified by that
underlying market shall be adjusted or
busted as set forth in the Obvious Error
provisions of the Proposed Rule,
provided a party notifies the Exchange’s
Trade Desk in a timely manner, as
further described below. The Exchange
proposes to define a trade resulting from
an erroneous print(s) as any options
trade executed during a period of time
for which one or more executions in the
underlying security are nullified and for
one second thereafter. The Exchange
believes that one second is an
appropriate amount of time in which an
options trade would be directly based
on executions in the underlying equity
security. The Exchange also proposes to
require that if a party believes that it
participated in an erroneous transaction
resulting from an erroneous print(s)
pursuant to the proposed erroneous
print provision it must notify the
Exchange’s Trade Desk within the
timeframes set forth in the Obvious
Error provision described above. The
Exchange has also proposed to state that
the allowed notification timeframe
commences at the time of notification
by the underlying market(s) of
nullification of transactions in the
underlying security. Further, the
Exchange proposes that if multiple
underlying markets nullify trades in the
underlying security, the allowed
notification timeframe will commence
at the time of the first market’s
notification.
As an example of a situation in which
a trade results from an erroneous print
disseminated by the underlying market
that is later nullified by the underlying
market, assume that a given underlying
is trading in the $49.00–$50.00 price
range then has an erroneous print at
$5.00. Given that there is the potential
perception that the underlying has gone
through a dramatic price revaluation,
PO 00000
Frm 00126
Fmt 4703
Sfmt 4703
numerous options trades could
promptly trigger based off of this new
price. However, because the price that
triggered them was not a valid price it
would be appropriate to review said
option trades when the underlying print
that triggered them is removed.
The Exchange also proposes to add a
provision stating that a trade resulting
from an erroneous quote(s) in the
underlying security shall be adjusted or
busted as set forth in the Obvious Error
provisions of the Proposed Rule,
provided a party notifies the Exchange’s
Trade Desk in a timely manner, as
further described below. Pursuant to the
Proposed Rule, an erroneous quote
occurs when the underlying security has
a width of at least $1.00 and has a width
at least five times greater than the
average quote width for such underlying
security during the time period
encompassing two minutes before and
after the dissemination of such quote.
For purposes of the Proposed Rule, the
average quote width will be determined
by adding the quote widths of sample
quotations at regular 15-second intervals
during the four-minute time period
referenced above (excluding the quote(s)
in question) and dividing by the number
of quotes during such time period
(excluding the quote(s) in question).10
Similar to the proposal with respect to
erroneous prints described above, if a
party believes that it participated in an
erroneous transaction resulting from an
erroneous quote(s) it must notify the
Exchange’s Trade Desk in accordance
with the notification provisions of the
Obvious Error provision described
above. The Proposed Rule, therefore,
puts the onus on each Member to notify
the Exchange if such Member believes
that a trade should be reviewed
pursuant to either of the proposed
provisions, as the Exchange is not in
position to determine the impact of
erroneous prints or quotes on individual
Members. The Exchange notes that it
does not believe that additional time is
necessary with respect to a trade based
on an erroneous quote because a
Member has all information necessary to
detect the error at the time of an option
transaction that was triggered by an
erroneous quote, which is in contrast to
the proposed erroneous print provision
that includes a dependency on an action
10 The Exchange has proposed the price and time
parameters for quote width and average quote width
used to determine whether an erroneous quote has
occurred based on established rules of options
exchanges that currently apply such parameters.
See, e.g., CBOE Rule 6.25(a)(5); NYSE Arca Rule
6.87(a)(5). Based on discussions with these
exchanges, the Exchange believes that the
parameters are a reasonable approach to determine
whether an erroneous quote has occurred for
purposes of the proposed rule.
E:\FR\FM\24DEN1.SGM
24DEN1
Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Notices
by the market where the underlying
security traded.
As an example of a situation in which
a trade results from an erroneous quote
in the underlying security, assume again
that a given underlying is quoting and
trading in the $49.00–$50.00 price range
then a liquidity gap occurs, with bidders
not representing quotes in the market
place and an offer quoted at $5.00.
Quoting may quickly return to normal,
again in the $49.00–$50.00 price range,
but due to the potential perception that
the underlying has gone through a
dramatic price revaluation, numerous
options trades could trigger based off of
this new quoted price in the interim.
Because the price that triggered such
trades was not a valid price it would be
appropriate to review said option trades.
mstockstill on DSK4VPTVN1PROD with NOTICES
Stop (and Stop-Limit) Order Trades
Triggered by Erroneous Trades
The Exchange notes that certain
market participants and their customers
enter stop or stop limit orders that are
triggered based on executions in the
marketplace. As proposed, transactions
resulting from the triggering of a stop or
stop-limit order by an erroneous trade in
an option contract shall be nullified by
the Exchange, provided a party notifies
the Exchange’s Trade Desk in a timely
manner as set forth below. The
Exchange believes it is appropriate to
nullify executions of stop or stop-limit
orders that were wrongly triggered
because such transactions should not
have occurred. If a party believes that it
participated in an erroneous transaction
pursuant to the Proposed Rule it must
notify the Exchange’s Trade Desk within
the timeframes set forth in the Obvious
Error Rule above, with the allowed
notification timeframe commencing at
the time of notification of the
nullification of transaction(s) that
triggered the stop or stop-limit order.
Linkage Trades
The Exchange also proposes to adopt
language that clearly provides the
Exchange with authority to take
necessary actions when another options
exchange nullifies or adjusts a
transaction pursuant to its respective
rules and the transaction resulted from
an order that has passed through the
Exchange and been routed on to another
options exchange on behalf of the
Exchange. Specifically, if the Exchange
routes an order pursuant to the
Intermarket Option Linkage Plan 11 that
results in a transaction on another
options exchange (a ‘‘Linkage Trade’’)
and such options exchange
subsequently nullifies or adjusts the
11 As
defined in Exchange Rule 27.1(17).
VerDate Sep<11>2014
16:34 Dec 23, 2014
Jkt 235001
Linkage Trade pursuant to its rules, the
Exchange will perform all actions
necessary to complete the nullification
or adjustment of the Linkage Trade.
Although the Exchange is not utilizing
its own authority to nullify or adjust a
transaction related to an action taken on
a Linkage Trade by another options
exchange, the Exchange does have to
assist in the processing of the
adjustment or nullification of the order,
such as notification to the Member and
the OCC of the adjustment or
nullification. Thus, the Exchange
believes that the proposed provision
adds additional transparency to the
Proposed Rule.
Appeals
The Exchange proposes to maintain
its current appeals process in
connection with the Proposed Rule.
Specifically, if a member of BATS
Options (‘‘Options Member’’) affected
by a determination made under the
Proposed Rule requests within the time
permitted below, the Obvious Error
Panel (‘‘Obvious Error Panel’’) will
review decisions made by the BATS
Official, including whether an obvious
error occurred and whether the correct
determination was made.
In order to maintain a diverse group
of participants, the Obvious Error Panel
will be comprised of the Exchange’s
Chief Regulatory Officer (‘‘CRO’’) or a
designee of the CRO, a representative of
one (1) Options Member engaged in
market making (any such representative,
a ‘‘MM Representative’’) and
representatives from two (2) Options
Members satisfying one or both of the
criteria set forth below (any such
representative, a ‘‘Non-MM
Representative’’). To qualify as a NonMM Representative a person must: Be
employed by an Options Member whose
revenues from options market making
activity do not exceed ten percent (10%)
of its total revenues; or have as his or
her primary responsibility the handling
of Public Customer orders or
supervisory responsibility over persons
with such responsibility, and not have
any responsibilities with respect to
market making activities.
In order to further assure a diverse
group of potential participants on an
Obvious Error Panel, the Exchange shall
designate at least ten (10) MM
Representatives and at least ten (10)
Non-MM Representatives to be called
upon to serve on the Obvious Error
Panel as needed. To assure fairness, in
no case shall an Obvious Error Panel
include a person affiliated with a party
to the trade in question. Also, to the
extent reasonably possible, the
Exchange shall call upon the designated
PO 00000
Frm 00127
Fmt 4703
Sfmt 4703
77567
representatives to participate on an
Obvious Error Panel on an equally
frequent basis.
Under the Proposed Rule a request for
review on appeal must be made in
writing via email or other electronic
means specified from time to time by
the Exchange in a circular distributed to
Options Members within thirty (30)
minutes after the party making the
appeal is given notification of the initial
determination being appealed. The
Obvious Error Panel shall review the
facts and render a decision as soon as
practicable, but generally on the same
trading day as the execution(s) under
review. On requests for appeal received
after 3:00 p.m. Eastern Time, a decision
will be rendered as soon as practicable,
but in no case later than the trading day
following the date of the execution
under review.
The Obvious Error Panel may
overturn or modify an action taken by
the BATS Official under this Rule. All
determinations by the Obvious Error
Panel shall constitute final action by the
Exchange on the matter at issue. The
Exchange believes that this is necessary
given the purpose of the appeal is
finality.
In order to deter frivolous appeals, if
the Obvious Error Panel votes to uphold
the decision made pursuant to the
Proposed Rule, the Exchange will assess
a $500.00 fee against the Options
Member(s) who initiated the request for
appeal. In addition, in instances where
the Exchange, on behalf of an Options
Member, requests a determination by
another market center that a transaction
is clearly erroneous, the Exchange will
pass any resulting charges through to
the relevant Options Member.
Any determination by an Officer or by
the Obvious Error Panel shall be
rendered without prejudice as to the
rights of the parties to the transaction to
submit their dispute to arbitration.
Limit Up-Limit Down Plan
The Exchange is proposing to adopt
Interpretation and Policy .01 to the
Proposed Rule to provide for how the
Exchange will treat Obvious and
Catastrophic Errors in response to the
Regulation NMS Plan to Address
Extraordinary Market Volatility
Pursuant to Rule 608 of Regulation NMS
under the Act (the ‘‘Limit Up-Limit
Down Plan’’ or the ‘‘Plan),12 which is
applicable to all NMS stocks, as defined
in Regulation NMS Rule 600(b)(47).13
Under the Proposed Rule, during a pilot
12 Securities Exchange Act Release No. 67091
(May 31, 2012), 77 FR 33498 (June 6, 2012) (order
approving the Plan on a pilot basis).
13 17 CFR 242.600(b)(47).
E:\FR\FM\24DEN1.SGM
24DEN1
mstockstill on DSK4VPTVN1PROD with NOTICES
77568
Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Notices
period to coincide with the pilot period
for the Plan, including any extensions to
the pilot period for the Plan, an
execution will not be subject to review
as an Obvious Error or Catastrophic
Error pursuant to paragraph (c) or (d) of
the Proposed Rule if it occurred while
the underlying security was in a ‘‘Limit
State’’ or ‘‘Straddle State,’’ as defined in
the Plan. The Exchange, however,
proposes to retain authority to review
transactions on an Official’s own motion
pursuant to sub-paragraph (c)(3) of the
Proposed Rule and to bust or adjust
transactions pursuant to the proposed
Significant Market Event provision, the
proposed trading halts provision, the
proposed provisions with respect to
erroneous prints and quotes in the
underlying security, or the proposed
provision related to stop and stop limit
orders that have been triggered by an
erroneous execution. The Exchange
believes that these safeguards will
provide the Exchange with the
flexibility to act when necessary and
appropriate to nullify or adjust a
transaction, while also providing market
participants with certainty that, under
normal circumstances, the trades they
affect with quotes and/or orders having
limit prices will stand irrespective of
subsequent moves in the underlying
security.
During a Limit or Straddle State,
options prices may deviate substantially
from those available immediately prior
to or following such States. Thus,
determining a Theoretical Price in such
situations would often be very
subjective, creating unnecessary
uncertainty and confusion for investors.
Because of this uncertainty, the
Exchange is proposing to amend Rule
20.6 to provide that the Exchange will
not review transactions as Obvious
Errors or Catastrophic Errors when the
underlying security is in a Limit or
Straddle State.
The Exchange notes that there are
additional protections in place outside
of the Obvious and Catastrophic Error
Rule that will continue to safeguard
customers. First, the Exchange rejects all
un-priced options orders received by the
Exchange (i.e., Market Orders) during a
Limit or Straddle State for the
underlying security. Second, SEC Rule
15c3–5 requires that, ‘‘financial risk
management controls and supervisory
procedures must be reasonably designed
to prevent the entry of orders that
exceed appropriate pre-set credit or
capital thresholds, or that appear to be
erroneous.’’ 14 Third, the Exchange has
14 See Securities and Exchange Act Release No.
63241 (November 3, 2010), 75 FR 69791 (November
15, 2010) (File No. S7–03–10).
VerDate Sep<11>2014
16:34 Dec 23, 2014
Jkt 235001
price checks applicable to limit orders
that reject limit orders that are priced
sufficiently far through the national best
bid or national best offer (‘‘NBBO’’) that
it seems likely an error occurred. The
rejection of Market Orders, the
requirements placed upon broker
dealers to adopt controls to prevent the
entry of orders that appear to be
erroneous, and Exchange functionality
that filters out orders that appear to be
erroneous, will all serve to sharply
reduce the incidence of erroneous
transactions.
The Exchange represents that it will
conduct its own analysis concerning the
elimination of the Obvious Error and
Catastrophic Error provisions during
Limit and Straddle States and agrees to
provide the Commission with relevant
data to assess the impact of this
proposed rule change. As part of its
analysis, the Exchange will evaluate (1)
the options market quality during Limit
and Straddle States, (2) assess the
character of incoming order flow and
transactions during Limit and Straddle
States, and (3) review any complaints
from Members and their customers
concerning executions during Limit and
Straddle States. The Exchange also
agrees to provide to the Commission
data requested to evaluate the impact of
the inapplicability of the Obvious Error
and Catastrophic Error provisions,
including data relevant to assessing the
various analyses noted above.
In connection with this proposal, the
Exchange will provide to the
Commission and the public a dataset
containing the data for each Straddle
State and Limit State in NMS Stocks
underlying options traded on the
Exchange beginning in the month
during which the proposal is approved,
limited to those option classes that have
at least one (1) trade on the Exchange
during a Straddle State or Limit State.
For each of those option classes
affected, each data record will contain
the following information:
• Stock symbol, option symbol, time
at the start of the Straddle or Limit
State, an indicator for whether it is a
Straddle or Limit State.
• For activity on the Exchange:
Æ executed volume, time-weighted
quoted bid-ask spread, time-weighted
average quoted depth at the bid, timeweighted average quoted depth at the
offer;
Æ high execution price, low execution
price;
Æ number of trades for which a
request for review for error was received
during Straddle and Limit States;
Æ an indicator variable for whether
those options outlined above have a
price change exceeding 30% during the
PO 00000
Frm 00128
Fmt 4703
Sfmt 4703
underlying stock’s Limit 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).
Another indicator variable for whether
the option price within five minutes of
the underlying stock leaving the Limit
or Straddle state (or halt if applicable)
is 30% away from the price before the
start of the Limit or Straddle State.
In addition, the Exchange shall
provide to the Commission assessments
relating to the impact of the operation
of the Obvious Error rules during Limit
and Straddle States as follows: (1)
Evaluate the statistical and economic
impact of Limit and Straddle States on
liquidity and market quality in the
options markets; and (2) Assess whether
the lack of Obvious Error rules in effect
during the Straddle and Limit States are
problematic. The timing of this
submission would coordinate with
Participants’ proposed time frame to
submit to the Commission assessments
as required under Appendix B of the
Plan.
No Adjustments to a Worse Price
Finally, the Exchange proposes to
include Interpretation and Policy .02 to
the Proposed Rule, which would make
clear that to the extent the provisions of
the proposed Rule would result in the
Exchange applying an adjustment of an
erroneous sell transaction to a price
lower than the execution price or an
erroneous buy transaction to a price
higher than the execution price, the
Exchange will not adjust or nullify the
transaction, but rather, the execution
price will stand.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with the
requirements of the Act and the rules
and regulations thereunder that are
applicable to a national securities
exchange, and, in particular, with the
requirements of section 6(b) of the
Act.15 Specifically, the proposal is
consistent with section 6(b)(5) of the
Act 16 because it would promote just
and equitable principles of trade,
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.
As described above, the Exchange and
other options exchanges are seeking to
adopt harmonized rules related to the
adjustment and nullification of
erroneous options transactions. The
15 15
16 15
E:\FR\FM\24DEN1.SGM
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
24DEN1
mstockstill on DSK4VPTVN1PROD with NOTICES
Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Notices
Exchange believes that the Proposed
Rule will provide greater transparency
and clarity with respect to the
adjustment and nullification of
erroneous options transactions.
Particularly, the proposed changes seek
to achieve consistent results for
participants across U.S. options
exchanges while maintaining a fair and
orderly market, protecting investors and
protecting the public interest. Based on
the foregoing, the Exchange believes
that the proposal is consistent with
section 6(b)(5) of the Act 17 in that the
Proposed Rule will foster cooperation
and coordination with persons engaged
in regulating and facilitating
transactions.
The Exchange believes the various
provisions allowing or dictating
adjustment rather than nullification of a
trade are necessary given the benefits of
adjusting a trade price rather than
nullifying the trade completely. Because
options trades are used to hedge, or are
hedged by, transactions in other
markets, including securities and
futures, many Members, and their
customers, would rather adjust prices of
executions rather than nullify the
transactions and, thus, lose a hedge
altogether. As such, the Exchange
believes it is in the best interest of
investors to allow for price adjustments
as well as nullifications. The Exchange
further discusses specific aspects of the
Proposed Rule below.
The Exchange does not believe that
the proposal is unfairly discriminatory,
even though it differentiates in many
places between Customers and nonCustomers. The rules of the options
exchanges, including the Exchange’s
existing Obvious Error provision, often
treat Customers differently, often
affording them preferential treatment.
This treatment is appropriate in light of
the fact that Customers are not
necessarily immersed in the day-to-day
trading of the markets, are less likely to
be watching trading activity in a
particular option throughout the day,
and may have limited funds in their
trading accounts. At the same time, the
Exchange reiterates that in the U.S.
options markets generally there is
significant retail customer participation
that occurs directly on (and only on)
options exchanges such as the
Exchange. Accordingly, differentiating
among market participants with respect
to the adjustment and nullification of
erroneous options transactions is not
unfairly discriminatory because it is
reasonable and fair to provide
Customers with additional protections
as compared to non-Customers.
17 15
U.S.C. 78f(b)(5).
VerDate Sep<11>2014
16:34 Dec 23, 2014
Jkt 235001
The Exchange believes that its
proposal with respect to the allowance
of mutual agreed upon adjustments or
nullifications is appropriate and
consistent with the Act, as such
proposal removes impediments to and
perfects the mechanism of a free and
open market and a national market
system, allowing participants to
mutually agree to correct an erroneous
transactions without the Exchange
mandating the outcome. The Exchange
also believes that its proposal with
respect to mutual adjustments is
consistent with the Act because it is
designed to prevent fraudulent and
manipulative acts and practices by
explicitly stating that it is considered
conduct inconsistent with just and
equitable principles of trade for any
Member to use the mutual adjustment
process to circumvent any applicable
Exchange rule, the Act or any of the
rules and regulations thereunder.
The Exchange believes its proposal to
provide within the Proposed Rule
definitions of Customer, erroneous sell
transaction and erroneous buy
transaction, and Official is consistent
with section 6(b)(5) of the Act because
such terms will provide more certainty
to market participants as to the meaning
of the Proposed Rule and reduce the
possibility that a party can intentionally
submit an order hoping for the market
to move in their favor in reliance on the
Rule as a safety mechanism, thereby
promoting just and fair principles of
trade. Similarly, the Exchange believes
that proposed Interpretation and Policy
.02 is consistent with the Act as it
would make clear that the Exchange
will not adjust or nullify a transaction,
but rather, the execution price will
stand when the applicable adjustment
criteria would actually adjust the price
of the transaction to a worse price (i.e.,
higher for an erroneous buy or lower for
an erroneous sell order).
As set forth below, the Exchange
believes it is consistent with section
6(b)(5) of the Act for the Exchange to
determine Theoretical Price when the
NBBO cannot reasonably be relied upon
because the alternative could result in
transactions that cannot be adjusted or
nullified even when they are otherwise
clearly at a price that is significantly
away from the appropriate market for
the option. Similarly, reliance on an
NBBO that is not reliable could result in
adjustment to prices that are still
significantly away from the appropriate
market for the option.
The Exchange believes that its
proposal with respect to determining
Theoretical Price is consistent with the
Act in that it has retained the standard
of the current rule, which is to rely on
PO 00000
Frm 00129
Fmt 4703
Sfmt 4703
77569
the NBBO to determine Theoretical
Price if such NBBO can reasonably be
relied upon. Because, however, there is
not always an NBBO that can or should
be used in order to administer the rule,
the Exchange has proposed various
provisions that provide the Exchange
with the authority to determine a
Theoretical Price. The Exchange
believes that the Proposed Rule is
transparent with respect to the
circumstances under which the
Exchange will determine Theoretical
Price, and has sought to limit such
circumstances as much as possible. The
Exchange notes that Exchange personnel
currently are required to determine
Theoretical Price in certain
circumstances. While the Exchange
continues to pursue alternative
solutions that might further enhance the
objectivity and consistency of
determining Theoretical Price, the
Exchange believes that the discretion
currently afforded to Exchange Officials
is appropriate in the absence of a
reliable NBBO that can be used to set
the Theoretical Price.
With respect to the specific proposed
provisions for determining Theoretical
Price for transactions that occur as part
of the Exchange’s Opening Process and
in situations where there is a wide
quote, the Exchange believes both
provisions are consistent with the Act
because they provide objective criteria
that will determine Theoretical Price
with limited exceptions for situations
where the Exchange does not believe the
NBBO is a reasonable benchmark or
there is no NBBO. The Exchange notes
in particular with respect to the wide
quote provision that the Proposed Rule
will result in the Exchange determining
Theoretical Price less frequently than it
would pursuant to wide quote
provisions that have previously been
approved. The Exchange believes that it
is appropriate and consistent with the
Act to afford protections to market
participants by not relying on the NBBO
to determine Theoretical Price when the
quote is extremely wide but had been,
in the prior 10 seconds, at much more
reasonable width. The Exchange also
believes it is appropriate and consistent
with the Act to use the NBBO to
determine Theoretical Price when the
quote has been wider than the
applicable amount for more than 10
seconds, as the Exchange does not
believe it is necessary to apply any other
criteria in such a circumstance. The
Exchange believes that market
participants can easily use or adopt
safeguards to prevent errors when such
market conditions exist. When entering
an order into a market with a
E:\FR\FM\24DEN1.SGM
24DEN1
mstockstill on DSK4VPTVN1PROD with NOTICES
77570
Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Notices
persistently wide quote, the Exchange
does not believe that the entering party
should reasonably expect anything other
than the quoted price of an option.
The Exchange believes that its
proposal to adopt clear but disparate
standards with respect to the deadline
for submitting a request for review of
Customer and non-Customer
transactions is consistent with the Act,
particularly in that it creates a greater
level of protection for Customers. As
noted above, the Exchange believes that
this is appropriate and not unfairly
discriminatory in light of the fact that
Customers are not necessarily immersed
in the day-to-day trading of the markets
and are less likely to be watching
trading activity in a particular option
throughout the day. Thus, Members
representing Customer orders
reasonably may need additional time to
submit a request for review. The
Exchange also believes that its proposal
to provide additional time for
submission of requests for review of
linkage trades is reasonable and
consistent with the protection of
investors and the public interest due to
the time that it might take an options
exchange or third-party routing broker
to file a request for review with the
Exchange if the initial notification of an
error is received by the originating
options exchange near the end of such
options exchange’s filing deadline.
Without this additional time, there
could be disparate results based purely
on the existence of intermediaries and
an interconnected market structure.
In relation to the aspect of the
proposal giving Officials the ability to
review transactions for obvious errors
on their own motion, the Exchange
notes that an Official can adjust or
nullify a transaction under the authority
granted by this provision only if the
transaction meets the specific and
objective criteria for an Obvious Error
under the Proposed Rule. As noted
above, this is designed to give an
Official the ability to provide parties
relief in those situations where they
have failed to report an apparent error
within the established notification
period. However, the Exchange will
only grant relief if the transaction meets
the requirements for an Obvious Error as
described in the Proposed Rule.
The Exchange believes that its
proposal to adjust non-Customer
transactions and to nullify Customer
transactions that qualify as Obvious
Errors is appropriate for reasons
consistent with those described above.
In particular, Customers are not
necessarily immersed in the day-to-day
trading of the markets, are less likely to
be watching trading activity in a
VerDate Sep<11>2014
16:34 Dec 23, 2014
Jkt 235001
particular option throughout the day,
and may have limited funds in their
trading accounts.
The Exchange acknowledges that the
proposal contains some uncertainty
regarding whether a trade will be
adjusted or nullified, depending on
whether one of the parties is a
Customer, because a party may not
know whether the other party to a
transaction was a Customer at the time
of entering into the transaction.
However, the Exchange believes that the
proposal nevertheless promotes just and
equitable principles of trade and
protects investors as well as the public
interest because it eliminates the
possibility that a Customer’s order will
be adjusted to a significantly different
price. As noted above, the Exchange
believes it is consistent with the Act to
afford Customers greater protections
under the Proposed Rule than are
afforded to non-Customers. Thus, the
Exchange believes that its proposal is
consistent with the Act in that it
protects investors and the public
interest by providing additional
protections to those that are less
informed and potentially less able to
afford an adjustment of a transaction
that was executed in error. Customers
are also less likely to have engaged in
significant hedging or other trading
activity based on earlier transactions,
and thus, are less in need of maintaining
a position at an adjusted price than nonCustomers.
If any Member submits requests to the
Exchange for review of transactions
pursuant to the Proposed Rule, and in
aggregate that Member has 200 or more
Customer transactions under review
concurrently and the orders resulting in
such transactions were submitted
during the course of 2 minutes or less,
the Exchange believes it is appropriate
for the Exchange apply the nonCustomer adjustment criteria described
above to such transactions. The
Exchange believes that the proposed
aggregation is reasonable as it is
representative of an extremely large
number of orders submitted to the
Exchange over a relatively short period
of time that are, in turn, possibly
erroneous (and within a time frame
significantly less than an entire day),
and thus is most likely to occur because
of a systems issue experienced by an
Options Member representing Customer
orders or a systems issue coupled with
the erroneous marking of orders. The
Exchange does not believe it is possible
at a level of 200 Customer orders over
a 2 minute period that are under review
at one time that multiple, separate
Customers were responsible for the
errors in the ordinary course of trading.
PO 00000
Frm 00130
Fmt 4703
Sfmt 4703
In the event of a large-scale issue caused
by an Options Member that has
submitted orders over a 2 minute period
marked as Customer that resulted in
more than 200 transactions under
review, the Exchange does not believe it
is appropriate to nullify all such
transactions because of the negative
impact that nullification could have on
the market participants on the contraside of such transactions, who might
have engaged in hedging and trading
activity following such transactions. In
order for a participant to have more than
200 transactions under review
concurrently when the orders triggering
such transactions were received in 2
minutes or less, the Exchange believes
that a market participant will have far
exceeded the normal behavior of
customers deserving protected status.
While the Exchange continues to believe
that it is appropriate to nullify
transactions in such a circumstance if
both participants to a transaction are
Customers, the Exchange does not
believe it is appropriate to place the
overall risk of a significant number of
trade breaks on non-Customers that in
the normal course of business may have
engaged in additional hedging activity
or trading activity based on such
transactions. Thus, the Exchange
believes it is necessary and appropriate
to protect non-Customers in such a
circumstance by applying the nonCustomer adjustment criteria, and thus
adjusting transactions as set forth above,
in the event a Member has more than
200 transactions under review
concurrently. In summary, due to the
extreme level at which the proposal is
set, the Exchange believes that the
proposal is consistent with section
6(b)(5) of the Act in that it promotes just
and equitable principles of trade by
encouraging market participants to
retain appropriate controls over their
systems to avoid submitting a large
number of erroneous orders in a short
period of time.
Similarly, the Exchange believes that
the proposed Size Adjustment Modifier,
which would increase the adjustment
amount for non-Customer transactions,
is appropriate because it attempts to
account for the additional risk that the
parties to the trade undertake for
transactions that are larger in scope. The
Exchange believes that the Size
Adjustment Modifier creates additional
incentives to prevent more impactful
Obvious Errors and it lessens the impact
on the contra-party to an adjusted trade.
The Exchange notes that these contraparties may have preferred to only trade
the size involved in the transaction at
the price at which such trade occurred,
E:\FR\FM\24DEN1.SGM
24DEN1
mstockstill on DSK4VPTVN1PROD with NOTICES
Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Notices
and in trading larger size has committed
a greater level of capital and bears a
larger hedge risk.
The Exchange similarly believes that
its Proposed Rule with respect to
Catastrophic Errors is consistent with
the Act as it affords additional time for
market participants to file for review of
erroneous transactions that were further
away from the Theoretical Price. At the
same time, the Exchange believes that
the Proposed Rule is consistent with the
Act in that it generally would adjust
transactions, including Customer
transactions, because this will protect
against hedge risk, particularly for
transactions that may have occurred
several hours earlier and thus, which all
parties to the transaction might presume
are protected from further modification.
Similarly, by providing larger
adjustment amounts away from
Theoretical Price than are set forth
under the Obvious Error provision, the
Catastrophic Error provision also takes
into account the possibility that the
party that was advantaged by the
erroneous transaction has already taken
actions based on the assumption that
the transaction would stand. The
Exchange believes it is reasonable to
specifically protect Customers from
adjustments through their limit prices
for the reasons stated above, including
that Customers are less likely to be
watching trading throughout the day
and that they may have less capital to
afford an adjustment price. The
Exchange believes that the proposal
provides a fair process that will ensure
that Customers are not forced to accept
a trade that was executed in violation of
their limit order price. In contrast,
market professionals are more likely to
have engaged in hedging or other
trading activity based on earlier trading
activity, and thus, are more likely to be
willing to accept an adjustment rather
than a nullification to preserve their
positions even if such adjustment is to
a price through their limit price.
The Exchange believes that proposed
rule change to adopt the Significant
Market Event provision is consistent
with section 6(b)(5) of the Act in that it
will foster cooperation and coordination
with persons engaged in regulating the
options markets. In particular, the
Exchange believes it is important for
options exchanges to coordinate when
there is a widespread and significant
event, as commonly, multiple options
exchanges are impacted in such an
event. Further, while the Exchange
recognizes that the Proposed Rule will
not guarantee a consistent result for all
market participants on every market, the
Exchange does believe that it will assist
in that outcome. For instance, if options
VerDate Sep<11>2014
16:34 Dec 23, 2014
Jkt 235001
exchanges are able to agree as to the
time from which Theoretical Price
should be determined and the period of
time that should be reviewed, the likely
disparity between the Theoretical Prices
used by such exchanges should be very
slight and, in turn, with otherwise
consistent rules, the results should be
similar. The Exchange also believes that
the Proposed Rule is consistent with the
Act in that it generally would adjust
transactions, including Customer
transactions, because this will protect
against hedge risk, particularly for
liquidity providers that might have been
quoting in thousands or tens of
thousands of different series and might
have affected executions throughout
such quoted series. The Exchange
believes that when weighing the
competing interests between preferring
a nullification for a Customer
transaction and an adjustment for a
transaction of a market professional,
while nullification is appropriate in a
typical one-off situation that it is
necessary to protect liquidity providers
in a widespread market event because,
presumably, they will be the most
affected by such an event (in contrast to
a Customer who, by virtue of their status
as such, likely would not have more
than a small number of affected
transactions). The Exchange believes
that the protection of liquidity providers
by favoring adjustments in the context
of Significant Market Events can also
benefit Customers indirectly by better
enabling liquidity providers, which
provides a cumulative benefit to the
market. Also, as stated above with
respect to Catastrophic Errors, the
Exchange believes it is reasonable to
specifically protect Customers from
adjustments through their limit prices
for the reasons stated above, including
that Customers are less likely to be
watching trading throughout the day
and that they may have less capital to
afford an adjustment price. The
Exchange believes that the proposal
provides a fair process that will ensure
that Customers are not forced to accept
a trade that was executed in violation of
their limit order price. In contrast,
market professionals are more likely to
have engaged in hedging or other
trading activity based on earlier trading
activity, and thus, are more likely to be
willing to accept an adjustment rather
than a nullification to preserve their
positions even if such adjustment is to
a price through their limit price. In
addition, the Exchange believes it is
important to have the ability to nullify
some or all transactions arising out of a
Significant Market Event in the event
timely adjustment is not feasible due to
PO 00000
Frm 00131
Fmt 4703
Sfmt 4703
77571
the extraordinary nature of the situation.
In particular, although the Exchange has
worked to limit the circumstances in
which it has to determine Theoretical
Price, in a widespread event it is
possible that hundreds if not thousands
of series would require an Exchange
determination of Theoretical Price. In
turn, if there are hundreds or thousands
of trades in such series, it may not be
practicable for the Exchange to
determine the adjustment levels for all
non-Customer transactions in a timely
fashion, and in turn, it would be in the
public interest to instead more promptly
deliver a simple, consistent result of
nullification.
The Exchange believes that proposed
rule change related to review,
nullification and/or adjustment of
erroneous transactions during a trading
halt (including the proposed
modification to Rule 20.3), an erroneous
print in the underlying security, an
erroneous quote in the underlying
security, or an erroneous transaction in
the option with respect to stop and stop
limit orders is likewise consistent with
section 6(b)(5) of the Act because the
proposal provides for the adjustment or
nullification of trades executed at
erroneous prices through no fault on the
part of the trading participants.
Allowing for Exchange review in such
situations will promote just and fair
principles of trade by protecting
investors from harm that is not of their
own making. Specifically with respect
to the proposed provisions governing
erroneous prints and quotes in the
underlying security, the Exchange notes
that market participants on the
Exchange base the value of their quotes
and orders on the price of the
underlying security. The provisions
regarding errors in prints and quotes in
the underlying security cover instances
where the information market
participants use to price options is
erroneous through no fault of their own.
In these instances, market participants
have little, if any, chance of pricing
options accurately. Thus, these
provisions are designed to provide relief
to market participants harmed by such
errors in the prints or quotes of the
underlying security.
The Exchange believes that the
proposed provision related to Linkage
Trades is consistent with the Act
because it adds additional transparency
to the Proposed Rule and makes clear
that when a Linkage Trade is adjusted
or nullified by another options
exchange, the Exchange will take
necessary actions to complete the
nullification or adjustment of the
Linkage Trade.
E:\FR\FM\24DEN1.SGM
24DEN1
mstockstill on DSK4VPTVN1PROD with NOTICES
77572
Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Notices
The Exchange believes that retaining
the same appeals process as the
Exchange maintains under the Current
Rule is consistent with the Act because
such process provides Options Members
with due process in connection with
decisions made by Exchange Officials
under the Proposed Rule. The Exchange
believes that this process provides fair
representation of Options Members by
ensuring diversity amongst the members
of any Obvious Error Review Panel,
which is consistent with sections 6(b)(3)
and 6(b)(7) of the Act. The Exchange
also believes that the proposed appeals
process is appropriate with respect to
financial penalties for appeals that
result in a decision of the Exchange
being upheld because it discourages
frivolous appeals, thereby reducing the
possibility of overusing Exchange
resources that can instead be focused on
other, more productive activities. The
fees with respect to such financial
penalties are the same as under the
Current Rule, and are equitable and not
unfairly discriminatory because they
will be applied uniformly to all Options
Members and are designed to reduce
administrative burden on the Exchange
as well as market participants that
volunteer to participate on Obvious
Error Review Panels.
With regard to the portion of the
Exchange’s proposal related to the
applicability of the Obvious Error Rule
when the underlying security is in a
Limit or Straddle State, the Exchange
believes that the proposed rule change
is consistent with section 6(b)(5) of the
Act because it will provide certainty
about how errors involving options
orders and trades will be handled
during periods of extraordinary
volatility in the underlying security.
Further, the Exchange believes that it is
necessary and appropriate in the
interest of promoting fair and orderly
markets to exclude from Rule 20.6 those
transactions executed during a Limit or
Straddle State.
The Exchange believes the application
of the Proposed Rule without the
proposed provision would be
impracticable given the lack of reliable
NBBO in the options market during
Limit and Straddle States, and that the
resulting actions (i.e., nullified trades or
adjusted prices) may not be appropriate
given market conditions. The Proposed
Rule change would ensure that limit
orders that are filled during a Limit
State or Straddle State would have
certainty of execution in a manner that
promotes just and equitable principles
of trade, removes impediments to, and
perfects the mechanism of a free and
open market and a national market
system.
VerDate Sep<11>2014
16:34 Dec 23, 2014
Jkt 235001
Moreover, given the fact that options
prices during brief Limit or Straddle
States may deviate substantially from
those available shortly following the
Limit or Straddle State, the Exchange
believes giving market participants time
to re-evaluate a transaction would create
an unreasonable adverse selection
opportunity that would discourage
participants from providing liquidity
during Limit or Straddle States. In this
respect, the Exchange notes that only
those orders with a limit price will be
executed during a Limit or Straddle
State. Therefore, on balance, the
Exchange believes that removing the
potential inequity of nullifying or
adjusting executions occurring during
Limit or Straddle States outweighs any
potential benefits from applying certain
provisions during such unusual market
conditions. Additionally, as discussed
above, there are additional pre-trade
protections in place outside of the
Obvious and Catastrophic Error Rule
that will continue to safeguard
customers.
The Exchange notes that under certain
limited circumstances the Proposed
Rule will permit the Exchange to review
transactions in options that overlay a
security that is in a Limit or Straddle
State. Specifically, an Official will have
authority to review a transaction on his
or her own motion in the interest of
maintaining a fair and orderly market
and for the protection of investors.
Furthermore, the Exchange will have
the authority to adjust or nullify
transactions in the event of a Significant
Market Event, a trading halt in the
affected option, an erroneous print or
quote in the underlying security, or with
respect to stop and stop limit orders that
have been triggered based on erroneous
trades. The Exchange believes that the
safeguards described above will protect
market participants and will provide the
Exchange with the flexibility to act
when necessary and appropriate to
nullify or adjust a transaction, while
also providing market participants with
certainty that, under normal
circumstances, the 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 those
transactions that occur during a Limit or
Straddle State would allow the
Exchange to account for unforeseen
circumstances that result in Obvious or
Catastrophic Errors for which a
nullification or adjustment may be
necessary in the interest of maintaining
a fair and orderly market and for the
protection of investors. Similarly, the
ability to nullify or adjust transactions
PO 00000
Frm 00132
Fmt 4703
Sfmt 4703
that occur during a Significant Market
Event or trading halt, erroneous print or
quote in the underlying security, or
erroneous trade in the option (i.e., stop
and stop limit orders) may also be
necessary in the interest of maintaining
a fair and orderly market and for the
protection of investors. Furthermore, the
Exchange will administer this provision
in a manner that is consistent with the
principles of the Act and will create and
maintain records relating to the use of
the authority to act on its own motion
during a Limit or Straddle State or any
adjustments or trade breaks based on
other proposed provisions under the
Rule.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
BATS believes the entire proposal is
consistent with section 6(b)(8) of the
Act 18 in that it does not impose any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act as explained
below.
Importantly, the Exchange believes
the proposal will not impose a burden
on intermarket competition but will
rather alleviate any burden on
competition because it is the result of a
collaborative effort by all options
exchanges to harmonize and improve
the process related to the adjustment
and nullification of erroneous options
transactions. The Exchange does not
believe that the rules applicable to such
process is an area where options
exchanges should compete, but rather,
that all options exchanges should have
consistent rules to the extent possible.
Particularly where a market participant
trades on several different exchanges
and an erroneous trade may occur on
multiple markets nearly simultaneously,
the Exchange believes that a participant
should have a consistent experience
with respect to the nullification or
adjustment of transactions. The
Exchange understands that all other
options exchanges intend to file
proposals that are substantially similar
to this proposal.
The Exchange does not believe that
the proposed rule change imposes a
burden on intramarket competition
because the provisions apply to all
market participants equally within each
participant category (i.e., Customers and
non-Customers). With respect to
competition between Customer and
non-Customer market participants, the
Exchange believes that the Proposed
Rule acknowledges competing concerns
and tries to strike the appropriate
balance between such concerns. For
18 15
E:\FR\FM\24DEN1.SGM
U.S.C. 78f(b)(8).
24DEN1
Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Notices
instance, as noted above, the Exchange
believes that protection of Customers is
important due to their direct
participation in the options markets as
well as the fact that they are not, by
definition, market professionals. At the
same time, the Exchange believes due to
the quote-driven nature of the options
markets, the importance of liquidity
provision in such markets and the risk
that liquidity providers bear when
quoting a large breadth of products that
are derivative of underlying securities,
that the protection of liquidity providers
and the practice of adjusting
transactions rather than nullifying them
is of critical importance. As described
above, the Exchange will apply specific
and objective criteria to determine
whether an erroneous transaction has
occurred and, if so, how to adjust or
nullify a transaction.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange has neither solicited
nor received written comments on the
proposed rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days after publication (i) as the
Commission may designate if it finds
such longer period to be appropriate
and publishes its reasons for so finding
or (ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) By order approve or disapprove
the proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
mstockstill on DSK4VPTVN1PROD with NOTICES
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Paper Comments
• Send paper comments in triplicate
to Brent J. Fields, Secretary, Securities
and Exchange Commission, 100 F Street
NE., Washington, DC 20549–1090.
All submissions should refer to File
Number SR–BATS–2014–067. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–BATS–
2014–067 and should be submitted on
or before January 14, 2015.19
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–30127 Filed 12–23–14; 8:45 am]
BILLING CODE 8011–01–P
VerDate Sep<11>2014
16:34 Dec 23, 2014
Jkt 235001
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–73883; File No. SR–NYSE–
2014–66]
Self-Regulatory Organizations; New
York Stock Exchange LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change Amending Rule
342 To Remove the Three Years’
Experience Requirement for
Supervisory Personnel and To Add
Supplementary Material to Rule 3110
Stating That Supervisors Must
Reasonably Discharge Their
Supervisory Duties and Obligations
December 18, 2014.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (‘‘Act’’
or ‘‘Exchange Act’’) 1 and Rule 19b–4
thereunder,2 notice is hereby given that
on December 8, 2014, New York Stock
Exchange LLC (‘‘NYSE’’ or ‘‘Exchange’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been substantially prepared by the
Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons. The Exchange
has designated the proposed rule change
as constituting a ‘‘non-controversial’’
rule change under Exchange Act Rule
19b–4(f)(6), which renders the proposal
effective upon receipt of this filing by
the Commission.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
NYSE Rule 342 to remove the three
years’ experience requirement for
supervisory personnel and to add
supplementary material to NYSE Rule
3110 stating that supervisors must
reasonably discharge their supervisory
duties and obligations. The text of the
proposed rule change is available on the
Exchange’s Web site at www.nyse.com,
at the principal office of the Exchange,
and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of, and basis for,
the proposed rule change and discussed
any comments it received on the
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
BATS–2014–067 on the subject line.
77573
1 15
19 17
PO 00000
CFR 200.30–3(a)(12).
Frm 00133
Fmt 4703
Sfmt 4703
2 17
E:\FR\FM\24DEN1.SGM
U.S.C. 78s(b)(1).
CFR 240.19b–4.
24DEN1
Agencies
[Federal Register Volume 79, Number 247 (Wednesday, December 24, 2014)]
[Notices]
[Pages 77557-77573]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-30127]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-73884; File No. SR-BATS-2014-067]
Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of
Filing of a Proposed Rule Change, as Modified by Amendment No. 1, to
Rule 20.6 of BATS Exchange, Inc.
December 18, 2014.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on December 4, 2014, BATS Exchange, Inc. (the ``Exchange'' or
``BATS'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the Exchange. On December
17, 2014, the Exchange filed Amendment No. 1 to the proposed rule
change, which amended and replaced the proposed rule change in its
entirety. The Commission is publishing this notice to solicit comments
on the proposed rule change, as amended, from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange filed a proposal to replace current Rule 20.6
(``Current Rule''), entitled ``Obvious Error,'' with new Rule 20.6
(``Proposed Rule''), entitled ``Nullification and Adjustment of Options
Transactions including Obvious Errors.'' Rule 20.6 relates to the
adjustment and nullification of transactions that occur on the
Exchange's equity options platform (``BATS Options'').
The text of the proposed rule change is available at the Exchange's
Web site at https://www.batstrading.com/, at the principal office of the
Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant parts of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Background
For several months the Exchange has been working with other options
exchanges to identify ways to improve the process related to the
adjustment and nullification of erroneous options transactions. The
goal of the process that the options exchanges have undertaken is to
adopt harmonized rules related to the adjustment and nullification of
erroneous options transactions as well as a specific provision related
to coordination in connection with large-scale events involving
erroneous options transactions. As described below, the Exchange
believes that the changes the options exchanges and the Exchange have
agreed to propose will provide transparency and finality with respect
to the adjustment and nullification of erroneous options transactions.
Particularly, the proposed changes seek to achieve consistent results
for participants across U.S. options exchanges while maintaining a fair
and orderly market, protecting investors and protecting the public
interest.
The Proposed Rule is the culmination of this coordinated effort and
reflects discussions by the options exchanges to universally adopt: (1)
Certain provisions already in place on one or more options exchanges;
and (2) new provisions that the options exchanges collectively believe
will improve the handling of erroneous options transactions. Thus,
although the Proposed Rule is in many ways similar to and based on the
Exchange's Current Rule, the Exchange is adopting various provisions to
[[Page 77558]]
conform with existing rules of one or more options exchanges and also
to adopt rules that are not currently in place on any options exchange.
As noted above, in order to adopt a rule that is similar in most
material respects to the rules adopted by other options exchanges, the
Exchange proposes to delete the Current Rule in its entirety and to
replace it with the Proposed Rule.
The Exchange notes that it has proposed additional objective
standards in the Proposed Rule as compared to the Current Rule. The
Exchange also notes that the Proposed Rule will ensure that the
Exchange will have the same standards as all other options exchanges.
However, there are still areas under the Proposed Rule where subjective
determinations need to be made by Exchange personnel with respect to
the calculation of Theoretical Price. The Exchange notes that the
Exchange and all other options exchanges have been working to further
improve the review of potentially erroneous transactions as well as
their subsequent adjustment by creating an objective and universal way
to determine Theoretical Price in the event a reliable NBBO is not
available. For instance, the Exchange and all other options exchanges
may utilize an independent third party to calculate and disseminate or
make available Theoretical Price. However, this initiative requires
additional exchange and industry discussion as well as additional time
for development and implementation. The Exchange will continue to work
with other options exchanges and the options industry towards the goal
of additional objectivity and uniformity with respect to the
calculation of Theoretical Price.
As additional background, the Exchange believes that the Proposed
Rule supports an approach consistent with long-standing principles in
the options industry under which the general policy is to adjust rather
than nullify transactions. The Exchange acknowledges that adjustment of
transactions is contrary to the operation of analogous rules applicable
to the equities markets, where erroneous transactions are typically
nullified rather than adjusted and where there is no distinction
between the types of market participants involved in a transaction. For
the reasons set forth below, the Exchange believes that the
distinctions in market structure between equities and options markets
continue to support these distinctions between the rules for handling
obvious errors in the equities and options markets. The Exchange also
believes that the Proposed Rule properly balances several competing
concerns based on the structure of the options markets.
Various general structural differences between the options and
equities markets point toward the need for a different balancing of
risks for options market participants and are reflected in the Proposed
Rule. Option pricing is formulaic and is tied to the price of the
underlying stock, the volatility of the underlying security and other
factors. Because options market participants can generally create new
open interest in response to trading demand, as new open interest is
created, correlated trades in the underlying or related series are
generally also executed to hedge a market participant's risk. This
pairing of open interest with hedging interest differentiates the
options market specifically (and the derivatives markets broadly) from
the cash equities markets. In turn, the Exchange believes that the
hedging transactions engaged in by market participants necessitates
protection of transactions through adjustments rather than
nullifications when possible and otherwise appropriate.
The options markets are also quote driven markets dependent on
liquidity providers to an even greater extent than equities markets. In
contrast to the approximately 7,000 different securities traded in the
U.S. equities markets each day, there are more than 500,000 unique,
regularly quoted option series. Given this breadth in options series
the options markets are more dependent on liquidity providers than
equities markets; such liquidity is provided most commonly by
registered market makers but also by other professional traders. With
the number of instruments in which registered market makers must quote
and the risk attendant with quoting so many products simultaneously,
the Exchange believes that those liquidity providers should be afforded
a greater level of protection. In particular, the Exchange believes
that liquidity providers should be allowed protection of their trades
given the fact that they typically engage in hedging activity to
protect them from significant financial risk to encourage continued
liquidity provision and maintenance of the quote-driven options
markets.
In addition to the factors described above, there are other
fundamental differences between options and equities markets which lend
themselves to different treatment of different classes of participants
that are reflected in the Proposed Rule. For example, there is no trade
reporting facility in the options markets. Thus, all transactions must
occur on an options exchange. This leads to significantly greater
retail customer participation directly on exchanges than in the
equities markets, where a significant amount of retail customer
participation never reaches the Exchange but is instead executed in
off-exchange venues such as alternative trading systems, broker-dealer
market making desks and internalizers. In turn, because of such direct
retail customer participation, the exchanges have taken steps to afford
those retail customers--generally Priority Customers--more favorable
treatment in some circumstances.
Definitions
The Exchange proposes to adopt various definitions that will be
used in the Proposed Rule, as described below.
First, the Exchange proposes to adopt a definition of ``Customer,''
to make clear that this term would not include any broker-dealer or
Professional Customer.\3\ Although other portions of the Exchange's
rules address the capacity of market participants, including customers,
the proposed definition is consistent with such rules and the Exchange
believes it is important for all options exchanges to have the same
definition of Customer in the context of nullifying and adjusting
trades in order to have harmonized rules. As set forth in detail below,
orders on behalf of a Customer are in many cases treated differently
than non-Customer orders in light of the fact that Customers are not
necessarily immersed in the day-to-day trading of the markets, are less
likely to be watching trading activity in a particular option
throughout the day, and may have limited funds in their trading
accounts.
---------------------------------------------------------------------------
\3\ A ``Professional'' is any person or entity that (A) is not a
broker or dealer in securities; and (B) places more than 390 orders
in listed options per day on average during a calendar month for its
own beneficial account(s). See Rule 16.1(a)(45).
---------------------------------------------------------------------------
Second, the Exchange proposes to adopt definitions for both an
``erroneous sell transaction'' and an ``erroneous buy transaction.'' As
proposed, an erroneous sell transaction is one in which the price
received by the person selling the option is erroneously low, and an
erroneous buy transaction is one in which the price paid by the person
purchasing the option is erroneously high. This provision helps to
reduce the possibility that a party can intentionally submit an order
hoping for the market to move in their favor while knowing that the
transaction will be nullified or adjusted if the market does not. For
instance, when a market participant who is buying options in a
particular series sees an aggressively priced sell order posted on the
Exchange, and the
[[Page 77559]]
buyer believes that the price of the options is such that it might
qualify for obvious error, the option buyer can trade with the
aggressively priced order, then wait to see which direction the market
moves. If the market moves in their direction, the buyer keeps the
trade and if it moves against them, the buyer calls the Exchange hoping
to get the trade adjusted or busted.
Third, the Exchange proposes to adopt a definition of ``Official,''
which would mean an Officer of the Exchange or such other employee
designee of the Exchange that is trained in the application of the
Proposed Rule. The Exchange notes that this definition is consistent
with the definition of Official currently contained in the Exchange's
Current Rule.
Fourth, the Exchange proposes to adopt a new term, a ``Size
Adjustment Modifier,'' which would apply to individual transactions and
would modify the applicable adjustment for orders under certain
circumstances, as discussed in further detail below. As proposed, the
Size Adjustment Modifier will be applied to individual orders as
follows:
------------------------------------------------------------------------
Number of contracts per execution Adjustment--TP plus/minus
------------------------------------------------------------------------
1-50................................ N/A.
51-250.............................. 2 times adjustment amount.
251-1000............................ 2.5 times adjustment amount.
1001 or more........................ 3 times adjustment amount.
------------------------------------------------------------------------
The Size Adjustment Modifier attempts to account for the additional
risk that the parties to the trade undertake for transactions that are
larger in scope. The Exchange believes that the Size Adjustment
Modifier creates additional incentives to prevent more impactful
Obvious Errors and it lessens the impact on the contra-party to an
adjusted trade. The Exchange notes that these contra-parties may have
preferred to only trade the size involved in the transaction at the
price at which such trade occurred, and in trading larger size has
committed a greater level of capital and bears a larger hedge risk.
When setting the proposed size adjustment modifier thresholds the
Exchange has tried to correlate the size breakpoints with typical small
and larger ``block'' execution sizes of underlying stock. For instance,
SEC Rule 10b-18(a)(5)(ii) defines a ``block'' as a quantity of stock
that is at least 5,000 shares and a purchase price of at least $50,000,
among others.\4\ Similarly, NYSE Rule 72 defines a ``block'' as an
order to buy or sell ``at least 10,000 shares or a quantity of stock
having a market value of $200,000 or more, whichever is less.'' Thus,
executions of 51 to 100 option contracts, which are generally
equivalent to executions of 5,100 and 10,000 shares of underlying
stock, respectively, are proposed to be subject to the lowest size
adjustment modifier. An execution of over 1,000 contracts is roughly
equivalent to a block transaction of more than 100,000 shares of
underlying stock, and is proposed to be subject to the highest size
adjustment modifier. The Exchange has correlated the proposed size
adjustment modifier thresholds to smaller and larger scale blocks
because the Exchange believes that the execution cost associated with
transacting in block sizes scales according to the size of the block.
In other words, in the same way that executing a 100,000 share stock
order will have a proportionately larger market impact and will have a
higher overall execution cost than executing a 500, 1,000 or 5,000
share order in the same stock, all other market factors being equal,
executing a 1,000 option contract order will have a larger market
impact and higher overall execution cost than executing a 5, 10 or 50
contract option order.
---------------------------------------------------------------------------
\4\ See 17 CFR 240.10b-18(a)(5)(ii).
---------------------------------------------------------------------------
Calculation of Theoretical Price
Theoretical Price in Normal Circumstances
Under both the Current Rule and the Proposed Rule, when reviewing a
transaction as potentially erroneous, the Exchange needs to first
determine the ``Theoretical Price'' of the option, i.e., the Exchange's
estimate of the correct market price for the option. Pursuant to the
Proposed Rule, if the applicable option series is traded on at least
one other options exchange, then the Theoretical Price of an option
series is the last national best bid (``NBB'') just prior to the trade
in question with respect to an erroneous sell transaction or the last
national best offer (``NBO'') just prior to the trade in question with
respect to an erroneous buy transaction unless one of the exceptions
described below exists. Thus, the Exchange proposes that whenever the
Exchange has a reliable NBB or NBO, as applicable, just prior to the
transaction, then the Exchange will use this NBB or NBO as the
Theoretical Price.
The Exchange also proposes to specify in the Proposed Rule that
when a single order received by the Exchange is executed at multiple
price levels, the Theoretical Price for the execution at the initial
price level will be the last NBB and last NBO just prior to the
Exchange's receipt of the order, and the Theoretical Price for all
subsequent executions at other price levels will be determined by the
Exchange. The Exchange believes that it is necessary to retain
discretion for the handling of an order that drills-through several
price levels consistent with the reasons for the wide quote provision
described below, where the Exchange too has proposed to retain
discretion. The Exchange believes this is important, among other
reasons, to ensure that a market participant is not intentionally
targeting quotations that it knows are at other price levels in order
to get an adjustment to a better price. For example, if the market in
an option is $1.00 x $1.05 and a member sends a large erroneously
aggressively priced buy order that will execute at multiple price
points while driving the price from $1.05 to $2.50, the Exchange
believes that it needs discretion in order to determine whether
executions that occurred as the order made it through various price
levels were erroneous or if they should be upheld. If, during the
handling of the order, executions took place originally at $1.05 and
then at $1.06, $1.08, $1.50, $2.00 and $2.50, these price levels were
the result of the handling of the order in question. The Exchange would
consider the Theoretical Price of the option to be $1.05 for the
initial execution and would determine Theoretical Price for executions
at all other price levels. If the market participant sending the order
aggressively priced the order in a way that it would drill-through all
available liquidity and buy at a price up to $2.50, then the Exchange
does not believe that the market participants providing liquidity in
the option on the Exchange that are on the other side of such
transactions should be forced to accept an adjustment to a different
price level. The Exchange believes that this situation is different
than, for example, an order received during a momentary gap in
liquidity.
The Exchange also proposes to set forth in the Proposed Rule
various provisions governing specific situations where the NBB or NBO
is not available or may not be reliable. Specifically, the Exchange is
proposing additional detail specifying situations in which there are no
quotes or no valid quotes (as defined below), when the national best
bid or offer (``NBBO'') is determined to be too wide to be reliable,
and at the open of trading on each trading day.
No Valid Quotes
As is true under the Current Rule, pursuant to the Proposed Rule
the Exchange will determine the Theoretical Price if there are no
quotes or no valid
[[Page 77560]]
quotes for comparison purposes. As proposed, quotes that are not valid
are all quotes in the applicable option series published at a time
where the last NBB is higher than the last NBO in such series (a
``crossed market''), quotes published by the Exchange that were
submitted by either party to the transaction in question, and quotes
published by another options exchange against which the Exchange has
declared self-help. Thus, in addition to scenarios where there are
literally no quotes to be used as Theoretical Price, the Exchange will
exclude quotes in certain circumstances if such quotes are not deemed
valid. The Proposed Rule is consistent with the Exchange's application
of the Current Rule but the descriptions of the various scenarios where
the Exchange considers quotes to be invalid represent additional detail
that is not included in the Current Rule.
The Exchange notes that Exchange personnel currently are required
to determine Theoretical Price in certain circumstances. While the
Exchange continues to pursue alternative solutions that might further
enhance the objectivity and consistency of determining Theoretical
Price, the Exchange believes that the discretion currently afforded to
Exchange Officials is appropriate in the absence of a reliable NBBO
that can be used to set the Theoretical Price. Under the current Rule,
Exchange personnel will generally consult and refer to data such as the
prices of related series, especially the closest strikes in the option
in question. Exchange personnel may also take into account the price of
the underlying security and the volatility characteristics of the
option as well as historical pricing of the option and/or similar
options.
Wide Quotes
Similarly, pursuant to the Proposed Rule the Exchange will
determine the Theoretical Price if the bid/ask differential of the NBB
and NBO for the affected series just prior to the erroneous transaction
was equal to or greater than the Minimum Amount set forth below and
there was a bid/ask differential less than the Minimum Amount during
the 10 seconds prior to the transaction. If there was no bid/ask
differential less than the Minimum Amount during the 10 seconds prior
to the transaction then the Theoretical Price of an option series is
the last NBB or NBO just prior to the transaction in question. The
Exchange proposes to use the following chart to determine whether a
quote is too wide to be reliable:
------------------------------------------------------------------------
Bid price at time of trade Minimum amount
------------------------------------------------------------------------
Below $2.00............................................. $0.75
$2.00 to $5.00.......................................... 1.25
Above $5.00 to $10.00................................... 1.50
Above $10.00 to $20.00.................................. 2.50
Above $20.00 to $50.00.................................. 3.00
Above $50.00 to $100.00................................. 4.50
Above $100.00........................................... 6.00
------------------------------------------------------------------------
The Exchange notes that the values set forth above generally
represent a multiple of 3 times the bid/ask differential requirements
of other options exchanges, with certain rounding applied (e.g., $1.25
as proposed rather than $1.20).\5\ The Exchange believes that basing
the Wide Quote table on a multiple of the permissible bid/ask
differential rule provides a reasonable baseline for quotations that
are indeed so wide that they cannot be considered reliable for purposes
of determining Theoretical Price unless they have been consistently
wide. As described above, while the Exchange will determine Theoretical
Price when the bid/ask differential equals or exceeds the amount set
forth in the chart above and within the previous 10 seconds there was a
bid/ask differential smaller than such amount, if a quote has been
persistently wide for at least 10 seconds the Exchange will use such
quote for purposes of Theoretical Price. The Exchange believes that
there should be a greater level of protection afforded to market
participants that enter the market when there are liquidity gaps and
price fluctuations. The Exchange does not believe that a similar level
of protection is warranted when market participants choose to enter a
market that is wide and has been consistently wide for some time. The
Exchange notes that it has previously determined that, given the
largely electronic nature of today's markets, as little as one second
(or less) is a long enough time for market participants to receive,
process and account for and respond to new market information.\6\ While
introducing this new provision the Exchange believes it is being
appropriately cautious by selecting a time frame that is an order of
magnitude above and beyond what the Exchange has previously determined
is sufficient for information dissemination. The table above bases the
wide quote provision off of bid price in order to provide a relatively
straightforward beginning point for the analysis.
---------------------------------------------------------------------------
\5\ See, e.g., NYSE Arca Options Rule 6.37(b)(1).
\6\ See, e.g., Exchange Rule 22.12, which requires certain
orders to be exposed on BATS Options for at least one second before
they can be executed; see also Securities Exchange Act Release No.
66306 (February 2, 2012), 77 FR 6608 (February 8, 2012) (SR-BX-2011-
084) (order granting approval of proposed rule change to reduce the
duration of the PIP from one second to one hundred milliseconds).
---------------------------------------------------------------------------
As an example, assume an option is quoted $3.00 by $6.00 with 50
contracts posted on each side of the market for an extended period of
time. If a market participant were to enter a market order to buy 20
contracts the Exchange believes that the buyer should have a reasonable
expectation of paying $6.00 for the contracts which they are buying.
This should be the case even if immediately after the purchase of those
options, the market conditions change and the same option is then
quoted at $3.75 by $4.25. Although the quote was wide according to the
table above at the time immediately prior to and the time of the
execution of the market order, it was also well established and well
known. The Exchange believes that an execution at the then prevailing
market price should not in and of itself constitute an erroneous trade.
Transactions at the Open
Under the Proposed Rule, for a transaction occurring as part of the
Opening Process \7\ the Exchange will determine the Theoretical Price
where there is no NBB or NBO for the affected series just prior to the
erroneous transaction or if the bid/ask differential of the NBBO just
prior to the erroneous transaction is equal to or greater than the
Minimum Amount set forth in the chart proposed for the wide quote
provision described above. The Exchange believes that this discretion
is necessary because it is consistent with other scenarios in which the
Exchange will determine the Theoretical Price if there are no quotes or
no valid quotes for comparison purposes, including the wide quote
provision proposed by the Exchange as described above. If, however,
there are valid quotes and the bid/ask differential of the NBBO is less
than the Minimum Amount set forth in the chart proposed for the wide
quote provision described above, then the Exchange will use the NBB or
NBO just prior to the transaction as it would in any other normal
review scenario.
---------------------------------------------------------------------------
\7\ See Exchange Rule 21.7 for a description of the Exchange's
Opening Process.
---------------------------------------------------------------------------
As an example of an erroneous transaction for which the NBBO is
wide at the open, assume the NBBO at the time of the opening
transaction is $1.00 x $5.00 and the opening transaction takes place at
$1.25. The Exchange would be responsible for determining the
Theoretical Price because the NBBO was wider than the applicable
minimum amount set forth in the wide quote
[[Page 77561]]
provision as described above. The Exchange believes that it is
necessary to determine theoretical price at the open in the event of a
wide quote at the open for the same reason that the Exchange has
proposed to determine theoretical price during the remainder of the
trading day pursuant to the proposed wide quote provision, namely that
a wide quote cannot be reliably used to determine Theoretical Price
because the Exchange does not know which of the two quotes, the NBB or
the NBO, is closer to the real value of the option.
Obvious Errors
The Exchange proposes to adopt numerical thresholds that would
qualify transactions as ``Obvious Errors.'' These thresholds are
similar to those in place under the Current Rule. As proposed, a
transaction will qualify as an Obvious Error if the Exchange receives a
properly submitted filing and the execution price of a transaction is
higher or lower than the Theoretical Price for the series by an amount
equal to at least the amount shown below:
------------------------------------------------------------------------
Theoretical price Minimum amount
------------------------------------------------------------------------
Below $2.00............................................. $0.25
$2.00 to $5.00.......................................... 0.40
Above $5.00 to $10.00................................... 0.50
Above $10.00 to $20.00.................................. 0.80
Above $20.00 to $50.00.................................. 1.00
Above $50.00 to $100.00................................. 1.50
Above $100.00........................................... 2.00
------------------------------------------------------------------------
Applying the Theoretical Price, as described above, to determine the
applicable threshold and comparing the Theoretical Price to the actual
execution price provides the Exchange with an objective methodology to
determine whether an Obvious Error occurred. The Exchange believes that
the proposed amounts are reasonable as they are generally consistent
with the standards of the Current Rule and reflect a significant
disparity from Theoretical Price. The Exchange notes that the Minimum
Amounts in the Proposed Rule and as set forth above are identical to
the Current Rule except for the last two categories, for options where
the Theoretical Price is above $50.00 to $100.00 and above $100.00. The
Exchange believes that this additional granularity is reasonable
because given the proliferation of additional strikes that have been
created in the past several years there are many more high-priced
options that are trading with open interest for extended periods. The
Exchange believes that it is appropriate to account for these high-
priced options with additional Minimum Amount levels for options with
Theoretical Prices above $50.00.
Under the Proposed Rule, a party that believes that it participated
in a transaction that was the result of an Obvious Error must notify
the Exchange's Trade Desk in the manner specified from time to time by
the Exchange in a circular distributed to Members. The Exchange
currently requires electronic notification through a web-based
application but believes that maintaining flexibility in the Rule is
important to allow for changes to the process.
The Exchange also proposes to adopt notification timeframes that
must be met in order for a transaction to qualify as an Obvious Error.
Specifically, as proposed a filing must be received by the Exchange
within thirty (30) minutes of the execution with respect to an
execution of a Customer order and within fifteen (15) minutes of the
execution for any other participant. The Exchange also proposes to
provide additional time for trades that are routed through other
options exchanges to the Exchange. Under the Proposed Rule, any other
options exchange will have a total of forty-five (45) minutes for
Customer orders and thirty (30) minutes for non-Customer orders,
measured from the time of execution on the Exchange, to file with the
Exchange for review of transactions routed to the Exchange from that
options exchange and executed on the Exchange (``linkage trades'').
This includes filings on behalf of another options exchange filed by a
third-party routing broker if such third-party broker identifies the
affected transactions as linkage trades. In order to facilitate timely
reviews of linkage trades the Exchange will accept filings from either
the other options exchange or, if applicable, the third-party routing
broker that routed the applicable order(s). The additional fifteen (15)
minutes provided with respect to linkage trades shall only apply to the
extent the options exchange that originally received and routed the
order to the Exchange itself received a timely filing from the entering
participant (i.e., within 30 minutes if a Customer order or 15 minutes
if a non-Customer order). The Exchange believes that additional time
for filings related to Customer orders is appropriate in light of the
fact that Customers are not necessarily immersed in the day-to-day
trading of the markets and are less likely to be watching trading
activity in a particular option throughout the day. The Exchange
believes that the additional time afforded to linkage trades is
appropriate given the interconnected nature of the markets today and
the practical difficulty that an end user may face in getting requests
for review filed in a timely fashion when the transaction originated at
a different exchange than where the error took place. Without this
additional time the Exchange believes it would be common for a market
participant to satisfy the filing deadline at the original exchange to
which an order was routed but that requests for review of executions
from orders routed to other options exchanges would not qualify for
review as potential Obvious Errors by the time filings were received by
such other options exchanges, in turn leading to potentially disparate
results under the applicable rules of options exchanges to which the
orders were routed.
Pursuant to the Proposed Rule, an Official may review a transaction
believed to be erroneous on his/her own motion in the interest of
maintaining a fair and orderly market and for the protection of
investors. This proposed provision is designed to give an Official the
ability to provide parties relief in those situations where they have
failed to report an apparent error within the established notification
period. A transaction reviewed pursuant to the proposed provision may
be nullified or adjusted only if it is determined by the Official that
the transaction is erroneous in accordance with the provisions of the
Proposed Rule, provided that the time deadlines for filing a request
for review described above shall not apply. The Proposed Rule would
require the Official to act as soon as possible after becoming aware of
the transaction; action by the Official would ordinarily be expected on
the same day that the transaction occurred. However, because a
transaction under review may have occurred near the close of trading or
due to unusual circumstances, the Proposed Rule provides that the
Official shall act no later than 8:30 a.m. Eastern Time on the next
trading day following the date of the transaction in question.
The Exchange also proposes to state that a party affected by a
determination to nullify or adjust a transaction after an Official's
review on his or her own motion may appeal such determination in
accordance with paragraph (k), which is described below. The Proposed
Rule would make clear that a determination by an Official not to review
a transaction or determination not to nullify or adjust a transaction
for which a review was conducted on an Official's own motion is not
appealable and further that if a transaction is reviewed and a
determination is rendered pursuant to another provision of the Proposed
Rule, no additional relief may be granted by an Official.
[[Page 77562]]
If it is determined that an Obvious Error has occurred based on the
objective numeric criteria and time deadlines described above, the
Exchange will adjust or nullify the transaction as described below and
promptly notify both parties to the trade electronically or via
telephone. The Exchange proposes different adjustment and nullification
criteria for Customers and non-Customers.
As proposed, where neither party to the transaction is a Customer,
the execution price of the transaction will be adjusted by the Official
pursuant to the table below.
------------------------------------------------------------------------
Buy Sell
transaction transaction
Theoretical price (TP) adjustment-- adjustment--
TP plus TP minus
------------------------------------------------------------------------
Below $3.00................................. $0.15 $0.15
At or above $3.00........................... 0.30 0.30
------------------------------------------------------------------------
The Exchange believes that it is appropriate to adjust to prices a
specified amount away from Theoretical Price rather than to adjust to
Theoretical Price because even though the Exchange has determined a
given trade to be erroneous in nature, the parties in question should
have had some expectation of execution at the price or prices
submitted. Also, it is common that by the time it is determined that an
obvious error has occurred additional hedging and trading activity has
already occurred based on the executions that previously happened. The
Exchange is concerned that an adjustment to Theoretical Price in all
cases would not appropriately incentivize market participants to
maintain appropriate controls to avoid potential errors.
Further, as proposed any non-Customer Obvious Error exceeding 50
contracts will be subject to the Size Adjustment Modifier described
above. The Exchange believes that it is appropriate to apply the Size
Adjustment Modifier to non-Customer orders because the hedging cost
associated with trading larger sized options orders and the market
impact of larger blocks of underlying can be significant.
As an example of the application of the Size Adjustment Modifier,
assume Exchange A has a quoted bid to buy 50 contracts at $2.50,
Exchange B has a quoted bid to buy 100 contracts at $2.05 and there is
no other options exchange quoting a bid priced higher than $2.00.
Assume that the NBBO is $2.50 by $3.00. Finally, assume that all orders
quoted and submitted to Exchange B in connection with this example are
non-Customer orders.
Assume Exchange A's quoted bid at $2.50 is either executed
or cancelled.
Assume Exchange B immediately thereafter receives an
incoming market order to sell 100 contracts.
The incoming order would be executed against Exchange B's
resting bid at $2.05 for 100 contracts.
Because the 100 contract execution of the incoming sell
order was priced at $2.05, which is $0.45 below the Theoretical Price
of $2.50, the 100 contract execution would qualify for adjustment as an
Obvious Error.
The normal adjustment process would adjust the execution
of the 100 contracts to $2.35 per contract, which is the Theoretical
Price minus $0.15.
However, because the execution would qualify for the Size
Adjustment Modifier of 2 times the adjustment price, the adjusted
transaction would instead be to $2.20 per contract, which is the
Theoretical Price minus $0.30.
By reference to the example above, the Exchange reiterates that it
believes that a Size Adjustment Modifier is appropriate, as the buyer
in this example was originally willing to buy 100 contracts at $2.05
and ended up paying $2.20 per contract for such execution. Without the
Size Adjustment Modifier the buyer would have paid $2.35 per contract.
Such buyer may be advantaged by the trade if the Theoretical Price is
indeed closer to $2.50 per contract, however the buyer may not have
wanted to buy so many contracts at a higher price and does incur
increasing cost and risk due to the additional size of their quote.
Thus, the proposed rule is attempting to strike a balance between
various competing objectives, including recognition of cost and risk
incurred in quoting larger size and incentivizing market participants
to maintain appropriate controls to avoid errors.
In contrast to non-Customer orders, where trades will be adjusted
if they qualify as Obvious Errors, pursuant the Proposed Rule a trade
that qualifies as an Obvious Error will be nullified where at least one
party to the Obvious Error is a Customer. The Exchange also proposes,
however, that if any Member submits requests to the Exchange for review
of transactions pursuant to the Proposed Rule, and in aggregate that
Member has 200 or more Customer transactions under review concurrently
and the orders resulting in such transactions were submitted during the
course of 2 minutes or less, where at least one party to the Obvious
Error is a non-Customer, the Exchange will apply the non-Customer
adjustment criteria described above to such transactions. The Exchange
based its proposal of 200 transactions on the fact that the proposed
level is reasonable as it is representative of an extremely large
number of orders submitted to the Exchange that are, in turn, possibly
erroneous. Similarly, the Exchange based its proposal of orders
received in 2 minutes or less on the fact that this is a very short
amount of time under which one Member could generate multiple erroneous
transactions. In order for a participant to have more than 200
transactions under review concurrently when the orders triggering such
transactions were received in 2 minutes or less, the market participant
will have far exceeded the normal behavior of customers deserving
protected status.\8\ While the Exchange continues to believe that it is
appropriate to nullify transactions in such a circumstance if both
participants to a transaction are Customers, the Exchange does not
believe it is appropriate to place the overall risk of a significant
number of trade breaks on non-Customers that in the normal course of
business may have engaged in additional hedging activity or trading
activity based on such transactions. Thus, the Exchange believes it is
necessary and appropriate to protect non-Customers in such a
circumstance by applying the non-Customer adjustment criteria, and thus
adjusting transactions as set forth above, in the event a Member has
more than 200 transactions under review concurrently.
---------------------------------------------------------------------------
\8\ The Exchange notes that in the third quarter of this year
across all options exchanges the average number of valid Customer
orders received and executed was less than 38 valid orders every two
minutes. The number of obvious errors resulting from valid orders
is, of course, a very small fraction of such orders.
---------------------------------------------------------------------------
Catastrophic Errors
Consistent with the Current Rule, the Exchange proposes to adopt
separate numerical thresholds for review of transactions for which the
Exchange does not receive a filing requesting review within the Obvious
Error timeframes set forth above. Based on this review these
transactions may qualify as ``Catastrophic Errors.'' As proposed, a
Catastrophic Error will be deemed to have occurred when the execution
price of a transaction is higher or lower than the Theoretical Price
for the series by an amount equal to at least the amount shown below:
------------------------------------------------------------------------
Theoretical price Minimum amount
------------------------------------------------------------------------
Below $2.00............................................. $0.50
$2.00 to $5.00.......................................... 1.00
[[Page 77563]]
Above $5.00 to $10.00................................... 1.50
Above $10.00 to $20.00.................................. 2.00
Above $20.00 to $50.00.................................. 2.50
Above $50.00 to $100.00................................. 3.00
Above $100.00........................................... 4.00
------------------------------------------------------------------------
Based on industry feedback on the Catastrophic Error thresholds set
forth under the Current Rule, the thresholds proposed as set forth
above are more granular and lower (i.e., more likely to qualify) than
the thresholds under the Current Rule. As noted above, under the
Proposed Rule as well as the Current Rule, parties have additional time
to submit transactions for review as Catastrophic Errors. As proposed,
notification requesting review must be received by the Exchange's Trade
Desk by 8:30 a.m. Eastern Time on the first trading day following the
execution. For transactions in an expiring options series that take
place on an expiration day, a party must notify the Exchange's Trade
Desk within 45 minutes after the close of trading that same day. As is
true for requests for review under the Obvious Error provision of the
Proposed Rule, a party requesting review of a transaction as a
Catastrophic Error must notify the Exchange's Trade Desk in the manner
specified from time to time by the Exchange in a circular distributed
to Members. By definition, any execution that qualifies as a
Catastrophic Error is also an Obvious Error. However, the Exchange
believes it is appropriate to maintain these two types of errors
because the Catastrophic Error provisions provide market participants
with a longer notification period under which they may file a request
for review with the Exchange of a potential Catastrophic Error than a
potential Obvious Error. This provides an additional level of
protection for transactions that are severely erroneous even in the
event a participant does not submit a request for review in a timely
fashion.
The Proposed Rule would specify the action to be taken by the
Exchange if it is determined that a Catastrophic Error has occurred, as
described below, and would require the Exchange to promptly notify both
parties to the trade electronically or via telephone. In the event of a
Catastrophic Error, the execution price of the transaction will be
adjusted by the Official pursuant to the table below.
------------------------------------------------------------------------
Buy Sell
transaction transaction
Theoretical price (TP) adjustment-- adjustment--
TP plus TP minus
------------------------------------------------------------------------
Below $2.00............................. $0.50 $0.50
$2.00 to $5.00.......................... 1.00 1.00
Above $5.00 to $10.00................... 1.50 1.50
Above $10.00 to $20.00.................. 2.00 2.00
Above $20.00 to $50.00.................. 2.50 2.50
Above $50.00 to $100.00................. 3.00 3.00
Above $100.00........................... 4.00 4.00
------------------------------------------------------------------------
Although Customer orders would be adjusted in the same manner as non-
Customer orders, any Customer order that qualifies as a Catastrophic
Error will be nullified if the adjustment would result in an execution
price higher (for buy transactions) or lower (for sell transactions)
than the Customer's limit price. Based on industry feedback, the levels
proposed above with respect to adjustment amounts are the same levels
as the thresholds at which a transaction may be deemed a Catastrophic
Error pursuant to the chart set forth above.
As is true for Obvious Errors as described above, the Exchange
believes that it is appropriate to adjust to prices a specified amount
away from Theoretical Price rather than to adjust to Theoretical Price
because even though the Exchange has determined a given trade to be
erroneous in nature, the parties in question should have had some
expectation of execution at the price or prices submitted. Also, it is
common that by the time it is determined that a Catastrophic Error has
occurred additional hedging and trading activity has already occurred
based on the executions that previously happened. The Exchange is
concerned that an adjustment to Theoretical Price in all cases would
not appropriately incentivize market participants to maintain
appropriate controls to avoid potential errors. Further, the Exchange
believes it is appropriate to maintain a higher adjustment level for
Catastrophic Errors than Obvious Errors given the significant
additional time that can potentially pass before an adjustment is
requested and applied and the amount of hedging and trading activity
that can occur based on the executions at issue during such time. For
the same reasons, other than honoring the limit prices established for
Customer orders, the Exchange has proposed to treat all market
participants the same in the context of the Catastrophic Error
provision. Specifically, the Exchange believes that treating market
participants the same in this context will provide additional certainty
to market participants with respect to their potential exposure and
hedging activities, including comfort that even if a transaction is
later adjusted (i.e., past the standard time limit for filing under the
Obvious Error provision), such transaction will not be fully nullified.
However, as noted above, under the Proposed Rule where at least one
party to the transaction is a Customer, the trade will be nullified if
the adjustment would result in an execution price higher (for buy
transactions) or lower (for sell transactions) than the Customer's
limit price. The Exchange has retained the protection of a Customer's
limit price in order to avoid a situation where the adjustment could be
to a price that the Customer could not afford, which is less likely to
be an issue for a market professional.
Significant Market Events
In order to improve consistency for market participants in the case
of a widespread market event and in light of the interconnected nature
of the options exchanges, the Exchange proposes to adopt a new
provision that calls for coordination between the options exchanges in
certain circumstances and provides limited flexibility in the
application of other provisions of the Proposed Rule in order to
promptly respond to a widespread market event.\9\
[[Page 77564]]
The Exchange proposes to describe such an event as a Significant Market
Event, and to set forth certain objective criteria that will determine
whether such an event has occurred. The Exchange developed these
objective criteria in consultation with the other options exchanges by
reference to historical patterns and events with a goal of setting
thresholds that very rarely will be triggered so as to limit the
application of the provision to truly significant market events. As
proposed, a Significant Market Event will be deemed to have occurred
when proposed criterion (A) below is met or the sum of all applicable
event statistics, where each is expressed as a percentage of the
relevant threshold in criteria (A) through (D) below, is greater than
or equal to 150% and 75% or more of at least one category is reached,
provided that no single category can contribute more than 100% to the
sum. All criteria set forth below will be measured in aggregate across
all exchanges.
---------------------------------------------------------------------------
\9\ Although the Exchange has proposed a specific provision
related to coordination amongst options exchanges in the context of
a widespread event, the Exchange does not believe that the
Significant Market Event provision or any other provision of the
proposed rule alters the Exchange's ability to coordinate with other
options exchanges in the normal course of business with respect to
market events or activity. The Exchange does already coordinate with
other options exchanges to the extent possible if such coordination
is necessary to maintain a fair and orderly market and/or to fulfill
the Exchange's duties as a self-regulatory organization.
---------------------------------------------------------------------------
The proposed criteria for determining a Significant Market Event
are as follows:
(A) Transactions that are potentially erroneous would result in a
total Worst-Case Adjustment Penalty greater than or equal to
$30,000,000, where the Worst-Case Adjustment Penalty is computed as the
sum, across all potentially erroneous trades, of: (i) $0.30 (i.e., the
largest Transaction Adjustment value listed in sub-paragraph (e)(3)(A)
below); times; (ii) the contract multiplier for each traded contract;
times (iii) the number of contracts for each trade; times (iv) the
appropriate Size Adjustment Modifier for each trade, if any, as defined
in sub-paragraph (e)(3)(A) below;
(B) Transactions involving over 500,000 options contracts are
potentially erroneous;
(C) Transactions with a notional value (i.e., number of contracts
traded multiplied by the option premium multiplied by the contract
multiplier) of more than $100,000,000 are potentially erroneous;
(D) Over 10,000 transactions are potentially erroneous.
As described above, the Exchange proposes to adopt a Worst Case
Adjustment Penalty, proposed as criterion (A), which is the only
criterion that can on its own result in an event being designated as a
significant market event. The Worst Case Adjustment Penalty is intended
to develop an objective criterion that can be quickly determined by the
Exchange in consultation with other options exchanges that approximates
the total overall exposure to market participants on the negatively
impacted side of each transaction that occurs during an event. If the
Worst Case Adjustment criterion exceeds $30,000,000, then an event is a
Significant Market Event. As an example of the Worst Case Adjustment
Penalty, assume that a single potentially erroneous transaction in an
event is as follows: Sale of 100 contracts of a standard option (i.e.,
an option with a 100 share multiplier). The highest potential
adjustment penalty for this single transaction would be $6,000, which
would be calculated as $0.30 times 100 (contract multiplier) times 100
(number of contracts) times 2 (applicable Size Adjustment Modifier).
The Exchange would calculate the highest potential adjustment penalty
for each of the potentially erroneous transactions in the event and the
Worst Case Adjustment Penalty would be the sum of such penalties on the
Exchange and all other options exchanges with affected transactions.
As described above, under the Proposed Rule if the Worst Case
Adjustment Penalty does not exceed $30,000,000, then a Significant
Market Event has occurred if the sum of all applicable event statistics
(expressed as a percentage of the relevant thresholds), is greater than
or equal to 150% and 75% or more of at least one category is reached.
The Proposed Rule further provides that no single category can
contribute more than 100% to the sum. As an example of the application
of this provision, assume that in a given event across all options
exchanges that: (A) The Worst Case Adjustment Penalty is $12,000,000
(40% of $30,000,000), (B) 300,000 options contracts are potentially
erroneous (60% of 500,000), (C) the notional value of potentially
erroneous transactions is $30,000,000 (30% of $100,000,000), and (D)
12,000 transactions are potentially erroneous (120% of 10,000). This
event would qualify as a Significant Market Event because the sum of
all applicable event statistics would be 230%, far exceeding the 150%
threshold. The 230% sum is reached by adding 40%, 60%, 30% and last,
100% (i.e., rounded down from 120%) for the number of transactions. The
Exchange notes that no single category can contribute more than 100% to
the sum and any category contributing more than 100% will be rounded
down to 100%.
As an alternative example, assume a large-scale event occurs
involving low-priced options with a small number of contracts in each
execution. Assume in this event across all options exchanges that: (A)
The Worst Case Adjustment Penalty is $600,000 (2% of $30,000,000), (B)
20,000 options contracts are potentially erroneous (4% of 500,000), (C)
the notional value of potentially erroneous transactions is $20,000,000
(20% of $100,000,000), and (D) 20,000 transactions are potentially
erroneous (200% of 10,000, but rounded down to 100%). This event would
not qualify as a Significant Market Event because the sum of all
applicable event statistics would be 126%, below the 150% threshold.
The Exchange reiterates that as proposed, even when a single category
other than criterion (A) is fully met, that does not necessarily
qualify an event as a Significant Market Event.
The Exchange believes that the breadth and scope of the obvious
error rules are appropriate and sufficient for handling of typical and
common obvious errors. Coordination between and among the exchanges
should generally not be necessary even when a member has an error that
results in executions on more than one exchange. In setting the
thresholds above the Exchange believes that the requirements will be
met only when truly widespread and significant errors happen and the
benefits of coordination and information sharing far outweigh the costs
of the logistics of additional intra-exchange coordination. The
Exchange notes that in addition to its belief that the proposed
thresholds are sufficiently high, the Exchange has proposed the
requirement that either criterion (A) is met or the sum of applicable
event statistics for proposed (A) through (D) equals or exceeds 150% in
order to ensure that an event is sufficiently large but also to avoid
situations where an event is extremely large but just misses potential
qualifying thresholds. For instance, the proposal is designed to help
avoid a situation where the Worst Case Adjustment Penalty is
$15,000,000, so the event does not qualify based on criterion (A)
alone, but there are transactions in 490,000 options contracts that are
potentially erroneous (missing criterion (B) by 10,000 contracts),
there transactions with a notional value of $99,000,000 (missing
criterion (C) by $1,000,000), and there are 9,000 potentially erroneous
transactions overall (missing criterion (D) by 1,000 transactions). The
Exchange believes that the proposed formula, while slightly more
complicated than simply requiring a certain threshold to be met in each
category, may help to avoid inapplicability of the proposed
[[Page 77565]]
provisions in the context of an event that would be deemed significant
by most subjective measures but that barely misses each of the
objective criteria proposed by the Exchange.
To ensure consistent application across options exchanges, in the
event of a suspected Significant Market Event, the Exchange shall
initiate a coordinated review of potentially erroneous transactions
with all other affected options exchanges to determine the full scope
of the event. Under the Proposed Rule, the Exchange will promptly
coordinate with the other options exchanges to determine the
appropriate review period as well as select one or more specific points
in time prior to the transactions in question and use one or more
specific points in time to determine Theoretical Price. Other than the
selected points in time, if applicable, the Exchange will determine
Theoretical Price as described above. For example, around the start of
a SME that is triggered by a large and aggressively priced buy order,
three exchanges have multiple orders on the offer side of the market:
Exchange A has offers priced at $2.20, $2.25, $2.30 and several other
price levels to $3.00, Exchange B has offers at $2.45, $2.30 and
several other price levels to $3.00, Exchange C has offers at price
levels between $2.50 and $3.00. Assume an event occurs starting at
10:05:25 a.m. ET and in this particular series the executions begin on
Exchange A and subsequently begin to occur on Exchanges B and C.
Without coordination and information sharing between the exchanges,
Exchange B and Exchange C cannot know with certainty that whether or
not the execution at Exchange A that happened at $2.20 immediately
prior to their executions at $2.45 and $2.50 is part of the same
erroneous event or not. With proper coordination, the exchanges can
determine that in this series, the proper point in time from which the
event should be analyzed is 10:05:25 a.m. ET, and thus, the NBO of
$2.20 should be used as the Theoretical Price for purposes of all buy
transactions in such options series that occurred during the event.
If it is determined that a Significant Market Event has occurred
then, using the parameters agreed with respect to the times from which
Theoretical Price will be calculated, if applicable, an Official will
determine whether any or all transactions under review qualify as
Obvious Errors. The Proposed Rule would require the Exchange to use the
criteria in Proposed Rule 20.6(c), as described above, to determine
whether an Obvious Error has occurred for each transaction that was
part of the Significant Market Event. Upon taking any final action, the
Exchange would be required to promptly notify both parties to the trade
electronically or via telephone.
The execution price of each affected transaction will be adjusted
by an Official to the price provided below, unless both parties agree
to adjust the transaction to a different price or agree to bust the
trade.
------------------------------------------------------------------------
Buy Sell
transaction transaction
Theoretical price (TP) adjustment-- adjustment--
TP plus TP minus
------------------------------------------------------------------------
Below $3.00............................. $0.15 $0.15
At or above $3.00....................... $0.30 $0.30
------------------------------------------------------------------------
Thus, the proposed adjustment criteria for Significant Market Events
are identical to the proposed adjustment levels for Obvious Errors
generally. In addition, in the context of a Significant Market Event,
any error exceeding 50 contracts will be subject to the Size Adjustment
Modifier described above. Also, the adjustment criteria would apply
equally to all market participants (i.e., Customers and non-Customers)
in a Significant Market Event. However, as is true for the proposal
with respect to Catastrophic Errors, under the Proposed Rule where at
least one party to the transaction is a Customer, the trade will be
nullified if the adjustment would result in an execution price higher
(for buy transactions) or lower (for sell transactions) than the
Customer's limit price. The Exchange has retained the protection of a
Customer's limit price in order to avoid a situation where the
adjustment could be to a price that the Customer could not afford,
which is less likely to be an issue for a market professional. The
Exchange has otherwise proposed to treat all market participants the
same in the context of a Significant Market Event to provide additional
certainty to market participants with respect to their potential
exposure as soon as an event has occurred.
Another significant distinction between the proposed Obvious Error
provision and the proposed Significant Market Event provision is that
if the Exchange, in consultation with other options exchanges,
determines that timely adjustment is not feasible due to the
extraordinary nature of the situation, then the Exchange will nullify
some or all transactions arising out of the Significant Market Event
during the review period selected by the Exchange and other options
exchanges. To the extent the Exchange, in consultation with other
options exchanges, determines to nullify less than all transactions
arising out of the Significant Market Event, those transactions subject
to nullification will be selected based upon objective criteria with a
view toward maintaining a fair and orderly market and the protection of
investors and the public interest. For example, assume a Significant
Market Event causes 25,000 potentially erroneous transactions and
impacts 51 options classes. Of the 25,000 transactions, 24,000 of them
are concentrated in a single options class. The exchanges may decide
the most appropriate solution because it will provide the most
certainty to participants and allow for the prompt resumption of
regular trading is to bust all trades in the most heavily affected
class between two specific points in time, while the other 1,000 trades
across the other 50 classes are reviewed and adjusted as appropriate. A
similar situation might arise directionally where a Customer submits
both erroneous buy and sell orders and the number of errors that
happened that were erroneously low priced (i.e., erroneous sell orders)
were 50,000 in number but the number of errors that were erroneously
high (i.e., erroneous buy orders) were only 500 in number. The most
effective and efficient approach that provides the most certainty to
the marketplace in a reasonable amount of time while most closely
following the generally prescribed obvious error rules could be to bust
all of the erroneous sell transactions but to adjust the erroneous buy
transactions.
With respect to rulings made pursuant to the proposed Significant
Market Event provision the Exchange believes that the number of
affected transactions is such that immediate finality is necessary to
maintain a fair and orderly market and to protect investors and the
public interest. Accordingly, rulings by the Exchange pursuant to the
Significant Market Event provision would be non-appealable pursuant to
the Proposed Rule.
Additional Provisions
Mutual Agreement
In addition to the objective criteria described above, the Proposed
Rule also proposes to make clear that the determination as to whether a
trade was executed at an erroneous price may be made by mutual
agreement of the affected parties to a particular transaction. The
Proposed Rule would state that a trade may be nullified or
[[Page 77566]]
adjusted on the terms that all parties to a particular transaction
agree, provided, however, that such agreement to nullify or adjust must
be conveyed to the Exchange in a manner prescribed by the Exchange
prior to 8:30 a.m. Eastern Time on the first trading day following the
execution.
The Exchange also proposes to explicitly state that it is
considered conduct inconsistent with just and equitable principles of
trade for any Member to use the mutual adjustment process to circumvent
any applicable Exchange rule, the Act or any of the rules and
regulations thereunder. Thus, for instance, a Member is precluded from
seeking to avoid applicable trade-through rules by executing a
transaction and then adjusting such transaction to a price at which the
Exchange would not have allowed it to execute at the time of the
execution because it traded through the quotation of another options
exchange. The Exchange notes that in connection with its obligations as
a self-regulatory organization, the Exchange's Regulatory Department
reviews adjustments to transactions to detect potential violations of
Exchange rules or the Act and the rules and regulations thereunder.
Trading Halts
Exchange Rule 20.3 describes the Exchange's authority to declare
trading halts in one or more options traded on the Exchange. The
Exchange proposes to make clear in the Proposed Rule that it will
nullify any transaction that occurs during a trading halt in the
affected option on the Exchange pursuant to Rule 20.3. If any trades
occur notwithstanding a trading halt then the Exchange believes it
appropriate to nullify such transactions. While the Exchange may halt
options trading for various reasons, such a scenario almost certainly
is due to extraordinary circumstances and is potentially the result of
market-wide coordination to halt options trading or trading generally.
Accordingly, the Exchange does not believe it is appropriate to allow
trades to stand if such trades should not have occurred in the first
place.
The Exchange proposes to modify Interpretation and Policy .01 to
Rule 20.3. Currently, Interpretation and Policy .01 states that the
Exchange ``may'' nullify any transaction that occurs: (a) During a
trading halt in the affected option on the Exchange; or (b) with
respect to equity options (including options overlying ETFs), during a
trading halt on the primary listing market for the underlying security.
To ensure consistency with the trading halt provision of the Proposed
Rule, the Exchange proposes to modify Interpretation and Policy .01 to
Rule 20.3 to state that in either situation the Exchange ``shall''
nullify transactions.
Erroneous Print and Quotes in Underlying Security
Market participants on the Exchange likely base the pricing of
their orders submitted to the Exchange on the price of the underlying
security for the option. Thus, the Exchange believes it is appropriate
to adopt provisions that allow adjustment or nullification of
transactions based on erroneous prints or erroneous quotes in the
underlying security.
The Exchange proposes to adopt language in the Proposed Rule
stating that a trade resulting from an erroneous print(s) disseminated
by the underlying market that is later nullified by that underlying
market shall be adjusted or busted as set forth in the Obvious Error
provisions of the Proposed Rule, provided a party notifies the
Exchange's Trade Desk in a timely manner, as further described below.
The Exchange proposes to define a trade resulting from an erroneous
print(s) as any options trade executed during a period of time for
which one or more executions in the underlying security are nullified
and for one second thereafter. The Exchange believes that one second is
an appropriate amount of time in which an options trade would be
directly based on executions in the underlying equity security. The
Exchange also proposes to require that if a party believes that it
participated in an erroneous transaction resulting from an erroneous
print(s) pursuant to the proposed erroneous print provision it must
notify the Exchange's Trade Desk within the timeframes set forth in the
Obvious Error provision described above. The Exchange has also proposed
to state that the allowed notification timeframe commences at the time
of notification by the underlying market(s) of nullification of
transactions in the underlying security. Further, the Exchange proposes
that if multiple underlying markets nullify trades in the underlying
security, the allowed notification timeframe will commence at the time
of the first market's notification.
As an example of a situation in which a trade results from an
erroneous print disseminated by the underlying market that is later
nullified by the underlying market, assume that a given underlying is
trading in the $49.00-$50.00 price range then has an erroneous print at
$5.00. Given that there is the potential perception that the underlying
has gone through a dramatic price revaluation, numerous options trades
could promptly trigger based off of this new price. However, because
the price that triggered them was not a valid price it would be
appropriate to review said option trades when the underlying print that
triggered them is removed.
The Exchange also proposes to add a provision stating that a trade
resulting from an erroneous quote(s) in the underlying security shall
be adjusted or busted as set forth in the Obvious Error provisions of
the Proposed Rule, provided a party notifies the Exchange's Trade Desk
in a timely manner, as further described below. Pursuant to the
Proposed Rule, an erroneous quote occurs when the underlying security
has a width of at least $1.00 and has a width at least five times
greater than the average quote width for such underlying security
during the time period encompassing two minutes before and after the
dissemination of such quote. For purposes of the Proposed Rule, the
average quote width will be determined by adding the quote widths of
sample quotations at regular 15-second intervals during the four-minute
time period referenced above (excluding the quote(s) in question) and
dividing by the number of quotes during such time period (excluding the
quote(s) in question).\10\ Similar to the proposal with respect to
erroneous prints described above, if a party believes that it
participated in an erroneous transaction resulting from an erroneous
quote(s) it must notify the Exchange's Trade Desk in accordance with
the notification provisions of the Obvious Error provision described
above. The Proposed Rule, therefore, puts the onus on each Member to
notify the Exchange if such Member believes that a trade should be
reviewed pursuant to either of the proposed provisions, as the Exchange
is not in position to determine the impact of erroneous prints or
quotes on individual Members. The Exchange notes that it does not
believe that additional time is necessary with respect to a trade based
on an erroneous quote because a Member has all information necessary to
detect the error at the time of an option transaction that was
triggered by an erroneous quote, which is in contrast to the proposed
erroneous print provision that includes a dependency on an action
[[Page 77567]]
by the market where the underlying security traded.
---------------------------------------------------------------------------
\10\ The Exchange has proposed the price and time parameters for
quote width and average quote width used to determine whether an
erroneous quote has occurred based on established rules of options
exchanges that currently apply such parameters. See, e.g., CBOE Rule
6.25(a)(5); NYSE Arca Rule 6.87(a)(5). Based on discussions with
these exchanges, the Exchange believes that the parameters are a
reasonable approach to determine whether an erroneous quote has
occurred for purposes of the proposed rule.
---------------------------------------------------------------------------
As an example of a situation in which a trade results from an
erroneous quote in the underlying security, assume again that a given
underlying is quoting and trading in the $49.00-$50.00 price range then
a liquidity gap occurs, with bidders not representing quotes in the
market place and an offer quoted at $5.00. Quoting may quickly return
to normal, again in the $49.00-$50.00 price range, but due to the
potential perception that the underlying has gone through a dramatic
price revaluation, numerous options trades could trigger based off of
this new quoted price in the interim. Because the price that triggered
such trades was not a valid price it would be appropriate to review
said option trades.
Stop (and Stop-Limit) Order Trades Triggered by Erroneous Trades
The Exchange notes that certain market participants and their
customers enter stop or stop limit orders that are triggered based on
executions in the marketplace. As proposed, transactions resulting from
the triggering of a stop or stop-limit order by an erroneous trade in
an option contract shall be nullified by the Exchange, provided a party
notifies the Exchange's Trade Desk in a timely manner as set forth
below. The Exchange believes it is appropriate to nullify executions of
stop or stop-limit orders that were wrongly triggered because such
transactions should not have occurred. If a party believes that it
participated in an erroneous transaction pursuant to the Proposed Rule
it must notify the Exchange's Trade Desk within the timeframes set
forth in the Obvious Error Rule above, with the allowed notification
timeframe commencing at the time of notification of the nullification
of transaction(s) that triggered the stop or stop-limit order.
Linkage Trades
The Exchange also proposes to adopt language that clearly provides
the Exchange with authority to take necessary actions when another
options exchange nullifies or adjusts a transaction pursuant to its
respective rules and the transaction resulted from an order that has
passed through the Exchange and been routed on to another options
exchange on behalf of the Exchange. Specifically, if the Exchange
routes an order pursuant to the Intermarket Option Linkage Plan \11\
that results in a transaction on another options exchange (a ``Linkage
Trade'') and such options exchange subsequently nullifies or adjusts
the Linkage Trade pursuant to its rules, the Exchange will perform all
actions necessary to complete the nullification or adjustment of the
Linkage Trade. Although the Exchange is not utilizing its own authority
to nullify or adjust a transaction related to an action taken on a
Linkage Trade by another options exchange, the Exchange does have to
assist in the processing of the adjustment or nullification of the
order, such as notification to the Member and the OCC of the adjustment
or nullification. Thus, the Exchange believes that the proposed
provision adds additional transparency to the Proposed Rule.
---------------------------------------------------------------------------
\11\ As defined in Exchange Rule 27.1(17).
---------------------------------------------------------------------------
Appeals
The Exchange proposes to maintain its current appeals process in
connection with the Proposed Rule. Specifically, if a member of BATS
Options (``Options Member'') affected by a determination made under the
Proposed Rule requests within the time permitted below, the Obvious
Error Panel (``Obvious Error Panel'') will review decisions made by the
BATS Official, including whether an obvious error occurred and whether
the correct determination was made.
In order to maintain a diverse group of participants, the Obvious
Error Panel will be comprised of the Exchange's Chief Regulatory
Officer (``CRO'') or a designee of the CRO, a representative of one (1)
Options Member engaged in market making (any such representative, a
``MM Representative'') and representatives from two (2) Options Members
satisfying one or both of the criteria set forth below (any such
representative, a ``Non-MM Representative''). To qualify as a Non-MM
Representative a person must: Be employed by an Options Member whose
revenues from options market making activity do not exceed ten percent
(10%) of its total revenues; or have as his or her primary
responsibility the handling of Public Customer orders or supervisory
responsibility over persons with such responsibility, and not have any
responsibilities with respect to market making activities.
In order to further assure a diverse group of potential
participants on an Obvious Error Panel, the Exchange shall designate at
least ten (10) MM Representatives and at least ten (10) Non-MM
Representatives to be called upon to serve on the Obvious Error Panel
as needed. To assure fairness, in no case shall an Obvious Error Panel
include a person affiliated with a party to the trade in question.
Also, to the extent reasonably possible, the Exchange shall call upon
the designated representatives to participate on an Obvious Error Panel
on an equally frequent basis.
Under the Proposed Rule a request for review on appeal must be made
in writing via email or other electronic means specified from time to
time by the Exchange in a circular distributed to Options Members
within thirty (30) minutes after the party making the appeal is given
notification of the initial determination being appealed. The Obvious
Error Panel shall review the facts and render a decision as soon as
practicable, but generally on the same trading day as the execution(s)
under review. On requests for appeal received after 3:00 p.m. Eastern
Time, a decision will be rendered as soon as practicable, but in no
case later than the trading day following the date of the execution
under review.
The Obvious Error Panel may overturn or modify an action taken by
the BATS Official under this Rule. All determinations by the Obvious
Error Panel shall constitute final action by the Exchange on the matter
at issue. The Exchange believes that this is necessary given the
purpose of the appeal is finality.
In order to deter frivolous appeals, if the Obvious Error Panel
votes to uphold the decision made pursuant to the Proposed Rule, the
Exchange will assess a $500.00 fee against the Options Member(s) who
initiated the request for appeal. In addition, in instances where the
Exchange, on behalf of an Options Member, requests a determination by
another market center that a transaction is clearly erroneous, the
Exchange will pass any resulting charges through to the relevant
Options Member.
Any determination by an Officer or by the Obvious Error Panel shall
be rendered without prejudice as to the rights of the parties to the
transaction to submit their dispute to arbitration.
Limit Up-Limit Down Plan
The Exchange is proposing to adopt Interpretation and Policy .01 to
the Proposed Rule to provide for how the Exchange will treat Obvious
and Catastrophic Errors in response to the Regulation NMS Plan to
Address Extraordinary Market Volatility Pursuant to Rule 608 of
Regulation NMS under the Act (the ``Limit Up-Limit Down Plan'' or the
``Plan),\12\ which is applicable to all NMS stocks, as defined in
Regulation NMS Rule 600(b)(47).\13\ Under the Proposed Rule, during a
pilot
[[Page 77568]]
period to coincide with the pilot period for the Plan, including any
extensions to the pilot period for the Plan, an execution will not be
subject to review as an Obvious Error or Catastrophic Error pursuant to
paragraph (c) or (d) of the Proposed Rule if it occurred while the
underlying security was in a ``Limit State'' or ``Straddle State,'' as
defined in the Plan. The Exchange, however, proposes to retain
authority to review transactions on an Official's own motion pursuant
to sub-paragraph (c)(3) of the Proposed Rule and to bust or adjust
transactions pursuant to the proposed Significant Market Event
provision, the proposed trading halts provision, the proposed
provisions with respect to erroneous prints and quotes in the
underlying security, or the proposed provision related to stop and stop
limit orders that have been triggered by an erroneous execution. The
Exchange believes that these safeguards will provide the Exchange with
the flexibility to act when necessary and appropriate to nullify or
adjust a transaction, while also providing market participants with
certainty that, under normal circumstances, the trades they affect with
quotes and/or orders having limit prices will stand irrespective of
subsequent moves in the underlying security.
---------------------------------------------------------------------------
\12\ Securities Exchange Act Release No. 67091 (May 31, 2012),
77 FR 33498 (June 6, 2012) (order approving the Plan on a pilot
basis).
\13\ 17 CFR 242.600(b)(47).
---------------------------------------------------------------------------
During a Limit or Straddle State, options prices may deviate
substantially from those available immediately prior to or following
such States. Thus, determining a Theoretical Price in such situations
would often be very subjective, creating unnecessary uncertainty and
confusion for investors. Because of this uncertainty, the Exchange is
proposing to amend Rule 20.6 to provide that the Exchange will not
review transactions as Obvious Errors or Catastrophic Errors when the
underlying security is in a Limit or Straddle State.
The Exchange notes that there are additional protections in place
outside of the Obvious and Catastrophic Error Rule that will continue
to safeguard customers. First, the Exchange rejects all un-priced
options orders received by the Exchange (i.e., Market Orders) during a
Limit or Straddle State for the underlying security. Second, SEC Rule
15c3-5 requires that, ``financial risk management controls and
supervisory procedures must be reasonably designed to prevent the entry
of orders that exceed appropriate pre-set credit or capital thresholds,
or that appear to be erroneous.'' \14\ Third, the Exchange has price
checks applicable to limit orders that reject limit orders that are
priced sufficiently far through the national best bid or national best
offer (``NBBO'') that it seems likely an error occurred. The rejection
of Market Orders, the requirements placed upon broker dealers to adopt
controls to prevent the entry of orders that appear to be erroneous,
and Exchange functionality that filters out orders that appear to be
erroneous, will all serve to sharply reduce the incidence of erroneous
transactions.
---------------------------------------------------------------------------
\14\ See Securities and Exchange Act Release No. 63241 (November
3, 2010), 75 FR 69791 (November 15, 2010) (File No. S7-03-10).
---------------------------------------------------------------------------
The Exchange represents that it will conduct its own analysis
concerning the elimination of the Obvious Error and Catastrophic Error
provisions during Limit and Straddle States and agrees to provide the
Commission with relevant data to assess the impact of this proposed
rule change. As part of its analysis, the Exchange will evaluate (1)
the options market quality during Limit and Straddle States, (2) assess
the character of incoming order flow and transactions during Limit and
Straddle States, and (3) review any complaints from Members and their
customers concerning executions during Limit and Straddle States. The
Exchange also agrees to provide to the Commission data requested to
evaluate the impact of the inapplicability of the Obvious Error and
Catastrophic Error provisions, including data relevant to assessing the
various analyses noted above.
In connection with this proposal, the Exchange will provide to the
Commission and the public a dataset containing the data for each
Straddle State and Limit State in NMS Stocks underlying options traded
on the Exchange beginning in the month during which the proposal is
approved, limited to those option classes that have at least one (1)
trade on the Exchange during a Straddle State or Limit State. For each
of those option classes affected, each data record will contain the
following information:
Stock symbol, option symbol, time at the start of the
Straddle or Limit State, an indicator for whether it is a Straddle or
Limit State.
For activity on the Exchange:
[cir] executed volume, time-weighted quoted bid-ask spread, time-
weighted average quoted depth at the bid, time-weighted average quoted
depth at the offer;
[cir] high execution price, low execution price;
[cir] number of trades for which a request for review for error was
received during Straddle and Limit States;
[cir] an indicator variable for whether those options outlined
above have a price change exceeding 30% during the underlying stock's
Limit 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). Another indicator variable for whether
the option price within five minutes of the underlying stock leaving
the Limit or Straddle state (or halt if applicable) is 30% away from
the price before the start of the Limit or Straddle State.
In addition, the Exchange shall provide to the Commission
assessments relating to the impact of the operation of the Obvious
Error rules during Limit and Straddle States as follows: (1) Evaluate
the statistical and economic impact of Limit and Straddle States on
liquidity and market quality in the options markets; and (2) Assess
whether the lack of Obvious Error rules in effect during the Straddle
and Limit States are problematic. The timing of this submission would
coordinate with Participants' proposed time frame to submit to the
Commission assessments as required under Appendix B of the Plan.
No Adjustments to a Worse Price
Finally, the Exchange proposes to include Interpretation and Policy
.02 to the Proposed Rule, which would make clear that to the extent the
provisions of the proposed Rule would result in the Exchange applying
an adjustment of an erroneous sell transaction to a price lower than
the execution price or an erroneous buy transaction to a price higher
than the execution price, the Exchange will not adjust or nullify the
transaction, but rather, the execution price will stand.
2. Statutory Basis
The Exchange believes that its proposal is consistent with the
requirements of the Act and the rules and regulations thereunder that
are applicable to a national securities exchange, and, in particular,
with the requirements of section 6(b) of the Act.\15\ Specifically, the
proposal is consistent with section 6(b)(5) of the Act \16\ because it
would promote just and equitable principles of trade, 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.
---------------------------------------------------------------------------
\15\ 15 U.S.C. 78f(b).
\16\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
As described above, the Exchange and other options exchanges are
seeking to adopt harmonized rules related to the adjustment and
nullification of erroneous options transactions. The
[[Page 77569]]
Exchange believes that the Proposed Rule will provide greater
transparency and clarity with respect to the adjustment and
nullification of erroneous options transactions. Particularly, the
proposed changes seek to achieve consistent results for participants
across U.S. options exchanges while maintaining a fair and orderly
market, protecting investors and protecting the public interest. Based
on the foregoing, the Exchange believes that the proposal is consistent
with section 6(b)(5) of the Act \17\ in that the Proposed Rule will
foster cooperation and coordination with persons engaged in regulating
and facilitating transactions.
---------------------------------------------------------------------------
\17\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes the various provisions allowing or dictating
adjustment rather than nullification of a trade are necessary given the
benefits of adjusting a trade price rather than nullifying the trade
completely. Because options trades are used to hedge, or are hedged by,
transactions in other markets, including securities and futures, many
Members, and their customers, would rather adjust prices of executions
rather than nullify the transactions and, thus, lose a hedge
altogether. As such, the Exchange believes it is in the best interest
of investors to allow for price adjustments as well as nullifications.
The Exchange further discusses specific aspects of the Proposed Rule
below.
The Exchange does not believe that the proposal is unfairly
discriminatory, even though it differentiates in many places between
Customers and non-Customers. The rules of the options exchanges,
including the Exchange's existing Obvious Error provision, often treat
Customers differently, often affording them preferential treatment.
This treatment is appropriate in light of the fact that Customers are
not necessarily immersed in the day-to-day trading of the markets, are
less likely to be watching trading activity in a particular option
throughout the day, and may have limited funds in their trading
accounts. At the same time, the Exchange reiterates that in the U.S.
options markets generally there is significant retail customer
participation that occurs directly on (and only on) options exchanges
such as the Exchange. Accordingly, differentiating among market
participants with respect to the adjustment and nullification of
erroneous options transactions is not unfairly discriminatory because
it is reasonable and fair to provide Customers with additional
protections as compared to non-Customers.
The Exchange believes that its proposal with respect to the
allowance of mutual agreed upon adjustments or nullifications is
appropriate and consistent with the Act, as such proposal removes
impediments to and perfects the mechanism of a free and open market and
a national market system, allowing participants to mutually agree to
correct an erroneous transactions without the Exchange mandating the
outcome. The Exchange also believes that its proposal with respect to
mutual adjustments is consistent with the Act because it is designed to
prevent fraudulent and manipulative acts and practices by explicitly
stating that it is considered conduct inconsistent with just and
equitable principles of trade for any Member to use the mutual
adjustment process to circumvent any applicable Exchange rule, the Act
or any of the rules and regulations thereunder.
The Exchange believes its proposal to provide within the Proposed
Rule definitions of Customer, erroneous sell transaction and erroneous
buy transaction, and Official is consistent with section 6(b)(5) of the
Act because such terms will provide more certainty to market
participants as to the meaning of the Proposed Rule and reduce the
possibility that a party can intentionally submit an order hoping for
the market to move in their favor in reliance on the Rule as a safety
mechanism, thereby promoting just and fair principles of trade.
Similarly, the Exchange believes that proposed Interpretation and
Policy .02 is consistent with the Act as it would make clear that the
Exchange will not adjust or nullify a transaction, but rather, the
execution price will stand when the applicable adjustment criteria
would actually adjust the price of the transaction to a worse price
(i.e., higher for an erroneous buy or lower for an erroneous sell
order).
As set forth below, the Exchange believes it is consistent with
section 6(b)(5) of the Act for the Exchange to determine Theoretical
Price when the NBBO cannot reasonably be relied upon because the
alternative could result in transactions that cannot be adjusted or
nullified even when they are otherwise clearly at a price that is
significantly away from the appropriate market for the option.
Similarly, reliance on an NBBO that is not reliable could result in
adjustment to prices that are still significantly away from the
appropriate market for the option.
The Exchange believes that its proposal with respect to determining
Theoretical Price is consistent with the Act in that it has retained
the standard of the current rule, which is to rely on the NBBO to
determine Theoretical Price if such NBBO can reasonably be relied upon.
Because, however, there is not always an NBBO that can or should be
used in order to administer the rule, the Exchange has proposed various
provisions that provide the Exchange with the authority to determine a
Theoretical Price. The Exchange believes that the Proposed Rule is
transparent with respect to the circumstances under which the Exchange
will determine Theoretical Price, and has sought to limit such
circumstances as much as possible. The Exchange notes that Exchange
personnel currently are required to determine Theoretical Price in
certain circumstances. While the Exchange continues to pursue
alternative solutions that might further enhance the objectivity and
consistency of determining Theoretical Price, the Exchange believes
that the discretion currently afforded to Exchange Officials is
appropriate in the absence of a reliable NBBO that can be used to set
the Theoretical Price.
With respect to the specific proposed provisions for determining
Theoretical Price for transactions that occur as part of the Exchange's
Opening Process and in situations where there is a wide quote, the
Exchange believes both provisions are consistent with the Act because
they provide objective criteria that will determine Theoretical Price
with limited exceptions for situations where the Exchange does not
believe the NBBO is a reasonable benchmark or there is no NBBO. The
Exchange notes in particular with respect to the wide quote provision
that the Proposed Rule will result in the Exchange determining
Theoretical Price less frequently than it would pursuant to wide quote
provisions that have previously been approved. The Exchange believes
that it is appropriate and consistent with the Act to afford
protections to market participants by not relying on the NBBO to
determine Theoretical Price when the quote is extremely wide but had
been, in the prior 10 seconds, at much more reasonable width. The
Exchange also believes it is appropriate and consistent with the Act to
use the NBBO to determine Theoretical Price when the quote has been
wider than the applicable amount for more than 10 seconds, as the
Exchange does not believe it is necessary to apply any other criteria
in such a circumstance. The Exchange believes that market participants
can easily use or adopt safeguards to prevent errors when such market
conditions exist. When entering an order into a market with a
[[Page 77570]]
persistently wide quote, the Exchange does not believe that the
entering party should reasonably expect anything other than the quoted
price of an option.
The Exchange believes that its proposal to adopt clear but
disparate standards with respect to the deadline for submitting a
request for review of Customer and non-Customer transactions is
consistent with the Act, particularly in that it creates a greater
level of protection for Customers. As noted above, the Exchange
believes that this is appropriate and not unfairly discriminatory in
light of the fact that Customers are not necessarily immersed in the
day-to-day trading of the markets and are less likely to be watching
trading activity in a particular option throughout the day. Thus,
Members representing Customer orders reasonably may need additional
time to submit a request for review. The Exchange also believes that
its proposal to provide additional time for submission of requests for
review of linkage trades is reasonable and consistent with the
protection of investors and the public interest due to the time that it
might take an options exchange or third-party routing broker to file a
request for review with the Exchange if the initial notification of an
error is received by the originating options exchange near the end of
such options exchange's filing deadline. Without this additional time,
there could be disparate results based purely on the existence of
intermediaries and an interconnected market structure.
In relation to the aspect of the proposal giving Officials the
ability to review transactions for obvious errors on their own motion,
the Exchange notes that an Official can adjust or nullify a transaction
under the authority granted by this provision only if the transaction
meets the specific and objective criteria for an Obvious Error under
the Proposed Rule. As noted above, this is designed to give an Official
the ability to provide parties relief in those situations where they
have failed to report an apparent error within the established
notification period. However, the Exchange will only grant relief if
the transaction meets the requirements for an Obvious Error as
described in the Proposed Rule.
The Exchange believes that its proposal to adjust non-Customer
transactions and to nullify Customer transactions that qualify as
Obvious Errors is appropriate for reasons consistent with those
described above. In particular, Customers are not necessarily immersed
in the day-to-day trading of the markets, are less likely to be
watching trading activity in a particular option throughout the day,
and may have limited funds in their trading accounts.
The Exchange acknowledges that the proposal contains some
uncertainty regarding whether a trade will be adjusted or nullified,
depending on whether one of the parties is a Customer, because a party
may not know whether the other party to a transaction was a Customer at
the time of entering into the transaction. However, the Exchange
believes that the proposal nevertheless promotes just and equitable
principles of trade and protects investors as well as the public
interest because it eliminates the possibility that a Customer's order
will be adjusted to a significantly different price. As noted above,
the Exchange believes it is consistent with the Act to afford Customers
greater protections under the Proposed Rule than are afforded to non-
Customers. Thus, the Exchange believes that its proposal is consistent
with the Act in that it protects investors and the public interest by
providing additional protections to those that are less informed and
potentially less able to afford an adjustment of a transaction that was
executed in error. Customers are also less likely to have engaged in
significant hedging or other trading activity based on earlier
transactions, and thus, are less in need of maintaining a position at
an adjusted price than non-Customers.
If any Member submits requests to the Exchange for review of
transactions pursuant to the Proposed Rule, and in aggregate that
Member has 200 or more Customer transactions under review concurrently
and the orders resulting in such transactions were submitted during the
course of 2 minutes or less, the Exchange believes it is appropriate
for the Exchange apply the non-Customer adjustment criteria described
above to such transactions. The Exchange believes that the proposed
aggregation is reasonable as it is representative of an extremely large
number of orders submitted to the Exchange over a relatively short
period of time that are, in turn, possibly erroneous (and within a time
frame significantly less than an entire day), and thus is most likely
to occur because of a systems issue experienced by an Options Member
representing Customer orders or a systems issue coupled with the
erroneous marking of orders. The Exchange does not believe it is
possible at a level of 200 Customer orders over a 2 minute period that
are under review at one time that multiple, separate Customers were
responsible for the errors in the ordinary course of trading. In the
event of a large-scale issue caused by an Options Member that has
submitted orders over a 2 minute period marked as Customer that
resulted in more than 200 transactions under review, the Exchange does
not believe it is appropriate to nullify all such transactions because
of the negative impact that nullification could have on the market
participants on the contra-side of such transactions, who might have
engaged in hedging and trading activity following such transactions. In
order for a participant to have more than 200 transactions under review
concurrently when the orders triggering such transactions were received
in 2 minutes or less, the Exchange believes that a market participant
will have far exceeded the normal behavior of customers deserving
protected status. While the Exchange continues to believe that it is
appropriate to nullify transactions in such a circumstance if both
participants to a transaction are Customers, the Exchange does not
believe it is appropriate to place the overall risk of a significant
number of trade breaks on non-Customers that in the normal course of
business may have engaged in additional hedging activity or trading
activity based on such transactions. Thus, the Exchange believes it is
necessary and appropriate to protect non-Customers in such a
circumstance by applying the non-Customer adjustment criteria, and thus
adjusting transactions as set forth above, in the event a Member has
more than 200 transactions under review concurrently. In summary, due
to the extreme level at which the proposal is set, the Exchange
believes that the proposal is consistent with section 6(b)(5) of the
Act in that it promotes just and equitable principles of trade by
encouraging market participants to retain appropriate controls over
their systems to avoid submitting a large number of erroneous orders in
a short period of time.
Similarly, the Exchange believes that the proposed Size Adjustment
Modifier, which would increase the adjustment amount for non-Customer
transactions, is appropriate because it attempts to account for the
additional risk that the parties to the trade undertake for
transactions that are larger in scope. The Exchange believes that the
Size Adjustment Modifier creates additional incentives to prevent more
impactful Obvious Errors and it lessens the impact on the contra-party
to an adjusted trade. The Exchange notes that these contra-parties may
have preferred to only trade the size involved in the transaction at
the price at which such trade occurred,
[[Page 77571]]
and in trading larger size has committed a greater level of capital and
bears a larger hedge risk.
The Exchange similarly believes that its Proposed Rule with respect
to Catastrophic Errors is consistent with the Act as it affords
additional time for market participants to file for review of erroneous
transactions that were further away from the Theoretical Price. At the
same time, the Exchange believes that the Proposed Rule is consistent
with the Act in that it generally would adjust transactions, including
Customer transactions, because this will protect against hedge risk,
particularly for transactions that may have occurred several hours
earlier and thus, which all parties to the transaction might presume
are protected from further modification. Similarly, by providing larger
adjustment amounts away from Theoretical Price than are set forth under
the Obvious Error provision, the Catastrophic Error provision also
takes into account the possibility that the party that was advantaged
by the erroneous transaction has already taken actions based on the
assumption that the transaction would stand. The Exchange believes it
is reasonable to specifically protect Customers from adjustments
through their limit prices for the reasons stated above, including that
Customers are less likely to be watching trading throughout the day and
that they may have less capital to afford an adjustment price. The
Exchange believes that the proposal provides a fair process that will
ensure that Customers are not forced to accept a trade that was
executed in violation of their limit order price. In contrast, market
professionals are more likely to have engaged in hedging or other
trading activity based on earlier trading activity, and thus, are more
likely to be willing to accept an adjustment rather than a
nullification to preserve their positions even if such adjustment is to
a price through their limit price.
The Exchange believes that proposed rule change to adopt the
Significant Market Event provision is consistent with section 6(b)(5)
of the Act in that it will foster cooperation and coordination with
persons engaged in regulating the options markets. In particular, the
Exchange believes it is important for options exchanges to coordinate
when there is a widespread and significant event, as commonly, multiple
options exchanges are impacted in such an event. Further, while the
Exchange recognizes that the Proposed Rule will not guarantee a
consistent result for all market participants on every market, the
Exchange does believe that it will assist in that outcome. For
instance, if options exchanges are able to agree as to the time from
which Theoretical Price should be determined and the period of time
that should be reviewed, the likely disparity between the Theoretical
Prices used by such exchanges should be very slight and, in turn, with
otherwise consistent rules, the results should be similar. The Exchange
also believes that the Proposed Rule is consistent with the Act in that
it generally would adjust transactions, including Customer
transactions, because this will protect against hedge risk,
particularly for liquidity providers that might have been quoting in
thousands or tens of thousands of different series and might have
affected executions throughout such quoted series. The Exchange
believes that when weighing the competing interests between preferring
a nullification for a Customer transaction and an adjustment for a
transaction of a market professional, while nullification is
appropriate in a typical one-off situation that it is necessary to
protect liquidity providers in a widespread market event because,
presumably, they will be the most affected by such an event (in
contrast to a Customer who, by virtue of their status as such, likely
would not have more than a small number of affected transactions). The
Exchange believes that the protection of liquidity providers by
favoring adjustments in the context of Significant Market Events can
also benefit Customers indirectly by better enabling liquidity
providers, which provides a cumulative benefit to the market. Also, as
stated above with respect to Catastrophic Errors, the Exchange believes
it is reasonable to specifically protect Customers from adjustments
through their limit prices for the reasons stated above, including that
Customers are less likely to be watching trading throughout the day and
that they may have less capital to afford an adjustment price. The
Exchange believes that the proposal provides a fair process that will
ensure that Customers are not forced to accept a trade that was
executed in violation of their limit order price. In contrast, market
professionals are more likely to have engaged in hedging or other
trading activity based on earlier trading activity, and thus, are more
likely to be willing to accept an adjustment rather than a
nullification to preserve their positions even if such adjustment is to
a price through their limit price. In addition, the Exchange believes
it is important to have the ability to nullify some or all transactions
arising out of a Significant Market Event in the event timely
adjustment is not feasible due to the extraordinary nature of the
situation. In particular, although the Exchange has worked to limit the
circumstances in which it has to determine Theoretical Price, in a
widespread event it is possible that hundreds if not thousands of
series would require an Exchange determination of Theoretical Price. In
turn, if there are hundreds or thousands of trades in such series, it
may not be practicable for the Exchange to determine the adjustment
levels for all non-Customer transactions in a timely fashion, and in
turn, it would be in the public interest to instead more promptly
deliver a simple, consistent result of nullification.
The Exchange believes that proposed rule change related to review,
nullification and/or adjustment of erroneous transactions during a
trading halt (including the proposed modification to Rule 20.3), an
erroneous print in the underlying security, an erroneous quote in the
underlying security, or an erroneous transaction in the option with
respect to stop and stop limit orders is likewise consistent with
section 6(b)(5) of the Act because the proposal provides for the
adjustment or nullification of trades executed at erroneous prices
through no fault on the part of the trading participants. Allowing for
Exchange review in such situations will promote just and fair
principles of trade by protecting investors from harm that is not of
their own making. Specifically with respect to the proposed provisions
governing erroneous prints and quotes in the underlying security, the
Exchange notes that market participants on the Exchange base the value
of their quotes and orders on the price of the underlying security. The
provisions regarding errors in prints and quotes in the underlying
security cover instances where the information market participants use
to price options is erroneous through no fault of their own. In these
instances, market participants have little, if any, chance of pricing
options accurately. Thus, these provisions are designed to provide
relief to market participants harmed by such errors in the prints or
quotes of the underlying security.
The Exchange believes that the proposed provision related to
Linkage Trades is consistent with the Act because it adds additional
transparency to the Proposed Rule and makes clear that when a Linkage
Trade is adjusted or nullified by another options exchange, the
Exchange will take necessary actions to complete the nullification or
adjustment of the Linkage Trade.
[[Page 77572]]
The Exchange believes that retaining the same appeals process as
the Exchange maintains under the Current Rule is consistent with the
Act because such process provides Options Members with due process in
connection with decisions made by Exchange Officials under the Proposed
Rule. The Exchange believes that this process provides fair
representation of Options Members by ensuring diversity amongst the
members of any Obvious Error Review Panel, which is consistent with
sections 6(b)(3) and 6(b)(7) of the Act. The Exchange also believes
that the proposed appeals process is appropriate with respect to
financial penalties for appeals that result in a decision of the
Exchange being upheld because it discourages frivolous appeals, thereby
reducing the possibility of overusing Exchange resources that can
instead be focused on other, more productive activities. The fees with
respect to such financial penalties are the same as under the Current
Rule, and are equitable and not unfairly discriminatory because they
will be applied uniformly to all Options Members and are designed to
reduce administrative burden on the Exchange as well as market
participants that volunteer to participate on Obvious Error Review
Panels.
With regard to the portion of the Exchange's proposal related to
the applicability of the Obvious Error Rule when the underlying
security is in a Limit or Straddle State, the Exchange believes that
the proposed rule change is consistent with section 6(b)(5) of the Act
because it will provide certainty about how errors involving options
orders and trades will be handled during periods of extraordinary
volatility in the underlying security. Further, the Exchange believes
that it is necessary and appropriate in the interest of promoting fair
and orderly markets to exclude from Rule 20.6 those transactions
executed during a Limit or Straddle State.
The Exchange believes the application of the Proposed Rule without
the proposed provision would be impracticable given the lack of
reliable NBBO in the options market during Limit and Straddle States,
and that the resulting actions (i.e., nullified trades or adjusted
prices) may not be appropriate given market conditions. The Proposed
Rule change would ensure that limit orders that are filled during a
Limit State or Straddle State would have certainty of execution in a
manner that promotes just and equitable principles of trade, removes
impediments to, and perfects the mechanism of a free and open market
and a national market system.
Moreover, given the fact that options prices during brief Limit or
Straddle States may deviate substantially from those available shortly
following the Limit or Straddle State, the Exchange believes giving
market participants time to re-evaluate a transaction would create an
unreasonable adverse selection opportunity that would discourage
participants from providing liquidity during Limit or Straddle States.
In this respect, the Exchange notes that only those orders with a limit
price will be executed during a Limit or Straddle State. Therefore, on
balance, the Exchange believes that removing the potential inequity of
nullifying or adjusting executions occurring during Limit or Straddle
States outweighs any potential benefits from applying certain
provisions during such unusual market conditions. Additionally, as
discussed above, there are additional pre-trade protections in place
outside of the Obvious and Catastrophic Error Rule that will continue
to safeguard customers.
The Exchange notes that under certain limited circumstances the
Proposed Rule will permit the Exchange to review transactions in
options that overlay a security that is in a Limit or Straddle State.
Specifically, an Official will have authority to review a transaction
on his or her own motion in the interest of maintaining a fair and
orderly market and for the protection of investors. Furthermore, the
Exchange will have the authority to adjust or nullify transactions in
the event of a Significant Market Event, a trading halt in the affected
option, an erroneous print or quote in the underlying security, or with
respect to stop and stop limit orders that have been triggered based on
erroneous trades. The Exchange believes that the safeguards described
above will protect market participants and will provide the Exchange
with the flexibility to act when necessary and appropriate to nullify
or adjust a transaction, while also providing market participants with
certainty that, under normal circumstances, the 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 those
transactions that occur during a Limit or Straddle State would allow
the Exchange to account for unforeseen circumstances that result in
Obvious or Catastrophic Errors for which a nullification or adjustment
may be necessary in the interest of maintaining a fair and orderly
market and for the protection of investors. Similarly, the ability to
nullify or adjust transactions that occur during a Significant Market
Event or trading halt, erroneous print or quote in the underlying
security, or erroneous trade in the option (i.e., stop and stop limit
orders) may also be necessary in the interest of maintaining a fair and
orderly market and for the protection of investors. Furthermore, the
Exchange will administer this provision in a manner that is consistent
with the principles of the Act and will create and maintain records
relating to the use of the authority to act on its own motion during a
Limit or Straddle State or any adjustments or trade breaks based on
other proposed provisions under the Rule.
B. Self-Regulatory Organization's Statement on Burden on Competition
BATS believes the entire proposal is consistent with section
6(b)(8) of the Act \18\ in that it does not impose any burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Act as explained below.
---------------------------------------------------------------------------
\18\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------
Importantly, the Exchange believes the proposal will not impose a
burden on intermarket competition but will rather alleviate any burden
on competition because it is the result of a collaborative effort by
all options exchanges to harmonize and improve the process related to
the adjustment and nullification of erroneous options transactions. The
Exchange does not believe that the rules applicable to such process is
an area where options exchanges should compete, but rather, that all
options exchanges should have consistent rules to the extent possible.
Particularly where a market participant trades on several different
exchanges and an erroneous trade may occur on multiple markets nearly
simultaneously, the Exchange believes that a participant should have a
consistent experience with respect to the nullification or adjustment
of transactions. The Exchange understands that all other options
exchanges intend to file proposals that are substantially similar to
this proposal.
The Exchange does not believe that the proposed rule change imposes
a burden on intramarket competition because the provisions apply to all
market participants equally within each participant category (i.e.,
Customers and non-Customers). With respect to competition between
Customer and non-Customer market participants, the Exchange believes
that the Proposed Rule acknowledges competing concerns and tries to
strike the appropriate balance between such concerns. For
[[Page 77573]]
instance, as noted above, the Exchange believes that protection of
Customers is important due to their direct participation in the options
markets as well as the fact that they are not, by definition, market
professionals. At the same time, the Exchange believes due to the
quote-driven nature of the options markets, the importance of liquidity
provision in such markets and the risk that liquidity providers bear
when quoting a large breadth of products that are derivative of
underlying securities, that the protection of liquidity providers and
the practice of adjusting transactions rather than nullifying them is
of critical importance. As described above, the Exchange will apply
specific and objective criteria to determine whether an erroneous
transaction has occurred and, if so, how to adjust or nullify a
transaction.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days after
publication (i) as the Commission may designate if it finds such longer
period to be appropriate and publishes its reasons for so finding or
(ii) as to which the self-regulatory organization consents, the
Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-BATS-2014-067 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-BATS-2014-067. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-BATS-2014-067 and should be
submitted on or before January 14, 2015.\19\
---------------------------------------------------------------------------
\19\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-30127 Filed 12-23-14; 8:45 am]
BILLING CODE 8011-01-P