Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending Rule 6.87-Obvious Errors and Catastrophic Errors in Order To Harmonize Substantial Portions of the Rule With Recently Adopted, and Proposed Rules of Other Options Exchanges, 27747-27764 [2015-11605]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 80, Number 93 (Thursday, May 14, 2015)]
[Notices]
[Pages 27747-27764]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-11605]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74921; File No. SR-NYSEArca-2015-41]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Amending Rule 
6.87--Obvious Errors and Catastrophic Errors in Order To Harmonize 
Substantial Portions of the Rule With Recently Adopted, and Proposed 
Rules of Other Options Exchanges

May 8, 2015.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on May 8, 2015, NYSE Arca, Inc. (the ``Exchange'' or ``NYSE 
Arca'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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

    The Exchange proposes to amend Rule 6.87--Obvious Errors and 
Catastrophic Errors \4\ in order to harmonize substantial portions of 
the rule with recently adopted, and proposed rules of other options 
exchanges. 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.
---------------------------------------------------------------------------

    \4\ For the purposes of this filing, Rule 6.87--Obvious Errors 
and Catastrophic Errors, in its current format is referred to as 
``Current Rule.'' Rule 6.87--Obvious Errors and Catastrophic Errors, 
with proposed changes is referred to as ``Proposed Rule''.

---------------------------------------------------------------------------

[[Page 27748]]

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

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

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

1. Purpose
    The Exchange proposes to amend Current Rule 6.87--Obvious Errors 
and Catastrophic Errors in order to harmonize substantial portions of 
the rule with recently adopted, and proposed, rules of other options 
exchanges.\5\
---------------------------------------------------------------------------

    \5\ See, e.g., Securities Exchange Act Release No. 74556 (March 
20, 2015), 80 FR 16031 (March 26, 2015) (SR-BATS-2014-067 as 
amended) (the ``BATS Filing'').
---------------------------------------------------------------------------

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 
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

[[Page 27749]]

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 an 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 speaking, 
public customers--more favorable treatment in some circumstances.
Proposed Rule
    The changes proposed in this filing are substantially similar to 
recently approved changes to BATS Rule 20.6, pursuant to the BATS 
Filing. The Exchange notes that certain provisions of BATS Rule 20.6, 
regarding trading halts and nullification by mutual agreement, are 
covered by Exchange rules other than Current Rule 6.87. The Exchange is 
not proposing to amend or relocate those rules; however, where 
appropriate, the Exchange has included a reference to those rules in 
this filing.\6\
---------------------------------------------------------------------------

    \6\ See infra ``Additional Exchange Provisions.''
---------------------------------------------------------------------------

    NYSE Arca trades options on both an electronic system and via open 
outcry on the Floor of the Exchange. Unless otherwise noted in this 
filing, both Current Rule 6.87 and Proposed Rule 6.87 apply to 
electronic transactions only.
Title
    The Exchange proposes to re-title Rule 6.87 from ``Obvious and 
Catastrophic Errors'' to ``Nullification and Adjustment of Options 
Transactions including Obvious Errors.'' The new rule title is 
consistent with the BATS Filing and is in keeping with the efforts of 
the options exchanges to harmonize rules where possible.
Definitions--Proposed Rule 6.87(a)
    The Exchange proposes to adopt various new definitions and will 
maintain certain existing definitions in the Proposed Rule, as 
described below.
     First, the Exchange proposes to adopt a new definition of 
``Customer,'' \7\ for the purposes of the Proposed Rule, to make clear 
that this term would not include any broker-dealer or Professional 
Customer.\8\ 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.
---------------------------------------------------------------------------

    \7\ See Commentary .06 to Rule 6.87 (setting forth definition of 
Customer for purpose of Current Rule).
    \8\ A ``Professional Customer'' 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 6.1A (a)(4A).
---------------------------------------------------------------------------

     Second, the Exchange proposes to adopt new 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 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 new definition of 
``Official,'' which for the purposes of this rule would mean an Officer 
of the Exchange or a Trading Official, as defined in Rule 6.1(b)(34), 
who is trained in the application of the Proposed Rule. The Exchange 
notes that utilizing an Exchange Officer or Trading Official when 
making Obvious and Catastrophic Error determinations is consistent with 
existing Rule 6.87.
     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 theoretical price plus/
Number of contracts per execution                  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

[[Page 27750]]

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.\9\ 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.
---------------------------------------------------------------------------

    \9\ See 17 CFR 240.10b-18(a)(5)(ii).
---------------------------------------------------------------------------

Theoretical Price--Proposed Rule 6.87(b)
Normal Circumstances
    Pursuant to 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 Exchange would use the last NBB and last NBO just 
prior to the Exchange's receipt of the order as the Theoretical Price 
for determining the execution price at all price levels.
    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.
Transactions at the Open
    Under the Proposed Rule, for a transaction occurring as part of the 
Opening Auction \10\ 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 below. 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 below. 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 below, then the Exchange will use the NBB or 
NBO just prior to the transaction as it would in any other normal 
review scenario.
---------------------------------------------------------------------------

    \10\ See Exchange Rule 6.64 for a description of the Exchange's 
Opening Auction.
---------------------------------------------------------------------------

    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 provision as described 
below. 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.
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 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 Trading Officials 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 
Trading Officials is appropriate in the absence of a reliable NBBO that 
can be used to set the Theoretical Price. Under the Current Rule, 
Trading Officials will generally consult and refer to data such as the 
prices of related series, especially the closest strikes in the option 
in question. Trading Officials 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 NBBO 
for the affected

[[Page 27751]]

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:

------------------------------------------------------------------------
                                                               Minimum
                 Bid price at time of trade                     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 Rule 6.37(b)(1), with certain rounding applied (e.g., $1.25 as 
proposed rather than $1.20). 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.\11\ 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.
---------------------------------------------------------------------------

    \11\ See, e.g., Exchange Rule 6.91(c)(3), which subjects 
eligible orders entered into the Electronic Complex Order Auction to 
be exposed on NYSE Arca for a period of time not to exceed one 
second before they will be executed.
---------------------------------------------------------------------------

    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.
Obvious Errors--Proposed Rule 6.87(c)
    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:

------------------------------------------------------------------------
                                                               Minimum
                     Theoretical price                          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 Trader Update.\12\ The Exchange currently only 
accepts notification via email or phone but believes that maintaining 
flexibility in the Rule is important to allow for changes to the 
process.
---------------------------------------------------------------------------

    \12\ Trader Updates are information memos issued by the Exchange 
and distributed via email to OTP Holders and posted on the 
Exchange's Web site.
---------------------------------------------------------------------------

    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

[[Page 27752]]

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.
    Current Rule 6.87(b)(3) authorizes the Chief Executive Officer of 
NYSE Arca, Inc. (``CEO'') or designee thereof, who is an officer of the 
Exchange (collectively ``Exchange officer''), to 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 provision is designed to give the Exchange ability to 
provide parties relief in those situations where they have failed to 
report an apparent error within the established notification period. 
The Exchange also proposes to relocate substantive provisions of Rule 
6.87(b)(3) and incorporate them into proposed Rule 6.87(c)(3). In 
addition, the Exchange proposes to replace ``Chief Executive Officer of 
NYSE Arca, Inc. (``CEO'') or designee thereof, who is an officer of the 
Exchange'' with Official (as defined in Proposed Rule 6.87(a)(3)). 
Having an Official make the determination to review a trade on his/her 
own motion is consistent with BATS Rule 20.6(c)(3).
    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.
    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 transaction    Sell transaction
      Theoretical price (TP)         adjustment-- TP    adjustment-- TP
                                           plus              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 transactions 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

[[Page 27753]]

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 OTP Holder submits requests to the Exchange for 
review of transactions pursuant to the Proposed Rule, and in aggregate 
that OTP Holder 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 OTP Holder 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.\13\ 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 OTP Holder has more than 200 transactions under 
review concurrently.
---------------------------------------------------------------------------

    \13\ See Securities Exchange Act Release No. 73884 (December 18, 
2014), 79 FR at 77562, n.8 (December 24, 2014) (Notice of Filing of 
SR-BATS-2014-067 as amended). BATS notes that in third quarter of 
2014 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--Proposed Rule 6.87(d)
    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:

------------------------------------------------------------------------
                                                               Minimum
                     Theoretical price                          amount
------------------------------------------------------------------------
Below $2.00................................................        $0.50
$2.00 to $5.00.............................................         1.00
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 (``ET'') 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 
Trader Update. 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 transaction    Sell transaction
      Theoretical price (TP)         adjustment-- TP    adjustment-- TP
                                           plus              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

[[Page 27754]]

 
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--Proposed Rule 6.87(e)
    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.\14\ 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 exceeded, 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.
---------------------------------------------------------------------------

    \14\ 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 of $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 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 $100,000,000 are potentially erroneous;
    (D) 10,000 transactions are potentially erroneous.

    As described above, the Exchange proposes to adopt a the 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 equals or 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

[[Page 27755]]

(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 equal or 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 market participant 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 exceeded 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 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 6.87(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.

[[Page 27756]]



------------------------------------------------------------------------
                                     Buy transaction    Sell transaction
      Theoretical price (TP)         adjustment-- TP    adjustment-- TP
                                           plus              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.
Trading Halts--Proposed Rule 6.87(f)
    Exchange Rule 6.65 Commentary .04 stipulates that trades that occur 
during a trading halt on the Exchange in the affected option shall be 
nullified. The Exchange is not proposing to amend Rule 6.65 as part of 
this filing, but does propose to include a reference to Rule 6.65 
Commentary .04 in Proposed Rule 6.87(f). While a trade that occurs 
during a halt in an option series is not subject to the same criteria 
as an Obvious Error, the Exchange believes including such a cross 
reference with in Rule 6.87 is appropriate as it would add clarity to 
market participants as to what would happen to a trade that occurred 
during a trading halt.
Erroneous Print in Underlying Security--Proposed Rule 6.87(g)
    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 provide market participants a process that allows for the adjustment 
or nullification of transactions based on an erroneous print in the 
underlying security.
    Current Rules 6.87(a)(4) provides OTP Holders an opportunity for 
relief in the event an aberrant transaction resulted from an erroneous 
print in the underlying security. The Current Rules are similar in 
scope to BATS Rules 20.6(g) and provide OTP Holders a similar 
opportunity for relief that is afforded to BATS members. The Exchange 
is proposing to adopt Rule 6.87(g) which is substantially similar to 
BATS Rule 20.6(g). In addition, the Current Rule contains provisions 
covering erroneous prints and quotes in related instruments that are 
not part of the BATS rules. The Exchange proposes to incorporate those 
provisions into the Proposed Rule, as explained later.
    The Exchange 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 further proposes 
to state that for the purposes of an erroneous print in the underlying 
security, the allowed notification timeframe commences at the time of 
notification by the underlying market(s) of nullification of 
transactions in the underlying security. The Exchange also 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.
    Current Rule 6.87(a)(4)(A)-(C) contains an additional provision 
governing erroneous prints in related instruments, which was outside of 
the scope of the industry-wide harmonization effort and was not 
included in the BATS Filing. Accordingly, the Exchange proposes to 
adopt new subsection (g)(1), containing

[[Page 27757]]

rule text from Current Rules 6.87(a)(4)(A)-(C). Proposed Rule 
6.87(g)(1) together with subparagraphs (A)-(B), are virtually identical 
to the Current Rule and explain in detail the procedures for the 
nullification or adjustment of an options transaction that resulted 
from an erroneous print in a related instrument. Retaining current 
rules governing erroneous prints in related instruments will allow OTP 
Holders to continue to seek relief in such situations.
    As previously mentioned in the filing, unless otherwise noted 
Proposed Rule 6.87 pertains to electronic trading only. Accordingly, 
the Exchange proposes to not carry over the reference to an 
``electronic'' trade (found in the Current Rule) to Proposed Rule 
6.87(g), as that concept is covered in earlier rule text.
Erroneous Quote in Underlying Security--Proposed Rule 6.87(h)
    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 provide market participants a process that allows for the adjustment 
or nullification of transactions based on an erroneous quote in the 
underlying security.
    Current Rule 6.87NY(a)(5) provides OTP Holders an opportunity for 
relief in the event an aberrant transaction resulted from an erroneous 
quote in the underlying security. The Current Rule is similar in scope 
to BATS Rules 20.6(h) and provides OTP Holders a similar opportunity 
for relief that is afforded to BATS members. The Exchange is proposing 
to adopt Rules 6.87(h) which is substantially similar to BATS Rule 
20.6(h). In addition, the Current Rules contain provisions covering 
erroneous quotes in related instruments that are not part of the BATS 
rules. The Exchange proposes to incorporate those provisions into the 
Proposed Rule, as explained below.
    The Exchange also proposes to require that if a party believes that 
it participated in an erroneous transaction resulting from an erroneous 
quote pursuant to the proposed erroneous quote provision it must notify 
the Exchange's Trade Desk within the timeframes set forth in the 
Obvious Error provision described above. For the purposes of an 
erroneous quote in the underlying security, the Exchange proposes to 
state the allowed notification timeframe commences at the time of the 
options execution.
    Current Rule 6.87(a)(5)(A) contains an additional provision 
governing erroneous quotes in related instruments, which was outside of 
the scope of the industry-wide harmonization effort and was not 
included in the BATS Filing. Accordingly, the Exchange proposes to 
adopt new subsection (h)(1), containing rule text from Current Rules 
6.87(a)(5)(A). Proposed Rule 6.87(h)(1), together with subparagraph 
(A), are virtually identical to the Current Rule and further explain 
procedures for the nullification or adjustment of an options 
transaction that resulted from an erroneous quote in a related 
instrument. Retaining current rules governing erroneous quotes in 
related instruments will allow OTP Holders to continue to seek relief 
in such situations.
    Current Rule 6.87(a)(5)(B) describes the procedures for determining 
the average quote width and states that ``the average quote width shall 
be determined by adding the quote widths of sample quotations at 
regular 15-second intervals during the four minute time period 
referenced above (excluding the quote in question) and dividing by the 
number of quotes during such time period (excluding the quote in 
question).'' These procedures are substantially similar in all material 
respects to those contained in Proposed Rule 6.87(h).
Stop and Stop-Limit Order Trades Triggered by Erroneous Trades--
Proposed Rule 6.87(i)
    The Exchange notes that certain market participants and their 
customers enter Stop Orders \15\ or Stop Limit Orders \16\ that are 
triggered based on executions in the marketplace. As proposed, Rule 
6.87(i) would provide that 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 Order or Stop Limit order.
---------------------------------------------------------------------------

    \15\ See Exchange Rule 6.62(d)(1).
    \16\ See Exchange Rule 6.62(d)(2).
---------------------------------------------------------------------------

Linkage Trades--Proposed Rule 6.87(j)
    The Exchange also proposes to adopt Rule 6.87(j) 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 Options Order Protection and Locked/
Crossed Market Plan \17\ 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 would 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 
OTP Holder and the OCC of the adjustment or nullification. Thus, the 
Exchange believes that the proposed subsection (j) adds additional 
transparency to the Proposed Rule.
---------------------------------------------------------------------------

    \17\ See Securities Exchange Act Release No. 60527 (August 18, 
2009), 74 FR 43178 (August 26, 2009) (approval for SR-NYSEArca-2009-
45 as amended).
---------------------------------------------------------------------------

Appeals--Proposed Rule 6.87(k)
    Current Exchange rules governing the appeal of an Obvious or 
Catastrophic Error determination are similar in scope to those in the 
BATS Filing. Specifically, if a party to an Obvious Error determination 
requests within thirty (30) minutes after the party is given 
notification of the initial determination being appealed, an Obvious 
Error Panel (``OE Panel'') will review decisions made by the Exchange, 
including whether an Obvious Error occurred and whether the correct 
action was made. In addition, if a party to a Catastrophic Error 
determination so requests within thirty (30) minutes after being given 
notification of the determination, a Catastrophic Error Review Panel 
(``CER Panel'') will review that determination to decide if it was 
correct, and to decide whether the correct action was taken. An OE 
Panel or a CER Panel (``Appeal Panel'') may overturn or modify an 
action taken by the Exchange Official acting pursuant to Rule 6.87. All 
determinations by an Appeal Panel constitute final action by the 
Exchange on the matter at issue.

[[Page 27758]]

    The Exchange proposes to maintain its current appeals process in 
connection with the Proposed Rule and relocate the existing rule text. 
As proposed, Current Rule 6.87(c) would be renumbered as Rule 
6.87(k)(1) and Current Rules 6.87(d)(3)(D)-(F) would be renumbered as 
Rule 6.87(k)(2). The Exchange also proposes to make technical edits to 
certain rule cites within the relocated provisions to reflect the 
numbering convention of the Proposed Rule.
    As proposed, portions of Current Rule 6.87(c) would be renumbered 
as Rule 6.87(k)(1) and Current Rules 6.87(d)(3)(D) and (F) would be 
renumbered as Rule 6.87(k)(2). Also, because the selection criteria and 
composition of members for both OE Panels and CER Panels are identical, 
the Exchange proposes to combine existing Rules 6.87(c)(A)-(B) and Rule 
6.87(d)(3)(E) into one common provision under proposed Rule 6.87(k)(3). 
In conjunction with the creation of one common rule, the Exchange 
proposes to rename the CER Panel as the Catastrophic Error Panel (``CE 
Panel''). The Exchange believes these changes will make for a concise 
and more easily navigable rule. The Exchange also proposes to make 
technical edits to certain rule cites within the relocated provisions 
to reflect the new numbering convention of the Proposed Rule.
Limit Up-Limit Down Plan--Proposed Commentary .03 to Rule 6.87
    The Exchange is proposing to adopt Commentary .03 to the Proposed 
Rule to provide for how the Exchange would 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''),\18\ 
which is applicable to all NMS stocks, as defined in Regulation NMS 
Rule 600(b)(47).\19\ Under the Proposed Rule, during a pilot period to 
coincide with the pilot period for the Plan, including any extensions 
to the pilot period for the Plan, an execution would 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 would 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 would stand irrespective of subsequent moves in the 
underlying security.
---------------------------------------------------------------------------

    \18\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012) (order approving the Plan on a 
pilot basis).
    \19\ 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 specify in Commentary .03 that the Exchange would 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.'' \20\ 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, all serve to sharply reduce the incidence of erroneous 
transactions.
---------------------------------------------------------------------------

    \20\ 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 OTP Holder 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:
     Executed volume, time-weighted quoted bid-ask spread, 
time-weighted average quoted depth at the bid, time-weighted average 
quoted depth at the offer;
     high execution price, low execution price;
     number of trades for which a request for review for error 
was received during Straddle and Limit States;
     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

[[Page 27759]]

applicable) is 30% away from the price before the start of the Limit or 
Straddle State.

    In addition, by May 29, 2015, the Exchange shall provide to the 
Commission and the public 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. The Exchange notes that the pilot program is 
intended to run concurrent with the pilot period of the Plan, which has 
been extended to October 23, 2015. The Exchange proposes to reflect 
this date in the Proposed Rule.
No Adjustments to a Worse Price--Proposed Commentary .04 to Rule 6.87
    Finally, the Exchange proposes to adopt Commentary .04, (currently 
Reserved) to Rule 6.87, 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.
Additional Exchange Provisions
    As noted above, the proposed changes to Current Rule 6.87 are 
substantially similar to those recently approved as part of the BATS 
Filing. The Exchange notes that certain provisions of BATS Rule 20.6 
are located in Exchange rules other than Rule 6.87. Additionally, 
Current Rule 6.87 contains various provisions that were not part of the 
BATS Filing but will be maintained by the Exchange and incorporated in 
the Proposed Rule. A description of each is shown below.
    NYSE Arca Rule 6.77A \21\ provides that a trade on the Exchange may 
be nullified or adjusted if the parties to the trade agree to the 
nullification or adjustment. Any adjustment or nullification must be 
authorized by the Exchange and any adjustment must be to a permissible 
price and in compliance with any applicable rules of the Exchange or 
the Securities and Exchange Commission at the time the original 
transaction was executed. Rule 6.77A is similar in scope to the rule 
text found in the opening paragraph of BATS Rule 20.6 and offers market 
participants the same opportunity to mutually agree to adjust or 
nullify a trade as provided by the BATS rule. The Exchange notes that 
notification procedures and reporting deadlines applicable to the 
adjustment or nullification of trades based on mutual agreement, was 
not within the scope of the industry-wide harmonization effort. 
Accordingly, the Exchange does not propose to relocate or amend Rule 
6.77A.
---------------------------------------------------------------------------

    \21\ See Securities Exchange Act Release No. 73909 (December 22, 
2014), 79 FR 78522 (December 30, 2014) (Notice of filing and 
immediate effectiveness of SR-NYSEArca-2014-140).
---------------------------------------------------------------------------

    Current Rule 6.87(a)(6) permits transactions in series where the 
NBBO bid is zero to be nullified under certain circumstances, 
regardless of whether the execution occurred at an erroneous price, 
pursuant to Obvious Error guidelines (``No-bid Rule''). The Exchange 
notes that former BATS Rule 20.6(b)(2), which was similar in scope to 
Rule 6.87(a)(6), was not part of the amended rule set included in the 
BATS Filing. Thus, the Exchange proposes to delete Rule 6.87(a)(6) in 
its entirely, to further harmonize trade nullification rules across the 
options industry.
    Current Rule 6.87(a)(7) governs Obvious Errors involving Complex 
Orders. The process for the handling of for Obvious Errors on Complex 
Orders was outside of the scope of the industry wide effort to 
harmonize Obvious and Catastrophic Error rules, and was not addressed 
in the BATS Filing. The Exchange notes that it will maintain the rule 
text from Current Rule 6.87(a)(7), in Proposed Rule 6.87(c)(5). To 
ensure that the Proposed Rule is consistent with other Exchange rules, 
the Exchange proposes to delete language in paragraph (A) of the rule 
referencing trades eligible to be adjusted or busted pursuant to 
paragraph (a)(6)--as this provision would be rendered obsolete by the 
proposed deletion of the No-bid Rule as discussed above.
    Current Commentary .01 states that determinations regarding Obvious 
Errors and Catastrophic Errors made by the Exchange will be rendered 
without prejudice as to the rights of the parties to the transaction to 
submit a dispute to arbitration. The rights to submit a dispute to 
arbitration under this Commentary is limited to rulings involving 
Obvious and Catastrophic Errors made pursuant to Current Rule 6.87(b) 
and (d)(3) and any appeal of such rulings. The Exchange does not 
propose to expand the applicability of this Commentary to the newly 
proposed provisions of the harmonization effort (i.e. Significant 
Market Events) but does proposes to amend rule cites within this 
Commentary to reflect the numbering convention of the Proposed Rule.
Implementation Date
    The Exchange will announce the effective date of the proposed 
changes in a Trader Update distributed to all OTP Holders and OTP 
Firms. The effective date will be no sooner than May 8, 2015, the 
scheduled implementation date of the BATS Filing, which serves as the 
basis for the Proposed Rule. The Current Rule will remain in force 
until the Proposed Rule is implemented.
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.\22\ Specifically, the 
proposal is consistent with Section 6(b)(5) of the Act \23\ 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.
---------------------------------------------------------------------------

    \22\ 15 U.S.C. 78f(b).
    \23\ 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 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 \24\ in that the Proposed Rule will foster cooperation and 
coordination with persons engaged in regulating and facilitating 
transactions.
---------------------------------------------------------------------------

    \24\ 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

[[Page 27760]]

nullifying the trade completely. Because options trades are used to 
hedge, or are hedged by, transactions in other markets, including 
securities and futures, many OTP Holders, 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 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 Commentary .04 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 Trading 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 
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, OTP 
Holders 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

[[Page 27761]]

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 OTP Holder submits requests to the Exchange for review of 
transactions pursuant to the Proposed Rule, and in aggregate that OTP 
Holder 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 OTP Holder 
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 OTP Holder 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 an OTP Holder 
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, 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

[[Page 27762]]

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 cross reference to Rule 6.65 
Commentary .04), 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 Orders 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.
    The Exchange believes that retaining the same appeals process for 
Obvious Errors and Catastrophic Errors as the Exchange maintains under 
the Current Rule is consistent with the Act because such process 
provides OTP Holders with due process in connection with decisions made 
by Exchange Officials under the Proposed Rule. 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, including the proposed new fee for an 
unsuccessful appeal of a Catastrophic Error determination, because it 
discourages frivolous appeals, thereby reducing the possibility of 
overusing Exchange resources that can instead be focused on other, more 
productive activities. The Exchange believes that the appeal process 
and the selection of panelists to sit on a panel provides fair 
representation of OTP Holders by ensuring diversity amongst the members 
of any Obvious Error or Catastrophic Error Panel, which is consistent 
with Sections 6(b)(3) and 6(b)(7) of the Act.
    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 6.87 those transactions 
executed during a Limit or Straddle State.
    The Exchange believes the application of the Proposed Rule without 
the

[[Page 27763]]

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.
    Finally, the Exchange believes that eliminating the Rule 6.87(a)(6) 
is consistent with the Act because it would encourage internal 
consistency in Exchange rules and would further industry-wide 
harmonization of obvious error rules, which, in turn, aids in providing 
consistent results for market participants across U.S. options 
exchanges when seeking relief from erroneously priced transactions.
    Based on the foregoing, the Exchange believes that the proposal is 
consistent with Section 6(b)(5) of the Act in that the Proposed Rule 
will foster cooperation and coordination with persons engaged in 
regulating and facilitating transactions.

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

    NYSE Arca believes the entire proposal is consistent with Section 
6(b)(8) of the Act \25\ 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.
---------------------------------------------------------------------------

    \25\ 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 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

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    Because the proposed rule change does not (i) significantly affect 
the

[[Page 27764]]

protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative for 30 
days from the date on which it was filed, or such shorter time as the 
Commission may designate if consistent with the protection of investors 
and the public interest, the proposed rule change has become effective 
pursuant to Section 19(b)(3)(A) of the Act \26\ and Rule 19b-4(f)(6) 
thereunder.\27\
---------------------------------------------------------------------------

    \26\ 15 U.S.C. 78s(b)(3)(A).
    \27\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and the text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission.
---------------------------------------------------------------------------

    The Exchange has asked the Commission to waive the 30-day operative 
delay so that the proposal may become operative immediately upon 
filing. The Commission believes that waiving the 30-day operative delay 
is consistent with the protection of investors and the public interest, 
as it will enable the Exchange to meet its proposed implementation date 
of May 8, 2015, which will help facilitate the implementation of 
harmonized rules related to the adjustment and nullification of 
erroneous options transactions across the options exchanges. For this 
reason, the Commission designates the proposed rule change to be 
operative upon filing.\28\
---------------------------------------------------------------------------

    \28\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the 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 to 
determine whether the proposed rule should be approved or 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-NYSEArca-2015-41 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-NYSEArca-2015-41. 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 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; 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-NYSEArca-2015-41, and should 
be submitted on or before June 4, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
---------------------------------------------------------------------------

    \29\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-11605 Filed 5-13-15; 8:45 am]
BILLING CODE 8011-01-P