Self-Regulatory Organizations; Miami International Securities Exchange, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Rule 521, Nullification and Adjustment of Options Transactions Including Obvious Errors, 15251-15258 [2017-05921]
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Federal Register / Vol. 82, No. 57 / Monday, March 27, 2017 / Notices
B. Self-Regulatory Organization’s
Statement on Burden on Competition
asabaliauskas on DSK3SPTVN1PROD with NOTICES
In accordance with Section 6(b)(8) of
the Act,13 the Exchange believes that the
proposed rule change would not impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. Instead, the
Exchange believes that the proposed
changes would encourage the
submission of additional liquidity to a
public exchange, thereby promoting
price discovery and transparency and
enhancing order execution
opportunities for ETP Holders. The
Exchange believes that this could
promote competition between the
Exchange and other execution venues,
including those that currently offer
similar order types and comparable
transaction pricing, by encouraging
additional orders to be sent to the
Exchange for execution.
Finally, the Exchange notes that it
operates in a highly competitive market
in which market participants can
readily favor competing venues if they
deem fee levels at a particular venue to
be excessive or rebate opportunities
available at other venues to be more
favorable. In such an environment, the
Exchange must continually adjust its
fees and rebates to remain competitive
with other exchanges and with
alternative trading systems that have
been exempted from compliance with
the statutory standards applicable to
exchanges. Because competitors are free
to modify their own fees and credits in
response, and because market
participants may readily adjust their
order routing practices, the Exchange
believes that the degree to which fee
changes in this market may impose any
burden on competition is extremely
limited. As a result of all of these
considerations, the Exchange does not
believe that the proposed changes will
impair the ability of ETP Holders or
competing order execution venues to
maintain their competitive standing in
the financial markets. Finally, the
Exchange believes the proposed fee
changes do not impose any burden on
competition as the fee changes are
consistent with the fees charged by
other exchanges.14
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
The foregoing rule change is effective
upon filing pursuant to Section
19(b)(3)(A) 15 of the Act and
subparagraph (f)(2) of Rule 19b–4 16
thereunder, because it establishes a due,
fee, or other charge imposed by the
Exchange.
At any time within 60 days of the
filing of such 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
under Section 19(b)(2)(B) 17 of the Act to
determine whether the proposed rule
change 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–2017–27 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NYSEArca–2017–27. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–
NYSEArca–2017–27 and should be
submitted on or before April 17, 2017.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.18
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–05918 Filed 3–24–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–80284; File No. SR–MIAX–
2017–13]
Self-Regulatory Organizations; Miami
International Securities Exchange,
LLC; Notice of Filing and Immediate
Effectiveness of a Proposed Rule
Change To Amend Rule 521,
Nullification and Adjustment of
Options Transactions Including
Obvious Errors
March 21, 2017.
Pursuant to the provisions of Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 notice is hereby given that
on March 17, 2017, Miami International
Securities Exchange, LLC (‘‘MIAX’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) a proposed rule change
as described in Items I and II below,
which Items have been prepared by the
Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
15 15
18:02 Mar 24, 2017
1 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(2).
17 15 U.S.C. 78s(b)(2)(B).
U.S.C. 78f(b)(8).
14 See supra, note 12.
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16 17
13 15
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15251
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
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Federal Register / Vol. 82, No. 57 / Monday, March 27, 2017 / Notices
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is filing a proposal to
amend Exchange Rule 521 (the ‘‘Current
Rule’’), Nullification and Adjustment of
Options Transactions Including Obvious
Errors, by adding new Interpretation
and Policy .03 to Rule 521 (the
‘‘Proposed Rule’’).
The text of the proposed rule change
is available on the Exchange’s Web site
at https://www.miaxoptions.com/rulefilings, at MIAX’s principal office, and
at the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
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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
Exchange Rule 521, Nullification and
Adjustment of Options Transactions
Including Obvious Errors, to add
Interpretation and Policy .03. This filing
is based on a proposal recently
submitted by Chicago Board Options
Exchange, Incorporated (‘‘CBOE’’) and
approved by the Commission.3
Last year, the Exchange and other
options exchanges adopted a new,
harmonized rule related to the
adjustment and nullification of
erroneous options transactions,
including a specific provision related to
coordination in connection with largescale events involving erroneous
options transactions.4 The Exchange
believes that the changes the options
exchanges implemented with the new,
harmonized rule have led to increased
transparency and finality with respect to
the adjustment and nullification of
3 See Securities Exchange Act Release No. 80040
(February 14, 2017), 82 FR 11248 (February 21,
2017) (Order Approving SR–CBOE–2016–088).
4 See Securities Exchange Act Release No. 74918
(May 8, 2015), 80 FR 27781 (May 14, 2015) (SR–
MIAX–2015–35) (the ‘‘Initial Filing’’).
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erroneous options transactions.
However, as part of the initial initiative,
the Exchange and other options
exchanges deferred a few specific
matters for further discussion.
Specifically, the options exchanges
have been working together to identify
ways to improve the process related to
the adjustment and nullification of
erroneous options transactions as it
relates to complex orders and stockoption orders.5 The goal of the process
that the options exchanges have
undertaken is to further harmonize rules
related to the adjustment and
nullification of 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 complex order and stockoption order 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
whereby the exchanges that offer
complex orders and/or stock-option
orders will universally adopt new
provisions that the options exchanges
collectively believe will improve the
handling of erroneous options
transactions that result from the
execution of complex orders and stockoption orders.6
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
5 See Exchange Rule 518(a)(5) (defining complex
orders and stock-option orders).
6 An exchange that does not offer complex orders
and/or stock-option orders will not adopt these new
provisions until such time as the exchange offers
complex orders and/or stock-option orders.
Exchange Rule 518 currently permits the trading of
complex orders and stock-option orders.
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the rules for handling obvious errors in
the equities and 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
this proposal. 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 necessitate
protection of transactions through
adjustments rather than nullifications
when possible and otherwise
appropriate.
The options markets are also quote
driven markets dependent on liquidity
providers to an even greater extent than
equities markets. In contrast to the
approximately 7,000 different securities
traded in the U.S. equities markets each
day, there are more than 500,000
unique, regularly quoted option series.
Given this breadth in options series the
options markets are more dependent on
liquidity providers than equities
markets; such liquidity is provided most
commonly by registered market makers
but also by other professional traders.
With the number of instruments in
which registered market makers must
quote and the risk attendant with
quoting so many products
simultaneously, the Exchange believes
that those liquidity providers should be
afforded a greater level of protection. In
particular, the Exchange believes that
liquidity providers should be allowed
protection of their trades given the fact
that they typically engage in hedging
activity to protect them from significant
financial risk to encourage continued
liquidity provision and maintenance of
the quote-driven options markets.
In addition to the factors described
above, there are other fundamental
differences between options and
equities markets which lend themselves
to different treatment of different classes
of participants that are reflected in this
proposal. 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
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participation directly on exchanges than
in the equities markets, where a
significant amount of retail customer
participation never reaches the
Exchange but is instead executed in offexchange venues such as alternative
trading systems, broker-dealer market
making desks and internalizers. In turn,
because of such direct retail customer
participation, the exchanges have taken
steps to afford those retail customers—
generally Priority Customers—more
favorable treatment in some
circumstances.
Complex Orders and Stock-Option
Orders
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As more fully described below, the
Proposed Rule applies much of the
Current Rule to complex orders and
stock-option orders.7 The Proposed Rule
deviates from the Current Rule only to
account for the unique qualities of
complex orders and stock-option orders.
The Proposed Rule reflects the fact that
complex orders can execute against
other complex orders or can execute
against individual simple orders in the
leg markets. When a complex order
executes against the leg markets there
may be different counterparties on each
leg of the complex order, and not every
leg will necessarily be executed at an
erroneous price. With regards to stockoption orders, the Proposed Rule
reflects the fact that stock-option orders
contain a stock component that is
executed on a stock trading venue, and
the Exchange may not be able to ensure
that the stock trading venue will adjust
or nullify the stock execution in the
event of an obvious or catastrophic
error. In order to apply the Current Rule
and account for the unique
characteristics of complex orders and
stock-option orders, proposed
Interpretation and Policy .03 is split into
three parts—paragraphs (a), (b), and (c).
First, proposed Interpretation and
Policy .03(a) governs the review of
complex orders that are executed
against individual legs (as opposed to a
complex order that executes against
another complex order).8 Proposed Rule
7 In order for a complex order or stock-option
order to qualify as an obvious or catastrophic error
at least one of the legs must itself qualify as an
obvious or catastrophic error under the Current
Rule. See Proposed Rule 521 Interpretation and
Policy .03(a)–(c).
8 The leg market consists of quotes and/or orders
in single options series. A complex order may be
received by the Exchange electronically, and the
legs of the complex order may have different
counterparties. For example, Market-Maker 1 may
be quoting in ABC calls and Market-Maker 2 may
be quoting in ABC puts. A complex order to buy
the ABC calls and puts may execute against the
quotes of Market-Maker 1 and Market-Maker 2.
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521 Interpretation and Policy .03(a)
provides:
If a complex order executes against
individual legs and at least one of the legs
qualifies as an Obvious Error under
paragraph (c)(1) or a Catastrophic Error under
paragraph (d)(1), then the leg(s) that is an
Obvious or Catastrophic Error will be
adjusted in accordance with paragraphs
(c)(4)(A) or (d)(3), respectively, regardless of
whether one of the parties is a Customer.
However, any Customer order subject to this
paragraph (a) 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 on the complex order or
individual leg(s). If any leg of a complex
order is nullified, the entire transaction is
nullified.
As previously noted, at least one of
the legs of the complex order must
qualify as an obvious or catastrophic
error under the Current Rule in order for
the complex order to receive obvious or
catastrophic error relief. Thus, when the
Exchange is notified (within the
timeframes set forth in paragraph (c)(2)
or (d)(2)) of a complex order that is a
possible obvious error or catastrophic
error, the Exchange will first review the
individual legs of the complex order to
determine if one or more legs qualify as
an obvious or catastrophic error.9 If no
leg qualifies as an obvious or
catastrophic error, the transaction
stands—no adjustment and no
nullification. Reviewing the legs to
determine whether one or more legs
qualify as an obvious or catastrophic
error requires the Exchange to follow
the Current Rule. In accordance with
paragraphs (c)(1) and (d)(1) of the
Current Rule, the Exchange compares
the execution price of each individual
leg to the Theoretical Price of each leg
(as determined by paragraph (b) of the
Current Rule). If the execution price of
an individual leg is higher or lower than
the Theoretical Price for the series by an
amount equal to at least the amount
shown in the obvious error table in
paragraph (c)(1) of the Current Rule or
the catastrophic error table in paragraph
(d)(1) of the Current Rule, the individual
leg qualifies as an obvious or
catastrophic error, and the Exchange
will take steps to adjust or nullify the
transaction.10
9 Because a complex order can execute against the
leg market, the Exchange may also be notified of a
possible obvious or catastrophic error by a
counterparty that received an execution in an
individual options series. If upon review of a
potential obvious error the Exchange determines an
individual options series was executed against the
leg of a complex order or stock-option order,
Proposed Rule 521 Interpretation and Policy .03
will govern.
10 Only the execution price on the leg (or legs)
that qualifies as an obvious or catastrophic error
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15253
To illustrate, assume a Customer
submits a complex order to the
Exchange consisting of Leg 1 and Leg
2—Leg 1 is to buy 100 ABC calls and
Leg 2 is to sell 100 ABC puts. Also,
assume that Market-Maker 1 is quoting
the ABC calls $1.00–1.20 and MarketMaker 2 is quoting the ABC puts $2.00–
2.20. If the complex order executes
against the quotes of Market-Makers 1
and 2, the Customer buys the ABC calls
for $1.20 and sells the ABC puts for
$2.00. As with the obvious/catastrophic
error reviews for simple orders, the
execution price of Leg 1 is compared to
the Theoretical Price 11 of Leg 1 in order
to determine if Leg 1 is an obvious error
under paragraph (c)(1) of the Current
Rule or a catastrophic error under
paragraph (d)(1) of the Current Rule.
The same goes for Leg 2. The execution
price of Leg 2 is compared to the
Theoretical Price of Leg 2. If it is
determined that one or both of the legs
are an obvious or catastrophic error,
then the leg (or legs) that is an obvious
or catastrophic error will be adjusted in
accordance with paragraphs (c)(4)(A) or
(d)(3) of the Current Rule, regardless of
whether one of the parties is a
Customer.12 Although a single-legged
execution that is deemed to be an
obvious error under the Current Rule is
nullified whenever a Customer is
involved in the transaction, the
Exchange believes adjusting execution
prices is generally better for the
marketplace than nullifying executions
because liquidity providers often
execute hedging transactions to offset
options positions. When an options
transaction is nullified the hedging
position can adversely affect the
liquidity provider. With regards to
complex orders that execute against
individual legs, the additional rationale
for adjusting erroneous execution prices
when possible is the fact that the
counterparty on a leg that is not
executed at an obvious or catastrophic
error price cannot look at the execution
price to determine whether the
execution may later be nullified (as
opposed to the counterparty on singlelegged order that is executed at an
pursuant to any portion of Proposed Rule 521
Interpretation and Policy .03 will be adjusted. The
execution price of a leg (or legs) that does not
qualify as an obvious or catastrophic error will not
be adjusted.
11 See Exchange Rule 521(b) (defining the manner
in which Theoretical Price is determined).
12 See Exchange Rule 521(a)(1) (defining
Customer for purposes of Rule 521 to mean a
Priority Customer, which is a person or entity that
(i) is not a broker or dealer in securities, and (ii)
does not place more than 390 orders in listed
options per day on average during a calendar month
for its own beneficial account(s). See Exchange Rule
100.)
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Federal Register / Vol. 82, No. 57 / Monday, March 27, 2017 / Notices
obvious error or catastrophic error
price).
Paragraph (c)(4)(A) of the Current
Rule mandates that if it is determined
that an obvious error has occurred, the
execution price of the transaction will
be adjusted pursuant to the table set
forth in (c)(4)(A). Although for simple
orders paragraph (c)(4)(A) is only
applicable when no party to the
transaction is a Customer, for the
purposes of complex orders paragraph
(a) of Interpretation and Policy .03 will
supersede that limitation; therefore, if it
is determined that a leg (or legs) of a
complex order is an obvious error, the
leg (or legs) will be adjusted pursuant to
(c)(4)(A), regardless of whether a party
to the transaction is a Customer. The
Size Adjustment Modifier defined in
subparagraph (a)(4) of the Current Rule
will similarly apply (regardless of
whether a Customer is on the
transaction) by virtue of the application
of paragraph (c)(4)(A).13 The Exchange
notes that adjusting all market
participants is not unique or novel.
When the Exchange determines that a
simple order execution is a Catastrophic
Error pursuant to the Current Rule,
paragraph (d)(3) already provides for
adjusting the execution price for all
market participants, including
Customers.
Furthermore, as with the Current
Rule, Proposed Rule 521 Interpretation
and Policy .03(a) provides protection for
Customer orders, stating that where at
least one party to a complex order
transaction is a Customer, the
transaction will be nullified if
adjustment would result in an execution
price higher (for buy transactions) or
lower (for sell transactions) than the
Customer’s limit price on the complex
order or individual leg(s). For example,
assume Customer enters a complex
order to buy Leg 1 and Leg 2.
• Assume the NBBO for Leg 1 is
$0.20–1.00 and the NBBO for Leg 2 is
$0.50–1.00 and that these have been the
NBBOs since the market opened.
• A split-second prior to the
execution of the complex order a
Customer enters a simple order to sell
the Leg 1 options series at $1.30, and the
simple order enters the Exchange’s book
so that the BBO is $.20–$1.30. The limit
price on the simple order is $1.30.
• The complex order executes Leg 1
against the Exchange’s best offer of
13 See Exchange Rule 521(c)(4)(A) (stating that
any non-Customer Obvious Error exceeding 50
contracts will be subject to the Size Adjustment
Modifier defined in sub-paragraph (a)(4)). The Size
Adjustment Modifier may also apply to the option
leg of a stock-option order that is adjusted pursuant
to Proposed Rule 521 Interpretation and Policy
.03(c).
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$1.30 and Leg 2 at $1.00 for a net
execution price of $2.30.
• However, Leg 1 executed on a wide
quote (the NBBO for Leg 1 was $0.20–
1.00 at the time of execution, which is
wider than $0.75).14 Leg 2 was not
executed on a wide quote (the market
for Leg 2 was $0.50–1.00); thus, Leg 2
execution price stands.
• The Exchange determines that the
Theoretical Price for Leg 1 is $1.00,
which was the best offer prior to the
execution. Leg 1 qualifies as an obvious
error because the difference between the
Theoretical Price ($1.00) and the
execution price ($1.30) is larger than
$0.25.15
• According to Proposed Rule 521
Interpretation and Policy .03(a),
Customers will also be adjusted in
accordance with Rule 521(c)(4)(A),
which for a buy transaction under $3.00
calls for the Theoretical Price to by
adjusted by adding $0.15 16 to the
Theoretical Price of $1.00. Thus, adjust
execution price for Leg 1 would be
$1.15.
• However, adjusting the execution
price of Leg 1 to $1.15 violates the limit
price of the Customer’s sell order on the
simple order book for Leg 1, which was
$1.30.
• Thus, the entire complex order
transaction will be nullified 17 because
the limit price of a Customer’s sell order
would be violated by the adjustment.18
As the above example demonstrates,
incoming complex orders may execute
against resting simple orders in the leg
market. If a complex order leg is deemed
to be an obvious error, adjusting the
execution price of the leg may violate
the limit price of the resting order,
which will result in nullification if the
resting order is for a Customer. In
contrast, Interpretation and Policy .02 to
Rule 521 provides that if an adjustment
would result in an execution price that
is higher than an erroneous buy
transaction or lower than an erroneous
sell transaction the execution will not
be adjusted or nullified.19 If the
adjustment of a complex order would
violate the complex order Customer’s
limit price, the transaction will be
nullified.
As previously noted, paragraph (d)(3)
of the Current Rule already mandates
14 See
Exchange Rule 521(b)(3).
Exchange Rule 521(c)(1).
16 See Exchange Rule 521(c)(4)(A).
17 If any leg of a complex order is nullified, the
entire transaction is nullified. See Proposed Rule
521 Interpretation and Policy .03(a).
18 The simple order in this example is not an
erroneous sell transaction because the execution
price was not erroneously low. See Exchange Rule
521(a)(2).
19 See Exchange Rule 521 Interpretation and
Policy .02.
15 See
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that if it is determined that a
catastrophic error has occurred, the
execution price of the transaction will
be adjusted pursuant to the table set
forth in paragraph (d)(3). For purposes
of complex orders under Proposed Rule
521 Interpretation and Policy .03(a), if
one of the legs of a complex order is
determined to be a Catastrophic Error
under paragraph (d)(3), all market
participants will be adjusted in
accordance with the table set forth in
(d)(3). Again, however, where at least
one party to a complex order transaction
is a Customer, the transaction will be
nullified if adjustment would result in
an execution price higher (for buy
transactions) or lower (for sell
transactions) than the Customer’s limit
price on the complex order or
individual leg(s). Again, if any leg of a
complex order is nullified, the entire
transaction is nullified. Additionally, as
is the case today, a Member that submits
an appeal seeking the review of an
Official ruling will be assessed a fee of
$500.00 for each Official ruling to be
reviewed that is sustained and not
overturned or modified by the Chief
Regulatory Officer or his/her designee.
In addition, in instances where the
Exchange, on behalf of a Member,
requests a determination by another
market center that a transaction is
clearly erroneous, the Exchange will
pass any resulting charges through to
the relevant Member.20
Other than honoring the limit prices
established for Customer orders, the
Exchange has proposed to treat
Customers and non-Customers the same
in the context of the complex orders that
trade against the leg market. When
complex orders trade against the leg
market, it is possible that at least some
of the legs will execute at prices that
would not be deemed obvious or
catastrophic errors, which gives the
counterparty in such situations no
indication that the execution will later
by adjusted or nullified. The Exchange
believes that treating Customers and
non-Customers the same in this context
will provide additional certainty to nonCustomers (especially Market-Makers)
with respect to their potential exposure
and hedging activities, including
comfort that even if a transaction is later
adjusted, 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
20 See
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price on the complex order or
individual leg(s). 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 a Customer would not have
expected, and market professionals such
as non-Customers would be better
prepared to recover in such situations.
Therefore, adjustment for nonCustomers is more appropriate.
Second, proposed Interpretation and
Policy .03(b) governs the review of
complex orders that are executed
against other complex orders. Proposed
Rule 521 Interpretation and Policy
.03(b) provides:
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If a complex order executes against another
complex order and at least one of the legs
qualifies as an Obvious Error under
paragraph (c)(1) or a Catastrophic Error under
paragraph (d)(1), then the leg(s) that is an
Obvious or Catastrophic Error will be
adjusted or busted in accordance with
paragraph (c)(4) or (d)(3), respectively, so
long as either: (i) The width of the National
Spread Market for the complex order strategy
just prior to the erroneous transaction was
equal to or greater than the amount set forth
in the wide quote table of paragraph (b)(3),
or (ii) the net execution price of the complex
order is higher (lower) than the offer (bid) of
the National Spread Market for the complex
order strategy just prior to the erroneous
transaction by an amount equal to at least the
amount shown in the table in paragraph
(c)(1). If any leg of a complex order is
nullified, the entire transaction is nullified.
For purposes of this Rule 521, the National
Spread Market for a complex order strategy
is determined by the National Best Bid/Offer
of the individual legs of the strategy.
As described above in relation to
Proposed Rule 521 Interpretation and
Policy .03(a), the first step is for the
Exchange to review (upon receipt of a
timely notification in accordance with
paragraphs (c)(2) or (d)(2) of the Current
Rule) the individual legs to determine
whether a leg or legs qualifies as an
obvious or catastrophic error. If no leg
qualifies as an obvious or catastrophic
error, the transaction stands—no
adjustment and no nullification.
Unlike Proposed Rule 521
Interpretation and Policy .03(a), the
Exchange is also proposing to compare
the net execution price of the entire
complex order package to the National
Spread Market (‘‘NSM’’) for the complex
order strategy.21 Complex orders are
exempt from the order protection rules
of the options exchanges.22 Thus,
depending on the manner in which the
21 NSM is the derived net market for a complex
order package. For example, if the NBBO of Leg 1
is $1.00–2.00 and the NBBO of Leg 2 is $5.00–7.00,
then the NSM for a complex order to buy Leg 1 and
buy Leg 2 is $6.00–9.00.
22 See Exchange Rule 1401(b)(7). All options
exchanges have the same order protection rule.
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systems of an options exchange are
calibrated, a complex order can execute
without regard to the prices offered in
the complex order books or the leg
markets of other options exchanges. In
certain situations, reviewing the
execution prices of the legs in a vacuum
would make the leg appear to be an
obvious or catastrophic error, even
though the net execution price on the
complex order is not an erroneous price.
For example, assume the Exchange
receives a complex order to buy ABC
calls and sell ABC puts.
• If the BBO for the ABC calls is
$5.50–7.50 and the BBO for ABC puts is
$3.00–4.50, then the Exchange’s spread
market is $1.00–4.50.23
• If the NBBO for the ABC calls is
$6.00–6.50 and the NBBO for the ABC
puts is $3.50–4.00, then the NSM is
$2.00–3.00.
• If the Customer buys the calls at
$7.50 and sells the puts at $4.00, the
complex order Customer receives a net
execution price of $3.00 (debit), which
is the expected net execution price as
indicated by the NSM offer of $3.00.
If the exchange were to solely focus
on the $7.50 execution price of the ABC
calls or the $4.00 execution price of the
ABC puts, the execution would qualify
as an obvious or catastrophic error
because the execution price on the legs
was outside the NBBO, even though the
net execution price is accurate. Thus,
the additional review of the NSM to
determine if the complex order was
executed at a truly erroneous price is
necessary. The same concern is not
present when a complex order executes
against the leg market under Proposed
Rule 521 Interpretation and Policy .03(a)
because the execution price of each
component is not executed at a price
that is outside of the NBBO.24
In order to incorporate NSM,
Proposed Rule 521 Interpretation and
Policy .03(b) provides that if a complex
order executes against another complex
order and at least one of the legs
qualifies as an obvious or catastrophic
error, the leg or legs that is an obvious
or catastrophic error will be adjusted or
busted in accordance with paragraph
(c)(4) or (d)(3) of the Current Rule, so
long as either: (i) The width of the NSM
for the complex order strategy just prior
23 The complex order is to buy ABC calls and sell
ABC puts. The Exchange’s best offer for ABC puts
is $7.50 and Exchange’s best bid for is $3.00. If the
Customer were to buy the complex order strategy,
the Customer would receive a debit of $4.50 (buy
ABC calls for $7.50 minus selling ABC puts for
$3.00). If the Customer were to sell the complex
order strategy the Customer would receive a credit
of $1.00 (selling the ABC calls for $5.50 minus
buying the ABC puts for $4.50). Thus, the
Exchange’s spread market is $1.00–4.50.
24 See Exchange Rule 518(c)(2)(iii).
PO 00000
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15255
to the erroneous transaction was equal
to or greater than the amount set forth
in the wide quote table of paragraph
(b)(3) of the Current Rule or (ii) the net
execution price of the complex order is
higher (lower) than the offer (bid) of the
NSM for the complex order strategy just
prior to the erroneous transaction by an
amount equal to at least the amount
shown in the table in paragraph (c)(1) of
the Current Rule.
For example, assume an individual
leg or legs qualifies as an obvious or
catastrophic error and the width of the
NSM of the complex order strategy just
prior to the erroneous transaction is
$6.00–9.00. The complex order will
qualify to be adjusted or busted in
accordance with paragraph (c)(4) of the
Current Rule because the wide quote
table of paragraph (b)(3) of the Current
Rule indicates that the minimum
amount is $1.50 for a bid price between
$5.00 to $10.00. If the NSM were instead
$6.00–7.00 the complex order strategy
would not qualify to be adjusted or
busted pursuant to Proposed Rule 521
Interpretation and Policy .03(b)(i)
because the width of the NSM is $1.00,
which is less than the required $1.50.
However, the execution may still qualify
to be adjusted or busted in accordance
with paragraph (c)(4) or (d)(3) of the
Current Rule pursuant to Proposed Rule
521 Interpretation and Policy .03(b)(ii).
Focusing on the NSM in this manner
will ensure that the obvious/
catastrophic error review process
focuses on the net execution price
instead of the execution prices of the
individual legs, which may have
execution prices outside of the NBBO of
the leg markets.
Again, assume an individual leg or
legs qualifies as an obvious or
catastrophic error as described above. If
the NSM is $6.00–7.00 (not a wide quote
pursuant to the wide quote table in
paragraph (b)(3) of the Current Rule) but
the execution price of the entire
complex order package (i.e., the net
execution price) is higher (lower) than
the offer (bid) of the NSM for the
complex order strategy just prior to the
erroneous transaction by an amount
equal to at least the amount in the table
in paragraph (c)(1) of the Current Rule,
then the complex order qualifies to be
adjusted or busted in accordance with
paragraph (c)(4) or (d)(3) of the Current
Rule. For example, if the NSM for the
complex order strategy just prior to the
erroneous transaction is $6.00–7.00 and
the net execution price of the complex
order transaction is $7.75, the complex
order qualifies to be adjusted or busted
in accordance with paragraph (c)(4) of
the Current Rule because the execution
price of $7.75 is more than $0.50 (i.e.,
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the minimum amount according to the
table in paragraph (c)(1) when the price
is above $5.00 but less than $10.01)
from the NSM offer of $7.00. Focusing
on the NSM in this manner will ensure
that the obvious/catastrophic error
review process focuses on the net
execution price instead of the execution
prices of the individual legs, which may
have execution prices outside of the
NBBO of the leg markets.
Although the Exchange believes
adjusting execution prices is generally
better for the marketplace than
nullifying executions because liquidity
providers often execute hedging
transactions to offset options positions,
the Exchange recognizes that complex
orders executing against other complex
orders is similar to simple orders
executing against other simple orders
because both parties are able to review
the execution price to determine
whether the transaction may have been
executed at an erroneous price. Thus,
for purposes of complex orders that
meet the requirements of Proposed Rule
521 Interpretation and Policy .03(b), the
Exchange proposes to apply the Current
Rule and adjust or bust obvious errors
in accordance with paragraph (c)(4) (as
opposed to applying paragraph (c)(4)(A)
as is the case under Proposed Rule 521
Interpretation and Policy .03(a)) and
catastrophic errors in accordance with
(d)(3).
Therefore, for purposes of complex
orders under Proposed Rule 521
Interpretation and Policy .03(b), if one
of the legs is determined to be an
obvious error under paragraph (c)(1), all
Customer transactions will be nullified,
unless a Member submits 200 or more
Customer transactions for review in
accordance with (c)(4)(C).25 For
purposes of complex orders under
Proposed Rule 521 Interpretation and
Policy .03(b), if one of the legs is
determined to be a catastrophic error
under paragraph (d)(3) and all of the
other requirements of Rule 521
Interpretation and Policy .03(b) are met,
all market participants will be adjusted
in accordance with the table set forth in
(d)(3). Again, however, pursuant to
paragraph (d)(3) where at least one party
to a complex order transaction is a
Customer, the transaction will be
nullified if adjustment would result in
an execution price higher (for buy
transactions) or lower (for sell
transactions) than the Customer’s limit
price on the complex order or
individual leg(s). Also, if any leg of a
25 Rule 521(c)(4)(C) also requires the orders
resulting in 200 or more Customer transactions to
have been submitted during the course of 2 minutes
or less.
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18:02 Mar 24, 2017
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complex order is nullified, the entire
transaction is nullified.
Third, proposed Interpretation and
Policy .03(c) governs stock-option
orders. Proposed Rule 521 Interpretation
and Policy .03(c) provides:
If the option leg of a stock-option order
qualifies as an Obvious Error under
paragraph (c)(1) or a Catastrophic Error under
paragraph (d)(1), then the option leg that is
an Obvious or Catastrophic Error will be
adjusted in accordance with paragraph
(c)(4)(A) or (d)(3), respectively, regardless of
whether one of the parties is a Customer.
However, the option leg of any Customer
order subject to this paragraph (c) 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 on the stock-option
order, and the Exchange will attempt to
nullify the stock leg. Whenever a stock
trading venue nullifies the stock leg of a
stock-option order or whenever the stock leg
cannot be executed, the Exchange will nullify
the option leg upon request of one of the
parties to the transaction or in accordance
with paragraph (c)(3).
Similar to proposed Interpretation
and Policy .03(a), an options leg (or legs)
of a stock-option order must qualify as
an obvious or catastrophic error under
the Current Rule in order for the stockoption order to qualify as an obvious or
catastrophic error. Also similar to
Proposed Rule 521 Interpretation and
Policy .03(a), if an options leg (or legs)
does qualify as an obvious or
catastrophic error, the option leg (or
legs) will be adjusted in accordance
with paragraph (c)(4)(A) or (d)(3),
respectively, regardless of whether one
of the parties is a Customer. Again, as
with Proposed Rule 521 Interpretation
and Policy .03(a), where at least one
party to a complex order transaction is
a Customer, the Exchange will nullify
the option leg and attempt to nullify the
stock leg if adjustment would result in
an execution price higher (for buy
transactions) or lower (for sell
transactions) than the Customer’s limit
price on the complex order or
individual leg(s).
The stock leg of a stock-option order
is not executed on the Exchange; rather,
the stock leg is sent to a stock trading
venue for execution. The Exchange is
unaware of a mechanism by which the
Exchange can guarantee that the stock
leg will be nullified by the stock trading
venue in the event of an obvious or
catastrophic error on the Exchange.
Thus, in the event of the nullification of
the option leg pursuant to Proposed
Rule 521 Interpretation and Policy
.03(c), the Exchange will attempt to
have the stock leg nullified by the stock
trading venue by either contacting the
stock trading venue or notifying the
PO 00000
Frm 00078
Fmt 4703
Sfmt 4703
parties to the transaction that the option
leg is being nullified. The party or
parties to the transaction may ultimately
need to contact the stock trading venue
to have the stock portion nullified.
Finally, the Exchange proposes to
provide guidance that whenever the
stock trading venue nullifies the stock
leg of a stock-option order, the option
will be nullified upon request of one of
the parties to the transaction or by an
Official acting on their own motion in
accordance with paragraph (c)(3). There
are situations in which buyer and seller
agree to trade a stock-option order, but
the stock leg cannot be executed. The
Exchange proposes to provide guidance
that whenever the stock portion of a
stock-option order cannot be executed,
the Exchange will nullify the option leg
upon request of one of the parties to the
transaction or on an Official’s own
motion.
Implementation Date
In order to ensure that the other
options exchanges are able to adopt
rules consistent with this proposal and
to coordinate effectiveness of such
harmonized rules, the Exchange
proposes to delay the operative date of
this proposal to April 17, 2017.
2. Statutory Basis
MIAX believes that its proposed rule
change is consistent with Section 6(b) of
the Act 26 in general, and furthers the
objectives of Section 6(b)(5) of the Act 27
in particular, in that it is designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to foster
cooperation and coordination with
persons engaged in facilitating
transactions in securities, to remove
impediments to and perfect the
mechanisms of a free and open market
and a national market system and, in
general, to protect investors and the
public interest. .[sic] 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
26 15
27 15
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U.S.C. 78f(b).
U.S.C. 78f(b)(5).
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the foregoing, the Exchange believes
that the proposal is consistent with
Section 6(b)(5) of the Act 28 in that the
Proposed Rule will foster cooperation
and coordination with persons engaged
in regulating and facilitating
transactions. The Exchange believes the
various provisions allowing or dictating
adjustment rather than nullification of a
trade are necessary given the benefits of
adjusting a trade price rather than
nullifying the trade completely. Because
options trades are used to hedge, or are
hedged by, transactions in other
markets, including securities and
futures, many Members, and their
customers, would rather adjust prices of
executions rather than nullify the
transactions and, thus, lose a hedge
altogether. As such, the Exchange
believes it is in the best interest of
investors to allow for price adjustments
as well as nullifications.
The Exchange does not believe that
the proposal is unfairly discriminatory,
even though it differentiates in many
places between Customers and nonCustomers. As with the Current Rule,
Customers are treated differently, often
affording them preferential treatment.
This treatment is appropriate in light of
the fact that Customers are not
necessarily immersed in the day-to-day
trading of the markets, are less likely to
be watching trading activity in a
particular option throughout the day,
and may have limited funds in their
trading accounts. At the same time, the
Exchange reiterates that in the U.S.
options markets generally there is
significant retail customer participation
that occurs directly on (and only on)
options exchanges such as the
Exchange. Accordingly, differentiating
among market participants with respect
to the adjustment and nullification of
erroneous options transactions is not
unfairly discriminatory because it is
reasonable and fair to provide
Customers with additional protections
as compared to non-Customers.
The Exchange believes that its
proposal to adopt the ability to adjust a
Customer’s execution price when a
complex order is deemed to be an
Obvious or Catastrophic Error is
consistent with the Act. A complex
order that executes against individual
leg markets may receive an execution
price on an individual leg that is not an
Obvious or Catastrophic error but
another leg of the transaction is an
Obvious or Catastrophic Error. In such
situations where the complex order is
executing against at least one individual
or firm that is not aware of the fact that
they have executed against a complex
28 Id.
VerDate Sep<11>2014
order or that the complex order has been
executed at an erroneous price, the
Exchange believes it is more appropriate
to adjust execution prices if possible
because the derivative transactions are
often hedged with other securities.
Allowing adjustments instead of
nullifying transactions in these limited
situations will help to ensure that
market participants are not left with a
hedge that has no position to hedge
against.
The Exchange also believes its
proposal related to stock-option orders
is consistent with the Act. Stock-option
orders consist of an option component
and a stock component. Due to the fact
that the Exchange has no control over
the venues on which the stock is
executed the proposal focuses on the
option component of the stock-option
order by adjusting or nullifying the
option in accordance with paragraph
(c)(4)(A) or (d)(3). Also, nullifying the
option component if the stock
component cannot be executed ensures
that market participants receive the
execution for which they bargained.
Stock-option orders are negotiated and
agreed to as a package; thus, if for any
reason the stock portion of a stockoption order cannot ultimately be
executed, the parties should not be
saddled with an options position sans
stock.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. In this regard
and as indicated above, the Exchange
notes that the proposed rule change is
substantially similar to a filing
submitted by CBOE that was recently
approved by the Commission.29
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
29 See
18:02 Mar 24, 2017
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PO 00000
supra, note 3.
Frm 00079
Fmt 4703
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 that trade complex
orders and/or stock-option orders 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, 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
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) Significantly affect
the 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, it has
become effective pursuant to Section
19(b)(3)(A)(iii) of the Act 30 and
30 15
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subparagraph (f)(6) of Rule 19b–4
thereunder.31
A proposed rule change filed
pursuant to Rule 19b–4(f)(6) under the
Act 32 normally does not become
operative for 30 days after the date of its
filing. However, Rule 19b–4(f)(6)(iii) 33
permits the Commission to designate a
shorter time if such action is consistent
with the protection of investors and the
public interest. 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 allow the Exchange to implement
the proposed rule change by April 17,
2017 in coordination with the other
options exchanges. Accordingly, the
Commission hereby waives the
operative delay and designates the
proposal operative upon filing.34
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: (i) Necessary or appropriate in
the public interest; (ii) for the protection
of investors; or (iii) 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
asabaliauskas on DSK3SPTVN1PROD with NOTICES
• 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–
MIAX–2017–13 on the subject line.
31 17 CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6) requires a self-regulatory organization to give
the Commission written notice of its intent to file
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 satisfied this
requirement.
32 17 CFR 240.19b–4(f)(6).
33 17 CFR 240.19b–4(f)(6)(iii).
34 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).
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18:02 Mar 24, 2017
Jkt 241001
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–MIAX–2017–13. 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–MIAX–
2017–13, and should be submitted on or
before April 17, 2017.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.35
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–05921 Filed 3–24–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–80282; File No. SR–BX–
2017–013]
Self-Regulatory Organizations;
NASDAQ BX, Inc.; Notice of Filing of
Proposed Rule Change, as Modified by
Amendment No. 1, To Shorten the
Settlement Cycle From T+3 to T+2
March 21, 2017.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on March 9,
2017, NASDAQ BX, Inc. (‘‘BX’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III, below, which Items have been
prepared by the Exchange. On March
13, 2017, the Exchange filed
Amendment No. 1.3 The Commission is
publishing this notice to solicit
comments on the proposed rule change,
as modified by Amendment No. 1, from
interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend BX
Rules 11140 (Transactions in Securities
‘‘Ex-Dividend,’’ ‘‘Ex-Rights’’ or ‘‘ExWarrants’’), 11150 (Transactions ‘‘ExInterest’’ in Bonds Which Are Dealt in
‘‘Flat’’), 11210 (Sent by Each Party),
11320 (Dates of Delivery), 11620
(Computation of Interest), and IM–
11810 (Sample Buy-In Forms), to
conform to the Commission’s proposed
amendment to SEA Rule 15c6–1(a) to
shorten the standard settlement cycle
for most broker-dealer transactions from
three business days after the trade date
(‘‘T+3’’) to two business days after the
trade date (‘‘T+2’’) and the industry-led
initiative to shorten the settlement cycle
from T+3 to T+2.4
The text of the proposed rule change
is available on the Exchange’s Web site
at https://nasdaqbx.cchwallstreet.com/,
at the principal office of the Exchange,
and at the Commission’s Public
Reference Room.
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 In Amendment No. 1, the Exchange proposes to
capitalize the letter ‘‘d’’ in the word ‘‘department’’
in the proposed revisions to Rule 11140(b)(1), as set
forth in Exhibit 5 to the filing, to conform to the
Exchange’s current rule text.
4 See Securities Exchange Act Release No. 78962
(September 28, 2016), 81 FR 69240 (October 5,
2016) (Amendment to Securities Transaction
Settlement Cycle) (File No. S7–22–16) (‘‘SEC
Proposing Release’’).
2 17
35 17
PO 00000
CFR 200.30–3(a)(12).
Frm 00080
Fmt 4703
Sfmt 4703
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27MRN1
]]>Agencies
[Federal Register Volume 82, Number 57 (Monday, March 27, 2017)]
[Notices]
[Pages 15251-15258]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-05921]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-80284; File No. SR-MIAX-2017-13]
Self-Regulatory Organizations; Miami International Securities
Exchange, LLC; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change To Amend Rule 521, Nullification and Adjustment of
Options Transactions Including Obvious Errors
March 21, 2017.
Pursuant to the provisions of Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on March 17, 2017, Miami International Securities
Exchange, LLC (``MIAX'' or ``Exchange'') filed with the Securities and
Exchange Commission (``Commission'') a proposed rule change as
described in Items I and II below, which Items have been prepared by
the Exchange. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
[[Page 15252]]
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is filing a proposal to amend Exchange Rule 521 (the
``Current Rule''), Nullification and Adjustment of Options Transactions
Including Obvious Errors, by adding new Interpretation and Policy .03
to Rule 521 (the ``Proposed Rule'').
The text of the proposed rule change is available on the Exchange's
Web site at https://www.miaxoptions.com/rule-filings, at MIAX's
principal office, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Exchange Rule 521, Nullification and
Adjustment of Options Transactions Including Obvious Errors, to add
Interpretation and Policy .03. This filing is based on a proposal
recently submitted by Chicago Board Options Exchange, Incorporated
(``CBOE'') and approved by the Commission.\3\
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Release No. 80040 (February 14,
2017), 82 FR 11248 (February 21, 2017) (Order Approving SR-CBOE-
2016-088).
---------------------------------------------------------------------------
Last year, the Exchange and other options exchanges adopted a new,
harmonized rule related to the adjustment and nullification of
erroneous options transactions, including a specific provision related
to coordination in connection with large-scale events involving
erroneous options transactions.\4\ The Exchange believes that the
changes the options exchanges implemented with the new, harmonized rule
have led to increased transparency and finality with respect to the
adjustment and nullification of erroneous options transactions.
However, as part of the initial initiative, the Exchange and other
options exchanges deferred a few specific matters for further
discussion.
---------------------------------------------------------------------------
\4\ See Securities Exchange Act Release No. 74918 (May 8, 2015),
80 FR 27781 (May 14, 2015) (SR-MIAX-2015-35) (the ``Initial
Filing'').
---------------------------------------------------------------------------
Specifically, the options exchanges have been working together to
identify ways to improve the process related to the adjustment and
nullification of erroneous options transactions as it relates to
complex orders and stock-option orders.\5\ The goal of the process that
the options exchanges have undertaken is to further harmonize rules
related to the adjustment and nullification of 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 complex order and stock-option order
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.
---------------------------------------------------------------------------
\5\ See Exchange Rule 518(a)(5) (defining complex orders and
stock-option orders).
---------------------------------------------------------------------------
The Proposed Rule is the culmination of this coordinated effort and
reflects discussions by the options exchanges whereby the exchanges
that offer complex orders and/or stock-option orders will universally
adopt new provisions that the options exchanges collectively believe
will improve the handling of erroneous options transactions that result
from the execution of complex orders and stock-option orders.\6\
---------------------------------------------------------------------------
\6\ An exchange that does not offer complex orders and/or stock-
option orders will not adopt these new provisions until such time as
the exchange offers complex orders and/or stock-option orders.
Exchange Rule 518 currently permits the trading of complex orders
and stock-option orders.
---------------------------------------------------------------------------
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.
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 this
proposal. 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 necessitate
protection of transactions through adjustments rather than
nullifications when possible and otherwise appropriate.
The options markets are also quote driven markets dependent on
liquidity providers to an even greater extent than equities markets. In
contrast to the approximately 7,000 different securities traded in the
U.S. equities markets each day, there are more than 500,000 unique,
regularly quoted option series. Given this breadth in options series
the options markets are more dependent on liquidity providers than
equities markets; such liquidity is provided most commonly by
registered market makers but also by other professional traders. With
the number of instruments in which registered market makers must quote
and the risk attendant with quoting so many products simultaneously,
the Exchange believes that those liquidity providers should be afforded
a greater level of protection. In particular, the Exchange believes
that liquidity providers should be allowed protection of their trades
given the fact that they typically engage in hedging activity to
protect them from significant financial risk to encourage continued
liquidity provision and maintenance of the quote-driven options
markets.
In addition to the factors described above, there are other
fundamental differences between options and equities markets which lend
themselves to different treatment of different classes of participants
that are reflected in this proposal. 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
[[Page 15253]]
participation directly on exchanges than in the equities markets, where
a significant amount of retail customer participation never reaches the
Exchange but is instead executed in off-exchange venues such as
alternative trading systems, broker-dealer market making desks and
internalizers. In turn, because of such direct retail customer
participation, the exchanges have taken steps to afford those retail
customers--generally Priority Customers--more favorable treatment in
some circumstances.
Complex Orders and Stock-Option Orders
As more fully described below, the Proposed Rule applies much of
the Current Rule to complex orders and stock-option orders.\7\ The
Proposed Rule deviates from the Current Rule only to account for the
unique qualities of complex orders and stock-option orders. The
Proposed Rule reflects the fact that complex orders can execute against
other complex orders or can execute against individual simple orders in
the leg markets. When a complex order executes against the leg markets
there may be different counterparties on each leg of the complex order,
and not every leg will necessarily be executed at an erroneous price.
With regards to stock-option orders, the Proposed Rule reflects the
fact that stock-option orders contain a stock component that is
executed on a stock trading venue, and the Exchange may not be able to
ensure that the stock trading venue will adjust or nullify the stock
execution in the event of an obvious or catastrophic error. In order to
apply the Current Rule and account for the unique characteristics of
complex orders and stock-option orders, proposed Interpretation and
Policy .03 is split into three parts--paragraphs (a), (b), and (c).
---------------------------------------------------------------------------
\7\ In order for a complex order or stock-option order to
qualify as an obvious or catastrophic error at least one of the legs
must itself qualify as an obvious or catastrophic error under the
Current Rule. See Proposed Rule 521 Interpretation and Policy
.03(a)-(c).
---------------------------------------------------------------------------
First, proposed Interpretation and Policy .03(a) governs the review
of complex orders that are executed against individual legs (as opposed
to a complex order that executes against another complex order).\8\
Proposed Rule 521 Interpretation and Policy .03(a) provides:
---------------------------------------------------------------------------
\8\ The leg market consists of quotes and/or orders in single
options series. A complex order may be received by the Exchange
electronically, and the legs of the complex order may have different
counterparties. For example, Market-Maker 1 may be quoting in ABC
calls and Market-Maker 2 may be quoting in ABC puts. A complex order
to buy the ABC calls and puts may execute against the quotes of
Market-Maker 1 and Market-Maker 2.
If a complex order executes against individual legs and at least
one of the legs qualifies as an Obvious Error under paragraph (c)(1)
or a Catastrophic Error under paragraph (d)(1), then the leg(s) that
is an Obvious or Catastrophic Error will be adjusted in accordance
with paragraphs (c)(4)(A) or (d)(3), respectively, regardless of
whether one of the parties is a Customer. However, any Customer
order subject to this paragraph (a) 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 on the complex order or individual leg(s). If any leg of
---------------------------------------------------------------------------
a complex order is nullified, the entire transaction is nullified.
As previously noted, at least one of the legs of the complex order
must qualify as an obvious or catastrophic error under the Current Rule
in order for the complex order to receive obvious or catastrophic error
relief. Thus, when the Exchange is notified (within the timeframes set
forth in paragraph (c)(2) or (d)(2)) of a complex order that is a
possible obvious error or catastrophic error, the Exchange will first
review the individual legs of the complex order to determine if one or
more legs qualify as an obvious or catastrophic error.\9\ If no leg
qualifies as an obvious or catastrophic error, the transaction stands--
no adjustment and no nullification. Reviewing the legs to determine
whether one or more legs qualify as an obvious or catastrophic error
requires the Exchange to follow the Current Rule. In accordance with
paragraphs (c)(1) and (d)(1) of the Current Rule, the Exchange compares
the execution price of each individual leg to the Theoretical Price of
each leg (as determined by paragraph (b) of the Current Rule). If the
execution price of an individual leg is higher or lower than the
Theoretical Price for the series by an amount equal to at least the
amount shown in the obvious error table in paragraph (c)(1) of the
Current Rule or the catastrophic error table in paragraph (d)(1) of the
Current Rule, the individual leg qualifies as an obvious or
catastrophic error, and the Exchange will take steps to adjust or
nullify the transaction.\10\
---------------------------------------------------------------------------
\9\ Because a complex order can execute against the leg market,
the Exchange may also be notified of a possible obvious or
catastrophic error by a counterparty that received an execution in
an individual options series. If upon review of a potential obvious
error the Exchange determines an individual options series was
executed against the leg of a complex order or stock-option order,
Proposed Rule 521 Interpretation and Policy .03 will govern.
\10\ Only the execution price on the leg (or legs) that
qualifies as an obvious or catastrophic error pursuant to any
portion of Proposed Rule 521 Interpretation and Policy .03 will be
adjusted. The execution price of a leg (or legs) that does not
qualify as an obvious or catastrophic error will not be adjusted.
---------------------------------------------------------------------------
To illustrate, assume a Customer submits a complex order to the
Exchange consisting of Leg 1 and Leg 2--Leg 1 is to buy 100 ABC calls
and Leg 2 is to sell 100 ABC puts. Also, assume that Market-Maker 1 is
quoting the ABC calls $1.00-1.20 and Market-Maker 2 is quoting the ABC
puts $2.00-2.20. If the complex order executes against the quotes of
Market-Makers 1 and 2, the Customer buys the ABC calls for $1.20 and
sells the ABC puts for $2.00. As with the obvious/catastrophic error
reviews for simple orders, the execution price of Leg 1 is compared to
the Theoretical Price \11\ of Leg 1 in order to determine if Leg 1 is
an obvious error under paragraph (c)(1) of the Current Rule or a
catastrophic error under paragraph (d)(1) of the Current Rule. The same
goes for Leg 2. The execution price of Leg 2 is compared to the
Theoretical Price of Leg 2. If it is determined that one or both of the
legs are an obvious or catastrophic error, then the leg (or legs) that
is an obvious or catastrophic error will be adjusted in accordance with
paragraphs (c)(4)(A) or (d)(3) of the Current Rule, regardless of
whether one of the parties is a Customer.\12\ Although a single-legged
execution that is deemed to be an obvious error under the Current Rule
is nullified whenever a Customer is involved in the transaction, the
Exchange believes adjusting execution prices is generally better for
the marketplace than nullifying executions because liquidity providers
often execute hedging transactions to offset options positions. When an
options transaction is nullified the hedging position can adversely
affect the liquidity provider. With regards to complex orders that
execute against individual legs, the additional rationale for adjusting
erroneous execution prices when possible is the fact that the
counterparty on a leg that is not executed at an obvious or
catastrophic error price cannot look at the execution price to
determine whether the execution may later be nullified (as opposed to
the counterparty on single-legged order that is executed at an
[[Page 15254]]
obvious error or catastrophic error price).
---------------------------------------------------------------------------
\11\ See Exchange Rule 521(b) (defining the manner in which
Theoretical Price is determined).
\12\ See Exchange Rule 521(a)(1) (defining Customer for purposes
of Rule 521 to mean a Priority Customer, which is a person or entity
that (i) is not a broker or dealer in securities, and (ii) does not
place more than 390 orders in listed options per day on average
during a calendar month for its own beneficial account(s). See
Exchange Rule 100.)
---------------------------------------------------------------------------
Paragraph (c)(4)(A) of the Current Rule mandates that if it is
determined that an obvious error has occurred, the execution price of
the transaction will be adjusted pursuant to the table set forth in
(c)(4)(A). Although for simple orders paragraph (c)(4)(A) is only
applicable when no party to the transaction is a Customer, for the
purposes of complex orders paragraph (a) of Interpretation and Policy
.03 will supersede that limitation; therefore, if it is determined that
a leg (or legs) of a complex order is an obvious error, the leg (or
legs) will be adjusted pursuant to (c)(4)(A), regardless of whether a
party to the transaction is a Customer. The Size Adjustment Modifier
defined in subparagraph (a)(4) of the Current Rule will similarly apply
(regardless of whether a Customer is on the transaction) by virtue of
the application of paragraph (c)(4)(A).\13\ The Exchange notes that
adjusting all market participants is not unique or novel. When the
Exchange determines that a simple order execution is a Catastrophic
Error pursuant to the Current Rule, paragraph (d)(3) already provides
for adjusting the execution price for all market participants,
including Customers.
---------------------------------------------------------------------------
\13\ See Exchange Rule 521(c)(4)(A) (stating that any non-
Customer Obvious Error exceeding 50 contracts will be subject to the
Size Adjustment Modifier defined in sub-paragraph (a)(4)). The Size
Adjustment Modifier may also apply to the option leg of a stock-
option order that is adjusted pursuant to Proposed Rule 521
Interpretation and Policy .03(c).
---------------------------------------------------------------------------
Furthermore, as with the Current Rule, Proposed Rule 521
Interpretation and Policy .03(a) provides protection for Customer
orders, stating that where at least one party to a complex order
transaction is a Customer, the transaction will be nullified if
adjustment would result in an execution price higher (for buy
transactions) or lower (for sell transactions) than the Customer's
limit price on the complex order or individual leg(s). For example,
assume Customer enters a complex order to buy Leg 1 and Leg 2.
Assume the NBBO for Leg 1 is $0.20-1.00 and the NBBO for
Leg 2 is $0.50-1.00 and that these have been the NBBOs since the market
opened.
A split-second prior to the execution of the complex order
a Customer enters a simple order to sell the Leg 1 options series at
$1.30, and the simple order enters the Exchange's book so that the BBO
is $.20-$1.30. The limit price on the simple order is $1.30.
The complex order executes Leg 1 against the Exchange's
best offer of $1.30 and Leg 2 at $1.00 for a net execution price of
$2.30.
However, Leg 1 executed on a wide quote (the NBBO for Leg
1 was $0.20-1.00 at the time of execution, which is wider than
$0.75).\14\ Leg 2 was not executed on a wide quote (the market for Leg
2 was $0.50-1.00); thus, Leg 2 execution price stands.
---------------------------------------------------------------------------
\14\ See Exchange Rule 521(b)(3).
---------------------------------------------------------------------------
The Exchange determines that the Theoretical Price for Leg
1 is $1.00, which was the best offer prior to the execution. Leg 1
qualifies as an obvious error because the difference between the
Theoretical Price ($1.00) and the execution price ($1.30) is larger
than $0.25.\15\
---------------------------------------------------------------------------
\15\ See Exchange Rule 521(c)(1).
---------------------------------------------------------------------------
According to Proposed Rule 521 Interpretation and Policy
.03(a), Customers will also be adjusted in accordance with Rule
521(c)(4)(A), which for a buy transaction under $3.00 calls for the
Theoretical Price to by adjusted by adding $0.15 \16\ to the
Theoretical Price of $1.00. Thus, adjust execution price for Leg 1
would be $1.15.
---------------------------------------------------------------------------
\16\ See Exchange Rule 521(c)(4)(A).
---------------------------------------------------------------------------
However, adjusting the execution price of Leg 1 to $1.15
violates the limit price of the Customer's sell order on the simple
order book for Leg 1, which was $1.30.
Thus, the entire complex order transaction will be
nullified \17\ because the limit price of a Customer's sell order would
be violated by the adjustment.\18\
---------------------------------------------------------------------------
\17\ If any leg of a complex order is nullified, the entire
transaction is nullified. See Proposed Rule 521 Interpretation and
Policy .03(a).
\18\ The simple order in this example is not an erroneous sell
transaction because the execution price was not erroneously low. See
Exchange Rule 521(a)(2).
---------------------------------------------------------------------------
As the above example demonstrates, incoming complex orders may
execute against resting simple orders in the leg market. If a complex
order leg is deemed to be an obvious error, adjusting the execution
price of the leg may violate the limit price of the resting order,
which will result in nullification if the resting order is for a
Customer. In contrast, Interpretation and Policy .02 to Rule 521
provides that if an adjustment would result in an execution price that
is higher than an erroneous buy transaction or lower than an erroneous
sell transaction the execution will not be adjusted or nullified.\19\
If the adjustment of a complex order would violate the complex order
Customer's limit price, the transaction will be nullified.
---------------------------------------------------------------------------
\19\ See Exchange Rule 521 Interpretation and Policy .02.
---------------------------------------------------------------------------
As previously noted, paragraph (d)(3) of the Current Rule already
mandates that if it is determined that a catastrophic error has
occurred, the execution price of the transaction will be adjusted
pursuant to the table set forth in paragraph (d)(3). For purposes of
complex orders under Proposed Rule 521 Interpretation and Policy
.03(a), if one of the legs of a complex order is determined to be a
Catastrophic Error under paragraph (d)(3), all market participants will
be adjusted in accordance with the table set forth in (d)(3). Again,
however, where at least one party to a complex order transaction is a
Customer, the transaction will be nullified if adjustment would result
in an execution price higher (for buy transactions) or lower (for sell
transactions) than the Customer's limit price on the complex order or
individual leg(s). Again, if any leg of a complex order is nullified,
the entire transaction is nullified. Additionally, as is the case
today, a Member that submits an appeal seeking the review of an
Official ruling will be assessed a fee of $500.00 for each Official
ruling to be reviewed that is sustained and not overturned or modified
by the Chief Regulatory Officer or his/her designee. In addition, in
instances where the Exchange, on behalf of a Member, requests a
determination by another market center that a transaction is clearly
erroneous, the Exchange will pass any resulting charges through to the
relevant Member.\20\
---------------------------------------------------------------------------
\20\ See Exchange Rule 521(l)(2).
---------------------------------------------------------------------------
Other than honoring the limit prices established for Customer
orders, the Exchange has proposed to treat Customers and non-Customers
the same in the context of the complex orders that trade against the
leg market. When complex orders trade against the leg market, it is
possible that at least some of the legs will execute at prices that
would not be deemed obvious or catastrophic errors, which gives the
counterparty in such situations no indication that the execution will
later by adjusted or nullified. The Exchange believes that treating
Customers and non-Customers the same in this context will provide
additional certainty to non-Customers (especially Market-Makers) with
respect to their potential exposure and hedging activities, including
comfort that even if a transaction is later adjusted, 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
[[Page 15255]]
price on the complex order or individual leg(s). 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 a Customer
would not have expected, and market professionals such as non-Customers
would be better prepared to recover in such situations. Therefore,
adjustment for non-Customers is more appropriate.
Second, proposed Interpretation and Policy .03(b) governs the
review of complex orders that are executed against other complex
orders. Proposed Rule 521 Interpretation and Policy .03(b) provides:
If a complex order executes against another complex order and at
least one of the legs qualifies as an Obvious Error under paragraph
(c)(1) or a Catastrophic Error under paragraph (d)(1), then the
leg(s) that is an Obvious or Catastrophic Error will be adjusted or
busted in accordance with paragraph (c)(4) or (d)(3), respectively,
so long as either: (i) The width of the National Spread Market for
the complex order strategy just prior to the erroneous transaction
was equal to or greater than the amount set forth in the wide quote
table of paragraph (b)(3), or (ii) the net execution price of the
complex order is higher (lower) than the offer (bid) of the National
Spread Market for the complex order strategy just prior to the
erroneous transaction by an amount equal to at least the amount
shown in the table in paragraph (c)(1). If any leg of a complex
order is nullified, the entire transaction is nullified. For
purposes of this Rule 521, the National Spread Market for a complex
order strategy is determined by the National Best Bid/Offer of the
individual legs of the strategy.
As described above in relation to Proposed Rule 521 Interpretation
and Policy .03(a), the first step is for the Exchange to review (upon
receipt of a timely notification in accordance with paragraphs (c)(2)
or (d)(2) of the Current Rule) the individual legs to determine whether
a leg or legs qualifies as an obvious or catastrophic error. If no leg
qualifies as an obvious or catastrophic error, the transaction stands--
no adjustment and no nullification.
Unlike Proposed Rule 521 Interpretation and Policy .03(a), the
Exchange is also proposing to compare the net execution price of the
entire complex order package to the National Spread Market (``NSM'')
for the complex order strategy.\21\ Complex orders are exempt from the
order protection rules of the options exchanges.\22\ Thus, depending on
the manner in which the systems of an options exchange are calibrated,
a complex order can execute without regard to the prices offered in the
complex order books or the leg markets of other options exchanges. In
certain situations, reviewing the execution prices of the legs in a
vacuum would make the leg appear to be an obvious or catastrophic
error, even though the net execution price on the complex order is not
an erroneous price. For example, assume the Exchange receives a complex
order to buy ABC calls and sell ABC puts.
---------------------------------------------------------------------------
\21\ NSM is the derived net market for a complex order package.
For example, if the NBBO of Leg 1 is $1.00-2.00 and the NBBO of Leg
2 is $5.00-7.00, then the NSM for a complex order to buy Leg 1 and
buy Leg 2 is $6.00-9.00.
\22\ See Exchange Rule 1401(b)(7). All options exchanges have
the same order protection rule.
---------------------------------------------------------------------------
If the BBO for the ABC calls is $5.50-7.50 and the BBO for
ABC puts is $3.00-4.50, then the Exchange's spread market is $1.00-
4.50.\23\
---------------------------------------------------------------------------
\23\ The complex order is to buy ABC calls and sell ABC puts.
The Exchange's best offer for ABC puts is $7.50 and Exchange's best
bid for is $3.00. If the Customer were to buy the complex order
strategy, the Customer would receive a debit of $4.50 (buy ABC calls
for $7.50 minus selling ABC puts for $3.00). If the Customer were to
sell the complex order strategy the Customer would receive a credit
of $1.00 (selling the ABC calls for $5.50 minus buying the ABC puts
for $4.50). Thus, the Exchange's spread market is $1.00-4.50.
---------------------------------------------------------------------------
If the NBBO for the ABC calls is $6.00-6.50 and the NBBO
for the ABC puts is $3.50-4.00, then the NSM is $2.00-3.00.
If the Customer buys the calls at $7.50 and sells the puts
at $4.00, the complex order Customer receives a net execution price of
$3.00 (debit), which is the expected net execution price as indicated
by the NSM offer of $3.00.
If the exchange were to solely focus on the $7.50 execution price
of the ABC calls or the $4.00 execution price of the ABC puts, the
execution would qualify as an obvious or catastrophic error because the
execution price on the legs was outside the NBBO, even though the net
execution price is accurate. Thus, the additional review of the NSM to
determine if the complex order was executed at a truly erroneous price
is necessary. The same concern is not present when a complex order
executes against the leg market under Proposed Rule 521 Interpretation
and Policy .03(a) because the execution price of each component is not
executed at a price that is outside of the NBBO.\24\
---------------------------------------------------------------------------
\24\ See Exchange Rule 518(c)(2)(iii).
---------------------------------------------------------------------------
In order to incorporate NSM, Proposed Rule 521 Interpretation and
Policy .03(b) provides that if a complex order executes against another
complex order and at least one of the legs qualifies as an obvious or
catastrophic error, the leg or legs that is an obvious or catastrophic
error will be adjusted or busted in accordance with paragraph (c)(4) or
(d)(3) of the Current Rule, so long as either: (i) The width of the NSM
for the complex order strategy just prior to the erroneous transaction
was equal to or greater than the amount set forth in the wide quote
table of paragraph (b)(3) of the Current Rule or (ii) the net execution
price of the complex order is higher (lower) than the offer (bid) of
the NSM for the complex order strategy just prior to the erroneous
transaction by an amount equal to at least the amount shown in the
table in paragraph (c)(1) of the Current Rule.
For example, assume an individual leg or legs qualifies as an
obvious or catastrophic error and the width of the NSM of the complex
order strategy just prior to the erroneous transaction is $6.00-9.00.
The complex order will qualify to be adjusted or busted in accordance
with paragraph (c)(4) of the Current Rule because the wide quote table
of paragraph (b)(3) of the Current Rule indicates that the minimum
amount is $1.50 for a bid price between $5.00 to $10.00. If the NSM
were instead $6.00-7.00 the complex order strategy would not qualify to
be adjusted or busted pursuant to Proposed Rule 521 Interpretation and
Policy .03(b)(i) because the width of the NSM is $1.00, which is less
than the required $1.50. However, the execution may still qualify to be
adjusted or busted in accordance with paragraph (c)(4) or (d)(3) of the
Current Rule pursuant to Proposed Rule 521 Interpretation and Policy
.03(b)(ii). Focusing on the NSM in this manner will ensure that the
obvious/catastrophic error review process focuses on the net execution
price instead of the execution prices of the individual legs, which may
have execution prices outside of the NBBO of the leg markets.
Again, assume an individual leg or legs qualifies as an obvious or
catastrophic error as described above. If the NSM is $6.00-7.00 (not a
wide quote pursuant to the wide quote table in paragraph (b)(3) of the
Current Rule) but the execution price of the entire complex order
package (i.e., the net execution price) is higher (lower) than the
offer (bid) of the NSM for the complex order strategy just prior to the
erroneous transaction by an amount equal to at least the amount in the
table in paragraph (c)(1) of the Current Rule, then the complex order
qualifies to be adjusted or busted in accordance with paragraph (c)(4)
or (d)(3) of the Current Rule. For example, if the NSM for the complex
order strategy just prior to the erroneous transaction is $6.00-7.00
and the net execution price of the complex order transaction is $7.75,
the complex order qualifies to be adjusted or busted in accordance with
paragraph (c)(4) of the Current Rule because the execution price of
$7.75 is more than $0.50 (i.e.,
[[Page 15256]]
the minimum amount according to the table in paragraph (c)(1) when the
price is above $5.00 but less than $10.01) from the NSM offer of $7.00.
Focusing on the NSM in this manner will ensure that the obvious/
catastrophic error review process focuses on the net execution price
instead of the execution prices of the individual legs, which may have
execution prices outside of the NBBO of the leg markets.
Although the Exchange believes adjusting execution prices is
generally better for the marketplace than nullifying executions because
liquidity providers often execute hedging transactions to offset
options positions, the Exchange recognizes that complex orders
executing against other complex orders is similar to simple orders
executing against other simple orders because both parties are able to
review the execution price to determine whether the transaction may
have been executed at an erroneous price. Thus, for purposes of complex
orders that meet the requirements of Proposed Rule 521 Interpretation
and Policy .03(b), the Exchange proposes to apply the Current Rule and
adjust or bust obvious errors in accordance with paragraph (c)(4) (as
opposed to applying paragraph (c)(4)(A) as is the case under Proposed
Rule 521 Interpretation and Policy .03(a)) and catastrophic errors in
accordance with (d)(3).
Therefore, for purposes of complex orders under Proposed Rule 521
Interpretation and Policy .03(b), if one of the legs is determined to
be an obvious error under paragraph (c)(1), all Customer transactions
will be nullified, unless a Member submits 200 or more Customer
transactions for review in accordance with (c)(4)(C).\25\ For purposes
of complex orders under Proposed Rule 521 Interpretation and Policy
.03(b), if one of the legs is determined to be a catastrophic error
under paragraph (d)(3) and all of the other requirements of Rule 521
Interpretation and Policy .03(b) are met, all market participants will
be adjusted in accordance with the table set forth in (d)(3). Again,
however, pursuant to paragraph (d)(3) where at least one party to a
complex order transaction is a Customer, the transaction will be
nullified if adjustment would result in an execution price higher (for
buy transactions) or lower (for sell transactions) than the Customer's
limit price on the complex order or individual leg(s). Also, if any leg
of a complex order is nullified, the entire transaction is nullified.
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\25\ Rule 521(c)(4)(C) also requires the orders resulting in 200
or more Customer transactions to have been submitted during the
course of 2 minutes or less.
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Third, proposed Interpretation and Policy .03(c) governs stock-
option orders. Proposed Rule 521 Interpretation and Policy .03(c)
provides:
If the option leg of a stock-option order qualifies as an
Obvious Error under paragraph (c)(1) or a Catastrophic Error under
paragraph (d)(1), then the option leg that is an Obvious or
Catastrophic Error will be adjusted in accordance with paragraph
(c)(4)(A) or (d)(3), respectively, regardless of whether one of the
parties is a Customer. However, the option leg of any Customer order
subject to this paragraph (c) 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 on the
stock-option order, and the Exchange will attempt to nullify the
stock leg. Whenever a stock trading venue nullifies the stock leg of
a stock-option order or whenever the stock leg cannot be executed,
the Exchange will nullify the option leg upon request of one of the
parties to the transaction or in accordance with paragraph (c)(3).
Similar to proposed Interpretation and Policy .03(a), an options
leg (or legs) of a stock-option order must qualify as an obvious or
catastrophic error under the Current Rule in order for the stock-option
order to qualify as an obvious or catastrophic error. Also similar to
Proposed Rule 521 Interpretation and Policy .03(a), if an options leg
(or legs) does qualify as an obvious or catastrophic error, the option
leg (or legs) will be adjusted in accordance with paragraph (c)(4)(A)
or (d)(3), respectively, regardless of whether one of the parties is a
Customer. Again, as with Proposed Rule 521 Interpretation and Policy
.03(a), where at least one party to a complex order transaction is a
Customer, the Exchange will nullify the option leg and attempt to
nullify the stock leg if adjustment would result in an execution price
higher (for buy transactions) or lower (for sell transactions) than the
Customer's limit price on the complex order or individual leg(s).
The stock leg of a stock-option order is not executed on the
Exchange; rather, the stock leg is sent to a stock trading venue for
execution. The Exchange is unaware of a mechanism by which the Exchange
can guarantee that the stock leg will be nullified by the stock trading
venue in the event of an obvious or catastrophic error on the Exchange.
Thus, in the event of the nullification of the option leg pursuant to
Proposed Rule 521 Interpretation and Policy .03(c), the Exchange will
attempt to have the stock leg nullified by the stock trading venue by
either contacting the stock trading venue or notifying the parties to
the transaction that the option leg is being nullified. The party or
parties to the transaction may ultimately need to contact the stock
trading venue to have the stock portion nullified.
Finally, the Exchange proposes to provide guidance that whenever
the stock trading venue nullifies the stock leg of a stock-option
order, the option will be nullified upon request of one of the parties
to the transaction or by an Official acting on their own motion in
accordance with paragraph (c)(3). There are situations in which buyer
and seller agree to trade a stock-option order, but the stock leg
cannot be executed. The Exchange proposes to provide guidance that
whenever the stock portion of a stock-option order cannot be executed,
the Exchange will nullify the option leg upon request of one of the
parties to the transaction or on an Official's own motion.
Implementation Date
In order to ensure that the other options exchanges are able to
adopt rules consistent with this proposal and to coordinate
effectiveness of such harmonized rules, the Exchange proposes to delay
the operative date of this proposal to April 17, 2017.
2. Statutory Basis
MIAX believes that its proposed rule change is consistent with
Section 6(b) of the Act \26\ in general, and furthers the objectives of
Section 6(b)(5) of the Act \27\ in particular, in that it is designed
to prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, to foster cooperation and
coordination with persons engaged in facilitating transactions in
securities, to remove impediments to and perfect the mechanisms of a
free and open market and a national market system and, in general, to
protect investors and the public interest. .[sic] 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
[[Page 15257]]
the foregoing, the Exchange believes that the proposal is consistent
with Section 6(b)(5) of the Act \28\ in that the Proposed Rule will
foster cooperation and coordination with persons engaged in regulating
and facilitating transactions. The Exchange believes the various
provisions allowing or dictating adjustment rather than nullification
of a trade are necessary given the benefits of adjusting a trade price
rather than nullifying the trade completely. Because options trades are
used to hedge, or are hedged by, transactions in other markets,
including securities and futures, many Members, and their customers,
would rather adjust prices of executions rather than nullify the
transactions and, thus, lose a hedge altogether. As such, the Exchange
believes it is in the best interest of investors to allow for price
adjustments as well as nullifications.
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\26\ 15 U.S.C. 78f(b).
\27\ 15 U.S.C. 78f(b)(5).
\28\ Id.
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The Exchange does not believe that the proposal is unfairly
discriminatory, even though it differentiates in many places between
Customers and non-Customers. As with the Current Rule, Customers are
treated differently, often affording them preferential treatment. This
treatment is appropriate in light of the fact that Customers are not
necessarily immersed in the day-to-day trading of the markets, are less
likely to be watching trading activity in a particular option
throughout the day, and may have limited funds in their trading
accounts. At the same time, the Exchange reiterates that in the U.S.
options markets generally there is significant retail customer
participation that occurs directly on (and only on) options exchanges
such as the Exchange. Accordingly, differentiating among market
participants with respect to the adjustment and nullification of
erroneous options transactions is not unfairly discriminatory because
it is reasonable and fair to provide Customers with additional
protections as compared to non-Customers.
The Exchange believes that its proposal to adopt the ability to
adjust a Customer's execution price when a complex order is deemed to
be an Obvious or Catastrophic Error is consistent with the Act. A
complex order that executes against individual leg markets may receive
an execution price on an individual leg that is not an Obvious or
Catastrophic error but another leg of the transaction is an Obvious or
Catastrophic Error. In such situations where the complex order is
executing against at least one individual or firm that is not aware of
the fact that they have executed against a complex order or that the
complex order has been executed at an erroneous price, the Exchange
believes it is more appropriate to adjust execution prices if possible
because the derivative transactions are often hedged with other
securities. Allowing adjustments instead of nullifying transactions in
these limited situations will help to ensure that market participants
are not left with a hedge that has no position to hedge against.
The Exchange also believes its proposal related to stock-option
orders is consistent with the Act. Stock-option orders consist of an
option component and a stock component. Due to the fact that the
Exchange has no control over the venues on which the stock is executed
the proposal focuses on the option component of the stock-option order
by adjusting or nullifying the option in accordance with paragraph
(c)(4)(A) or (d)(3). Also, nullifying the option component if the stock
component cannot be executed ensures that market participants receive
the execution for which they bargained. Stock-option orders are
negotiated and agreed to as a package; thus, if for any reason the
stock portion of a stock-option order cannot ultimately be executed,
the parties should not be saddled with an options position sans stock.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. In this regard and as
indicated above, the Exchange notes that the proposed rule change is
substantially similar to a filing submitted by CBOE that was recently
approved by the Commission.\29\
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\29\ See supra, note 3.
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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 that trade complex orders and/or stock-option orders 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, 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
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the 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, it has become
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \30\ and
[[Page 15258]]
subparagraph (f)(6) of Rule 19b-4 thereunder.\31\
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\30\ 15 U.S.C. 78s(b)(3)(A)(iii).
\31\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file 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 satisfied this requirement.
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A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the
Act \32\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6)(iii) \33\ permits the
Commission to designate a shorter time if such action is consistent
with the protection of investors and the public interest. 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 allow the Exchange to implement the proposed rule change by
April 17, 2017 in coordination with the other options exchanges.
Accordingly, the Commission hereby waives the operative delay and
designates the proposal operative upon filing.\34\
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\32\ 17 CFR 240.19b-4(f)(6).
\33\ 17 CFR 240.19b-4(f)(6)(iii).
\34\ 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).
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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: (i)
Necessary or appropriate in the public interest; (ii) for the
protection of investors; or (iii) 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-MIAX-2017-13 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-MIAX-2017-13. 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-MIAX-2017-13, and should be
submitted on or before April 17, 2017.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\35\
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\35\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-05921 Filed 3-24-17; 8:45 am]
BILLING CODE 8011-01-P
