Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Rule 1092, Nullification and Adjustment of Options Transactions Including Obvious Errors, 37949-37955 [2017-17067]
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Federal Register / Vol. 82, No. 155 / Monday, August 14, 2017 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.14
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–17046 Filed 8–11–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–81352; File No. SR–Phlx–
2017–66]
Self-Regulatory Organizations;
NASDAQ PHLX LLC; Notice of Filing
and Immediate Effectiveness of
Proposed Rule Change To Amend Rule
1092, Nullification and Adjustment of
Options Transactions Including
Obvious Errors
August 8, 2017.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on August 3,
2017, NASDAQ PHLX LLC (‘‘Phlx’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
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The Exchange proposes to amend
Rule 1092, Nullification and
Adjustment of Options Transactions
including Obvious Errors.
While these amendments are effective
upon filing, the Exchange has
designated the proposed amendments to
be operative on a date that is within
ninety (90) days after the Commission
approved a similar proposal filed by
Bats BZX on July 6, 2017.
The text of the proposed rule change
is available on the Exchange’s Web site
at https://nasdaqphlx.cchwallstreet.
com/, at the principal office of the
Exchange, and at the Commission’s
Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
14 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
16:45 Aug 11, 2017
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange and other options
exchanges recently 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.3 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.
Specifically, as described in the Initial
Filing, the Exchange and all other
options exchanges have been working to
further improve the review of
potentially erroneous transactions as
well as their subsequent adjustment by
creating an objective and universal way
to determine Theoretical Price in the
event a reliable NBBO is not available.
Because this initiative required
additional exchange and industry
discussion as well as additional time for
development and implementation, the
Exchange and the other options
exchanges determined to proceed with
the Initial Filing and to undergo a
secondary initiative to complete any
additional improvements to the
applicable rule. In this filing, the
Exchange proposes to adopt procedures
that will lead to a more objective and
uniform way to determine Theoretical
Price in the event a reliable NBBO is not
available. In addition to this change, the
Exchange has proposed two additional
minor changes to its rules. The
Exchange’s proposal mirrors that of Bats
BZX, which the Commission approved
3 See Securities Exchange Act Release No. 34–
74919 (May 8, 2015); 80 FR 27766 (May 14, 2015)
(SR–PHLX–2015–43) (the ‘‘Initial Filing’’).
1 15
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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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37949
on July 6, 2017,4 and those that the
other options exchanges intend to file.
Calculation of Theoretical Price Using a
Third Party Provider
Under the harmonized rule, when
reviewing a transaction as potentially
erroneous, the Exchange needs to first
determine the ‘‘Theoretical Price’’ of the
option, i.e., the Exchange’s estimate of
the correct market price for the option.
Pursuant to Rule 1092, if the applicable
option series is traded on at least one
other options exchange, then the
Theoretical Price of an option series is
the last national best bid (‘‘NBB’’) just
prior to the trade in question with
respect to an erroneous sell transaction
or the last national best offer (‘‘NBO’’)
just prior to the trade in question with
respect to an erroneous buy transaction
unless one of the exceptions described
below exists. Thus, whenever the
Exchange has a reliable NBB or NBO, as
applicable, just prior to the transaction,
then the Exchange uses this NBB or
NBO as the Theoretical Price.
The Rule also contains various
provisions governing specific situations
where the NBB or NBO is not available
or may not be reliable. Specifically, the
Rule specifies situations in which there
are no quotes or no valid quotes for
comparison purposes, when the
national best bid or offer (‘‘NBBO’’) is
determined to be too wide to be reliable,
and at the open of trading on each
trading day. In each of these
circumstances, in turn, because the NBB
or NBO is not available or is deemed to
be unreliable, the Exchange determines
Theoretical Price. Under the current
Rule, when determining Theoretical
Price, Exchange personnel generally
consult and refer to data such as the
prices of related series, especially the
closest strikes in the option in question.
Exchange personnel may also take into
account the price of the underlying
security and the volatility
characteristics of the option as well as
historical pricing of the option and/or
similar options. Although the Rule is
administered by experienced personnel
and the Exchange believes the process is
currently appropriate, the Exchange
recognizes that it is also subjective and
could lead to disparate results for a
transaction that spans multiple options
exchanges.
The Exchange proposes to adopt
Commentary .05 to specify how the
Exchange will determine Theoretical
Price when required by sub-paragraphs
4 See Securities Exchange Act Release No. 34–
81084 (July 6, 2017) (granting approval of Bats BZX
proposal), 82 FR 32216 (July 12, 2017); 82 FR 23684
(May 23, 2017) (SR–BatsBZX–2017–035) (notice of
filing of Bats BZX proposal).
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(b)(1)–(3) of the Rule (i.e., at the open,
when there are no valid quotes or when
there is a wide quote). In particular, the
Exchange has been working with other
options exchanges to identify and select
a reliable third party vendor (‘‘TP
Provider’’) that would provide
Theoretical Price to the Exchange
whenever one or more transactions is
under review pursuant to Rule 1092 and
the NBBO is unavailable or deemed
unreliable pursuant to Rule 1092(b). The
Exchange and other options exchanges
have selected CBOE Livevol, LLC
(‘‘Livevol’’) as the TP Provider, as
described below. As further described
below, proposed Commentary .05 would
codify the use of the TP Provider as well
as limited exceptions where the
Exchange would be able to deviate from
the Theoretical Price given by the TP
Provider.
Pursuant to proposed Commentary
.05, when the Exchange must determine
Theoretical Price pursuant to the subparagraphs (b)(1)–(3) of the Rule, the
Exchange will request Theoretical Price
from the third party vendor to which the
Exchange and all other options
exchanges have subscribed. Thus, as set
forth in this proposed language,
Theoretical Price would be provided to
the Exchange by the TP Provider on
request and not through a streaming
data feed.5 This language also makes
clear that the Exchange and all other
options exchanges will use the same TP
Provider.
As noted above, the proposed TP
Provider selected by the Exchange and
other options exchanges is Livevol. The
Exchange proposes to codify this
selection in proposed paragraph (d) to
Commentary .05. As such, the Exchange
would file a rule proposal and would
provide notice to the options industry of
any proposed change to the TP Provider.
The Exchange and other options
exchanges have selected Livevol as the
proposed TP Provider after diligence
into various alternatives. Livevol has,
since 2009, been the options industry
leader in providing equity and index
options market data and analytics
services.6 The Exchange believes that
Livevol has established itself within the
options industry as a trusted provider of
such services and notes that it and all
other options exchanges already
5 Though the Exchange and other options
exchanges considered a streaming feed, it was
determined that it would be more feasible to
develop and implement an on demand service and
that such a service would satisfy the goals of the
initiative.
6 The Exchange notes that in 2015, Livevol was
acquired by CBOE Holdings, Inc., the ultimate
parent company of the Chicago Board Options
Exchange (‘‘CBOE’’) and C2 Options Exchange
(‘‘C2’’).
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subscribe to various Livevol services. In
connection with this proposal, Livevol
will develop a new tool based on its
existing technology and services that
will supply Theoretical Price to the
Exchange and other options exchanges
upon request. The Theoretical Price tool
will leverage current market data and
surrounding strikes to assist in a relative
value pricing approach to generating a
Theoretical Price. When relative value
methods are incapable of generating a
valid Theoretical Price, the Theoretical
Price tool will utilize historical trade
and quote data to calculate Theoretical
Price.
Because the purpose of the proposal
is to move away from a subjective
determination by Exchange personnel
when the NBBO is unavailable or
unreliable, the Exchange intends to use
the Theoretical Price provided by the TP
Provider in all such circumstances.
However, the Exchange believes it is
necessary to retain the ability to contact
the TP Provider if it believes that the
Theoretical Price provided is
fundamentally incorrect and to
determine the Theoretical Price in the
limited circumstance of a systems issue
experienced by the TP Provider, as
described below.
As proposed, to the extent an
Official 7 of the Exchange believes that
the Theoretical Price provided by the TP
Provider is fundamentally incorrect and
cannot be used consistent with the
maintenance of a fair and orderly
market, the Official shall contact the TP
Provider to notify the TP Provider of the
reason the Official believes such
Theoretical Price is inaccurate and to
request a review and correction of the
calculated Theoretical Price. For
example, if an Official received from the
TP Provider a Theoretical Price of $80
in a series that the Official might expect
to be instead in the range of $8 to $10
because of a recent corporate action in
the underlying, the Official would
request that the TP Provider review and
confirm its calculation and determine
whether it had appropriately accounted
for the corporate action. In order to
ensure that other options exchanges that
may potentially be relying on the same
Theoretical Price that, in turn, the
Official believes to be fundamentally
incorrect, the Exchange also proposes to
promptly provide notice to other
options exchanges that the TP Provider
has been contacted to review and
correct the calculated Theoretical Price
at issue and to include a brief
7 For purposes of the Rule, an Official is an
Exchange staff member or contract employee
designated as such by the Chief Regulatory Officer.
See Rule 1092(a)(3).
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explanation of the reason for the
request.8 Although not directly
addressed by the proposed Rule, the
Exchange expects that all other options
exchanges once in receipt of this
notification would await the
determination of the TP Provider and
would use the corrected price as soon as
it is available. The Exchange further
notes that it expects the TP Provider to
cooperate with, but to be independent
of, the Exchange and other options
exchanges.9
The Exchange believes that the
proposed provision to allow an Official
to contact the TP Provider if he or she
believes the provided Theoretical Price
is fundamentally incorrect is necessary,
particularly because the Exchange and
other options exchanges will be using
the new process for the first time.
Although the exchanges have conducted
thorough diligence with respect to
Livevol as the selected TP Provider and
would do so with any potential
replacement TP Provider, the Exchange
is concerned that certain scenarios
could arise where the Theoretical Price
generated by the TP Provider does not
take into account relevant factors and
would result in an unfair result for
market participants involved in a
transaction. The Exchange notes that if
such situations do indeed arise, to the
extent practicable the Exchange will
also work with the TP Provider and
other options exchanges to improve the
TP Provider’s calculation of Theoretical
Price in future situations. For instance,
if the Exchange determines that a
particular type of corporate action is not
being appropriately captured by the TP
Provider when such provider is
generating Theoretical Price, while the
Exchange believes that it needs the
ability to request a review and
correction of the Theoretical Price in
connection with a specific review in
order to provide a timely decision to
market participants, the Exchange
would share information regarding the
specific situation with the TP Provider
and other options exchanges in an effort
to improve the Theoretical Price service
for future use. The Exchange notes that
it does not anticipate needing to rely on
this provision frequently, if at all, but
8 See
proposed paragraph (b) to Commentary .05.
Exchange expects any TP Provider selected
by the Exchange and other options exchanges to act
independently in its determination and calculation
of Theoretical Price. With respect to Livevol
specifically, the Exchange again notes that Livevol
is a subsidiary of CBOE Holdings, Inc., which is
also the ultimate parent company of multiple
options exchanges. The Exchange expects Livevol
to calculate Theoretical Price independent of its
affiliated exchanges in the same way it will
calculate Theoretical Price independent of nonaffiliated exchanges.
9 The
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believes the provision is necessary
nonetheless to best prepare for all
potential circumstances. Further, the
Theoretical Price used by the Exchange
in connection with its rulings will
always be that received from the TP
Provider and the Exchange has not
proposed the ability to deviate from
such price.10
Pursuant to proposed paragraph (c) to
Commentary .05, an Official of the
Exchange may determine the
Theoretical Price if the TP Provider has
experienced a systems issue that has
rendered its services unavailable to
accurately calculate Theoretical Price
and such issue cannot be corrected in a
timely manner. The Exchange notes that
it does not anticipate needing to rely on
this provision frequently, if at all, but
believes the provision is necessary
nonetheless to best prepare for all
potential circumstances. Further,
consistent with existing text in Rule
1092(e)(4), the Exchange has not
proposed a specific time by which the
service must be available in order to be
considered timely.11 The Exchange
expects that it would await the TP
Provider’s services becoming available
again so long as the Exchange was able
to obtain information regarding the
issue and the TP Provider had a
reasonable expectation of being able to
resume normal operations within the
next several hours based on
communications with the TP Provider.
More specifically with respect to
Livevol, Livevol has business continuity
and disaster recovery procedures that
will help to ensure that the Theoretical
Price tool remains available or, in the
event of an outage, that service is
restored in a timely manner.
The Exchange also notes that if a
wide-scale event occurred, even if such
event did not qualify as a ‘‘Significant
Market Event’’ pursuant to Rule 1092(e),
and the TP Provider was unavailable or
otherwise experiencing difficulty, the
Exchange believes that it and other
options exchanges would seek to
coordinate to the extent possible. In
particular, the Exchange and other
options exchanges now have a process,
administered by the Options Clearing
Corporation, to invoke a discussion
amongst all options exchanges in the
event of any widespread or significant
10 To the extent the TP Provider has been
contacted by an Official of the Exchange, reviews
the Theoretical Price provided but disagrees that
there has been any error, then the Exchange would
be bound to use the Theoretical Price provided by
the TP Provider.
11 In the context of a Significant Market Event, the
Exchange may determine, ‘‘in consultation with
other options exchanges . . . that timely adjustment
is not feasible due to the extraordinary nature of the
situation.’’ See Rule 1092(e)(4).
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market events. The Exchange believes
that this process could be used in the
event necessary if there were an issue
with the TP Provider.
The Exchange also proposes to adopt
language in paragraph (d) of
Commentary .05 to Rule 1092 to
disclaim the liability of the Exchange
and the TP Provider in connection with
the proposed Rule, the TP Provider’s
calculation of Theoretical Price, and the
Exchange’s use of such Theoretical
Price. Specifically, the proposed rule
would state that neither the Exchange,
the TP Provider, nor any affiliate of the
TP Provider (the TP Provider and its
affiliates are referred to collectively as
the ‘‘TP Provider’’), makes any
warranty, express or implied, as to the
results to be obtained by any person or
entity from the use of the TP Provider
pursuant to Commentary .05. The
proposed rule would further state that
the TP Provider does not guarantee the
accuracy or completeness of the
calculated Theoretical Price and that the
TP Provider disclaims all warranties of
merchantability or fitness for a
particular purpose or use with respect to
such Theoretical Price. Finally, the
proposed Rule would state that neither
the Exchange nor the TP Provider shall
have any liability for any damages,
claims, losses (including any indirect or
consequential losses), expenses, or
delays, whether direct or indirect,
foreseen or unforeseen, suffered by any
person arising out of any circumstance
or occurrence relating to the use of such
Theoretical Price or arising out of any
errors or delays in calculating such
Theoretical Price. This proposed
language is modeled after existing
language in Exchange Rules regarding
‘‘reporting authorities’’ that calculate
indices.12
In connection with the proposed
change described above, the Exchange
proposes to modify Rule 1092 to state
that the Exchange will rely on paragraph
(b) and Commentary .05 when
determining Theoretical Price.
No Valid Quotes—Market Participant
Quoting on Multiple Exchanges
As described above, one of the times
where the NBB or NBO is deemed to be
unreliable for purposes of Theoretical
Price is when there are no quotes or no
valid quotes for the affected series. In
addition to when there are no quotes,
the Exchange does not consider the
following to be valid quotes: (i) All
quotes in the applicable option series
12 See, e.g., Rule 1102A, which relates to index
options potentially listed and traded on the
Exchange and disclaims liability for a reporting
authority and their affiliates.
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37951
published at a time where the last NBB
is higher than the last NBO in such
series (a ‘‘crossed market’’); (ii) quotes
published by the Exchange that were
submitted by either party to the
transaction in question; and (iii) quotes
published by another options exchange
against which the Exchange has
declared self-help. In recognition of
today’s market structure where certain
participants actively provide liquidity
on multiple exchanges simultaneously,
the Exchange proposes to add an
additional category of invalid quotes.
Specifically, in order to avoid a
situation where a market participant has
established the market at an erroneous
price on multiple exchanges, the
Exchange proposes to consider as
invalid the quotes in a series published
by another options exchange if either
party to the transaction in question
submitted the quotes in the series
representing such options exchange’s
best bid or offer. Thus, similar to being
able to ignore for purposes of the Rule
the quotes published by the Exchange if
submitted by either party to the
transaction in question, the Exchange
would be able to ignore for purposes of
the rule quotations on other options
exchanges by that same market
participant.
In order to continue to apply the Rule
in a timely and organized fashion,
however, the Exchange proposes to
initially limit the scope of this proposed
provision in two ways. First, because
the process will take considerable
coordination with other options
exchanges to confirm that the quotations
in question on an away options
exchange were indeed submitted by a
party to a transaction on the Exchange,
the Exchange proposes to limit this
provision to apply to up to twenty-five
(25) total options series (i.e., whether
such series all relate to the same
underlying security or multiple
underlying securities). Second, the
Exchange proposes to require the party
that believes it established the best bid
or offer on one or more other options
exchanges to identify to the Exchange
the quotes which were submitted by
such party and published by other
options exchanges. In other words, as
proposed, the burden will be on the
party seeking that the Exchange
disregard their quotations on other
options exchanges to identify such
quotations. In turn, the Exchange will
verify with such other options
exchanges that such quotations were
indeed submitted by such party.
Below are examples of both the
current rule and the rule as proposed to
be amended.
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Example 2—Current Rule, Member
Erroneously Quotes on Multiple
Exchanges
Example 1—Current Rule, Member
Erroneously Quotes on One Exchange
Assumptions
For purposes of this example, assume
the following:
• A Member acting as a Market Maker
on the Exchange (‘‘Market Maker A’’) is
quoting in twenty series of options
underlying security ABCD on the
Exchange (and only the Exchange).
• Market Maker A makes an error in
calculating the market for options on
ABCD, and publishes quotes in all
twenty series to buy options at $1.00
and to sell options at $1.05.
• In fact, options on ABCD in these
series are nearly worthless and no other
market participant is quoting in such
series.
• Therefore, the NBBO in the twenty
series at issue is $1.00 × $1.05 (with the
Exchange representing the NBBO based
on Market Maker A’s quotes).
• Assume Member A immediately
enters sell orders and executes against
Market Maker A’s quotes at $1.00.
• Assume Market Maker A submits to
the Exchange a timely request for review
of the trades with Member A as
potentially erroneous transactions to
buy.
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Result
• Based on the Exchange’s current
rules, the Exchange would identify
Market Maker A as a participant to the
trades at issue and would consider
Market Maker A’s quotations invalid
pursuant to Rule 1092(b)(2).
• As there were no other valid quotes
to use as a reference price, the Exchange
would then determine Theoretical Price.
• Assume the Exchange determines a
Theoretical Price of $0.05.
• The execution price of $1.00
exceeds the $0.25 minimum amount set
forth in the Exchange’s table to
determine whether an obvious error has
occurred (i.e., $0.05 + $0.25 = $0.30) so
any execution at or above this price is
an obvious error.
• Accordingly, the executions in all
series would be adjusted by the
Exchange to executions at $0.20 per
contract (Theoretical Price of $0.05 plus
$0.15) to the extent the incoming orders
submitted by Member A were nonCustomer orders.
• The executions in all series would
be nullified to the extent the incoming
orders submitted by Member A were
Customer orders.
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Example 3—Proposed Rule, Member
Erroneously Quotes on Multiple
Exchanges 13
Assumptions
Assumptions
For purposes of this example, assume
the following:
• A Member acting as a Market Maker
on the Exchange (‘‘Market Maker A’’) is
quoting in twenty series of options
underlying security ABCD on the
Exchange and on a second exchange
(‘‘Away Exchange’’).14
• Market Maker A makes an error in
calculating the market for options on
ABCD, and publishes quotes on both the
Exchange and the Away Exchange in all
twenty series to buy options at $1.00
and to sell options at $1.05.
• In fact, options on ABCD in these
series are nearly worthless and no other
market participant is quoting in such
series.
• Therefore, the NBBO in the twenty
series at issue is $1.00 × $1.05 (with the
Exchange and the Away Exchange
representing the NBBO based on Market
Maker A’s quotes).
• Assume Member A immediately
enters sell orders and executes against
Market Maker A’s quotes at $1.00.
• Assume Market Maker A submits to
the Exchange and to the Away Exchange
timely requests for review of the trades
with Member A as potentially erroneous
transactions to buy. At the time of
submitting the requests for review to the
Exchange and the Away Exchange,
Market Maker A identifies to the
Exchange the quotes on the Away
Exchange as quotes also represented by
Market Maker A (and to the Away
Exchange, the quotes on the Exchange
as quotes also represented by Market
Maker A).
For purposes of this example, assume
the following:
• A Member acting as a Market Maker
on the Exchange (‘‘Market Maker A’’) is
quoting in twenty series of options
underlying security ABCD on the
Exchange and on a second exchange
(‘‘Away Exchange’’).
• Market Maker A makes an error in
calculating the market for options on
ABCD, and publishes quotes on both the
Exchange and the Away Exchange in all
twenty series to buy options at $1.00
and to sell options at $1.05.
• In fact, options on ABCD in these
series are nearly worthless and no other
market participant is quoting in such
series.
• Therefore, the NBBO in the twenty
series at issue is $1.00 × $1.05 (with the
Exchange and the Away Exchange
representing the NBBO based on Market
Maker A’s quotes).
• Assume Member A immediately
enters sell orders and executes against
Market Maker A’s quotes at $1.00.
• Assume Market Maker A submits to
the Exchange and to the Away Exchange
timely requests for review of the trades
with Member A as potentially erroneous
transactions to buy.
Result
• Based on the Exchange’s current
rules, the Exchange would identify
Market Maker A as a participant to the
trades at issue and would consider
Market Maker A’s quotations on the
Exchange invalid pursuant to Rule
1092(b)(2). The Exchange, however,
would view the Away Exchange’s
quotations as valid, and would thus
determine Theoretical Price to be $1.05
(i.e., the NBO in the case of a potentially
erroneous buy transaction).
• The execution price of $1.00 does
not exceed the $0.25 minimum amount
set forth in the Exchange’s table to
determine whether an obvious error has
occurred (i.e., $1.05 + $0.25 = $1.30) so
any execution at or above this price is
an obvious error.
• The transactions on the Exchange
would not be nullified or adjusted.
• As the Exchange and all other
options exchanges have identical rules
with respect to the process described
above, the transactions on the Away
Exchange would not be nullified or
adjusted.
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Result
• Based on the proposed rules, the
Exchange would identify Market Maker
A as a participant to the trades at issue
and would consider Market Maker A’s
quotations on the Exchange invalid
pursuant to Rule 1092(b)(2).
• The Exchange and the Away
Exchange would also coordinate to
confirm that the quotations identified by
Market Maker A on the other exchange
were indeed Market Maker A’s
quotations. Once confirmed, each of the
Exchange and the Away Exchange
13 The Exchange notes that its proposed rule will
not impact the proposed handling of a request for
review where a market participant is quoting only
on the Exchange, thus, the Exchange has not
included a separate example for such a fact pattern.
14 The Exchange notes that the proposed rule
would operate the same if Market Maker A was
quoting on more than two exchanges. The Exchange
has limited the example to two exchanges for
simplicity.
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would also consider invalid the
quotations published on the other
exchange.
• As there were no other valid quotes
to use as a reference price, the Exchange
would then determine Theoretical Price.
• Assume the Exchange determines a
Theoretical Price of $0.05.
• The execution price of $1.00
exceeds the $0.25 minimum amount set
forth in the Exchange’s table to
determine whether an obvious error has
occurred (i.e., $0.05 + $0.25 = $0.30) so
any execution at or above this price is
an obvious error.
• Accordingly, the executions in all
series would be adjusted by the
Exchange to executions at $0.20 per
contract (Theoretical Price of $0.05 plus
$0.15) to the extent the incoming orders
submitted by Member A were nonCustomer orders.
• The executions in all series would
be nullified to the extent the incoming
orders submitted by Member A were
Customer orders.
• As the Exchange and all other
options exchanges would have identical
rules with respect to the process
described above, as other options
exchanges intend to adopt the same rule
if the proposed rule is approved, the
transactions on the Away Exchange
would also be nullified or adjusted as
set forth above.
• If this example was instead
modified such that Market Maker A was
quoting in 200 series rather than 20, the
Exchange notes that Market Maker A
could only request that the Exchange
consider as invalid their quotations in
25 of those series on other exchanges.
As noted above, the Exchange has
proposed to limit the proposed rule to
25 series in order to continue to process
requests for review in a timely and
organized fashion in order to provide
certainty to market participants. This is
due to the amount of coordination that
will be necessary in such a scenario to
confirm that the quotations in question
on an away options exchange were
indeed submitted by a party to a
transaction on the Exchange.
Trading Halts—Clarifying Change to
Rule 1092, Commentary .03
Commentary .03 to Rule 1092
describes the Exchange’s authority to
declare trading halts in one or more
options traded on the Exchange. The
Exchange proposes to modify
Commentary .03 to provide that, with
respect to equity options, the Exchange
shall nullify any transaction that occurs
during a regulatory halt as declared by
the primary listing market for the
underlying security. The Exchange
believes this change is necessary to
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distinguish a declared regulatory halt,
where the underlying security should
not be actively trading on any venue,
from an operational issue on the
primary listing exchange where the
security continues to safely trade on
other trading venues.
Implementation Date
The Exchange proposes to delay the
operative date of this proposal to a date
within ninety (90) days after the
Commission approved the Bats BZX
proposal on July 6, 2017. The Exchange
will announce the operative date in a
Regulatory Alert made available to its
Members.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with the
requirements of the Act and the rules
and regulations thereunder that are
applicable to a national securities
exchange, and, in particular, with the
requirements of Section 6(b) of the
Act.15
Specifically, the proposal is
consistent with Section 6(b)(5) of the
Act 16 because it would promote just
and equitable principles of trade,
remove impediments to, and perfect the
mechanism of, a free and open market
and a national market system, and, in
general, protect investors and the public
interest.
As described above, the Exchange and
other options exchanges are seeking to
further modify their harmonized rules
related to the adjustment and
nullification of erroneous options
transactions. The Exchange believes that
the proposal to utilize a TP Provider in
the event the NBBO is unavailable or
unreliable 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. Thus, the
Exchange believes that the proposal is
consistent with Section 6(b)(5) of the
Act 17 in that the proposed Rule will
foster cooperation and coordination
with persons engaged in regulating and
facilitating transactions.
The Exchange again reiterates that it
has retained the standard of the current
rule for most reviews of options
transactions pursuant to Rule 1092,
which is to rely on the NBBO to
15 15
16 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
PO 00000
Frm 00115
determine Theoretical Price if such
NBBO can reasonably be relied upon.
The proposal to use a TP Provider when
the NBBO is unavailable or unreliable is
consistent with Section 6(b)(5) of the
Act 18 in that the proposed Rule will
foster cooperation and coordination
with persons engaged in regulating and
facilitating transactions by further
reducing the possibility of disparate
results between options exchanges and
increasing the objectivity of the
application of Rule 1092. Further, the
Exchange believes that the proposed
Rule is transparent with respect to the
limited circumstances under which the
Exchange will request a review and
correction of Theoretical Price from the
TP Provider, and has sought to limit
such circumstances as much as possible.
The Exchange notes that under the
current Rule, Exchange personnel are
required to determine Theoretical Price
in certain circumstances and yet rarely
do so because such circumstances have
already been significantly limited under
the harmonized rule (for example,
because the wide quote provision of the
harmonized rule only applies if the
quote was narrower and then gapped
but does not apply if the quote had been
persistently wide). Thus, the Exchange
believes it will need to request
Theoretical Price from the TP Provider
only in very rare circumstances and in
turn, the Exchange anticipates that the
need to contact the TP Provider for
additional review of the Theoretical
Price provided by the TP Provider will
be even rarer. Similarly, the Exchange
believes it is unlikely that an Exchange
Official will ever be required to
determine Theoretical Price, as such
circumstance would only be in the
event of a systems issue that has
rendered the TP Provider’s services
unavailable and such issue cannot be
corrected in a timely manner.
The Exchange also believes its
proposal to adopt language in paragraph
(d) of Commentary .05 to Rule 1092 to
disclaim the liability of the Exchange
and the TP Provider in connection with
the proposed Rule, the TP Provider’s
calculation of Theoretical Price, and the
Exchange’s use of such Theoretical Price
is consistent with the Act. As noted
above, this proposed language is
modeled after existing language in
Exchange Rules regarding ‘‘reporting
authorities’’ that calculate indices,19
and is consistent with Section 6(b)(5) of
the Act 20 in that the proposed Rule will
foster cooperation and coordination
18 Id.
19 See
17 Id.
20 15
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U.S.C. 78f(b)(5).
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Federal Register / Vol. 82, No. 155 / Monday, August 14, 2017 / Notices
with persons engaged in regulating and
facilitating transactions.
As described above, the Exchange
proposes a modification to the valid
quotes provision to also exclude quotes
in a series published by another options
exchange if either party to the
transaction in question submitted the
orders or quotes in the series
representing such options exchange’s
best bid or offer. The Exchange believes
this proposal is consistent with Section
6(b)(5) of the Act 21 because the
application of the rule will foster
cooperation and coordination with
persons engaged in regulating and
facilitating transactions by allowing the
Exchange to coordinate with other
options exchanges to determine whether
a market participant that is party to a
potentially erroneous transaction on the
Exchange established the market in an
option on other options exchanges; to
the extent this can be established, the
Exchange believes such participant’s
quotes should be excluded in the same
way such quotes are excluded on the
Exchange. The Exchange also believes it
is reasonable to limit the scope of this
provision to twenty-five (25) series and
to require the party that believes it
established the best bid or offer on one
or more other options exchanges to
identify to the Exchange the quotes
which were submitted by that party and
published by other options exchanges.
The Exchange believes these limitations
are consistent with Section 6(b)(5) of the
Act 22 because they will ensure that the
Exchange is able to continue to apply
the Rule in a timely and organized
fashion, thus fostering cooperation and
coordination with persons engaged in
regulating and facilitating transactions
and also removing impediments to and
perfecting the mechanism of a free and
open market and a national market
system.
Finally, with respect to the proposed
modification to Commentary .03 to Rule
1092, the Exchange believes that this
proposal is consistent with Section
6(b)(5) of the Act 23 because it
specifically provides for nullification
where a trading halt exists with respect
to an underlying security across the
industry (i.e., a regulatory halt) as
distinguished from a situation where the
primary exchange has experienced a
technical issue but the underlying
security continues to trade on other
equities platforms. The Exchange notes
that a similar provision already exists in
the rules of certain other options
21 15
U.S.C. 78f(b)(5).
exchanges, and thus, has been found to
be consistent with the Act.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange believes the entire
proposal is consistent with Section
6(b)(8) of the Act 24 in that it does not
impose any burden on competition that
is not necessary or appropriate in
furtherance of the purposes of the Act
as explained below.
Importantly, the Exchange does not
believe that the proposal will impose a
burden on intermarket competition but
rather that it will alleviate any burden
on competition because it is the result
of a collaborative effort by all options
exchanges to further harmonize and
improve the process related to the
adjustment and nullification o [sic]
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. To that end,
the selection and implementation of a
TP Provider utilized by all options
exchanges will further reduce the
possibility that participants with
potentially erroneous transactions that
span multiple options exchanges are
handled differently on such exchanges.
Similarly, the proposed ability to
consider quotations invalid on another
options exchange if ultimately
originating from a party to a potentially
erroneous transaction on the Exchange
represents a proposal intended to
further foster cooperation by the options
exchanges with respect to market
events. The Exchange understands that
all other options exchanges either have
or they 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 proposed provisions apply
to all market participants equally.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
22 Id.
23 Id.
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16:45 Aug 11, 2017
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PO 00000
U.S.C. 78f(b)(8).
Frm 00116
Fmt 4703
Sfmt 4703
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 after the date of
the filing, or such shorter time as the
Commission may designate, it has
become effective pursuant to 19(b)(3)(A)
of the Act 25 and Rule 19b–4(f)(6) 26
thereunder.
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
Phlx–2017–66 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–Phlx–2017–66. 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/
25 15
U.S.C. 78s(b)(3)(A).
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, along with a brief
description and text of the proposed rule change,
at least five business days prior to the date of filing
of the proposed rule change, or such shorter time
as designated by the Commission. The Exchange
has satisfied this requirement.
26 17
E:\FR\FM\14AUN1.SGM
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Federal Register / Vol. 82, No. 155 / Monday, August 14, 2017 / Notices
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–Phlx–
2017–66, and should be submitted on or
before September 5, 2017.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.27
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–17067 Filed 8–11–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–81344; File No. SR–
NASDAQ–2017–068]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Revise the
NASDAQ Options Market LLC Rules
Regarding the Options Regulatory Fee
sradovich on DSK3GMQ082PROD with NOTICES
August 8, 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 July 26,
2017, The NASDAQ Stock Market LLC
(‘‘Nasdaq’’ 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. The
Commission is publishing this notice to
27 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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18:24 Aug 11, 2017
Jkt 241001
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to revise The
NASDAQ Options Market LLC (‘‘NOM’’)
Rules at Chapter XV, Section 5 to: (i)
Make adjustments to the amount of its
Options Regulatory Fee (‘‘ORF’’); and
(ii) more closely reflect the manner in
which NOM assesses and collects its
ORF.
While the changes proposed herein
are effective upon filing, the Exchange
has designated the amendments [sic]
become operative on August 1, 2017.
The text of the proposed rule change
is available on the Exchange’s Web site
at https://nasdaq.cchwallstreet.com, at
the principal office of the Exchange, and
at the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
NOM initially filed to establish its
ORF in 2011.3 The Exchange has
amended its ORF several times since the
inception of this fee.4 At this time, the
Exchange proposes to: (i) Amend the
amount of its ORF; and (ii) revise
NOM’s Rules at Chapter XV, Section 5
to more closely reflect the manner in
which NOM assesses and collects its
ORF.
The Exchange supports a common
approach for the assessment and
collection of ORF among the various
options exchanges that assess such a fee.
Furthermore, the Exchange supports
guidance from the Commission
regarding regulatory cost structures to
ensure equal knowledge and treatment
among options markets assessing ORF.
Proposal 1—Amend the Amount of the
ORF
The Exchange assesses an ORF of
$0.0021 per contract side. The Exchange
proposes to increase the ORF from
$0.0021 per contract side to $0.0027 per
contract side as of August 1, 2017 to
account for a reduction in market
volume. The Exchange’s proposed
change to the ORF should balance the
Exchange’s regulatory cost [sic] against
the anticipated revenue. The Exchange
regularly reviews its ORF to ensure that
the ORF, in combination with its other
regulatory fees and fines, does not
exceed regulatory costs. The Exchange
believes this adjustment will permit the
Exchange to cover a material portion of
its regulatory costs, while not exceeding
regulatory costs.
The Exchange notified its Participants
of this ORF adjustment thirty (30)
calendar days prior to the proposed
operative date.5
Proposal 2—Reflect the Manner in
Which NOM Assesses and Collects Its
ORF
Currently, NOM assesses its ORF for
each Customer option transaction that is
either: (1) Executed by a Participant on
NOM; or (2) cleared by a NOM
Participant at The Options Clearing
Corporation (‘‘OCC’’) in the Customer
range,6 even if the transaction was
executed by a non-member of NOM,
regardless of the exchange on which the
transaction occurs.7 If the OCC clearing
member is a NOM Participant, ORF is
assessed and collected on all cleared
Customer contracts (after adjustment for
CMTA 8); and (2) if the OCC clearing
member is not a NOM Participant, ORF
is collected only on the cleared
Customer contracts executed at NOM,
taking into account any CMTA
instructions which may result in
collecting the ORF from a non-member.
By way of example, if Broker A, a
NOM Participant, routes a Customer
5 See
Options Trader Alert #2017–54.
Rules require each member to record
the appropriate account origin code on all orders at
the time of entry in order to allow the Exchange to
properly prioritize and route orders and assess
transaction fees pursuant to the Rules of the
Exchange and report resulting transactions to OCC.
7 The Exchange uses reports from OCC when
assessing and collecting the ORF.
8 CMTA or Clearing Member Trade Assignment is
a form of ‘‘give-up’’ whereby the position will be
assigned to a specific clearing firm at OCC.
6 Exchange
3 See Securities Exchange Act Release No. 65913
(December 8, 2011), 76 FR 77883 (December 14,
2011) (SR–NASDAQ–2011–163) (Notice of Filing
and Immediate Effectiveness of Proposed Rule
Change Relating to the Options Regulatory Fee).
4 See Securities Exchange Act Release Nos. 76950
(January 21, 2016), 81 FR 4687 January 27,
2016)(SR–NASDAQ–2016–003); and 78360 (July 19,
2016), 81 FR 48475 (July 25, 2016) (SR–NASDAQ–
2016–096).
PO 00000
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E:\FR\FM\14AUN1.SGM
14AUN1
Agencies
[Federal Register Volume 82, Number 155 (Monday, August 14, 2017)]
[Notices]
[Pages 37949-37955]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-17067]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-81352; File No. SR-Phlx-2017-66]
Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend Rule 1092,
Nullification and Adjustment of Options Transactions Including Obvious
Errors
August 8, 2017.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on August 3, 2017, NASDAQ PHLX LLC (``Phlx'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by the Exchange. 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.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Rule 1092, Nullification and
Adjustment of Options Transactions including Obvious Errors.
While these amendments are effective upon filing, the Exchange has
designated the proposed amendments to be operative on a date that is
within ninety (90) days after the Commission approved a similar
proposal filed by Bats BZX on July 6, 2017.
The text of the proposed rule change is available on the Exchange's
Web site at https://nasdaqphlx.cchwallstreet.com/ com/, at the principal
office of the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant 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 and other options exchanges recently 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.\3\ 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. Specifically, as described in the Initial Filing, the
Exchange and all other options exchanges have been working to further
improve the review of potentially erroneous transactions as well as
their subsequent adjustment by creating an objective and universal way
to determine Theoretical Price in the event a reliable NBBO is not
available. Because this initiative required additional exchange and
industry discussion as well as additional time for development and
implementation, the Exchange and the other options exchanges determined
to proceed with the Initial Filing and to undergo a secondary
initiative to complete any additional improvements to the applicable
rule. In this filing, the Exchange proposes to adopt procedures that
will lead to a more objective and uniform way to determine Theoretical
Price in the event a reliable NBBO is not available. In addition to
this change, the Exchange has proposed two additional minor changes to
its rules. The Exchange's proposal mirrors that of Bats BZX, which the
Commission approved on July 6, 2017,\4\ and those that the other
options exchanges intend to file.
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Release No. 34-74919 (May 8,
2015); 80 FR 27766 (May 14, 2015) (SR-PHLX-2015-43) (the ``Initial
Filing'').
\4\ See Securities Exchange Act Release No. 34-81084 (July 6,
2017) (granting approval of Bats BZX proposal), 82 FR 32216 (July
12, 2017); 82 FR 23684 (May 23, 2017) (SR-BatsBZX-2017-035) (notice
of filing of Bats BZX proposal).
---------------------------------------------------------------------------
Calculation of Theoretical Price Using a Third Party Provider
Under the harmonized rule, when reviewing a transaction as
potentially erroneous, the Exchange needs to first determine the
``Theoretical Price'' of the option, i.e., the Exchange's estimate of
the correct market price for the option. Pursuant to Rule 1092, if the
applicable option series is traded on at least one other options
exchange, then the Theoretical Price of an option series is the last
national best bid (``NBB'') just prior to the trade in question with
respect to an erroneous sell transaction or the last national best
offer (``NBO'') just prior to the trade in question with respect to an
erroneous buy transaction unless one of the exceptions described below
exists. Thus, whenever the Exchange has a reliable NBB or NBO, as
applicable, just prior to the transaction, then the Exchange uses this
NBB or NBO as the Theoretical Price.
The Rule also contains various provisions governing specific
situations where the NBB or NBO is not available or may not be
reliable. Specifically, the Rule specifies situations in which there
are no quotes or no valid quotes for comparison purposes, when the
national best bid or offer (``NBBO'') is determined to be too wide to
be reliable, and at the open of trading on each trading day. In each of
these circumstances, in turn, because the NBB or NBO is not available
or is deemed to be unreliable, the Exchange determines Theoretical
Price. Under the current Rule, when determining Theoretical Price,
Exchange personnel generally consult and refer to data such as the
prices of related series, especially the closest strikes in the option
in question. Exchange personnel may also take into account the price of
the underlying security and the volatility characteristics of the
option as well as historical pricing of the option and/or similar
options. Although the Rule is administered by experienced personnel and
the Exchange believes the process is currently appropriate, the
Exchange recognizes that it is also subjective and could lead to
disparate results for a transaction that spans multiple options
exchanges.
The Exchange proposes to adopt Commentary .05 to specify how the
Exchange will determine Theoretical Price when required by sub-
paragraphs
[[Page 37950]]
(b)(1)-(3) of the Rule (i.e., at the open, when there are no valid
quotes or when there is a wide quote). In particular, the Exchange has
been working with other options exchanges to identify and select a
reliable third party vendor (``TP Provider'') that would provide
Theoretical Price to the Exchange whenever one or more transactions is
under review pursuant to Rule 1092 and the NBBO is unavailable or
deemed unreliable pursuant to Rule 1092(b). The Exchange and other
options exchanges have selected CBOE Livevol, LLC (``Livevol'') as the
TP Provider, as described below. As further described below, proposed
Commentary .05 would codify the use of the TP Provider as well as
limited exceptions where the Exchange would be able to deviate from the
Theoretical Price given by the TP Provider.
Pursuant to proposed Commentary .05, when the Exchange must
determine Theoretical Price pursuant to the sub-paragraphs (b)(1)-(3)
of the Rule, the Exchange will request Theoretical Price from the third
party vendor to which the Exchange and all other options exchanges have
subscribed. Thus, as set forth in this proposed language, Theoretical
Price would be provided to the Exchange by the TP Provider on request
and not through a streaming data feed.\5\ This language also makes
clear that the Exchange and all other options exchanges will use the
same TP Provider.
---------------------------------------------------------------------------
\5\ Though the Exchange and other options exchanges considered a
streaming feed, it was determined that it would be more feasible to
develop and implement an on demand service and that such a service
would satisfy the goals of the initiative.
---------------------------------------------------------------------------
As noted above, the proposed TP Provider selected by the Exchange
and other options exchanges is Livevol. The Exchange proposes to codify
this selection in proposed paragraph (d) to Commentary .05. As such,
the Exchange would file a rule proposal and would provide notice to the
options industry of any proposed change to the TP Provider.
The Exchange and other options exchanges have selected Livevol as
the proposed TP Provider after diligence into various alternatives.
Livevol has, since 2009, been the options industry leader in providing
equity and index options market data and analytics services.\6\ The
Exchange believes that Livevol has established itself within the
options industry as a trusted provider of such services and notes that
it and all other options exchanges already subscribe to various Livevol
services. In connection with this proposal, Livevol will develop a new
tool based on its existing technology and services that will supply
Theoretical Price to the Exchange and other options exchanges upon
request. The Theoretical Price tool will leverage current market data
and surrounding strikes to assist in a relative value pricing approach
to generating a Theoretical Price. When relative value methods are
incapable of generating a valid Theoretical Price, the Theoretical
Price tool will utilize historical trade and quote data to calculate
Theoretical Price.
---------------------------------------------------------------------------
\6\ The Exchange notes that in 2015, Livevol was acquired by
CBOE Holdings, Inc., the ultimate parent company of the Chicago
Board Options Exchange (``CBOE'') and C2 Options Exchange (``C2'').
---------------------------------------------------------------------------
Because the purpose of the proposal is to move away from a
subjective determination by Exchange personnel when the NBBO is
unavailable or unreliable, the Exchange intends to use the Theoretical
Price provided by the TP Provider in all such circumstances. However,
the Exchange believes it is necessary to retain the ability to contact
the TP Provider if it believes that the Theoretical Price provided is
fundamentally incorrect and to determine the Theoretical Price in the
limited circumstance of a systems issue experienced by the TP Provider,
as described below.
As proposed, to the extent an Official \7\ of the Exchange believes
that the Theoretical Price provided by the TP Provider is fundamentally
incorrect and cannot be used consistent with the maintenance of a fair
and orderly market, the Official shall contact the TP Provider to
notify the TP Provider of the reason the Official believes such
Theoretical Price is inaccurate and to request a review and correction
of the calculated Theoretical Price. For example, if an Official
received from the TP Provider a Theoretical Price of $80 in a series
that the Official might expect to be instead in the range of $8 to $10
because of a recent corporate action in the underlying, the Official
would request that the TP Provider review and confirm its calculation
and determine whether it had appropriately accounted for the corporate
action. In order to ensure that other options exchanges that may
potentially be relying on the same Theoretical Price that, in turn, the
Official believes to be fundamentally incorrect, the Exchange also
proposes to promptly provide notice to other options exchanges that the
TP Provider has been contacted to review and correct the calculated
Theoretical Price at issue and to include a brief explanation of the
reason for the request.\8\ Although not directly addressed by the
proposed Rule, the Exchange expects that all other options exchanges
once in receipt of this notification would await the determination of
the TP Provider and would use the corrected price as soon as it is
available. The Exchange further notes that it expects the TP Provider
to cooperate with, but to be independent of, the Exchange and other
options exchanges.\9\
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\7\ For purposes of the Rule, an Official is an Exchange staff
member or contract employee designated as such by the Chief
Regulatory Officer. See Rule 1092(a)(3).
\8\ See proposed paragraph (b) to Commentary .05.
\9\ The Exchange expects any TP Provider selected by the
Exchange and other options exchanges to act independently in its
determination and calculation of Theoretical Price. With respect to
Livevol specifically, the Exchange again notes that Livevol is a
subsidiary of CBOE Holdings, Inc., which is also the ultimate parent
company of multiple options exchanges. The Exchange expects Livevol
to calculate Theoretical Price independent of its affiliated
exchanges in the same way it will calculate Theoretical Price
independent of non-affiliated exchanges.
---------------------------------------------------------------------------
The Exchange believes that the proposed provision to allow an
Official to contact the TP Provider if he or she believes the provided
Theoretical Price is fundamentally incorrect is necessary, particularly
because the Exchange and other options exchanges will be using the new
process for the first time. Although the exchanges have conducted
thorough diligence with respect to Livevol as the selected TP Provider
and would do so with any potential replacement TP Provider, the
Exchange is concerned that certain scenarios could arise where the
Theoretical Price generated by the TP Provider does not take into
account relevant factors and would result in an unfair result for
market participants involved in a transaction. The Exchange notes that
if such situations do indeed arise, to the extent practicable the
Exchange will also work with the TP Provider and other options
exchanges to improve the TP Provider's calculation of Theoretical Price
in future situations. For instance, if the Exchange determines that a
particular type of corporate action is not being appropriately captured
by the TP Provider when such provider is generating Theoretical Price,
while the Exchange believes that it needs the ability to request a
review and correction of the Theoretical Price in connection with a
specific review in order to provide a timely decision to market
participants, the Exchange would share information regarding the
specific situation with the TP Provider and other options exchanges in
an effort to improve the Theoretical Price service for future use. The
Exchange notes that it does not anticipate needing to rely on this
provision frequently, if at all, but
[[Page 37951]]
believes the provision is necessary nonetheless to best prepare for all
potential circumstances. Further, the Theoretical Price used by the
Exchange in connection with its rulings will always be that received
from the TP Provider and the Exchange has not proposed the ability to
deviate from such price.\10\
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\10\ To the extent the TP Provider has been contacted by an
Official of the Exchange, reviews the Theoretical Price provided but
disagrees that there has been any error, then the Exchange would be
bound to use the Theoretical Price provided by the TP Provider.
---------------------------------------------------------------------------
Pursuant to proposed paragraph (c) to Commentary .05, an Official
of the Exchange may determine the Theoretical Price if the TP Provider
has experienced a systems issue that has rendered its services
unavailable to accurately calculate Theoretical Price and such issue
cannot be corrected in a timely manner. The Exchange notes that it does
not anticipate needing to rely on this provision frequently, if at all,
but believes the provision is necessary nonetheless to best prepare for
all potential circumstances. Further, consistent with existing text in
Rule 1092(e)(4), the Exchange has not proposed a specific time by which
the service must be available in order to be considered timely.\11\ The
Exchange expects that it would await the TP Provider's services
becoming available again so long as the Exchange was able to obtain
information regarding the issue and the TP Provider had a reasonable
expectation of being able to resume normal operations within the next
several hours based on communications with the TP Provider. More
specifically with respect to Livevol, Livevol has business continuity
and disaster recovery procedures that will help to ensure that the
Theoretical Price tool remains available or, in the event of an outage,
that service is restored in a timely manner.
---------------------------------------------------------------------------
\11\ In the context of a Significant Market Event, the Exchange
may determine, ``in consultation with other options exchanges . . .
that timely adjustment is not feasible due to the extraordinary
nature of the situation.'' See Rule 1092(e)(4).
---------------------------------------------------------------------------
The Exchange also notes that if a wide-scale event occurred, even
if such event did not qualify as a ``Significant Market Event''
pursuant to Rule 1092(e), and the TP Provider was unavailable or
otherwise experiencing difficulty, the Exchange believes that it and
other options exchanges would seek to coordinate to the extent
possible. In particular, the Exchange and other options exchanges now
have a process, administered by the Options Clearing Corporation, to
invoke a discussion amongst all options exchanges in the event of any
widespread or significant market events. The Exchange believes that
this process could be used in the event necessary if there were an
issue with the TP Provider.
The Exchange also proposes to adopt language in paragraph (d) of
Commentary .05 to Rule 1092 to disclaim the liability of the Exchange
and the TP Provider in connection with the proposed Rule, the TP
Provider's calculation of Theoretical Price, and the Exchange's use of
such Theoretical Price. Specifically, the proposed rule would state
that neither the Exchange, the TP Provider, nor any affiliate of the TP
Provider (the TP Provider and its affiliates are referred to
collectively as the ``TP Provider''), makes any warranty, express or
implied, as to the results to be obtained by any person or entity from
the use of the TP Provider pursuant to Commentary .05. The proposed
rule would further state that the TP Provider does not guarantee the
accuracy or completeness of the calculated Theoretical Price and that
the TP Provider disclaims all warranties of merchantability or fitness
for a particular purpose or use with respect to such Theoretical Price.
Finally, the proposed Rule would state that neither the Exchange nor
the TP Provider shall have any liability for any damages, claims,
losses (including any indirect or consequential losses), expenses, or
delays, whether direct or indirect, foreseen or unforeseen, suffered by
any person arising out of any circumstance or occurrence relating to
the use of such Theoretical Price or arising out of any errors or
delays in calculating such Theoretical Price. This proposed language is
modeled after existing language in Exchange Rules regarding ``reporting
authorities'' that calculate indices.\12\
---------------------------------------------------------------------------
\12\ See, e.g., Rule 1102A, which relates to index options
potentially listed and traded on the Exchange and disclaims
liability for a reporting authority and their affiliates.
---------------------------------------------------------------------------
In connection with the proposed change described above, the
Exchange proposes to modify Rule 1092 to state that the Exchange will
rely on paragraph (b) and Commentary .05 when determining Theoretical
Price.
No Valid Quotes--Market Participant Quoting on Multiple Exchanges
As described above, one of the times where the NBB or NBO is deemed
to be unreliable for purposes of Theoretical Price is when there are no
quotes or no valid quotes for the affected series. In addition to when
there are no quotes, the Exchange does not consider the following to be
valid quotes: (i) All quotes in the applicable option series published
at a time where the last NBB is higher than the last NBO in such series
(a ``crossed market''); (ii) quotes published by the Exchange that were
submitted by either party to the transaction in question; and (iii)
quotes published by another options exchange against which the Exchange
has declared self-help. In recognition of today's market structure
where certain participants actively provide liquidity on multiple
exchanges simultaneously, the Exchange proposes to add an additional
category of invalid quotes. Specifically, in order to avoid a situation
where a market participant has established the market at an erroneous
price on multiple exchanges, the Exchange proposes to consider as
invalid the quotes in a series published by another options exchange if
either party to the transaction in question submitted the quotes in the
series representing such options exchange's best bid or offer. Thus,
similar to being able to ignore for purposes of the Rule the quotes
published by the Exchange if submitted by either party to the
transaction in question, the Exchange would be able to ignore for
purposes of the rule quotations on other options exchanges by that same
market participant.
In order to continue to apply the Rule in a timely and organized
fashion, however, the Exchange proposes to initially limit the scope of
this proposed provision in two ways. First, because the process will
take considerable coordination with other options exchanges to confirm
that the quotations in question on an away options exchange were indeed
submitted by a party to a transaction on the Exchange, the Exchange
proposes to limit this provision to apply to up to twenty-five (25)
total options series (i.e., whether such series all relate to the same
underlying security or multiple underlying securities). Second, the
Exchange proposes to require the party that believes it established the
best bid or offer on one or more other options exchanges to identify to
the Exchange the quotes which were submitted by such party and
published by other options exchanges. In other words, as proposed, the
burden will be on the party seeking that the Exchange disregard their
quotations on other options exchanges to identify such quotations. In
turn, the Exchange will verify with such other options exchanges that
such quotations were indeed submitted by such party.
Below are examples of both the current rule and the rule as
proposed to be amended.
[[Page 37952]]
Example 1--Current Rule, Member Erroneously Quotes on One Exchange
Assumptions
For purposes of this example, assume the following:
A Member acting as a Market Maker on the Exchange
(``Market Maker A'') is quoting in twenty series of options underlying
security ABCD on the Exchange (and only the Exchange).
Market Maker A makes an error in calculating the market
for options on ABCD, and publishes quotes in all twenty series to buy
options at $1.00 and to sell options at $1.05.
In fact, options on ABCD in these series are nearly
worthless and no other market participant is quoting in such series.
Therefore, the NBBO in the twenty series at issue is $1.00
x $1.05 (with the Exchange representing the NBBO based on Market Maker
A's quotes).
Assume Member A immediately enters sell orders and
executes against Market Maker A's quotes at $1.00.
Assume Market Maker A submits to the Exchange a timely
request for review of the trades with Member A as potentially erroneous
transactions to buy.
Result
Based on the Exchange's current rules, the Exchange would
identify Market Maker A as a participant to the trades at issue and
would consider Market Maker A's quotations invalid pursuant to Rule
1092(b)(2).
As there were no other valid quotes to use as a reference
price, the Exchange would then determine Theoretical Price.
Assume the Exchange determines a Theoretical Price of
$0.05.
The execution price of $1.00 exceeds the $0.25 minimum
amount set forth in the Exchange's table to determine whether an
obvious error has occurred (i.e., $0.05 + $0.25 = $0.30) so any
execution at or above this price is an obvious error.
Accordingly, the executions in all series would be
adjusted by the Exchange to executions at $0.20 per contract
(Theoretical Price of $0.05 plus $0.15) to the extent the incoming
orders submitted by Member A were non-Customer orders.
The executions in all series would be nullified to the
extent the incoming orders submitted by Member A were Customer orders.
Example 2--Current Rule, Member Erroneously Quotes on Multiple
Exchanges
Assumptions
For purposes of this example, assume the following:
A Member acting as a Market Maker on the Exchange
(``Market Maker A'') is quoting in twenty series of options underlying
security ABCD on the Exchange and on a second exchange (``Away
Exchange'').
Market Maker A makes an error in calculating the market
for options on ABCD, and publishes quotes on both the Exchange and the
Away Exchange in all twenty series to buy options at $1.00 and to sell
options at $1.05.
In fact, options on ABCD in these series are nearly
worthless and no other market participant is quoting in such series.
Therefore, the NBBO in the twenty series at issue is $1.00
x $1.05 (with the Exchange and the Away Exchange representing the NBBO
based on Market Maker A's quotes).
Assume Member A immediately enters sell orders and
executes against Market Maker A's quotes at $1.00.
Assume Market Maker A submits to the Exchange and to the
Away Exchange timely requests for review of the trades with Member A as
potentially erroneous transactions to buy.
Result
Based on the Exchange's current rules, the Exchange would
identify Market Maker A as a participant to the trades at issue and
would consider Market Maker A's quotations on the Exchange invalid
pursuant to Rule 1092(b)(2). The Exchange, however, would view the Away
Exchange's quotations as valid, and would thus determine Theoretical
Price to be $1.05 (i.e., the NBO in the case of a potentially erroneous
buy transaction).
The execution price of $1.00 does not exceed the $0.25
minimum amount set forth in the Exchange's table to determine whether
an obvious error has occurred (i.e., $1.05 + $0.25 = $1.30) so any
execution at or above this price is an obvious error.
The transactions on the Exchange would not be nullified or
adjusted.
As the Exchange and all other options exchanges have
identical rules with respect to the process described above, the
transactions on the Away Exchange would not be nullified or adjusted.
Example 3--Proposed Rule, Member Erroneously Quotes on Multiple
Exchanges \13\
---------------------------------------------------------------------------
\13\ The Exchange notes that its proposed rule will not impact
the proposed handling of a request for review where a market
participant is quoting only on the Exchange, thus, the Exchange has
not included a separate example for such a fact pattern.
---------------------------------------------------------------------------
Assumptions
For purposes of this example, assume the following:
A Member acting as a Market Maker on the Exchange
(``Market Maker A'') is quoting in twenty series of options underlying
security ABCD on the Exchange and on a second exchange (``Away
Exchange'').\14\
---------------------------------------------------------------------------
\14\ The Exchange notes that the proposed rule would operate the
same if Market Maker A was quoting on more than two exchanges. The
Exchange has limited the example to two exchanges for simplicity.
---------------------------------------------------------------------------
Market Maker A makes an error in calculating the market
for options on ABCD, and publishes quotes on both the Exchange and the
Away Exchange in all twenty series to buy options at $1.00 and to sell
options at $1.05.
In fact, options on ABCD in these series are nearly
worthless and no other market participant is quoting in such series.
Therefore, the NBBO in the twenty series at issue is $1.00
x $1.05 (with the Exchange and the Away Exchange representing the NBBO
based on Market Maker A's quotes).
Assume Member A immediately enters sell orders and
executes against Market Maker A's quotes at $1.00.
Assume Market Maker A submits to the Exchange and to the
Away Exchange timely requests for review of the trades with Member A as
potentially erroneous transactions to buy. At the time of submitting
the requests for review to the Exchange and the Away Exchange, Market
Maker A identifies to the Exchange the quotes on the Away Exchange as
quotes also represented by Market Maker A (and to the Away Exchange,
the quotes on the Exchange as quotes also represented by Market Maker
A).
Result
Based on the proposed rules, the Exchange would identify
Market Maker A as a participant to the trades at issue and would
consider Market Maker A's quotations on the Exchange invalid pursuant
to Rule 1092(b)(2).
The Exchange and the Away Exchange would also coordinate
to confirm that the quotations identified by Market Maker A on the
other exchange were indeed Market Maker A's quotations. Once confirmed,
each of the Exchange and the Away Exchange
[[Page 37953]]
would also consider invalid the quotations published on the other
exchange.
As there were no other valid quotes to use as a reference
price, the Exchange would then determine Theoretical Price.
Assume the Exchange determines a Theoretical Price of
$0.05.
The execution price of $1.00 exceeds the $0.25 minimum
amount set forth in the Exchange's table to determine whether an
obvious error has occurred (i.e., $0.05 + $0.25 = $0.30) so any
execution at or above this price is an obvious error.
Accordingly, the executions in all series would be
adjusted by the Exchange to executions at $0.20 per contract
(Theoretical Price of $0.05 plus $0.15) to the extent the incoming
orders submitted by Member A were non-Customer orders.
The executions in all series would be nullified to the
extent the incoming orders submitted by Member A were Customer orders.
As the Exchange and all other options exchanges would have
identical rules with respect to the process described above, as other
options exchanges intend to adopt the same rule if the proposed rule is
approved, the transactions on the Away Exchange would also be nullified
or adjusted as set forth above.
If this example was instead modified such that Market
Maker A was quoting in 200 series rather than 20, the Exchange notes
that Market Maker A could only request that the Exchange consider as
invalid their quotations in 25 of those series on other exchanges. As
noted above, the Exchange has proposed to limit the proposed rule to 25
series in order to continue to process requests for review in a timely
and organized fashion in order to provide certainty to market
participants. This is due to the amount of coordination that will be
necessary in such a scenario to confirm that the quotations in question
on an away options exchange were indeed submitted by a party to a
transaction on the Exchange.
Trading Halts--Clarifying Change to Rule 1092, Commentary .03
Commentary .03 to Rule 1092 describes the Exchange's authority to
declare trading halts in one or more options traded on the Exchange.
The Exchange proposes to modify Commentary .03 to provide that, with
respect to equity options, the Exchange shall nullify any transaction
that occurs during a regulatory halt as declared by the primary listing
market for the underlying security. The Exchange believes this change
is necessary to distinguish a declared regulatory halt, where the
underlying security should not be actively trading on any venue, from
an operational issue on the primary listing exchange where the security
continues to safely trade on other trading venues.
Implementation Date
The Exchange proposes to delay the operative date of this proposal
to a date within ninety (90) days after the Commission approved the
Bats BZX proposal on July 6, 2017. The Exchange will announce the
operative date in a Regulatory Alert made available to its Members.
2. Statutory Basis
The Exchange believes that its proposal is consistent with the
requirements of the Act and the rules and regulations thereunder that
are applicable to a national securities exchange, and, in particular,
with the requirements of Section 6(b) of the Act.\15\
---------------------------------------------------------------------------
\15\ 15 U.S.C. 78f(b).
---------------------------------------------------------------------------
Specifically, the proposal is consistent with Section 6(b)(5) of
the Act \16\ because it would promote just and equitable principles of
trade, remove impediments to, and perfect the mechanism of, a free and
open market and a national market system, and, in general, protect
investors and the public interest.
---------------------------------------------------------------------------
\16\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
As described above, the Exchange and other options exchanges are
seeking to further modify their harmonized rules related to the
adjustment and nullification of erroneous options transactions. The
Exchange believes that the proposal to utilize a TP Provider in the
event the NBBO is unavailable or unreliable 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. Thus,
the Exchange believes that the proposal is consistent with Section
6(b)(5) of the Act \17\ in that the proposed Rule will foster
cooperation and coordination with persons engaged in regulating and
facilitating transactions.
---------------------------------------------------------------------------
\17\ Id.
---------------------------------------------------------------------------
The Exchange again reiterates that it has retained the standard of
the current rule for most reviews of options transactions pursuant to
Rule 1092, which is to rely on the NBBO to determine Theoretical Price
if such NBBO can reasonably be relied upon. The proposal to use a TP
Provider when the NBBO is unavailable or unreliable is consistent with
Section 6(b)(5) of the Act \18\ in that the proposed Rule will foster
cooperation and coordination with persons engaged in regulating and
facilitating transactions by further reducing the possibility of
disparate results between options exchanges and increasing the
objectivity of the application of Rule 1092. Further, the Exchange
believes that the proposed Rule is transparent with respect to the
limited circumstances under which the Exchange will request a review
and correction of Theoretical Price from the TP Provider, and has
sought to limit such circumstances as much as possible. The Exchange
notes that under the current Rule, Exchange personnel are required to
determine Theoretical Price in certain circumstances and yet rarely do
so because such circumstances have already been significantly limited
under the harmonized rule (for example, because the wide quote
provision of the harmonized rule only applies if the quote was narrower
and then gapped but does not apply if the quote had been persistently
wide). Thus, the Exchange believes it will need to request Theoretical
Price from the TP Provider only in very rare circumstances and in turn,
the Exchange anticipates that the need to contact the TP Provider for
additional review of the Theoretical Price provided by the TP Provider
will be even rarer. Similarly, the Exchange believes it is unlikely
that an Exchange Official will ever be required to determine
Theoretical Price, as such circumstance would only be in the event of a
systems issue that has rendered the TP Provider's services unavailable
and such issue cannot be corrected in a timely manner.
---------------------------------------------------------------------------
\18\ Id.
---------------------------------------------------------------------------
The Exchange also believes its proposal to adopt language in
paragraph (d) of Commentary .05 to Rule 1092 to disclaim the liability
of the Exchange and the TP Provider in connection with the proposed
Rule, the TP Provider's calculation of Theoretical Price, and the
Exchange's use of such Theoretical Price is consistent with the Act. As
noted above, this proposed language is modeled after existing language
in Exchange Rules regarding ``reporting authorities'' that calculate
indices,\19\ and is consistent with Section 6(b)(5) of the Act \20\ in
that the proposed Rule will foster cooperation and coordination
[[Page 37954]]
with persons engaged in regulating and facilitating transactions.
---------------------------------------------------------------------------
\19\ See supra, note 12.
\20\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
As described above, the Exchange proposes a modification to the
valid quotes provision to also exclude quotes in a series published by
another options exchange if either party to the transaction in question
submitted the orders or quotes in the series representing such options
exchange's best bid or offer. The Exchange believes this proposal is
consistent with Section 6(b)(5) of the Act \21\ because the application
of the rule will foster cooperation and coordination with persons
engaged in regulating and facilitating transactions by allowing the
Exchange to coordinate with other options exchanges to determine
whether a market participant that is party to a potentially erroneous
transaction on the Exchange established the market in an option on
other options exchanges; to the extent this can be established, the
Exchange believes such participant's quotes should be excluded in the
same way such quotes are excluded on the Exchange. The Exchange also
believes it is reasonable to limit the scope of this provision to
twenty-five (25) series and to require the party that believes it
established the best bid or offer on one or more other options
exchanges to identify to the Exchange the quotes which were submitted
by that party and published by other options exchanges. The Exchange
believes these limitations are consistent with Section 6(b)(5) of the
Act \22\ because they will ensure that the Exchange is able to continue
to apply the Rule in a timely and organized fashion, thus fostering
cooperation and coordination with persons engaged in regulating and
facilitating transactions and also removing impediments to and
perfecting the mechanism of a free and open market and a national
market system.
---------------------------------------------------------------------------
\21\ 15 U.S.C. 78f(b)(5).
\22\ Id.
---------------------------------------------------------------------------
Finally, with respect to the proposed modification to Commentary
.03 to Rule 1092, the Exchange believes that this proposal is
consistent with Section 6(b)(5) of the Act \23\ because it specifically
provides for nullification where a trading halt exists with respect to
an underlying security across the industry (i.e., a regulatory halt) as
distinguished from a situation where the primary exchange has
experienced a technical issue but the underlying security continues to
trade on other equities platforms. The Exchange notes that a similar
provision already exists in the rules of certain other options
exchanges, and thus, has been found to be consistent with the Act.
---------------------------------------------------------------------------
\23\ Id.
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes the entire proposal is consistent with
Section 6(b)(8) of the Act \24\ in that it does not impose any burden
on competition that is not necessary or appropriate in furtherance of
the purposes of the Act as explained below.
---------------------------------------------------------------------------
\24\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------
Importantly, the Exchange does not believe that the proposal will
impose a burden on intermarket competition but rather that it will
alleviate any burden on competition because it is the result of a
collaborative effort by all options exchanges to further harmonize and
improve the process related to the adjustment and nullification o [sic]
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. To that
end, the selection and implementation of a TP Provider utilized by all
options exchanges will further reduce the possibility that participants
with potentially erroneous transactions that span multiple options
exchanges are handled differently on such exchanges. Similarly, the
proposed ability to consider quotations invalid on another options
exchange if ultimately originating from a party to a potentially
erroneous transaction on the Exchange represents a proposal intended to
further foster cooperation by the options exchanges with respect to
market events. The Exchange understands that all other options
exchanges either have or they 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 proposed provisions
apply to all market participants equally.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or 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 after the date of the filing, or such
shorter time as the Commission may designate, it has become effective
pursuant to 19(b)(3)(A) of the Act \25\ and Rule 19b-4(f)(6) \26\
thereunder.
---------------------------------------------------------------------------
\25\ 15 U.S.C. 78s(b)(3)(A).
\26\ 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, along
with a brief description and text of the proposed rule change, at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
---------------------------------------------------------------------------
At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-Phlx-2017-66 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-Phlx-2017-66. 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/
[[Page 37955]]
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-
Phlx-2017-66, and should be submitted on or before September 5, 2017.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-17067 Filed 8-11-17; 8:45 am]
BILLING CODE 8011-01-P