Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Proposed Rule Change To Update the Obvious Error Rule, 6633-6637 [2022-02312]
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Federal Register / Vol. 87, No. 24 / Friday, February 4, 2022 / Notices
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 13 and paragraph (f)(2) of Rule
19b–4 14 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.
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:
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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–
ICEEU–2022–001 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–ICEEU–2022–001. 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 website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change, security-based
swap submission or advance notice
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 website 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
filings will also be available for
inspection and copying at the principal
office of ICE Clear Europe and on ICE
Clear Europe’s website at https://
www.theice.com/clear-europe/
regulation.
All comments received will be posted
without change. Persons submitting
comments are cautioned that we do not
redact or edit personal identifying
information from comment submissions.
You should submit only information
that you wish to make available
publicly. All submissions should refer
to File Number SR–ICEEU–2022–001
and should be submitted on or before
February 25, 2022.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.15
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022–02313 Filed 2–3–22; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–94096; File No. SR–Phlx–
2022–04]
Self-Regulatory Organizations; Nasdaq
PHLX LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change to Proposed Rule Change
To Update the Obvious Error Rule
January 31, 2022.
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 January
26, 2022, Nasdaq PHLX LLC (‘‘Phlx’’ 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
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 amend
Options 3, Section 20 (Nullification and
Adjustment of Options Transactions
including Obvious Errors).
The text of the proposed rule change
is available on the Exchange’s website at
https://listingcenter.nasdaq.com/
rulebook/phlx/rules, at the principal
CFR 200.30–3(a)(12).
15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
U.S.C. 78s(b)(3)(A).
14 17 CFR 240.19b–4(f)(2).
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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
15 17
13 15
office of the Exchange, and at the
Commission’s Public Reference Room.
Sfmt 4703
The purpose of this proposed rule
change is to amend Options 3, Section
20 (Nullification and Adjustment of
Options Transactions including Obvious
Errors) to improve the operation of the
Rule. Following discussions with other
exchanges and a cross-section of
industry participants and in
coordination with the Listed Options
Market Structure Working Group
(‘‘LOMSWG’’) (collectively, the
‘‘Industry Working Group’’), the
Exchange proposes: (1) To amend
section (b)(3) of the Rule to permit the
Exchange to determine the Theoretical
Price of a Customer option transaction
in a wide market so long as a narrow
market exists at any point during the 10second period after an opening or reopening; and (2) to amend section
(c)(4)(B) of the Rule to adjust, rather
than nullify, Customer transactions in
Obvious Error situations, provided the
adjustment does not violate the limit
price. The foregoing changes are based
on the recently amended rules of NYSE
Arca, Inc. (‘‘Arca’’).3 The Exchange
further proposes to make a nonsubstantive, corrective change. Each
change is discussed in detail below.
Proposed Change to Section (b)(3)
Options 3, Section 20 has been part of
various harmonization efforts by the
Industry Working Group.4 These efforts
3 See Arca Rule 6.87–O. See also Securities
Exchange Act Release No. 93818 (December 17,
2021), 86 FR 73009 (December 23, 2021) (SR–
NYSEArca–2021–91) (Order Approving a Proposed
Rule Change to Amend Rule 6.87–O).
4 See, e.g., Securities Exchange Act Release Nos.
74919 (May 8, 2015), 80 FR 27766 (May 14, 2015)
Continued
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have often centered around the
Theoretical Price for which an options
transaction should be compared to
determine whether an Obvious Error has
occurred. For instance, all options
exchanges have adopted language
comparable to Supplementary Material
.05,5 which explains how an exchange
is to determine Theoretical Price at the
open, when there are no valid quotes,
and when there is a wide quote. This
includes at times the use of a singular
third-party vendor, known as a TP
Provider (currently CBOE Livevol, LLC).
Similarly, section (b)(3) of Options 3,
Section 20 was previously harmonized
across all options exchanges to handle
situations where executions occur in
markets that are wide (as set forth in the
rule).6 Under that section, the Exchange
determines the Theoretical Price if the
NBBO for the subject series is wide
immediately before execution and a
narrow market (as set forth in the rule)
existed ‘‘during the 10 seconds prior to
the transaction.’’ The rule goes on to
clarify that, should there be no narrow
quotes ‘‘during the 10 seconds prior to
the transaction,’’ the Theoretical Price
for the affected series is the NBBO that
existed at the time of execution
(regardless of its width).
In recent discussions, the Industry
Working Group has identified proposed
changes to section (b)(3) of Options 3,
Section 20 that would improve the
Rule’s functioning. Currently, section
(b)(3) does not permit the Exchange to
determine the Theoretical Price unless
there is a narrow quote 10 seconds prior
to the transaction. However, in the first
seconds of trading, there is no 10second period ‘‘prior to the
transaction.’’ Further, the Industry
Working Group has observed that prices
in certain series can be disjointed at the
start of trading. Accordingly, the
Exchange proposes to provide
additional protections to trading in
certain circumstances immediately after
the opening before liquidity has had a
chance to enter the market. The
Exchange proposes to amend section
(b)(3) to allow the Exchange to
determine the Theoretical Price in a
wide market so long as a narrow market
exists at any point during the 10-second
period after an opening or reopening.
Specifically, the Exchange proposes
that the existing text of section (b)(3)
would become sub-section (A). The
(SRP–hlx–2015–43); 80431 (April 11, 2017), 82 FR
18182 (April 17, 2017) (SRP–hlx–2017–27).
5 See, e.g., Securities Exchange Act Release No.
81352 (August 8, 2017), 82 FR 37949 (August 14,
2017) (SRP–hlx–2017–66).
6 See, e.g., Securities Exchange Act Release Nos.
74919 (May 8, 2015), 80 FR 27766 (May 14, 2015)
(SR–Phlx–2015–43).
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Exchange proposes to add the following
heading and text as sub-section (B):
(B) Customer Transactions Occurring
Within 10 Seconds or Less After an Opening
or Re-Opening:
(i) The Exchange will determine the
Theoretical Price if the bid/ask differential of
the NBB and NBO for the affected series just
prior to the Customer’s erroneous transaction
was equal to or greater than the Minimum
Amount set forth in paragraph (A) above and
there was a bid/ask differential less than the
Minimum Amount during the 10 seconds
prior to the transaction.
(ii) If there was no bid/ask differential less
than the Minimum Amount during the 10
seconds prior to the transaction, then the
Exchange will determine the Theoretical
Price if the bid/ask differential of the NBB
and NBO for the affected series just prior to
the Customer’s erroneous transaction was
equal to or greater than the Minimum
Amount set forth in paragraph (A) above and
there was a bid/ask differential less than the
Minimum Amount anytime during the 10
seconds after an opening or re-opening.
(iii) If there was no bid/ask differential less
than the Minimum Amount during the 10
seconds following an Opening or ReOpening, then the Theoretical Price of an
option series is the last NBB or NBO just
prior to the Customer transaction in question,
as set forth in paragraph (b) above.
(iv) Customer transactions occurring more
than 10 seconds after an opening or reopening are subject to paragraph (A) above.
The following examples illustrate the
functioning of the proposed rule change.
Consider that the NBBO of a series
opens as $0.01 at $4.00. A marketable
limit order to buy one contract arrives
one second later and is executed at
$4.00. In the third second of trading, the
NBBO narrows from $0.01 at $4.00 to
$2.00 at $2.10. While the execution
occurred in a market with wide widths,
there was no tight market within the 10
seconds prior to execution. Accordingly,
under the current rule, the trade would
not qualify for obvious error review, in
part due to the fact that there was only
a single second of trading before the
execution. Under the proposal, since a
tight market existed at some point in the
first 10 seconds of trading (i.e., in the
third second), the Exchange would be
able to determine the Theoretical Price
as provided in Supplementary Material
.05.
As another example, the NBBO for a
series opens as $0.01 at $4.00. In the
seventh second of trading, a marketable
limit order is received to buy one
contract and is executed at $4.00. Five
seconds later (i.e., in the twelfth second
of trading), the NBBO narrows from
$0.01 at $4.00 to $2.00 at $2.10. While
the execution occurred in a market with
wide widths, there was no tight market
within 10 seconds prior to execution.
Accordingly, under the current rule, the
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trade would not qualify for obvious
error review. Under the proposal, since
no tight market existed at any point
during the first 10 seconds of trading
(i.e., the narrow market occurred in the
twelfth second), the trade would not
qualify for obvious error review.
The proposed rule change would also
better harmonize section (b)(3) with
section(b)(1) of the Rule. Under section
(b)(1), the Exchange is permitted to
determine the Theoretical Price for
transactions occurring as part of the
Opening Process (as defined in Options
3, Section 8) if there is no NBB or NBO
for the affected series just prior to the
erroneous transaction. However, under
the current version of section (b)(3), a
transaction during regular trading hours
could occur in the same wide market
but the Exchange would not be
permitted to determine the Theoretical
Price. Consider an example where one
second after the Exchange opens a
selected series, the NBBO is $1.00 at
$5.00. At 9:30:03, a customer submits a
marketable buy order to the Exchange
and pays $5.00. At 9:30:03, a different
exchange runs an opening auction that
results in a customer paying $5.00 for
the same selected series. At 9:30:06, the
NBBO changes from $1.00 at $5.00 to
$1.35 at $1.45. Under the current
version of section (b)(3), the Exchange
would not be able to determine the
Theoretical Price for the trade occurring
during regular trading hours. However,
the trade on the other exchange could be
submitted for review under (b)(1) and
that exchange would be able to
determine the Theoretical Price. If the
proposed change to section (b)(3) were
approved, both of the trades occurring at
9:30:03 (on the Exchange during regular
trading and on another exchange via
auction) would also be entitled to the
same review regarding the same
Theoretical Price based upon the same
time.
The proposal would not change any
obvious error review beyond the first 10
seconds of an opening or re-opening.
Proposed Change to Section (c)(4)(B)
The Exchange proposes to amend
section (c)(4)(B)—the ‘‘Adjust or Bust’’
rule for Customer transactions in
Obvious Error situations—to adjust
rather than nullify such orders,
provided the adjustment does not
violate the Customer’s limit price.
Currently, the Rule provides that in
Obvious Error situations, transactions
involving non-Customers should be
adjusted, while transactions involving
Customers are nullified, unless a certain
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condition applies.7 The Industry
Working Group has concluded that the
treatment of these transactions should
be harmonized under the Rule, such
that transactions involving Customers
may benefit from adjustment, just as
non-Customer transactions currently do,
except where such adjustment would
violate the Customer’s limit price; in
that instance, the trade would be
nullified.
Specifically, the Exchange proposes to
amend the text of section (c)(4)(B) to
add that where at least one party to the
Obvious Error is a Customer, ‘‘the
execution price of the transaction will
be adjusted by the Official pursuant to
the table immediately above. Any
Customer Obvious Error exceeding 50
contracts will be subject to the Size
Adjustment Modifier defined in subparagraph (a)(4) above. However, if such
adjustment(s) would result in an
execution price higher (for buy
transactions) or lower (for sell
transactions) than the Customer’s limit
price,’’ the trade will be nullified. The
‘‘table immediately above’’ referenced in
the proposed text refers to the table at
current Section (c)(4)(A), which
provides for the adjustment of prices a
specified amount away from the
Theoretical Price, rather than adjusting
the Theoretical Price.
Non-Substantive Amendment
The Exchange proposes a nonsubstantive change in Options 3,
Section 20(j) to update the reference to
the definition of Plan therein to Options
3, Section 1(n) to Options 5, Section
1(n).
Implementation Date
The proposed rule change will
become operative no sooner than six
months following the approval of the
Arca proposal to coincide with
implementation on other options
exchanges.8 The Exchange will
announce the effective date of the
proposed changes in an alert distributed
to all Members.
2. Statutory Basis
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The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act,9 in general, and furthers the
7 Specifically, the current Rule provides at
section (c)(4)(C) that if a member or member
organization has 200 or more Customer transactions
under review concurrently and the orders resulting
in such transactions were submitted during the
course of 2 minutes or less, where at least one party
to the Obvious Error is a non-Customer, then the
Exchange will apply the non-Customer adjustment
criteria found in section (c)(4)(A).
8 See supra note 3.
9 15 U.S.C. 78f(b).
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objectives of Section 6(b)(5) of the Act,10
in particular, in that it is designed to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, and, in general to protect
investors and the public interest and
because it is not designed to permit
unfair discrimination between
customers, issuers, brokers, or dealers.
The Exchange believes that the
proposed change to section (b)(3) of the
Rule would 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
because it provides a method for
addressing Obvious Error Customer
transactions that occur in a wide market
at the opening of trading. Generally, a
wide market is an indication of a lack
of liquidity in the market such that the
market is unreliable. Current section
(b)(3) recognizes that a persistently wide
quote (i.e., more than 10 seconds)
should be considered the reliable
market regardless of its width, but does
not address transactions that occur in a
wide market in the first seconds of
trading, where there is no preceding 10second period to reference. Accordingly,
in the first 10 seconds of trading, there
is no opportunity for a wide quote to
have persisted for a sufficiently lengthy
period such that the market should
consider it a reliable market for the
purposes of determining an Obvious
Error transaction.
The proposed change would rectify
this disparity and permit the Exchange
to consider whether a narrow quote is
present at any time during the 10second period after an opening or reopening. The presence of such a narrow
quote would indicate that the market
has gained sufficient liquidity and that
the previous wide market was
unreliable, such that it would be
appropriate for the Exchange to
determine the Theoretical Price of an
Obvious Error transaction. In this way,
the proposed rule harmonizes the
treatment of Customer transactions that
execute in an unreliable market at any
point of the trading day, by making
them uniformly subject to Exchange
determination of the Theoretical Price.
The Exchange believes that the
proposed change to section (c)(4)(B) of
the Rule would remove impediments to
and perfect the mechanism of a free and
open market and a national market
system and enhance the protection of
investors by harmonizing the treatment
of non-Customer transactions and
10
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15 U.S.C. 78f(b)(5).
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6635
Customer transactions under the Rule.
Under the current Rule, Obvious Error
situations involving non-Customer
transactions are adjusted, while those
involving Customer transactions are
generally nullified, unless they meet the
additional requirements of section
(c)(4)(C) (i.e., where a member or
member organization has 200 or more
Customer transactions under review
concurrently and the orders resulting in
such transactions were submitted
during the course of 2 minutes or less).
The proposal would harmonize the
treatment of non-Customer and
Customer transactions by providing for
the adjustment of all such transactions,
except where such adjustment would
violate the Customer’s limit price.
When it proposed the current rule in
2015, the Exchange believed there were
sound reasons for treating non-Customer
transactions and Customer transactions
differently. At the time, the Exchange
stated its belief that ‘‘Customers are not
necessarily immersed in the day-to-day
trading of the markets, are less likely to
be watching trading activity in a
particular option throughout the day,
and may have limited funds in their
trading accounts,’’ and that nullifying
Obvious Error transactions involving
Customers would give Customers
‘‘greater protections’’ than adjusting
such transactions by eliminating the
possibility that a Customer’s order will
be adjusted to a significantly different
price. The Exchange also noted its belief
that ‘‘Customers are . . . less likely to
have engaged in significant hedging or
other trading activity based on earlier
transactions, and thus, are less in need
of maintaining a position at an adjusted
price than non-Customers.11
Those assumptions about Customer
trading and hedging activity no longer
hold. The Exchange and the Industry
Working Group believe that over the
course of the last five years, Customers
that use options have become more
sophisticated, as retail broker-dealers
have enhanced the trading tools
available. Pursuant to OCC data,
volumes clearing in the Customer range
have expanded from 12,022,163 ADV in
2015 to 35,081,130 ADV in 2021. This
increase in trading activity underscores
the greater understanding of options by
Customers as a trading tool and its use
in the markets. Customers who trade
options today largely are more educated,
have better trading tools, and have
better access to financial news than any
11 See Securities Exchange Act Release Nos.
74919 (May 8, 2015), 80 FR 27766 (May 14, 2015)
(SR–Phlx–2015–43).
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Federal Register / Vol. 87, No. 24 / Friday, February 4, 2022 / Notices
time prior.12 The proposed rule would
extend the hedging protections
currently enjoyed by non-Customers to
Customers, by allowing them to
maintain an option position at an
adjusted price, which would in turn
prevent a cascading effect by
maintaining the hedge relationship
between the option transaction and any
other transactions in a related security.
The Exchange believes that extending
such hedging protections to Customer
transactions would remove
impediments to and perfect the
mechanism of a free and open market
and a national market system and
enhance the protection of investors by
providing greater certainty of execution
for all participants to options
transactions. Under the current Rule, a
Customer that believes its transaction
was executed pursuant to an Obvious
Error may be disincentivized from
submitting the transaction for review,
since during the review process, the
Customer would be uncertain whether
the trade would be nullified, and if so,
whether market conditions would still
permit the opportunity to execute a
related order at a better price after the
nullification ruling is finalized. In
contrast, under the proposed rule, the
Customer would know that the only
likely outcomes of submitting a trade to
Obvious Error review would be that the
trade would stand or be re-executed at
a better price; the trade would only be
nullified if the adjustment would violate
the order’s limit. Similarly, under the
current Rule, during the review period,
a market maker who traded contra to the
Customer would be uncertain if it
should retain any position executed to
hedge the original trade, or attempt to
unwind it, possibly at a significant loss.
Under the proposed rule change, this
uncertainty is largely eliminated, and
the question would be whether the
already-executed and hedged trade
would be adjusted to a better price for
the Customer, or if it would stand as
originally executed. In this way, the
proposed rule enhances the protection
of investors and removes impediments
to and perfects the mechanism of a free
and open market and a national market
system.
The proposed rule also addresses the
concern the Exchange cited in its 2015
filing that adjusting, rather than
nullifying, Customer transactions could
lead to a Customer’s order being
adjusted to a significantly different
price. To address that concern, the
12 See ‘‘Retail Traders Adopt Options En Masse’’
by Dan Raju, available at https://www.nasdaq.com/
articles/retail-traders-adopt-options-en-masse-202012-08.
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proposed rule would prevent Customer
transactions from being adjusted to a
price that violates the order’s limit; if
the adjustment would violate a
Customer’s limit, the trade would
instead be nullified. The Exchange
believes it is in the best interest of
investors to expand the availability of
adjustments to Customer transactions in
all Obvious Error situations except
where the adjustment would violate the
Customer’s limit price.
Further, the Exchange believes that,
with respect to such proposed
adjustments to Customer transactions, it
is appropriate to use the same form of
adjustment as is currently in place with
respect to non-Customer transactions as
laid out in the table in section (c)(4)(A).
That is, the Exchange believes that it is
appropriate to adjust to prices a
specified amount away from the
Theoretical Price rather than to adjust
the Theoretical Price, even though the
Exchange has determined a given trade
to be erroneous in nature, because the
parties in question should have had
some expectation of execution at the
price or prices submitted. Also, it is
common that by the time it is
determined that an Obvious Error has
occurred, additional hedging and
trading activity has already occurred
based on the executions that previously
happened. The Exchange believes that
providing an adjustment to the
Theoretical Price in all cases would not
appropriately incentivize market
participants to maintain appropriate
controls to avoid potential errors, while
adjusting to prices a specified amount
away from the Theoretical Price would
incentivize such behavior.
The Exchange believes that the
proposal is not designed to permit
unfair discrimination between
customers, issuers, brokers, or dealers.
The proposed change to section (b)(3)
would apply to all instances of a wide
market occurring within the first 10
seconds of trading followed by a narrow
market at any point in the subsequent
10-second period, regardless of the
types of market participants involved in
such transactions. The proposed change
to section (c)(4)(B) would harmonize the
treatment of Obvious Error transactions
involving Customers and nonCustomers, no matter what type of
market participants those parties may
be.
Lastly, the Exchange believes that the
non-substantive correction to update the
rule cite within Options 3, Section 20(j)
is consistent with the Act because it will
bring greater transparency to the
Rulebook and reduce potential
confusion by investors.
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For these reasons, the Exchange
believes that the proposal is consistent
with the Act.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange anticipates that the other
options exchanges will adopt
substantively similar proposals, such
that there would be no burden on
intermarket competition from the
Exchange’s proposal. Accordingly, the
proposed change is not meant to affect
competition among the options
exchanges. For these reasons, the
Exchange believes that the proposed
rule change reflects this competitive
environment and does not impose any
undue burden on intermarket
competition.
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 from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A)(iii) of the Act 13 and
subparagraph (f)(6) of Rule 19b–4
thereunder.14
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.
15 U.S.C. 78s(b)(3)(A)(iii).
17 CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6) requires a self-regulatory organization to give
the Commission written notice of its intent to file
the proposed rule change at least five business days
prior to the date of filing of the proposed rule
change, or such shorter time as designated by the
Commission. The Exchange has satisfied this
requirement.
13
14
E:\FR\FM\04FEN1.SGM
04FEN1
Federal Register / Vol. 87, No. 24 / Friday, February 4, 2022 / Notices
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
• 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–2022–04 on the subject line.
Paper Comments
lotter on DSK11XQN23PROD with NOTICES1
• Send paper comments in triplicate
to Vanessa Countryman, Secretary,
Securities and Exchange Commission,
100 F Street NE, Washington, DC
20549–1090.
All submissions should refer to File
Number SR–Phlx–2022–04. 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 website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–Phlx–2022–04 and should
be submitted on or before February 25,
2022.
18:50 Feb 03, 2022
[FR Doc. 2022–02312 Filed 2–3–22; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Electronic Comments
VerDate Sep<11>2014
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.15
J. Matthew DeLesDernier,
Assistant Secretary.
Jkt 256001
[Release No. 34–94109; File No. SR–
NYSECHX–2022–01]
Self-Regulatory Organizations; NYSE
Chicago, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend Its Rules To
Remove Obsolete References
January 31, 2022.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934
(‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on January
27, 2022, the NYSE Chicago, Inc.
(‘‘NYSE Chicago’’ or ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the selfregulatory organization. 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
The Exchange proposes to amend its
rules to remove obsolete references to
the Board of Governors and constitution
of the Exchange. The proposed rule
change is available on the Exchange’s
website at www.nyse.com, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
17 CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
15
1 15
PO 00000
Frm 00155
Fmt 4703
Sfmt 4703
6637
of the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend its
rules to remove obsolete references to
the Board of Governors and constitution
of the Exchange. In 2005 the Exchange’s
ownership structure was demutualized.4
As part of that change, a Board of
Directors replaced the Board of
Governors as the governing body of the
Exchange.5 The Exchange filed an
updated certificate of incorporation and
bylaws and ceased having a
constitution.6
Although most references in the
Exchange rules to the Board of
Governors and constitution were
removed or updated at the time of the
demutualization, some obsolete
references remain.7 To update those
obsolete references, the Exchange
proposes to make the following nonsubstantive changes.
• References to the ‘‘Board of
Governors’’ would be revised to refer to
the ‘‘Board of Directors’’ instead.
Accordingly, the Exchange proposes to
4 See Securities Exchange Act Release No. 51149
(February 8, 2005), 70 FR 7531 (February 14, 2005)
(SR–CHX–2004–26) (Order Approving Proposed
Rule Change and Amendment No. 1 and Notice of
Filing and Order Granting Accelerated Approval to
Amendment No. 3 by the Chicago Stock Exchange,
Inc. Relating to the Demutualization of the Chicago
Stock Exchange, Inc.).
5 See Section Fifth of Exhibit A to Amendment 1,
SR–CHX–2004–26 (November 24, 2004), available
at https://www.sec.gov/rules/sro/chx/3450892exa.pdf (stating that ‘‘[t]he governing body of
the Corporation shall be its Board of Directors’’).
See also Securities Exchange Act Release No. 50892
(December 20, 2004), 69 FR 77796 (December 28,
2004) (SR–CHX–2004–26) (Notice of Filing of
Amendment 1) and 70 FR 7531, supra note 4, at
7531 (‘‘CHX will have its own Board of Directors
that will manage CHX’s business and affairs’’) &
7534 (description of Board of Directors).
6 See Exhibit A and Exhibit B to Amendment 1,
SR–CHX–2004–26 (November 24, 2004), available
at https://www.sec.gov/rules/sro/chx/3450892exa.pdf and https://www.sec.gov/rules/sro/
chx/34-50892exb.pdf (removing all references to the
‘‘Constitution’’ by either replacing them with
references to the ‘‘bylaws’’ or deleting them). See
also 69 FR 77796, supra note 5. The current
governing documents of the Exchange are the
Second Amended and Restated Certification of
Incorporation of NYSE Chicago, Inc., available at
https://www.nyse.com/publicdocs/nyse/regulation/
nyse/NYSE_Chicago_Second_Amended_and_
Restated_Certificate_of_Incorporation.pdf, and
Second Amended and Restated By-laws of NYSE
Chicago, Inc., available at https://www.nyse.com/
publicdocs/nyse/regulation/nyse/NYSE_Chicago_
Second_Amended_and_Restated_Bylaws.pdf.
7 See Exhibit E to Amendment 1, SR–CHX–2004–
26 (November 24, 2004), available at https://
www.sec.gov/rules/sro/chx/34-50892exe.pdf. See
also 69 FR 77796, supra note 5.
E:\FR\FM\04FEN1.SGM
04FEN1
]]>Agencies
[Federal Register Volume 87, Number 24 (Friday, February 4, 2022)]
[Notices]
[Pages 6633-6637]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-02312]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-94096; File No. SR-Phlx-2022-04]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change to Proposed Rule
Change To Update the Obvious Error Rule
January 31, 2022.
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 January 26, 2022, Nasdaq PHLX LLC (``Phlx'' 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 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 Options 3, Section 20 (Nullification
and Adjustment of Options Transactions including Obvious Errors).
The text of the proposed rule change is available on the Exchange's
website at https://listingcenter.nasdaq.com/rulebook/phlx/rules, 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 purpose of this proposed rule change is to amend Options 3,
Section 20 (Nullification and Adjustment of Options Transactions
including Obvious Errors) to improve the operation of the Rule.
Following discussions with other exchanges and a cross-section of
industry participants and in coordination with the Listed Options
Market Structure Working Group (``LOMSWG'') (collectively, the
``Industry Working Group''), the Exchange proposes: (1) To amend
section (b)(3) of the Rule to permit the Exchange to determine the
Theoretical Price of a Customer option transaction in a wide market so
long as a narrow market exists at any point during the 10-second period
after an opening or re-opening; and (2) to amend section (c)(4)(B) of
the Rule to adjust, rather than nullify, Customer transactions in
Obvious Error situations, provided the adjustment does not violate the
limit price. The foregoing changes are based on the recently amended
rules of NYSE Arca, Inc. (``Arca'').\3\ The Exchange further proposes
to make a non-substantive, corrective change. Each change is discussed
in detail below.
---------------------------------------------------------------------------
\3\ See Arca Rule 6.87-O. See also Securities Exchange Act
Release No. 93818 (December 17, 2021), 86 FR 73009 (December 23,
2021) (SR-NYSEArca-2021-91) (Order Approving a Proposed Rule Change
to Amend Rule 6.87-O).
---------------------------------------------------------------------------
Proposed Change to Section (b)(3)
Options 3, Section 20 has been part of various harmonization
efforts by the Industry Working Group.\4\ These efforts
[[Page 6634]]
have often centered around the Theoretical Price for which an options
transaction should be compared to determine whether an Obvious Error
has occurred. For instance, all options exchanges have adopted language
comparable to Supplementary Material .05,\5\ which explains how an
exchange is to determine Theoretical Price at the open, when there are
no valid quotes, and when there is a wide quote. This includes at times
the use of a singular third-party vendor, known as a TP Provider
(currently CBOE Livevol, LLC).
---------------------------------------------------------------------------
\4\ See, e.g., Securities Exchange Act Release Nos. 74919 (May
8, 2015), 80 FR 27766 (May 14, 2015) (SRP-hlx-2015-43); 80431 (April
11, 2017), 82 FR 18182 (April 17, 2017) (SRP-hlx-2017-27).
\5\ See, e.g., Securities Exchange Act Release No. 81352 (August
8, 2017), 82 FR 37949 (August 14, 2017) (SRP-hlx-2017-66).
---------------------------------------------------------------------------
Similarly, section (b)(3) of Options 3, Section 20 was previously
harmonized across all options exchanges to handle situations where
executions occur in markets that are wide (as set forth in the
rule).\6\ Under that section, the Exchange determines the Theoretical
Price if the NBBO for the subject series is wide immediately before
execution and a narrow market (as set forth in the rule) existed
``during the 10 seconds prior to the transaction.'' The rule goes on to
clarify that, should there be no narrow quotes ``during the 10 seconds
prior to the transaction,'' the Theoretical Price for the affected
series is the NBBO that existed at the time of execution (regardless of
its width).
---------------------------------------------------------------------------
\6\ See, e.g., Securities Exchange Act Release Nos. 74919 (May
8, 2015), 80 FR 27766 (May 14, 2015) (SR-Phlx-2015-43).
---------------------------------------------------------------------------
In recent discussions, the Industry Working Group has identified
proposed changes to section (b)(3) of Options 3, Section 20 that would
improve the Rule's functioning. Currently, section (b)(3) does not
permit the Exchange to determine the Theoretical Price unless there is
a narrow quote 10 seconds prior to the transaction. However, in the
first seconds of trading, there is no 10-second period ``prior to the
transaction.'' Further, the Industry Working Group has observed that
prices in certain series can be disjointed at the start of trading.
Accordingly, the Exchange proposes to provide additional protections to
trading in certain circumstances immediately after the opening before
liquidity has had a chance to enter the market. The Exchange proposes
to amend section (b)(3) to allow the Exchange to determine the
Theoretical Price in a wide market so long as a narrow market exists at
any point during the 10-second period after an opening or reopening.
Specifically, the Exchange proposes that the existing text of
section (b)(3) would become sub-section (A). The Exchange proposes to
add the following heading and text as sub-section (B):
(B) Customer Transactions Occurring Within 10 Seconds or Less
After an Opening or Re-Opening:
(i) The Exchange will determine the Theoretical Price if the
bid/ask differential of the NBB and NBO for the affected series just
prior to the Customer's erroneous transaction was equal to or
greater than the Minimum Amount set forth in paragraph (A) above and
there was a bid/ask differential less than the Minimum Amount during
the 10 seconds prior to the transaction.
(ii) If there was no bid/ask differential less than the Minimum
Amount during the 10 seconds prior to the transaction, then the
Exchange will determine the Theoretical Price if the bid/ask
differential of the NBB and NBO for the affected series just prior
to the Customer's erroneous transaction was equal to or greater than
the Minimum Amount set forth in paragraph (A) above and there was a
bid/ask differential less than the Minimum Amount anytime during the
10 seconds after an opening or re-opening.
(iii) If there was no bid/ask differential less than the Minimum
Amount during the 10 seconds following an Opening or Re-Opening,
then the Theoretical Price of an option series is the last NBB or
NBO just prior to the Customer transaction in question, as set forth
in paragraph (b) above.
(iv) Customer transactions occurring more than 10 seconds after
an opening or re-opening are subject to paragraph (A) above.
The following examples illustrate the functioning of the proposed
rule change. Consider that the NBBO of a series opens as $0.01 at
$4.00. A marketable limit order to buy one contract arrives one second
later and is executed at $4.00. In the third second of trading, the
NBBO narrows from $0.01 at $4.00 to $2.00 at $2.10. While the execution
occurred in a market with wide widths, there was no tight market within
the 10 seconds prior to execution. Accordingly, under the current rule,
the trade would not qualify for obvious error review, in part due to
the fact that there was only a single second of trading before the
execution. Under the proposal, since a tight market existed at some
point in the first 10 seconds of trading (i.e., in the third second),
the Exchange would be able to determine the Theoretical Price as
provided in Supplementary Material .05.
As another example, the NBBO for a series opens as $0.01 at $4.00.
In the seventh second of trading, a marketable limit order is received
to buy one contract and is executed at $4.00. Five seconds later (i.e.,
in the twelfth second of trading), the NBBO narrows from $0.01 at $4.00
to $2.00 at $2.10. While the execution occurred in a market with wide
widths, there was no tight market within 10 seconds prior to execution.
Accordingly, under the current rule, the trade would not qualify for
obvious error review. Under the proposal, since no tight market existed
at any point during the first 10 seconds of trading (i.e., the narrow
market occurred in the twelfth second), the trade would not qualify for
obvious error review.
The proposed rule change would also better harmonize section (b)(3)
with section(b)(1) of the Rule. Under section (b)(1), the Exchange is
permitted to determine the Theoretical Price for transactions occurring
as part of the Opening Process (as defined in Options 3, Section 8) if
there is no NBB or NBO for the affected series just prior to the
erroneous transaction. However, under the current version of section
(b)(3), a transaction during regular trading hours could occur in the
same wide market but the Exchange would not be permitted to determine
the Theoretical Price. Consider an example where one second after the
Exchange opens a selected series, the NBBO is $1.00 at $5.00. At
9:30:03, a customer submits a marketable buy order to the Exchange and
pays $5.00. At 9:30:03, a different exchange runs an opening auction
that results in a customer paying $5.00 for the same selected series.
At 9:30:06, the NBBO changes from $1.00 at $5.00 to $1.35 at $1.45.
Under the current version of section (b)(3), the Exchange would not be
able to determine the Theoretical Price for the trade occurring during
regular trading hours. However, the trade on the other exchange could
be submitted for review under (b)(1) and that exchange would be able to
determine the Theoretical Price. If the proposed change to section
(b)(3) were approved, both of the trades occurring at 9:30:03 (on the
Exchange during regular trading and on another exchange via auction)
would also be entitled to the same review regarding the same
Theoretical Price based upon the same time.
The proposal would not change any obvious error review beyond the
first 10 seconds of an opening or re-opening.
Proposed Change to Section (c)(4)(B)
The Exchange proposes to amend section (c)(4)(B)--the ``Adjust or
Bust'' rule for Customer transactions in Obvious Error situations--to
adjust rather than nullify such orders, provided the adjustment does
not violate the Customer's limit price. Currently, the Rule provides
that in Obvious Error situations, transactions involving non-Customers
should be adjusted, while transactions involving Customers are
nullified, unless a certain
[[Page 6635]]
condition applies.\7\ The Industry Working Group has concluded that the
treatment of these transactions should be harmonized under the Rule,
such that transactions involving Customers may benefit from adjustment,
just as non-Customer transactions currently do, except where such
adjustment would violate the Customer's limit price; in that instance,
the trade would be nullified.
---------------------------------------------------------------------------
\7\ Specifically, the current Rule provides at section (c)(4)(C)
that if a member or member organization has 200 or more Customer
transactions under review concurrently and the orders resulting in
such transactions were submitted during the course of 2 minutes or
less, where at least one party to the Obvious Error is a non-
Customer, then the Exchange will apply the non-Customer adjustment
criteria found in section (c)(4)(A).
---------------------------------------------------------------------------
Specifically, the Exchange proposes to amend the text of section
(c)(4)(B) to add that where at least one party to the Obvious Error is
a Customer, ``the execution price of the transaction will be adjusted
by the Official pursuant to the table immediately above. Any Customer
Obvious Error exceeding 50 contracts will be subject to the Size
Adjustment Modifier defined in sub-paragraph (a)(4) above. However, if
such adjustment(s) would result in an execution price higher (for buy
transactions) or lower (for sell transactions) than the Customer's
limit price,'' the trade will be nullified. The ``table immediately
above'' referenced in the proposed text refers to the table at current
Section (c)(4)(A), which provides for the adjustment of prices a
specified amount away from the Theoretical Price, rather than adjusting
the Theoretical Price.
Non-Substantive Amendment
The Exchange proposes a non-substantive change in Options 3,
Section 20(j) to update the reference to the definition of Plan therein
to Options 3, Section 1(n) to Options 5, Section 1(n).
Implementation Date
The proposed rule change will become operative no sooner than six
months following the approval of the Arca proposal to coincide with
implementation on other options exchanges.\8\ The Exchange will
announce the effective date of the proposed changes in an alert
distributed to all Members.
---------------------------------------------------------------------------
\8\ See supra note 3.
---------------------------------------------------------------------------
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\9\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\10\ in particular, in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general to protect investors and the public
interest and because it is not designed to permit unfair discrimination
between customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------
\9\ 15 U.S.C. 78f(b).
\10\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes that the proposed change to section (b)(3) of
the Rule would 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 because it provides a method
for addressing Obvious Error Customer transactions that occur in a wide
market at the opening of trading. Generally, a wide market is an
indication of a lack of liquidity in the market such that the market is
unreliable. Current section (b)(3) recognizes that a persistently wide
quote (i.e., more than 10 seconds) should be considered the reliable
market regardless of its width, but does not address transactions that
occur in a wide market in the first seconds of trading, where there is
no preceding 10-second period to reference. Accordingly, in the first
10 seconds of trading, there is no opportunity for a wide quote to have
persisted for a sufficiently lengthy period such that the market should
consider it a reliable market for the purposes of determining an
Obvious Error transaction.
The proposed change would rectify this disparity and permit the
Exchange to consider whether a narrow quote is present at any time
during the 10-second period after an opening or re-opening. The
presence of such a narrow quote would indicate that the market has
gained sufficient liquidity and that the previous wide market was
unreliable, such that it would be appropriate for the Exchange to
determine the Theoretical Price of an Obvious Error transaction. In
this way, the proposed rule harmonizes the treatment of Customer
transactions that execute in an unreliable market at any point of the
trading day, by making them uniformly subject to Exchange determination
of the Theoretical Price.
The Exchange believes that the proposed change to section (c)(4)(B)
of the Rule would remove impediments to and perfect the mechanism of a
free and open market and a national market system and enhance the
protection of investors by harmonizing the treatment of non-Customer
transactions and Customer transactions under the Rule. Under the
current Rule, Obvious Error situations involving non-Customer
transactions are adjusted, while those involving Customer transactions
are generally nullified, unless they meet the additional requirements
of section (c)(4)(C) (i.e., where a member or member organization has
200 or more Customer transactions under review concurrently and the
orders resulting in such transactions were submitted during the course
of 2 minutes or less). The proposal would harmonize the treatment of
non-Customer and Customer transactions by providing for the adjustment
of all such transactions, except where such adjustment would violate
the Customer's limit price.
When it proposed the current rule in 2015, the Exchange believed
there were sound reasons for treating non-Customer transactions and
Customer transactions differently. At the time, the Exchange stated its
belief that ``Customers are not necessarily immersed in the day-to-day
trading of the markets, are less likely to be watching trading activity
in a particular option throughout the day, and may have limited funds
in their trading accounts,'' and that nullifying Obvious Error
transactions involving Customers would give Customers ``greater
protections'' than adjusting such transactions by eliminating the
possibility that a Customer's order will be adjusted to a significantly
different price. The Exchange also noted its belief that ``Customers
are . . . less likely to have engaged in significant hedging or other
trading activity based on earlier transactions, and thus, are less in
need of maintaining a position at an adjusted price than non-
Customers.\11\
---------------------------------------------------------------------------
\11\ See Securities Exchange Act Release Nos. 74919 (May 8,
2015), 80 FR 27766 (May 14, 2015) (SR-Phlx-2015-43).
---------------------------------------------------------------------------
Those assumptions about Customer trading and hedging activity no
longer hold. The Exchange and the Industry Working Group believe that
over the course of the last five years, Customers that use options have
become more sophisticated, as retail broker-dealers have enhanced the
trading tools available. Pursuant to OCC data, volumes clearing in the
Customer range have expanded from 12,022,163 ADV in 2015 to 35,081,130
ADV in 2021. This increase in trading activity underscores the greater
understanding of options by Customers as a trading tool and its use in
the markets. Customers who trade options today largely are more
educated, have better trading tools, and have better access to
financial news than any
[[Page 6636]]
time prior.\12\ The proposed rule would extend the hedging protections
currently enjoyed by non-Customers to Customers, by allowing them to
maintain an option position at an adjusted price, which would in turn
prevent a cascading effect by maintaining the hedge relationship
between the option transaction and any other transactions in a related
security.
---------------------------------------------------------------------------
\12\ See ``Retail Traders Adopt Options En Masse'' by Dan Raju,
available at https://www.nasdaq.com/articles/retail-traders-adopt-options-en-masse-2020-12-08.
---------------------------------------------------------------------------
The Exchange believes that extending such hedging protections to
Customer transactions would remove impediments to and perfect the
mechanism of a free and open market and a national market system and
enhance the protection of investors by providing greater certainty of
execution for all participants to options transactions. Under the
current Rule, a Customer that believes its transaction was executed
pursuant to an Obvious Error may be disincentivized from submitting the
transaction for review, since during the review process, the Customer
would be uncertain whether the trade would be nullified, and if so,
whether market conditions would still permit the opportunity to execute
a related order at a better price after the nullification ruling is
finalized. In contrast, under the proposed rule, the Customer would
know that the only likely outcomes of submitting a trade to Obvious
Error review would be that the trade would stand or be re-executed at a
better price; the trade would only be nullified if the adjustment would
violate the order's limit. Similarly, under the current Rule, during
the review period, a market maker who traded contra to the Customer
would be uncertain if it should retain any position executed to hedge
the original trade, or attempt to unwind it, possibly at a significant
loss. Under the proposed rule change, this uncertainty is largely
eliminated, and the question would be whether the already-executed and
hedged trade would be adjusted to a better price for the Customer, or
if it would stand as originally executed. In this way, the proposed
rule enhances the protection of investors and removes impediments to
and perfects the mechanism of a free and open market and a national
market system.
The proposed rule also addresses the concern the Exchange cited in
its 2015 filing that adjusting, rather than nullifying, Customer
transactions could lead to a Customer's order being adjusted to a
significantly different price. To address that concern, the proposed
rule would prevent Customer transactions from being adjusted to a price
that violates the order's limit; if the adjustment would violate a
Customer's limit, the trade would instead be nullified. The Exchange
believes it is in the best interest of investors to expand the
availability of adjustments to Customer transactions in all Obvious
Error situations except where the adjustment would violate the
Customer's limit price.
Further, the Exchange believes that, with respect to such proposed
adjustments to Customer transactions, it is appropriate to use the same
form of adjustment as is currently in place with respect to non-
Customer transactions as laid out in the table in section (c)(4)(A).
That is, the Exchange believes that it is appropriate to adjust to
prices a specified amount away from the Theoretical Price rather than
to adjust the Theoretical Price, even though the Exchange has
determined a given trade to be erroneous in nature, because the parties
in question should have had some expectation of execution at the price
or prices submitted. Also, it is common that by the time it is
determined that an Obvious Error has occurred, additional hedging and
trading activity has already occurred based on the executions that
previously happened. The Exchange believes that providing an adjustment
to the Theoretical Price in all cases would not appropriately
incentivize market participants to maintain appropriate controls to
avoid potential errors, while adjusting to prices a specified amount
away from the Theoretical Price would incentivize such behavior.
The Exchange believes that the proposal is not designed to permit
unfair discrimination between customers, issuers, brokers, or dealers.
The proposed change to section (b)(3) would apply to all instances of a
wide market occurring within the first 10 seconds of trading followed
by a narrow market at any point in the subsequent 10-second period,
regardless of the types of market participants involved in such
transactions. The proposed change to section (c)(4)(B) would harmonize
the treatment of Obvious Error transactions involving Customers and
non-Customers, no matter what type of market participants those parties
may be.
Lastly, the Exchange believes that the non-substantive correction
to update the rule cite within Options 3, Section 20(j) is consistent
with the Act because it will bring greater transparency to the Rulebook
and reduce potential confusion by investors.
For these reasons, the Exchange believes that the proposal is
consistent with the Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. The Exchange anticipates that
the other options exchanges will adopt substantively similar proposals,
such that there would be no burden on intermarket competition from the
Exchange's proposal. Accordingly, the proposed change is not meant to
affect competition among the options exchanges. For these reasons, the
Exchange believes that the proposed rule change reflects this
competitive environment and does not impose any undue burden on
intermarket competition.
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 from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \13\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\14\
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\13\ 15 U.S.C. 78s(b)(3)(A)(iii).
\14\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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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.
[[Page 6637]]
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 [email protected]. Please include
File Number SR-Phlx-2022-04 on the subject line.
Paper Comments
Send paper comments in triplicate to Vanessa Countryman,
Secretary, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-Phlx-2022-04. 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 website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-Phlx-2022-04 and should be submitted on
or before February 25, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-02312 Filed 2-3-22; 8:45 am]
BILLING CODE 8011-01-P
