Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend EDGX Rule 11.15, Clearly Erroneous Executions, 58827-58834 [2022-20941]
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Federal Register / Vol. 87, No. 187 / Wednesday, September 28, 2022 / Notices
I. Introduction
The Commission gives notice that the
Postal Service filed request(s) for the
Commission to consider matters related
to negotiated service agreement(s). The
request(s) may propose the addition or
removal of a negotiated service
agreement from the market dominant or
the competitive product list, or the
modification of an existing product
currently appearing on the market
dominant or the competitive product
list.
Section II identifies the docket
number(s) associated with each Postal
Service request, the title of each Postal
Service request, the request’s acceptance
date, and the authority cited by the
Postal Service for each request. For each
request, the Commission appoints an
officer of the Commission to represent
the interests of the general public in the
proceeding, pursuant to 39 U.S.C. 505
(Public Representative). Section II also
establishes comment deadline(s)
pertaining to each request.
The public portions of the Postal
Service’s request(s) can be accessed via
the Commission’s website (https://
www.prc.gov). Non-public portions of
the Postal Service’s request(s), if any,
can be accessed through compliance
with the requirements of 39 CFR
3011.301.1
The Commission invites comments on
whether the Postal Service’s request(s)
in the captioned docket(s) are consistent
with the policies of title 39. For
request(s) that the Postal Service states
concern market dominant product(s),
applicable statutory and regulatory
requirements include 39 U.S.C. 3622, 39
U.S.C. 3642, 39 CFR part 3030, and 39
CFR part 3040, subpart B. For request(s)
that the Postal Service states concern
competitive product(s), applicable
statutory and regulatory requirements
include 39 U.S.C. 3632, 39 U.S.C. 3633,
39 U.S.C. 3642, 39 CFR part 3035, and
39 CFR part 3040, subpart B. Comment
deadline(s) for each request appear in
section II.
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II. Docketed Proceeding(s)
1. Docket No(s).: MC2022–133 and
CP2022–137; Filing Title: USPS Request
to Add Parcel Select Contract 52 to
Competitive Product List and Notice of
Filing Materials Under Seal; Filing
Acceptance Date: September 22, 2022;
Filing Authority: 39 U.S.C. 3642, 39 CFR
3040.130 through 3040.135, and 39 CFR
3035.105; Public Representative:
1 See Docket No. RM2018–3, Order Adopting
Final Rules Relating to Non-Public Information,
June 27, 2018, Attachment A at 19–22 (Order No.
4679).
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Christopher C. Mohr; Comments Due:
September 30, 2022.
2. Docket No(s).: MC2022–134 and
CP2022–138; Filing Title: USPS Request
to Add Priority Mail Express, Priority
Mail, First-Class Package Service &
Parcel Select Contract 45 to Competitive
Product List and Notice of Filing
Materials Under Seal; Filing Acceptance
Date: September 22, 2022; Filing
Authority: 39 U.S.C. 3642, 39 CFR
3040.130 through 3040.135, and 39 CFR
3035.105; Public Representative:
Gregory S. Stanton; Comments Due:
September 30, 2022.
3. Docket No(s).: MC2022–135 and
CP2022–139; Filing Title: USPS Request
to Add Priority Mail Express, Priority
Mail, First-Class Package Service &
Parcel Select Contract 46 to Competitive
Product List and Notice of Filing
Materials Under Seal; Filing Acceptance
Date: September 22, 2022; Filing
Authority: 39 U.S.C. 3642, 39 CFR
3040.130 through 3040.135, and 39 CFR
3035.105; Public Representative:
Gregory S. Stanton; Comments Due:
September 30, 2022.
4. Docket No(s).: MC2022–136 and
CP2022–140; Filing Title: USPS Request
to Add Priority Mail Express, Priority
Mail, First-Class Package Service &
Parcel Select Contract 47 to Competitive
Product List and Notice of Filing
Materials Under Seal; Filing Acceptance
Date: September 22, 2022; Filing
Authority: 39 U.S.C. 3642, 39 CFR
3040.130 through 3040.135, and 39 CFR
3035.105; Public Representative:
Gregory S. Stanton; Comments Due:
September 30, 2022.
This Notice will be published in the
Federal Register.
Erica A. Barker,
Secretary.
[FR Doc. 2022–21015 Filed 9–27–22; 8:45 am]
BILLING CODE 7710–FW–P
POSTAL SERVICE
Product Change—Priority Mail
Express, Priority Mail, First-Class
Package Service, and Parcel Select
Service Negotiated Service Agreement
Postal ServiceTM.
ACTION: Notice.
AGENCY:
The Postal Service gives
notice of filing a request with the Postal
Regulatory Commission to add a
domestic shipping services contract to
the list of Negotiated Service
Agreements in the Mail Classification
Schedule’s Competitive Products List.
DATES: Date of required notice:
September 28, 2022.
SUMMARY:
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58827
FOR FURTHER INFORMATION CONTACT:
Sean Robinson, 202–268–8405.
The
United States Postal Service® hereby
gives notice that, pursuant to 39 U.S.C.
3642 and 3632(b)(3), on Sepember 19,
2022, it filed with the Postal Regulatory
Commission a USPS Request to Add
Priority Mail Express, Priority Mail,
First-Class Package Service, and Parcel
Select Service Contract 38 to
Competitive Product List. Documents
are available at www.prc.gov, Docket
Nos. MC2022–125, CP2022–129.
SUPPLEMENTARY INFORMATION:
Sarah Sullivan,
Attorney, Ethics & Legal Compliance.
[FR Doc. 2022–21058 Filed 9–27–22; 8:45 am]
BILLING CODE 7710–12–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–95878; File No. SR–
CboeEDGX–2022–041]
Self-Regulatory Organizations; Cboe
EDGX Exchange, Inc.; Notice of Filing
and Immediate Effectiveness of a
Proposed Rule Change To Amend
EDGX Rule 11.15, Clearly Erroneous
Executions
September 22, 2022.
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
September 14, 2022, Cboe EDGX
Exchange, Inc. (the ‘‘Exchange’’ or
‘‘EDGX’’) filed with the Securities and
Exchange Commission (the
‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Exchange filed the
proposal as a ‘‘non-controversial’’
proposed rule change pursuant to
Section 19(b)(3)(A)(iii) of the Act 3 and
Rule 19b–4(f)(6) thereunder.4 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
Cboe EDGX Exchange, Inc. (‘‘EDGX’’
or the ‘‘Exchange’’) is filing with the
Securities and Exchange Commission
(the ‘‘Commission’’) a proposed rule
change to amend EDGX Rule 11.15,
Clearly Erroneous Executions. The text
1 U.S.C.
78s(b)(1).
240.19b–4.
3 U.S.C. 78s(b)(3)(A)(iii).
4 CFR 240.19b–4(f)(6).
2 CFR
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Federal Register / Vol. 87, No. 187 / Wednesday, September 28, 2022 / Notices
of the proposed rule change is provided
in Exhibit 5.
The text of the proposed rule change
is also available on the Exchange’s
website (https://markets.cboe.com/us/
options/regulation/rule_filings/edgx/),
at the Exchange’s Office of the
Secretary, 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
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The purpose of the proposed rule
change is to amend EDGX Rule 11.15,
Clearly Erroneous Executions.
Specifically, the Exchange proposes to:
(1) make the current clearly erroneous
pilot program permanent; and (2) limit
the circumstances where clearly
erroneous review would continue to be
available during Regular Trading
Hours,5 when the LULD Plan to Address
Extraordinary Market Volatility (the
‘‘LULD Plan’’) 6 already provides similar
protections for trades occurring at prices
that may be deemed erroneous. The
Exchange believes that these changes
are appropriate as the LULD Plan has
been approved by the Commission on a
permanent basis,7 and in light of
amendments to the LULD Plan,
including changes to the applicable
Price Bands 8 around the open and close
of trading. Moreover, the proposal is
substantially identical to Cboe BZX
Exchange, Inc. (‘‘BZX’’) Rule 11.17,
5 The term ‘‘Regular Trading Hours’’ means the
time between 9:30 a.m. and 4:00 p.m. Eastern Time.
See EDGX Rule 1.5(y).
6 See Securities Exchange Act Release No. 67091
(May 31, 2012), 77 FR 33498 (June 6, 2012).
7 See Securities Exchange Act Release No. 84843
(December 18, 2018), 83 FR 66464 (December 26,
2018) (‘‘Notice’’); 85623 (April 11, 2019), 84 FR
16086 (April 17, 2019) (File No. 4–631)
(‘‘Amendment Eighteen’’).
8 ’’Price Bands’’ refers to the term provided in
Section V of the LULD Plan.
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which was recently amended.9 The
Exchange proposes to implement the
proposed Rule change October 1, 2022.
Proposal To Make the Clearly Erroneous
Pilot Permanent
On September 10, 2010, the
Commission approved, on a pilot basis,
changes to EDGX Rule 11.15 that,
among other things: (i) provided for
uniform treatment of clearly erroneous
execution reviews in multi-stock events
involving twenty or more securities; and
(ii) reduced the ability of the Exchange
to deviate from the objective standards
set forth in the rule.10 In 2013, the
Exchange adopted a provision designed
to address the operation of the LULD
Plan.11 Finally, in 2014, the Exchange
adopted two additional provisions
providing that: (i) a series of
transactions in a particular security on
one or more trading days may be viewed
as one event if all such transactions
were effected based on the same
fundamentally incorrect or grossly
misinterpreted issuance information
resulting in a severe valuation error for
all such transactions; and (ii) in the
event of any disruption or malfunction
in the operation of the electronic
communications and trading facilities of
an Exchange, another SRO, or
responsible single plan processor in
connection with the transmittal or
receipt of a trading halt, an Officer,
acting on his or her own motion, shall
nullify any transaction that occurs after
a trading halt has been declared by the
primary listing market for a security and
before such trading halt has officially
ended according to the primary listing
market.12 These changes are currently
scheduled to operate for a pilot period
that would end at the close of business
on October 20, 2022.13
When it originally approved the
clearly erroneous pilot, the Commission
explained that the changes were ‘‘being
implemented on a pilot basis so that the
Commission and the Exchanges can
monitor the effects of the pilot on the
markets and investors, and consider
9 See Securities and Exchange Act No. 95658
(September 1, 2022) 87 FR 55060 (SR–CboeBZX–
2022–037) (Order approving a proposed rule
change, as modified by Amendments Nos. 1 and 2,
to amend BZX Rule 11.17, Clearly Erroneous
Executions).
10 See Securities Exchange Act Release No. 62886
(Sept. 10, 2010), 75 FR 56613 (Sept. 16, 2010) (SR–
BATS–2010–016).
11 See Securities Exchange Act Release No. 68797
(Jan. 31, 2013), 78 FR 8635 (Feb. 6, 2013) (SR–
BATS–2013–008).
12 See Securities Exchange Act Release No. 72434
(June 19, 2014), 79 FR 36110 (June 25, 2014) (SR–
BATS–2014–014).
13 See Securities Exchange Act Release No. 95295
(July 15, 2022), 87 FR 43341 (July 21, 2022) (SR–
CboeEDGX–2022–031).
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appropriate adjustments, as
necessary.’’ 14 In the 12 years since that
time, the Exchange and other national
securities exchanges have gained
considerable experience in the
operation of the rule, as amended on a
pilot basis. Based on that experience,
the Exchange believes that the program
should be allowed to continue on a
permanent basis so that equities market
participants and investors can benefit
from the increased certainty provided
by the amended rule.
The clearly erroneous pilot was
implemented following a severe
disruption in the U.S. equities markets
on May 6, 2010 (‘‘Flash Crash’’) to
‘‘provide greater transparency and
certainty to the process of breaking
trades.’’ 15 Largely, the pilot reduced the
discretion of the Exchange, other
national securities exchanges, and
Financial Industry Regulatory Authority
(‘‘FINRA’’) to deviate from the objective
standards in their respective rules when
dealing with potentially erroneous
transactions. The pilot has thus helped
afford greater certainty to Members and
investors about when trades will be
deemed erroneous pursuant to selfregulatory organization (‘‘SRO’’) rules
and has provided a more transparent
process for conducting such reviews.
The Exchange proposes to make the
current pilot permanent so that market
participants can continue to benefit
from the increased certainty afforded by
the current rule.
Amendments to the Clearly Erroneous
Rules
When the Participants to the LULD
Plan filed to introduce the Limit UpLimit Down (‘‘LULD’’) mechanism, itself
a response to the Flash Crash, a handful
of commenters noted the potential
discordance between the clearly
erroneous rules and the Price Bands
used to limit the price at which trades
would be permitted to be executed
pursuant to the LULD Plan. For
example, two commenters requested
that the clearly erroneous rules be
amended so the presumption would be
that trades executed within the Price
Bands would not be not subject to
review.16 While the Participants
acknowledged that the potential to
prevent clearly erroneous executions
would be a ‘‘key benefit’’ of the LULD
Plan, the Participants decided not to
amend the clearly erroneous rules at
14 See Securities Exchange Act Release No. 62886
(September 10, 2010), 75 FR 56613 (September 16,
2010) (SR–BATS–2010–016).
15 Id.
16 See Securities Exchange Act Release No. 67091
(May 31, 2012), 77 FR 33498 (June 6, 2012) (File
No. 4–631) (n. 33505).
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that time.17 In the years since, industry
feedback has continued to reflect a
desire to eliminate the discordance
between the LULD mechanism and the
clearly erroneous rules so that market
participants would have more certainty
that trades executed with the Price
Bands would stand. For example, the
Equity Market Structure Advisory
Committee (‘‘EMSAC’’) Market Quality
Subcommittee included in its April 19,
2016 status report a preliminary
recommendation that clearly erroneous
rules be amended to conform to the
Price Bands—i.e., ‘‘any trade that takes
place within the band would stand and
not be broken and trades outside the
LU/LD bands would be eligible for the
consideration of the Clearly Erroneous
rules.’’ 18
The Exchange believes that it is
important for there to be some
mechanism to ensure that investors’
orders are either not executed at clearly
erroneous prices or are subsequently
busted as needed to maintain a fair and
orderly market. At the same time, the
Exchange believes that the LULD Plan,
as amended, would provide sufficient
protection for trades executed during
Regular Trading Hours. Indeed, the
LULD mechanism could be considered
to offer superior protection as it
prevents potentially erroneous trades
from being executed in the first
instance. After gaining experience with
the LULD Plan, the Exchange now
believes that it is appropriate to largely
eliminate clearly erroneous review
during Regular Trading Hours when
Price Bands are in effect. Thus, as
proposed, trades executed within the
Price Bands would stand, barring one of
a handful of identified scenarios where
such review may still be necessary for
the protection of investors. The
Exchange believes that this change
would be beneficial for the U.S. equities
markets as it would ensure that trades
executed within the Price Bands are
subject to clearly erroneous review in
only rare circumstances, resulting in
greater certainty for Members and
investors.
The current LULD mechanism for
addressing extraordinary market
volatility is available solely during
Regular Trading Hours. Thus, trades
during the Exchange’s Early Trading,19
17 Id.
18 See EMSAC Market Quality Subcommittee,
Recommendations for Rulemaking on Issues of
Market Quality (November 29, 2016), available at
https://www.sec.gov/spotlight/emsac/emsacrecommendations-rulemaking-market-quality.pdf.
19 The term ‘‘Early Trading Session’’ means the
time between 7:00 a.m. and 8:00 a.m. Eastern Time.
See EDGX Rule 1.5(ii).
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Pre-Opening,20 or After Hours
Sessions 21 would not benefit from this
protection and could ultimately be
executed at prices that may be
considered erroneous. For this reason,
the Exchange proposes that transactions
executed during the Early Trading, PreOpening, or After Hours Sessions would
continue to be reviewable as clearly
erroneous. Continued availability of the
clearly erroneous rule during pre- and
post-market trading sessions would
therefore ensure that investors have
appropriate recourse when erroneous
trades are executed outside of the hours
where similar protection can be
provided by the LULD Plan. Further, the
proposal is designed to eliminate the
potential discordance between clearly
erroneous review and LULD Price
Bands, which does not exist outside of
Regular Trading Hours because the
LULD Plan is not in effect. Thus, the
Exchange believes that it is appropriate
to continue to allow transactions to be
eligible for clearly erroneous review if
executed outside of Regular Trading
Hours.
On the other hand, there would be
much more limited potential to request
that a transaction be reviewed as
potentially erroneous during Regular
Trading Hours. With the introduction of
the LULD mechanism in 2013, clearly
erroneous trades are largely prevented
by the requirement that trades be
executed within the Price Bands. In
addition, in 2019, Amendment Eighteen
to the LULD Plan eliminated doublewide Price Bands: (1) at the Open, and
(2) at the Close for Tier 2 NMS Stocks
2 with a Reference Price above $3.00.22
Due to these changes, the Exchange
believes that the Price Bands would
provide sufficient protection to investor
orders such that clearly erroneous
review would no longer be necessary
during Regular Trading Hours. As the
Participants to the LULD Plan explained
in Amendment Eighteen: ‘‘Broadly, the
Limit Up-Limit Down mechanism
prevents trades from happening at
prices where one party to the trade
would be considered ‘aggrieved,’ and
thus could be viewed as an appropriate
mechanism to supplant clearly
erroneous rules.’’ While the Participants
also expressed concern that the Price
Bands might be too wide to afford
meaningful protection around the open
and close of trading, amendments to the
LULD Plan adopted in Amendment
20 The term ‘‘Pre-Opening Session’’ means the
time between 8:00 a.m. and 9:30 a.m. Eastern Time.
See EDGX Rule 1.5(s).
21 The term ‘‘Post-Closing Session’’ means the
time between 4:00 p.m. and 8:00 p.m. Eastern Time.
See EDGX Rule 1.5(r).
22 See Amendment Eighteen, supra note 7.
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58829
Eighteen narrowed Price Bands at these
times in a manner that the Exchange
believes is sufficient to ensure that
investors’ orders would be appropriately
protected in the absence of clearly
erroneous review. The Exchange
therefore believes that it is appropriate
to rely on the LULD mechanism as the
primary means of preventing clearly
erroneous trades during Regular Trading
Hours.
At the same time, the Exchange is
cognizant that there may be limited
circumstances where clearly erroneous
review may continue to be appropriate,
even during Regular Trading Hours.
Thus, the Exchange proposes to amend
its clearly erroneous rules to enumerate
the specific circumstances where such
review would remain available during
the course of Regular Trading Hours, as
follows. All transactions that fall
outside of these specific enumerated
exceptions would be ineligible for
clearly erroneous review.
First, pursuant to proposed paragraph
(c)(1)(A), a transaction executed during
Regular Trading Hours would continue
to be eligible for clearly erroneous
review if the transaction is not subject
to the LULD Plan. In such case, the
Numerical Guidelines set forth in
paragraph (c)(2) of Rule 11.15 will be
applicable to such NMS Stock. While
the majority of securities traded on the
Exchange would be subject to the LULD
Plan, certain equity securities, such as
rights and warrants, are explicitly
excluded from the provisions of the
LULD Plan and would therefore be
eligible for clearly erroneous review
instead.23 Similarly, there are instances,
such as the opening auction on the
primary listing market,24 where
transactions are not ordinarily subject to
the LULD Plan, or circumstances where
a transaction that ordinarily would have
been subject to the LULD Plan is not—
due, for example, to some issue with
processing the Price Bands. These
transactions would continue to be
eligible for clearly erroneous review,
effectively ensuring that such review
remains available as a backstop when
the LULD Plan would not prevent
executions from occurring at erroneous
prices in the first instance.
Second, investors would also
continue to be able to request review of
transactions that resulted from certain
systems issues pursuant to proposed
paragraph (c)(1)(B). This limited
exception would help to ensure that
23 See
Appendix A of the LULD Plan.
initial Reference Price used to calculate
Price Bands is typically set by the Opening Price
on the primary listing market. See Section V(B) of
the LULD Plan.
24 The
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trades that should not have been
executed would continue to be subject
to clearly erroneous review.
Specifically, as proposed, transactions
executed during Regular Trading Hours
would be eligible for clearly erroneous
review pursuant to proposed paragraph
(c)(1)(B) if the transaction is the result
of an Exchange technology or systems
issue that results in the transaction
occurring outside of the applicable
LULD Price Bands pursuant to EDGX
Rule 11.15(g). A transaction subject to
review pursuant to this paragraph shall
be found to be clearly erroneous if the
price of the transaction to buy (sell) that
is the subject of the complaint is greater
than (less than) the Reference Price,
described in paragraph (d) of this Rule,
by an amount that equals or exceeds the
applicable Percentage Parameter defined
in Appendix A to the LULD Plan
(‘‘Percentage Parameters’’).
Third, the Exchange proposes to
narrowly allow for the review of
transactions during Regular Trading
Hours when the Reference Price,
described in proposed paragraph (d), is
determined to be erroneous by an
Officer of the Exchange. Specifically, a
transaction executed during Regular
Trading Hours would be eligible for
clearly erroneous review pursuant to
proposed paragraph (c)(1)(C) if the
transaction involved, in the case of (1)
a corporate action or new issue or (2) a
security that enters a Trading Pause
pursuant to the LULD Plan and resumes
trading without an auction,25 a
Reference Price that is determined to be
erroneous by an Officer of the Exchange
because it clearly deviated from the
theoretical value of the security. In such
circumstances, the Exchange may use a
different Reference Price pursuant to
proposed paragraph (d)(2) of this Rule.
A transaction subject to review pursuant
to this paragraph shall be found to be
clearly erroneous if the price of the
transaction to buy (sell) that is the
subject of the complaint is greater than
(less than) the new Reference Price,
described in paragraph (d)(2) below, by
an amount that equals or exceeds the
applicable Numerical Guidelines or
Percentage Parameters, as applicable
depending on whether the security is
subject to the LULD Plan. Specifically,
the Percentage Parameters would apply
to all transactions except those in an
NMS Stock that is not subject to the
LULD Plan, as described in paragraph
(c)(1)(A).
25 The
Exchange notes that the ‘‘resumption of
trading without an auction’’ provision of the
proposed rule text applies only to securities that
enter a Trading Pause pursuant to LULD and does
not apply to a corporate action or new issue.
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In the context of a corporate action or
a new issue, there may be instances
where the security’s Reference Price is
later determined by the Exchange to be
erroneous (e.g., because of a bad first
trade for a new issue), and subsequent
LULD Price Bands are calculated from
that incorrect Reference Price. In
determining whether the Reference
Price is erroneous in such instances, the
Exchange would generally look to see if
such Reference Price clearly deviated
from the theoretical value of the
security. In such cases, the Exchange
would consider a number of factors to
determine a new Reference Price that is
based on the theoretical value of the
security, including but not limited to,
the offering price of the new issue , the
ratio of the stock split applied to the
prior day’s closing price, the theoretical
price derived from the numerical terms
of the corporate action transaction such
as the exchange ratio and spin-off terms,
and the prior day’s closing price on the
OTC market for an OTC up-listing.26 In
the foregoing instances, the theoretical
value of the security would be used as
the new Reference Price when applying
the Percentage Parameters under the
LULD Plan (or Numerical Guidelines if
the transaction is in an NMS Stock that
is not subject to the LULD Plan) to
determine whether executions would be
cancelled as clearly erroneous.
The following illustrate the proposed
application of the rule in the context of
a corporate action or new issue:
Example 1:
1. ABCD is subject to a corporate action, 1
for 10 reverse split, and the previous day
close was $5, but the new theoretical price
based on the terms of the corporate action is
$50.
2. The security opens at $5, with LULD
bands at $4.50 × $5.50.
3.The bands will be calculated correctly
but the security is trading at an erroneous
price based on the valuation of the remaining
outstanding shares.
4.The theoretical price of $50 would be
used as the new Reference Price when
applying LULD bands to determine if
executions would be cancelled as clearly
erroneous.
Example 2:
1. ABCD is subject to a corporate action,
the company is doing a spin off where a new
issue will be listed, BCDE. ABCD trades at
$50, and the spinoff company is worth 1⁄5 of
ABCD.
2. BCDE opens at $50 in the belief it is the
same company as ABCD.
26 Using transaction data reported to the FINRA
OTC Reporting Facility, FINRA disseminates via the
Trade Data Dissemination Service a final closing
report for OTC equity securities for each business
day that includes, among other things, each
security’s closing last sale price.
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3.The theoretical values of the two
companies are ABCD $40 and BCDE $10.
4. BCDE would be deemed to have had an
incorrect Reference Price and the theoretical
value of $10 would be used as the new
Reference Price when applying the LULD
Bands to determine if executions would be
cancelled as clearly erroneous.
Example 3:
1. ABCD is an uplift from the OTC market,
the prior days close on the OTC market was
$20.
2. ABCD opens trading on the new listing
exchange at $0.20 due to an erroneous order
entry.
3. The new Reference Price to determine
clearly erroneous executions would be $20,
the theoretical value of the stock from where
it was last traded.
In the context of the rare situation in
which a security that enters a LULD
Trading Pause and resumes trading
without an auction (i.e., reopens with
quotations), the LULD Plan requires that
the new Reference Price in this instance
be established by using the mid-point of
the best bid and offer (‘‘BBO’’) on the
primary listing exchange at the
reopening time.27 This can result in a
Reference Price and subsequent LULD
Price Band calculation that is
significantly away from the security’s
last traded or more relevant price,
especially in less liquid names. In such
rare instances, the Exchange is
proposing to use a different Reference
Price that is based on the prior LULD
Band that triggered the Trading Pause,
rather than the midpoint of the BBO.
The following example illustrates the
proposed application of the rule in the
context of a security that reopens
without an auction:
Example 4:
1. ABCD stock is trading at $20, with LULD
Bands at $18 × $22.
2. An incoming buy order causes the stock
to enter a Limit State Trading Pause and then
a Trading Pause at $22.
3. During the Trading Pause, the buy order
causing the Trading Pause is cancelled.
4. At the end of the 5-minute halt, there is
no crossed interest for an auction to occur,
thus trading would resume on a quote.
5. Upon resumption, a quote that was
available prior to the Trading Pause (e.g. a
quote was resting on the book prior to the
Trading Pause), is widely set at $10 × $90.
6. The Reference Price upon resumption is
$50 (mid-point of BBO).
7. The SIP will use this Reference Price
and publish LULD Bands of $45 × $55 (i.e.,
far away from BBO prior to the halt).
8. The bands will be calculated correctly,
but the $50 Reference Price is subsequently
determined to be incorrect as the price
clearly deviated from where it previously
traded prior to the Trading Pause
9. The new Reference Price would be $22
(i.e., the last effective Price Band that was in
27 See
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LULD Plan, Section I(U) and V(C)(1).
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a limit state before the Trading Pause), and
the LULD Bands would be applied to
determine if the executions should be
cancelled as clearly erroneous
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In all of the foregoing situations,
investors would be left with no remedy
to request clearly erroneous review
without the proposed carveouts in
paragraph (c)(1)(C) because the trades
occurred within the LULD Price Bands
(albeit LULD Price Bands that were
calculated from an erroneous Reference
Price). The Exchange believes that
removing the current ability for the
Exchange to review in these narrow
circumstances would lessen investor
protections.
Numerical Guidelines
Today, paragraph (c)(1) defines the
Numerical Guidelines that are used to
determine if a transaction is deemed
clearly erroneous during Regular
Trading Hours, or during the Early
Trading, Pre-Opening and After Hours
Sessions. With respect to Regular
Trading Hours, trades are generally
deemed clearly erroneous if the
execution price differs from the
Reference Price (i.e., last sale) by 10%
if the Reference Price is greater than
$0.00 up to and including $25.00; 5% if
the Reference Price is greater than
$25.00 up to and including $50.00; and
3% if the Reference Price is greater than
$50.00. Wider parameters are also used
for reviews for Multi-Stock Events, as
described in paragraph (c)(2). With
respect to transactions in Leveraged
ETF/ETN securities executed during
Regular Trading Hours, Early Trading,
Pre-Opening and After-Hours Trading
Session, trades are deemed clearly
erroneous if the execution price exceeds
the Regular Trading Hours Numerical
Guidelines multiplied by the leverage
multiplier.
Given the changes described in this
proposed rule change, the Exchange
proposes to amend the way that the
Numerical Guidelines are calculated
during Regular Trading Hours in the
handful of instances where clearly
erroneous review would continue to be
available. Specifically, the Exchange
would base these Numerical Guidelines,
as applied to the circumstances
described in paragraph (c)(1)(A), on the
Percentage Parameters used to calculate
Price Bands, as set forth in Appendix A
to the LULD Plan. Without this change,
a transaction that would otherwise
stand if Price Bands were properly
applied to the transaction may end up
being subject to review and deemed
clearly erroneous solely due to the fact
that the Price Bands were not available
due to a systems or other issue. The
Exchange believes that it makes more
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sense to instead base the Price Bands on
the same parameters as would otherwise
determine whether the trade would
have been allowed to execute within the
Price Bands. The Exchange also
proposes to modify the Numerical
Guidelines applicable to leveraged ETF/
ETN securities during Regular Trading
Hours. As noted above, the Numerical
Guidelines will only be applicable to
transactions eligible for review pursuant
paragraph (c)(1)(A) (i.e., to NMS Stocks
that are not subject to the LULD Plan).
As leveraged ETF/ETN securities are
subject to LULD and thus the Percentage
Parameters will be applicable during
Regular Trading Hours, the Exchange
proposes to eliminate the Numerical
Guidelines for leveraged ETF/ETN
securities traded during Regular Trading
Hours. However, as no Price Bands are
available outside of Regular Trading
Hours, the Exchange proposes to keep
the existing Numerical Guidelines in
place for transactions in leveraged ETF/
ETN securities that occur during Early
Trading, Pre-Opening and After-Hours
Trading.
The Exchange also proposes to move
existing paragraphs (c)(2), (c)(3), and (d)
to proposed paragraph (c)(2)(B),
(c)(2)(C), and (C)(2)(D), respectively, as
Multi-Stock Events, Additional Factors,
and Outlier Transactions will only be
subject to review if those NMS Stocks
are not subject to the LULD Plan or
occur during the Early Trading, PreOpening and After Hours Sessions.
Proposed paragraph (c)(2)(B) is
substantially similar to existing
paragraph (c)(2) except for a change in
rule reference to paragraph (c)(1) has
been updated to paragraph (c)(1)(A).
Further, given the proposal to move
existing paragraph (c)(2) to paragraph
(c)(2)(B), the Exchange also proposes to
amend applicable rule references
throughout paragraph (c)(2)(A). Finally,
the Exchange proposes to update
applicable rule references in paragraph
(c)(2)(D) based on the above-described
structural changes to the Rule.
Reference Price
As proposed, the Reference Price used
would continue to be based on last sale
and would be memorialized in proposed
paragraph (d). Continuing to use the last
sale as the Reference Price is necessary
for operational efficiency as it may not
be possible to perform a timely clearly
erroneous review if doing so required
computing the arithmetic mean price of
eligible reported transactions over the
past five minutes, as contemplated by
the LULD Plan. While this means that
there would still be some differences
between the Price Bands and the clearly
erroneous parameters, the Exchange
PO 00000
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58831
believes that this difference is
reasonable in light of the need to ensure
timely review if clearly erroneous rules
are invoked. The Exchange also
proposes to allow for an alternate
Reference Price to be used as prescribed
in proposed paragraphs (d)(1), (2), and
(3). Specifically, the Reference Price
may be a value other than the
consolidated last sale immediately prior
to the execution(s) under review (1) in
the case of Multi-Stock Events involving
twenty or more securities, as described
in paragraph (c)(2)(B) above, (2) in the
case of an erroneous Reference Price, as
described in paragraph (c)(1)(C) above,28
or (3) in other circumstances, such as,
for example, relevant news impacting a
security or securities, periods of extreme
market volatility, sustained illiquidity,
or widespread system issues, where use
of a different Reference Price is
necessary for the maintenance of a fair
and orderly market and the protection of
investors and the public interest,
provided that such circumstances
occurred during Early Trading, PreOpening or After-Hours Session or are
eligible for review pursuant to
paragraph (c)(1)(A).
Appeals
As described more fully below, the
Exchange proposes to eliminate
paragraph (f), System Disruption or
Malfunction. Accordingly, the Exchange
proposes to remove from paragraph
(e)(2), Appeals, each reference to
paragraph (f), and include language
referencing proposed paragraph (g),
Transactions Occurring Outside of the
LULD Bands.
System Disruption or Malfunction
To conform with the structural
changes described above, the Exchange
now proposes to remove paragraph
11.15(f), System Disruption or
Malfunction, and proposes new
paragraph (c)(1)(B). Specifically, as
described in paragraph (c)(1)(B),
transactions occurring during Regular
Trading Hours that are executed outside
of the LULD Price Bands due to an
Exchange technology or system issue,
may be subject to clearly erroneous
review pursuant to proposed paragraph
28 As discussed above, in the case of (c)(1)(C)(1),
the Exchange would consider a number of factors
to determine a new Reference Price that is based on
the theoretical value of the security, including but
not limited to, the offering price of the new issue,
the ratio of the stock split applied to the prior day’s
closing price, the theoretical price derived from the
numerical terms of the corporate action transaction
such as the exchange ratio and spin-off terms, and
the prior day’s closing price on the OTC market for
an OTC up-listing. In the case of (c)(1)(C)(2), the
Reference Price will be the last effective Price Band
that was in a limit state before the Trading Pause.
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11.15(g). Proposed paragraph 11.17
(c)(1)(B) further provides that a
transaction subject to review pursuant
to this paragraph shall be found to be
clearly erroneous if the price of the
transaction to buy (sell) that is the
subject of the complaint is greater than
(less than) the Reference Price,
described in paragraph (d), by an
amount that equals or exceeds the
applicable Percentage Parameter defined
in Appendix A to the LULD Plan.
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Trade Nullification for UTP Securities
That Are the Subject of Initial Public
Offerings
Current paragraph (h) of EDGX Rule
11.15 provides different procedures for
conducting clearly erroneous review in
initial public offering (‘‘IPO’’) securities
that are traded pursuant to unlisted
trading privileges (‘‘UTP’’) after the
initial opening of such IPO securities on
the listing market. Specifically, this
paragraph provides that a clearly
erroneous error may be deemed to have
occurred in the opening transaction of
the subject security if the execution
price of the opening transaction on the
Exchange is the lesser of $1.00 or 10%
away from the opening price on the
listing exchange or association. The
Exchange no longer believes that this
provision is necessary as opening
transactions on the Exchange following
an IPO are subject to Price Bands
pursuant to the LULD Plan. The
Exchange therefore proposes to
eliminate this provision in connection
with the broader changes to clearly
erroneous review during Regular
Trading Hours.
Securities Subject to Limit Up-Limit
Down Plan
The Exchange proposes to renumber
paragraph (i) to paragraph (h) based on
the proposal to eliminate existing
paragraph (h), and to rename the
paragraph to provide for transactions
occurring outside of LULD Price Bands.
Given that proposed paragraph (c)(1)
defines the LULD Plan, the Exchange
also proposes to eliminate redundant
language from proposed paragraph (h).
Finally, the Exchange also proposes to
update references to the LULD Plan and
Price Bands so that they are uniform
throughout the Rule and to update rule
references throughout the paragraph to
conform to the structural changes to the
Rule described above.
Multi-Day Event and Trading Halts
The Exchange proposes to renumber
paragraphs (j) and (k) to paragraphs (h)
and (i), respectively, based on the
proposal to eliminate existing paragraph
(h). Additionally, the Exchange
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18:06 Sep 27, 2022
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proposes to modify the text of both
paragraphs to reference the Percentage
Parameters as well as the Numerical
Guidelines. Specifically, the existing
text of proposed paragraphs (h) and (i)
provides that any action taken in
connection with this paragraph will be
taken without regard to the Numerical
Guidelines set forth in this Rule. The
Exchange proposes to amend the rule
text to provide that any action taken in
connection with this paragraph will be
taken without regard to the Percentage
Parameters or Numerical Guidelines set
forth in this Rule, with the Percentage
Parameters being applicable to an NMS
Stock subject to the LULD Plan and the
Numerical Guidelines being applicable
to an NMS Stock not subject to the
LULD Plan. Finally, the Exchange
proposes to make several ministerial
changes to conform the Rule text to BZX
Rule 11.17.
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the
requirements of Section 6(b) of the
Act,29 in general, and Section 6(b)(5) of
the Act,30 in particular, in that it is
designed to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, to promote just and equitable
principles of trade, and, in general, to
protect investors and the public interest
and not to permit unfair discrimination
between customers, issuers, brokers, or
dealers.
As explained in the purpose section
of this proposed rule change, the current
pilot was implemented following the
Flash Crash to bring greater
transparency to the process for
conducting clearly erroneous reviews,
and to help assure that the review
process is based on clear, objective, and
consistent rules across the U.S. equities
markets. The Exchange believes that the
amended clearly erroneous rules have
been successful in that regard and have
thus furthered fair and orderly markets.
Specifically, the Exchange believes that
the pilot has successfully ensured that
such reviews are conducted based on
objective and consistent standards
across SROs and has therefore afforded
greater certainty to Members and
investors. The Exchange therefore
believes that making the current pilot a
permanent program is appropriate so
that equities market participants can
continue to reap the benefits of a clear,
objective, and transparent process for
conducting clearly erroneous reviews.
In addition, the proposal is substantially
29 15
30 15
PO 00000
U.S.C. § 78f(b).
U.S.C. § 78f(b)(5).
Frm 00069
Fmt 4703
identical to a recent rule change to BZX
Rule 11.17, and the Exchange
understands that the other U.S. equities
exchanges and FINRA will also file
largely identical proposals to make their
respective clearly erroneous pilots
permanent. The Exchange therefore
believes that the proposed rule change
would promote transparency and
uniformity across markets concerning
review of transactions as clearly
erroneous and would also help assure
consistent results in handling erroneous
trades across the U.S. equities markets,
thus furthering fair and orderly markets,
the protection of investors, and the
public interest.
Similarly, the Exchange believes that
it is consistent with just and equitable
principles of trade to limit the
availability of clearly erroneous review
during Regular Trading Hours. The Plan
was approved by the Commission to
operate on a permanent rather than pilot
basis. As a number of market
participants have noted, the LULD Plan
provides protections that ensure that
investors’ orders are not executed at
prices that may be considered clearly
erroneous. Further, amendments to the
LULD Plan approved in Amendment
Eighteen serve to ensure that the Price
Bands established by the LULD Plan are
‘‘appropriately tailored to prevent trades
that are so far from current market
prices that they would be viewed as
having been executed in error.’’ 31 Thus,
the Exchange believes that clearly
erroneous review should only be
necessary in very limited circumstances
during Regular Trading Hours.
Specifically, such review would only be
necessary in instances where a
transaction was not subject to the LULD
Plan, or was the result of some form of
systems issue, as detailed in the purpose
section of this proposed rule change.
Additionally, in narrow circumstances
where the transaction was subject to the
LULD Plan, a clearly erroneous review
would be available in the case of (1) a
corporate action or new issue or (2) a
security that enters a Trading Pause
pursuant to LULD and resumes trading
without an auction, where the Reference
Price is determined to be erroneous by
an Officer of the Exchange because it
clearly deviated from the theoretical
value of the security. Thus, eliminating
clearly erroneous review in all other
instances will serve to increase certainty
for Members and investors that trades
executed during Regular Trading Hours
would typically stand and would not be
subject to review.
Given the fact that clearly erroneous
review would largely be limited to
31 See
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Amendment Eighteen, supra note 7.
28SEN1
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transactions that were not subject to the
LULD Plan, the Exchange also believes
that it is necessary to change the
parameters used to determine whether a
trade is clearly erroneous. Specifically,
due to the different parameters currently
used for clearly erroneous review and
for determining Price Bands, it is
possible that a trade that would have
been permitted to execute within the
Price Bands would later be deemed
clearly erroneous, if, for example, a
systems issue prevented the
dissemination of the Price Bands. The
Exchange believes that this result is
contrary to the principle that trades
within the Price Bands should stand,
and has the potential to cause investor
confusion if trades that are properly
executed within the applicable
parameters described in the LULD Plan
are later deemed erroneous. By using
consistent parameters for clearly
erroneous reviews conducted during
Regular Trading Hours and the
calculation of the Price Bands, the
Exchange believes that this change
would also serve to promote greater
certainty with regards to when trades
may be deemed erroneous.
The Exchange believes that it is
consistent with the protection of
investors and the public interest to
remove the current provision of the
clearly erroneous rule dealing with UTP
securities that are the subject of IPOs.
This provision applies specifically to
opening transactions on a non-listing
market following an IPO on the listing
market. As such, review under this
paragraph is limited to trades conducted
during Regular Trading Hours. As
previously addressed, trades executed
during Regular Trading Hours would
generally not be subject to clearly
erroneous review but would instead be
protected by the Price Bands. The
Exchange therefore no longer believes
that this paragraph is necessary, as all
trades subject to this provision today
would either be subject to the LULD
Plan, or, in the event of some systems
or other issue, would be subject to the
provisions that apply to transactions
that are not adequately protected by the
LULD Plan.
Finally, the proposed rule changes
make organizational updates to the
Exchange’s Clearly Erroneous Execution
Rule as well as minor updates and
corrections to the Rule to improve
readability and clarity.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change would impose
any burden on competition that is not
necessary or appropriate in furtherance
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18:06 Sep 27, 2022
Jkt 256001
of the purposes of the Act. The proposal
would ensure the continued,
uninterrupted operation of harmonized
clearly erroneous execution rules across
the U.S. equities markets while also
amending those rules to provide greater
certainty to Members and investors that
trades will stand if executed during
Regular Trading Hours where the LULD
Plan provides adequate protection
against trading at erroneous prices. The
Exchange understands that the other
national securities exchanges and
FINRA will also file similar proposals,
the substance of which are substantively
identical to this proposal. Thus, the
proposed rule change will help to
ensure consistency across SROs without
implicating any competitive issues.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The Exchange has filed the proposed
rule change pursuant to Section
19(b)(3)(A)(iii) of the Act 32 and Rule
19b–4(f)(6) thereunder.33 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 34 and
subparagraph (f)(6) of Rule 19b–4
thereunder.35
A proposed rule change filed under
Rule 19b–4(f)(6) 36 normally does not
become operative prior to 30 days after
the date of the filing. However, Rule
19b–4(f)(6)(iii) 37 permits the
Commission to designate a shorter time
if such action is consistent with the
protection of investors and the public
interest. The Exchange has asked the
32 15
U.S.C. 78s(b)(3)(A)(iii).
CFR 240.19b–4(f)(6).
34 15 U.S.C. 78s(b)(3)(A)(iii).
35 17 CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6)(iii) 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.
36 17 CFR 240.19b–4(f)(6).
37 17 CFR 240.19b–4(f)(6)(iii).
33 17
PO 00000
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58833
Commission to waive the 30-day
operative delay so that the proposed
rule change may become operative on
October 1, 2022. The Commission
believes that waiving the 30-day
operative delay is consistent with the
protection of investors and the public
interest, as it will allow the Exchange to
coordinate its implementation of the
revised clearly erroneous execution
rules with the other national securities
exchanges and FINRA, and will help
ensure consistency across the SROs.38
For this reason, the Commission hereby
waives the 30-day operative delay and
designates the proposed rule change as
operative upon filing.39
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 rulecomments@sec.gov. Please include File
Number SR–CboeEDGX–2022–041 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–CboeEDGX–2022–041. 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/
38 See
SR–CboeBZX–2022–37 (July 8, 2022).
purposes only of waiving the 30-day
operative delay, the Commission has also
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
39 For
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Federal Register / Vol. 87, No. 187 / Wednesday, September 28, 2022 / 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 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
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–CboeEDGX–2022–041 and
should be submitted on or before
October 19, 2022.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.40
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022–20941 Filed 9–27–22; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–95867; File No. SRCboeEDGA–2022–014]
Self-Regulatory Organizations; Cboe
EDGA Exchange, Inc.; Notice of Filing
and Immediate Effectiveness of a
Proposed Rule Change To Eliminate
the Listings Standards Provided for in
Chapter XIV of the Exchange’s
Rulebook
lotter on DSK11XQN23PROD with NOTICES1
September 22, 2022.
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
September 16, 2022, Cboe EDGA
Exchange, Inc. filed with the Securities
and Exchange Commission (the
‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
40 17
CFR 200.30–3(a)(12).
15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1
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Jkt 256001
by the self-regulatory 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
Cboe EDGA Exchange, Inc. (the
‘‘Exchange’’ or ‘‘EDGA’’) is filing with
the Securities and Exchange
Commission (‘‘Commission’’) a
proposed amendment to eliminate the
listings standards provided for in
Chapter XIV of the Exchange Rulebook
as the Exchange is not a listing venue.3
The text of the proposed rule change is
provided in Exhibit 5.
The text of the proposed rule change
is also available on the Exchange’s
website (https://markets.cboe.com/us/
equities/regulation/rule_filings/edga/),
at the Exchange’s Office of the
Secretary, 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
As part of this proposal, the Exchange
proposes to (1) adopt a new definition
for Derivative Security, move the
definition of unlisted trading privileges
(‘‘UTP’’) Derivative Security 4 from Rule
14.1(c) to Exchange Rule 1.5(gg), and
amend Rule 3.21 to reference proposed
Rule 1.5(gg); (2) eliminate listing
standards and any references to
Exchange listed securities from Chapter
3 As noted in a recent filing, the Exchange
represented that it planned to submit a proposal to
amend its applicable Rules set forth in Chapter XIV
in order to reflect that the Exchange does not
currently list any securities, nor does it intend to
list any securities, in the foreseeable future.
Accordingly, the Exchange is now proposing to
amend its Rules. See Securities Exchange Act No.
89019 (June 4, 2020) 85 FR 35461 (June 10, 2020)
(SR–CboeEDGA–2020–016).
4 See Rule 14.1(c) and proposed Rule 1.5(gg).
PO 00000
Frm 00071
Fmt 4703
Sfmt 4703
XIV (Securities Traded) and Rules 3.7,
11.2, and 13.6; (3) amend Rule 14.1(a)
to provide for NMS stocks rather than
equity securities and amend the
Exchange’s additional rules applicable
to UTP Derivative Securities as
provided in Rule 14.1(c)(1)–(6); and (4)
amend Rule 14.10 to make ministerial
changes to update paragraph
numbering. As discussed in further
detail below, all of the proposed
changes are substantially similar to
other exchange rules.
(1) Proposal To Define Derivative
Security in Exchange Rule 1.5(ff) and
Add the Definition of UTP Derivative
Security to Re-Lettered Exchange Rule
1.5(gg)
The Exchange proposes to define
‘‘Derivative Security’’ in proposed Rule
1.5(ff) and amend existing Rule 1.5(gg)
to add the definition of ‘‘UTP Derivative
Security’’. ‘‘Derivative Security’’ would
be a new definition and would mean a
security that meets the definition of
‘‘new derivative securities product’’ in
Rule 19b–4(e) under the Act. ‘‘UTP
Derivative Security’’ would refer to any
one of a list of Derivative Securities that
trades on the Exchange pursuant to
unlisted trading privileges. The list of
proposed Derivative Securities that may
meet the definition of UTP Derivative
Security are as follows: Equity Linked
Notes; Index Fund Shares listed
pursuant to Cboe BZX Exchange, Inc.
(‘‘BZX’’) Rule 14.11(c) or Nasdaq Stock
Market LLC (‘‘Nasdaq’’) Rule 5705(b)
and Investment Company Units listed
pursuant to NYSE Arca, Inc. (‘‘NYSE
Arca’’) Rule 5.2–E(j)(3); Index-Linked
Exchangeable Notes; Equity Gold
Shares; Equity Index-Linked Securities;
Commodity-Linked Securities;
Currency-Linked Securities; Fixed
Income Index-Linked Securities;
Futures-Linked Securities; Multifactor
Index-Linked Securities; Trust
Certificates; Currency and Index
Warrants; Portfolio Depository Receipts;
Trust Issued Receipts; CommodityBased Trust Shares; Currency Trust
Shares; Commodity Index Trust Shares;
Commodity Futures Trust Shares;
Partnership Units; Paired Trust Shares;
Trust Units; Managed Fund Shares;
Managed Trust Securities; Managed
Portfolio Shares; Tracking Fund Shares
listed pursuant to BZX Exchange Rule
14.11(m), Active Proxy Portfolio Shares
listed pursuant to NYSE Arca Rule
8.601–E, and Proxy Portfolio Shares
listed pursuant to Nasdaq Stock Market
LLC Rule 5750; Selected Equity-linked
Debt Securities (‘‘SEEDS’’); ExchangeTraded Fund Shares; and Contingent
E:\FR\FM\28SEN1.SGM
28SEN1
]]>Agencies
[Federal Register Volume 87, Number 187 (Wednesday, September 28, 2022)]
[Notices]
[Pages 58827-58834]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-20941]
=======================================================================
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95878; File No. SR-CboeEDGX-2022-041]
Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice
of Filing and Immediate Effectiveness of a Proposed Rule Change To
Amend EDGX Rule 11.15, Clearly Erroneous Executions
September 22, 2022.
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 September 14, 2022, Cboe EDGX Exchange, Inc. (the ``Exchange''
or ``EDGX'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I and II
below, which Items have been prepared by the Exchange. The Exchange
filed the proposal as a ``non-controversial'' proposed rule change
pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-
4(f)(6) thereunder.\4\ The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ U.S.C. 78s(b)(1).
\2\ CFR 240.19b-4.
\3\ U.S.C. 78s(b)(3)(A)(iii).
\4\ CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe EDGX Exchange, Inc. (``EDGX'' or the ``Exchange'') is filing
with the Securities and Exchange Commission (the ``Commission'') a
proposed rule change to amend EDGX Rule 11.15, Clearly Erroneous
Executions. The text
[[Page 58828]]
of the proposed rule change is provided in Exhibit 5.
The text of the proposed rule change is also available on the
Exchange's website (https://markets.cboe.com/us/options/regulation/rule_filings/edgx/), at the Exchange's Office of the Secretary, 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 the proposed rule change is to amend EDGX Rule
11.15, Clearly Erroneous Executions. Specifically, the Exchange
proposes to: (1) make the current clearly erroneous pilot program
permanent; and (2) limit the circumstances where clearly erroneous
review would continue to be available during Regular Trading Hours,\5\
when the LULD Plan to Address Extraordinary Market Volatility (the
``LULD Plan'') \6\ already provides similar protections for trades
occurring at prices that may be deemed erroneous. The Exchange believes
that these changes are appropriate as the LULD Plan has been approved
by the Commission on a permanent basis,\7\ and in light of amendments
to the LULD Plan, including changes to the applicable Price Bands \8\
around the open and close of trading. Moreover, the proposal is
substantially identical to Cboe BZX Exchange, Inc. (``BZX'') Rule
11.17, which was recently amended.\9\ The Exchange proposes to
implement the proposed Rule change October 1, 2022.
---------------------------------------------------------------------------
\5\ The term ``Regular Trading Hours'' means the time between
9:30 a.m. and 4:00 p.m. Eastern Time. See EDGX Rule 1.5(y).
\6\ See Securities Exchange Act Release No. 67091 (May 31,
2012), 77 FR 33498 (June 6, 2012).
\7\ See Securities Exchange Act Release No. 84843 (December 18,
2018), 83 FR 66464 (December 26, 2018) (``Notice''); 85623 (April
11, 2019), 84 FR 16086 (April 17, 2019) (File No. 4-631)
(``Amendment Eighteen'').
\8\ ''Price Bands'' refers to the term provided in Section V of
the LULD Plan.
\9\ See Securities and Exchange Act No. 95658 (September 1,
2022) 87 FR 55060 (SR-CboeBZX-2022-037) (Order approving a proposed
rule change, as modified by Amendments Nos. 1 and 2, to amend BZX
Rule 11.17, Clearly Erroneous Executions).
---------------------------------------------------------------------------
Proposal To Make the Clearly Erroneous Pilot Permanent
On September 10, 2010, the Commission approved, on a pilot basis,
changes to EDGX Rule 11.15 that, among other things: (i) provided for
uniform treatment of clearly erroneous execution reviews in multi-stock
events involving twenty or more securities; and (ii) reduced the
ability of the Exchange to deviate from the objective standards set
forth in the rule.\10\ In 2013, the Exchange adopted a provision
designed to address the operation of the LULD Plan.\11\ Finally, in
2014, the Exchange adopted two additional provisions providing that:
(i) a series of transactions in a particular security on one or more
trading days may be viewed as one event if all such transactions were
effected based on the same fundamentally incorrect or grossly
misinterpreted issuance information resulting in a severe valuation
error for all such transactions; and (ii) in the event of any
disruption or malfunction in the operation of the electronic
communications and trading facilities of an Exchange, another SRO, or
responsible single plan processor in connection with the transmittal or
receipt of a trading halt, an Officer, acting on his or her own motion,
shall nullify any transaction that occurs after a trading halt has been
declared by the primary listing market for a security and before such
trading halt has officially ended according to the primary listing
market.\12\ These changes are currently scheduled to operate for a
pilot period that would end at the close of business on October 20,
2022.\13\
---------------------------------------------------------------------------
\10\ See Securities Exchange Act Release No. 62886 (Sept. 10,
2010), 75 FR 56613 (Sept. 16, 2010) (SR-BATS-2010-016).
\11\ See Securities Exchange Act Release No. 68797 (Jan. 31,
2013), 78 FR 8635 (Feb. 6, 2013) (SR-BATS-2013-008).
\12\ See Securities Exchange Act Release No. 72434 (June 19,
2014), 79 FR 36110 (June 25, 2014) (SR-BATS-2014-014).
\13\ See Securities Exchange Act Release No. 95295 (July 15,
2022), 87 FR 43341 (July 21, 2022) (SR-CboeEDGX-2022-031).
---------------------------------------------------------------------------
When it originally approved the clearly erroneous pilot, the
Commission explained that the changes were ``being implemented on a
pilot basis so that the Commission and the Exchanges can monitor the
effects of the pilot on the markets and investors, and consider
appropriate adjustments, as necessary.'' \14\ In the 12 years since
that time, the Exchange and other national securities exchanges have
gained considerable experience in the operation of the rule, as amended
on a pilot basis. Based on that experience, the Exchange believes that
the program should be allowed to continue on a permanent basis so that
equities market participants and investors can benefit from the
increased certainty provided by the amended rule.
---------------------------------------------------------------------------
\14\ See Securities Exchange Act Release No. 62886 (September
10, 2010), 75 FR 56613 (September 16, 2010) (SR-BATS-2010-016).
---------------------------------------------------------------------------
The clearly erroneous pilot was implemented following a severe
disruption in the U.S. equities markets on May 6, 2010 (``Flash
Crash'') to ``provide greater transparency and certainty to the process
of breaking trades.'' \15\ Largely, the pilot reduced the discretion of
the Exchange, other national securities exchanges, and Financial
Industry Regulatory Authority (``FINRA'') to deviate from the objective
standards in their respective rules when dealing with potentially
erroneous transactions. The pilot has thus helped afford greater
certainty to Members and investors about when trades will be deemed
erroneous pursuant to self-regulatory organization (``SRO'') rules and
has provided a more transparent process for conducting such reviews.
The Exchange proposes to make the current pilot permanent so that
market participants can continue to benefit from the increased
certainty afforded by the current rule.
---------------------------------------------------------------------------
\15\ Id.
---------------------------------------------------------------------------
Amendments to the Clearly Erroneous Rules
When the Participants to the LULD Plan filed to introduce the Limit
Up-Limit Down (``LULD'') mechanism, itself a response to the Flash
Crash, a handful of commenters noted the potential discordance between
the clearly erroneous rules and the Price Bands used to limit the price
at which trades would be permitted to be executed pursuant to the LULD
Plan. For example, two commenters requested that the clearly erroneous
rules be amended so the presumption would be that trades executed
within the Price Bands would not be not subject to review.\16\ While
the Participants acknowledged that the potential to prevent clearly
erroneous executions would be a ``key benefit'' of the LULD Plan, the
Participants decided not to amend the clearly erroneous rules at
[[Page 58829]]
that time.\17\ In the years since, industry feedback has continued to
reflect a desire to eliminate the discordance between the LULD
mechanism and the clearly erroneous rules so that market participants
would have more certainty that trades executed with the Price Bands
would stand. For example, the Equity Market Structure Advisory
Committee (``EMSAC'') Market Quality Subcommittee included in its April
19, 2016 status report a preliminary recommendation that clearly
erroneous rules be amended to conform to the Price Bands--i.e., ``any
trade that takes place within the band would stand and not be broken
and trades outside the LU/LD bands would be eligible for the
consideration of the Clearly Erroneous rules.'' \18\
---------------------------------------------------------------------------
\16\ See Securities Exchange Act Release No. 67091 (May 31,
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631) (n. 33505).
\17\ Id.
\18\ See EMSAC Market Quality Subcommittee, Recommendations for
Rulemaking on Issues of Market Quality (November 29, 2016),
available at https://www.sec.gov/spotlight/emsac/emsac-recommendations-rulemaking-market-quality.pdf.
---------------------------------------------------------------------------
The Exchange believes that it is important for there to be some
mechanism to ensure that investors' orders are either not executed at
clearly erroneous prices or are subsequently busted as needed to
maintain a fair and orderly market. At the same time, the Exchange
believes that the LULD Plan, as amended, would provide sufficient
protection for trades executed during Regular Trading Hours. Indeed,
the LULD mechanism could be considered to offer superior protection as
it prevents potentially erroneous trades from being executed in the
first instance. After gaining experience with the LULD Plan, the
Exchange now believes that it is appropriate to largely eliminate
clearly erroneous review during Regular Trading Hours when Price Bands
are in effect. Thus, as proposed, trades executed within the Price
Bands would stand, barring one of a handful of identified scenarios
where such review may still be necessary for the protection of
investors. The Exchange believes that this change would be beneficial
for the U.S. equities markets as it would ensure that trades executed
within the Price Bands are subject to clearly erroneous review in only
rare circumstances, resulting in greater certainty for Members and
investors.
The current LULD mechanism for addressing extraordinary market
volatility is available solely during Regular Trading Hours. Thus,
trades during the Exchange's Early Trading,\19\ Pre-Opening,\20\ or
After Hours Sessions \21\ would not benefit from this protection and
could ultimately be executed at prices that may be considered
erroneous. For this reason, the Exchange proposes that transactions
executed during the Early Trading, Pre-Opening, or After Hours Sessions
would continue to be reviewable as clearly erroneous. Continued
availability of the clearly erroneous rule during pre- and post-market
trading sessions would therefore ensure that investors have appropriate
recourse when erroneous trades are executed outside of the hours where
similar protection can be provided by the LULD Plan. Further, the
proposal is designed to eliminate the potential discordance between
clearly erroneous review and LULD Price Bands, which does not exist
outside of Regular Trading Hours because the LULD Plan is not in
effect. Thus, the Exchange believes that it is appropriate to continue
to allow transactions to be eligible for clearly erroneous review if
executed outside of Regular Trading Hours.
---------------------------------------------------------------------------
\19\ The term ``Early Trading Session'' means the time between
7:00 a.m. and 8:00 a.m. Eastern Time. See EDGX Rule 1.5(ii).
\20\ The term ``Pre-Opening Session'' means the time between
8:00 a.m. and 9:30 a.m. Eastern Time. See EDGX Rule 1.5(s).
\21\ The term ``Post-Closing Session'' means the time between
4:00 p.m. and 8:00 p.m. Eastern Time. See EDGX Rule 1.5(r).
---------------------------------------------------------------------------
On the other hand, there would be much more limited potential to
request that a transaction be reviewed as potentially erroneous during
Regular Trading Hours. With the introduction of the LULD mechanism in
2013, clearly erroneous trades are largely prevented by the requirement
that trades be executed within the Price Bands. In addition, in 2019,
Amendment Eighteen to the LULD Plan eliminated double-wide Price Bands:
(1) at the Open, and (2) at the Close for Tier 2 NMS Stocks 2 with a
Reference Price above $3.00.\22\ Due to these changes, the Exchange
believes that the Price Bands would provide sufficient protection to
investor orders such that clearly erroneous review would no longer be
necessary during Regular Trading Hours. As the Participants to the LULD
Plan explained in Amendment Eighteen: ``Broadly, the Limit Up-Limit
Down mechanism prevents trades from happening at prices where one party
to the trade would be considered `aggrieved,' and thus could be viewed
as an appropriate mechanism to supplant clearly erroneous rules.''
While the Participants also expressed concern that the Price Bands
might be too wide to afford meaningful protection around the open and
close of trading, amendments to the LULD Plan adopted in Amendment
Eighteen narrowed Price Bands at these times in a manner that the
Exchange believes is sufficient to ensure that investors' orders would
be appropriately protected in the absence of clearly erroneous review.
The Exchange therefore believes that it is appropriate to rely on the
LULD mechanism as the primary means of preventing clearly erroneous
trades during Regular Trading Hours.
---------------------------------------------------------------------------
\22\ See Amendment Eighteen, supra note 7.
---------------------------------------------------------------------------
At the same time, the Exchange is cognizant that there may be
limited circumstances where clearly erroneous review may continue to be
appropriate, even during Regular Trading Hours. Thus, the Exchange
proposes to amend its clearly erroneous rules to enumerate the specific
circumstances where such review would remain available during the
course of Regular Trading Hours, as follows. All transactions that fall
outside of these specific enumerated exceptions would be ineligible for
clearly erroneous review.
First, pursuant to proposed paragraph (c)(1)(A), a transaction
executed during Regular Trading Hours would continue to be eligible for
clearly erroneous review if the transaction is not subject to the LULD
Plan. In such case, the Numerical Guidelines set forth in paragraph
(c)(2) of Rule 11.15 will be applicable to such NMS Stock. While the
majority of securities traded on the Exchange would be subject to the
LULD Plan, certain equity securities, such as rights and warrants, are
explicitly excluded from the provisions of the LULD Plan and would
therefore be eligible for clearly erroneous review instead.\23\
Similarly, there are instances, such as the opening auction on the
primary listing market,\24\ where transactions are not ordinarily
subject to the LULD Plan, or circumstances where a transaction that
ordinarily would have been subject to the LULD Plan is not--due, for
example, to some issue with processing the Price Bands. These
transactions would continue to be eligible for clearly erroneous
review, effectively ensuring that such review remains available as a
backstop when the LULD Plan would not prevent executions from occurring
at erroneous prices in the first instance.
---------------------------------------------------------------------------
\23\ See Appendix A of the LULD Plan.
\24\ The initial Reference Price used to calculate Price Bands
is typically set by the Opening Price on the primary listing market.
See Section V(B) of the LULD Plan.
---------------------------------------------------------------------------
Second, investors would also continue to be able to request review
of transactions that resulted from certain systems issues pursuant to
proposed paragraph (c)(1)(B). This limited exception would help to
ensure that
[[Page 58830]]
trades that should not have been executed would continue to be subject
to clearly erroneous review. Specifically, as proposed, transactions
executed during Regular Trading Hours would be eligible for clearly
erroneous review pursuant to proposed paragraph (c)(1)(B) if the
transaction is the result of an Exchange technology or systems issue
that results in the transaction occurring outside of the applicable
LULD Price Bands pursuant to EDGX Rule 11.15(g). A transaction subject
to review pursuant to this paragraph shall be found to be clearly
erroneous if the price of the transaction to buy (sell) that is the
subject of the complaint is greater than (less than) the Reference
Price, described in paragraph (d) of this Rule, by an amount that
equals or exceeds the applicable Percentage Parameter defined in
Appendix A to the LULD Plan (``Percentage Parameters'').
Third, the Exchange proposes to narrowly allow for the review of
transactions during Regular Trading Hours when the Reference Price,
described in proposed paragraph (d), is determined to be erroneous by
an Officer of the Exchange. Specifically, a transaction executed during
Regular Trading Hours would be eligible for clearly erroneous review
pursuant to proposed paragraph (c)(1)(C) if the transaction involved,
in the case of (1) a corporate action or new issue or (2) a security
that enters a Trading Pause pursuant to the LULD Plan and resumes
trading without an auction,\25\ a Reference Price that is determined to
be erroneous by an Officer of the Exchange because it clearly deviated
from the theoretical value of the security. In such circumstances, the
Exchange may use a different Reference Price pursuant to proposed
paragraph (d)(2) of this Rule. A transaction subject to review pursuant
to this paragraph shall be found to be clearly erroneous if the price
of the transaction to buy (sell) that is the subject of the complaint
is greater than (less than) the new Reference Price, described in
paragraph (d)(2) below, by an amount that equals or exceeds the
applicable Numerical Guidelines or Percentage Parameters, as applicable
depending on whether the security is subject to the LULD Plan.
Specifically, the Percentage Parameters would apply to all transactions
except those in an NMS Stock that is not subject to the LULD Plan, as
described in paragraph (c)(1)(A).
---------------------------------------------------------------------------
\25\ The Exchange notes that the ``resumption of trading without
an auction'' provision of the proposed rule text applies only to
securities that enter a Trading Pause pursuant to LULD and does not
apply to a corporate action or new issue.
---------------------------------------------------------------------------
In the context of a corporate action or a new issue, there may be
instances where the security's Reference Price is later determined by
the Exchange to be erroneous (e.g., because of a bad first trade for a
new issue), and subsequent LULD Price Bands are calculated from that
incorrect Reference Price. In determining whether the Reference Price
is erroneous in such instances, the Exchange would generally look to
see if such Reference Price clearly deviated from the theoretical value
of the security. In such cases, the Exchange would consider a number of
factors to determine a new Reference Price that is based on the
theoretical value of the security, including but not limited to, the
offering price of the new issue , the ratio of the stock split applied
to the prior day's closing price, the theoretical price derived from
the numerical terms of the corporate action transaction such as the
exchange ratio and spin-off terms, and the prior day's closing price on
the OTC market for an OTC up-listing.\26\ In the foregoing instances,
the theoretical value of the security would be used as the new
Reference Price when applying the Percentage Parameters under the LULD
Plan (or Numerical Guidelines if the transaction is in an NMS Stock
that is not subject to the LULD Plan) to determine whether executions
would be cancelled as clearly erroneous.
---------------------------------------------------------------------------
\26\ Using transaction data reported to the FINRA OTC Reporting
Facility, FINRA disseminates via the Trade Data Dissemination
Service a final closing report for OTC equity securities for each
business day that includes, among other things, each security's
closing last sale price.
---------------------------------------------------------------------------
The following illustrate the proposed application of the rule in
the context of a corporate action or new issue:
Example 1:
1. ABCD is subject to a corporate action, 1 for 10 reverse
split, and the previous day close was $5, but the new theoretical
price based on the terms of the corporate action is $50.
2. The security opens at $5, with LULD bands at $4.50 x $5.50.
3.The bands will be calculated correctly but the security is
trading at an erroneous price based on the valuation of the
remaining outstanding shares.
4.The theoretical price of $50 would be used as the new
Reference Price when applying LULD bands to determine if executions
would be cancelled as clearly erroneous.
Example 2:
1. ABCD is subject to a corporate action, the company is doing a
spin off where a new issue will be listed, BCDE. ABCD trades at $50,
and the spinoff company is worth \1/5\ of ABCD.
2. BCDE opens at $50 in the belief it is the same company as
ABCD.
3.The theoretical values of the two companies are ABCD $40 and
BCDE $10.
4. BCDE would be deemed to have had an incorrect Reference Price
and the theoretical value of $10 would be used as the new Reference
Price when applying the LULD Bands to determine if executions would
be cancelled as clearly erroneous.
Example 3:
1. ABCD is an uplift from the OTC market, the prior days close
on the OTC market was $20.
2. ABCD opens trading on the new listing exchange at $0.20 due
to an erroneous order entry.
3. The new Reference Price to determine clearly erroneous
executions would be $20, the theoretical value of the stock from
where it was last traded.
In the context of the rare situation in which a security that
enters a LULD Trading Pause and resumes trading without an auction
(i.e., reopens with quotations), the LULD Plan requires that the new
Reference Price in this instance be established by using the mid-point
of the best bid and offer (``BBO'') on the primary listing exchange at
the reopening time.\27\ This can result in a Reference Price and
subsequent LULD Price Band calculation that is significantly away from
the security's last traded or more relevant price, especially in less
liquid names. In such rare instances, the Exchange is proposing to use
a different Reference Price that is based on the prior LULD Band that
triggered the Trading Pause, rather than the midpoint of the BBO.
---------------------------------------------------------------------------
\27\ See LULD Plan, Section I(U) and V(C)(1).
---------------------------------------------------------------------------
The following example illustrates the proposed application of the
rule in the context of a security that reopens without an auction:
Example 4:
1. ABCD stock is trading at $20, with LULD Bands at $18 x $22.
2. An incoming buy order causes the stock to enter a Limit State
Trading Pause and then a Trading Pause at $22.
3. During the Trading Pause, the buy order causing the Trading
Pause is cancelled.
4. At the end of the 5-minute halt, there is no crossed interest
for an auction to occur, thus trading would resume on a quote.
5. Upon resumption, a quote that was available prior to the
Trading Pause (e.g. a quote was resting on the book prior to the
Trading Pause), is widely set at $10 x $90.
6. The Reference Price upon resumption is $50 (mid-point of
BBO).
7. The SIP will use this Reference Price and publish LULD Bands
of $45 x $55 (i.e., far away from BBO prior to the halt).
8. The bands will be calculated correctly, but the $50 Reference
Price is subsequently determined to be incorrect as the price
clearly deviated from where it previously traded prior to the
Trading Pause
9. The new Reference Price would be $22 (i.e., the last
effective Price Band that was in
[[Page 58831]]
a limit state before the Trading Pause), and the LULD Bands would be
applied to determine if the executions should be cancelled as
clearly erroneous
In all of the foregoing situations, investors would be left with no
remedy to request clearly erroneous review without the proposed
carveouts in paragraph (c)(1)(C) because the trades occurred within the
LULD Price Bands (albeit LULD Price Bands that were calculated from an
erroneous Reference Price). The Exchange believes that removing the
current ability for the Exchange to review in these narrow
circumstances would lessen investor protections.
Numerical Guidelines
Today, paragraph (c)(1) defines the Numerical Guidelines that are
used to determine if a transaction is deemed clearly erroneous during
Regular Trading Hours, or during the Early Trading, Pre-Opening and
After Hours Sessions. With respect to Regular Trading Hours, trades are
generally deemed clearly erroneous if the execution price differs from
the Reference Price (i.e., last sale) by 10% if the Reference Price is
greater than $0.00 up to and including $25.00; 5% if the Reference
Price is greater than $25.00 up to and including $50.00; and 3% if the
Reference Price is greater than $50.00. Wider parameters are also used
for reviews for Multi-Stock Events, as described in paragraph (c)(2).
With respect to transactions in Leveraged ETF/ETN securities executed
during Regular Trading Hours, Early Trading, Pre-Opening and After-
Hours Trading Session, trades are deemed clearly erroneous if the
execution price exceeds the Regular Trading Hours Numerical Guidelines
multiplied by the leverage multiplier.
Given the changes described in this proposed rule change, the
Exchange proposes to amend the way that the Numerical Guidelines are
calculated during Regular Trading Hours in the handful of instances
where clearly erroneous review would continue to be available.
Specifically, the Exchange would base these Numerical Guidelines, as
applied to the circumstances described in paragraph (c)(1)(A), on the
Percentage Parameters used to calculate Price Bands, as set forth in
Appendix A to the LULD Plan. Without this change, a transaction that
would otherwise stand if Price Bands were properly applied to the
transaction may end up being subject to review and deemed clearly
erroneous solely due to the fact that the Price Bands were not
available due to a systems or other issue. The Exchange believes that
it makes more sense to instead base the Price Bands on the same
parameters as would otherwise determine whether the trade would have
been allowed to execute within the Price Bands. The Exchange also
proposes to modify the Numerical Guidelines applicable to leveraged
ETF/ETN securities during Regular Trading Hours. As noted above, the
Numerical Guidelines will only be applicable to transactions eligible
for review pursuant paragraph (c)(1)(A) (i.e., to NMS Stocks that are
not subject to the LULD Plan). As leveraged ETF/ETN securities are
subject to LULD and thus the Percentage Parameters will be applicable
during Regular Trading Hours, the Exchange proposes to eliminate the
Numerical Guidelines for leveraged ETF/ETN securities traded during
Regular Trading Hours. However, as no Price Bands are available outside
of Regular Trading Hours, the Exchange proposes to keep the existing
Numerical Guidelines in place for transactions in leveraged ETF/ETN
securities that occur during Early Trading, Pre-Opening and After-Hours
Trading.
The Exchange also proposes to move existing paragraphs (c)(2),
(c)(3), and (d) to proposed paragraph (c)(2)(B), (c)(2)(C), and
(C)(2)(D), respectively, as Multi-Stock Events, Additional Factors, and
Outlier Transactions will only be subject to review if those NMS Stocks
are not subject to the LULD Plan or occur during the Early Trading,
Pre-Opening and After Hours Sessions. Proposed paragraph (c)(2)(B) is
substantially similar to existing paragraph (c)(2) except for a change
in rule reference to paragraph (c)(1) has been updated to paragraph
(c)(1)(A). Further, given the proposal to move existing paragraph
(c)(2) to paragraph (c)(2)(B), the Exchange also proposes to amend
applicable rule references throughout paragraph (c)(2)(A). Finally, the
Exchange proposes to update applicable rule references in paragraph
(c)(2)(D) based on the above-described structural changes to the Rule.
Reference Price
As proposed, the Reference Price used would continue to be based on
last sale and would be memorialized in proposed paragraph (d).
Continuing to use the last sale as the Reference Price is necessary for
operational efficiency as it may not be possible to perform a timely
clearly erroneous review if doing so required computing the arithmetic
mean price of eligible reported transactions over the past five
minutes, as contemplated by the LULD Plan. While this means that there
would still be some differences between the Price Bands and the clearly
erroneous parameters, the Exchange believes that this difference is
reasonable in light of the need to ensure timely review if clearly
erroneous rules are invoked. The Exchange also proposes to allow for an
alternate Reference Price to be used as prescribed in proposed
paragraphs (d)(1), (2), and (3). Specifically, the Reference Price may
be a value other than the consolidated last sale immediately prior to
the execution(s) under review (1) in the case of Multi-Stock Events
involving twenty or more securities, as described in paragraph
(c)(2)(B) above, (2) in the case of an erroneous Reference Price, as
described in paragraph (c)(1)(C) above,\28\ or (3) in other
circumstances, such as, for example, relevant news impacting a security
or securities, periods of extreme market volatility, sustained
illiquidity, or widespread system issues, where use of a different
Reference Price is necessary for the maintenance of a fair and orderly
market and the protection of investors and the public interest,
provided that such circumstances occurred during Early Trading, Pre-
Opening or After-Hours Session or are eligible for review pursuant to
paragraph (c)(1)(A).
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\28\ As discussed above, in the case of (c)(1)(C)(1), the
Exchange would consider a number of factors to determine a new
Reference Price that is based on the theoretical value of the
security, including but not limited to, the offering price of the
new issue, the ratio of the stock split applied to the prior day's
closing price, the theoretical price derived from the numerical
terms of the corporate action transaction such as the exchange ratio
and spin-off terms, and the prior day's closing price on the OTC
market for an OTC up-listing. In the case of (c)(1)(C)(2), the
Reference Price will be the last effective Price Band that was in a
limit state before the Trading Pause.
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Appeals
As described more fully below, the Exchange proposes to eliminate
paragraph (f), System Disruption or Malfunction. Accordingly, the
Exchange proposes to remove from paragraph (e)(2), Appeals, each
reference to paragraph (f), and include language referencing proposed
paragraph (g), Transactions Occurring Outside of the LULD Bands.
System Disruption or Malfunction
To conform with the structural changes described above, the
Exchange now proposes to remove paragraph 11.15(f), System Disruption
or Malfunction, and proposes new paragraph (c)(1)(B). Specifically, as
described in paragraph (c)(1)(B), transactions occurring during Regular
Trading Hours that are executed outside of the LULD Price Bands due to
an Exchange technology or system issue, may be subject to clearly
erroneous review pursuant to proposed paragraph
[[Page 58832]]
11.15(g). Proposed paragraph 11.17 (c)(1)(B) further provides that a
transaction subject to review pursuant to this paragraph shall be found
to be clearly erroneous if the price of the transaction to buy (sell)
that is the subject of the complaint is greater than (less than) the
Reference Price, described in paragraph (d), by an amount that equals
or exceeds the applicable Percentage Parameter defined in Appendix A to
the LULD Plan.
Trade Nullification for UTP Securities That Are the Subject of Initial
Public Offerings
Current paragraph (h) of EDGX Rule 11.15 provides different
procedures for conducting clearly erroneous review in initial public
offering (``IPO'') securities that are traded pursuant to unlisted
trading privileges (``UTP'') after the initial opening of such IPO
securities on the listing market. Specifically, this paragraph provides
that a clearly erroneous error may be deemed to have occurred in the
opening transaction of the subject security if the execution price of
the opening transaction on the Exchange is the lesser of $1.00 or 10%
away from the opening price on the listing exchange or association. The
Exchange no longer believes that this provision is necessary as opening
transactions on the Exchange following an IPO are subject to Price
Bands pursuant to the LULD Plan. The Exchange therefore proposes to
eliminate this provision in connection with the broader changes to
clearly erroneous review during Regular Trading Hours.
Securities Subject to Limit Up-Limit Down Plan
The Exchange proposes to renumber paragraph (i) to paragraph (h)
based on the proposal to eliminate existing paragraph (h), and to
rename the paragraph to provide for transactions occurring outside of
LULD Price Bands. Given that proposed paragraph (c)(1) defines the LULD
Plan, the Exchange also proposes to eliminate redundant language from
proposed paragraph (h). Finally, the Exchange also proposes to update
references to the LULD Plan and Price Bands so that they are uniform
throughout the Rule and to update rule references throughout the
paragraph to conform to the structural changes to the Rule described
above.
Multi-Day Event and Trading Halts
The Exchange proposes to renumber paragraphs (j) and (k) to
paragraphs (h) and (i), respectively, based on the proposal to
eliminate existing paragraph (h). Additionally, the Exchange proposes
to modify the text of both paragraphs to reference the Percentage
Parameters as well as the Numerical Guidelines. Specifically, the
existing text of proposed paragraphs (h) and (i) provides that any
action taken in connection with this paragraph will be taken without
regard to the Numerical Guidelines set forth in this Rule. The Exchange
proposes to amend the rule text to provide that any action taken in
connection with this paragraph will be taken without regard to the
Percentage Parameters or Numerical Guidelines set forth in this Rule,
with the Percentage Parameters being applicable to an NMS Stock subject
to the LULD Plan and the Numerical Guidelines being applicable to an
NMS Stock not subject to the LULD Plan. Finally, the Exchange proposes
to make several ministerial changes to conform the Rule text to BZX
Rule 11.17.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the requirements of Section 6(b) of the Act,\29\ in general, and
Section 6(b)(5) of the Act,\30\ in particular, in that it is designed
to remove impediments to and perfect the mechanism of a free and open
market and a national market system, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest and not to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\29\ 15 U.S.C. Sec. 78f(b).
\30\ 15 U.S.C. Sec. 78f(b)(5).
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As explained in the purpose section of this proposed rule change,
the current pilot was implemented following the Flash Crash to bring
greater transparency to the process for conducting clearly erroneous
reviews, and to help assure that the review process is based on clear,
objective, and consistent rules across the U.S. equities markets. The
Exchange believes that the amended clearly erroneous rules have been
successful in that regard and have thus furthered fair and orderly
markets. Specifically, the Exchange believes that the pilot has
successfully ensured that such reviews are conducted based on objective
and consistent standards across SROs and has therefore afforded greater
certainty to Members and investors. The Exchange therefore believes
that making the current pilot a permanent program is appropriate so
that equities market participants can continue to reap the benefits of
a clear, objective, and transparent process for conducting clearly
erroneous reviews. In addition, the proposal is substantially identical
to a recent rule change to BZX Rule 11.17, and the Exchange understands
that the other U.S. equities exchanges and FINRA will also file largely
identical proposals to make their respective clearly erroneous pilots
permanent. The Exchange therefore believes that the proposed rule
change would promote transparency and uniformity across markets
concerning review of transactions as clearly erroneous and would also
help assure consistent results in handling erroneous trades across the
U.S. equities markets, thus furthering fair and orderly markets, the
protection of investors, and the public interest.
Similarly, the Exchange believes that it is consistent with just
and equitable principles of trade to limit the availability of clearly
erroneous review during Regular Trading Hours. The Plan was approved by
the Commission to operate on a permanent rather than pilot basis. As a
number of market participants have noted, the LULD Plan provides
protections that ensure that investors' orders are not executed at
prices that may be considered clearly erroneous. Further, amendments to
the LULD Plan approved in Amendment Eighteen serve to ensure that the
Price Bands established by the LULD Plan are ``appropriately tailored
to prevent trades that are so far from current market prices that they
would be viewed as having been executed in error.'' \31\ Thus, the
Exchange believes that clearly erroneous review should only be
necessary in very limited circumstances during Regular Trading Hours.
Specifically, such review would only be necessary in instances where a
transaction was not subject to the LULD Plan, or was the result of some
form of systems issue, as detailed in the purpose section of this
proposed rule change. Additionally, in narrow circumstances where the
transaction was subject to the LULD Plan, a clearly erroneous review
would be available in the case of (1) a corporate action or new issue
or (2) a security that enters a Trading Pause pursuant to LULD and
resumes trading without an auction, where the Reference Price is
determined to be erroneous by an Officer of the Exchange because it
clearly deviated from the theoretical value of the security. Thus,
eliminating clearly erroneous review in all other instances will serve
to increase certainty for Members and investors that trades executed
during Regular Trading Hours would typically stand and would not be
subject to review.
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\31\ See Amendment Eighteen, supra note 7.
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Given the fact that clearly erroneous review would largely be
limited to
[[Page 58833]]
transactions that were not subject to the LULD Plan, the Exchange also
believes that it is necessary to change the parameters used to
determine whether a trade is clearly erroneous. Specifically, due to
the different parameters currently used for clearly erroneous review
and for determining Price Bands, it is possible that a trade that would
have been permitted to execute within the Price Bands would later be
deemed clearly erroneous, if, for example, a systems issue prevented
the dissemination of the Price Bands. The Exchange believes that this
result is contrary to the principle that trades within the Price Bands
should stand, and has the potential to cause investor confusion if
trades that are properly executed within the applicable parameters
described in the LULD Plan are later deemed erroneous. By using
consistent parameters for clearly erroneous reviews conducted during
Regular Trading Hours and the calculation of the Price Bands, the
Exchange believes that this change would also serve to promote greater
certainty with regards to when trades may be deemed erroneous.
The Exchange believes that it is consistent with the protection of
investors and the public interest to remove the current provision of
the clearly erroneous rule dealing with UTP securities that are the
subject of IPOs. This provision applies specifically to opening
transactions on a non-listing market following an IPO on the listing
market. As such, review under this paragraph is limited to trades
conducted during Regular Trading Hours. As previously addressed, trades
executed during Regular Trading Hours would generally not be subject to
clearly erroneous review but would instead be protected by the Price
Bands. The Exchange therefore no longer believes that this paragraph is
necessary, as all trades subject to this provision today would either
be subject to the LULD Plan, or, in the event of some systems or other
issue, would be subject to the provisions that apply to transactions
that are not adequately protected by the LULD Plan.
Finally, the proposed rule changes make organizational updates to
the Exchange's Clearly Erroneous Execution Rule as well as minor
updates and corrections to the Rule to improve readability and clarity.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change would
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The proposal would ensure
the continued, uninterrupted operation of harmonized clearly erroneous
execution rules across the U.S. equities markets while also amending
those rules to provide greater certainty to Members and investors that
trades will stand if executed during Regular Trading Hours where the
LULD Plan provides adequate protection against trading at erroneous
prices. The Exchange understands that the other national securities
exchanges and FINRA will also file similar proposals, the substance of
which are substantively identical to this proposal. Thus, the proposed
rule change will help to ensure consistency across SROs without
implicating any competitive issues.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The Exchange has filed the proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \32\ and Rule 19b-4(f)(6) thereunder.\33\
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 \34\ and subparagraph (f)(6) of
Rule 19b-4 thereunder.\35\
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\32\ 15 U.S.C. 78s(b)(3)(A)(iii).
\33\ 17 CFR 240.19b-4(f)(6).
\34\ 15 U.S.C. 78s(b)(3)(A)(iii).
\35\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
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.
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A proposed rule change filed under Rule 19b-4(f)(6) \36\ normally
does not become operative prior to 30 days after the date of the
filing. However, Rule 19b-4(f)(6)(iii) \37\ permits the Commission to
designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay so that the proposed
rule change may become operative on October 1, 2022. The Commission
believes that waiving the 30-day operative delay is consistent with the
protection of investors and the public interest, as it will allow the
Exchange to coordinate its implementation of the revised clearly
erroneous execution rules with the other national securities exchanges
and FINRA, and will help ensure consistency across the SROs.\38\ For
this reason, the Commission hereby waives the 30-day operative delay
and designates the proposed rule change as operative upon filing.\39\
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\36\ 17 CFR 240.19b-4(f)(6).
\37\ 17 CFR 240.19b-4(f)(6)(iii).
\38\ See SR-CboeBZX-2022-37 (July 8, 2022).
\39\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is 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 [email protected]. Please include
File Number SR-CboeEDGX-2022-041 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-CboeEDGX-2022-041. 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/
[[Page 58834]]
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 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. 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-CboeEDGX-2022-041 and should
be submitted on or before October 19, 2022.
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\40\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\40\
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-20941 Filed 9-27-22; 8:45 am]
BILLING CODE 8011-01-P
