Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Clearly Erroneous Rules, 59142-59148 [2022-21065]
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Federal Register / Vol. 87, No. 188 / Thursday, September 29, 2022 / Notices
Number SR–Phlx–2022–36 and should
be submitted on or before October 20,
2022.
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.36
J. Matthew DeLesDernier,
Deputy Secretary.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
[FR Doc. 2022–21067 Filed 9–28–22; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–95896; File No. SR–BX–
2022–017]
Self-Regulatory Organizations; Nasdaq
BX, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend the Clearly
Erroneous Rules
September 23, 2022.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on
September 20, 2022, Nasdaq BX, Inc.
(‘‘BX’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I and
II, below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
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I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to a proposal
to amend BX Equity 11, Rule 11890
(Clearly Erroneous Transactions).
The text of the proposed rule change
is available on the Exchange’s website at
https://listingcenter.nasdaq.com/
rulebook/bx/rules, at the principal office
of the Exchange, and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
36 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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1. Purpose
On September 1, 2022, the
Commission approved the proposal of
Cboe BZX Exchange, Inc. (‘‘Cboe BZX’’)
to (1) adopt on a permanent basis the
pilot program for clearly erroneous
executions in Cboe BZX Rule 11.17 and
(2) limit the circumstances where
clearly erroneous review would
continue to be available during regular
trading hours (i.e., Market Hours 3)
when the Limit Up-Limit Down
(‘‘LULD’’) Plan to Address Extraordinary
Market Volatility (the ‘‘LULD Plan’’) 4
already provides similar protections for
trades occurring at prices that may be
deemed erroneous.5
The Exchange now proposes to adopt
the same changes in Equity 11, Rule
11890 (Clearly Erroneous Transactions).
The Exchange believes that these
changes are appropriate as the LULD
Plan has been approved by the
Commission on a permanent basis,6 and
in light of amendments to the LULD
Plan, including changes to the
applicable Price Bands 7 around the
open and close of trading.
Proposal To Make the Clearly Erroneous
Pilot Permanent
On September 10, 2010, the
Commission approved, on a pilot basis,
changes to Equity 11, Rule 11890 that,
among other things: (i) provided for
uniform treatment of clearly
erroneous execution reviews in multistock 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.8
3 See Securities Exchange Act Release No. 95658
(September 1, 2022) (SR–CboeBZX–2022–037).
4 See Securities Exchange Act Release No. 67091
(May 31, 2012), 77 FR 33498 (June 6, 2012).
5 The term ‘‘Market Hours’’ means the period of
time beginning at 9:30 a.m. ET and ending at 4:00
p.m. ET (or such earlier time as may be designated
by the Exchange on a day when the Exchange closes
early). See Equity 1, Section 1(a)(13). The Exchange
will make conforming changes throughout Rule
11890 to replace references to ‘‘Regular Trading
Hours’’ and ‘‘Regular Market Session’’ with ‘‘Market
Hours,’’ which is the correct defined term.
6 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’’).
7 ‘‘Price Bands’’ refers to the term provided in
Section V of the LULD Plan.
8 See Securities Exchange Act Release No. 62886
(September 10, 2010), 75 FR 56613 (September 16,
2010) (SR–BX–2010–040).
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In 2013, the Exchange adopted a
provision designed to address the
operation of the LULD Plan.9 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.10 These changes are currently
scheduled to operate for a pilot period
that would end at the close of business
on October 20, 2022.11
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.’’ 12 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.’’ 13 Largely, the pilot reduced the
9 See Securities Exchange Act Release No. 68818
(February 1, 2013), 78 FR 9100 (February 7, 2013)
(SR–BX–2013–010).
10 See Securities Exchange Act Release No. 72434
(June 19, 2014), 79 FR 36110 (June 25, 2014) (SR–
BX–2014–021).
11 See Securities Exchange Act Release No. 95332
(July 20, 2022), 87 FR 44471 (July 26, 2022) (SR–
BX–2022–011).
12 See Securities Exchange Act Release No. 62886
(September 10, 2010), 75 FR 56613 (September 16,
2010) (SR–BX–2010–040).
13 Id.
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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.
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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 subject to review.14
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 that time.15 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.’’ 16
14 See Securities Exchange Act Release No. 67091
(May 31, 2012), 77 FR 33498 (June 6, 2012) (File
No. 4–631) (n. 33505).
15 Id.
16 See EMSAC Market Quality Subcommittee,
Recommendations for Rulemaking on Issues of
Market Quality (November 29, 2016), available at
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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
Market 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 Market 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
Market Hours. Thus, trades during the
Exchange’s Pre-Market 17 or Post-Market
Hours 18 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 Pre-Market or PostMarket Hours would continue to be
reviewable as clearly erroneous.
Continued availability of the clearly
erroneous rule during Pre- and PostMarket Hours 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
https://www.sec.gov/spotlight/emsac/emsacrecommendations-rulemaking-market-quality.pdf.
17 The term ‘‘Pre-Market Hours’’ means the period
of time beginning at 7:00 a.m. ET and ending
immediately prior to the commencement of Market
Hours. See Equity 1, Section 1(a)(13). The Exchange
will make conforming changes throughout Rule
11890 to replace references to ‘‘Pre-Opening Hours’’
or ‘‘Pre-Opening Hours Trading Session’’ with ‘‘PreMarket Hours,’’ which is the correct defined term.
18 The term ‘‘Post-Market Hours’’ means the
period of time beginning immediately after the end
of Market Hours and ending at 7:00 p.m. ET. See
Equity 1, Section 1(a)(13). The Exchange will make
conforming changes throughout Rule 11890 to
replace references to ‘‘After Hours’’ or ‘‘After Hours
Trading Session’’ with ‘‘Post-Market Hours,’’ which
is the correct defined term.
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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 Market 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 Market Hours.
On the other hand, there would be
much more limited potential to request
that a transaction be reviewed as
potentially erroneous during Market
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 $3.00.19
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 Market 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 Market 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 Market 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 Market Hours, as follows.
All transactions that fall outside of these
specific enumerated exceptions would
19 See
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Amendment Eighteen, supra note 6.
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be ineligible for clearly erroneous
review.
First, pursuant to proposed
subparagraph (C)(1)(i) of Rule
11890(a)(2), a transaction executed
during Market 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 subparagraph
(C)(2) of Rule 11890(a)(2) 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.20 Similarly, there are instances,
such as the opening auction on the
primary listing market,21 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
subparagraph (C)(1)(ii). This limited
exception would help to ensure that
trades that should not have been
executed would continue to be subject
to clearly erroneous review.
Specifically, as proposed, transactions
executed during Market Hours would be
eligible for clearly erroneous review
pursuant to proposed subparagraph
(C)(1)(ii) 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 Rule
11890(g), or is executed after the
primary listing market for the security
declares a regulatory trading halt,
suspension, or pause pursuant to Rule
11890(i). 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,
20 See
Appendix A of the LULD Plan.
21 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.
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described in subparagraph (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 Market Hours when
the Reference Price, described in
proposed subparagraph (D), is
determined to be erroneous by an
Officer of the Exchange or senior level
employee designee. Specifically, a
transaction executed during Market
Hours would be eligible for clearly
erroneous review pursuant to proposed
subparagraph (C)(1)(iii) of Rule
11890(a)(2) 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,22 a Reference Price that is
determined to be erroneous by an
Officer of the Exchange or senior level
employee designee 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
subparagraph (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 subparagraph (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
subparagraph (C)(1)(i).
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
22 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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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.23 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
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
23 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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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.24 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
24 See
LULD Plan, Section I(U) and V(C)(1).
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9. The new Reference Price would be
$22 (i.e., the last effective Price
Band that was in 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
subparagraph (C)(1)(iii) 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, subparagraph (C)(1) defines
the Numerical Guidelines that are used
to determine if a transaction is deemed
clearly erroneous during Market Hours,
or during the Pre-Market and PostMarket Hours. With respect to Market
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 subparagraph
(C)(2). With respect to transactions in
Leveraged ETF/ETN securities executed
during Market Hours, Pre-Market and
Post-Market Hours, trades are deemed
clearly erroneous if the execution price
exceeds the Market 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 applied
during Market Hours in the handful of
instances where clearly erroneous
review would continue to be available.
Specifically during Market Hours, the
Exchange would continue to apply the
Numerical Guidelines, which would be
relocated from subparagraph (C)(1) to
(C)(2)(i) under this proposal, to
transactions eligible for review pursuant
proposed subparagraph (C)(1)(i) (i.e.,
transactions in NMS Stocks that are not
subject to the LULD Plan). In addition,
as applied to the circumstances
described in proposed subparagraphs
(C)(1)(ii) and (iii), the Exchange would
not apply the Numerical Guidelines in
proposed subparagraph (C)(2)(i) during
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59145
Market Hours, and would instead apply
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
Market Hours. As noted above, the
Numerical Guidelines will only be
applicable to transactions eligible for
review pursuant subparagraph (C)(1)(i)
(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 Market Hours, the
Exchange proposes to eliminate the
Numerical Guidelines for leveraged
ETF/ETN securities traded during
Market Hours. However, as no Price
Bands are available outside of Market
Hours, the Exchange proposes to keep
the existing Numerical Guidelines in
place for transactions in leveraged ETF/
ETN securities that occur during PreMarket and Post-Market Hours.
The Exchange also proposes to move
existing subparagraphs (C)(2) (MultiStock Events Involving Twenty or More
Securities) and (C)(3) (Additional
Factors) as proposed subparagraphs
(C)(2)(ii) and (C)(2)(iii), respectively,
and also proposes to make clear that
Multi-Stock Events and Additional
Factors will only be subject to clearly
erroneous review if those NMS Stocks
are not subject to the LULD Plan or
occur during the Pre-Market or PostMarket Hours. The Exchange proposes
to make similar changes to existing
subparagraph (A)(iii) (Outlier
Transactions) to make clear that such
transactions will only be subject to
clearly erroneous review if those NMS
Stocks are not subject to the LULD Plan
or occur during Pre-Market or PostMarket Hours. Further, given the
proposal to move existing
subparagraphs (C)(2) and (C)(3) to
subparagraphs (C)(2)(ii) and (C)(2)(iii),
respectively, the Exchange also
proposes to amend applicable rule
references throughout subparagraph
(C)(2)(i). Further, the Exchange proposes
to update applicable rule references in
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subparagraph (A)(iii) 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
subparagraph (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 subparagraphs
(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 MultiStock Events involving twenty or more
securities, as described in subparagraph
(C)(2)(ii) above, (2) in the case of an
erroneous Reference Price, as described
in subparagraph (C)(1)(iii) above,25 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 Pre-Market or PostMarket Hours or are eligible for review
pursuant to subparagraph (C)(1)(i).
khammond on DSKJM1Z7X2PROD with NOTICES
System Disruption or Malfunction
To conform with the structural
changes described above, the Exchange
now proposes to remove paragraph
(b)(i), System Disruption or
Malfunctions, and renumber existing
25 As discussed above, in the case of (C)(1)(iii)(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)(iii)(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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17:52 Sep 28, 2022
Jkt 256001
paragraph (b)(ii) as (b)(i). Additionally,
the Exchange proposes to add rule text
in renumbered (b)(i) (Senior Official
Acting on Own Motion) to specify that
a Senior Official, acting on his or her
own motion, may review potentially
erroneous transactions that occur only
during Pre-Market or Post-Market Hours
or that are eligible for review pursuant
to proposed paragraph (a)(2)(C)(1).
The Exchange also proposes new
subparagraph (C)(1)(ii) of Rule
11890(a)(2). Specifically, as described in
subparagraph (C)(1)(ii), transactions
occurring during Market 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 (g) of Rule 11890. Proposed
subparagraph (C)(1)(ii) 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 subparagraph (D), by an
amount that equals or exceeds the
applicable Percentage Parameter defined
in Appendix A to the LULD Plan.
Securities Subject to Limit Up-Limit
Down Plan
The Exchange proposes to rename
paragraph (g) (Securities Subject to
LULD Plan) as ‘‘Transactions Occurring
Outside of LULD Price Bands.’’ Given
that proposed subparagraph (C)(1) of
Rule 11890(a)(2) defines the LULD Plan,
the Exchange also proposes to eliminate
redundant language from paragraph (g).
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.
Conforming Changes
In connection with the changes
proposed above, the Exchange proposes
to make a conforming change in
paragraph (a)(2) to replace the reference
to ‘‘Numerical Guidelines’’ to
‘‘guidelines’’ as clearly erroneous
review will now be based on both the
existing Numerical Guidelines and the
Percentage Parameters in the manner
specified above. In addition, the
Exchange proposes to modify the text of
paragraphs (e) (Fees), (h) (Multi-Day
Event), and (i) (Trading Halts) to
reference the Percentage Parameters as
well as the Numerical Guidelines, and
to update rule references therein to
conform to the structural changes to the
Rule described above. Specifically, the
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Frm 00109
Fmt 4703
Sfmt 4703
existing text of paragraph (e) provides
that adjustments or voluntary breaks
negotiated by the Exchange to trades
executed at prices that meet the
Numerical Guidelines set forth in
(a)(2)(C)(1) count as breaks by the
Exchange for purposes of this
paragraph. The Exchange now proposes
to amend the rule text to state that
adjustments or voluntary breaks
negotiated by the Exchange to trades
executed at prices that meet the
Percentage Parameters or Numerical
Guidelines set forth in (a)(2)(C)(2) count
as breaks by the Exchange for purposes
of this paragraph.
In addition, the existing text of
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.
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the
requirements of Section 6(b) of the
Act,26 in general, and Section 6(b)(5) of
the Act,27 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
26 15
27 15
E:\FR\FM\29SEN1.SGM
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
29SEN1
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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 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 Market Hours. The LULD 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.’’ 28 Thus,
the Exchange believes that clearly
erroneous review should only be
necessary in very limited circumstances
during Market 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 or senior level
employee designee because it clearly
deviated from the theoretical value of
28 See
Amendment Eighteen, supra note 6.
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17:52 Sep 28, 2022
Jkt 256001
the security. Thus, eliminating clearly
erroneous review in all other instances
will serve to increase certainty for
Members and investors that trades
executed during Market Hours would
typically stand and would not be subject
to review.
Given the fact that clearly erroneous
review would largely be limited to
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
Market 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.
Finally, the proposed rule changes
make organizational updates to Rule
11890 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
Market 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 identical to
this proposal. Thus, the proposed rule
change will help to ensure consistency
across SROs without implicating any
competitive issues.
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59147
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A)(iii) of the Act 29 and
subparagraph (f)(6) of Rule 19b–4
thereunder.30
A proposed rule change filed under
Rule 19b–4(f)(6) 31 normally does not
become operative prior to 30 days after
the date of the filing. However, Rule
19b–4(f)(6)(iii) 32 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.33
For this reason, the Commission hereby
waives the 30-day operative delay and
designates the proposed rule change as
operative upon filing.34
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
29 15
U.S.C. 78s(b)(3)(A)(iii).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6) requires a self-regulatory organization to give
the Commission written notice of its intent to file
the proposed rule change at least five business days
prior to the date of filing of the proposed rule
change, or such shorter time as designated by the
Commission. The Exchange has satisfied this
requirement.
31 17 CFR 240.19b–4(f)(6).
32 17 CFR 240.19b–4(f)(6)(iii).
33 See SR–CboeBZX–2022–37 (July 8, 2022).
34 For purposes only of waiving the 30-day
operative delay, the Commission has also
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
30 17
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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:
khammond on DSKJM1Z7X2PROD with NOTICES
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
BX–2022–017 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–BX–2022–017. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of 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
VerDate Sep<11>2014
17:52 Sep 28, 2022
Jkt 256001
Number SR–BX–2022–017 and should
be submitted on or before October 20,
2022.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.35
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022–21065 Filed 9–28–22; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–95903; File No. SR–MEMX–
2022–27]
Self-Regulatory Organizations; MEMX
LLC; Notice of Filing and Immediate
Effectiveness of a Proposed Rule
Change To Update Exchange Rule
13.4(a) Regarding the Exchange’s
Usage of Data Feeds
September 23, 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 19, 2022, MEMX LLC
(‘‘MEMX’’ or the ‘‘Exchange’’) 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 ‘‘noncontroversial’’ 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
The Exchange is filing with the
Commission a proposed rule change to
update Exchange Rule 13.4(a) regarding
the sources of data that the Exchange
utilizes for the handling, execution and
routing of orders, as well as for
surveillance necessary to monitor
compliance with applicable securities
laws and Exchange rules, with respect
to certain market centers. The text of the
proposed rule change is provided in
Exhibit 5.
35 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(iii).
4 17 CFR 240.19b–4(f)(6).
1 15
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II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to update
Exchange Rule 13.4(a) regarding the
sources of data that the Exchange
utilizes for the handling, execution and
routing of orders, as well as for
surveillance necessary to monitor
compliance with applicable securities
laws and Exchange rules, with respect
to certain market centers. Specifically,
the Exchange proposes to amend
Exchange Rule 13.4(a) to reflect that it
no longer utilizes direct data feeds and
instead will utilize market data from the
Consolidated Quotation System
(‘‘CQS’’)/UTP Quotation Data Feed
(‘‘UQDF’’) for such purposes with
respect to the following markets centers:
Cboe BYX, Cboe EDGA, Nasdaq BX,
Nasdaq PSX, NYSE American, NYSE
Chicago, and NYSE National.5 The
Exchange does not have a secondary
source for data for these market centers.
By making the changes set forth
above, the Exchange anticipates saving
approximately $30,000 per month, or
$360,000 annually, by discontinuing
receipt of direct data feeds from the
markets listed above. The Exchange
determined the list of markets from
which to discontinue direct data feeds
because such markets represent the U.S.
national securities exchanges that
charge for market data but have less
5 The Exchange previously filed the proposal,
which was effective on filing prior to August 1,
2022, the date that the Exchange transitioned over
to use CQS/UQDF for the market centers listed
above. See Securities Exchange Act Release No.
95395 (July 29, 2022), 87 FR 47799 (August 4, 2022)
(SR–MEMX–2022–20) (the ‘‘Original Proposal’’).
The Exchange withdrew the Original Proposal and
re-filed this proposal in order to provide additional
transparency and respond to a comment letter
received on the Original Proposal. See Letter from
Christopher Nagy, Research Director, Healthy
Markets Association, to Vanessa Countryman,
Secretary, Securities and Exchange Commission
dated August 16, 2022.
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]]>Agencies
[Federal Register Volume 87, Number 188 (Thursday, September 29, 2022)]
[Notices]
[Pages 59142-59148]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-21065]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95896; File No. SR-BX-2022-017]
Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend the
Clearly Erroneous Rules
September 23, 2022.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on September 20, 2022, Nasdaq BX, Inc. (``BX'' or ``Exchange'') filed
with the Securities and Exchange Commission (``SEC'' or ``Commission'')
the proposed rule change as described in Items I and II, below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to a proposal to amend BX Equity 11, Rule
11890 (Clearly Erroneous Transactions).
The text of the proposed rule change is available on the Exchange's
website at https://listingcenter.nasdaq.com/rulebook/bx/rules, at the
principal office of the Exchange, and at the Commission's Public
Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
On September 1, 2022, the Commission approved the proposal of Cboe
BZX Exchange, Inc. (``Cboe BZX'') to (1) adopt on a permanent basis the
pilot program for clearly erroneous executions in Cboe BZX Rule 11.17
and (2) limit the circumstances where clearly erroneous review would
continue to be available during regular trading hours (i.e., Market
Hours \3\) when the Limit Up-Limit Down (``LULD'') Plan to Address
Extraordinary Market Volatility (the ``LULD Plan'') \4\ already
provides similar protections for trades occurring at prices that may be
deemed erroneous.\5\
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Release No. 95658 (September 1,
2022) (SR-CboeBZX-2022-037).
\4\ See Securities Exchange Act Release No. 67091 (May 31,
2012), 77 FR 33498 (June 6, 2012).
\5\ The term ``Market Hours'' means the period of time beginning
at 9:30 a.m. ET and ending at 4:00 p.m. ET (or such earlier time as
may be designated by the Exchange on a day when the Exchange closes
early). See Equity 1, Section 1(a)(13). The Exchange will make
conforming changes throughout Rule 11890 to replace references to
``Regular Trading Hours'' and ``Regular Market Session'' with
``Market Hours,'' which is the correct defined term.
---------------------------------------------------------------------------
The Exchange now proposes to adopt the same changes in Equity 11,
Rule 11890 (Clearly Erroneous Transactions). The Exchange believes that
these changes are appropriate as the LULD Plan has been approved by the
Commission on a permanent basis,\6\ and in light of amendments to the
LULD Plan, including changes to the applicable Price Bands \7\ around
the open and close of trading.
---------------------------------------------------------------------------
\6\ 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'').
\7\ ``Price Bands'' refers to the term provided in Section V of
the LULD Plan.
---------------------------------------------------------------------------
Proposal To Make the Clearly Erroneous Pilot Permanent
On September 10, 2010, the Commission approved, on a pilot basis,
changes to Equity 11, Rule 11890 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.\8\ In 2013, the Exchange adopted a provision
designed to address the operation of the LULD Plan.\9\ 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.\10\ These changes are currently scheduled to operate for a
pilot period that would end at the close of business on October 20,
2022.\11\
---------------------------------------------------------------------------
\8\ See Securities Exchange Act Release No. 62886 (September 10,
2010), 75 FR 56613 (September 16, 2010) (SR-BX-2010-040).
\9\ See Securities Exchange Act Release No. 68818 (February 1,
2013), 78 FR 9100 (February 7, 2013) (SR-BX-2013-010).
\10\ See Securities Exchange Act Release No. 72434 (June 19,
2014), 79 FR 36110 (June 25, 2014) (SR-BX-2014-021).
\11\ See Securities Exchange Act Release No. 95332 (July 20,
2022), 87 FR 44471 (July 26, 2022) (SR-BX-2022-011).
---------------------------------------------------------------------------
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.'' \12\ 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.
---------------------------------------------------------------------------
\12\ See Securities Exchange Act Release No. 62886 (September
10, 2010), 75 FR 56613 (September 16, 2010) (SR-BX-2010-040).
---------------------------------------------------------------------------
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.'' \13\ Largely, the pilot reduced the
[[Page 59143]]
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.
---------------------------------------------------------------------------
\13\ 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 subject to review.\14\ 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 that
time.\15\ 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.'' \16\
---------------------------------------------------------------------------
\14\ See Securities Exchange Act Release No. 67091 (May 31,
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631) (n. 33505).
\15\ Id.
\16\ 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 Market 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 Market 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 Market Hours. Thus, trades during
the Exchange's Pre-Market \17\ or Post-Market Hours \18\ 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 Pre-Market or Post-Market
Hours would continue to be reviewable as clearly erroneous. Continued
availability of the clearly erroneous rule during Pre- and Post-Market
Hours 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
Market 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 Market
Hours.
---------------------------------------------------------------------------
\17\ The term ``Pre-Market Hours'' means the period of time
beginning at 7:00 a.m. ET and ending immediately prior to the
commencement of Market Hours. See Equity 1, Section 1(a)(13). The
Exchange will make conforming changes throughout Rule 11890 to
replace references to ``Pre-Opening Hours'' or ``Pre-Opening Hours
Trading Session'' with ``Pre-Market Hours,'' which is the correct
defined term.
\18\ The term ``Post-Market Hours'' means the period of time
beginning immediately after the end of Market Hours and ending at
7:00 p.m. ET. See Equity 1, Section 1(a)(13). The Exchange will make
conforming changes throughout Rule 11890 to replace references to
``After Hours'' or ``After Hours Trading Session'' with ``Post-
Market Hours,'' which is the correct defined term.
---------------------------------------------------------------------------
On the other hand, there would be much more limited potential to
request that a transaction be reviewed as potentially erroneous during
Market 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.\19\ 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 Market 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 Market Hours.
---------------------------------------------------------------------------
\19\ See Amendment Eighteen, supra note 6.
---------------------------------------------------------------------------
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 Market 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 Market Hours, as follows. All transactions that fall outside
of these specific enumerated exceptions would
[[Page 59144]]
be ineligible for clearly erroneous review.
First, pursuant to proposed subparagraph (C)(1)(i) of Rule
11890(a)(2), a transaction executed during Market 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 subparagraph (C)(2) of Rule 11890(a)(2) 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.\20\ Similarly, there are instances, such as the opening
auction on the primary listing market,\21\ 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.
---------------------------------------------------------------------------
\20\ See Appendix A of the LULD Plan.
\21\ 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 subparagraph (C)(1)(ii). This limited exception would help to
ensure that trades that should not have been executed would continue to
be subject to clearly erroneous review. Specifically, as proposed,
transactions executed during Market Hours would be eligible for clearly
erroneous review pursuant to proposed subparagraph (C)(1)(ii) 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 Rule 11890(g), or is executed after the
primary listing market for the security declares a regulatory trading
halt, suspension, or pause pursuant to Rule 11890(i). 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 subparagraph (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 Market Hours when the Reference Price, described in
proposed subparagraph (D), is determined to be erroneous by an Officer
of the Exchange or senior level employee designee. Specifically, a
transaction executed during Market Hours would be eligible for clearly
erroneous review pursuant to proposed subparagraph (C)(1)(iii) of Rule
11890(a)(2) 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,\22\ a
Reference Price that is determined to be erroneous by an Officer of the
Exchange or senior level employee designee 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
subparagraph (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 subparagraph (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 subparagraph (C)(1)(i).
---------------------------------------------------------------------------
\22\ 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.\23\ 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.
---------------------------------------------------------------------------
\23\ 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
[[Page 59145]]
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.\24\ 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.
---------------------------------------------------------------------------
\24\ 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 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 subparagraph (C)(1)(iii) 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, subparagraph (C)(1) defines the Numerical Guidelines that
are used to determine if a transaction is deemed clearly erroneous
during Market Hours, or during the Pre-Market and Post-Market Hours.
With respect to Market 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 subparagraph (C)(2). With respect
to transactions in Leveraged ETF/ETN securities executed during Market
Hours, Pre-Market and Post-Market Hours, trades are deemed clearly
erroneous if the execution price exceeds the Market 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
applied during Market Hours in the handful of instances where clearly
erroneous review would continue to be available. Specifically during
Market Hours, the Exchange would continue to apply the Numerical
Guidelines, which would be relocated from subparagraph (C)(1) to
(C)(2)(i) under this proposal, to transactions eligible for review
pursuant proposed subparagraph (C)(1)(i) (i.e., transactions in NMS
Stocks that are not subject to the LULD Plan). In addition, as applied
to the circumstances described in proposed subparagraphs (C)(1)(ii) and
(iii), the Exchange would not apply the Numerical Guidelines in
proposed subparagraph (C)(2)(i) during Market Hours, and would instead
apply 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 Market Hours. As noted above, the
Numerical Guidelines will only be applicable to transactions eligible
for review pursuant subparagraph (C)(1)(i) (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 Market Hours, the Exchange proposes to eliminate the Numerical
Guidelines for leveraged ETF/ETN securities traded during Market Hours.
However, as no Price Bands are available outside of Market Hours, the
Exchange proposes to keep the existing Numerical Guidelines in place
for transactions in leveraged ETF/ETN securities that occur during Pre-
Market and Post-Market Hours.
The Exchange also proposes to move existing subparagraphs (C)(2)
(Multi-Stock Events Involving Twenty or More Securities) and (C)(3)
(Additional Factors) as proposed subparagraphs (C)(2)(ii) and
(C)(2)(iii), respectively, and also proposes to make clear that Multi-
Stock Events and Additional Factors will only be subject to clearly
erroneous review if those NMS Stocks are not subject to the LULD Plan
or occur during the Pre-Market or Post-Market Hours. The Exchange
proposes to make similar changes to existing subparagraph (A)(iii)
(Outlier Transactions) to make clear that such transactions will only
be subject to clearly erroneous review if those NMS Stocks are not
subject to the LULD Plan or occur during Pre-Market or Post-Market
Hours. Further, given the proposal to move existing subparagraphs
(C)(2) and (C)(3) to subparagraphs (C)(2)(ii) and (C)(2)(iii),
respectively, the Exchange also proposes to amend applicable rule
references throughout subparagraph (C)(2)(i). Further, the Exchange
proposes to update applicable rule references in
[[Page 59146]]
subparagraph (A)(iii) 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 subparagraph (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
subparagraphs (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 subparagraph
(C)(2)(ii) above, (2) in the case of an erroneous Reference Price, as
described in subparagraph (C)(1)(iii) above,\25\ 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 Pre-Market or Post-
Market Hours or are eligible for review pursuant to subparagraph
(C)(1)(i).
---------------------------------------------------------------------------
\25\ As discussed above, in the case of (C)(1)(iii)(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)(iii)(2), the
Reference Price will be the last effective Price Band that was in a
limit state before the Trading Pause.
---------------------------------------------------------------------------
System Disruption or Malfunction
To conform with the structural changes described above, the
Exchange now proposes to remove paragraph (b)(i), System Disruption or
Malfunctions, and renumber existing paragraph (b)(ii) as (b)(i).
Additionally, the Exchange proposes to add rule text in renumbered
(b)(i) (Senior Official Acting on Own Motion) to specify that a Senior
Official, acting on his or her own motion, may review potentially
erroneous transactions that occur only during Pre-Market or Post-Market
Hours or that are eligible for review pursuant to proposed paragraph
(a)(2)(C)(1).
The Exchange also proposes new subparagraph (C)(1)(ii) of Rule
11890(a)(2). Specifically, as described in subparagraph (C)(1)(ii),
transactions occurring during Market 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
(g) of Rule 11890. Proposed subparagraph (C)(1)(ii) 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 subparagraph (D), by an amount that
equals or exceeds the applicable Percentage Parameter defined in
Appendix A to the LULD Plan.
Securities Subject to Limit Up-Limit Down Plan
The Exchange proposes to rename paragraph (g) (Securities Subject
to LULD Plan) as ``Transactions Occurring Outside of LULD Price
Bands.'' Given that proposed subparagraph (C)(1) of Rule 11890(a)(2)
defines the LULD Plan, the Exchange also proposes to eliminate
redundant language from paragraph (g). 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.
Conforming Changes
In connection with the changes proposed above, the Exchange
proposes to make a conforming change in paragraph (a)(2) to replace the
reference to ``Numerical Guidelines'' to ``guidelines'' as clearly
erroneous review will now be based on both the existing Numerical
Guidelines and the Percentage Parameters in the manner specified above.
In addition, the Exchange proposes to modify the text of paragraphs (e)
(Fees), (h) (Multi-Day Event), and (i) (Trading Halts) to reference the
Percentage Parameters as well as the Numerical Guidelines, and to
update rule references therein to conform to the structural changes to
the Rule described above. Specifically, the existing text of paragraph
(e) provides that adjustments or voluntary breaks negotiated by the
Exchange to trades executed at prices that meet the Numerical
Guidelines set forth in (a)(2)(C)(1) count as breaks by the Exchange
for purposes of this paragraph. The Exchange now proposes to amend the
rule text to state that adjustments or voluntary breaks negotiated by
the Exchange to trades executed at prices that meet the Percentage
Parameters or Numerical Guidelines set forth in (a)(2)(C)(2) count as
breaks by the Exchange for purposes of this paragraph.
In addition, the existing text of 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.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the requirements of Section 6(b) of the Act,\26\ in general, and
Section 6(b)(5) of the Act,\27\ 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.
---------------------------------------------------------------------------
\26\ 15 U.S.C. 78f(b).
\27\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
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
[[Page 59147]]
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 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 Market Hours. The LULD 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.'' \28\ Thus, the
Exchange believes that clearly erroneous review should only be
necessary in very limited circumstances during Market 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 or senior
level employee designee 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 Market Hours would
typically stand and would not be subject to review.
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\28\ See Amendment Eighteen, supra note 6.
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Given the fact that clearly erroneous review would largely be
limited to 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 Market 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.
Finally, the proposed rule changes make organizational updates to
Rule 11890 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 Market 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
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
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \29\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\30\
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\29\ 15 U.S.C. 78s(b)(3)(A)(iii).
\30\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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A proposed rule change filed under Rule 19b-4(f)(6) \31\ normally
does not become operative prior to 30 days after the date of the
filing. However, Rule 19b-4(f)(6)(iii) \32\ 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.\33\ For
this reason, the Commission hereby waives the 30-day operative delay
and designates the proposed rule change as operative upon filing.\34\
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\31\ 17 CFR 240.19b-4(f)(6).
\32\ 17 CFR 240.19b-4(f)(6)(iii).
\33\ See SR-CboeBZX-2022-37 (July 8, 2022).
\34\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such
[[Page 59148]]
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-BX-2022-017 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-BX-2022-017. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of 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-BX-2022-017 and should be submitted on
or before October 20, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\35\
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\35\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-21065 Filed 9-28-22; 8:45 am]
BILLING CODE 8011-01-P
