Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Clearly Erroneous Rules, 59135-59142 [2022-21067]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 87, Number 188 (Thursday, September 29, 2022)]
[Notices]
[Pages 59135-59142]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-21067]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95900; File No. SR-Phlx-2022-36]


Self-Regulatory Organizations; Nasdaq PHLX LLC; 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 PHLX LLC (``Phlx'' 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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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Equity 4, Rule 3312.
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/phlx/rules, at the 
principal office of the Exchange, and at the Commission's Public 
Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these

[[Page 59136]]

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\
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    \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 PSX closes early). 
See Equity 1, Section 1(g). The Exchange will make conforming 
changes throughout Rule 3312 to replace references to ``Regular 
Trading Hours'' or ``Regular Market Session'' with ``Market Hours,'' 
which is the correct defined term.
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    The Exchange now proposes to adopt the same changes in Equity 4, 
Rule 3312 (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.
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    \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.
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Proposal To Make the Clearly Erroneous Pilot Permanent
    On September 10, 2010, the Commission approved, on a pilot basis, 
changes to Equity 4, Rule 3312 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\ Following this, on September 30, 2010, the 
Exchange adopted changes to conform its Rule 3312 to Nasdaq's and BX's 
rules 11890.\9\ In 2013, the Exchange adopted a provision designed to 
address the operation of the LULD Plan.\10\ 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.\11\ These 
changes are currently scheduled to operate for a pilot period that 
would end at the close of business on October 20, 2022.\12\
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    \8\ See Securities Exchange Act Release No. 62886 (September 10, 
2010), 75 FR 56613 (September 16, 2010) (SR-NASDAQ-2010-076).
    \9\ See Securities Exchange Act Release No. 63023 (September 30, 
2010), 75 FR 61802 (October 6, 2010) (SR-Phlx-2010-125).
    \10\ See Securities Exchange Act Release No. 68820 (February 1, 
2013), 78 FR 9436 (February 8, 2013) (SR-Phlx-2013-12).
    \11\ See Securities Exchange Act Release No. 72434 (June 19, 
2014), 79 FR 36110 (June 25, 2014) (SR-Phlx-2014-27).
    \12\ See Securities Exchange Act Release No. 95331 (July 20, 
2022), 87 FR 44447 (July 26, 2022) (SR-Phlx-2022-31).
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    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.'' \13\ 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.
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    \13\ See Securities Exchange Act Release No. 62886 (September 
10, 2010), 75 FR 56613 (September 16, 2010) (SR-NASDAQ-2010-076).
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    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.'' \14\ Largely, the pilot reduced the discretion of 
the Exchange, other national securities exchanges, and Financial 
Industry Regulatory Authority (``FINRA'') to deviate from the objective 
standards in their respective rules when dealing with potentially 
erroneous transactions. The pilot has thus helped afford greater 
certainty to Members and investors about when trades will be deemed 
erroneous pursuant to self-regulatory organization (``SRO'') rules and 
has provided a more transparent process for conducting such reviews. 
The Exchange proposes to make the current pilot permanent so that 
market participants can continue to benefit from the increased 
certainty afforded by the current rule.
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    \14\ Id.
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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.\15\ 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.\16\ 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

[[Page 59137]]

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.'' \17\
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    \15\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631) (n. 33505).
    \16\ Id.
    \17\ 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.
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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 \18\ or Post-Market Hours \19\ 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.
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    \18\ The term ``Pre-Market Hours'' means the period of time 
beginning at 8:00 a.m. ET and ending immediately prior to the 
commencement of Market Hours. See Equity 1, Section 1(g). The 
Exchange will make conforming changes throughout Rule 3312 to 
replace references to ``Pre-Opening Hours'' or ``Pre-Opening Hours 
Trading Session'' with ``Pre-Market Hours,'' which is the correct 
defined term.
    \19\ The term ``Post-Market Hours'' means the period of time 
beginning immediately after the end of Market Hours and ending at 
5:00 p.m. ET. See Equity 1, Section 1(g). The Exchange will make 
conforming changes throughout Rule 3312 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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    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.\20\ 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.
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    \20\ See Amendment Eighteen, supra note 6.
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    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 be ineligible for clearly 
erroneous review.
    First, pursuant to proposed subparagraph (C)(1)(i) of Rule 
3312(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 3312(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.\21\ Similarly, there are instances, such as the opening 
auction on the primary listing market,\22\ 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.
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    \21\ See Appendix A of the LULD Plan.
    \22\ 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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    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 3312(g), or is executed after the 
primary listing market for the security declares

[[Page 59138]]

a regulatory trading halt, suspension, or pause pursuant to Rule 
3312(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 
3312(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,\23\ 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).
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    \23\ The Exchange notes that the ``resumption of trading without 
an auction'' provision of the proposed rule text applies only to 
securities that enter a Trading Pause pursuant to LULD and does not 
apply to a corporate action or new issue.
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    In the context of a corporate action or a new issue, there may be 
instances where the security's Reference Price is later determined by 
the Exchange to be erroneous (e.g., because of a bad first trade for a 
new issue), and subsequent LULD Price Bands are calculated from that 
incorrect Reference Price. In determining whether the Reference Price 
is erroneous in such instances, the Exchange would generally look to 
see if such Reference Price clearly deviated from the theoretical value 
of the security. In such cases, the Exchange would consider a number of 
factors to determine a new Reference Price that is based on the 
theoretical value of the security, including but not limited to, the 
offering price of the new issue, the ratio of the stock split applied 
to the prior day's closing price, the theoretical price derived from 
the numerical terms of the corporate action transaction such as the 
exchange ratio and spin-off terms, and the prior day's closing price on 
the OTC market for an OTC up-listing.\24\ 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.
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    \24\ 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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    The following illustrate the proposed application of the rule in 
the context of a corporate action or new issue:
    Example 1:
    1. ABCD is subject to a corporate action, 1 for 10 reverse split, 
and the previous day close was $5, but the new theoretical price based 
on the terms of the corporate action is $50.
    2. The security opens at $5, with LULD bands at $4.50 x $5.50.
    3. The bands will be calculated correctly but the security is 
trading at an erroneous price based on the valuation of the remaining 
outstanding shares.
    4. The theoretical price of $50 would be used as the new Reference 
Price when applying LULD bands to determine if executions would be 
cancelled as clearly erroneous.
    Example 2:
    1. ABCD is subject to a corporate action, the company is doing a 
spin off where a new issue will be listed, BCDE. ABCD trades at $50, 
and the spinoff company is worth \1/5\ of ABCD.
    2. BCDE opens at $50 in the belief it is the same company as ABCD.
    3. The theoretical values of the two companies are ABCD $40 and 
BCDE $10.
    4. BCDE would be deemed to have had an incorrect Reference Price 
and the theoretical value of $10 would be used as the new Reference 
Price when applying the LULD Bands to determine if executions would be 
cancelled as clearly erroneous.
    Example 3:
    1. ABCD is an uplift from the OTC market, the prior days close on 
the OTC market was $20.
    2. ABCD opens trading on the new listing exchange at $0.20 due to 
an erroneous order entry.
    3. The new Reference Price to determine clearly erroneous 
executions would be $20, the theoretical value of the stock from where 
it was last traded.
    In the context of the rare situation in which a security that 
enters a LULD Trading Pause and resumes trading without an auction 
(i.e., reopens with quotations), the LULD Plan requires that the new 
Reference Price in this instance be established by using the mid-point 
of the best bid and offer (``BBO'') on the primary listing exchange at 
the reopening time.\25\ 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.
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    \25\ See LULD Plan, Section I(U) and V(C)(1).
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    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.

[[Page 59139]]

    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)(i) 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)(ii). 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)(i) 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)(ii) 
(Multi-Stock Events Involving Twenty or More Securities) and (C)(iii) 
(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 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,\26\ 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).
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    \26\ 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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System Disruption or Malfunction
    To conform with the structural changes described above, the 
Exchange now proposes to remove paragraph (b)(1), System Disruption or 
Malfunctions, and renumber existing paragraph (b)(2) as (b)(1). 
Additionally,

[[Page 59140]]

the Exchange proposes to add rule text in renumbered (b)(1) (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 
3312(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 3312. 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 3312(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)(i) 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,\27\ in general, and 
Section 6(b)(5) of the Act,\28\ in particular, in that it is designed 
to remove impediments to and perfect the mechanism of a free and open 
market and a national market system, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest and not to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \27\ 15 U.S.C. 78f(b).
    \28\ 15 U.S.C. 78f(b)(5).
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    As explained in the purpose section of this proposed rule change, 
the current pilot was implemented following the Flash Crash to bring 
greater transparency to the process for conducting clearly erroneous 
reviews, and to help assure that the review process is based on clear, 
objective, and consistent rules across the U.S. equities markets. The 
Exchange believes that the amended clearly erroneous rules have been 
successful in that regard and have thus furthered fair and orderly 
markets. Specifically, the Exchange believes that the pilot has 
successfully ensured that such reviews are conducted based on objective 
and consistent standards across SROs and has therefore afforded greater 
certainty to Members and investors. The Exchange therefore believes 
that making the current pilot a permanent program is appropriate so 
that equities market participants can continue to reap the benefits of 
a clear, objective, and transparent process for conducting clearly 
erroneous reviews. In addition, the 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.'' \29\ 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

[[Page 59141]]

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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    \29\ 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 3312 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 \30\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\31\
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    \30\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \31\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) \32\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, Rule 19b-4(f)(6)(iii) \33\ permits the Commission to 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the 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.\34\ For 
this reason, the Commission hereby waives the 30-day operative delay 
and designates the proposed rule change as operative upon filing.\35\
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    \32\ 17 CFR 240.19b-4(f)(6).
    \33\ 17 CFR 240.19b-4(f)(6)(iii).
    \34\ See SR-CboeBZX-2022-37 (July 8, 2022).
    \35\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-Phlx-2022-36 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-Phlx-2022-36. 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

[[Page 59142]]

Number SR-Phlx-2022-36 and should be submitted on or before October 20, 
2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\36\
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    \36\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-21067 Filed 9-28-22; 8:45 am]
BILLING CODE 8011-01-P