[Federal Register Volume 73, Number 125 (Friday, June 27, 2008)]
[Notices]
[Pages 36581-36583]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-14566]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-58002; File No. SR-Phlx-2008-42]
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.;
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change
Relating to Catastrophic Errors
June 23, 2008.
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 June 17, 2008, the Philadelphia Stock Exchange, Inc. (``Phlx'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been substantially prepared by the Exchange.
The Exchange filed the proposal as a ``non-controversial'' proposed
rule change pursuant to section 19(b)(3)(A) of the Act \3\ and Rule
19b-4(f)(6) thereunder,\4\ which renders the proposal effective upon
filing with the Commission. 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.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Phlx proposes to adopt amendments to Exchange Rule 1092
(``Rule'') to: (i) Define a ``Catastrophic Error''; (ii) extend the
time period for member notification to Exchange staff that the member
believes it has participated in a trade that resulted from a
Catastrophic Error; and (iii) state in the Rule that, if the parties to
such a trade do not agree on an adjustment price, trades resulting from
a Catastrophic Error will be adjusted to the Theoretical Price of the
affected option series, plus or minus a pre-determined adjustment
value, depending on the Theoretical Price of the series.
The text of the proposed rule change is available at the Exchange,
the Commission's Public Reference Room, and http://www.phlx.com.
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. Phlx 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 states that the purpose of the proposed rule change is
to help its members better manage risk by affording them relief from
trades that result from a Catastrophic Error.
The proposed rule change would address particularly egregious
options trading errors, called Catastrophic Errors. An Options Exchange
Official \5\
[[Page 36582]]
would determine that a Catastrophic Error occurred when the execution
price of a transaction is higher or lower than the Theoretical Price
for the series by an amount equal to at least the minimum amount shown
below:
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\5\ See Exchange Rules 124(a) and (b).
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Theoretical price Minimum amount
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Below $2................................................ $1
$2 to $5................................................ 2
Above $5 to $10......................................... 5
Above $10 to $50........................................ 10
Above $50 to $100....................................... 20
Above $100.............................................. 30
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The proposed rule change would also set forth the procedure to be
followed when an Exchange member believes that he/she has participated
in a trade resulting from a Catastrophic Error. Significantly, the time
period within which such a member would be required to notify the
Exchange's Market Surveillance staff that such an error may have
occurred would be extended well beyond the time period applicable to an
Obvious Error under current Phlx Rule 1092. Members would have until
8:30 a.m. Eastern Time on the first trading day following the date on
which the Catastrophic Error occurred to make such a notification,
except that for such transactions in an expiring options series that
take place on an expiration day, an Exchange member must notify the
Exchange by 5 p.m. Eastern Time that same day.
If it is determined that a Catastrophic Error has occurred, unless
both (all) parties agree to adjust the transaction to a different
price, the execution price(s) of the transaction(s) will be adjusted to
the theoretical price: (i) Plus the adjustment value provided below for
erroneous buy transactions; and (ii) minus the adjustment value
provided for erroneous sell transactions, as described below:
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Adjustment
Theoretical price value
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Below $2................................................... $1
$2 to $5................................................... 2
Above $5 to $10............................................ 3
Above $10 to $50........................................... 5
Above $50 to $100.......................................... 7
Above $100................................................. 10
------------------------------------------------------------------------
The Exchange believes that the proposed longer time period is
appropriate to allow members to discover, and seek relief from, trading
errors that result in extreme losses. At the same time, the Exchange
believes that the proposed Minimum Amounts required for a trade to
qualify as a Catastrophic Error, in combination with the large
Adjustment Values, assures that only those transactions where the price
of the execution results in very high losses will be eligible for
adjustment under the new provisions. While the Exchange believes it is
important to identify and resolve trading errors quickly, it also
believes it is important to the integrity of the marketplace to have
the authority to mitigate extreme losses resulting from errors.
A member that requests a review under the proposed rule would be
charged $5,000 by the Exchange if there is no adjustment or
nullification of the transaction. The initial ruling by the Options
Exchange Official would be appealable to the Exchange's Referee.\6\
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\6\ See Exchange Rule 124, Commentary .02 and current Exchange
Rule 1092(f).
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The Exchange states that it has weighed carefully the need to
assure that one market participant is not permitted to receive a
windfall at the expense of another market participant that made an
Obvious Error, against the need to assure that market participants are
not simply being given an opportunity to reconsider poor trading
decisions. The Exchange states that, while it believes that the Obvious
Error Rule strikes the correct balance in most situations, in some
extreme situations, trade participants may not be aware of errors that
result in very large losses within the time periods currently required
under the rule. In this type of extreme situation, the Exchange
believes its members should be given more time to seek relief so that
there is a greater opportunity to mitigate very large losses and reduce
the corresponding large wind-falls. However, to maintain the
appropriate balance, the Exchange believes members should only be given
more time when the execution price is much further away from the
theoretical price than is required for Obvious Errors so that relief is
only provided in extreme circumstances.\7\
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\7\ The Exchange does not believe the type of extreme situation
that is covered by the proposed rule would occur in the normal
course of trading. Rather, this type of situation could potentially
occur as a result of, for example, an error in a member's quotation
system that causes a market maker to severely misprice an option.
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Under the proposed rule, members will have until 8:30 a.m. Eastern
Time on the trading day following the trade to notify the Exchange of a
potential Catastrophic Error. For trades that take place in an expiring
series on the day of expiration, members must notify the Exchange's
Market Surveillance Department of a potential Catastrophic Error by 5
p.m. Eastern Time that same day. Once a member has notified Market
Surveillance of a potential Catastrophic Error, within the required
time period, an Options Exchange Official would review and make a
determination as to the claim.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with section 6(b) of the Act,\8\ in general, and furthers the
objectives of section 6(b)(5) of the Act,\9\ in particular, in that it
is designed to promote just and equitable principles of trade, to
remove impediments to and perfect the mechanism of a free and open
market and a national market system, and, in general to protect
investors and the public interest, by helping Exchange members better
manage risk through the Catastrophic Error rule. In particular, the
proposal would allow members a longer opportunity to seek relief from
errors that result in large losses.
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\8\ 15 U.S.C. 78f(b).
\9\ 15 U.S.C. 78f(b)(5).
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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.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the proposed rule change does not: (i) Significantly affect
the protection of investors or the public interest; (ii) impose any
significant burden on competition; and (iii) become operative for 30
days after the date of filing (or such shorter time as the Commission
may designate if consistent with the protection of investors and the
public interest), the proposed rule change has become effective
pursuant to section 19(b)(3)(A) of the Act \10\ and subparagraph (f)(6)
of Rule 19b-4 thereunder.\11\
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\10\ 15 U.S.C. 78s(b)(3)(A).
\11\ 17 CFR 240.19b-4(f)(6).
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A proposed rule change filed under Rule 19b-4(f)(6) normally does
not become operative prior to 30 days after the date of filing.\12\
However, Rule 19b-4(f)(6)(iii) permits the Commission to
[[Page 36583]]
designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has
requested that the Commission waive the 30-day operative delay and
designate the proposed rule change operative upon filing. The
Commission believes that waiving the 30-day operative delay is
consistent with the protection of investors and the public interest.
Given that the Exchange's proposed catastrophic error rule is
substantially similar to that of the International Securities Exchange
and that of NYSE Arca,\13\ the proposal does not appear to present any
novel regulatory issues. Therefore, the Commission designates the
proposal operative upon filing.\14\
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\12\ 17 CFR 240.19b-4(f)(6)(iii). The Exchange has satisfied the
five-day pre-filing requirement of Rule 19b-4(f)(6)(iii).
\13\ See Securities Exchange Act Release Nos. 57398 (February
28, 2008), 73 FR 12240 (March 6, 2008) (SR-ISE-2007-112) and 57653
(April 11, 2008), 73 FR 20996 (April 17, 2008) (SR-NYSEArca-2008-
41).
\14\ For purposes only of waiving the operative delay of this
proposal, the Commission has considered the proposed rule's impact
on efficiency, competition, and capital formation. 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 may summarily abrogate 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 the furtherance of the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-Phlx-2008-42 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-2008-42. This file
number should be included on the subject line if e-mail is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://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 inspection and copying in the
Commission's Public Reference Room, 100 F Street, NE., Washington, DC
20549, on official business days between the hours of 10 a.m. and 3
p.m. Copies of such filing also will be available for inspection and
copying at the principal office of the Exchange. All comments received
will be posted without change; the Commission does not edit personal
identifying information from submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-Phlx-2008-42 and should be submitted on
or before July 18, 2008.
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\15\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\15\
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-14566 Filed 6-26-08; 8:45 am]
BILLING CODE 8010-01-P