[Federal Register Volume 78, Number 17 (Friday, January 25, 2013)]
[Notices]
[Pages 5525-5527]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-01487]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68693; File No. SR-ISE-2013-04]
Self-Regulatory Organizations; International Securities Exchange,
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule
Change To Amend the Exchange's Obvious and Catastrophic Error Rule
January 18, 2013.
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 January 8, 2013, the International Securities Exchange, LLC
(the ``Exchange'' or the ``ISE'') filed with the Securities and
Exchange Commission (``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 ISE Rule 720, Obvious and
Catastrophic Errors, to address obvious and catastrophic errors
involving complex orders. The text of the proposed rule change is
available on the Exchange's Web site www.ise.com, at the principal
office of the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the 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 self-regulatory organization has prepared summaries,
set forth in Sections A, B and C below, of the most significant aspects
of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of this proposed rule change is to amend ISE Rule 720
regarding Obvious and Catastrophic Errors to mitigate the risk to
parties using complex orders, where part or all of a complex order
traded at an erroneous price. Specifically, this proposed rule change
addresses situations where one component (or leg) of a complex order is
deemed an obvious (or catastrophic) error but the other component(s) is
(are) not.
Complex orders are orders involving the simultaneous purchase and/
or sale of two or more different options series in the same underlying
security, for the same account, in a ratio that is equal to or greater
than one-to-three (.333) and less than or equal to three-to-one (3.00)
and for the purpose of executing a particular investment strategy.\3\
With this proposed rule change, the Exchange is proposing to amend Rule
720 to
[[Page 5526]]
address complex orders that have at least one leg that trades at an
erroneous price. Rule 720 is the Exchange's rule that governs obvious
and catastrophic errors in options. Most options exchanges have similar
but not identical rules; this proposal would adopt a new process of
determining how to deal with obvious/catastrophic errors when a complex
order trades with another complex order on the Exchange.
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\3\ See ISE Rule 722(a)(1).
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Rule 720 provides a framework for reviewing the price of a
transaction to determine whether that price was an ``obvious error''
\4\ pursuant to objective standards. When a Member believes it received
one or more executions at an erroneous price, that Member may notify
designated members of the Exchange's market control center (``Market
Control'') within the prescribed timeframe so Market Control can
determine whether the Member participated in a transaction that was the
result of an obvious or catastrophic error.\5\ Such an error will be
deemed to have occurred when the execution price of a transaction is
higher or lower than the theoretical price for a series by a certain
amount depending on the type of option. Market Control use one of two
criteria when determining the theoretical price of an options
execution, which is enumerated in ISE Rule 720(a)(3). The theoretical
price is then compared to an obvious/catastrophic error chart within
Rule 720(a). If the transaction price meets this threshold, the
transaction may be adjusted or nullified.
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\4\ This proposed rule change also covers catastrophic errors.
\5\ See, ISE Rules 720(b)(1) and 720(d)(1).
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This proposed rule change would permit all legs of a complex order
execution to be nullified when one leg can be nullified under Rule 720,
only if the execution was a complex order versus a complex order.\6\
This occurs when a complex order executes against another complex
order. For example, assume a customer trades a call spread at a net
price of $0.50 by buying the January 50 calls at $3.00 and selling the
January 55 calls at $2.50. If the January 50 calls should have been
trading at $7.00 and thus meet the obvious error threshold in Rule 720,
then the entire complex trade will be nullified only if the January 50
and 55 calls traded as a complex order against another complex order,
rather than as two separate trades. Currently, once the trade involving
the January 50 calls is nullified, both parties are stuck with a
transaction in the January 55 calls, which was not intended by either.
This proposed rule change, therefore, provides an important benefit to
both parties of a complex order, i.e., nullification of all the
components of a complex order that traded with another complex order,
because neither party intended to end up with just one component of a
complex order. With this proposed rule change, a complex order
execution where part or all of a complex order traded at an erroneous
price would be nullified, not adjusted. The Exchange believes that if
any one leg of a complex order is adjusted to a price other than its
stated price, the trade no longer serves its purpose because complex
orders are intended to serve a particular trading strategy but only if
the order is executed at its stated price.
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\6\ See, proposed ISE Rule 720, Supplementary Material .06.
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This proposal does not address complex orders that do not trade
against other complex orders. This proposal is intended to mitigate
risk for parties of a complex order where a complex order traded with
another complex order at an erroneous price. By creating uniformity for
all trades that are ``complex to complex,'' parties will have less
trading risk because all of the components will be nullified under this
proposed rule change.
The Exchange believes that the proposed rule change is reasonable
and objective, and would serve to enhance the application of the
Exchange's Obvious and Catastrophic Error rule by extending it to
erroneous executions in complex orders. The purpose of this proposed
rule change is to align the Exchange's rule with rules currently in
place at other exchanges that address erroneous executions in complex
orders.\7\ The proposed rule change will provide members with similar
opportunities for trade nullification that are available on PHLX which
also has a rule in place to address obvious and catastrophic errors
involving executions in complex orders.
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\7\ See, for example, NASDAQ OMX PHLX LLC (``PHLX'') Rule
1092(c)(v).
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2. Basis
The Exchange believes that this proposed rule change is consistent
with Section 6(b) of the Securities Exchange Act of 1934 (``Exchange
Act'') \8\ in general, and furthers the objectives of Section 6(b)(5)
of the Exchange Act \9\ in particular, in that it is designed to
promote just and equitable principles of trade, and to remove
impediments to and perfect the mechanism for a free and open market and
a national market system, and in general, to protect investors and the
public interest.
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\8\ 15 U.S.C. 78f(b).
\9\ 15 U.S.C. 78f(b)(5).
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The Exchange understands that, in approving proposals related to
adjusting and nullifying option trades involving obvious and
catastrophic errors, the Commission has focused on the need for
specificity and objectivity with respect to exchange determinations and
processes for reviewing such determinations.\10\ In this regard, the
Exchange believes that the proposed rule change provides specific and
objective procedures for determining whether a trade should be
nullified. The Exchange believes the proposed rule change will improve
the obvious error process for complex orders that trade with another
complex order. Recognition that a trade is part of a complex order
should help add more certainty to the obvious/catastrophic error
process and reduce the risk to parties trading complex orders on the
Exchange because neither party to a complex order expects or intends to
end up with just a piece of a complex order.
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\10\ See Securities Exchange Act Release No. 54228 (July 27,
2006), 71 FR 44066 (August 3, 2006) (SR-ISE-2006-14).
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The Exchange also believes that the proposed rule change would
benefit investors and market participants that are members of multiple
exchanges by more closely aligning the Exchange's rules with respect to
obvious and catastrophic errors involving executions in complex orders
with those of other exchanges. In this respect, the proposed rule
change helps foster certainty for market participants trading on
multiple exchanges. Accordingly, the Exchange believes that the
increased specificity resulting from the proposed rule change, combined
with the continued objective nature of the Exchange's process for
rendering and reviewing trade nullification determinations, is
consistent with prior guidance from the Commission, is consistent with
the Exchange Act and is consistent with the maintenance of a fair and
orderly market and the protection of investors and the public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act, but rather this proposal will
promote competition as it is designed to improve the treatment of
complex orders where part or all of a complex order is traded at an
erroneous price.
[[Page 5527]]
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any unsolicited written comments from members or other interested
parties.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not significantly
affect the protection of investors or the public interest, does not
impose any significant burden on competition, and, by its terms, does
not 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) \11\ of the Act and Rule 19b-
4(f)(6) \12\ thereunder. The Exchange provided the Commission with
written notice of its intent to file the proposed rule change, along
with a brief description and text of the proposed rule change, at least
five business days prior to the date of filing the proposed rule
change.
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\11\ 15 U.S.C. 78s(b)(3)(A).
\12\ 17 CFR 240.19b-4(f)(6).
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The Exchange has asked the Commission to waive the 30-day operative
delay so that the proposal may become operative immediately upon
filing. The Commission believes that waiver of the operative delay is
consistent with the protection of investors and the public interest
because this rule will offer Exchange members the same potential for
relief that is available at other options exchanges for certain obvious
and catastrophic errors involving complex orders. Therefore, the
Commission designates the proposal operative upon filing.\13\
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\13\ For purposes only of waiving the 30-day operative delay,
the Commission has 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.
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 email to [email protected]. Please include
File Number SR-ISE-2013-04 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-ISE-2013-04. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet 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 Web site 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 offices 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-ISE-2013-04, and should be
submitted on or before February 15, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-01487 Filed 1-24-13; 8:45 am]
BILLING CODE 8011-01-P