[Federal Register Volume 78, Number 54 (Wednesday, March 20, 2013)]
[Notices]
[Pages 17262-17266]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-06392]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69141; File No. SR-Phlx-2013-29]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of
Filing of Proposed Rule Change To Address Obvious and Catastrophic
Options Errors in Response to the Regulation NMS Plan To Address
Extraordinary Market Volatility
March 15, 2013.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on March 14, 2013, NASDAQ OMX PHLX LLC (``Phlx'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II
and III below, which Items have been prepared by the self-regulatory
organization. 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\ 15 U.S.C. 78a.
\3\ 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 adopt new Exchange Rule 1047(f)(v) to
provide for how the Exchange proposes to treat obvious and catastrophic
options errors in response to the Regulation NMS Plan to Address
Extraordinary Market Volatility.
The text of the proposed rule change is below; proposed new
language is in italics.
* * * * *
Rule 1047. Trading Rotations, Halts and Suspensions
(a)-(e) No change.
(f) This paragraph shall be in effect during a pilot period to
coincide with the pilot period for the Plan to Address Extraordinary
Market Volatility Pursuant to Rule 608 of Regulation NMS, as it may be
amended from time to time (``LULD Plan''), except as specified in
subparagraph (v) below. Capitalized terms used in this paragraph shall
have the same meaning as provided for in the LULD Plan. During a Limit
State and Straddle State in the Underlying NMS stock:
(i)-(iv) No change.
(v) For a one year period following the adoption of this
subparagraph (v), electronic trades are not subject to an obvious error
or catastrophic error review pursuant to Rule 1092(a)(i) or (ii) nor
are they subject to nullification or adjustment pursuant to Rule
1092(c)(ii)(E) or (F). Nothing in this provision shall prevent
electronic trades from review on Exchange motion pursuant to Rule
1092(e)(i)(B).
(g) No change.
* * * Commentary:
.01-.03 No change.
* * * * *
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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to adopt Exchange Rule 1047(f)(v) \4\ to
provide for how the Exchange will treat options obvious and
catastrophic options errors in response to the Regulation NMS Plan to
Address Extraordinary Market Volatility (the ``Plan''), which is
applicable to all NMS stocks, as defined in Regulation NMS Rule
600(b)(47). The Exchange proposes to adopt new Rule 1047(f)(v) for a
one year pilot period.\5\
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\4\ The provisions of Rule 1047(f)(i)-(iii) and (g) were filed
and became effective on February 28, 2013, with a 30 day operative
delay, on a pilot basis. See Securities Exchange Act Release No.
69118 (March 12, 2013) (SR-Phlx-2013-20). Rule 1047(f)(iv) was filed
as SR-Phlx-2013-21. See Securities Exchange Act Release No. 69068
(March 7, 2013).
\5\ The Exchange will conduct its own analysis concerning the
elimination of obvious and catastrophic error provisions during
Limit States and Straddle States and agrees to provide the
Commission with relevant data to assess the impact of this proposed
rule change. As part of its analysis, the Exchange will evaluate:
(1) The options market quality during Limit States and Straddle
States; (2) assess the character of incoming order flow and
transactions during Limit States and Straddle States; and (3) review
any complaints from members and their customers concerning
executions during Limit States and Straddle States. Additionally,
the Exchange agrees to provide to the Commission data requested to
evaluate the impact of the elimination of the obvious and
catastrophic error provisions, including data relevant to assessing
the various analyses noted above.
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Background
Since May 6, 2010, when the markets experienced excessive
volatility in an abbreviated time period, i.e., the ``flash crash,''
the equities exchanges and the Financial Industry Regulatory Authority
(``FINRA'') have implemented market-wide measures designed to restore
investor confidence by reducing the potential for excessive market
volatility. Among the measures adopted include pilot plans for stock-
by-stock trading pauses,\6\ related changes to the equities market
clearly erroneous execution rules,\7\ and more stringent equities
market maker quoting requirements.\8\ On May 31, 2012, the Commission
approved the Plan, as amended, on a one-year pilot basis.\9\ In
addition, the Commission approved changes to the equities market-wide
circuit breaker
[[Page 17263]]
rules on a pilot basis to coincide with the pilot period for the
Plan.\10\
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\6\ See e.g., Exchange Rule 3100.
\7\ See e.g., Exchange Rule 3312.
\8\ See e.g., NASDAQ Rule 4613.
\9\ See Securities Exchange Act Release No. 67091 (May 31,
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631) (Order Approving
the Plan on a Pilot Basis).
\10\ See Securities Exchange Act Release No. 67090 (May 31,
2012), 77 FR 33531 (June 6, 2012) (SR-BATS-2011-038; SR-BYX-2011-
025; SR-BX-2011-068; SR-CBOE-2011-087; SR-C2-2011-024; SR-CHX-2011-
30; SR-EDGA-2011-31; SR-EDGX-2011-30; SR-FINRA-2011-054; SR-ISE-
2011-61; SR-NASDAQ-2011-131; SR-NSX-2011-11; SR-NYSE-2011-48; SR-
NYSEAmex-2011-73; SR-NYSEArca-2011-68; SR-Phlx-2011-129).
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The Plan is designed to prevent trades in individual NMS stocks
from occurring outside of specified Price Bands.\11\ As described more
fully below, the requirements of the Plan are coupled with Trading
Pauses to accommodate more fundamental price moves (as opposed to
erroneous trades or momentary gaps in liquidity). All trading centers
in NMS stocks, including both those operated by Participants and those
operated by members of Participants, are required to establish,
maintain, and enforce written policies and procedures that are
reasonably designed to comply with the requirements specified in the
Plan.
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\11\ Unless otherwise specified, capitalized terms used in this
rule filing are based on the defined terms of the Plan.
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As set forth in more detail in the Plan, Price Bands consisting of
a Lower Price Band and an Upper Price Band for each NMS Stock are
calculated by the Processors.\12\ When the National Best Bid (Offer) is
below (above) the Lower (Upper) Price Band, the Processors shall
disseminate such National Best Bid (Offer) with an appropriate flag
identifying it as unexecutable. When the National Best Bid (Offer) is
equal to the Upper (Lower) Price Band, the Processors shall distribute
such National Best Bid (Offer) with an appropriate flag identifying it
as a Limit State Quotation.\13\ All trading centers in NMS stocks must
maintain written policies and procedures that are reasonably designed
to prevent the display of offers below the Lower Price Band and bids
above the Upper Price Band for NMS stocks. Notwithstanding this
requirement, the Processor shall display an offer below the Lower Price
Band or a bid above the Upper Price Band, but with a flag that it is
non-executable. Such bids or offers shall not be included in the
National Best Bid or National Best Offer calculations.\14\ Trading in
an NMS stock immediately enters a Limit State if the National Best
Offer (Bid) equals but does not cross the Lower (Upper) Price Band.\15\
Trading for an NMS stock exits a Limit State if, within 15 seconds of
entering the Limit State, all Limit State Quotations were executed or
canceled in their entirety. If the market does not exit a Limit State
within 15 seconds, then the Primary Listing Exchange would declare a
five-minute trading pause pursuant to Section VII of the Plan, which
would be applicable to all markets trading the security.\16\ In
addition, the Plan defines a Straddle State as when the National Best
Bid (Offer) is below (above) the Lower (Upper) Price Band and the NMS
stock is not in a Limit State. For example, assume the Lower Price Band
for an NMS Stock is $9.50 and the Upper Price Band is $10.50, such NMS
stock would be in a Straddle State if the National Best Bid were below
$9.50, and therefore unexecutable, and the National Best Offer were
above $9.50 (including a National Best Offer that could be above
$10.50). If an NMS stock is in a Straddle State and trading in that
stock deviates from normal trading characteristics, the Primary Listing
Exchange may declare a trading pause for that NMS stock if such Trading
Pause would support the Plan's goal to address extraordinary market
volatility.
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\12\ See Section V(A) of the Plan.
\13\ See Section VI(A) of the Plan.
\14\ See Section VI(A)(3) of the Plan.
\15\ See Section VI(B)(1) of the Plan.
\16\ The primary listing market would declare a Trading Pause in
an NMS stock; upon notification by the primary listing market, the
Processor would disseminate this information to the public. No
trades in that NMS stock could occur during the trading pause, but
all bids and offers may be displayed. See Section VII(A) of the
Plan.
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Proposal
The Exchange proposes to adopt new subparagraph (f)(v) to provide
that trades are not subject to an obvious error or catastrophic error
review pursuant to Rule 1092(a)(i) or (ii) during a Limit State or
Straddle State. Thus, pursuant to Rule 1092(c)(ii)(F), relating back to
Rule 1092(a), such trade could not be nullified or adjusted.
Pursuant to Rule 1092(c)(ii)(E), if the trade resulted in an
execution price in a series quoted no bid during a Limit State or
Straddle State, such trade could not be nullified or adjusted.
Nevertheless, trades will continue to be subject to an obvious
error or catastrophic error review in a Limit State or Straddle State
if:
(A) The trade resulted from a verifiable disruption or malfunction
of an Exchange execution, dissemination, or communication system that
caused a quote/order to trade in excess of its disseminated size (e.g.
a quote/order that is frozen, because of an Exchange system error, and
repeatedly traded) in which case trades in excess of the disseminated
size may be nullified;\17\
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\17\ See Rule 1092(c)(ii)(A).
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(B) The trade resulted from a verifiable disruption or malfunction
of an Exchange dissemination or communication system that prevented a
member from updating or canceling a quote/order for which the member is
responsible where there is Exchange documentation providing that the
member sought to update or cancel the quote/order;\18\
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\18\ See Rule 1092(c)(ii)(B).
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(C) The trade resulted from an erroneous print disseminated by the
underlying market which is later cancelled or corrected by the
underlying market where such erroneous print resulted in a trade higher
or lower than the average trade in the underlying security during the
time period encompassing two minutes before and after the erroneous
print, by an amount at least five times greater than the average quote
width for such underlying security during the time period encompassing
two minutes before and after the erroneous print. For purposes of this
Rule, the average trade in the underlying security shall be determined
by adding the prices of each trade during the four minute time period
referenced above (excluding the trade in question) and dividing by the
number of trades during such time period (excluding the trade in
question);\19\ or
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\19\ See Rule 1092(c)(ii)(C).
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(D) The trade resulted from an erroneous quote in the Primary
Market for the underlying security that has a width of at least $1.00
and that width is at least five times greater than the average quote
width for such underlying security during the time period encompassing
two minutes before and after the dissemination of such quote. For the
purposes of this Rule, the average quote width shall be determined by
adding the quote widths of sample quotations at regular 15-second
intervals during the four minute time period referenced above
(excluding the quote in question) and dividing by the number of quotes
during such time period (excluding the quote in question).\20\
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\20\ See Rule 1092(c)(ii)(D).
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Currently, under Rule 1092(a)(i) and (ii), obvious and catastrophic
errors are calculated by determining a theoretical price and applying
such price, based on objective standards, to ascertain whether the
trade should be nullified or adjusted. While the rule contains a
notification process for requesting an obvious error review, certain
more substantial errors may fall under the category of a catastrophic
error, for which a longer time period is permitted to request a review
and for which trades can currently only be adjusted (not
[[Page 17264]]
nullified).\21\ Trades are adjusted pursuant to an adjustment table
that, in effect, assesses an adjustment penalty. By adjusting trades
above or below the theoretical price, the Rule assesses a ``penalty''
in that the adjustment price is not as favorable as the amount the
party making the error would have received had it not made the error.
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\21\ But see Securities Exchange Act Release No. 68907 (February
12, 2013), 78 FR 11705 (February 19, 2013) (SR-Phlx-2013-05).
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Pursuant to Rule 1092(a)(i) and (ii), obvious and catastrophic
errors are determined by comparing the theoretical price of the option,
calculated by one of the methods in Rule 1092(b), to an adjustment
table in Rule 1092(a). The Exchange has determined not to permit
obvious and catastrophic errors reviews under Rule 1092(a) when a trade
occurred during a Limit State or Straddle State.
Pursuant to Rule 1092(b), the theoretical price of an option is
determined in one of three ways: (i) If the series is traded on at
least one other options exchange, the last National Best Bid price with
respect to an erroneous sell transaction and the last National Best
Offer price with respect to an erroneous buy transaction, just prior to
the trade; (ii) if there are no quotes for comparison purposes, or if
the bid/ask differential of the National Best Bid and Offer (``NBBO'')
for the affected series, just prior to the erroneous transaction, was
at least two times the permitted bid/ask differential under Rule
1014(c)(i)(A)(1)(a), as determined by an Options Exchange Official; or
(iii) for transactions occurring as part of the Exchange's automated
opening system, the theoretical price shall be the first quote after
the transaction(s) in question that does not reflect the erroneous
transaction(s).
The Exchange believes that none of these three methods is
appropriate during a Limit State or Straddle State. Specifically, under
Rule 1092(b)(i), the theoretical price is determined with respect to
the NBBO for an option series just prior to the trade. As discussed
above, during a Limit State or Straddle State, options prices may
deviate substantially from those available prior to or following the
State. The Exchange believes this provision would give rise to much
uncertainty for market participants as there is no bright line
definition of what the theoretical price should be for an option when
the underlying NMS stock has an unexecutable bid or offer or both.
Determining theoretical price in such a situation would be often times
very subjective as opposed to an objective determination giving rise to
additional uncertainty and confusion for investors. Accordingly, the
Exchange does not believe that the approach employed under Rule
1092(b)(i), which by definition depends on a reliable NBBO in the
option, is appropriate during a Limit State or Straddle State. The
Exchange believes that this is appropriate because while in a Limit
State or Straddle State, only limit orders will be accepted by the
Exchange, affirming that the participant is willing to accept an
execution up to the limit price. Further, because the Exchange system
will only trade through the theoretical bid or offer if the Exchange or
the participant (via an ISO order) has accessed all better priced
interest away in accordance the Options Order Protection and Locked/
Crossed Markets Plan, the Exchange believes potential trade reviews of
executions that occurred at the participant's limit price and also in
compliance with aforementioned Plan could result in uncertainty that
could harm liquidity and also could create an advantage to either side
of an execution depending on the future movement of the underlying
stock.
The Exchange recognizes that the second method (in Rule
1092(b)(ii)) affords discretion to the Options Exchange Official in
determining the theoretical price and thereby, ultimately, whether a
trade is busted or adjusted and to what price. The Exchange has
determined that it would be difficult to exercise such discretion in
periods of extraordinary market volatility and in particular when the
price of the underlying security is unreliable. Moreover, the
theoretical price would be subjective. Thus, the Exchange has
determined not to permit an obvious or catastrophic error review if
there are no quotes for comparison purposes, or if the bid/ask
differential of the NBBO for the affected series, just prior to the
erroneous transaction, was at least two times the permitted bid/ask
differential. The Exchange believes that adding certainty to the
execution of orders in these situations should encourage market
participants to continue to provide liquidity to the Exchange and thus
promote a fair and orderly market.
The Exchange notes that Rule 1092(b)(iii) applies to trades
executed during openings. Because the Exchange does not intend to open
an option during a Limit State or Straddle State, this provision, on
its face, will not apply.
For the same reasons, the Exchange is proposing that Rule
1092(c)(ii)(F) not apply during a Limit State or Straddle State.
In addition, the Exchange proposes to provide that trades are not
subject to an obvious error and catastrophic error review if pursuant
to Rule 1092(c)(ii)(E) the trade resulted from an execution price in a
series quoted no bid. A zero bid option refers to an option where the
bid price is $0.00. Series of options quoted zero bid are usually deep
out-of-the-money series that are perceived as having little if any
chance of expiring in-the-money. For this reason, relatively few
transactions occur in these series and those that do are usually the
result of a momentary pricing error.
Specifically, under this provision, where the trade resulted in an
execution price in a series quoted no bid and for 5 seconds prior to
the execution remained no bid (excluding the quote in question; bids
and offers of the parties to the subject trade that are in any of the
series in the same options class shall not be considered) and at least
one strike price below (for calls) or above (for puts) in the same
class were quoted no bid at the time of the erroneous execution (in
which case the trade shall be nullified). The Exchange believes that
these situations are not appropriate for an error review because they
are more likely to result in a windfall to one party at the expense of
another, in a Limit State or Straddle State, because the criteria for
meeting the no-bid provision are more likely to be met in a Limit State
or Straddle State, and unlike normal circumstances, may not be a true
reflection of the value of the series being quoted. For example, in a
series quoted $1.95-$2.00 on multiple exchanges prior to the Limit
State or Straddle State, an order to B10@ $2.00 is likely a reasonably
priced trade because the buyer attempted to pay $2.00 with a limit
price. However, if that series and the series one strike below are both
quoted $0.00-$5.00, then both the seller and the buyer at $2.00 would
have an opportunity to dispute the trade. This would create uncertainty
to both parties and an advantage to one participant if the underlying
stock moved significantly in their direction.
Rationale
When Rule 1092 was first adopted, the Commission stated that it ``*
* * considers that in most circumstances trades that are executed
between parties should be honored. On rare occasions, the price of the
executed trade indicates an `obvious error' may exist, suggesting that
it is unrealistic to expect that the parties to the trade had come to a
meeting of the minds regarding the terms of the transaction. In the
[[Page 17265]]
Commission's view, the determination of whether an `obvious error' has
occurred, and the adjustment or nullification of a transaction because
an obvious error is considered to exist, should be based on specific
and objective criteria and subject to specific and objective procedures
* * * The Commission believes that Phlx's proposed obvious error rule
establishes specific and objective criteria for determining when a
trade is an `obvious error.' Moreover, the Commission believes that the
Exchange's proposal establishes specific and objective procedures
governing the adjustment or nullification of a trade that resulted from
an `obvious error.' \22\
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\22\ See Securities Exchange Act Release No. 49785 (May 28,
2004), 69 FR 32090 (June 8, 2004) (SR-Phlx-2003-68).
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In 2008, the Exchange amended Rule 1092 to adopt the catastrophic
error provision. In doing so, the Exchange stated that it had ``* * *
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.'' \23\
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\23\ See Securities Exchange Act Release No. 58002 (June 23,
2008), 73 FR 36581 (June 27, 2008) (SR-Phlx-2008-42)(Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change
Relating to Catastrophic Errors).
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The Exchange believes that this proposal is consistent with those
principles because it strikes the aforementioned balance. The Exchange
is proposing to decline to review certain trades, which is specific and
objective. Furthermore, the proposal more fairly balances the potential
windfall to one market participant against the potential
reconsideration of a trading decision under the guise of an error, and
thereby results in more certainty during periods of extreme market
volatility. Trades can nevertheless be considered erroneous under other
sections of the Rule, because those continue to be an objective method
of determining whether an error occurred, even during periods of
extraordinary market volatility. Because the Exchange intends to
continue to review trades pursuant to Rule 1092(c)(ii)(A)-(D), the
Exchange believes that this continues to provide some protection to
market participants.
The Exchange notes that there are additional protections in place
outside of the Obvious Errors and Catastrophic Errors Rule,
specifically pre-trade protections. First, SEC Rule 15c3-5 requires
that, ``financial risk management controls and supervisory procedures
must be reasonably designed to prevent the entry of orders that exceed
appropriate pre-set credit or capital thresholds, or that appear to be
erroneous.'' \24\ Secondly, the Exchange has price checks applicable to
limit orders that rejects limit orders that are priced sufficiently far
through the NBBO that it seems likely an error occurred. The
requirements placed upon broker-dealers to adopt controls to prevent
the entry of orders that appear to be erroneous, coupled with Exchange
functionality that filters out orders that appear to be erroneous serve
to sharply reduce the incidence of errors arising from situations, for
example, where participants mistakenly enter an order to pay $20 for an
option that is offered at $2. Accordingly, the Exchange believes it is
appropriate to eliminate any potential protection applying the obvious
or catastrophic error rule might provide during Limit States and
Straddle States, as its application may produce inequitable results.
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\24\ See Securities and Exchange Act Release No. 63241 (November
3, 2010), 75 FR 69791 (November 15, 2010) (S7-03-10).
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The Exchange may still review transactions in the interest of
maintaining a fair and orderly market and for the protection of
investors, on its own motion, determine to review any electronic
transaction occurring on the Exchange that is believed to be erroneous
that occurs during a Limit State or a Straddle State in accordance with
Rule 1092(e)(i)(B). The Exchange believes that this safeguard will
provide the flexibility for the Exchange to act when necessary and
appropriate to nullify or adjust a transaction, while also providing
market participants with certainty that trades they effect with quotes
and/or orders having limit prices will stand irrespective of subsequent
moves in the underlying security. The right to review on Exchange
motion electronic transactions that occur during a Limit State or
Straddle State under this provision would also allow the Exchange to
account for unforeseen circumstances that result in obvious or
catastrophic errors for which a nullification or adjustment may be
necessary in order to preserve the interest of maintaining a fair and
orderly market and for the protection of investors. The Exchange
understands that this provision is specifically limited to [sic] and
will administer it in a manner that is consistent with the principles
of the Act. The Exchange will create and maintain records relating to
the use of the authority to act on its own motion during a Limit State
or Straddle State, including when the Exchange received requests to act
on its motion and determined not to as well as any complaints related
to the Exchange's use of such authority.
Various Exchange staff have, over time, spoken to a number of
member organizations about how to treat obvious and catastrophic errors
during a Limit State or Straddle State, with no one viewpoint
particularly emerging; rather, the Exchange staff has heard a variety
of views, mostly focused on having many trades stand, on fairness and
fair and orderly markets and on being able to re-address the details
during the course of the pilot, if needed.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the provisions of Section 6 of the Act,\25\ in general and with Section
6(b)(5) of the Act,\26\ in particular, which requires that the rules of
an exchange be designed to prevent fraudulent and manipulative acts and
practices, promote just and equitable principles of trade, foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general, protect investors and the public interest,
because it should provide certainty about how errors involving options
orders and trades will be handled during periods of extraordinary
volatility in the underlying security. The Exchange further believes
that it is necessary and appropriate in the interest of promoting fair
and orderly markets to exclude transactions
[[Page 17266]]
executed during a Limit State or Straddle State from certain aspects of
Rule 1092. The Exchange believes the application of the current rule
will be impracticable given the lack of a reliable NBBO in the options
market during Limit States and Straddle States, and that the resulting
actions (i.e., nullified trades or adjusted prices) may not be
appropriate given market conditions. This change would ensure that
limit orders that are filled during a Limit State or Straddle State
would have certainty of execution in a manner that promotes just and
equitable principles of trade, removes impediments to, and perfects the
mechanism of a free and open market and a national market system.
Moreover, given that options prices during brief Limit States or
Straddle States may deviate substantially from those available shortly
following the Limit State or Straddle State, the Exchange believes
giving market participants time to re-evaluate a transaction would
create an unreasonable adverse selection opportunity that would
discourage participants from providing liquidity during Limit States or
Straddle States. In this respect, the Exchange notes that by rejecting
market orders and stop orders, and cancelling pending market orders and
stop orders, only those orders with a limit price will be executed
during a Limit State or Straddle State. Therefore, on balance, the
Exchange believes that removing the potential inequity of nullifying or
adjusting executions occurring during Limit States or Straddle States
outweighs any potential benefits from applying certain provisions
during such unusual market conditions. Additionally, as discussed
above, there are additional pre-trade protections in place both within
and outside of Rule 1092 that will continue to safeguard customers.
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\25\ 15 U.S.C. 78f.
\26\ 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 will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act, as amended.
Specifically, the proposal does not impose an intra-market burden on
competition, because it will apply to all members. Nor will the
proposal impose a burden on competition among the options exchanges,
because, in addition to the vigorous competition for order flow among
the options exchanges, the proposal addresses a regulatory situation
common to all options exchanges. To the extent that market participants
disagree with the particular approach taken by the Exchange herein,
market participants can easily and readily direct order flow to
competing venues. The Exchange believes this proposal will not impose a
burden on competition and will help provide certainty during periods of
extraordinary volatility in an NMS stock.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission shall: (a) by order approve
or disapprove such proposed rule change, or (b) institute proceedings
to determine whether the proposed rule change should be 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 (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-Phlx-2013-29 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-Phlx-2013-29. 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 the filing will also 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-2013-29 and should be
submitted on or before April 4, 2013.
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\27\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\27\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-06392 Filed 3-19-13; 8:45 am]
BILLING CODE 8011-01-P