[Federal Register Volume 78, Number 69 (Wednesday, April 10, 2013)]
[Notices]
[Pages 21482-21483]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-08328]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69304; File No. SR-PHLX-2013-005]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order
Granting Approval of Proposed Rule Change Regarding Catastrophic Errors
April 4, 2013.
I. Introduction
On January 31, 2013, NASDAQ OMX PHLX LLC (``PHLX'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
amend Rule 1092, Obvious Errors and Catastrophic Errors. The proposed
rule change was published for comment in the Federal Register on
February 19, 2013.\3\ The Commission received one comment letter on the
proposed rule change.\4\ This order approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 68907 (February 12,
2013), 78 FR 11705 (``Notice'').
\4\ See Letter from Ellen Greene, Vice President, Securities
Industry and Financial Markets Association to Elizabeth M. Murphy,
Secretary, Commission, dated March 14, 2013.
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II. Background
The Exchange proposes to amend Rule 1092(f)(ii) to permit the
nullification of trades involving catastrophic errors in certain
situations. Specifically, the proposed rule would enable a non-broker
dealer customer \5\ who is the contra-side to a trade that is deemed to
be a catastrophic error to have the trade nullified in instances where
the adjusted price would violate the customer's limit price. Trades
would adjusted in these circumstances if the customer, or his agent,
affirms the customer's willingness to accept the adjusted price through
the customer's limit price within 20 minutes of notification of the
catastrophic error ruling.\6\
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\5\ The Exchange notes that a professional customer is a
customer for purposes of Rule 1092.
\6\ The Exchange notes that the 20 minute notification period is
similar to the time period used currently with respect to triggering
the obvious error review process.
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Under the current rule, and under the rules of all options
exchanges, all transactions that qualify as a catastrophic error are
adjusted, not nullified. The purpose of the proposal is to help market
participants better manage their risk by addressing the situation
where, under current rules, a trade can be adjusted to a price outside
of a customer's limit price, forcing the customer to spend additional
money for a trade that it may not be able to afford. The Exchange notes
that this proposal is a fair way to address the issue of a customer's
limit price while balancing the competing interests of certainty that
trades stand with the policy concerns about dealing with true
errors.\7\
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\7\ The Exchanges noted that it is focused on this particular
situation because of a recent catastrophic error ruling that
resulted in an appeal pursuant to Rule 1092(f)(iv).
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III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act \8\ and the rules
and regulations thereunder applicable to a national securities
exchange.\9\ In particular, the Commission finds that the proposed rule
change is consistent with Section 6(b)(5) of the Act,\10\ which
requires, among other things, that the Exchange's rules be designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to foster cooperation and
coordination with persons engaged in facilitating transactions in
securities, 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.
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\8\ 15 U.S.C. 78f.
\9\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\10\ 15 U.S.C. 78f(b)(5).
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The Commission received one comment letter expressing support for
the proposed rule change.\11\ The commenter believes that the special
treatment afforded by the rule change to non-broker-dealer customers is
appropriate because, unlike market makers or broker-dealers, non-
broker-dealer customers are less likely to be able to absorb the
monetary penalty of being forced into a situation where their
[[Page 21483]]
original limit price is violated.\12\ The commenter points to other
precedents in the options markets for non-broker-dealer customers
getting special treatment for similar reasons to the proposed rule
change, namely because they are less active in the markets and often
have limited funds in their accounts.\13\ Finally, the commenter
encourages other options exchanges to adopt similar amendments to their
Obvious and Catastrophic Error rules.\14\
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\11\ See note 4, supra.
\12\ Id.
\13\ Id.
\14\ Id.
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The Exchange notes that the proposed rule change is not unfairly
discriminatory, even though it offers non-broker dealer customers a
choice not provided to other market participants. Specifically, the
Exchange notes that the existing obvious error rules differentiate
among market participants.\15\ The Exchange notes further that
customers often are treated specially in the options markets,
recognizing that they are not necessarily immersed in the day-to-day
trading of the markets, are less likely to be watching trading activity
in a particular option throughout the day, and may have limited funds
in their trading accounts.\16\ The Exchange goes on to note that, while
the proposed rule change may introduce uncertainty regarding whether a
trade will be adjusted or nullified, it eliminates price uncertainty,
as customer orders can be adjusted to significantly different prices
than their limit prices under the rule prior to this proposed rule
change. For this reason, the Exchange believes that the proposed rule
change promotes just and equitable principles of trade and protects
investors and the public interest.
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\15\ The Exchange notes, for example, that the notification
period to begin the obvious error process is shorter for specialists
and Registered Options Traders than it is for other market
participants.
\16\ The Exchange notes that customers often have favorable fees
relative to other market participants.
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The Commission notes that in considering the proposed rule change
the Exchange has weighed the benefits of certainty to non-broker-dealer
customers that their limit price will not be violated against the costs
of increased uncertainty to market makers and broker-dealers that their
trades may be nullified instead of adjusted depending on whether the
other party to the transaction is or is not a customer.\17\ The
proposed rule change strikes a similar balance on this issue to the
approach taken in the Exchange's Obvious Error Rule, whereby
transactions in which an Obvious Error occurred with at least one party
as a non-specialist are nullified unless both parties agree to adjust
the price of the transaction within 30 minutes of being notified of the
Obvious Error.\18\ For the reasons noted above, the Commission believes
that the proposed rule change is consistent with the Act.
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\17\ See Notice, supra note 3.
\18\ Id.
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\19\ that the proposed rule change (SR-PHLX-2013-005) is hereby
approved.
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\19\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-08328 Filed 4-9-13; 8:45 am]
BILLING CODE 8011-01-P