[Federal Register Volume 78, Number 225 (Thursday, November 21, 2013)]
[Notices]
[Pages 69921-69923]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-27900]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70885; File No. SR-TOPAZ-2013-11]
Self-Regulatory Organizations; Topaz Exchange, LLC; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Address
the Treatment of Certain Stop Orders During a Limit State or Straddle
State
November 15, 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 November 7, 2013, the Topaz Exchange, LLC (d/b/a ISE Gemini)
(the ``Exchange'' or ``Topaz'') 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
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 the
Substance of the Proposed Rule Change
The Exchange proposes to amend its rules to address how certain
stop orders are handled during a Limit State or Straddle State.
The text of the proposed rule change is available on the Exchange's
Internet Web site at http://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 Exchange rules
to address how stop orders are handled during a Limit State \3\ or
Straddle State.\4\ On May 31, 2012, the Commission approved the Plan to
Address Extraordinary Market Volatility (the ``Plan''),\5\ which
establishes procedures to address extraordinary volatility in NMS
Stocks. The procedures provide for market-wide limit up-limit down
requirements that prevent trades in individual NMS Stocks from
occurring outside of specified Price Bands. These limit up-limit down
requirements are coupled with Trading Pauses to accommodate more
fundamental price moves. The Plan procedures are designed, among other
things, to protect investors and promote fair and orderly markets.\6\
The Plan has been implemented, as a one year pilot program, in two
phases.\7\ Phase I of the Plan became effective on April 18, 2013 and
applies to Tier I NMS Stocks per Appendix A of the Plan, with Phase II,
which would apply to all NMS Stocks, scheduled to become effective six
months later.
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\3\ Limit State means the condition when the national best bid
or national best offer for an underlying security equals an
applicable price band, as determined by the primary listing exchange
for the underlying security. See Topaz Rule 703A(a)(2).
\4\ Straddle State means the condition when the national best
bid or national best offer for an underlying security in non-
executable, as determined by the primary listing exchange for the
underlying security, but the security is not in a Limit State. See
Topaz Rule 703A(a)(3).
\5\ See Securities Exchange Act Release No. 67091 (May 31,
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631) (``Plan Approval
Order'').
\6\ Id.
\7\ Id.
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Topaz is not a participant in the Plan because it does not trade
NMS Stocks. However, Topaz trades options contracts overlying NMS
Stocks. Because options pricing models are highly dependent on the
price of the underlying security and the ability of options traders to
effect hedging transactions in the underlying security, the
implementation of the Plan impacts the trading of options classes
traded on the Exchange.
When the national best bid (offer) for a security underlying an
options class is non-executable, the ability for options market
participants to purchase (sell) shares of the underlying security and
the price at which they may be able to purchase (sell) shares becomes
[[Page 69922]]
uncertain, as there is a lack of transparency regarding the
availability of liquidity for the security. This uncertainty is
factored into the options pricing models of market professionals, such
as options market makers, which then results in wider spreads and less
liquidity at the best bid and offer for the options class. To address
trading during limit up-limit down states, the Exchange has rules that
govern the handling of market orders and stop orders.\8\ Specifically,
the Exchange currently automatically rejects all incoming orders that
do not contain a limit price to protect them from being executed at
prices that may be vastly inferior to the prices available immediately
prior to or following a Limit State or Straddle State.\9\ Such un-
priced orders include market orders and stop orders, which become
market orders when the stop price is elected.\10\ The Exchange also
currently cancels any unexecuted market orders and unexecuted stop
orders.
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\8\ See Topaz Rule 703A(b).
\9\ See Topaz Rules 703A(b)(1) and (2).
\10\ See Topaz Rule 715(e).
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After discussions with, and at the request of members, the Exchange
now proposes to amend the treatment of unexecuted stop orders.
Specifically, the Exchange proposes to hold, rather than cancel, all
unexecuted stop orders pending in the trading system until the end of a
Limit State or Straddle State, at which point the order will become
eligible to be elected if the market for the particular option contract
has reached the specified contract price. The Exchange believes that it
is unduly burdensome for members to have stop orders cancelled back to
them without their affirmatively choosing to do so, particularly when
these orders have not become eligible to be elected and therefore are
not at risk of being executed at inferior prices. The Exchange further
believes it is appropriate, in the interests of promoting fair and
orderly markets, to hold unexecuted stop orders rather than cancel
them, until the end of a Limit State or Straddle State. The Exchange
believes that when investors enter a stop order, they have an
expectation that the stop order will be traded at the elected price
once a Limit State or Straddle State has ended, and that the order will
not be cancelled back to them. Investors send stop orders because they
do not want to continuously monitor them and expect that the order will
execute once the stop price has been reached. The Exchange believes it
is onerous for investors to have these orders cancelled back to them
when they expect these orders to trade at their stopped price. The
Exchange is not proposing any change to how unexecuted market orders
are treated and, per Rule 703A(b)(1), these orders will continue to be
canceled upon the initiation of a Limit State or Straddle State in the
underlying security. The Exchange believes that holding unexecuted
market orders until the underlying security comes out of a Limit State
or Straddle State could result in these orders being executed at prices
drastically different from the time when these orders were first sent
to the Exchange for execution. As noted above, orders that do not
contain a limit price are at risk of being executed at inferior prices
if the Exchange were to hold such orders in the system until the
underlying security comes out of a Limit State or Straddle State.
Canceling such orders therefore provides investors the opportunity to
submit their orders for execution at their expected price.
While the proposed treatment of unexecuted stop orders is a
departure from how these orders are currently addressed, the Exchange
believes this rule change will promote fair and orderly markets as
investors will have greater certainty that these orders will be
executed once they become eligible rather than be cancelled. The
proposed rule change is also consistent with how such orders are
treated on other exchanges.\11\
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\11\ See Chicago Board Options Exchange, Inc. (``CBOE'') Rule
6.53, Interpretation and Policies .01(C).
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Securities Exchange Act of 1934 (the ``Act'') \12\ in
general, and furthers the objectives of Section 6(b)(5) of the Act \13\
in particular, in that it is designed to promote just and equitable
principles of trade, 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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\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
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As discussed above, when an underlying security enters a Limit
State or Straddle State, the best bid and offer in the options class is
likely to widen considerably, and the liquidity available at those
prices may be greatly reduced. Given that a Limit State or a Straddle
State may be resolved very quickly, the Exchange believes holding
unexecuted stop orders in the trading system until the end of a Limit
State or a Straddle State, rather than canceling them, will provide
market participants a greater opportunity to have their orders executed
when the market for the particular option contract reaches its
specified price.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposal will impose any
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. Specifically, the Exchange
believes the proposed rule change will not impose any burden on
intramarket competition because it will apply to all market makers
equally. The Exchange does not believe the proposed rule change will
impose any burden on intermarket competition as the proposed change is
made for the protection of investors.
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
The Exchange believes that the foregoing proposed rule change may
take effect upon filing with the Commission pursuant to
Section19(b)(3)(A) \14\ of the Act and Rule 19b-4(f)(6) thereunder \15\
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 after its filing date, or such shorter time as the Commission
may designate.
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\14\ 15 U.S.C. 78s(b)(3)(A).
\15\ 17 CFR 240.19b-4(f)(6).
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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: (i)
Necessary or appropriate in the public interest; (ii) for the
protection of investors; or (iii) 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.
[[Page 69923]]
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-TOPAZ-2013-11 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-TOPAZ-2013-11. 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 20549-1090, 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 Topaz.
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-TOPAZ-2013-11,
and should be submitted on or before December 12, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-27900 Filed 11-20-13; 8:45 am]
BILLING CODE 8011-01-P