[Federal Register Volume 79, Number 68 (Wednesday, April 9, 2014)]
[Notices]
[Pages 19692-19695]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-07952]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71870; File No. SR-NYSEMKT-2014-31]
Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and
Immediate Effectiveness of Proposed Rule Change Extending the Pilot
Period Applicable to Rule 953.1NY(c), Which Addresses How the Exchange
Treats Obvious and Catastrophic Errors During Periods of Extreme Market
Volatility, Until February 20, 2015
April 4, 2014.
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 April 1, 2014 NYSE MKT LLC (the ``Exchange'' or ``NYSE
MKT'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I and II
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 extend the pilot period applicable to Rule
953.1NY(c), which addresses how the Exchange treats Obvious and
Catastrophic Errors during periods of extreme market volatility, until
February 20, 2015. The pilot period for subsection (c) is currently set
to expire on April 8, 2014. The text of the proposed rule change is
available on the Exchange's Web site at www.nyse.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 self-regulatory organization
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 those 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 parts 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 proposes to extend the pilot period applicable to Rule
953.1NY(c), which addresses how the Exchange treats Obvious and
Catastrophic Errors during periods of extreme market volatility, until
February 20, 2015. The pilot period for subsection (c) is currently set
to expire on April 8, 2014.
Background
Rule 953.1NY (described below) was adopted in connection with the
Plan to Address Extraordinary Market Volatility Pursuant to Rule 608 of
Regulation NMS, as it may be amended from time to time (the
``Plan'').\4\ The Plan was developed in response to events that
occurred on May 6, 2010.\5\ On May 6, 2010, the U.S. equity markets
experienced excessive volatility in an abbreviated time period
resulting in, among other things, the prices of a large number of
individual securities declining by significant amounts in a very short
time period before abruptly returning to prices consistent with their
pre-decline levels.\6\ This extreme volatility resulted in a large
number of trades being executed at temporarily depressed prices,
including many that were more than 60% away from the pre-decline
prices. As part of the effort to
[[Page 19693]]
address the events of May 6, 2010 and to restore investor confidence in
the markets, the equity exchanges filed the Plan.
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\4\ See Securities and Exchange Act Release No. 69339 (April 8,
2013), 78 FR 22011 (April 12, 2013) (SR-NYSEMKT-2013-10) (``Approval
Order'').
\5\ See Securities Exchange Act Release No. 67091 (May 31,
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631) (Order Approving,
on a Pilot Basis, the Plan).
\6\ See Approval Order, 78 FR, at 22011, n.7 (citing Report of
the Staffs of the CFTC and SEC to the Joint Advisory Committee on
Emerging Regulatory Issues, ``Findings Regarding the Market Events
of May 6, 2010,'' dated September 30, 2010, available at, http://www.sec.gov/news/studies/2010/marketevents-report.pdf).
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The Plan is designed to prevent trades in individual NMS Stocks
from occurring outside of specified Price Bands, which are described in
more detail in the Plan.\7\ In sum, the Price Bands consist of a Lower
Price Band and an Upper Price Band for each NMS Stock and are
calculated by the Processors.\8\ 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.\9\
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\7\ Unless otherwise specified, capitalized terms used in this
rule filing are based on the defined terms of the Plan.
\8\ See Section V(A) of the Plan.
\9\ See Section VI(A) of the Plan.
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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.\10\ 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 LULD
Plan, which would be applicable to all markets trading the security. 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.\11\ 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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\10\ See Section VI(B)(1) of the Plan.
\11\ See Section VII(A)(2) of the Plan.
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The Plan was initially approved for a one-year pilot, which began
on April 8, 2013, and would, if not amended, end on April 8, 2014.\12\
As initially contemplated, the Plan would have been fully implemented
across all NMS Stocks within six months of initial Plan operations,
which meant there would have been full implementation of the Plan for
six months before the end of the pilot period.\13\ The Plan, however,
was amended several times since inception and, ultimately, was not
implemented across all NMS Stocks until February 24, 2014.\14\ As a
result, if the pilot period were to end in April 2014, there would be
less than two months of full operation of the Plan. Because the goal of
the pilot was to provide an opportunity to assess whether the Plan
should be modified prior to approval on a permanent basis, the
Participants recently filed the Seventh Amendment to the Plan to extend
the pilot period of the Plan until February 20, 2015 (the ``Seventh
Amendment'').\15\
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\12\ See supra n.5. See also Section VIII of the Plan.
\13\ See Securities and Exchange Act Release No. 71649 (March 8,
2014), 79 FR 13696 (March 11, 2014) (File No. 4-631) (notice) (the
``Seventh Amendment'').
\14\ Id.
\15\ Id. The Seventh Amendment to the Plan also seeks to move
the time by which Participants would be required to submit
assessments of Plan operations, pursuant to Appendix B of the Plan,
until September 30, 2014.
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Rule 953.1NY
Coincident with the Plan, the Exchange adopted Rule 953.1NY, which
provided for how the Exchange would treat orders, market-making quoting
obligations, and errors in options overlying NMS Stocks when the Plan
is in effect.\16\ Subsections (a) to (b) Rule 953.1NY, which address
the treatment of orders when the underlying NMS Stock is in a Limit
State or Straddle State, and Market Maker quoting obligations,
respectively, ``shall be in effect during a pilot period to coincide
with the pilot period for the Plan.'' \17\ These provisions need not be
amended and will align with the Plan upon approval of the Seventh
Amendment to the Plan.
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\16\ See Approval Order.
\17\ Subsection (a) to Rule 953.1NY provides that if the
underlying NMS Stock is in a Limit State or Straddle State, the
Exchange shall reject all incoming Market Orders and will not elect
Stop Orders. Subsection (b) to Rule 953.1NY provides that when
evaluating whether a Specialist has met its market-making quoting
requirement pursuant to Rule 925.1NY(b) or a Market Maker has met
its market-making quoting requirement pursuant to Rule 925.1NY(c) in
options overlying NMS Stocks, the Exchange shall consider as a
mitigating circumstance the frequency and duration of occurrences
when an underlying NMS Stock is in a Limit State or a Straddle
State.
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Subsection (c) to Rule 953.1NY, which addresses how the Exchange
treats Obvious and Catastrophic Errors during periods of extreme market
volatility, ``shall be in effect for a one-year pilot period,'' which
began on April 8, 2013.\18\ The pilot period will expire on April 8,
2014. In order to align the pilot period for Rule 953.1NY(c) with the
proposed Seventh Amendment to the Plan, the Exchange proposes to extend
the pilot period for subsection (c) to Rule 953.1NY until February 20,
2015. The Exchange believes that extending the pilot period for Rule
953.1NY(c) would allow the Exchange additional time to collect and
evaluate data related to this provision now that the Plan has been
fully implemented.
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\18\ Subsection (c) to Rule 953.1NY provides that electronic
transactions in options that overlay an NMS Stock that occur during
a Limit State or a Straddle State are not subject to review under
Rule 975MY(a) for Obvious Errors or Rule 975NY(d) for Catastrophic
Errors. Nothing in Rule 953.1NY(c) prevents electronic transactions
in options that overlay an NMS Stock that occur during a Limit State
or a Straddle State from being reviewed on Exchange motion pursuant
to 975NY(b)(3).
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When the Exchange initially adopted subsection (c), the Exchange
committed to review the operation of this provision and to analyze the
impact of Limit and Straddle States accordingly.\19\ In addition, at
least two months prior to the end of the pilot--i.e., prior to February
2014--the Exchange agreed to provide the Commission with certain data
requested to evaluate the impact of the elimination of the Obvious
Error rule under these circumstances.\20\ As noted above, however, the
Plan was not fully implemented until February 24, 2014.
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\19\ Specifically, the Exchange committed to: ``(1) Evaluate 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.'' See Approval Order, 78 FR at 22015.
\20\ See Letter to Elizabeth M. Murphy, Secretary, Commission,
from Janet L. McGinness, Executive Vice President and Corporate
Secretary, General Counsel, NYSE Markets, dated April 5, 2013
(``Comment Letter'').
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Thus, in connection with the proposed amendment, the Exchange
proposes to revise the data that the Exchange will gather in order to
address the Commission's concern about whether market quality and
liquidity for options is maintained despite these changes to the
Obvious Error rules. In addition, the Exchange proposes to revise the
date by which certain assessments will be provided to the Commission.
First, in lieu of the dataset described in the Exchange's Comment
Letter,\21\ the Exchange shall provide to the Commission and the public
a revised dataset containing the data for each Straddle State and Limit
State in NMS Stocks underlying options traded on the Exchange beginning
in April 2013, limited to those option classes that have at least one
(1) trade on the Exchange during a Straddle State or Limit State.
[[Page 19694]]
For each of those option classes affected, each data record will
contain the following information:
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\21\ Id.
Stock symbol, option symbol, time at the start of the Straddle
or Limit State, an indicator for whether it is a Straddle or Limit
State.
For activity on the Exchange:
Executed volume, time-weighted quoted bid-ask spread, time-
weighted average quoted depth at the bid, time-weighted average quoted
depth at the offer;
high execution price, low execution price;
number of trades for which a request for review for error was
received during Straddle and Limit States;
an indicator variable for whether those options outlined above
have a price change exceeding 30% during the underlying stock's Limit
or Straddle state compared to the last available option price as
reported by OPRA before the start of the Limit or Straddle State (1 if
observe 30% and 0 otherwise). Another indicator variable for whether
the option price within five minutes of the underlying stock leaving
the Limit or Straddle state (or halt if applicable) is 30% away from
the price before the start of the Limit or Straddle state.
The Exchange notes that it will update the data available on the
Exchange's Web site for the period April 2013 through January 2014 with
the revised dataset once the Exchange has completed its analysis and
review of such data. Prospectively, the data made available to the
public will be based on the proposed revised dataset described above.
In addition, by September 30, 2014, the Exchange shall provide to
the Commission assessments relating to the impact of the operation of
the Obvious Error rules during Limit and Straddle States as follows:
(1) Evaluate the statistical and economic impact of Limit and Straddle
States on liquidity and market quality in the options markets; and (2)
Assess whether the lack of Obvious Error rules in effect during the
Straddle and Limit States are problematic. The timing of this
submission would coordinate with Participants' proposed time frame to
submit to the Commission assessments as required under Appendix B of
the Plan, per the Seventh Amendment to the Plan.\22\
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\22\ See supra n. 15.
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
Section 6(b) of the Act \23\ in general, and furthers the objectives of
Section 6(b)(5),\24\ in particular, in that it is designed to promote
just and equitable principles of trade, remove impediments to and
perfect the mechanisms 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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\23\ 15 U.S.C. 78f(b).
\24\ 15 U.S.C. 78f(b)(5).
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Specifically, the proposal to extend the pilot program of Rule
953.1NY(c) until February 20, 2015, which will align that pilot program
with the Pilot Period for the Plan, as proposed in the Seventh
Amendment to the Plan, will ensure that trading in options that overlay
NMS Stocks continues to be appropriately modified to reflect market
conditions that occur during a Limit State or a Straddle State in a
manner that promotes just and equitable principles of trade and removes
impediments to, and perfects the mechanism of, a free and open market
and a national market system. The Exchange believes that the extension
of Rule 953.1NY(c) will help encourage market participants to continue
to provide liquidity during extraordinary market volatility.
Moreover, the Exchange believes that revising the dataset that it
provides to the Commission and the public would remove impediments to,
and perfect the mechanisms of, a free and open market because the
revised dataset will provide more information from which to assess the
impact of Rule 953.1NY(c). In addition, the Exchange believes that
extending the time for the Exchange to provide its overall assessment
of the Rule 953.1NY(c) pilot to September 30, 2014 is appropriate and
in the public interest, for the protection of investors, and the
maintenance of a fair and orderly market because it will align the
timing of such assessments with the time that the Participants have
proposed to provide the Commission with assessments pursuant to
Appendix B of the Plan.
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 that is not necessary or appropriate
in furtherance of the purposes of the Act. The proposed changes will
not impose any burden on competition and will instead provide certainty
regarding the treatment and execution of options orders, specifically
the treatment of Obvious and Catastrophic Errors during periods of
extraordinary volatility in the underlying NMS Stock, and will
facilitate appropriate liquidity during a Limit State or Straddle
State.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to 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 from the date on which it was filed, 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 \25\ and Rule 19b-
4(f)(6)(iii) thereunder.\26\
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\25\ 15 U.S.C. 78s(b)(3)(A).
\26\ 17 CFR 240.19b-4(f)(6)(iii). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written
notice of its intent to file the proposed rule change, along with a
brief description and the text of the proposed rule change, at least
five business days prior to the date of filing of the proposed rule
change, or such shorter time as designated by the Commission.
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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 Exchange stated that waiver of this requirement will allow
the Exchange to extend the pilot program prior to its expiration on
April 8, 2014. The Exchange also stated that waiver of this requirement
would ensure the pilot program would align with the pilot period for
the Plan and would ensure that trading in options that overlay NMS
Stocks continues to be appropriately modified to reflect market
conditions that occur during a Limit State or a Straddle State. For
these reasons, the Commission believes that the proposed rule change
presents no novel issues and that waiver of the 30-day operative delay
is consistent with the protection of investors and the public interest.
Therefore, the Commission designates the proposed rule change to be
operative upon filing.\27\
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\27\ For purposes only of waiving the 30-day operative delay,
the Commission has also 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
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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. If the Commission takes such
action, the Commission shall institute proceedings to determine whether
the proposed rule should be approved or 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-NYSEMKT-2014-31 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-NYSEMKT-2014-31. 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 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-NYSEMKT-2014-31 and should
be submitted on or before April 30, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\28\
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\28\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-07952 Filed 4-8-14; 8:45 am]
BILLING CODE 8011-01-P