82 FR 15251 - Self-Regulatory Organizations; Miami International Securities Exchange, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Rule 521, Nullification and Adjustment of Options Transactions Including Obvious Errors
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 82, Issue 57 (March 27, 2017)
Federal Register Volume 82, Issue 57 (March 27, 2017)
| Page Range | 15251-15258 | |
| FR Document | 2017-05921 |
[Federal Register Volume 82, Number 57 (Monday, March 27, 2017)] [Notices] [Pages 15251-15258] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-05921] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-80284; File No. SR-MIAX-2017-13] Self-Regulatory Organizations; Miami International Securities Exchange, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Rule 521, Nullification and Adjustment of Options Transactions Including Obvious Errors March 21, 2017. Pursuant to the provisions of Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that on March 17, 2017, Miami International Securities Exchange, LLC (``MIAX'' or ``Exchange'') filed with the Securities and Exchange Commission (``Commission'') a 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. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. --------------------------------------------------------------------------- [[Page 15252]] I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange is filing a proposal to amend Exchange Rule 521 (the ``Current Rule''), Nullification and Adjustment of Options Transactions Including Obvious Errors, by adding new Interpretation and Policy .03 to Rule 521 (the ``Proposed Rule''). The text of the proposed rule change is available on the Exchange's Web site at http://www.miaxoptions.com/rule-filings, at MIAX's principal office, 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 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 Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to amend Exchange Rule 521, Nullification and Adjustment of Options Transactions Including Obvious Errors, to add Interpretation and Policy .03. This filing is based on a proposal recently submitted by Chicago Board Options Exchange, Incorporated (``CBOE'') and approved by the Commission.\3\ --------------------------------------------------------------------------- \3\ See Securities Exchange Act Release No. 80040 (February 14, 2017), 82 FR 11248 (February 21, 2017) (Order Approving SR-CBOE- 2016-088). --------------------------------------------------------------------------- Last year, the Exchange and other options exchanges adopted a new, harmonized rule related to the adjustment and nullification of erroneous options transactions, including a specific provision related to coordination in connection with large-scale events involving erroneous options transactions.\4\ The Exchange believes that the changes the options exchanges implemented with the new, harmonized rule have led to increased transparency and finality with respect to the adjustment and nullification of erroneous options transactions. However, as part of the initial initiative, the Exchange and other options exchanges deferred a few specific matters for further discussion. --------------------------------------------------------------------------- \4\ See Securities Exchange Act Release No. 74918 (May 8, 2015), 80 FR 27781 (May 14, 2015) (SR-MIAX-2015-35) (the ``Initial Filing''). --------------------------------------------------------------------------- Specifically, the options exchanges have been working together to identify ways to improve the process related to the adjustment and nullification of erroneous options transactions as it relates to complex orders and stock-option orders.\5\ The goal of the process that the options exchanges have undertaken is to further harmonize rules related to the adjustment and nullification of erroneous options transactions. As described below, the Exchange believes that the changes the options exchanges and the Exchange have agreed to propose will provide transparency and finality with respect to the adjustment and nullification of erroneous complex order and stock-option order transactions. Particularly, the proposed changes seek to achieve consistent results for participants across U.S. options exchanges while maintaining a fair and orderly market, protecting investors and protecting the public interest. --------------------------------------------------------------------------- \5\ See Exchange Rule 518(a)(5) (defining complex orders and stock-option orders). --------------------------------------------------------------------------- The Proposed Rule is the culmination of this coordinated effort and reflects discussions by the options exchanges whereby the exchanges that offer complex orders and/or stock-option orders will universally adopt new provisions that the options exchanges collectively believe will improve the handling of erroneous options transactions that result from the execution of complex orders and stock-option orders.\6\ --------------------------------------------------------------------------- \6\ An exchange that does not offer complex orders and/or stock- option orders will not adopt these new provisions until such time as the exchange offers complex orders and/or stock-option orders. Exchange Rule 518 currently permits the trading of complex orders and stock-option orders. --------------------------------------------------------------------------- The Exchange believes that the Proposed Rule supports an approach consistent with long-standing principles in the options industry under which the general policy is to adjust rather than nullify transactions. The Exchange acknowledges that adjustment of transactions is contrary to the operation of analogous rules applicable to the equities markets, where erroneous transactions are typically nullified rather than adjusted and where there is no distinction between the types of market participants involved in a transaction. For the reasons set forth below, the Exchange believes that the distinctions in market structure between equities and options markets continue to support these distinctions between the rules for handling obvious errors in the equities and options markets. Various general structural differences between the options and equities markets point toward the need for a different balancing of risks for options market participants and are reflected in this proposal. Option pricing is formulaic and is tied to the price of the underlying stock, the volatility of the underlying security and other factors. Because options market participants can generally create new open interest in response to trading demand, as new open interest is created, correlated trades in the underlying or related series are generally also executed to hedge a market participant's risk. This pairing of open interest with hedging interest differentiates the options market specifically (and the derivatives markets broadly) from the cash equities markets. In turn, the Exchange believes that the hedging transactions engaged in by market participants necessitate protection of transactions through adjustments rather than nullifications when possible and otherwise appropriate. The options markets are also quote driven markets dependent on liquidity providers to an even greater extent than equities markets. In contrast to the approximately 7,000 different securities traded in the U.S. equities markets each day, there are more than 500,000 unique, regularly quoted option series. Given this breadth in options series the options markets are more dependent on liquidity providers than equities markets; such liquidity is provided most commonly by registered market makers but also by other professional traders. With the number of instruments in which registered market makers must quote and the risk attendant with quoting so many products simultaneously, the Exchange believes that those liquidity providers should be afforded a greater level of protection. In particular, the Exchange believes that liquidity providers should be allowed protection of their trades given the fact that they typically engage in hedging activity to protect them from significant financial risk to encourage continued liquidity provision and maintenance of the quote-driven options markets. In addition to the factors described above, there are other fundamental differences between options and equities markets which lend themselves to different treatment of different classes of participants that are reflected in this proposal. For example, there is no trade reporting facility in the options markets. Thus, all transactions must occur on an options exchange. This leads to significantly greater retail customer [[Page 15253]] participation directly on exchanges than in the equities markets, where a significant amount of retail customer participation never reaches the Exchange but is instead executed in off-exchange venues such as alternative trading systems, broker-dealer market making desks and internalizers. In turn, because of such direct retail customer participation, the exchanges have taken steps to afford those retail customers--generally Priority Customers--more favorable treatment in some circumstances. Complex Orders and Stock-Option Orders As more fully described below, the Proposed Rule applies much of the Current Rule to complex orders and stock-option orders.\7\ The Proposed Rule deviates from the Current Rule only to account for the unique qualities of complex orders and stock-option orders. The Proposed Rule reflects the fact that complex orders can execute against other complex orders or can execute against individual simple orders in the leg markets. When a complex order executes against the leg markets there may be different counterparties on each leg of the complex order, and not every leg will necessarily be executed at an erroneous price. With regards to stock-option orders, the Proposed Rule reflects the fact that stock-option orders contain a stock component that is executed on a stock trading venue, and the Exchange may not be able to ensure that the stock trading venue will adjust or nullify the stock execution in the event of an obvious or catastrophic error. In order to apply the Current Rule and account for the unique characteristics of complex orders and stock-option orders, proposed Interpretation and Policy .03 is split into three parts--paragraphs (a), (b), and (c). --------------------------------------------------------------------------- \7\ In order for a complex order or stock-option order to qualify as an obvious or catastrophic error at least one of the legs must itself qualify as an obvious or catastrophic error under the Current Rule. See Proposed Rule 521 Interpretation and Policy .03(a)-(c). --------------------------------------------------------------------------- First, proposed Interpretation and Policy .03(a) governs the review of complex orders that are executed against individual legs (as opposed to a complex order that executes against another complex order).\8\ Proposed Rule 521 Interpretation and Policy .03(a) provides: --------------------------------------------------------------------------- \8\ The leg market consists of quotes and/or orders in single options series. A complex order may be received by the Exchange electronically, and the legs of the complex order may have different counterparties. For example, Market-Maker 1 may be quoting in ABC calls and Market-Maker 2 may be quoting in ABC puts. A complex order to buy the ABC calls and puts may execute against the quotes of Market-Maker 1 and Market-Maker 2. If a complex order executes against individual legs and at least one of the legs qualifies as an Obvious Error under paragraph (c)(1) or a Catastrophic Error under paragraph (d)(1), then the leg(s) that is an Obvious or Catastrophic Error will be adjusted in accordance with paragraphs (c)(4)(A) or (d)(3), respectively, regardless of whether one of the parties is a Customer. However, any Customer order subject to this paragraph (a) will be nullified if the adjustment would result in an execution price higher (for buy transactions) or lower (for sell transactions) than the Customer's limit price on the complex order or individual leg(s). If any leg of --------------------------------------------------------------------------- a complex order is nullified, the entire transaction is nullified. As previously noted, at least one of the legs of the complex order must qualify as an obvious or catastrophic error under the Current Rule in order for the complex order to receive obvious or catastrophic error relief. Thus, when the Exchange is notified (within the timeframes set forth in paragraph (c)(2) or (d)(2)) of a complex order that is a possible obvious error or catastrophic error, the Exchange will first review the individual legs of the complex order to determine if one or more legs qualify as an obvious or catastrophic error.\9\ If no leg qualifies as an obvious or catastrophic error, the transaction stands-- no adjustment and no nullification. Reviewing the legs to determine whether one or more legs qualify as an obvious or catastrophic error requires the Exchange to follow the Current Rule. In accordance with paragraphs (c)(1) and (d)(1) of the Current Rule, the Exchange compares the execution price of each individual leg to the Theoretical Price of each leg (as determined by paragraph (b) of the Current Rule). If the execution price of an individual leg is higher or lower than the Theoretical Price for the series by an amount equal to at least the amount shown in the obvious error table in paragraph (c)(1) of the Current Rule or the catastrophic error table in paragraph (d)(1) of the Current Rule, the individual leg qualifies as an obvious or catastrophic error, and the Exchange will take steps to adjust or nullify the transaction.\10\ --------------------------------------------------------------------------- \9\ Because a complex order can execute against the leg market, the Exchange may also be notified of a possible obvious or catastrophic error by a counterparty that received an execution in an individual options series. If upon review of a potential obvious error the Exchange determines an individual options series was executed against the leg of a complex order or stock-option order, Proposed Rule 521 Interpretation and Policy .03 will govern. \10\ Only the execution price on the leg (or legs) that qualifies as an obvious or catastrophic error pursuant to any portion of Proposed Rule 521 Interpretation and Policy .03 will be adjusted. The execution price of a leg (or legs) that does not qualify as an obvious or catastrophic error will not be adjusted. --------------------------------------------------------------------------- To illustrate, assume a Customer submits a complex order to the Exchange consisting of Leg 1 and Leg 2--Leg 1 is to buy 100 ABC calls and Leg 2 is to sell 100 ABC puts. Also, assume that Market-Maker 1 is quoting the ABC calls $1.00-1.20 and Market-Maker 2 is quoting the ABC puts $2.00-2.20. If the complex order executes against the quotes of Market-Makers 1 and 2, the Customer buys the ABC calls for $1.20 and sells the ABC puts for $2.00. As with the obvious/catastrophic error reviews for simple orders, the execution price of Leg 1 is compared to the Theoretical Price \11\ of Leg 1 in order to determine if Leg 1 is an obvious error under paragraph (c)(1) of the Current Rule or a catastrophic error under paragraph (d)(1) of the Current Rule. The same goes for Leg 2. The execution price of Leg 2 is compared to the Theoretical Price of Leg 2. If it is determined that one or both of the legs are an obvious or catastrophic error, then the leg (or legs) that is an obvious or catastrophic error will be adjusted in accordance with paragraphs (c)(4)(A) or (d)(3) of the Current Rule, regardless of whether one of the parties is a Customer.\12\ Although a single-legged execution that is deemed to be an obvious error under the Current Rule is nullified whenever a Customer is involved in the transaction, the Exchange believes adjusting execution prices is generally better for the marketplace than nullifying executions because liquidity providers often execute hedging transactions to offset options positions. When an options transaction is nullified the hedging position can adversely affect the liquidity provider. With regards to complex orders that execute against individual legs, the additional rationale for adjusting erroneous execution prices when possible is the fact that the counterparty on a leg that is not executed at an obvious or catastrophic error price cannot look at the execution price to determine whether the execution may later be nullified (as opposed to the counterparty on single-legged order that is executed at an [[Page 15254]] obvious error or catastrophic error price). --------------------------------------------------------------------------- \11\ See Exchange Rule 521(b) (defining the manner in which Theoretical Price is determined). \12\ See Exchange Rule 521(a)(1) (defining Customer for purposes of Rule 521 to mean a Priority Customer, which is a person or entity that (i) is not a broker or dealer in securities, and (ii) does not place more than 390 orders in listed options per day on average during a calendar month for its own beneficial account(s). See Exchange Rule 100.) --------------------------------------------------------------------------- Paragraph (c)(4)(A) of the Current Rule mandates that if it is determined that an obvious error has occurred, the execution price of the transaction will be adjusted pursuant to the table set forth in (c)(4)(A). Although for simple orders paragraph (c)(4)(A) is only applicable when no party to the transaction is a Customer, for the purposes of complex orders paragraph (a) of Interpretation and Policy .03 will supersede that limitation; therefore, if it is determined that a leg (or legs) of a complex order is an obvious error, the leg (or legs) will be adjusted pursuant to (c)(4)(A), regardless of whether a party to the transaction is a Customer. The Size Adjustment Modifier defined in subparagraph (a)(4) of the Current Rule will similarly apply (regardless of whether a Customer is on the transaction) by virtue of the application of paragraph (c)(4)(A).\13\ The Exchange notes that adjusting all market participants is not unique or novel. When the Exchange determines that a simple order execution is a Catastrophic Error pursuant to the Current Rule, paragraph (d)(3) already provides for adjusting the execution price for all market participants, including Customers. --------------------------------------------------------------------------- \13\ See Exchange Rule 521(c)(4)(A) (stating that any non- Customer Obvious Error exceeding 50 contracts will be subject to the Size Adjustment Modifier defined in sub-paragraph (a)(4)). The Size Adjustment Modifier may also apply to the option leg of a stock- option order that is adjusted pursuant to Proposed Rule 521 Interpretation and Policy .03(c). --------------------------------------------------------------------------- Furthermore, as with the Current Rule, Proposed Rule 521 Interpretation and Policy .03(a) provides protection for Customer orders, stating that where at least one party to a complex order transaction is a Customer, the transaction will be nullified if adjustment would result in an execution price higher (for buy transactions) or lower (for sell transactions) than the Customer's limit price on the complex order or individual leg(s). For example, assume Customer enters a complex order to buy Leg 1 and Leg 2.Assume the NBBO for Leg 1 is $0.20-1.00 and the NBBO for Leg 2 is $0.50-1.00 and that these have been the NBBOs since the market opened. A split-second prior to the execution of the complex order a Customer enters a simple order to sell the Leg 1 options series at $1.30, and the simple order enters the Exchange's book so that the BBO is $.20-$1.30. The limit price on the simple order is $1.30. The complex order executes Leg 1 against the Exchange's best offer of $1.30 and Leg 2 at $1.00 for a net execution price of $2.30. However, Leg 1 executed on a wide quote (the NBBO for Leg 1 was $0.20-1.00 at the time of execution, which is wider than $0.75).\14\ Leg 2 was not executed on a wide quote (the market for Leg 2 was $0.50-1.00); thus, Leg 2 execution price stands. --------------------------------------------------------------------------- \14\ See Exchange Rule 521(b)(3). --------------------------------------------------------------------------- The Exchange determines that the Theoretical Price for Leg 1 is $1.00, which was the best offer prior to the execution. Leg 1 qualifies as an obvious error because the difference between the Theoretical Price ($1.00) and the execution price ($1.30) is larger than $0.25.\15\ --------------------------------------------------------------------------- \15\ See Exchange Rule 521(c)(1). --------------------------------------------------------------------------- According to Proposed Rule 521 Interpretation and Policy .03(a), Customers will also be adjusted in accordance with Rule 521(c)(4)(A), which for a buy transaction under $3.00 calls for the Theoretical Price to by adjusted by adding $0.15 \16\ to the Theoretical Price of $1.00. Thus, adjust execution price for Leg 1 would be $1.15. --------------------------------------------------------------------------- \16\ See Exchange Rule 521(c)(4)(A). --------------------------------------------------------------------------- However, adjusting the execution price of Leg 1 to $1.15 violates the limit price of the Customer's sell order on the simple order book for Leg 1, which was $1.30. Thus, the entire complex order transaction will be nullified \17\ because the limit price of a Customer's sell order would be violated by the adjustment.\18\ --------------------------------------------------------------------------- \17\ If any leg of a complex order is nullified, the entire transaction is nullified. See Proposed Rule 521 Interpretation and Policy .03(a). \18\ The simple order in this example is not an erroneous sell transaction because the execution price was not erroneously low. See Exchange Rule 521(a)(2). --------------------------------------------------------------------------- As the above example demonstrates, incoming complex orders may execute against resting simple orders in the leg market. If a complex order leg is deemed to be an obvious error, adjusting the execution price of the leg may violate the limit price of the resting order, which will result in nullification if the resting order is for a Customer. In contrast, Interpretation and Policy .02 to Rule 521 provides that if an adjustment would result in an execution price that is higher than an erroneous buy transaction or lower than an erroneous sell transaction the execution will not be adjusted or nullified.\19\ If the adjustment of a complex order would violate the complex order Customer's limit price, the transaction will be nullified. --------------------------------------------------------------------------- \19\ See Exchange Rule 521 Interpretation and Policy .02. --------------------------------------------------------------------------- As previously noted, paragraph (d)(3) of the Current Rule already mandates that if it is determined that a catastrophic error has occurred, the execution price of the transaction will be adjusted pursuant to the table set forth in paragraph (d)(3). For purposes of complex orders under Proposed Rule 521 Interpretation and Policy .03(a), if one of the legs of a complex order is determined to be a Catastrophic Error under paragraph (d)(3), all market participants will be adjusted in accordance with the table set forth in (d)(3). Again, however, where at least one party to a complex order transaction is a Customer, the transaction will be nullified if adjustment would result in an execution price higher (for buy transactions) or lower (for sell transactions) than the Customer's limit price on the complex order or individual leg(s). Again, if any leg of a complex order is nullified, the entire transaction is nullified. Additionally, as is the case today, a Member that submits an appeal seeking the review of an Official ruling will be assessed a fee of $500.00 for each Official ruling to be reviewed that is sustained and not overturned or modified by the Chief Regulatory Officer or his/her designee. In addition, in instances where the Exchange, on behalf of a Member, requests a determination by another market center that a transaction is clearly erroneous, the Exchange will pass any resulting charges through to the relevant Member.\20\ --------------------------------------------------------------------------- \20\ See Exchange Rule 521(l)(2). --------------------------------------------------------------------------- Other than honoring the limit prices established for Customer orders, the Exchange has proposed to treat Customers and non-Customers the same in the context of the complex orders that trade against the leg market. When complex orders trade against the leg market, it is possible that at least some of the legs will execute at prices that would not be deemed obvious or catastrophic errors, which gives the counterparty in such situations no indication that the execution will later by adjusted or nullified. The Exchange believes that treating Customers and non-Customers the same in this context will provide additional certainty to non-Customers (especially Market-Makers) with respect to their potential exposure and hedging activities, including comfort that even if a transaction is later adjusted, such transaction will not be fully nullified. However, as noted above, under the Proposed Rule where at least one party to the transaction is a Customer, the trade will be nullified if the adjustment would result in an execution price higher (for buy transactions) or lower (for sell transactions) than the Customer's limit [[Page 15255]] price on the complex order or individual leg(s). The Exchange has retained the protection of a Customer's limit price in order to avoid a situation where the adjustment could be to a price that a Customer would not have expected, and market professionals such as non-Customers would be better prepared to recover in such situations. Therefore, adjustment for non-Customers is more appropriate. Second, proposed Interpretation and Policy .03(b) governs the review of complex orders that are executed against other complex orders. Proposed Rule 521 Interpretation and Policy .03(b) provides: If a complex order executes against another complex order and at least one of the legs qualifies as an Obvious Error under paragraph (c)(1) or a Catastrophic Error under paragraph (d)(1), then the leg(s) that is an Obvious or Catastrophic Error will be adjusted or busted in accordance with paragraph (c)(4) or (d)(3), respectively, so long as either: (i) The width of the National Spread Market for the complex order strategy just prior to the erroneous transaction was equal to or greater than the amount set forth in the wide quote table of paragraph (b)(3), or (ii) the net execution price of the complex order is higher (lower) than the offer (bid) of the National Spread Market for the complex order strategy just prior to the erroneous transaction by an amount equal to at least the amount shown in the table in paragraph (c)(1). If any leg of a complex order is nullified, the entire transaction is nullified. For purposes of this Rule 521, the National Spread Market for a complex order strategy is determined by the National Best Bid/Offer of the individual legs of the strategy. As described above in relation to Proposed Rule 521 Interpretation and Policy .03(a), the first step is for the Exchange to review (upon receipt of a timely notification in accordance with paragraphs (c)(2) or (d)(2) of the Current Rule) the individual legs to determine whether a leg or legs qualifies as an obvious or catastrophic error. If no leg qualifies as an obvious or catastrophic error, the transaction stands-- no adjustment and no nullification. Unlike Proposed Rule 521 Interpretation and Policy .03(a), the Exchange is also proposing to compare the net execution price of the entire complex order package to the National Spread Market (``NSM'') for the complex order strategy.\21\ Complex orders are exempt from the order protection rules of the options exchanges.\22\ Thus, depending on the manner in which the systems of an options exchange are calibrated, a complex order can execute without regard to the prices offered in the complex order books or the leg markets of other options exchanges. In certain situations, reviewing the execution prices of the legs in a vacuum would make the leg appear to be an obvious or catastrophic error, even though the net execution price on the complex order is not an erroneous price. For example, assume the Exchange receives a complex order to buy ABC calls and sell ABC puts. --------------------------------------------------------------------------- \21\ NSM is the derived net market for a complex order package. For example, if the NBBO of Leg 1 is $1.00-2.00 and the NBBO of Leg 2 is $5.00-7.00, then the NSM for a complex order to buy Leg 1 and buy Leg 2 is $6.00-9.00. \22\ See Exchange Rule 1401(b)(7). All options exchanges have the same order protection rule. --------------------------------------------------------------------------- If the BBO for the ABC calls is $5.50-7.50 and the BBO for ABC puts is $3.00-4.50, then the Exchange's spread market is $1.00- 4.50.\23\ --------------------------------------------------------------------------- \23\ The complex order is to buy ABC calls and sell ABC puts. The Exchange's best offer for ABC puts is $7.50 and Exchange's best bid for is $3.00. If the Customer were to buy the complex order strategy, the Customer would receive a debit of $4.50 (buy ABC calls for $7.50 minus selling ABC puts for $3.00). If the Customer were to sell the complex order strategy the Customer would receive a credit of $1.00 (selling the ABC calls for $5.50 minus buying the ABC puts for $4.50). Thus, the Exchange's spread market is $1.00-4.50. --------------------------------------------------------------------------- If the NBBO for the ABC calls is $6.00-6.50 and the NBBO for the ABC puts is $3.50-4.00, then the NSM is $2.00-3.00. If the Customer buys the calls at $7.50 and sells the puts at $4.00, the complex order Customer receives a net execution price of $3.00 (debit), which is the expected net execution price as indicated by the NSM offer of $3.00. If the exchange were to solely focus on the $7.50 execution price of the ABC calls or the $4.00 execution price of the ABC puts, the execution would qualify as an obvious or catastrophic error because the execution price on the legs was outside the NBBO, even though the net execution price is accurate. Thus, the additional review of the NSM to determine if the complex order was executed at a truly erroneous price is necessary. The same concern is not present when a complex order executes against the leg market under Proposed Rule 521 Interpretation and Policy .03(a) because the execution price of each component is not executed at a price that is outside of the NBBO.\24\ --------------------------------------------------------------------------- \24\ See Exchange Rule 518(c)(2)(iii). --------------------------------------------------------------------------- In order to incorporate NSM, Proposed Rule 521 Interpretation and Policy .03(b) provides that if a complex order executes against another complex order and at least one of the legs qualifies as an obvious or catastrophic error, the leg or legs that is an obvious or catastrophic error will be adjusted or busted in accordance with paragraph (c)(4) or (d)(3) of the Current Rule, so long as either: (i) The width of the NSM for the complex order strategy just prior to the erroneous transaction was equal to or greater than the amount set forth in the wide quote table of paragraph (b)(3) of the Current Rule or (ii) the net execution price of the complex order is higher (lower) than the offer (bid) of the NSM for the complex order strategy just prior to the erroneous transaction by an amount equal to at least the amount shown in the table in paragraph (c)(1) of the Current Rule. For example, assume an individual leg or legs qualifies as an obvious or catastrophic error and the width of the NSM of the complex order strategy just prior to the erroneous transaction is $6.00-9.00. The complex order will qualify to be adjusted or busted in accordance with paragraph (c)(4) of the Current Rule because the wide quote table of paragraph (b)(3) of the Current Rule indicates that the minimum amount is $1.50 for a bid price between $5.00 to $10.00. If the NSM were instead $6.00-7.00 the complex order strategy would not qualify to be adjusted or busted pursuant to Proposed Rule 521 Interpretation and Policy .03(b)(i) because the width of the NSM is $1.00, which is less than the required $1.50. However, the execution may still qualify to be adjusted or busted in accordance with paragraph (c)(4) or (d)(3) of the Current Rule pursuant to Proposed Rule 521 Interpretation and Policy .03(b)(ii). Focusing on the NSM in this manner will ensure that the obvious/catastrophic error review process focuses on the net execution price instead of the execution prices of the individual legs, which may have execution prices outside of the NBBO of the leg markets. Again, assume an individual leg or legs qualifies as an obvious or catastrophic error as described above. If the NSM is $6.00-7.00 (not a wide quote pursuant to the wide quote table in paragraph (b)(3) of the Current Rule) but the execution price of the entire complex order package (i.e., the net execution price) is higher (lower) than the offer (bid) of the NSM for the complex order strategy just prior to the erroneous transaction by an amount equal to at least the amount in the table in paragraph (c)(1) of the Current Rule, then the complex order qualifies to be adjusted or busted in accordance with paragraph (c)(4) or (d)(3) of the Current Rule. For example, if the NSM for the complex order strategy just prior to the erroneous transaction is $6.00-7.00 and the net execution price of the complex order transaction is $7.75, the complex order qualifies to be adjusted or busted in accordance with paragraph (c)(4) of the Current Rule because the execution price of $7.75 is more than $0.50 (i.e., [[Page 15256]] the minimum amount according to the table in paragraph (c)(1) when the price is above $5.00 but less than $10.01) from the NSM offer of $7.00. Focusing on the NSM in this manner will ensure that the obvious/ catastrophic error review process focuses on the net execution price instead of the execution prices of the individual legs, which may have execution prices outside of the NBBO of the leg markets. Although the Exchange believes adjusting execution prices is generally better for the marketplace than nullifying executions because liquidity providers often execute hedging transactions to offset options positions, the Exchange recognizes that complex orders executing against other complex orders is similar to simple orders executing against other simple orders because both parties are able to review the execution price to determine whether the transaction may have been executed at an erroneous price. Thus, for purposes of complex orders that meet the requirements of Proposed Rule 521 Interpretation and Policy .03(b), the Exchange proposes to apply the Current Rule and adjust or bust obvious errors in accordance with paragraph (c)(4) (as opposed to applying paragraph (c)(4)(A) as is the case under Proposed Rule 521 Interpretation and Policy .03(a)) and catastrophic errors in accordance with (d)(3). Therefore, for purposes of complex orders under Proposed Rule 521 Interpretation and Policy .03(b), if one of the legs is determined to be an obvious error under paragraph (c)(1), all Customer transactions will be nullified, unless a Member submits 200 or more Customer transactions for review in accordance with (c)(4)(C).\25\ For purposes of complex orders under Proposed Rule 521 Interpretation and Policy .03(b), if one of the legs is determined to be a catastrophic error under paragraph (d)(3) and all of the other requirements of Rule 521 Interpretation and Policy .03(b) are met, all market participants will be adjusted in accordance with the table set forth in (d)(3). Again, however, pursuant to paragraph (d)(3) where at least one party to a complex order transaction is a Customer, the transaction will be nullified if adjustment would result in an execution price higher (for buy transactions) or lower (for sell transactions) than the Customer's limit price on the complex order or individual leg(s). Also, if any leg of a complex order is nullified, the entire transaction is nullified. --------------------------------------------------------------------------- \25\ Rule 521(c)(4)(C) also requires the orders resulting in 200 or more Customer transactions to have been submitted during the course of 2 minutes or less. --------------------------------------------------------------------------- Third, proposed Interpretation and Policy .03(c) governs stock- option orders. Proposed Rule 521 Interpretation and Policy .03(c) provides: If the option leg of a stock-option order qualifies as an Obvious Error under paragraph (c)(1) or a Catastrophic Error under paragraph (d)(1), then the option leg that is an Obvious or Catastrophic Error will be adjusted in accordance with paragraph (c)(4)(A) or (d)(3), respectively, regardless of whether one of the parties is a Customer. However, the option leg of any Customer order subject to this paragraph (c) will be nullified if the adjustment would result in an execution price higher (for buy transactions) or lower (for sell transactions) than the Customer's limit price on the stock-option order, and the Exchange will attempt to nullify the stock leg. Whenever a stock trading venue nullifies the stock leg of a stock-option order or whenever the stock leg cannot be executed, the Exchange will nullify the option leg upon request of one of the parties to the transaction or in accordance with paragraph (c)(3). Similar to proposed Interpretation and Policy .03(a), an options leg (or legs) of a stock-option order must qualify as an obvious or catastrophic error under the Current Rule in order for the stock-option order to qualify as an obvious or catastrophic error. Also similar to Proposed Rule 521 Interpretation and Policy .03(a), if an options leg (or legs) does qualify as an obvious or catastrophic error, the option leg (or legs) will be adjusted in accordance with paragraph (c)(4)(A) or (d)(3), respectively, regardless of whether one of the parties is a Customer. Again, as with Proposed Rule 521 Interpretation and Policy .03(a), where at least one party to a complex order transaction is a Customer, the Exchange will nullify the option leg and attempt to nullify the stock leg if adjustment would result in an execution price higher (for buy transactions) or lower (for sell transactions) than the Customer's limit price on the complex order or individual leg(s). The stock leg of a stock-option order is not executed on the Exchange; rather, the stock leg is sent to a stock trading venue for execution. The Exchange is unaware of a mechanism by which the Exchange can guarantee that the stock leg will be nullified by the stock trading venue in the event of an obvious or catastrophic error on the Exchange. Thus, in the event of the nullification of the option leg pursuant to Proposed Rule 521 Interpretation and Policy .03(c), the Exchange will attempt to have the stock leg nullified by the stock trading venue by either contacting the stock trading venue or notifying the parties to the transaction that the option leg is being nullified. The party or parties to the transaction may ultimately need to contact the stock trading venue to have the stock portion nullified. Finally, the Exchange proposes to provide guidance that whenever the stock trading venue nullifies the stock leg of a stock-option order, the option will be nullified upon request of one of the parties to the transaction or by an Official acting on their own motion in accordance with paragraph (c)(3). There are situations in which buyer and seller agree to trade a stock-option order, but the stock leg cannot be executed. The Exchange proposes to provide guidance that whenever the stock portion of a stock-option order cannot be executed, the Exchange will nullify the option leg upon request of one of the parties to the transaction or on an Official's own motion. Implementation Date In order to ensure that the other options exchanges are able to adopt rules consistent with this proposal and to coordinate effectiveness of such harmonized rules, the Exchange proposes to delay the operative date of this proposal to April 17, 2017. 2. Statutory Basis MIAX believes that its proposed rule change is consistent with Section 6(b) of the Act \26\ in general, and furthers the objectives of Section 6(b)(5) of the Act \27\ in particular, in that it is 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 mechanisms of a free and open market and a national market system and, in general, to protect investors and the public interest. .[sic] As described above, the Exchange and other options exchanges are seeking to adopt harmonized rules related to the adjustment and nullification of erroneous options transactions. The Exchange believes that the Proposed Rule will provide greater transparency and clarity with respect to the adjustment and nullification of erroneous options transactions. Particularly, the proposed changes seek to achieve consistent results for participants across U.S. options exchanges while maintaining a fair and orderly market, protecting investors and protecting the public interest. Based on [[Page 15257]] the foregoing, the Exchange believes that the proposal is consistent with Section 6(b)(5) of the Act \28\ in that the Proposed Rule will foster cooperation and coordination with persons engaged in regulating and facilitating transactions. The Exchange believes the various provisions allowing or dictating adjustment rather than nullification of a trade are necessary given the benefits of adjusting a trade price rather than nullifying the trade completely. Because options trades are used to hedge, or are hedged by, transactions in other markets, including securities and futures, many Members, and their customers, would rather adjust prices of executions rather than nullify the transactions and, thus, lose a hedge altogether. As such, the Exchange believes it is in the best interest of investors to allow for price adjustments as well as nullifications. --------------------------------------------------------------------------- \26\ 15 U.S.C. 78f(b). \27\ 15 U.S.C. 78f(b)(5). \28\ Id. --------------------------------------------------------------------------- The Exchange does not believe that the proposal is unfairly discriminatory, even though it differentiates in many places between Customers and non-Customers. As with the Current Rule, Customers are treated differently, often affording them preferential treatment. This treatment is appropriate in light of the fact that Customers 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. At the same time, the Exchange reiterates that in the U.S. options markets generally there is significant retail customer participation that occurs directly on (and only on) options exchanges such as the Exchange. Accordingly, differentiating among market participants with respect to the adjustment and nullification of erroneous options transactions is not unfairly discriminatory because it is reasonable and fair to provide Customers with additional protections as compared to non-Customers. The Exchange believes that its proposal to adopt the ability to adjust a Customer's execution price when a complex order is deemed to be an Obvious or Catastrophic Error is consistent with the Act. A complex order that executes against individual leg markets may receive an execution price on an individual leg that is not an Obvious or Catastrophic error but another leg of the transaction is an Obvious or Catastrophic Error. In such situations where the complex order is executing against at least one individual or firm that is not aware of the fact that they have executed against a complex order or that the complex order has been executed at an erroneous price, the Exchange believes it is more appropriate to adjust execution prices if possible because the derivative transactions are often hedged with other securities. Allowing adjustments instead of nullifying transactions in these limited situations will help to ensure that market participants are not left with a hedge that has no position to hedge against. The Exchange also believes its proposal related to stock-option orders is consistent with the Act. Stock-option orders consist of an option component and a stock component. Due to the fact that the Exchange has no control over the venues on which the stock is executed the proposal focuses on the option component of the stock-option order by adjusting or nullifying the option in accordance with paragraph (c)(4)(A) or (d)(3). Also, nullifying the option component if the stock component cannot be executed ensures that market participants receive the execution for which they bargained. Stock-option orders are negotiated and agreed to as a package; thus, if for any reason the stock portion of a stock-option order cannot ultimately be executed, the parties should not be saddled with an options position sans stock. 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. In this regard and as indicated above, the Exchange notes that the proposed rule change is substantially similar to a filing submitted by CBOE that was recently approved by the Commission.\29\ --------------------------------------------------------------------------- \29\ See supra, note 3. --------------------------------------------------------------------------- The Exchange believes the proposal will not impose a burden on intermarket competition but will rather alleviate any burden on competition because it is the result of a collaborative effort by all options exchanges to harmonize and improve the process related to the adjustment and nullification of erroneous options transactions. The Exchange does not believe that the rules applicable to such process is an area where options exchanges should compete, but rather, that all options exchanges should have consistent rules to the extent possible. Particularly where a market participant trades on several different exchanges and an erroneous trade may occur on multiple markets nearly simultaneously, the Exchange believes that a participant should have a consistent experience with respect to the nullification or adjustment of transactions. The Exchange understands that all other options exchanges that trade complex orders and/or stock-option orders intend to file proposals that are substantially similar to this proposal. The Exchange does not believe that the proposed rule change imposes a burden on intramarket competition because the provisions apply to all market participants equally within each participant category (i.e., Customers and non-Customers). With respect to competition between Customer and non-Customer market participants, the Exchange believes that the Proposed Rule acknowledges competing concerns and tries to strike the appropriate balance between such concerns. For instance, the Exchange believes that protection of Customers is important due to their direct participation in the options markets as well as the fact that they are not, by definition, market professionals. At the same time, the Exchange believes due to the quote-driven nature of the options markets, the importance of liquidity provision in such markets and the risk that liquidity providers bear when quoting a large breadth of products that are derivative of underlying securities, that the protection of liquidity providers and the practice of adjusting transactions rather than nullifying them is of critical importance. As described above, the Exchange will apply specific and objective criteria to determine whether an erroneous transaction has occurred and, if so, how to adjust or nullify a transaction. 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 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 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)(iii) of the Act \30\ and [[Page 15258]] subparagraph (f)(6) of Rule 19b-4 thereunder.\31\ --------------------------------------------------------------------------- \30\ 15 U.S.C. 78s(b)(3)(A)(iii). \31\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) requires a self-regulatory organization to give the Commission written notice of its intent to file 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. The Exchange has satisfied this requirement. --------------------------------------------------------------------------- A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the Act \32\ normally does not become operative for 30 days after the date of its filing. However, Rule 19b-4(f)(6)(iii) \33\ permits the Commission to designate a shorter time if such action is consistent with the protection of investors and the public interest. 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 waiving the 30-day operative delay is consistent with the protection of investors and the public interest as it will allow the Exchange to implement the proposed rule change by April 17, 2017 in coordination with the other options exchanges. Accordingly, the Commission hereby waives the operative delay and designates the proposal operative upon filing.\34\ --------------------------------------------------------------------------- \32\ 17 CFR 240.19b-4(f)(6). \33\ 17 CFR 240.19b-4(f)(6)(iii). \34\ 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). --------------------------------------------------------------------------- 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. 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-MIAX-2017-13 on the subject line. Paper Comments Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-MIAX-2017-13. 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 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-MIAX-2017-13, and should be submitted on or before April 17, 2017. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\35\ --------------------------------------------------------------------------- \35\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017-05921 Filed 3-24-17; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 82, No. 57 / Monday, March 27, 2017 / Notices 15251
B. Self-Regulatory Organization’s III. Date of Effectiveness of the Commission and any person, other than
Statement on Burden on Competition Proposed Rule Change and Timing for those that may be withheld from the
In accordance with Section 6(b)(8) of Commission Action public in accordance with the
the Act,13 the Exchange believes that the The foregoing rule change is effective provisions of 5 U.S.C. 552, will be
proposed rule change would not impose upon filing pursuant to Section available for Web site viewing and
any burden on competition that is not 19(b)(3)(A) 15 of the Act and printing in the Commission’s Public
necessary or appropriate in furtherance subparagraph (f)(2) of Rule 19b–4 16 Reference Room, 100 F Street NE.,
of the purposes of the Act. Instead, the thereunder, because it establishes a due, Washington, DC 20549, on official
Exchange believes that the proposed fee, or other charge imposed by the business days between the hours of
changes would encourage the Exchange. 10:00 a.m. and 3:00 p.m. Copies of the
submission of additional liquidity to a At any time within 60 days of the filing also will be available for
public exchange, thereby promoting filing of such proposed rule change, the inspection and copying at the principal
price discovery and transparency and Commission summarily may office of the Exchange. All comments
enhancing order execution temporarily suspend such rule change if received will be posted without change;
opportunities for ETP Holders. The it appears to the Commission that such the Commission does not edit personal
Exchange believes that this could action is necessary or appropriate in the identifying information from
promote competition between the public interest, for the protection of submissions. You should submit only
Exchange and other execution venues, investors, or otherwise in furtherance of information that you wish to make
including those that currently offer the purposes of the Act. If the available publicly. All submissions
similar order types and comparable Commission takes such action, the
should refer to File Number SR–
transaction pricing, by encouraging Commission shall institute proceedings
NYSEArca–2017–27 and should be
additional orders to be sent to the under Section 19(b)(2)(B) 17 of the Act to
determine whether the proposed rule submitted on or before April 17, 2017.
Exchange for execution.
Finally, the Exchange notes that it change should be approved or For the Commission, by the Division of
operates in a highly competitive market disapproved. Trading and Markets, pursuant to delegated
authority.18
in which market participants can IV. Solicitation of Comments
readily favor competing venues if they Eduardo A. Aleman,
Interested persons are invited to
deem fee levels at a particular venue to submit written data, views, and
Assistant Secretary.
be excessive or rebate opportunities arguments concerning the foregoing, [FR Doc. 2017–05918 Filed 3–24–17; 8:45 am]
available at other venues to be more including whether the proposed rule BILLING CODE 8011–01–P
favorable. In such an environment, the change is consistent with the Act.
Exchange must continually adjust its Comments may be submitted by any of
fees and rebates to remain competitive the following methods: SECURITIES AND EXCHANGE
with other exchanges and with COMMISSION
alternative trading systems that have Electronic Comments
been exempted from compliance with • Use the Commission’s Internet [Release No. 34–80284; File No. SR–MIAX–
the statutory standards applicable to comment form (http://www.sec.gov/ 2017–13]
exchanges. Because competitors are free rules/sro.shtml); or
to modify their own fees and credits in • Send an email to rule-comments@ Self-Regulatory Organizations; Miami
response, and because market sec.gov. Please include File Number SR– International Securities Exchange,
participants may readily adjust their NYSEArca–2017–27 on the subject line. LLC; Notice of Filing and Immediate
order routing practices, the Exchange Effectiveness of a Proposed Rule
believes that the degree to which fee Paper Comments
Change To Amend Rule 521,
changes in this market may impose any • Send paper comments in triplicate
Nullification and Adjustment of
burden on competition is extremely to Secretary, Securities and Exchange
Options Transactions Including
limited. As a result of all of these Commission, 100 F Street NE.,
Obvious Errors
considerations, the Exchange does not Washington, DC 20549–1090.
believe that the proposed changes will All submissions should refer to File March 21, 2017.
impair the ability of ETP Holders or Number SR–NYSEArca–2017–27. This
competing order execution venues to Pursuant to the provisions of Section
file number should be included on the
maintain their competitive standing in 19(b)(1) of the Securities Exchange Act
subject line if email is used. To help the
the financial markets. Finally, the Commission process and review your of 1934 (‘‘Act’’) 1 and Rule 19b–4
Exchange believes the proposed fee comments more efficiently, please use thereunder,2 notice is hereby given that
changes do not impose any burden on only one method. The Commission will on March 17, 2017, Miami International
competition as the fee changes are post all comments on the Commission’s Securities Exchange, LLC (‘‘MIAX’’ or
consistent with the fees charged by Internet Web site (http://www.sec.gov/ ‘‘Exchange’’) filed with the Securities
other exchanges.14 rules/sro.shtml). Copies of the and Exchange Commission
submission, all subsequent (‘‘Commission’’) a proposed rule change
C. Self-Regulatory Organization’s as described in Items I and II below,
amendments, all written statements
Statement on Comments on the which Items have been prepared by the
asabaliauskas on DSK3SPTVN1PROD with NOTICES
with respect to the proposed rule
Proposed Rule Change Received From Exchange. The Commission is
change that are filed with the
Members, Participants, or Others publishing this notice to solicit
Commission, and all written
No written comments were solicited communications relating to the comments on the proposed rule change
or received with respect to the proposed proposed rule change between the from interested persons.
rule change.
15 15 U.S.C. 78s(b)(3)(A). 18 17 CFR 200.30–3(a)(12).
13 15 U.S.C. 78f(b)(8). 16 17 CFR 240.19b–4(f)(2). 1 15 U.S.C. 78s(b)(1).
14 See supra, note 12. 17 15 U.S.C. 78s(b)(2)(B). 2 17 CFR 240.19b–4.
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![15256 Federal Register / Vol. 82, No. 57 / Monday, March 27, 2017 / Notices
the minimum amount according to the complex order is nullified, the entire parties to the transaction that the option
table in paragraph (c)(1) when the price transaction is nullified. leg is being nullified. The party or
is above $5.00 but less than $10.01) Third, proposed Interpretation and parties to the transaction may ultimately
from the NSM offer of $7.00. Focusing Policy .03(c) governs stock-option need to contact the stock trading venue
on the NSM in this manner will ensure orders. Proposed Rule 521 Interpretation to have the stock portion nullified.
that the obvious/catastrophic error and Policy .03(c) provides: Finally, the Exchange proposes to
review process focuses on the net If the option leg of a stock-option order provide guidance that whenever the
execution price instead of the execution qualifies as an Obvious Error under stock trading venue nullifies the stock
prices of the individual legs, which may paragraph (c)(1) or a Catastrophic Error under leg of a stock-option order, the option
have execution prices outside of the paragraph (d)(1), then the option leg that is will be nullified upon request of one of
NBBO of the leg markets. an Obvious or Catastrophic Error will be the parties to the transaction or by an
Although the Exchange believes adjusted in accordance with paragraph Official acting on their own motion in
adjusting execution prices is generally (c)(4)(A) or (d)(3), respectively, regardless of accordance with paragraph (c)(3). There
whether one of the parties is a Customer. are situations in which buyer and seller
better for the marketplace than However, the option leg of any Customer
nullifying executions because liquidity order subject to this paragraph (c) will be
agree to trade a stock-option order, but
providers often execute hedging nullified if the adjustment would result in an the stock leg cannot be executed. The
transactions to offset options positions, execution price higher (for buy transactions) Exchange proposes to provide guidance
the Exchange recognizes that complex or lower (for sell transactions) than the that whenever the stock portion of a
orders executing against other complex Customer’s limit price on the stock-option stock-option order cannot be executed,
orders is similar to simple orders order, and the Exchange will attempt to the Exchange will nullify the option leg
executing against other simple orders nullify the stock leg. Whenever a stock upon request of one of the parties to the
trading venue nullifies the stock leg of a transaction or on an Official’s own
because both parties are able to review stock-option order or whenever the stock leg
the execution price to determine motion.
cannot be executed, the Exchange will nullify
whether the transaction may have been the option leg upon request of one of the Implementation Date
executed at an erroneous price. Thus, parties to the transaction or in accordance
for purposes of complex orders that with paragraph (c)(3).
In order to ensure that the other
meet the requirements of Proposed Rule options exchanges are able to adopt
Similar to proposed Interpretation rules consistent with this proposal and
521 Interpretation and Policy .03(b), the and Policy .03(a), an options leg (or legs)
Exchange proposes to apply the Current to coordinate effectiveness of such
of a stock-option order must qualify as harmonized rules, the Exchange
Rule and adjust or bust obvious errors an obvious or catastrophic error under
in accordance with paragraph (c)(4) (as proposes to delay the operative date of
the Current Rule in order for the stock- this proposal to April 17, 2017.
opposed to applying paragraph (c)(4)(A) option order to qualify as an obvious or
as is the case under Proposed Rule 521 catastrophic error. Also similar to 2. Statutory Basis
Interpretation and Policy .03(a)) and Proposed Rule 521 Interpretation and MIAX believes that its proposed rule
catastrophic errors in accordance with Policy .03(a), if an options leg (or legs) change is consistent with Section 6(b) of
(d)(3). does qualify as an obvious or the Act 26 in general, and furthers the
Therefore, for purposes of complex catastrophic error, the option leg (or objectives of Section 6(b)(5) of the Act 27
orders under Proposed Rule 521 legs) will be adjusted in accordance in particular, in that it is designed to
Interpretation and Policy .03(b), if one with paragraph (c)(4)(A) or (d)(3), prevent fraudulent and manipulative
of the legs is determined to be an respectively, regardless of whether one acts and practices, to promote just and
obvious error under paragraph (c)(1), all of the parties is a Customer. Again, as equitable principles of trade, to foster
Customer transactions will be nullified, with Proposed Rule 521 Interpretation cooperation and coordination with
unless a Member submits 200 or more and Policy .03(a), where at least one persons engaged in facilitating
Customer transactions for review in party to a complex order transaction is transactions in securities, to remove
accordance with (c)(4)(C).25 For a Customer, the Exchange will nullify impediments to and perfect the
purposes of complex orders under the option leg and attempt to nullify the mechanisms of a free and open market
Proposed Rule 521 Interpretation and stock leg if adjustment would result in and a national market system and, in
Policy .03(b), if one of the legs is an execution price higher (for buy general, to protect investors and the
determined to be a catastrophic error transactions) or lower (for sell public interest. .[sic] As described
under paragraph (d)(3) and all of the transactions) than the Customer’s limit above, the Exchange and other options
other requirements of Rule 521 price on the complex order or exchanges are seeking to adopt
Interpretation and Policy .03(b) are met, individual leg(s). harmonized rules related to the
all market participants will be adjusted The stock leg of a stock-option order adjustment and nullification of
in accordance with the table set forth in is not executed on the Exchange; rather, erroneous options transactions. The
(d)(3). Again, however, pursuant to the stock leg is sent to a stock trading Exchange believes that the Proposed
paragraph (d)(3) where at least one party venue for execution. The Exchange is Rule will provide greater transparency
to a complex order transaction is a unaware of a mechanism by which the and clarity with respect to the
Customer, the transaction will be Exchange can guarantee that the stock adjustment and nullification of
nullified if adjustment would result in leg will be nullified by the stock trading erroneous options transactions.
an execution price higher (for buy venue in the event of an obvious or
asabaliauskas on DSK3SPTVN1PROD with NOTICES
Particularly, the proposed changes seek
transactions) or lower (for sell catastrophic error on the Exchange. to achieve consistent results for
transactions) than the Customer’s limit Thus, in the event of the nullification of participants across U.S. options
price on the complex order or the option leg pursuant to Proposed exchanges while maintaining a fair and
individual leg(s). Also, if any leg of a Rule 521 Interpretation and Policy orderly market, protecting investors and
25 Rule 521(c)(4)(C) also requires the orders
.03(c), the Exchange will attempt to protecting the public interest. Based on
resulting in 200 or more Customer transactions to
have the stock leg nullified by the stock
have been submitted during the course of 2 minutes trading venue by either contacting the 26 15 U.S.C. 78f(b).
or less. stock trading venue or notifying the 27 15 U.S.C. 78f(b)(5).
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![15258 Federal Register / Vol. 82, No. 57 / Monday, March 27, 2017 / Notices
subparagraph (f)(6) of Rule 19b–4 Paper Comments SECURITIES AND EXCHANGE
thereunder.31 COMMISSION
A proposed rule change filed • Send paper comments in triplicate
pursuant to Rule 19b–4(f)(6) under the to Brent J. Fields, Secretary, Securities [Release No. 34–80282; File No. SR–BX–
Act 32 normally does not become and Exchange Commission, 100 F Street 2017–013]
operative for 30 days after the date of its NE., Washington, DC 20549–1090.
Self-Regulatory Organizations;
filing. However, Rule 19b–4(f)(6)(iii) 33 All submissions should refer to File NASDAQ BX, Inc.; Notice of Filing of
permits the Commission to designate a Number SR–MIAX–2017–13. This file Proposed Rule Change, as Modified by
shorter time if such action is consistent number should be included on the Amendment No. 1, To Shorten the
with the protection of investors and the Settlement Cycle From T+3 to T+2
subject line if email is used. To help the
public interest. The Exchange has asked
Commission process and review your
the Commission to waive the 30-day March 21, 2017.
operative delay so that the proposal may comments more efficiently, please use
Pursuant to Section 19(b)(1) of the
become operative immediately upon only one method. The Commission will
Securities Exchange Act of 1934
filing. The Commission believes that post all comments on the Commission’s
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
waiving the 30-day operative delay is Internet Web site (http://www.sec.gov/ notice is hereby given that on March 9,
consistent with the protection of rules/sro.shtml). Copies of the 2017, NASDAQ BX, Inc. (‘‘BX’’ or
investors and the public interest as it submission, all subsequent ‘‘Exchange’’) filed with the Securities
will allow the Exchange to implement amendments, all written statements and Exchange Commission (‘‘SEC’’ or
the proposed rule change by April 17, with respect to the proposed rule ‘‘Commission’’) the proposed rule
2017 in coordination with the other change that are filed with the change as described in Items I, II, and
options exchanges. Accordingly, the Commission, and all written III, below, which Items have been
Commission hereby waives the communications relating to the prepared by the Exchange. On March
operative delay and designates the proposed rule change between the 13, 2017, the Exchange filed
proposal operative upon filing.34 Commission and any person, other than Amendment No. 1.3 The Commission is
At any time within 60 days of the those that may be withheld from the publishing this notice to solicit
filing of the proposed rule change, the public in accordance with the comments on the proposed rule change,
Commission summarily may provisions of 5 U.S.C. 552, will be as modified by Amendment No. 1, from
temporarily suspend such rule change if available for Web site viewing and interested persons.
it appears to the Commission that such printing in the Commission’s Public
action is: (i) Necessary or appropriate in I. Self-Regulatory Organization’s
Reference room, 100 F Street NE., Statement of the Terms of Substance of
the public interest; (ii) for the protection Washington, DC 20549 on official
of investors; or (iii) otherwise in the Proposed Rule Change
business days between the hours of
furtherance of the purposes of the Act. 10:00 a.m. and 3:00 p.m. Copies of such The Exchange proposes to amend BX
If the Commission takes such action, the Rules 11140 (Transactions in Securities
filing also will be available for
Commission shall institute proceedings ‘‘Ex-Dividend,’’ ‘‘Ex-Rights’’ or ‘‘Ex-
inspection and copying at the principal
to determine whether the proposed rule Warrants’’), 11150 (Transactions ‘‘Ex-
office of the Exchange. All comments
should be approved or disapproved. Interest’’ in Bonds Which Are Dealt in
received will be posted without change; ‘‘Flat’’), 11210 (Sent by Each Party),
IV. Solicitation of Comments the Commission does not edit personal 11320 (Dates of Delivery), 11620
Interested persons are invited to identifying information from (Computation of Interest), and IM–
submit written data, views, and submissions. You should submit only 11810 (Sample Buy-In Forms), to
arguments concerning the foregoing, information that you wish to make conform to the Commission’s proposed
including whether the proposed rule available publicly. All submissions amendment to SEA Rule 15c6–1(a) to
change is consistent with the Act. should refer to File Number SR–MIAX– shorten the standard settlement cycle
Comments may be submitted by any of 2017–13, and should be submitted on or for most broker-dealer transactions from
the following methods: before April 17, 2017. three business days after the trade date
Electronic Comments (‘‘T+3’’) to two business days after the
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
trade date (‘‘T+2’’) and the industry-led
• Use the Commission’s Internet initiative to shorten the settlement cycle
comment form (http://www.sec.gov/ authority.35
from T+3 to T+2.4
rules/sro.shtml); or Eduardo A. Aleman, The text of the proposed rule change
• Send an email to rule-comments@ Assistant Secretary. is available on the Exchange’s Web site
sec.gov. Please include File Number SR– [FR Doc. 2017–05921 Filed 3–24–17; 8:45 am] at http://nasdaqbx.cchwallstreet.com/,
MIAX–2017–13 on the subject line. BILLING CODE 8011–01–P at the principal office of the Exchange,
and at the Commission’s Public
31 17 CFR 240.19b–4(f)(6). In addition, Rule 19b–
Reference Room.
4(f)(6) requires a self-regulatory organization to give
the Commission written notice of its intent to file
the proposed rule change at least five business days 1 15 U.S.C. 78s(b)(1).
prior to the date of filing of the proposed rule 2 17 CFR 240.19b–4.
asabaliauskas on DSK3SPTVN1PROD with NOTICES
change, or such shorter time as designated by the 3 In Amendment No. 1, the Exchange proposes to
Commission. The Exchange has satisfied this capitalize the letter ‘‘d’’ in the word ‘‘department’’
requirement. in the proposed revisions to Rule 11140(b)(1), as set
32 17 CFR 240.19b–4(f)(6).
forth in Exhibit 5 to the filing, to conform to the
33 17 CFR 240.19b–4(f)(6)(iii). Exchange’s current rule text.
34 For purposes only of waiving the 30-day 4 See Securities Exchange Act Release No. 78962
operative delay, the Commission has also (September 28, 2016), 81 FR 69240 (October 5,
considered the proposed rule’s impact on 2016) (Amendment to Securities Transaction
efficiency, competition, and capital formation. See Settlement Cycle) (File No. S7–22–16) (‘‘SEC
15 U.S.C. 78c(f). 35 17 CFR 200.30–3(a)(12). Proposing Release’’).
VerDate Sep<11>2014 18:02 Mar 24, 2017 Jkt 241001 PO 00000 Frm 00080 Fmt 4703 Sfmt 4703 E:\FR\FM\27MRN1.SGM 27MRN1](https://thefederalregister.org/doc/82_FR_15308/page/8.svg)
Document Created: 2017-03-25 00:21:21
Document Modified: 2017-03-25 00:21:21
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Notices | |
| FR Citation | 82 FR 15251 |
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