82 FR 18173 - Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Obvious Errors
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 82, Issue 72 (April 17, 2017)
Federal Register Volume 82, Issue 72 (April 17, 2017)
| Page Range | 18173-18180 | |
| FR Document | 2017-07635 |
[Federal Register Volume 82, Number 72 (Monday, April 17, 2017)] [Notices] [Pages 18173-18180] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-07635] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-80429; File No. SR-ISE-2017-30] Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Obvious Errors April 11, 2017. Pursuant to 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 April 3, 2017, Nasdaq ISE, LLC (``ISE'' or ``Exchange'') \3\ filed with the Securities and Exchange Commission (``Commission'') the 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. \3\ ISE was renamed Nasdaq ISE, LLC in a rule change that became operative on April 3, 2017. See Securities Exchange Act Release No. 80325 (March 29, 2017) (SR-ISE-2017-25). --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend Rule 720 (``Current Rule''), entitled ``Nullification and Adjustment of Options Transactions including Obvious Errors'' by adding a new Supplementary Material .05 to Rule 720. The text of the proposed rule change is available on the Exchange's Web site at www.ise.com, at the principal office of the Exchange, and at the Commission's Public Reference Room. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The 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 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. 76232 (October 22, 2015), 80 FR 66063 (October 28, 2015) (SR-ISE-2015-34). --------------------------------------------------------------------------- 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 \5\ and stock-option orders. 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 [[Page 18174]] 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 Rule 722(a)(1) defining a complex order and (a)(2) definition a stock-option order. --------------------------------------------------------------------------- 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 stock- option orders will not adopt these new provisions until such time as the exchange offers complex orders and/or stock-option orders. The Exchange currently trades complex orders and/or stock-option orders pursuant to ISE Rule 722. --------------------------------------------------------------------------- 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 option 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 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 Supplementary Material .05 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 720.05(a)-(c). --------------------------------------------------------------------------- First, proposed Supplementary Material .05(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 720.05(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 [[Page 18175]] 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. --------------------------------------------------------------------------- \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 720.05 will govern. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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 720.05 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, consider 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, consider 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 obvious error or catastrophic error price). --------------------------------------------------------------------------- \11\ See Rule 720(b) (defining the manner in which Theoretical Price is determined). \12\ See Rule 720(a)(1) (defining Customer for purposes of Rule 720 as not including a broker-dealer, Professional Customer, or Voluntary Professional Customer). --------------------------------------------------------------------------- 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 Supplementary Material .05 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) 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 Rule 720(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 720.05(c). --------------------------------------------------------------------------- Furthermore, as with the Current Rule, Proposed Rule 720.05(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 Rule 720(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 Rule 720(c)(1). --------------------------------------------------------------------------- According to Proposed Rule 720.05(a) Customers will also be adjusted in accordance with Rule 720(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 Rule 720(c)(4)(A). --------------------------------------------------------------------------- [[Page 18176]] 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 720.05(a). \18\ The simple order in this example is not an erroneous sell transaction because the execution price was not erroneously low. See Rule 720(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, Rule 720(d)(1) 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 Rule 720(d)(1). --------------------------------------------------------------------------- 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 (d)(3). For purposes of complex orders under Proposed Rule .05(a), if one of the legs of a complex orders 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, if it is determined that a Catastrophic Error has not occurred, the Exchange shall take action as set forth in ISE Rule 720(e). A Member that submits an appeal seeking the review of the Obvious Error Panel will be assessed a fee of $5,000 for each ruling that is overturned. 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. 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 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 Supplementary Material .05(b) governs the review of complex orders that are executed against other complex orders. Proposed Rule 720.05(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 Rule 720, 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 720.05(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 720.05(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.\20\ Complex orders are exempt from the order protection rules of the options exchanges.\21\ 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. --------------------------------------------------------------------------- \20\ 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. See ISE Rule 722. NSM is the derived net market for a complex order package. \21\ See Rule 1901(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.\22\ --------------------------------------------------------------------------- \22\ 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 $4.50, the complex order Customer receives a net execution price of $3.00 (debit), which [[Page 18177]] 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 $4.50 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 720.03(a). The ISE System permits a given leg of a complex order to trade through the NBBO provided the complex order trades no more than a configurable amount outside of the NBBO.\23\ --------------------------------------------------------------------------- \23\ See Supplementary Material .07 to Rule 722, which states, ``[p]rice limits for complex orders and quotes. (a) As provided in paragraph (b)(3) above, the legs of a complex order may be executed at prices that are inferior to the prices available on other exchanges trading the same options series. Notwithstanding, the System will not permit any leg of a complex order to trade through the NBBO for the series by a configurable amount calculated as the lesser of (i) an absolute amount not to exceed $0.10, and (ii) a percentage of the NBBO not to exceed 500%, as determined by the Exchange on a class or series basis. A Member can also include an instruction on a complex order entered on the complex order book that each leg of the complex order is to be executed only at a price that is equal to or better than the national best bid or offer for the options series or any stock component, as applicable.'' --------------------------------------------------------------------------- In order to incorporate NSM, Rule 720.05(b) provides that if the Exchange determines that a leg or legs does qualify as on obvious or catastrophic error, the leg or legs 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 .05(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 .05(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., 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 Rule 720.05(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 .05(a)) and catastrophic errors in accordance with (d)(3). Therefore, for purposes of complex orders under Proposed Rule 720.05(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).\24\ For purposes of complex orders under Proposed Rule 720.05(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 720.05(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. --------------------------------------------------------------------------- \24\ Rule 720(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 Supplementary Material .05(c) governs stock-option orders. Proposed Rule 720.05(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 Supplementary Material .05(a), an options leg (or legs) of a stock-option order must qualify as [[Page 18178]] 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 720.05(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 720.05(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 720.05(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 other options exchanges are able to adopt rules consistent with this proposal and to coordinate the effectiveness of such harmonized rules, the Exchange proposes to delay the operative date of this proposal to April 17, 2017. 2. Statutory Basis The Exchange believes that its proposal is consistent with the requirements of the Act and the rules and regulations thereunder that are applicable to a national securities exchange, and, in particular, with the requirements of Section 6(b) of the Act.\25\ Specifically, the proposal is consistent with Section 6(b)(5) of the Act \26\ because it would promote just and equitable principles of trade, remove impediments to, and perfect the mechanism of, a free and open market and a national market system, and, in general, protect investors and the public interest. --------------------------------------------------------------------------- \25\ 15 U.S.C. 78f(b). \26\ 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- 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 the foregoing, the Exchange believes that the proposal is consistent with Section 6(b)(5) of the Act \27\ in that the Proposed Rule will foster cooperation and coordination with persons engaged in regulating and facilitating transactions. --------------------------------------------------------------------------- \27\ 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- 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. 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 [[Page 18179]] 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. Importantly, the Exchange believes the proposal will not impose a burden on inter-market 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 intra-market 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 No written comments were either solicited or 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 \28\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\29\ --------------------------------------------------------------------------- \28\ 15 U.S.C. 78s(b)(3)(A)(iii). \29\ 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 \30\ normally does not become operative for 30 days after the date of its filing. However, Rule 19b-4(f)(6)(iii) \31\ 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.\32\ --------------------------------------------------------------------------- \30\ 17 CFR 240.19b-4(f)(6). \31\ 17 CFR 240.19b-4(f)(6)(iii). \32\ 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-ISE-2017-30 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-ISE-2017-30. 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-ISE- [[Page 18180]] 2017-30, and should be submitted on or before May 8, 2017. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\33\ --------------------------------------------------------------------------- \33\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017-07635 Filed 4-14-17; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 82, No. 72 / Monday, April 17, 2017 / Notices 18173
consistent with the protection of those that may be withheld from the ‘‘Nullification and Adjustment of
investors and the public interest, the public in accordance with the Options Transactions including Obvious
proposed rule change has become provisions of 5 U.S.C. 552, will be Errors’’ by adding a new Supplementary
effective pursuant to Section 19(b)(3)(A) available for Web site viewing and Material .05 to Rule 720.
of the Act 13 and Rule 19b–4(f)(6) printing in the Commission’s Public The text of the proposed rule change
thereunder.14 Reference Room, 100 F Street NE., is available on the Exchange’s Web site
At any time within 60 days of the Washington, DC 20549 on official at www.ise.com, at the principal office
filing of the proposed rule change, the business days between the hours of of the Exchange, and at the
Commission summarily may 10:00 a.m. and 3:00 p.m. Copies of such Commission’s Public Reference Room.
temporarily suspend such rule change if filing also will be available for
II. Self-Regulatory Organization’s
it appears to the Commission that such inspection and copying at the principal
Statement of the Purpose of, and
action is necessary or appropriate in the office of the Exchange. All comments
Statutory Basis for, the Proposed Rule
public interest, for the protection of received will be posted without change;
Change
investors, or otherwise in furtherance of the Commission does not edit personal
the purposes of the Act. If the identifying information from In its filing with the Commission, the
Commission takes such action, the submissions. You should submit only Exchange included statements
Commission shall institute proceedings information that you wish to make concerning the purpose of and basis for
to determine whether the proposed rule available publicly. All submissions the proposed rule change and discussed
should be approved or disapproved. should refer to File Number SR–BOX– any comments it received on the
2017–10, and should be submitted on or proposed rule change. The text of these
IV. Solicitation of Comments before May 8, 2017. statements may be examined at the
Interested persons are invited to For the Commission, by the Division of places specified in Item IV below. The
submit written data, views, and Trading and Markets, pursuant to delegated Exchange has prepared summaries, set
arguments concerning the foregoing, authority.15 forth in sections A, B, and C below, of
including whether the proposed rule Eduardo A. Aleman, the most significant aspects of such
change is consistent with the Act. Assistant Secretary. statements.
Comments may be submitted by any of [FR Doc. 2017–07634 Filed 4–14–17; 8:45 am] A. Self-Regulatory Organization’s
the following methods: BILLING CODE 8011–01–P Statement of the Purpose of, and
Electronic Comments Statutory Basis for, the Proposed Rule
Change
• Use the Commission’s Internet SECURITIES AND EXCHANGE
comment form (http://www.sec.gov/ COMMISSION 1. Purpose
rules/sro.shtml); or Last year, the Exchange and other
• Send an email to rule-comments@ [Release No. 34–80429; File No. SR–ISE–
options exchanges adopted a new,
sec.gov. Please include File Number SR– 2017–30]
harmonized rule related to the
BOX–2017–10 on the subject line. Self-Regulatory Organizations; Nasdaq adjustment and nullification of
Paper Comments ISE, LLC; Notice of Filing and erroneous options transactions,
Immediate Effectiveness of Proposed including a specific provision related to
• Send paper comments in triplicate
Rule Change Relating to Obvious coordination in connection with large-
to Brent J. Fields, Secretary, Securities
Errors scale events involving erroneous
and Exchange Commission, 100 F Street
options transactions.4 The Exchange
NE., Washington, DC 20549–1090. April 11, 2017.
believes that the changes the options
All submissions should refer to File Pursuant to Section 19(b)(1) of the exchanges implemented with the new,
Number SR–BOX–2017–10. This file Securities Exchange Act of 1934 harmonized rule have led to increased
number should be included on the (‘‘Act’’),1 and Rule 19b–4 thereunder,2 transparency and finality with respect to
subject line if email is used. To help the notice is hereby given that on April 3, the adjustment and nullification of
Commission process and review your 2017, Nasdaq ISE, LLC (‘‘ISE’’ or erroneous options transactions.
comments more efficiently, please use ‘‘Exchange’’) 3 filed with the Securities However, as part of the initial initiative,
only one method. The Commission will and Exchange Commission the Exchange and other options
post all comments on the Commission’s (‘‘Commission’’) the proposed rule
exchanges deferred a few specific
Internet Web site (http://www.sec.gov/ change as described in Items I and II
matters for further discussion.
rules/sro.shtml). Copies of the below, which Items have been prepared Specifically, the options exchanges
submission, all subsequent by the Exchange. The Commission is have been working together to identify
amendments, all written statements publishing this notice to solicit ways to improve the process related to
with respect to the proposed rule comments on the proposed rule change the adjustment and nullification of
change that are filed with the from interested persons. erroneous options transactions as it
Commission, and all written I. Self-Regulatory Organization’s relates to complex orders 5 and stock-
communications relating to the Statement of the Terms of Substance of option orders. The goal of the process
proposed rule change between the the Proposed Rule Change that the options exchanges have
Commission and any person, other than undertaken is to further harmonize rules
The Exchange proposes to amend
Rule 720 (‘‘Current Rule’’), entitled related to the adjustment and
mstockstill on DSK30JT082PROD with NOTICES
13 15 U.S.C. 78s(b)(3)(A). nullification of erroneous options
14 17 CFR 240.19b–4(f)(6). As required under Rule
19b–4(f)(6)(iii), the Exchange provided the
15 17 CFR 200.30–3(a)(12). transactions. As described below, the
1 15 U.S.C. 78s(b)(1).
Commission with written notice of its intent to file
2 17 CFR 240.19b–4. 4 See Securities Exchange Act Release No. 76232
the proposed rule change, along with a brief
description and the text of the proposed rule 3 ISE was renamed Nasdaq ISE, LLC in a rule (October 22, 2015), 80 FR 66063 (October 28, 2015)
change, at least five business days prior to the date change that became operative on April 3, 2017. See (SR–ISE–2015–34).
of filing of the proposed rule change, or such Securities Exchange Act Release No. 80325 (March 5 See Rule 722(a)(1) defining a complex order and
shorter time as designated by the Commission. 29, 2017) (SR–ISE–2017–25). (a)(2) definition a stock-option order.
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![Federal Register / Vol. 82, No. 72 / Monday, April 17, 2017 / Notices 18177
is the expected net execution price as Rule indicates that the minimum executed at an erroneous price. Thus,
indicated by the NSM offer of $3.00. amount is $1.50 for a bid price between for purposes of complex orders that
If the exchange were to solely focus $5.00 to $10.00. If the NSM were instead meet the requirements of Rule 720.05(b),
on the $7.50 execution price of the ABC $6.00–7.00 the complex order strategy the Exchange proposes to apply the
calls or the $4.50 execution price of the would not qualify to be adjusted or Current Rule and adjust or bust obvious
ABC puts, the execution would qualify busted pursuant to .05(b)(i) because the errors in accordance with paragraph
as an obvious or catastrophic error width of the NSM is $1.00, which is less (c)(4) (as opposed to applying paragraph
because the execution price on the legs than the required $1.50. However, the (c)(4)(A) as is the case under .05(a)) and
was outside the NBBO, even though the execution may still qualify to be catastrophic errors in accordance with
net execution price is accurate. Thus, adjusted or busted in accordance with (d)(3).
the additional review of the NSM to paragraph (c)(4) or (d)(3) of the Current Therefore, for purposes of complex
determine if the complex order was Rule pursuant to .05(b)(ii). Focusing on orders under Proposed Rule 720.05(b), if
executed at a truly erroneous price is the NSM in this manner will ensure that one of the legs is determined to be an
necessary. The same concern is not the obvious/catastrophic error review obvious error under paragraph (c)(1), all
present when a complex order executes process focuses on the net execution Customer transactions will be nullified,
against the leg market under Proposed price instead of the execution prices of unless a Member submits 200 or more
Rule 720.03(a). The ISE System permits the individual legs, which may have Customer transactions for review in
a given leg of a complex order to trade execution prices outside of the NBBO of accordance with (c)(4)(C).24 For
through the NBBO provided the the leg markets. purposes of complex orders under
complex order trades no more than a Again, assume an individual leg or Proposed Rule 720.05(b), if one of the
configurable amount outside of the legs qualifies as an obvious or legs is determined to be a catastrophic
NBBO.23 catastrophic error as described above. If error under paragraph (d)(3) and all of
In order to incorporate NSM, Rule the NSM is $6.00–7.00 (not a wide quote the other requirements of Rule 720.05(b)
720.05(b) provides that if the Exchange pursuant to the wide quote table in are met, all market participants will be
determines that a leg or legs does paragraph (b)(3) of the Current Rule) but adjusted in accordance with the table
qualify as on obvious or catastrophic the execution price of the entire set forth in (d)(3). Again, however,
error, the leg or legs will be adjusted or complex order package (i.e., the net pursuant to paragraph (d)(3) where at
busted in accordance with paragraph execution price) is higher (lower) than least one party to a complex order
(c)(4) or (d)(3) of the Current Rule, so the offer (bid) of the NSM for the transaction is a Customer, the
long as either: (i) The width of the NSM complex order strategy just prior to the transaction will be nullified if
for the complex order strategy just prior erroneous transaction by an amount adjustment would result in an execution
to the erroneous transaction was equal equal to at least the amount in the table price higher (for buy transactions) or
to or greater than the amount set forth in paragraph (c)(1) of the Current Rule, lower (for sell transactions) than the
in the wide quote table of paragraph then the complex order qualifies to be Customer’s limit price on the complex
(b)(3) of the Current Rule or (ii) the net adjusted or busted in accordance with order or individual leg(s). Also, if any
execution price of the complex order is paragraph (c)(4) or (d)(3) of the Current leg of a complex order is nullified, the
higher (lower) than the offer (bid) of the Rule. For example, if the NSM for the entire transaction is nullified.
NSM for the complex order strategy just complex order strategy just prior to the Third, proposed Supplementary
prior to the erroneous transaction by an erroneous transaction is $6.00–7.00 and Material .05(c) governs stock-option
amount equal to at least the amount the net execution price of the complex orders.
shown in the table in paragraph (c)(1) of order transaction is $7.75, the complex Proposed Rule 720.05(c) provides:
the Current Rule. order qualifies to be adjusted or busted
If the option leg of a stock-option order
For example, assume an individual in accordance with paragraph (c)(4) of qualifies as an Obvious Error under
leg or legs qualifies as an obvious or the Current Rule because the execution paragraph (c)(1) or a Catastrophic Error under
catastrophic error and the width of the price of $7.75 is more than $0.50 (i.e., paragraph (d)(1), then the option leg that is
NSM of the complex order strategy just the minimum amount according to the an Obvious or Catastrophic Error will be
prior to the erroneous transaction is table in paragraph (c)(1) when the price adjusted in accordance with paragraph
is above $5.00 but less than $10.01) (c)(4)(A) or (d)(3), respectively, regardless of
$6.00–9.00. The complex order will whether one of the parties is a Customer.
qualify to be adjusted or busted in from the NSM offer of $7.00. Focusing
on the NSM in this manner will ensure However, the option leg of any Customer
accordance with paragraph (c)(4) of the order subject to this paragraph (c) will be
Current Rule because the wide quote that the obvious/catastrophic error nullified if the adjustment would result in an
table of paragraph (b)(3) of the Current review process focuses on the net execution price higher (for buy transactions)
execution price instead of the execution or lower (for sell transactions) than the
23 See Supplementary Material .07 to Rule 722, prices of the individual legs, which may Customer’s limit price on the stock-option
which states, ‘‘[p]rice limits for complex orders and have execution prices outside of the order, and the Exchange will attempt to
quotes. (a) As provided in paragraph (b)(3) above, NBBO of the leg markets. nullify the stock leg. Whenever a stock
the legs of a complex order may be executed at Although the Exchange believes trading venue nullifies the stock leg of a
prices that are inferior to the prices available on adjusting execution prices is generally stock-option order or whenever the stock leg
other exchanges trading the same options series. cannot be executed, the Exchange will nullify
Notwithstanding, the System will not permit any better for the marketplace than
the option leg upon request of one of the
leg of a complex order to trade through the NBBO nullifying executions because liquidity parties to the transaction or in accordance
for the series by a configurable amount calculated providers often execute hedging with paragraph (c)(3).
as the lesser of (i) an absolute amount not to exceed transactions to offset options positions,
mstockstill on DSK30JT082PROD with NOTICES
$0.10, and (ii) a percentage of the NBBO not to
the Exchange recognizes that complex Similar to proposed Supplementary
exceed 500%, as determined by the Exchange on a Material .05(a), an options leg (or legs)
class or series basis. A Member can also include an orders executing against other complex
instruction on a complex order entered on the orders is similar to simple orders of a stock-option order must qualify as
complex order book that each leg of the complex executing against other simple orders
order is to be executed only at a price that is equal 24 Rule 720(c)(4)(C) also requires the orders
to or better than the national best bid or offer for
because both parties are able to review resulting in 200 or more Customer transactions to
the options series or any stock component, as the execution price to determine have been submitted during the course of 2 minutes
applicable.’’ whether the transaction may have been or less.
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![18180 Federal Register / Vol. 82, No. 72 / Monday, April 17, 2017 / Notices
2017–30, and should be submitted on or of the Exchange, and at the Agency Orders’’, which are QCC orders
before May 8, 2017. Commission’s Public Reference Room. represented as an agent by a Member on
For the Commission, by the Division of behalf of another party and submitted
II. Self-Regulatory Organization’s
Trading and Markets, pursuant to delegated for execution pursuant to Rule 21.1. The
Statement of the Purpose of, and
authority.33 Statutory Basis for, the Proposed Rule Exchange proposes that orders that yield
Eduardo A. Aleman, Change fee code QA would provide the Member
Assistant Secretary. with a standard rebate of $0.05 per
In its filing with the Commission, the contract.
[FR Doc. 2017–07635 Filed 4–14–17; 8:45 am] Exchange included statements Fee Code QC. Currently, fee code QC
BILLING CODE 8011–01–P concerning the purpose of and basis for is appended to Customer ‘‘QCC Contra
the proposed rule change and discussed Orders’’, which are QCC orders
any comments it received on the submitted by a Member for execution
SECURITIES AND EXCHANGE proposed rule change. The text of these
COMMISSION that will potentially execute against the
statements may be examined at the QCC Agency Order pursuant to Rule
[Release No. 34–80434; File No. SR– places specified in Item IV below. The 21.1. The Exchange proposes that orders
BatsEDGX–2017–15] Exchange has prepared summaries, set that yield fee code QC would provide
forth in Sections A, B, and C below, of the Member with a standard rebate of
Self-Regulatory Organizations; Bats the most significant parts of such $0.05 per contract.
EDGX Exchange, Inc.; Notice of Filing statements. Fee Code QM. Currently, fee code QM
and Immediate Effectiveness of a is appended to Non-Customer10 QCC
A. Self-Regulatory Organization’s
Proposed Rule Change to Fees for Use Agency Orders, as described above. The
Statement of the Purpose of, and
on the Exchange’s Equities Options Exchange proposes that for orders that
Statutory Basis for, the Proposed Rule
Platform yield fee code QM the Member would
Change
April 11, 2017. be charged a fee of $0.019 [sic] per
1. Purpose contract.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the The Exchange proposes to amend its Fee Code QN. Currently, fee code QN
‘‘Act’’),1 and Rule 19b–4 thereunder,2 fee schedule for its equity options is appended to Non-Customer QCC
platform (‘‘EDGX Options’’) to modify Agency Orders, as described above. The
notice is hereby given that on March 31,
fees for its recently adopted Qualified Exchange proposes that for orders that
2017, Bats EDGX Exchange, Inc. (the
Contingent Cross Orders (‘‘QCC’’).6 yield fee code QN the Member would be
‘‘Exchange’’ or ‘‘EDGX’’) filed with the
Securities and Exchange Commission Background of QCC charged a fee of $0.019 [sic] per
(the ‘‘Commission’’) the proposed rule contract.
The Exchange recently adopted
change as described in Items I, II, and functionality allowing participants on Designated Give Up Footnote
III below, which Items have been the Exchange the ability to submit to the
prepared by the Exchange. The Footnote 5 of the fee schedule
Exchange Qualified Contingent Cross currently specifies that when order is
Exchange has designated the proposed Orders, an order type offered by
rule change as one establishing or submitted with a Designated Give Up, as
multiple other options exchanges.7 The defined in Rule 21.12(b)(1), the
changing a member due, fee, or other operation of Qualified Contingent Cross
charge imposed by the Exchange under applicable rebates for such orders when
Orders on the Exchange is substantially executed on the Exchange (yielding fee
Section 19(b)(3)(A)(ii) of the Act 3 and similar in all material respects to the
Rule 19b–4(f)(2) thereunder,4 which code BC,11 NC 12 or PC 13) are provided
operation of such orders on such other to the Member who routed the order to
renders the proposed rule change exchanges.8
effective upon filing with the the Exchange. Pursuant to Rule 21.12,
Commission. The Commission is Pricing of QCC Orders which specifies the process to submit an
publishing this notice to solicit order with a Designated Give Up, a
Since the launch of QCC order
comments on the proposed rule change Member acting as an options routing
functionality on the Exchange on March
from interested persons. 3, 2017, all executions in QCC orders firm on behalf of one or more other
have been provided free of charge. The Exchange Members (a ‘‘Routing Firm’’)
I. Self-Regulatory Organization’s is able to route orders to the Exchange
Exchange proposes to amend these fees
Statement of the Terms of the Substance and to immediately give up the party (a
to reflect the value of the execution
of the Proposed Rule Change party other than the Routing Firm itself
opportunities provided by the QCC
The Exchange filed a proposal to functionality. Thus, the Exchange or the Routing Firm’s own clearing firm)
amend the fee schedule applicable to proposes to adopt fees corresponding to who will accept and clear any resulting
Members 5 and non-members of the the four new fee codes that were transaction. Because the Routing Firm is
Exchange pursuant to EDGX Rules adopted in connection with QCC, as
the OCC, excluding any transaction for a Broker
15.1(a) and (c). described below. Dealer or a ‘‘Professional’’ as defined in Exchange
The text of the proposed rule change Fee Code QA. Currently, fee code QA Rule 16.1
is available at the Exchange’s Web site is appended to Customer 9 ‘‘QCC 10 ‘‘Non-Customer’’ applies to any transaction that
at www.bats.com, at the principal office is not a Customer order.
6 See Securities Exchange Act Release No. 79942 11 Fee code BC is appended Customer orders
(February 1, 2017), 82 FR 9804 (February 8, 2017) represented as agent by a Member on behalf of
mstockstill on DSK30JT082PROD with NOTICES
33 17 CFR 200.30–3(a)(12).
(SR-BatsEDGX–2017–11) (‘‘QCC Filing’’). another party and submitted to BAM for potential
1 15 U.S.C. 78s(b)(1).
7 See ISE Rule 715(j), Supplementary Material .01 price improvement pursuant to Rule 21.19, and
2 17 CFR 240.19b–4.
to ISE Rule 715 and ISE Rule 721(b); see also CBOE provided a standard rebate of $0.14 per share. Id.
3 15 U.S.C. 78s(b)(3)(A)(ii).
Rule 6.53(u); NASDAQ PHLX Rule 1080(o); NYSE 12 Fee code NC is appended to Customer orders
4 17 CFR 240.19b–4(f)(2). Arca Rule 6.62(bb), Commentary .02 to NYSE Arca which add liquidity in Non-Penny Pilot securities
5 The term ‘‘Member’’ is defined as ‘‘any Rule 6.62 and NYSE Arca Rule 6.90. is provided a standard rebate of $0.05 per share. Id.
8 See QCC Filing supra, note 6.
registered broker or dealer that has been admitted 13 Fee code PC is appended to Customer orders
to membership in the Exchange.’’ See Exchange 9 ‘‘Customer’’ applies to any transaction identified which add liquidity in Penny Pilot securities is
Rule 1.5(n). by a Member for clearing in the Customer range at provided a standard rebate of $0.05 per share. Id.
VerDate Sep<11>2014 17:14 Apr 14, 2017 Jkt 241001 PO 00000 Frm 00082 Fmt 4703 Sfmt 4703 E:\FR\FM\17APN1.SGM 17APN1](https://thefederalregister.org/doc/82_FR_18245/page/8.svg)
Document Created: 2018-08-25 11:27:41
Document Modified: 2018-08-25 11:27:41
| 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 18173 |
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