82 FR 19282 - Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending Rule 6.87
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 82, Issue 79 (April 26, 2017)
Federal Register Volume 82, Issue 79 (April 26, 2017)
| Page Range | 19282-19289 | |
| FR Document | 2017-08390 |
[Federal Register Volume 82, Number 79 (Wednesday, April 26, 2017)] [Notices] [Pages 19282-19289] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-08390] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-80496; File No. SR-NYSEArca-2017-42] Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending Rule 6.87 April 20, 2017. Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 1934 (the ``Act''),\2\ and Rule 19b-4 thereunder,\3\ notice is hereby given that, on April 17, 2017, NYSE Arca, Inc. (the ``Exchange'' or ``NYSE Arca'') filed with the Securities and Exchange Commission (the ``Commission'') the proposed rule change as described in Items I and II below, which Items have been prepared by the self-regulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 15 U.S.C. 78a. \3\ 17 CFR 240.19b-4. --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend Rule 6.87 (Nullification and Adjustment of Options Transactions including Obvious Errors). The proposed rule change is available on the Exchange's Web site at www.nyse.com, at the principal office of the Exchange, and at the Commission's Public Reference Room. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements. [[Page 19283]] A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The purpose of this filing is to amend Rule 6.87 relating to the adjustment and nullification of erroneous transactions. This filing is based on a proposal recently submitted by Chicago Board Options Exchange, Incorporated (``CBOE'') and approved by the Commission.\4\ --------------------------------------------------------------------------- \4\ See Securities Exchange Act Release Nos. 80040 (February 14, 2017), 82 FR 11248 (February 21, 2017) (``CBOE Approval Order''); 79697 (December 27, 2016), 82 FR 167 (January 3, 2017) (``CBOE Notice'') (SR-CBOE-2016-088). See also Securities Exchange Act Release No. 80247 (March 15, 2017), 82 FR 14589 (March 21, 2017) (SR-BOX-2017-08) (immediately effective filing based on CBOE Approval Order). --------------------------------------------------------------------------- Background 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.\5\ 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, including how erroneous Complex Orders and Stock/Option Orders should be handled.\6\ --------------------------------------------------------------------------- \5\ See Securities Exchange Act Release No. 74921 (May 8, 2015), 80 FR 27747 (May 14, 2015) (SR-NYSEArca-2015-41). \6\ Rule 6.62(e) (defining Complex Order) and (h)(1) (defining Stock/Option Order). --------------------------------------------------------------------------- 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. 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 NYSE Arca 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. 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.\7\ --------------------------------------------------------------------------- \7\ The Exchange notes that it only offers Stock/Option Orders in open outcry, but does not offer electronic Stock/Option Orders. Therefore, the Exchange is not adopting the CBOE provisions around 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 necessitates 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 Customers--more favorable treatment in some circumstances. Proposed Rule As more fully described below, although the proposed rule applies much of the current rule (i.e., initial harmonized rule) to Complex Orders, it deviates to account for unique qualities of these transactions.\8\ Specifically, the [[Page 19284]] proposed rule reflects the fact that Complex Orders can execute against other Complex Orders or can execute against individual simple orders in the leg market.\9\ 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. To account for these variables, the proposed rule, as set forth in new Commentary .05, is divided into two parts--paragraphs (a) and (b). --------------------------------------------------------------------------- \8\ For example, for a Complex Order to qualify as an Obvious or Catastrophic Error, at least one leg of the Complex Order must itself qualify as an Obvious or Catastrophic Error under the current rule. See proposed Commentary .05(a)-(b) to Rule 6.87. See also Rule 6.87(c)(5) (regarding Complex Order Obvious Errors, which rule text was not part of the prior harmonization effort). \9\ The leg market consists of individual 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. --------------------------------------------------------------------------- Complex Orders Executed Against Individual Legs Proposed Commentary .05(a) governs the review of Complex Orders that are executed against the individual legs (as opposed to against another Complex Order). Proposed Rule 6.87.05(a) provides: 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.\10\ If no leg qualifies as an Obvious or Catastrophic Error, the transaction stands-- no adjustment and no nullification. --------------------------------------------------------------------------- \10\ 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, proposed Commentary .05 of Rule 6.87 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 \11\ 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 initial harmonized rule, the individual leg qualifies as an Obvious or Catastrophic error, and the Exchange will take steps to adjust or nullify the transaction.\12\ --------------------------------------------------------------------------- \11\ See Rule 6.87(b) (defining the manner in which Theoretical Price is determined). \12\ Only the execution price on the leg (or legs) that qualifies as an Obvious or Catastrophic Error per proposed Rule 6.87.05 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, assume that a Customer enters 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 (``MM1'') is quoting the ABC calls at $1.00-1.20; and Market Maker 2 (``MM2'') is quoting the ABC puts at $2.00-2.20. If the Complex Order executes against the quotes of MMs 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 each Leg (i.e., Legs 1 and 2) are compared to the Theoretical Price for each Leg to determine if either Leg qualifies as an Obvious Error (per paragraph (c)(1)) or Catastrophic Error (per paragraph (d)(1)).\13\ 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.\14\ --------------------------------------------------------------------------- \13\ See supra note 11. \14\ See Rule 6.87 (a)(1) (defining Customer for purposes of Rule 6.87 as not including any broker-dealer or Professional Customer). --------------------------------------------------------------------------- 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). 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 purposes of Complex Orders, proposed Commentary .05(a) will supersede this limitation. Specifically, 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 paragraph (c)(4)(A), regardless of whether any 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).\15\ 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 initial harmonized rule, paragraph (d)(3) already provides for adjusting the execution price for all market participants, including Customers. --------------------------------------------------------------------------- \15\ See Rule 6.87(c)(4)(A) (providing that any non-Customer Obvious Error exceeding 50 contracts will be subject to the Size Adjustment Modifier defined in sub-paragraph (a)(4)). --------------------------------------------------------------------------- Furthermore, as with the current, Proposed Rule 6.87.05(a) provides [[Page 19285]] 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 a 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 $0.501.00 and that these have been the NBBOs since the market opened. A split-second prior to the execution of the Complex Order, a different Customer enters a simple order to sell the leg 1 options series at $1.30, and this order enters the Exchange's book resulting in a BBO of $0.20-$1.30. The limit price of the simple order is $1.30. The Complex Order executes leg 1 against the Exchange best offer of $1.30 and leg 2 executes 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).\16\ 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. --------------------------------------------------------------------------- \16\ See Rule 6.87(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.\17\ --------------------------------------------------------------------------- \17\ See Rule 6.87(c)(1). --------------------------------------------------------------------------- Per Proposed Rule 6.87.05(a), Customers will also be adjusted in accordance with Rule 6.87(c)(4)(A), which for a buy transaction under $3.00 means the Theoretical Price will be adjusted by adding $0.15 to the Theoretical Price of $1.00.\18\ Thus, the adjusted execution price for Leg 1 would be $1.15. --------------------------------------------------------------------------- \18\ See Rule 6.87(c)(4)(A). --------------------------------------------------------------------------- However, adjusting the execution price of leg 1 to $1.15 would violate the limit price of the Customer's sell order for leg 1, which was $1.30. Thus, the entire Complex Order transaction will be nullified because the limit price of a Customer's sell order would be violated by the adjustment.\19\ --------------------------------------------------------------------------- \19\ If any leg of a Complex Order is nullified, the entire transaction is nullified. See Proposed Rule 6.87.05(a). The Exchange notes that the simple order in this example is not an erroneous sell transaction because the execution price was not erroneously low. See Rule 6.87(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, Commentary .02 to Rule 6.87 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.\20\ If the adjustment of a Complex Order would violate the Complex Order Customer's limit price, the transaction will be nullified. --------------------------------------------------------------------------- \20\ See Commentary .02 to Rule 6.87. --------------------------------------------------------------------------- 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 Rule 6.87.05(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. 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. Complex Orders Executed Against Complex Orders Proposed Commentary .05(b) to Rule 6.87 governs the review of Complex Orders that are executed against other Complex Orders. Specifically, proposed Rule 6.87.05(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 Complex NBBO 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 Complex NBBO 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. As described above in relation to proposed Rule 6.87.05(a), the first step is for the Exchange to review (upon receipt of a timely notification in accordance with paragraph (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. If the adjustment of a complex order would violate the complex order Customer's limit price, the transaction will be nullified. Unlike proposed Rule 6.87.05(a), the Exchange also proposes to compare the net execution price of the entire Complex Order package to the Complex NBBO for the complex order strategy.\21\ [[Page 19286]] 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\ The Complex NBBO 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 Complex NBBO for a Complex Order to buy Leg 1 and buy Leg 2 is $6.00-9.00. See Rule 6.1A(11)(b) (defining Complex NBBO as ``the NBBO for a given complex order strategy as derived from the national best bid and national best offer for each individual component series of a Complex Order''). The Complex NBBO is analogous to the concept of the National Spread Market, or NSM, as used by other exchanges. See supra 4, CBOE Notice, 82 FR at 170; CBOE Approval Order, 82 FR at 11249-50. \22\ All options exchanges have the same order protection rule. See, e.g., Rule 6.94(b)(7). --------------------------------------------------------------------------- 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--or Complex BBO--is $1.00-4.50. See also Rule 6.1A((b) (defining Complex BBO as ``the BBO for a given complex order strategy as derived from the best bid on OX and best offer on OX for each individual component series of a Complex Order''). The Complex BBO is analogous to the concept of the ``exchange spread market,'' as used by other exchanges. See supra 4, CBOE Notice, 82 FR at 173, fn22. --------------------------------------------------------------------------- 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 Complex NBBO 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 is the expected net execution price as indicated by the Complex NBBO 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 Complex NBBO to determine if the Complex Order was executed at a truly erroneous price is necessary.\24\ The same concern is not present when a Complex Order executes against the leg market under proposed Rule 6.87.05(a). The Exchange permits a given leg of a Complex Order to trade through the NBBO, however the Exchange will not accept incoming Complex Orders if they are priced a certain amount outside of the Complex NBBO.\25\ --------------------------------------------------------------------------- \24\ The Exchange notes that this treatment is consistent with current Rule 6.87(c)(5)(A), which provides that ``[i]f a Complex Order executes against another Complex Order in the Complex Order Book and one or more legs of the transaction is deemed eligible to be adjusted or busted, the entire trade (all legs) will be busted, unless both parties agree to adjust the transaction to a different price within thirty (30) minutes of being notified by the Exchange of the decision to bust''). The Exchange proposes to delete paragraph (c)(5) of the Rule in its entirety to harmonize with proposed Rule 6.87.05. See below, under the heading ``Conforming Change to Eliminate Current Rule Regarding Complex Orders Obvious Errors,'' for additional discussion. \25\ Commentary .05 to Rule 6.91 sets forth the Price Protection Filter (``Filter''), which prevents the execution of aggressively- priced electronic Complex Orders (i.e., priced so far away from the prevailing contra-side NBBO market for the same strategy). Specifically, an incoming electronic Complex Order will be rejected (or cancelled) if the sum of the following is less than zero ($0.00): (i) The net debit (credit) limit price of the order, (ii) the contra-side Complex NBBO for that same Complex Order, and (iii) an amount specified by the Exchange (``Specified Amount'' or ``Amount''). The Specified Amount varies depending on the smallest MPV of any leg in the Complex Order, e.g., the Amount ranges from .10 to .15 to .30 where the smallest MPV of any leg is .01 to .05 to .10, respectively. See Commentary .05 to Rule 6.91. --------------------------------------------------------------------------- In order to incorporate Complex NBBO, proposed Rule 6.87.05(b) provides that if the Exchange determines that a leg or legs does qualify as an 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 Complex NBBO 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 Complex NBBO 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 Complex NBBO 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 Complex NBBO were instead $6.00-7.00 the Complex Order strategy would not qualify to be adjusted or busted pursuant to proposed Rule 6.87.05(b)(i) because the width of the Complex NBBO 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 6.87.05(b)(ii). Focusing on the Complex NBBO 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 Complex NBBO 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 Complex NBBO 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 Complex NBBO 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 Complex NBBO offer of $7.00. Focusing on the Complex NBBO 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. [[Page 19287]] 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 6.87.05(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 Rule 6.87.05(a) and catastrophic errors in accordance with (d)(3). Therefore, for purposes of Complex Orders under proposed Rule 6.87.05(b), if one of the legs is determined to be an obvious error under paragraph (c)(1), all Customer transactions will be nullified, unless an OTP Holder or OTP Firm submits 200 or more Customer transactions for review in accordance with (c)(4)(C).\26\ For purposes of Complex Orders under proposed Rule 6.87.05(b), if one of the legs is determined to be a Catastrophic Error under paragraph (d)(3) and all of the other requirements of proposed Rule 6.87.05(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. --------------------------------------------------------------------------- \26\ Rule 6.87(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. --------------------------------------------------------------------------- Conforming Change To Eliminate Rule Regarding Complex Orders Obvious Errors Finally, the Exchange proposes to delete the rule text in paragraph (c)(5) of the current rule, which addresses ``Complex Order Obvious Errors,'' in light of the proposed addition of Commentary .05 to the Rule. The Exchange proposed to designate Rule 6.87(c)(5) as ``Reserved.'' The Exchange believes this modification would add clarity, transparency and internal consistency to the Rule. Implementation 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 proposed to delay the operative date of this proposal to April 17, 2017. 2. Statutory Basis The Exchange believes that its proposal is consistent with Section 6(b) of the Securities Exchange Act of 1934 (the ``Act''),\27\ in general, and furthers the objectives of Section 6(b)(5) of the Act,\28\ in particular, in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. --------------------------------------------------------------------------- \27\ 15 U.S.C. 78f(b). \28\ 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 \29\ in that the proposed rule will foster cooperation and coordination with persons engaged in regulating and facilitating transactions. --------------------------------------------------------------------------- \29\ 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 Participants, 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. Finally, the proposal to delete paragraph (c)(5) of the current rule, which addresses ``Complex Order Obvious Errors,'' would add would add clarity, transparency and internal consistency to the Rule, in light of the proposed addition of Commentary .05 to the Rule. [[Page 19288]] B. Self-Regulatory Organization's Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The Exchange does not believe that the proposed rule change will impose any burden on competition 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.\30\ --------------------------------------------------------------------------- \30\ See CBOE Approval Order, supra note 4. --------------------------------------------------------------------------- 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 No written comments were solicited or received with respect to the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Because the 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 \31\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\32\ --------------------------------------------------------------------------- \31\ 15 U.S.C. 78s(b)(3)(A)(iii). \32\ 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 Commission has waived the five-day prefiling requirement in this case. --------------------------------------------------------------------------- A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the Act \33\ normally does not become operative for 30 days after the date of its filing. However, Rule 19b-4(f)(6)(iii) \34\ 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.\35\ --------------------------------------------------------------------------- \33\ 17 CFR 240.19b-4(f)(6). \34\ 17 CFR 240.19b-4(f)(6)(iii). \35\ 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-NYSEArca-2017-42 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-NYSEArca-2017-42. 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 [[Page 19289]] 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-NYSEArca-2017-42, and should be submitted on or before May 17, 2017. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\36\ --------------------------------------------------------------------------- \36\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017-08390 Filed 4-25-17; 8:45 am] BILLING CODE 8011-01-P
![19282 Federal Register / Vol. 82, No. 79 / Wednesday, April 26, 2017 / Notices
fair, and equitable because the these it appears to the Commission that such For the Commission, by the Division of
tiers were not providing the desired action is necessary or appropriate in the Trading and Markets, pursuant to delegated
result of incentivizing Members to public interest, for the protection of authority.26
increase their participation on the investors, or otherwise in furtherance of Eduardo A. Aleman,
Exchange. As such, the Exchange also the purposes of the Act. Assistant Secretary.
believes that the proposed elimination [FR Doc. 2017–08392 Filed 4–25–17; 8:45 am]
IV. Solicitation of Comments
of these tiers would be non- BILLING CODE 8011–01–P
discriminatory in that they currently Interested persons are invited to
apply equally to all Members and, upon submit written data, views, and
elimination, would no longer be arguments concerning the foregoing, SECURITIES AND EXCHANGE
available to any Members. Further, their including whether the proposed rule COMMISSION
elimination will allow the Exchange to change is consistent with the Act.
explore other pricing mechanisms in Comments may be submitted by any of [Release No. 34–80496; File No. SR–
which it may enhance market quality for the following methods: NYSEArca–2017–42]
all Members. Electronic Comments
Self-Regulatory Organizations; NYSE
B. Self-Regulatory Organization’s • Use the Commission’s Internet Arca, Inc.; Notice of Filing and
Statement on Burden on Competition comment form (http://www.sec.gov/ Immediate Effectiveness of Proposed
The Exchange believes the proposed rules/sro.shtml); or Rule Change Amending Rule 6.87
amendment to its fee schedule would • Send an email to rule-comments@
not impose any burden on competition sec.gov. Please include File Number SR– April 20, 2017.
that is not necessary or appropriate in BatsBZX–2017–23 on the subject line. Pursuant to Section 19(b)(1) 1 of the
furtherance of the purposes of the Act. Paper Comments Securities Exchange Act of 1934 (the
The Exchange does not believe that the ‘‘Act’’),2 and Rule 19b–4 thereunder,3
• Send paper comments in triplicate notice is hereby given that, on April 17,
proposed change represents a significant to Brent J. Fields, Secretary, Securities
departure from previous pricing offered 2017, NYSE Arca, Inc. (the ‘‘Exchange’’
and Exchange Commission, 100 F Street or ‘‘NYSE Arca’’) filed with the
by the Exchange or pricing offered by NE., Washington, DC 20549–1090.
the Exchange’s competitors. Securities and Exchange Commission
All submissions should refer to File (the ‘‘Commission’’) the proposed rule
Additionally, Members may opt to
Number SR–BatsBZX–2017–23. This file change as described in Items I and II
disfavor the Exchange’s pricing if they
number should be included on the below, which Items have been prepared
believe that alternatives offer them
subject line if email is used. To help the by the self-regulatory organization. The
better value. Accordingly, the Exchange
Commission process and review your Commission is publishing this notice to
does not believe that the proposed
comments more efficiently, please use solicit comments on the proposed rule
change will impair the ability of
only one method. The Commission will change from interested persons.
Members or competing venues to
post all comments on the Commission’s
maintain their competitive standing in I. Self-Regulatory Organization’s
Internet Web site (http://www.sec.gov/
the financial markets. The Exchange Statement of the Terms of Substance of
rules/sro.shtml). Copies of the
does not believe that the proposed the Proposed Rule Change
submission, all subsequent
change to the Exchange’s standard fees,
amendments, all written statements The Exchange proposes to amend
rebates and tiered pricing structure
with respect to the proposed rule Rule 6.87 (Nullification and Adjustment
burdens competition, but instead,
change that are filed with the of Options Transactions including
enhances competition as it is intended
Commission, and all written Obvious Errors). The proposed rule
to increase the competitiveness of the
communications relating to the change is available on the Exchange’s
Exchange.
proposed rule change between the Web site at www.nyse.com, at the
C. Self-Regulatory Organization’s Commission and any person, other than principal office of the Exchange, and at
Statement on Comments on the those that may be withheld from the the Commission’s Public Reference
Proposed Rule Change Received From public in accordance with the Room.
Members, Participants, or Others provisions of 5 U.S.C. 552, will be
available for Web site viewing and II. Self-Regulatory Organization’s
The Exchange has not solicited, and Statement of the Purpose of, and
does not intend to solicit, comments on printing in the Commission’s Public
Reference Room, 100 F Street NE., Statutory Basis for, the Proposed Rule
this proposed rule change. The Change
Exchange has not received any written Washington, DC 20549, on official
comments from members or other business days between the hours of In its filing with the Commission, the
interested parties. 10:00 a.m. and 3:00 p.m. Copies of the self-regulatory organization included
filing also will be available for statements concerning the purpose of,
III. Date of Effectiveness of the inspection and copying at the principal and basis for, the proposed rule change
Proposed Rule Change and Timing for office of the Exchange. All comments and discussed any comments it received
Commission Action received will be posted without change; on the proposed rule change. The text
The foregoing rule change has become the Commission does not edit personal of those statements may be examined at
effective pursuant to Section 19(b)(3)(A) identifying information from the places specified in Item IV below.
of the Act 24 and paragraph (f) of Rule submissions. You should submit only The Exchange has prepared summaries,
mstockstill on DSK30JT082PROD with NOTICES
19b–4 thereunder.25 At any time within information that you wish to make set forth in sections A, B, and C below,
60 days of the filing of the proposed rule available publicly. All submissions of the most significant parts of such
change, the Commission summarily may should refer to File Number SR– statements.
temporarily suspend such rule change if BatsBZX–2017–23 and should be
submitted on or before May 17, 2017. 1 15 U.S.C. 78s(b)(1).
24 15 U.S.C. 78s(b)(3)(A). 2 15 U.S.C. 78a.
25 17 CFR 240.19b–4(f). 26 17 CFR 200.30–3(a)(12). 3 17 CFR 240.19b–4.
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![19286 Federal Register / Vol. 82, No. 79 / Wednesday, April 26, 2017 / Notices
Complex Orders are exempt from the NBBO to determine if the Complex busted in accordance with paragraph
order protection rules of the options Order was executed at a truly erroneous (c)(4) of the current rule because the
exchanges.22 Thus, depending on the price is necessary.24 The same concern wide quote table of paragraph (b)(3) of
manner in which the systems of an is not present when a Complex Order the current rule indicates that the
options exchange are calibrated, a executes against the leg market under minimum amount is $1.50 for a bid
Complex Order can execute without proposed Rule 6.87.05(a). The Exchange price between $5.00 to $10.00. If the
regard to the prices offered in the permits a given leg of a Complex Order Complex NBBO were instead $6.00–7.00
complex order books or the leg markets to trade through the NBBO, however the the Complex Order strategy would not
of other options exchanges. In certain Exchange will not accept incoming qualify to be adjusted or busted
situations, reviewing the execution Complex Orders if they are priced a
pursuant to proposed Rule 6.87.05(b)(i)
prices of the legs in a vacuum would certain amount outside of the Complex
because the width of the Complex
make the leg appear to be an Obvious NBBO.25
or Catastrophic error, even though the In order to incorporate Complex NBBO is $1.00, which is less than the
net execution price on the Complex NBBO, proposed Rule 6.87.05(b) required $1.50. However, the execution
Order is not an erroneous price. For provides that if the Exchange may still qualify to be adjusted or
example, assume the Exchange receives determines that a leg or legs does busted in accordance with paragraph
a Complex Order to buy ABC calls and qualify as an Obvious or Catastrophic (c)(4) or (d)(3) of the current rule
sell ABC puts. Error, the leg or legs will be adjusted or pursuant to proposed Rule 6.87.05(b)(ii).
• If the BBO for the ABC calls is busted in accordance with paragraph Focusing on the Complex NBBO in this
$5.50–7.50 and the BBO for ABC puts is (c)(4) or (d)(3) of the current rule, so manner will ensure that the Obvious/
$3.00–4.50, then the Exchange’s spread long as either: (i) The width of the Catastrophic Error review process
market is $1.00–4.50.23 Complex NBBO for the Complex Order focuses on the net execution price
• If the NBBO for the ABC calls is strategy just prior to the erroneous instead of the execution prices of the
$6.00–6.50 and the NBBO for the ABC transaction was equal to or greater than individual legs, which may have
puts is $3.50–4.00, then the Complex the amount set forth in the wide quote execution prices outside of the NBBO of
NBBO is $2.00–3.00. If the Customer table of paragraph (b)(3) of the current the leg markets.
buys the calls at $7.50 and sells the puts rule or (ii) the net execution price of the
at $4.50, the Complex Order Customer Complex Order is higher (lower) than Again, assume an individual leg (or
receives a net execution price of $3.00 the offer (bid) of the Complex NBBO for legs) qualifies as an Obvious or
(debit), which is the expected net the Complex Order strategy just prior to Catastrophic Error as described above. If
execution price as indicated by the the erroneous transaction by an amount the Complex NBBO is $6.00–7.00 (not a
Complex NBBO offer of $3.00. equal to at least the amount shown in wide quote pursuant to the wide quote
If the Exchange were to solely focus the table in paragraph (c)(1) of the table in paragraph (b)(3) of the current
on the $7.50 execution price of the ABC current rule. rule) but the execution price of the
calls or the $4.50 execution price of the For example, assume an individual entire Complex Order package (i.e., the
ABC puts, the execution would qualify leg or legs qualifies as an Obvious or net execution price) is higher (lower)
as an Obvious or Catastrophic error Catastrophic Error and the width of the than the offer (bid) of the Complex
because the execution price on the legs Complex NBBO of the Complex Order NBBO for the complex order strategy
was outside the NBBO, even though the strategy just prior to the erroneous just prior to the erroneous transaction
net execution price is accurate. Thus, transaction is $6.00–9.00. The Complex by an amount equal to at least the
the additional review of the Complex Order will qualify to be adjusted or amount in the table in paragraph (c)(1)
of the current rule, then the Complex
NBBO of Leg 1 is $1.00–2.00 and the NBBO of Leg 24 The Exchange notes that this treatment is
2 is $5.00–7.00, then the Complex NBBO for a consistent with current Rule 6.87(c)(5)(A), which
Order qualifies to be adjusted or busted
Complex Order to buy Leg 1 and buy Leg 2 is provides that ‘‘[i]f a Complex Order executes in accordance with paragraph (c)(4) or
$6.00–9.00. See Rule 6.1A(11)(b) (defining Complex against another Complex Order in the Complex (d)(3) of the current rule. For example,
NBBO as ‘‘the NBBO for a given complex order Order Book and one or more legs of the transaction
strategy as derived from the national best bid and
if the Complex NBBO for the Complex
is deemed eligible to be adjusted or busted, the
national best offer for each individual component entire trade (all legs) will be busted, unless both Order strategy just prior to the
series of a Complex Order’’). The Complex NBBO parties agree to adjust the transaction to a different erroneous transaction is $6.00–7.00 and
is analogous to the concept of the National Spread price within thirty (30) minutes of being notified by the net execution price of the Complex
Market, or NSM, as used by other exchanges. See the Exchange of the decision to bust’’). The
supra 4, CBOE Notice, 82 FR at 170; CBOE Exchange proposes to delete paragraph (c)(5) of the Order transaction is $7.75, the Complex
Approval Order, 82 FR at 11249–50. Rule in its entirety to harmonize with proposed Order qualifies to be adjusted or busted
22 All options exchanges have the same order Rule 6.87.05. See below, under the heading in accordance with paragraph (c)(4) of
protection rule. See, e.g., Rule 6.94(b)(7). ‘‘Conforming Change to Eliminate Current Rule
23 The Complex Order is to buy ABC calls and sell Regarding Complex Orders Obvious Errors,’’ for
the current rule because the execution
ABC puts. The Exchange’s best offer for ABC puts additional discussion. price of $7.75 is more than $0.50 (i.e.,
is $7.50 and Exchange’s best bid for is $3.00. If the 25 Commentary .05 to Rule 6.91 sets forth the the minimum amount according to the
Customer were to buy the Complex Order strategy, Price Protection Filter (‘‘Filter’’), which prevents table in paragraph (c)(1) when the price
the Customer would receive a debit of $4.50 (buy the execution of aggressively-priced electronic
ABC calls for $7.50 minus selling ABC puts for Complex Orders (i.e., priced so far away from the is above $5.00 but less than $10.01)
$3.00). If the Customer were to sell the Complex prevailing contra-side NBBO market for the same from the Complex NBBO offer of $7.00.
Order strategy the Customer would receive a credit strategy). Specifically, an incoming electronic Focusing on the Complex NBBO in this
of $1.00 (selling the ABC calls for $5.50 minus Complex Order will be rejected (or cancelled) if the
buying the ABC puts for $4.50). Thus, the sum of the following is less than zero ($0.00): (i)
manner will ensure that the Obvious/
mstockstill on DSK30JT082PROD with NOTICES
Exchange’s spread market—or Complex BBO—is The net debit (credit) limit price of the order, (ii) Catastrophic error review process
$1.00–4.50. See also Rule 6.1A((b) (defining the contra-side Complex NBBO for that same focuses on the net execution price
Complex BBO as ‘‘the BBO for a given complex Complex Order, and (iii) an amount specified by the instead of the execution prices of the
order strategy as derived from the best bid on OX Exchange (‘‘Specified Amount’’ or ‘‘Amount’’). The
and best offer on OX for each individual component Specified Amount varies depending on the smallest individual legs, which may have
series of a Complex Order’’). The Complex BBO is MPV of any leg in the Complex Order, e.g., the execution prices outside of the NBBO of
analogous to the concept of the ‘‘exchange spread Amount ranges from .10 to .15 to .30 where the the leg markets.
market,’’ as used by other exchanges. See supra 4, smallest MPV of any leg is .01 to .05 to .10,
CBOE Notice, 82 FR at 173, fn22. respectively. See Commentary .05 to Rule 6.91.
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![Federal Register / Vol. 82, No. 79 / Wednesday, April 26, 2017 / Notices 19289
business days between the hours of investment trusts outside of the same actively-managed exchange traded
10:00 a.m. and 3:00 p.m. Copies of such group of investment companies as the funds (‘‘ETFs’’).1 Fund shares will be
filing also will be available for Funds (‘‘Funds of Funds’’) to acquire purchased and redeemed at their NAV
inspection and copying at the principal shares of the Funds; and (f) certain in Creation Units only. All orders to
office of the Exchange. All comments Funds (‘‘Feeder Funds’’) to create and purchase Creation Units and all
received will be posted without change; redeem Creation Units in-kind in a redemption requests will be placed by
the Commission does not edit personal master-feeder structure. or through an ‘‘Authorized Participant’’,
identifying information from Applicants: Formula Folio which will have signed a participant
submissions. You should submit only Investments, LLC (the ‘‘Initial agreement with a broker-dealer
information that you wish to make Adviser’’), a Michigan limited liability registered under the Securities
available publicly. All submissions company registered as an investment Exchange Act of 1934 (‘‘Exchange Act’’)
should refer to File Number SR– adviser under the Investment Advisers (together with any future distributor, the
NYSEArca–2017–42, and should be Act of 1940, and Northern Lights Fund ‘‘Distributor’’). Shares will be listed and
submitted on or before May 17, 2017. Trust IV (the ‘‘Trust’’), a Delaware traded individually on a national
For the Commission, by the Division of statutory trust registered under the Act securities exchange, where share prices
Trading and Markets, pursuant to delegated as an open-end management investment will be based on the current bid/offer
authority.36 company with multiple series. market. Certain Funds may operate as
Eduardo A. Aleman, Filing Dates: The application was Feeder Funds in a master-feeder
Assistant Secretary. filed on August 30, 2016, and amended structure. Any order granting the
[FR Doc. 2017–08390 Filed 4–25–17; 8:45 am] on November 4, 2016. requested relief would be subject to the
BILLING CODE 8011–01–P
Hearing or Notification of Hearing: An terms and conditions stated in the
order granting the requested relief will application.
be issued unless the Commission orders 2. Each Fund will consist of a
SECURITIES AND EXCHANGE a hearing. Interested persons may portfolio of securities and other assets
COMMISSION request a hearing by writing to the and investment positions (‘‘Portfolio
Commission’s Secretary and serving Positions’’). Each Fund will disclose on
[Investment Company Act Release No. applicants with a copy of the request,
32607; 812–14695] its Web site the identities and quantities
personally or by mail. Hearing requests of the Portfolio Positions that will form
Formula Folio Investments, LLC and should be received by the Commission the basis for the Fund’s calculation of
Northern Lights Fund Trust IV by 5:30 p.m. on May 15, 2017, and NAV at the end of the day.
should be accompanied by proof of 3. Shares will be purchased and
April 20, 2017. service on applicants, in the form of an redeemed in Creation Units and
AGENCY: Securities and Exchange affidavit, or for lawyers, a certificate of generally on an in-kind basis. Except
Commission (‘‘Commission’’). service. Pursuant to rule 0–5 under the where the purchase or redemption will
ACTION: Notice. Act, hearing requests should state the include cash under the limited
nature of the writer’s interest, any facts circumstances specified in the
Notice of an application for an order bearing upon the desirability of a
under section 6(c) of the Investment application, purchasers will be required
hearing on the matter, the reason for the to purchase Creation Units by
Company Act of 1940 (the ‘‘Act’’) for an request, and the issues contested.
exemption from sections 2(a)(32), depositing specified instruments
Persons who wish to be notified of a (‘‘Deposit Instruments’’), and
5(a)(1), 22(d), and 22(e) of the Act and hearing may request notification by
rule 22c–1 under the Act, under shareholders redeeming their shares
writing to the Commission’s Secretary. will receive specified instruments
sections 6(c) and 17(b) of the Act for an
ADDRESSES: Secretary, Securities and (‘‘Redemption Instruments’’). The
exemption from sections 17(a)(1) and
17(a)(2) of the Act, and under section Exchange Commission, 100 F Street NE., Deposit Instruments and the
12(d)(1)(J) for an exemption from Washington, DC 20549–1090; Redemption Instruments will each
sections 12(d)(1)(A) and 12(d)(1)(B) of Applicants: the Initial Adviser, 89 Ionia correspond pro rata to the positions in
the Act. The requested order would Avenue NW., Suite 600, Grand Rapids, the Fund’s portfolio (including cash
permit (a) actively-managed series of MI 49503; the Trust, 17605 Wright positions) except as specified in the
certain open-end management Street, Omaha, NE 68130. application.
investment companies (‘‘Funds’’) to FOR FURTHER INFORMATION CONTACT: 4. Because shares will not be
issue shares redeemable in large Christine Y. Greenlees, Senior Counsel, individually redeemable, applicants
aggregations only (‘‘Creation Units’’); (b) at (202) 551–6879, or David J. request an exemption from section
secondary market transactions in Fund Marcinkus, Branch Chief, at (202) 551– 5(a)(1) and section 2(a)(32) of the Act
shares to occur at negotiated market 6821 (Division of Investment that would permit the Funds to register
prices rather than at net asset value Management, Chief Counsel’s Office). as open-end management investment
(‘‘NAV’’); (c) certain Funds to pay SUPPLEMENTARY INFORMATION: The companies and issue shares that are
redemption proceeds, under certain following is a summary of the redeemable in Creation Units only.
circumstances, more than seven days application. The complete application
after the tender of shares for may be obtained via the Commission’s 1 Applicants request that the order apply to future
redemption; (d) certain affiliated Web site by searching for the file series of the Trust or of other open-end management
persons of a Fund to deposit securities number, or for an applicant using the investment companies that currently exist or that
mstockstill on DSK30JT082PROD with NOTICES
may be created in the future (each, included in the
into, and receive securities from, the Company name box, at http:// term ‘‘Fund’’), each of which will operate as an
Fund in connection with the purchase www.sec.gov/search/search.htm or by actively-managed ETF. Any Fund will (a) be
and redemption of Creation Units; (e) calling (202) 551–8090. advised by the Initial Adviser or an entity
certain registered management controlling, controlled by, or under common
investment companies and unit Summary of the Application control with the Initial Adviser (each such entity or
any successor thereto is included in the term
1. Applicants request an order that ‘‘Adviser’’) and (b) comply with the terms and
36 17 CFR 200.30–3(a)(12). would allow Funds to operate as conditions of the application.
VerDate Sep<11>2014 18:43 Apr 25, 2017 Jkt 241001 PO 00000 Frm 00093 Fmt 4703 Sfmt 4703 E:\FR\FM\26APN1.SGM 26APN1](https://thefederalregister.org/doc/82_FR_19361/page/8.svg)
Document Created: 2017-04-26 03:15:28
Document Modified: 2017-04-26 03:15:28
| 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 19282 |
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