82 FR 19290 - Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending Rule 975NY
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 82, Issue 79 (April 26, 2017)
Federal Register Volume 82, Issue 79 (April 26, 2017)
| Page Range | 19290-19297 | |
| FR Document | 2017-08391 |
[Federal Register Volume 82, Number 79 (Wednesday, April 26, 2017)] [Notices] [Pages 19290-19297] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-08391] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-80497; File No. SR-NYSEMKT-2017-22] Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending Rule 975NY 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 MKT LLC (the ``Exchange'' or ``NYSE MKT'') filed with the Securities and Exchange Commission (the ``Commission'') the proposed rule change as described in Items I and II below, which Items have been prepared by the self-regulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. --------------------------------------------------------------------------- \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 975NY (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, [[Page 19291]] of the most significant parts of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The purpose of this filing is to amend Rule 975NY 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. 74920 (May 8, 2015), 80 FR 27816 (May 14, 2015) (SR-NYSEMKT-2015-39). \6\ Rule 900.3NY(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 MKT 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 [[Page 19292]] of these transactions.\8\ Specifically, 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 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 975NY. See also Rule 975NY(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 975NY .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 975NY 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 975NY(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 975NY.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 975NY(a)(1) (defining Customer for purposes of Rule 975NY 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 975NY(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 975NY .05(a) provides [[Page 19293]] 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 975NY(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 975NY(c)(1). --------------------------------------------------------------------------- Per Proposed Rule 975NY .05(a), Customers will also be adjusted in accordance with Rule 975NY (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 975NY(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 975NY.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 975NY(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 975NY 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 975NY. --------------------------------------------------------------------------- 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 975NY .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 975NY governs the review of Complex Orders that are executed against other Complex Orders. Specifically, proposed Rule 975NY.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 975NY.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 975NY.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 19294]] 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 900.2NY(41)(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 991NY(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 900.2NY(7)(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, fn 22. --------------------------------------------------------------------------- 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 975NY.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 975NY(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 975NY.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 980NY 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 980NY. --------------------------------------------------------------------------- In order to incorporate Complex NBBO, proposed Rule 975NY.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 975NY.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 975NY.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. Although the Exchange believes adjusting execution prices is generally better for the marketplace than nullifying executions because liquidity providers often execute hedging [[Page 19295]] 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 975NY.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 975NY.05(a) and catastrophic errors in accordance with (d)(3). Therefore, for purposes of Complex Orders under proposed Rule 975NY.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 975NY.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 975NY.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 975NY(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 975NY(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. B. Self-Regulatory Organization's Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose [[Page 19296]] 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-NYSEMKT-2017-22 on the subject line. Paper Comments Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-NYSEMKT-2017-22. 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 [[Page 19297]] received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-NYSEMKT-2017-22, 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. 2017-08391 Filed 4-25-17; 8:45 am] BILLING CODE 8011-01-P
![19290 Federal Register / Vol. 82, No. 79 / Wednesday, April 26, 2017 / Notices
5. Applicants also request an purchases of Creation Units and the investment company involved; and (c)
exemption from section 22(d) of the Act redemption procedures for in-kind the proposed transaction is consistent
and rule 22c–1 under the Act as redemptions of Creation Units will be with the general purposes of the Act.
secondary market trading in shares will the same for all purchases and For the Commission, by the Division of
take place at negotiated prices, not at a redemptions and Deposit Instruments Investment Management, under delegated
current offering price described in a and Redemption Instruments will be authority.
Fund’s prospectus, and not at a price valued in the same manner as those Eduardo A. Aleman,
based on NAV. Applicants state that (a) Portfolio Positions currently held by the Assistant Secretary.
secondary market trading in shares does Funds. Applicants also seek relief from [FR Doc. 2017–08394 Filed 4–25–17; 8:45 am]
not involve a Fund as a party and will the prohibitions on affiliated
BILLING CODE 8011–01–P
not result in dilution of an investment transactions in section 17(a) to permit a
in shares, and (b) to the extent different Fund to sell its shares to and redeem its
prices exist during a given trading day, shares from a Fund of Funds, and to SECURITIES AND EXCHANGE
or from day to day, such variances occur engage in the accompanying in-kind COMMISSION
as a result of third-party market forces, transactions with the Fund of Funds.2
such as supply and demand. Therefore, The purchase of Creation Units by a [Release No. 34–80497; File No. SR–
applicants assert that secondary market Fund of Funds directly from a Fund will NYSEMKT–2017–22]
transactions in shares will not lead to be accomplished in accordance with the Self-Regulatory Organizations; NYSE
discrimination or preferential treatment policies of the Fund of Funds and will MKT LLC; Notice of Filing and
among purchasers. Finally, applicants be based on the NAVs of the Funds. Immediate Effectiveness of Proposed
represent that share market prices will 9. Applicants also request relief to
Rule Change Amending Rule 975NY
be disciplined by arbitrage permit a Feeder Fund to acquire shares
opportunities, which should prevent of another registered investment April 20, 2017.
shares from trading at a material company managed by the Adviser Pursuant to Section 19(b)(1) 1 of the
discount or premium from NAV. having substantially the same Securities Exchange Act of 1934 (the
6. With respect to Funds that hold investment objectives as the Feeder ‘‘Act’’),2 and Rule 19b–4 thereunder,3
non-U.S. Portfolio Positions and that Fund (‘‘Master Fund’’) beyond the notice is hereby given that on April 17,
effect creations and redemptions of limitations in section 12(d)(1)(A) and 2017, NYSE MKT LLC (the ‘‘Exchange’’
Creation Units in kind, applicants permit the Master Fund, and any or ‘‘NYSE MKT’’) filed with the
request relief from the requirement principal underwriter for the Master Securities and Exchange Commission
imposed by section 22(e) in order to Fund, to sell shares of the Master Fund (the ‘‘Commission’’) the proposed rule
allow such Funds to pay redemption to the Feeder Fund beyond the change as described in Items I and II
proceeds within fifteen calendar days limitations in section 12(d)(1)(B). below, which Items have been prepared
following the tender of Creation Units 10. Section 6(c) of the Act permits the by the self-regulatory organization. The
for redemption. Applicants assert that Commission to exempt any persons or Commission is publishing this notice to
the requested relief would not be transactions from any provision of the solicit comments on the proposed rule
inconsistent with the spirit and intent of Act if such exemption is necessary or change from interested persons.
section 22(e) to prevent unreasonable, appropriate in the public interest and
undisclosed or unforeseen delays in the consistent with the protection of I. Self-Regulatory Organization’s
actual payment of redemption proceeds. investors and the purposes fairly Statement of the Terms of Substance of
7. Applicants request an exemption to intended by the policy and provisions of the Proposed Rule Change
permit Funds of Funds to acquire Fund the Act. Section 12(d)(1)(J) of the Act The Exchange proposes to amend
shares beyond the limits of section provides that the Commission may Rule 975NY (Nullification and
12(d)(1)(A) of the Act; and the Funds, exempt any person, security, or Adjustment of Options Transactions
and any principal underwriter for the transaction, or any class or classes of including Obvious Errors. The proposed
Funds, and/or any broker or dealer persons, securities, or transactions, from rule change is available on the
registered under the Exchange Act, to any provision of section 12(d)(1) if the Exchange’s Web site at www.nyse.com,
sell shares to Funds of Funds beyond exemption is consistent with the public at the principal office of the Exchange,
the limits of section 12(d)(1)(B) of the interest and the protection of investors. and at the Commission’s Public
Act. The application’s terms and Section 17(b) of the Act authorizes the Reference Room.
conditions are designed to, among other Commission to grant an order
things, help prevent any potential (i) permitting a transaction otherwise II. Self-Regulatory Organization’s
undue influence over a Fund through prohibited by section 17(a) if it finds Statement of the Purpose of, and
control or voting power, or in that (a) the terms of the proposed Statutory Basis for, the Proposed Rule
connection with certain services, transaction are fair and reasonable and Change
transactions, and underwritings, (ii) do not involve overreaching on the part In its filing with the Commission, the
excessive layering of fees, and (iii) of any person concerned; (b) the self-regulatory organization included
overly complex fund structures, which proposed transaction is consistent with statements concerning the purpose of,
are the concerns underlying the limits the policies of each registered and basis for, the proposed rule change
in sections 12(d)(1)(A) and (B) of the and discussed any comments it received
Act. 2 The requested relief would apply to direct sales
on the proposed rule change. The text
8. Applicants request an exemption of shares in Creation Units by a Fund to a Fund of
mstockstill on DSK30JT082PROD with NOTICES
Funds and redemptions of those shares. Applicants,
of those statements may be examined at
from sections 17(a)(1) and 17(a)(2) of the moreover, are not seeking relief from section 17(a) the places specified in Item IV below.
Act to permit persons that are Affiliated for, and the requested relief will not apply to, The Exchange has prepared summaries,
Persons, or Second Tier Affiliates, of the transactions where a Fund could be deemed an set forth in sections A, B, and C below,
Funds, solely by virtue of certain Affiliated Person, or a Second-Tier Affiliate, of a
Fund of Funds because an Adviser or an entity
ownership interests, to effectuate controlling, controlled by or under common control
1 15 U.S.C.78s(b)(1).
purchases and redemptions in-kind. The with an Adviser provides investment advisory 2 15 U.S.C. 78a.
deposit procedures for in-kind services to that Fund of Funds. 3 17 CFR 240.19b–4.
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![19294 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 975NY.05(a). The price between $5.00 to $10.00. If the
regard to the prices offered in the Exchange permits a given leg of a Complex NBBO were instead $6.00–7.00
complex order books or the leg markets Complex Order to trade through the the Complex Order strategy would not
of other options exchanges. In certain NBBO, however the Exchange will not qualify to be adjusted or busted
situations, reviewing the execution accept incoming Complex Orders if they pursuant to proposed Rule
prices of the legs in a vacuum would are priced a certain amount outside of 975NY.05(b)(i) because the width of the
make the leg appear to be an Obvious the Complex NBBO.25 Complex NBBO is $1.00, which is less
or Catastrophic error, even though the In order to incorporate Complex than the required $1.50. However, the
net execution price on the Complex NBBO, proposed Rule 975NY.05(b) execution may still qualify to be
Order is not an erroneous price. For provides that if the Exchange adjusted or busted in accordance with
example, assume the Exchange receives determines that a leg or legs does paragraph (c)(4) or (d)(3) of the current
a Complex Order to buy ABC calls and qualify as an Obvious or Catastrophic rule pursuant to proposed Rule
sell ABC puts. Error, the leg or legs will be adjusted or 975NY.05(b)(ii). Focusing on the
• If the BBO for the ABC calls is busted in accordance with paragraph Complex NBBO in this manner will
$5.50–7.50 and the BBO for ABC puts is (c)(4) or (d)(3) of the current rule, so ensure that the Obvious/Catastrophic
$3.00–4.50, then the Exchange’s spread long as either: (i) The width of the Error review process focuses on the net
market is $1.00–4.50.23 Complex NBBO for the Complex Order execution price instead of the execution
• If the NBBO for the ABC calls is strategy just prior to the erroneous prices of the individual legs, which may
$6.00–6.50 and the NBBO for the ABC transaction was equal to or greater than have execution prices outside of the
puts is $3.50–4.00, then the Complex the amount set forth in the wide quote NBBO of the leg markets.
NBBO is $2.00–3.00. If the Customer table of paragraph (b)(3) of the current Again, assume an individual leg (or
buys the calls at $7.50 and sells the puts rule or (ii) the net execution price of the legs) qualifies as an Obvious or
at $4.50, the Complex Order Customer Complex Order is higher (lower) than Catastrophic Error as described above. If
receives a net execution price of $3.00 the offer (bid) of the Complex NBBO for the Complex NBBO is $6.00–7.00 (not a
(debit), which is the expected net the Complex Order strategy just prior to wide quote pursuant to the wide quote
execution price as indicated by the the erroneous transaction by an amount table in paragraph (b)(3) of the current
Complex NBBO offer of $3.00. equal to at least the amount shown in rule) but the execution price of the
If the Exchange were to solely focus the table in paragraph (c)(1) of the entire Complex Order package (i.e., the
on the $7.50 execution price of the ABC current rule. net execution price) is higher (lower)
calls or the $4.50 execution price of the For example, assume an individual than the offer (bid) of the Complex
ABC puts, the execution would qualify leg or legs qualifies as an Obvious or NBBO for the complex order strategy
as an Obvious or Catastrophic error Catastrophic Error and the width of the just prior to the erroneous transaction
because the execution price on the legs Complex NBBO of the Complex Order by an amount equal to at least the
was outside the NBBO, even though the strategy just prior to the erroneous amount in the table in paragraph (c)(1)
net execution price is accurate. Thus, transaction is $6.00–9.00. The Complex of the current rule, then the Complex
the additional review of the Complex Order will qualify to be adjusted or Order qualifies to be adjusted or busted
in accordance with paragraph (c)(4) or
NBBO of Leg 1 is $1.00–2.00 and the NBBO of Leg 24 The Exchange notes that this treatment is (d)(3) of the current rule. For example,
2 is $5.00–7.00, then the Complex NBBO for a consistent with current Rule 975NY(c)(5)(A), which if the Complex NBBO for the Complex
Complex Order to buy Leg 1 and buy Leg 2 is provides that ‘‘[i]f a Complex Order executes
$6.00–9.00. See Rule 900.2NY(41)(b) (defining against another Complex Order in the Complex
Order strategy just prior to the
Complex NBBO as ‘‘the NBBO for a given complex Order Book and one or more legs of the transaction erroneous transaction is $6.00–7.00 and
order strategy as derived from the national best bid is deemed eligible to be adjusted or busted, the the net execution price of the Complex
and national best offer for each individual entire trade (all legs) will be busted, unless both Order transaction is $7.75, the Complex
component series of a Complex Order’’). The parties agree to adjust the transaction to a different
Complex NBBO is analogous to the concept of the price within thirty (30) minutes of being notified by
Order qualifies to be adjusted or busted
National Spread Market, or NSM, as used by other the Exchange of the decision to bust’’). The in accordance with paragraph (c)(4) of
exchanges. See supra 4, CBOE Notice, 82 FR at 170; Exchange proposes to delete paragraph (c)(5) of the the current rule because the execution
CBOE Approval Order, 82 FR at 11249–50. Rule in its entirety to harmonize with proposed price of $7.75 is more than $0.50 (i.e.,
22 All options exchanges have the same order Rule 975NY.05. See below, under the heading the minimum amount according to the
protection rule. See, e.g., Rule 991NY(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 table in paragraph (c)(1) when the price
ABC puts. The Exchange’s best offer for ABC puts additional discussion. is above $5.00 but less than $10.01)
is $7.50 and Exchange’s best bid for is $3.00. If the 25 Commentary .05 to Rule 980NY sets forth the from the Complex NBBO offer of $7.00.
Customer were to buy the Complex Order strategy, Price Protection Filter (‘‘Filter’’), which prevents Focusing on the Complex NBBO in this
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
manner will ensure that the Obvious/
$3.00). If the Customer were to sell the Complex prevailing contra-side NBBO market for the same Catastrophic error review process
Order strategy the Customer would receive a credit strategy). Specifically, an incoming electronic focuses on the net execution price
of $1.00 (selling the ABC calls for $5.50 minus Complex Order will be rejected (or cancelled) if the instead of the execution prices of the
buying the ABC puts for $4.50). Thus, the sum of the following is less than zero ($0.00): (i) individual legs, which may have
mstockstill on DSK30JT082PROD with NOTICES
Exchange’s spread market—or Complex BBO—is The net debit (credit) limit price of the order, (ii)
$1.00–4.50. See also Rule 900.2NY(7)(b) (defining the contra-side Complex NBBO for that same execution prices outside of the NBBO of
Complex BBO as ‘‘the BBO for a given complex Complex Order, and (iii) an amount specified by the the leg markets.
order strategy as derived from the best bid on OX Exchange (‘‘Specified Amount’’ or ‘‘Amount’’). The Although the Exchange believes
and best offer on OX for each individual component Specified Amount varies depending on the smallest adjusting execution prices is generally
series of a Complex Order’’). The Complex BBO is MPV of any leg in the Complex Order, e.g., the
analogous to the concept of the ‘‘exchange spread Amount ranges from .10 to .15 to .30 where the
better for the marketplace than
market,’’ as used by other exchanges. See supra 4, smallest MPV of any leg is .01 to .05 to .10, nullifying executions because liquidity
CBOE Notice, 82 FR at 173, fn 22. respectively. See Commentary .05 to Rule 980NY. providers often execute hedging
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![Federal Register / Vol. 82, No. 79 / Wednesday, April 26, 2017 / Notices 19297
received will be posted without change; II. Self-Regulatory Organization’s Act,9 in particular, in that it is designed
the Commission does not edit personal Statement of the Purpose of, and to protect investors and the public
identifying information from Statutory Basis for, the Proposed Rule interest, promote just and equitable
submissions. You should submit only Change principles of trade, and foster
information that you wish to make In its filing with the Commission, the cooperation and coordination with
available publicly. All submissions self-regulatory organization included persons engaged in facilitating
should refer to File Number SR– statements concerning the purpose of, transactions in securities by eliminating
NYSEMKT–2017–22, and should be and basis for, the proposed rule change investor confusion with regard to the
submitted on or before May 17, 2017. and discussed any comments it received portion of text found in the previous
For the Commission, by the Division of on the proposed rule change. The text filing that is not applicable to BOX.
Trading and Markets, pursuant to delegated of these statements may be examined at B. Self-Regulatory Organization’s
authority.36 the places specified in Item IV below. Statement on Burden on Competition
Eduardo A. Aleman, The self-regulatory organization has The proposed rule change will not
Assistant Secretary. prepared summaries, set forth in impose any burden on competition not
[FR Doc. 2017–08391 Filed 4–25–17; 8:45 am] Sections A, B, and C below, of the most necessary or appropriate in furtherance
BILLING CODE 8011–01–P
significant aspects of such statements. of the purposes of the Act as the
A. Self-Regulatory Organization’s proposed rule change is simply seeking
Statement of the Purpose of, and to eliminate investor confusion with
SECURITIES AND EXCHANGE Statutory Basis for, the Proposed Rule regard to the provision in the previous
COMMISSION Change filing that is not applicable to BOX.
1. Purpose C. Self-Regulatory Organization’s
[Release No. 34–80495; File No. SR–BOX– Statement on Comments on the
2017–12] The Exchange proposes to amend the Proposed Rule Change Received From
previously submitted filing SR–BOX– Members, Participants, or Others
Self-Regulatory Organizations; BOX 2017–08 which contained a portion of
Options Exchange LLC; Notice of text that is not applicable to BOX. The Exchange has neither solicited
Filing and Immediate Effectiveness of Last year, the Exchange and other nor received comments on the proposed
a Proposed Rule Change To Amend a options exchanges adopted a new, rule change.
Prior Rule Change, SR–BOX–2017–08, harmonized rule related to the III. Date of Effectiveness of the
Which Contained a Portion of Text adjustment and nullification of Proposed Rule Change and Timing for
That Is Not Applicable to BOX erroneous options transactions, Commission Action
including a specific provision related to
April 20, 2017.
coordination in connection with large- Because the proposed rule change
Pursuant to Section 19(b)(1) of the does not (i) significantly affect the
scale events involving erroneous
Securities Exchange Act of 1934 protection of investors or the public
options transactions.4 Accordingly, the
(‘‘Act’’),1 and Rule 19b–4 thereunder,2 interest; (ii) impose any significant
Exchange filed a proposed rule change
notice is hereby given that on April 17, burden on competition; and (iii) become
detailing the handling of erroneous
2017, BOX Options Exchange LLC (the operative for 30 days from the date on
options transactions that result from the
‘‘Exchange’’) filed with the Securities which it was filed, or such shorter time
execution of complex orders.5 The
and Exchange Commission as the Commission may designate, it has
purpose of this filing is to clarify that a
(‘‘Commission’’) the proposed rule become effective pursuant to Section
portion of text found in the previous
change as described in Items I and II 19(b)(3)(A) of the Act 10 and Rule 19b–
filing is not applicable to BOX.
below, which Items have been prepared 4(f)(6) thereunder.11
Specifically, the text states, ‘‘The same A proposed rule change filed
by the self-regulatory organization. The concern is not present when a Complex pursuant to Rule 19b–4(f)(6) under the
Commission is publishing this notice to Order executes against the leg market Act 12 normally does not become
solicit comments on the proposed rule under IM–7170–4(a) because the operative for 30 days after the date of its
from interested persons. Exchange is modifying its system in filing. However, Rule 19b–4(f)(6)(iii) 13
order to ensure the leg will execute at permits the Commission to designate a
I. Self-Regulatory Organization’s
or within the NBBO of the leg shorter time if such action is consistent
Statement of the Terms of Substance of
markets.’’ 6 The Exchange seeks to with the protection of investors and the
the Proposed Rule Change
clarify that BOX already has this NBBO public interest. The Exchange has asked
The Exchange proposes to amend a functionality in place 7 and will not be the Commission to waive the 30-day
prior rule change, SR–BOX–2017–08,3 modifying its system. operative delay so that the proposal may
which contained a portion of text that 2. Statutory Basis become operative immediately upon
is not applicable to BOX. The text of the filing. The Exchange states that the
proposed rule change is available from The Exchange believes that the
proposal is consistent with the proposed rule change simply seeks to
the principal office of the Exchange, at
the Commission’s Public Reference requirements of Section 6(b) of the Act,8 9 15 U.S.C. 78f(b)(5).
Room and also on the Exchange’s in general, and Section 6(b)(5) of the 10 15 U.S.C. 78s(b)(3)(A).
Internet Web site at http:// 11 17 CFR 240.19b–4(f)(6). As required under Rule
mstockstill on DSK30JT082PROD with NOTICES
4 See Securities Exchange Act Release No. 74911
boxexchange.com. 19b–4(f)(6)(iii), the Exchange provided the
(May 8, 2015), 80 FR 27717 (May 14, 2015) (SR– Commission with written notice of its intent to file
BOX–2015–18) (the ‘‘Initial Filing’’). the proposed rule change, along with a brief
36 17 CFR 200.30–3(a)(12). 5 See Complex Order Filing supra note 3. The
description and the text of the proposed rule
1 15 U.S.C. 78s(b)(1). Exchange notes that this previous filing was based change, at least five business days prior to the date
2 17 CFR 240.19b–4. off of an industry filing. of filing of the proposed rule change, or such
3 See Securities and Exchange Act Release No. 6 See Complex Order Filing supra note 3 at 14592. shorter time as designated by the Commission.
7 See BOX Rule 7240(b)(3)(iii). 12 17 CFR 240.19b–4(f)(6).
80247 (March 15, 2017), 82 FR 14589 (March 21,
2017) (‘‘Complex Order filing’’). 8 15 U.S.C. 78f(b). 13 17 CFR 240.19b–4(f)(6)(iii).
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Document Created: 2017-04-26 03:15:52
Document Modified: 2017-04-26 03:15:52
| 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 19290 |
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