82 FR 37926 - Self-Regulatory Organizations; Nasdaq MRX, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Rule 720, Nullification and Adjustment of Options Transactions Including Obvious Errors

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 82, Issue 155 (August 14, 2017)

Page Range		37926-37932
FR Document		2017-17068
Federal Register, Volume 82 Issue 155 (Monday, August 14, 2017)
[Federal Register Volume 82, Number 155 (Monday, August 14, 2017)]
[Notices]
[Pages 37926-37932]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2017-17068]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81353; File No. SR-MRX-2017-16]


Self-Regulatory Organizations; Nasdaq MRX, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Rule 720, 
Nullification and Adjustment of Options Transactions Including Obvious 
Errors

August 8, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on August 3, 2017, Nasdaq MRX, LLC (``MRX'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II below, which Items 
have been prepared by the Exchange. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 720, Nullification and 
Adjustment of Options Transactions including Obvious Errors.
    While these amendments are effective upon filing, the Exchange has 
designated the proposed amendments to be operative on a date that is 
within ninety (90) days after the Commission approved a similar 
proposal filed by Bats BZX on July 6, 2017.
    The text of the proposed rule change is available on the Exchange's 
Web site at www.ise.com, at the principal office of the Exchange, and 
at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for

[[Page 37927]]

the proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange and other options exchanges recently 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.\3\ 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. Specifically, as described in the Initial Filing, the 
Exchange and all other options exchanges have been working to further 
improve the review of potentially erroneous transactions as well as 
their subsequent adjustment by creating an objective and universal way 
to determine Theoretical Price in the event a reliable NBBO is not 
available. Because this initiative required additional exchange and 
industry discussion as well as additional time for development and 
implementation, the Exchange and the other options exchanges determined 
to proceed with the Initial Filing and to undergo a secondary 
initiative to complete any additional improvements to the applicable 
rule. In this filing, the Exchange proposes to adopt procedures that 
will lead to a more objective and uniform way to determine Theoretical 
Price in the event a reliable NBBO is not available. In addition to 
this change, the Exchange has proposed two additional minor changes to 
its rules. The Exchange's proposal mirrors that of Bats BZX, which the 
Exchange [sic] approved on July 6, 2017,\4\ and those that the other 
options exchanges intend to file, except that it omits the section of 
the proposal that pertains to trading halts due to the fact that the 
Supplementary Material to Exchange Rule 702 already includes the 
applicable language.
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    \3\ The Exchange's application for registration as a national 
securities exchange, ss [sic] approved by the Commission, 
incorporated the changes made previously by the other options 
exchanges. See Securities Exchange Act Release No. 34-76998 (January 
29, 2016); 81 FR 6066 (Feb. 4, 2016) (the ``Initial Filing'').
    \4\ See Securities Exchange Act Release No. 34-81084 (July 6, 
2017) (granting approval of Bats BZX proposal), 82 FR 32216 (July 
12, 2017); 82 FR 23684 (May 23, 2017) (SR-BatsBZX-2017-035) (notice 
of filing of Bats BZX proposal).
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Calculation of Theoretical Price Using a Third Party Provider
    Under the harmonized rule, when reviewing a transaction as 
potentially erroneous, the Exchange needs to first determine the 
``Theoretical Price'' of the option, i.e., the Exchange's estimate of 
the correct market price for the option. Pursuant to Rule 720, if the 
applicable option series is traded on at least one other options 
exchange, then the Theoretical Price of an option series is the last 
national best bid (``NBB'') just prior to the trade in question with 
respect to an erroneous sell transaction or the last national best 
offer (``NBO'') just prior to the trade in question with respect to an 
erroneous buy transaction unless one of the exceptions described below 
exists. Thus, whenever the Exchange has a reliable NBB or NBO, as 
applicable, just prior to the transaction, then the Exchange uses this 
NBB or NBO as the Theoretical Price.
    The Rule also contains various provisions governing specific 
situations where the NBB or NBO is not available or may not be 
reliable. Specifically, the Rule specifies situations in which there 
are no quotes or no valid quotes for comparison purposes, when the 
national best bid or offer (``NBBO'') is determined to be too wide to 
be reliable, and at the open of trading on each trading day. In each of 
these circumstances, in turn, because the NBB or NBO is not available 
or is deemed to be unreliable, the Exchange determines Theoretical 
Price. Under the current Rule, when determining Theoretical Price, 
Exchange personnel generally consult and refer to data such as the 
prices of related series, especially the closest strikes in the option 
in question. Exchange personnel may also take into account the price of 
the underlying security and the volatility characteristics of the 
option as well as historical pricing of the option and/or similar 
options. Although the Rule is administered by experienced personnel and 
the Exchange believes the process is currently appropriate, the 
Exchange recognizes that it is also subjective and could lead to 
disparate results for a transaction that spans multiple options 
exchanges.
    The Exchange proposes to adopt Supplementary Material to Rule 720, 
Item .04 to specify how the Exchange will determine Theoretical Price 
when required by sub-paragraphs (b)(1)-(3) of the Rule (i.e., at the 
open, when there are no valid quotes or when there is a wide quote). In 
particular, the Exchange has been working with other options exchanges 
to identify and select a reliable third party vendor (``TP Provider'') 
that would provide Theoretical Price to the Exchange whenever one or 
more transactions is under review pursuant to Rule 720 and the NBBO is 
unavailable or deemed unreliable pursuant to Rule 720(b). The Exchange 
and other options exchanges have selected CBOE Livevol, LLC 
(``Livevol'') as the TP Provider, as described below. As further 
described below, proposed Supplementary Material to Rule 720, Item .04 
would codify the use of the TP Provider as well as limited exceptions 
where the Exchange would be able to deviate from the Theoretical Price 
given by the TP Provider.
    Pursuant to proposed Supplementary Material to Rule 720, Item .04, 
when the Exchange must determine Theoretical Price pursuant to the sub-
paragraphs (b)(1)-(3) of the Rule, the Exchange will request 
Theoretical Price from the third party vendor to which the Exchange and 
all other options exchanges have subscribed. Thus, as set forth in this 
proposed language, Theoretical Price would be provided to the Exchange 
by the TP Provider on request and not through a streaming data feed.\5\ 
This language also makes clear that the Exchange and all other options 
exchanges will use the same TP Provider.
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    \5\ Though the Exchange and other options exchanges considered a 
streaming feed, it was determined that it would be more feasible to 
develop and implement an on demand service and that such a service 
would satisfy the goals of the initiative.
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    As noted above, the proposed TP Provider selected by the Exchange 
and other options exchanges is Livevol. The Exchange proposes to codify 
this selection in proposed paragraph (d) to Supplementary Material to 
Rule 720, Item .04. As such, the Exchange would file a rule proposal 
and would provide notice to the options industry of any proposed change 
to the TP Provider.
    The Exchange and other options exchanges have selected Livevol as 
the proposed TP Provider after diligence into various alternatives. 
Livevol has, since 2009, been the options industry

[[Page 37928]]

leader in providing equity and index options market data and analytics 
services.\6\ The Exchange believes that Livevol has established itself 
within the options industry as a trusted provider of such services and 
notes that it and all other options exchanges already subscribe to 
various Livevol services. In connection with this proposal, Livevol 
will develop a new tool based on its existing technology and services 
that will supply Theoretical Price to the Exchange and other options 
exchanges upon request. The Theoretical Price tool will leverage 
current market data and surrounding strikes to assist in a relative 
value pricing approach to generating a Theoretical Price. When relative 
value methods are incapable of generating a valid Theoretical Price, 
the Theoretical Price tool will utilize historical trade and quote data 
to calculate Theoretical Price.
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    \6\ The Exchange notes that in 2015, Livevol was acquired by 
CBOE Holdings, Inc., the ultimate parent company of the Chicago 
Board Options Exchange (``CBOE'') and C2 Options Exchange (``C2'').
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    Because the purpose of the proposal is to move away from a 
subjective determination by Exchange personnel when the NBBO is 
unavailable or unreliable, the Exchange intends to use the Theoretical 
Price provided by the TP Provider in all such circumstances. However, 
the Exchange believes it is necessary to retain the ability to contact 
the TP Provider if it believes that the Theoretical Price provided is 
fundamentally incorrect and to determine the Theoretical Price in the 
limited circumstance of a systems issue experienced by the TP Provider, 
as described below.
    As proposed, to the extent an Official \7\ of the Exchange believes 
that the Theoretical Price provided by the TP Provider is fundamentally 
incorrect and cannot be used consistent with the maintenance of a fair 
and orderly market, the Official shall contact the TP Provider to 
notify the TP Provider of the reason the Official believes such 
Theoretical Price is inaccurate and to request a review and correction 
of the calculated Theoretical Price. For example, if an Official 
received from the TP Provider a Theoretical Price of $80 in a series 
that the Official might expect to be instead in the range of $8 to $10 
because of a recent corporate action in the underlying, the Official 
would request that the TP Provider review and confirm its calculation 
and determine whether it had appropriately accounted for the corporate 
action. In order to ensure that other options exchanges that may 
potentially be relying on the same Theoretical Price that, in turn, the 
Official believes to be fundamentally incorrect, the Exchange also 
proposes to promptly provide notice to other options exchanges that the 
TP Provider has been contacted to review and correct the calculated 
Theoretical Price at issue and to include a brief explanation of the 
reason for the request.\8\ Although not directly addressed by the 
proposed Rule, the Exchange expects that all other options exchanges 
once in receipt of this notification would await the determination of 
the TP Provider and would use the corrected price as soon as it is 
available. The Exchange further notes that it expects the TP Provider 
to cooperate with, but to be independent of, the Exchange and other 
options exchanges.\9\
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    \7\ For purposes of the Rule, an Official is an Officer of the 
Exchange or such other employee designee of the Exchange that is 
trained in the application of this Rule. See Rule 720(a)(3).
    \8\ See proposed paragraph (b) to Supplementary Material to Rule 
720, Item .04.
    \9\ The Exchange expects any TP Provider selected by the 
Exchange and other options exchanges to act independently in its 
determination and calculation of Theoretical Price. With respect to 
Livevol specifically, the Exchange again notes that Livevol is a 
subsidiary of CBOE Holdings, Inc., which is also the ultimate parent 
company of multiple options exchanges. The Exchange expects Livevol 
to calculate Theoretical Price independent of its affiliated 
exchanges in the same way it will calculate Theoretical Price 
independent of non-affiliated exchanges.
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    The Exchange believes that the proposed provision to allow an 
Official to contact the TP Provider if he or she believes the provided 
Theoretical Price is fundamentally incorrect is necessary, particularly 
because the Exchange and other options exchanges will be using the new 
process for the first time. Although the exchanges have conducted 
thorough diligence with respect to Livevol as the selected TP Provider 
and would do so with any potential replacement TP Provider, the 
Exchange is concerned that certain scenarios could arise where the 
Theoretical Price generated by the TP Provider does not take into 
account relevant factors and would result in an unfair result for 
market participants involved in a transaction. The Exchange notes that 
if such situations do indeed arise, to the extent practicable the 
Exchange will also work with the TP Provider and other options 
exchanges to improve the TP Provider's calculation of Theoretical Price 
in future situations. For instance, if the Exchange determines that a 
particular type of corporate action is not being appropriately captured 
by the TP Provider when such provider is generating Theoretical Price, 
while the Exchange believes that it needs the ability to request a 
review and correction of the Theoretical Price in connection with a 
specific review in order to provide a timely decision to market 
participants, the Exchange would share information regarding the 
specific situation with the TP Provider and other options exchanges in 
an effort to improve the Theoretical Price service for future use. The 
Exchange notes that it does not anticipate needing to rely on this 
provision frequently, if at all, but believes the provision is 
necessary nonetheless to best prepare for all potential circumstances. 
Further, the Theoretical Price used by the Exchange in connection with 
its rulings will always be that received from the TP Provider and the 
Exchange has not proposed the ability to deviate from such price.\10\
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    \10\ To the extent the TP Provider has been contacted by an 
Official of the Exchange, reviews the Theoretical Price provided but 
disagrees that there has been any error, then the Exchange would be 
bound to use the Theoretical Price provided by the TP Provider.
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    Pursuant to proposed paragraph (c) to Supplementary Material to 
Rule 720, Item .04, an Official of the Exchange may determine the 
Theoretical Price if the TP Provider has experienced a systems issue 
that has rendered its services unavailable to accurately calculate 
Theoretical Price and such issue cannot be corrected in a timely 
manner. The Exchange notes that it does not anticipate needing to rely 
on this provision frequently, if at all, but believes the provision is 
necessary nonetheless to best prepare for all potential circumstances. 
Further, consistent with existing text in Rule 720(e)(4), the Exchange 
has not proposed a specific time by which the service must be available 
in order to be considered timely.\11\ The Exchange expects that it 
would await the TP Provider's services becoming available again so long 
as the Exchange was able to obtain information regarding the issue and 
the TP Provider had a reasonable expectation of being able to resume 
normal operations within the next several hours based on communications 
with the TP Provider. More specifically with respect to Livevol, 
Livevol has business continuity and disaster recovery procedures that 
will help to ensure that the Theoretical Price tool remains available 
or, in the event of an outage, that service is restored in a timely 
manner.
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    \11\ In the context of a Significant Market Event, the Exchange 
may determine, ``in consultation with other options exchanges . . . 
that timely adjustment is not feasible due to the extraordinary 
nature of the situation.'' See Rule 720(e)(4).
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    The Exchange also notes that if a wide-scale event occurred, even 
if such

[[Page 37929]]

event did not qualify as a ``Significant Market Event'' pursuant to 
Rule 720(e), and the TP Provider was unavailable or otherwise 
experiencing difficulty, the Exchange believes that it and other 
options exchanges would seek to coordinate to the extent possible. In 
particular, the Exchange and other options exchanges now have a 
process, administered by the Options Clearing Corporation, to invoke a 
discussion amongst all options exchanges in the event of any widespread 
or significant market events. The Exchange believes that this process 
could be used in the event necessary if there were an issue with the TP 
Provider.
    The Exchange also proposes to adopt language in paragraph (d) of 
Supplementary Material to Rule 720, Item .04 to Rule 720 to disclaim 
the liability of the Exchange and the TP Provider in connection with 
the proposed Rule, the TP Provider's calculation of Theoretical Price, 
and the Exchange's use of such Theoretical Price. Specifically, the 
proposed rule would state that neither the Exchange, the TP Provider, 
nor any affiliate of the TP Provider (the TP Provider and its 
affiliates are referred to collectively as the ``TP Provider''), makes 
any warranty, express or implied, as to the results to be obtained by 
any person or entity from the use of the TP Provider pursuant to 
Supplementary Material to Rule 720, Item .04. The proposed rule would 
further state that the TP Provider does not guarantee the accuracy or 
completeness of the calculated Theoretical Price and that the TP 
Provider disclaims all warranties of merchantability or fitness for a 
particular purpose or use with respect to such Theoretical Price. 
Finally, the proposed Rule would state that neither the Exchange nor 
the TP Provider shall have any liability for any damages, claims, 
losses (including any indirect or consequential losses), expenses, or 
delays, whether direct or indirect, foreseen or unforeseen, suffered by 
any person arising out of any circumstance or occurrence relating to 
the use of such Theoretical Price or arising out of any errors or 
delays in calculating such Theoretical Price. This proposed language is 
modeled after existing language in Exchange Rules regarding ``reporting 
authorities'' that calculate indices.\12\
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    \12\ See, e.g., ISE Rule 2011, which is incorporated by 
reference into the MRX rules and which relates to index options 
potentially listed and traded on the Exchange and disclaim [sic] 
liability for a reporting authority and their affiliates.
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    In connection with the proposed change described above, the 
Exchange proposes to modify Rule 720 to state that the Exchange will 
rely on paragraph (b) and Supplementary Material to Rule 720, Item .04 
when determining Theoretical Price.
No Valid Quotes--Market Participant Quoting on Multiple Exchanges
    As described above, one of the times where the NBB or NBO is deemed 
to be unreliable for purposes of Theoretical Price is when there are no 
quotes or no valid quotes for the affected series. In addition to when 
there are no quotes, the Exchange does not consider the following to be 
valid quotes: (i) All quotes in the applicable option series published 
at a time where the last NBB is higher than the last NBO in such series 
(a ``crossed market''); (ii) quotes published by the Exchange that were 
submitted by either party to the transaction in question; and (iii) 
quotes published by another options exchange against which the Exchange 
has declared self-help. In recognition of today's market structure 
where certain participants actively provide liquidity on multiple 
exchanges simultaneously, the Exchange proposes to add an additional 
category of invalid quotes. Specifically, in order to avoid a situation 
where a market participant has established the market at an erroneous 
price on multiple exchanges, the Exchange proposes to consider as 
invalid the quotes in a series published by another options exchange if 
either party to the transaction in question submitted the quotes in the 
series representing such options exchange's best bid or offer. Thus, 
similar to being able to ignore for purposes of the Rule the quotes 
published by the Exchange if submitted by either party to the 
transaction in question, the Exchange would be able to ignore for 
purposes of the rule quotations on other options exchanges by that same 
market participant.
    In order to continue to apply the Rule in a timely and organized 
fashion, however, the Exchange proposes to initially limit the scope of 
this proposed provision in two ways. First, because the process will 
take considerable coordination with other options exchanges to confirm 
that the quotations in question on an away options exchange were indeed 
submitted by a party to a transaction on the Exchange, the Exchange 
proposes to limit this provision to apply to up to twenty-five (25) 
total options series (i.e., whether such series all relate to the same 
underlying security or multiple underlying securities). Second, the 
Exchange proposes to require the party that believes it established the 
best bid or offer on one or more other options exchanges to identify to 
the Exchange the quotes which were submitted by such party and 
published by other options exchanges. In other words, as proposed, the 
burden will be on the party seeking that the Exchange disregard their 
quotations on other options exchanges to identify such quotations. In 
turn, the Exchange will verify with such other options exchanges that 
such quotations were indeed submitted by such party.
    Below are examples of both the current rule and the rule as 
proposed to be amended.
Example 1--Current Rule, Member Erroneously Quotes on One Exchange
Assumptions
    For purposes of this example, assume the following:
     A Member acting as a Market Maker on the Exchange 
(``Market Maker A'') is quoting in twenty series of options underlying 
security ABCD on the Exchange (and only the Exchange).
     Market Maker A makes an error in calculating the market 
for options on ABCD, and publishes quotes in all twenty series to buy 
options at $1.00 and to sell options at $1.05.
     In fact, options on ABCD in these series are nearly 
worthless and no other market participant is quoting in such series.
     Therefore, the NBBO in the twenty series at issue is $1.00 
x $1.05 (with the Exchange representing the NBBO based on Market Maker 
A's quotes).
     Assume Member A immediately enters sell orders and 
executes against Market Maker A's quotes at $1.00.
     Assume Market Maker A submits to the Exchange a timely 
request for review of the trades with Member A as potentially erroneous 
transactions to buy.
Result
     Based on the Exchange's current rules, the Exchange would 
identify Market Maker A as a participant to the trades at issue and 
would consider Market Maker A's quotations invalid pursuant to Rule 
720(b)(2).
     As there were no other valid quotes to use as a reference 
price, the Exchange would then determine Theoretical Price.
     Assume the Exchange determines a Theoretical Price of 
$0.05.
     The execution price of $1.00 exceeds the $0.25 minimum 
amount set forth in the Exchange's table to determine whether an 
obvious error has occurred (i.e., $0.05 + $0.25 = $0.30) so any 
execution at or above this price is an obvious error.
     Accordingly, the executions in all series would be 
adjusted by the

[[Page 37930]]

Exchange to executions at $0.20 per contract (Theoretical Price of 
$0.05 plus $0.15) to the extent the incoming orders submitted by Member 
A were non-Customer orders.
     The executions in all series would be nullified to the 
extent the incoming orders submitted by Member A were Customer orders.
Example 2--Current Rule, Member Erroneously Quotes on Multiple 
Exchanges
Assumptions
    For purposes of this example, assume the following:
     A Member acting as a Market Maker on the Exchange 
(``Market Maker A'') is quoting in twenty series of options underlying 
security ABCD on the Exchange and on a second exchange (``Away 
Exchange'').
     Market Maker A makes an error in calculating the market 
for options on ABCD, and publishes quotes on both the Exchange and the 
Away Exchange in all twenty series to buy options at $1.00 and to sell 
options at $1.05.
     In fact, options on ABCD in these series are nearly 
worthless and no other market participant is quoting in such series.
     Therefore, the NBBO in the twenty series at issue is $1.00 
x $1.05 (with the Exchange and the Away Exchange representing the NBBO 
based on Market Maker A's quotes).
     Assume Member A immediately enters sell orders and 
executes against Market Maker A's quotes at $1.00.
     Assume Market Maker A submits to the Exchange and to the 
Away Exchange timely requests for review of the trades with Member A as 
potentially erroneous transactions to buy.
Result
     Based on the Exchange's current rules, the Exchange would 
identify Market Maker A as a participant to the trades at issue and 
would consider Market Maker A's quotations on the Exchange invalid 
pursuant to Rule 720(b)(2). The Exchange, however, would view the Away 
Exchange's quotations as valid, and would thus determine Theoretical 
Price to be $1.05 (i.e., the NBO in the case of a potentially erroneous 
buy transaction).
     The execution price of $1.00 does not exceed the $0.25 
minimum amount set forth in the Exchange's table to determine whether 
an obvious error has occurred (i.e., $1.05 + $0.25 = $1.30) so any 
execution at or above this price is an obvious error.
     The transactions on the Exchange would not be nullified or 
adjusted.
     As the Exchange and all other options exchanges have 
identical rules with respect to the process described above, the 
transactions on the Away Exchange would not be nullified or adjusted.
Example 3--Proposed Rule, Member Erroneously Quotes on Multiple 
Exchanges \13\
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    \13\ The Exchange notes that its proposed rule will not impact 
the proposed handling of a request for review where a market 
participant is quoting only on the Exchange, thus, the Exchange has 
not included a separate example for such a fact pattern.
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Assumptions
    For purposes of this example, assume the following:
     A Member acting as a Market Maker on the Exchange 
(``Market Maker A'') is quoting in twenty series of options underlying 
security ABCD on the Exchange and on a second exchange (``Away 
Exchange'').\14\
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    \14\ The Exchange notes that the proposed rule would operate the 
same if Market Maker A was quoting on more than two exchanges. The 
Exchange has limited the example to two exchanges for simplicity.
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     Market Maker A makes an error in calculating the market 
for options on ABCD, and publishes quotes on both the Exchange and the 
Away Exchange in all twenty series to buy options at $1.00 and to sell 
options at $1.05.
     In fact, options on ABCD in these series are nearly 
worthless and no other market participant is quoting in such series.
     Therefore, the NBBO in the twenty series at issue is $1.00 
x $1.05 (with the Exchange and the Away Exchange representing the NBBO 
based on Market Maker A's quotes).
     Assume Member A immediately enters sell orders and 
executes against Market Maker A's quotes at $1.00.
     Assume Market Maker A submits to the Exchange and to the 
Away Exchange timely requests for review of the trades with Member A as 
potentially erroneous transactions to buy. At the time of submitting 
the requests for review to the Exchange and the Away Exchange, Market 
Maker A identifies to the Exchange the quotes on the Away Exchange as 
quotes also represented by Market Maker A (and to the Away Exchange, 
the quotes on the Exchange as quotes also represented by Market Maker 
A).
Result
     Based on the proposed rules, the Exchange would identify 
Market Maker A as a participant to the trades at issue and would 
consider Market Maker A's quotations on the Exchange invalid pursuant 
to Rule 720(b)(2).
     The Exchange and the Away Exchange would also coordinate 
to confirm that the quotations identified by Market Maker A on the 
other exchange were indeed Market Maker A's quotations. Once confirmed, 
each of the Exchange and the Away Exchange would also consider invalid 
the quotations published on the other exchange.
     As there were no other valid quotes to use as a reference 
price, the Exchange would then determine Theoretical Price.
     Assume the Exchange determines a Theoretical Price of 
$0.05.
     The execution price of $1.00 exceeds the $0.25 minimum 
amount set forth in the Exchange's table to determine whether an 
obvious error has occurred (i.e., $0.05 + $0.25 = $0.30) so any 
execution at or above this price is an obvious error.
     Accordingly, the executions in all series would be 
adjusted by the Exchange to executions at $0.20 per contract 
(Theoretical Price of $0.05 plus $0.15) to the extent the incoming 
orders submitted by Member A were non-Customer orders.
     The executions in all series would be nullified to the 
extent the incoming orders submitted by Member A were Customer orders.
     As the Exchange and all other options exchanges would have 
identical rules with respect to the process described above, as other 
options exchanges intend to adopt the same rule if the proposed rule is 
approved, the transactions on the Away Exchange would also be nullified 
or adjusted as set forth above.
     If this example was instead modified such that Market 
Maker A was quoting in 200 series rather than 20, the Exchange notes 
that Market Maker A could only request that the Exchange consider as 
invalid their quotations in 25 of those series on other exchanges. As 
noted above, the Exchange has proposed to limit the proposed rule to 25 
series in order to continue to process requests for review in a timely 
and organized fashion in order to provide certainty to market 
participants. This is due to the amount of coordination that will be 
necessary in such a scenario to confirm that the quotations in question 
on an away options exchange were indeed submitted by a party to a 
transaction on the Exchange.
Implementation Date
    The Exchange proposes to delay the operative date of this proposal 
to a date within ninety (90) days after the Commission approved the 
Bats BZX proposal on July 6, 2017. The Exchange will announce the 
operative date in a

[[Page 37931]]

Regulatory Alert made available to its Members.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with the 
requirements of the Act and the rules and regulations thereunder that 
are applicable to a national securities exchange, and, in particular, 
with the requirements of Section 6(b) of the Act.\15\ Specifically, the 
proposal is consistent with Section 6(b)(5) of the Act \16\ because it 
would promote just and equitable principles of trade, remove 
impediments to, and perfect the mechanism of, a free and open market 
and a national market system, and, in general, protect investors and 
the public interest.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
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    As described above, the Exchange and other options exchanges are 
seeking to further modify their harmonized rules related to the 
adjustment and nullification of erroneous options transactions. The 
Exchange believes that the proposal to utilize a TP Provider in the 
event the NBBO is unavailable or unreliable 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. Thus, 
the Exchange believes that the proposal is consistent with Section 
6(b)(5) of the Act \17\ in that the proposed Rule will foster 
cooperation and coordination with persons engaged in regulating and 
facilitating transactions.
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    \17\ Id.
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    The Exchange again reiterates that it has retained the standard of 
the current rule for most reviews of options transactions pursuant to 
Rule 720, which is to rely on the NBBO to determine Theoretical Price 
if such NBBO can reasonably be relied upon. The proposal to use a TP 
Provider when the NBBO is unavailable or unreliable is consistent with 
Section 6(b)(5) of the Act \18\ in that the proposed Rule will foster 
cooperation and coordination with persons engaged in regulating and 
facilitating transactions by further reducing the possibility of 
disparate results between options exchanges and increasing the 
objectivity of the application of Rule 720. Further, the Exchange 
believes that the proposed Rule is transparent with respect to the 
limited circumstances under which the Exchange will request a review 
and correction of Theoretical Price from the TP Provider, and has 
sought to limit such circumstances as much as possible. The Exchange 
notes that under the current Rule, Exchange personnel are required to 
determine Theoretical Price in certain circumstances and yet rarely do 
so because such circumstances have already been significantly limited 
under the harmonized rule (for example, because the wide quote 
provision of the harmonized rule only applies if the quote was narrower 
and then gapped but does not apply if the quote had been persistently 
wide). Thus, the Exchange believes it will need to request Theoretical 
Price from the TP Provider only in very rare circumstances and in turn, 
the Exchange anticipates that the need to contact the TP Provider for 
additional review of the Theoretical Price provided by the TP Provider 
will be even rarer. Similarly, the Exchange believes it is unlikely 
that an Exchange Official will ever be required to determine 
Theoretical Price, as such circumstance would only be in the event of a 
systems issue that has rendered the TP Provider's services unavailable 
and such issue cannot be corrected in a timely manner.
---------------------------------------------------------------------------

    \18\ Id.
---------------------------------------------------------------------------

    The Exchange also believes its proposal to adopt language in 
paragraph (d) of Supplementary Material to Rule 720, Item .04 to Rule 
720 to disclaim the liability of the Exchange and the TP Provider in 
connection with the proposed Rule, the TP Provider's calculation of 
Theoretical Price, and the Exchange's use of such Theoretical Price is 
consistent with the Act. As noted above, this proposed language is 
modeled after existing language in Exchange Rules regarding ``reporting 
authorities'' that calculate indices,\19\ and is consistent with 
Section 6(b)(5) of the Act \20\ in that the proposed Rule will foster 
cooperation and coordination with persons engaged in regulating and 
facilitating transactions.
---------------------------------------------------------------------------

    \19\ See supra, note 12.
    \20\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    As described above, the Exchange proposes a modification to the 
valid quotes provision to also exclude quotes in a series published by 
another options exchange if either party to the transaction in question 
submitted the orders or quotes in the series representing such options 
exchange's best bid or offer. The Exchange believes this proposal is 
consistent with Section 6(b)(5) of the Act \21\ because the application 
of the rule will foster cooperation and coordination with persons 
engaged in regulating and facilitating transactions by allowing the 
Exchange to coordinate with other options exchanges to determine 
whether a market participant that is party to a potentially erroneous 
transaction on the Exchange established the market in an option on 
other options exchanges; to the extent this can be established, the 
Exchange believes such participant's quotes should be excluded in the 
same way such quotes are excluded on the Exchange. The Exchange also 
believes it is reasonable to limit the scope of this provision to 
twenty-five (25) series and to require the party that believes it 
established the best bid or offer on one or more other options 
exchanges to identify to the Exchange the quotes which were submitted 
by that party and published by other options exchanges. The Exchange 
believes these limitations are consistent with Section 6(b)(5) of the 
Act \22\ because they will ensure that the Exchange is able to continue 
to apply the Rule in a timely and organized fashion, thus fostering 
cooperation and coordination with persons engaged in regulating and 
facilitating transactions and also removing impediments to and 
perfecting the mechanism of a free and open market and a national 
market system.
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78f(b)(5).
    \22\ Id.
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes the entire proposal is consistent with 
Section 6(b)(8) of the Act \23\ in that it does not impose any burden 
on competition that is not necessary or appropriate in furtherance of 
the purposes of the Act as explained below.
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

    Importantly, the Exchange does not believe that the proposal will 
impose a burden on intermarket competition but rather that it will 
alleviate any burden on competition because it is the result of a 
collaborative effort by all options exchanges to further harmonize and 
improve the process related to the adjustment and nullification o [sic] 
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

[[Page 37932]]

adjustment of transactions. To that end, the selection and 
implementation of a TP Provider utilized by all options exchanges will 
further reduce the possibility that participants with potentially 
erroneous transactions that span multiple options exchanges are handled 
differently on such exchanges. Similarly, the proposed ability to 
consider quotations invalid on another options exchange if ultimately 
originating from a party to a potentially erroneous transaction on the 
Exchange represents a proposal intended to further foster cooperation 
by the options exchanges with respect to market events. The Exchange 
understands that all other options exchanges either have or they 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 proposed provisions 
apply to all market participants equally.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \24\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\25\
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \25\ 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, along 
with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
---------------------------------------------------------------------------

    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-MRX-2017-16 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-MRX-2017-16. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-MRX-2017-16, and should be 
submitted on or before September 5, 2017.
---------------------------------------------------------------------------

    \26\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-17068 Filed 8-11-17; 8:45 am]
BILLING CODE 8011-01-P
37926 Federal Register / Vol. 82, No. 155 / Monday, August 14, 2017 / Notices

adjustment of transactions. To that end, to determine whether the proposed rule For the Commission, by the Division of
the selection and implementation of a should be approved or disapproved. Trading and Markets, pursuant to delegated
TP Provider utilized by all options authority.25
exchanges will further reduce the IV. Solicitation of Comments Eduardo A. Aleman,
possibility that participants with Assistant Secretary.
Interested persons are invited to
potentially erroneous transactions that submit written data, views, and [FR Doc. 2017–17066 Filed 8–11–17; 8:45 am]
span multiple options exchanges are arguments concerning the foregoing, BILLING CODE 8011–01–P
handled differently on such exchanges.
including whether the proposed rule
Similarly, the proposed ability to
change is consistent with the Act. SECURITIES AND EXCHANGE
consider quotations invalid on another
Comments may be submitted by any of COMMISSION
options exchange if ultimately
originating from a party to a potentially the following methods:
[Release No. 34–81353; File No. SR–MRX–
erroneous transaction on the Exchange Electronic Comments 2017–16]
represents a proposal intended to
further foster cooperation by the options • Use the Commission’s Internet Self-Regulatory Organizations; Nasdaq
exchanges with respect to market comment form (http://www.sec.gov/ MRX, LLC; Notice of Filing and
events. The Exchange understands that rules/sro.shtml); or Immediate Effectiveness of Proposed
all other options exchanges intend to • Send an email to rule-comments@ Rule Change To Amend Rule 720,
file proposals that are substantially sec.gov. Please include File Number SR– Nullification and Adjustment of
similar to this proposal. BOX–2017–25 on the subject line. Options Transactions Including
The Exchange does not believe that Obvious Errors
the proposed rule change imposes a Paper Comments
burden on intramarket competition August 8, 2017.
because the proposed provisions apply • Send paper comments in triplicate Pursuant to Section 19(b)(1) of the
to all market participants equally. to Brent J. Fields, Secretary, Securities Securities Exchange Act of 1934 (the
and Exchange Commission, 100 F Street ‘‘Act’’),1 and Rule 19b–4 thereunder,2
C. Self-Regulatory Organization’s NE., Washington, DC 20549–1090. notice is hereby given that on August 3,
Statement on Comments on the 2017, Nasdaq MRX, LLC (‘‘MRX’’ or
Proposed Rule Change Received From All submissions should refer to File ‘‘Exchange’’) filed with the Securities
Members, Participants, or Others Number SR–BOX–2017–25. This file and Exchange Commission
number should be included on the (‘‘Commission’’) the proposed rule
The Exchange has neither solicited
subject line if email is used. To help the change as described in Items I and II
nor received comments on the proposed
rule change. Commission process and review your below, which Items have been prepared
comments more efficiently, please use by the Exchange. The Commission is
III. Date of Effectiveness of the only one method. The Commission will publishing this notice to solicit
Proposed Rule Change and Timing for post all comments on the Commission’s comments on the proposed rule change
Commission Action Internet Web site (http://www.sec.gov/ from interested persons.
Because the foregoing proposed rule rules/sro.shtml). Copies of the
I. Self-Regulatory Organization’s
change does not: (i) Significantly affect submission, all subsequent
Statement of the Terms of Substance of
the protection of investors or the public amendments, all written statements
the Proposed Rule Change
interest; (ii) impose any significant with respect to the proposed rule
burden on competition; and (iii) become change that are filed with the The Exchange proposes to amend
operative for 30 days after the date of Commission, and all written Rule 720, Nullification and Adjustment
the filing, or such shorter time as the communications relating to the of Options Transactions including
Commission may designate, it has proposed rule change between the Obvious Errors.
become effective pursuant to 19(b)(3)(A) Commission and any person, other than While these amendments are effective
of the Act 23 and Rule 19b–4(f)(6) 24 those that may be withheld from the upon filing, the Exchange has
thereunder. designated the proposed amendments to
public in accordance with the
At any time within 60 days of the be operative on a date that is within
provisions of 5 U.S.C. 552, will be
filing of the proposed rule change, the ninety (90) days after the Commission
available for Web site viewing and approved a similar proposal filed by
Commission summarily may printing in the Commission’s Public
temporarily suspend such rule change if Bats BZX on July 6, 2017.
Reference Room, 100 F Street NE., The text of the proposed rule change
it appears to the Commission that such
Washington, DC 20549 on official is available on the Exchange’s Web site
action is necessary or appropriate in the
business days between the hours of at www.ise.com, at the principal office
public interest, for the protection of
investors, or otherwise in furtherance of 10:00 a.m. and 3:00 p.m. Copies of such of the Exchange, and at the
the purposes of the Act. If the filing also will be available for Commission’s Public Reference Room.
Commission takes such action, the inspection and copying at the principal
office of the Exchange. All comments II. Self-Regulatory Organization’s
Commission shall institute proceedings Statement of the Purpose of, and
received will be posted without change;
Statutory Basis for, the Proposed Rule
23 15 U.S.C. 78s(b)(3)(A). the Commission does not edit personal
Change
sradovich on DSK3GMQ082PROD with NOTICES

24 17 CFR 240.19b–4(f)(6). In addition, Rule 19b– identifying information from
4(f)(6) requires a self-regulatory organization to give submissions. You should submit only In its filing with the Commission, the
the Commission written notice of its intent to file information that you wish to make Exchange included statements
the proposed rule change, along with a brief concerning the purpose of and basis for
description and text of the proposed rule change, available publicly. All submissions
at least five business days prior to the date of filing should refer to File Number SR–BOX– 25 17
of the proposed rule change, or such shorter time CFR 200.30–3(a)(12).
2017–25, and should be submitted on or 1 15
as designated by the Commission. The Exchange U.S.C. 78s(b)(1).
has satisfied this requirement. before September 5, 2017. 2 17 CFR 240.19b–4.

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Federal Register / Vol. 82, No. 155 / Monday, August 14, 2017 / Notices 37929

event did not qualify as a ‘‘Significant that the Exchange will rely on paragraph exchanges to identify to the Exchange
Market Event’’ pursuant to Rule 720(e), (b) and Supplementary Material to Rule the quotes which were submitted by
and the TP Provider was unavailable or 720, Item .04 when determining such party and published by other
otherwise experiencing difficulty, the Theoretical Price. options exchanges. In other words, as
Exchange believes that it and other proposed, the burden will be on the
No Valid Quotes—Market Participant
options exchanges would seek to party seeking that the Exchange
Quoting on Multiple Exchanges
coordinate to the extent possible. In disregard their quotations on other
particular, the Exchange and other As described above, one of the times options exchanges to identify such
options exchanges now have a process, where the NBB or NBO is deemed to be quotations. In turn, the Exchange will
administered by the Options Clearing unreliable for purposes of Theoretical verify with such other options
Corporation, to invoke a discussion Price is when there are no quotes or no exchanges that such quotations were
amongst all options exchanges in the valid quotes for the affected series. In indeed submitted by such party.
event of any widespread or significant addition to when there are no quotes, Below are examples of both the
market events. The Exchange believes the Exchange does not consider the current rule and the rule as proposed to
that this process could be used in the following to be valid quotes: (i) All be amended.
event necessary if there were an issue quotes in the applicable option series
with the TP Provider. published at a time where the last NBB Example 1—Current Rule, Member
The Exchange also proposes to adopt is higher than the last NBO in such Erroneously Quotes on One Exchange
language in paragraph (d) of series (a ‘‘crossed market’’); (ii) quotes Assumptions
Supplementary Material to Rule 720, published by the Exchange that were
For purposes of this example, assume
Item .04 to Rule 720 to disclaim the submitted by either party to the
the following:
liability of the Exchange and the TP transaction in question; and (iii) quotes • A Member acting as a Market Maker
Provider in connection with the published by another options exchange on the Exchange (‘‘Market Maker A’’) is
proposed Rule, the TP Provider’s against which the Exchange has
quoting in twenty series of options
calculation of Theoretical Price, and the declared self-help. In recognition of
underlying security ABCD on the
Exchange’s use of such Theoretical today’s market structure where certain
Exchange (and only the Exchange).
Price. Specifically, the proposed rule participants actively provide liquidity • Market Maker A makes an error in
would state that neither the Exchange, on multiple exchanges simultaneously, calculating the market for options on
the TP Provider, nor any affiliate of the the Exchange proposes to add an ABCD, and publishes quotes in all
TP Provider (the TP Provider and its additional category of invalid quotes. twenty series to buy options at $1.00
affiliates are referred to collectively as Specifically, in order to avoid a and to sell options at $1.05.
the ‘‘TP Provider’’), makes any situation where a market participant has • In fact, options on ABCD in these
warranty, express or implied, as to the established the market at an erroneous series are nearly worthless and no other
results to be obtained by any person or price on multiple exchanges, the market participant is quoting in such
entity from the use of the TP Provider Exchange proposes to consider as series.
pursuant to Supplementary Material to invalid the quotes in a series published • Therefore, the NBBO in the twenty
Rule 720, Item .04. The proposed rule by another options exchange if either series at issue is $1.00 × $1.05 (with the
would further state that the TP Provider party to the transaction in question Exchange representing the NBBO based
does not guarantee the accuracy or submitted the quotes in the series on Market Maker A’s quotes).
completeness of the calculated representing such options exchange’s • Assume Member A immediately
Theoretical Price and that the TP best bid or offer. Thus, similar to being enters sell orders and executes against
Provider disclaims all warranties of able to ignore for purposes of the Rule Market Maker A’s quotes at $1.00.
merchantability or fitness for a the quotes published by the Exchange if • Assume Market Maker A submits to
particular purpose or use with respect to submitted by either party to the the Exchange a timely request for review
such Theoretical Price. Finally, the transaction in question, the Exchange of the trades with Member A as
proposed Rule would state that neither would be able to ignore for purposes of potentially erroneous transactions to
the Exchange nor the TP Provider shall the rule quotations on other options buy.
have any liability for any damages, exchanges by that same market
claims, losses (including any indirect or participant. Result
consequential losses), expenses, or In order to continue to apply the Rule • Based on the Exchange’s current
delays, whether direct or indirect, in a timely and organized fashion, rules, the Exchange would identify
foreseen or unforeseen, suffered by any however, the Exchange proposes to Market Maker A as a participant to the
person arising out of any circumstance initially limit the scope of this proposed trades at issue and would consider
or occurrence relating to the use of such provision in two ways. First, because Market Maker A’s quotations invalid
Theoretical Price or arising out of any the process will take considerable pursuant to Rule 720(b)(2).
errors or delays in calculating such coordination with other options • As there were no other valid quotes
Theoretical Price. This proposed exchanges to confirm that the quotations to use as a reference price, the Exchange
language is modeled after existing in question on an away options would then determine Theoretical Price.
language in Exchange Rules regarding exchange were indeed submitted by a • Assume the Exchange determines a
‘‘reporting authorities’’ that calculate party to a transaction on the Exchange, Theoretical Price of $0.05.
indices.12 the Exchange proposes to limit this • The execution price of $1.00
provision to apply to up to twenty-five
sradovich on DSK3GMQ082PROD with NOTICES

In connection with the proposed exceeds the $0.25 minimum amount set
change described above, the Exchange (25) total options series (i.e., whether forth in the Exchange’s table to
proposes to modify Rule 720 to state such series all relate to the same determine whether an obvious error has
underlying security or multiple occurred (i.e., $0.05 + $0.25 = $0.30) so
12 See, e.g., ISE Rule 2011, which is incorporated
underlying securities). Second, the any execution at or above this price is
by reference into the MRX rules and which relates Exchange proposes to require the party
to index options potentially listed and traded on the
an obvious error.
Exchange and disclaim [sic] liability for a reporting that believes it established the best bid • Accordingly, the executions in all
authority and their affiliates. or offer on one or more other options series would be adjusted by the

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37930 Federal Register / Vol. 82, No. 155 / Monday, August 14, 2017 / Notices

Exchange to executions at $0.20 per • As the Exchange and all other • The Exchange and the Away
contract (Theoretical Price of $0.05 plus options exchanges have identical rules Exchange would also coordinate to
$0.15) to the extent the incoming orders with respect to the process described confirm that the quotations identified by
submitted by Member A were non- above, the transactions on the Away Market Maker A on the other exchange
Customer orders. Exchange would not be nullified or were indeed Market Maker A’s
• The executions in all series would adjusted. quotations. Once confirmed, each of the
be nullified to the extent the incoming Exchange and the Away Exchange
Example 3—Proposed Rule, Member
orders submitted by Member A were would also consider invalid the
Erroneously Quotes on Multiple
Customer orders. quotations published on the other
Exchanges 13
exchange.
Example 2—Current Rule, Member Assumptions • As there were no other valid quotes
Erroneously Quotes on Multiple to use as a reference price, the Exchange
Exchanges For purposes of this example, assume
the following: would then determine Theoretical Price.
Assumptions • A Member acting as a Market Maker • Assume the Exchange determines a
on the Exchange (‘‘Market Maker A’’) is Theoretical Price of $0.05.
For purposes of this example, assume • The execution price of $1.00
the following: quoting in twenty series of options
exceeds the $0.25 minimum amount set
• A Member acting as a Market Maker underlying security ABCD on the
forth in the Exchange’s table to
on the Exchange (‘‘Market Maker A’’) is Exchange and on a second exchange
determine whether an obvious error has
quoting in twenty series of options (‘‘Away Exchange’’).14
occurred (i.e., $0.05 + $0.25 = $0.30) so
underlying security ABCD on the • Market Maker A makes an error in
any execution at or above this price is
Exchange and on a second exchange calculating the market for options on
an obvious error.
(‘‘Away Exchange’’). ABCD, and publishes quotes on both the • Accordingly, the executions in all
• Market Maker A makes an error in Exchange and the Away Exchange in all series would be adjusted by the
calculating the market for options on twenty series to buy options at $1.00 Exchange to executions at $0.20 per
ABCD, and publishes quotes on both the and to sell options at $1.05. contract (Theoretical Price of $0.05 plus
Exchange and the Away Exchange in all • In fact, options on ABCD in these
$0.15) to the extent the incoming orders
twenty series to buy options at $1.00 series are nearly worthless and no other
submitted by Member A were non-
and to sell options at $1.05. market participant is quoting in such
Customer orders.
• In fact, options on ABCD in these series. • The executions in all series would
series are nearly worthless and no other • Therefore, the NBBO in the twenty be nullified to the extent the incoming
market participant is quoting in such series at issue is $1.00 × $1.05 (with the orders submitted by Member A were
series. Exchange and the Away Exchange Customer orders.
• Therefore, the NBBO in the twenty representing the NBBO based on Market • As the Exchange and all other
series at issue is $1.00 × $1.05 (with the Maker A’s quotes). options exchanges would have identical
Exchange and the Away Exchange • Assume Member A immediately rules with respect to the process
representing the NBBO based on Market enters sell orders and executes against described above, as other options
Maker A’s quotes). Market Maker A’s quotes at $1.00. exchanges intend to adopt the same rule
• Assume Member A immediately • Assume Market Maker A submits to if the proposed rule is approved, the
enters sell orders and executes against the Exchange and to the Away Exchange transactions on the Away Exchange
Market Maker A’s quotes at $1.00. timely requests for review of the trades would also be nullified or adjusted as
• Assume Market Maker A submits to with Member A as potentially erroneous set forth above.
the Exchange and to the Away Exchange transactions to buy. At the time of • If this example was instead
timely requests for review of the trades submitting the requests for review to the modified such that Market Maker A was
with Member A as potentially erroneous Exchange and the Away Exchange, quoting in 200 series rather than 20, the
transactions to buy. Market Maker A identifies to the Exchange notes that Market Maker A
Exchange the quotes on the Away could only request that the Exchange
Result Exchange as quotes also represented by consider as invalid their quotations in
• Based on the Exchange’s current Market Maker A (and to the Away 25 of those series on other exchanges.
rules, the Exchange would identify Exchange, the quotes on the Exchange As noted above, the Exchange has
Market Maker A as a participant to the as quotes also represented by Market proposed to limit the proposed rule to
trades at issue and would consider Maker A). 25 series in order to continue to process
Market Maker A’s quotations on the Result requests for review in a timely and
Exchange invalid pursuant to Rule organized fashion in order to provide
720(b)(2). The Exchange, however, • Based on the proposed rules, the certainty to market participants. This is
would view the Away Exchange’s Exchange would identify Market Maker due to the amount of coordination that
quotations as valid, and would thus A as a participant to the trades at issue will be necessary in such a scenario to
determine Theoretical Price to be $1.05 and would consider Market Maker A’s confirm that the quotations in question
(i.e., the NBO in the case of a potentially quotations on the Exchange invalid on an away options exchange were
erroneous buy transaction). pursuant to Rule 720(b)(2). indeed submitted by a party to a
• The execution price of $1.00 does transaction on the Exchange.
13 The Exchange notes that its proposed rule will
not exceed the $0.25 minimum amount
sradovich on DSK3GMQ082PROD with NOTICES

not impact the proposed handling of a request for Implementation Date
set forth in the Exchange’s table to review where a market participant is quoting only
determine whether an obvious error has on the Exchange, thus, the Exchange has not The Exchange proposes to delay the
occurred (i.e., $1.05 + $0.25 = $1.30) so included a separate example for such a fact pattern. operative date of this proposal to a date
14 The Exchange notes that the proposed rule
any execution at or above this price is within ninety (90) days after the
would operate the same if Market Maker A was
an obvious error. quoting on more than two exchanges. The Exchange
Commission approved the Bats BZX
• The transactions on the Exchange has limited the example to two exchanges for proposal on July 6, 2017. The Exchange
would not be nullified or adjusted. simplicity. will announce the operative date in a

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Regulatory Alert made available to its limited circumstances under which the persons engaged in regulating and
Members. Exchange will request a review and facilitating transactions by allowing the
correction of Theoretical Price from the Exchange to coordinate with other
2. Statutory Basis
TP Provider, and has sought to limit options exchanges to determine whether
The Exchange believes that its such circumstances as much as possible. a market participant that is party to a
proposal is consistent with the The Exchange notes that under the potentially erroneous transaction on the
requirements of the Act and the rules current Rule, Exchange personnel are Exchange established the market in an
and regulations thereunder that are required to determine Theoretical Price option on other options exchanges; to
applicable to a national securities in certain circumstances and yet rarely the extent this can be established, the
exchange, and, in particular, with the do so because such circumstances have Exchange believes such participant’s
requirements of Section 6(b) of the already been significantly limited under quotes should be excluded in the same
Act.15 Specifically, the proposal is the harmonized rule (for example, way such quotes are excluded on the
consistent with Section 6(b)(5) of the because the wide quote provision of the Exchange. The Exchange also believes it
Act 16 because it would promote just harmonized rule only applies if the is reasonable to limit the scope of this
and equitable principles of trade, quote was narrower and then gapped provision to twenty-five (25) series and
remove impediments to, and perfect the but does not apply if the quote had been to require the party that believes it
mechanism of, a free and open market persistently wide). Thus, the Exchange established the best bid or offer on one
and a national market system, and, in believes it will need to request or more other options exchanges to
general, protect investors and the public Theoretical Price from the TP Provider identify to the Exchange the quotes
interest. only in very rare circumstances and in which were submitted by that party and
As described above, the Exchange and turn, the Exchange anticipates that the published by other options exchanges.
other options exchanges are seeking to need to contact the TP Provider for The Exchange believes these limitations
further modify their harmonized rules additional review of the Theoretical are consistent with Section 6(b)(5) of the
related to the adjustment and Price provided by the TP Provider will Act 22 because they will ensure that the
nullification of erroneous options be even rarer. Similarly, the Exchange Exchange is able to continue to apply
transactions. The Exchange believes that believes it is unlikely that an Exchange the Rule in a timely and organized
the proposal to utilize a TP Provider in Official will ever be required to fashion, thus fostering cooperation and
the event the NBBO is unavailable or determine Theoretical Price, as such coordination with persons engaged in
unreliable will provide greater circumstance would only be in the regulating and facilitating transactions
transparency and clarity with respect to event of a systems issue that has and also removing impediments to and
the adjustment and nullification of rendered the TP Provider’s services perfecting the mechanism of a free and
erroneous options transactions. unavailable and such issue cannot be open market and a national market
Particularly, the proposed changes seek corrected in a timely manner. system.
to achieve consistent results for The Exchange also believes its
proposal to adopt language in paragraph B. Self-Regulatory Organization’s
participants across U.S. options
(d) of Supplementary Material to Rule Statement on Burden on Competition
exchanges while maintaining a fair and
orderly market, protecting investors and 720, Item .04 to Rule 720 to disclaim the The Exchange believes the entire
protecting the public interest. Thus, the liability of the Exchange and the TP proposal is consistent with Section
Exchange believes that the proposal is Provider in connection with the 6(b)(8) of the Act 23 in that it does not
consistent with Section 6(b)(5) of the proposed Rule, the TP Provider’s impose any burden on competition that
Act 17 in that the proposed Rule will calculation of Theoretical Price, and the is not necessary or appropriate in
foster cooperation and coordination Exchange’s use of such Theoretical Price furtherance of the purposes of the Act
with persons engaged in regulating and is consistent with the Act. As noted as explained below.
facilitating transactions. above, this proposed language is Importantly, the Exchange does not
The Exchange again reiterates that it modeled after existing language in believe that the proposal will impose a
has retained the standard of the current Exchange Rules regarding ‘‘reporting burden on intermarket competition but
rule for most reviews of options authorities’’ that calculate indices,19 rather that it will alleviate any burden
transactions pursuant to Rule 720, and is consistent with Section 6(b)(5) of on competition because it is the result
which is to rely on the NBBO to the Act 20 in that the proposed Rule will of a collaborative effort by all options
determine Theoretical Price if such foster cooperation and coordination exchanges to further harmonize and
NBBO can reasonably be relied upon. with persons engaged in regulating and improve the process related to the
The proposal to use a TP Provider when facilitating transactions. adjustment and nullification o [sic]
the NBBO is unavailable or unreliable is As described above, the Exchange erroneous options transactions. The
consistent with Section 6(b)(5) of the proposes a modification to the valid Exchange does not believe that the rules
Act 18 in that the proposed Rule will quotes provision to also exclude quotes applicable to such process is an area
foster cooperation and coordination in a series published by another options where options exchanges should
with persons engaged in regulating and exchange if either party to the compete, but rather, that all options
facilitating transactions by further transaction in question submitted the exchanges should have consistent rules
reducing the possibility of disparate orders or quotes in the series to the extent possible. Particularly
results between options exchanges and representing such options exchange’s where a market participant trades on
increasing the objectivity of the best bid or offer. The Exchange believes several different exchanges and an
sradovich on DSK3GMQ082PROD with NOTICES

application of Rule 720. Further, the this proposal is consistent with Section erroneous trade may occur on multiple
Exchange believes that the proposed 6(b)(5) of the Act 21 because the markets nearly simultaneously, the
Rule is transparent with respect to the application of the rule will foster Exchange believes that a participant
cooperation and coordination with should have a consistent experience
15 15 U.S.C. 78f(b). with respect to the nullification or
16 15 U.S.C. 78f(b)(5). 19 See supra, note 12.
17 Id. 20 15 U.S.C. 78f(b)(5). 22 Id.
18 Id. 21 15 U.S.C. 78f(b)(5). 23 15 U.S.C. 78f(b)(8).

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37932 Federal Register / Vol. 82, No. 155 / Monday, August 14, 2017 / Notices

adjustment of transactions. To that end, to determine whether the proposed rule For the Commission, by the Division of
the selection and implementation of a should be approved or disapproved. Trading and Markets, pursuant to delegated
TP Provider utilized by all options authority.26
exchanges will further reduce the IV. Solicitation of Comments
Eduardo A. Aleman,
possibility that participants with Interested persons are invited to Assistant Secretary.
potentially erroneous transactions that submit written data, views, and [FR Doc. 2017–17068 Filed 8–11–17; 8:45 am]
span multiple options exchanges are arguments concerning the foregoing, BILLING CODE 8011–01–P
handled differently on such exchanges. including whether the proposed rule
Similarly, the proposed ability to change is consistent with the Act.
consider quotations invalid on another Comments may be submitted by any of SECURITIES AND EXCHANGE
options exchange if ultimately the following methods: COMMISSION
originating from a party to a potentially
erroneous transaction on the Exchange Electronic Comments
represents a proposal intended to [Release No. 34–81339; File No. SR–NSCC–
further foster cooperation by the options • Use the Commission’s Internet 2017–011]
exchanges with respect to market comment form (http://www.sec.gov/
rules/sro.shtml); or Self-Regulatory Organizations;
events. The Exchange understands that
National Securities Clearing
all other options exchanges either have • Send an email to rule-comments@
Corporation; Notice of Filing and
or they intend to file proposals that are sec.gov. Please include File Number SR–
substantially similar to this proposal. Immediate Effectiveness of Proposed
MRX–2017–16 on the subject line.
The Exchange does not believe that Rule Change To Make Certain
the proposed rule change imposes a Paper Comments Adjustments, Clarifications and
burden on intramarket competition Corrections to the Fee Provisions for
• Send paper comments in triplicate Insurance and Retirement Processing
because the proposed provisions apply to Brent J. Fields, Secretary, Securities
to all market participants equally. Services
and Exchange Commission, 100 F Street
C. Self-Regulatory Organization’s NE., Washington, DC 20549–1090. August 8, 2017.
Statement on Comments on the All submissions should refer to File Pursuant to Section 19(b)(1) of the
Proposed Rule Change Received From Number SR–MRX–2017–16. This file Securities Exchange Act of 1934
Members, Participants, or Others number should be included on the (‘‘Act’’) 1 and Rule 19b–4 thereunder,2
No written comments were either subject line if email is used. To help the notice is hereby given that on August 3,
solicited or received. Commission process and review your 2017, National Securities Clearing
comments more efficiently, please use Corporation (‘‘NSCC’’) filed with the
III. Date of Effectiveness of the Securities and Exchange Commission
only one method. The Commission will
Proposed Rule Change and Timing for (‘‘Commission’’) the proposed rule
post all comments on the Commission’s
Commission Action change as described in Items I, II and III
Internet Web site (http://www.sec.gov/
Because the foregoing proposed rule rules/sro.shtml). Copies of the below, which Items have been prepared
change does not: (i) Significantly affect submission, all subsequent by the clearing agency. NSCC filed the
the protection of investors or the public amendments, all written statements proposed rule change pursuant to
interest; (ii) impose any significant with respect to the proposed rule Section 19(b)(3)(A) 3 of the Act and
burden on competition; and (iii) become change that are filed with the subparagraphs (f)(2) 4 and (f)(4) 5 of Rule
operative for 30 days from the date on Commission, and all written 19b–4 thereunder so that the proposal
which it was filed, or such shorter time communications relating to the was effective upon filing with the
as the Commission may designate, it has proposed rule change between the Commission. The Commission is
become effective pursuant to Section Commission and any person, other than publishing this notice to solicit
19(b)(3)(A)(iii) of the Act 24 and those that may be withheld from the comments on the proposed rule change
subparagraph (f)(6) of Rule 19b–4 public in accordance with the from interested persons.
thereunder.25 provisions of 5 U.S.C. 552, will be I. Clearing Agency’s Statement of the
At any time within 60 days of the available for Web site viewing and Terms of Substance of the Proposed
filing of the proposed rule change, the printing in the Commission’s Public Rule Change
Commission summarily may Reference Room, 100 F Street NE.,
temporarily suspend such rule change if Washington, DC 20549 on official The proposed rule change would
it appears to the Commission that such business days between the hours of make certain adjustments, clarifications
action is: (i) Necessary or appropriate in 10:00 a.m. and 3:00 p.m. Copies of such and corrections to the fee provisions for
the public interest; (ii) for the protection filing also will be available for NSCC’s Insurance and Retirement
of investors; or (iii) otherwise in inspection and copying at the principal Processing Services (‘‘I&RS’’) set forth in
furtherance of the purposes of the Act. office of the Exchange. All comments Addendum A (Fee Structure)
If the Commission takes such action, the received will be posted without change; (‘‘Addendum A’’) of NSCC’s Rules &
Commission shall institute proceedings the Commission does not edit personal Procedures (‘‘Rules’’), as described
identifying information from below.6
24 15 U.S.C. 78s(b)(3)(A)(iii). submissions. You should submit only
sradovich on DSK3GMQ082PROD with NOTICES

25 17 CFR 240.19b–4(f)(6). In addition, Rule 19b– information that you wish to make 1 15 U.S.C. 78s(b)(1).
4(f)(6) requires a self-regulatory organization to give
the Commission written notice of its intent to file available publicly. All submissions 2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A).
the proposed rule change, along with a brief should refer to File Number SR–MRX–
4 17 CFR 240.19b–4(f)(2).
description and text of the proposed rule change, 2017–16, and should be submitted on or 5 17 CFR 240.19b–4(f)(4).
at least five business days prior to the date of filing before September 5, 2017.
of the proposed rule change, or such shorter time 6 Capitalized terms not defined herein are defined

as designated by the Commission. The Exchange in the Rules, available at http://www.dtcc.com/∼/
has satisfied this requirement. 26 17 CFR 200.30–3(a)(12). media/Files/Downloads/legal/rules/nscc_rules.pdf.

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Document Created: 2018-10-24 11:52:58
Document Modified: 2018-10-24 11:52:58
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 37926