[Federal Register Volume 75, Number 230 (Wednesday, December 1, 2010)]
[Notices]
[Pages 74755-74757]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-30225]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63367; File No. SR-Phlx-2010-163]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by NASDAQ OMX PHLX LLC Relating to Obvious Errors Respecting
Complex Trades
November 23, 2010.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given
that on November 17, 2010, NASDAQ OMX PHLX LLC (``Phlx'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III, 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, pursuant to Section 19(b)(1) of the Act \3\ and Rule
19b-4 thereunder,\4\ proposes to amend Rule 1092, Obvious Errors and
Catastrophic Errors, to address obvious and catastrophic errors
involving complex orders.
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\3\ 15 U.S.C. 78s(b)(1).
\4\ 17 CFR 240.19b-4.
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The text of the proposed rule change is available on the Exchange's
website at http://www.nasdaqtrader.com/micro.aspx?id=PHLXRulefilings,
at the principal office of the Exchange, on the Commission's Web site
at http://www.sec.gov, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule change is to mitigate the risk to
parties using complex orders, where part or all of a complex order
traded at an erroneous price; specifically, the proposal addresses the
situation where one component (or leg) of a complex order is deemed an
obvious (or catastrophic) error but the other component(s) is (are)
not.
Background
Complex orders are orders with more than one component, and take
many
[[Page 74756]]
forms, such as spreads and straddles.\5\ Complex orders have been
trading electronically on the Exchange's trading system since 2008.\6\
At this time, the Exchange is proposing to amend its Rule 1092 to
address complex orders that have at least one leg that trades at an
erroneous price. Rule 1092 is the Exchange's rule that governs obvious
errors and catastrophic errors in options. Most options exchanges have
similar but not identical rules; this proposal would adopt a new
process of determining how to deal with obvious/catastrophic errors
when a complex order trades with another complex order.
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\5\ See Rule 1080.08.
\6\ See Securities Exchange Act Release No. 58361 (August 14,
2008), 73 FR 49529 (August 21, 2008) (SR-Phlx-2008-50). Complex
orders have long been executed on the trading floor verbally using
contingent orders and the rules that apply to such executions.
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Rule 1092 provides a framework for reviewing the price of a
transaction to determine whether that price was an ``obvious error''
\7\ pursuant to objective standards. When a participant believes he/she
received one or more executions at an erroneous price, a participant
may notify the Options Exchange Officials (``OEOs'') and request the
review of a trade as a possible obvious error.\8\ An obvious error will
be deemed to have occurred when the execution price of a transaction is
higher or lower than the theoretical price for a series by a certain
amount depending on the type of option. OEOs use one of three criteria
when determining the theoretical price of an options execution, which
is enumerated in Rule 1092(b). The theoretical price is then compared
to an obvious/catastrophic error chart within Rule 1092(a). If the
transaction price meets this threshold, the transaction may be adjusted
or nullified.
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\7\ This proposal also covers catastrophic errors.
\8\ See Rule 1092(e).
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Proposal
The proposal at hand would permit all legs of a complex order
execution to be nullified when one leg can be nullified under this
Rule, only if the execution was a complex order versus a complex order
(such that all of the same parties are involved in the trade).\9\ This
occurs when a complex order executes against another complex order,
with each piece executing through the System against each other. For
example, assume a customer trades a call spread at a net price of $.50
by buying the January 50 calls at $3.00 and selling the January 55
calls at $2.50. If the January 50 calls should have been trading at
$7.00 and thus meet the obvious error threshold in Rule 1092, then the
entire complex trade will be nullified only if the January 50 and 55
calls traded as a complex order against another complex order, rather
than as two separate trades. Currently, once the trade involving the
January 50 calls is nullified, both parties are stuck with a
transaction in the January 55 calls, which was not intended by either.
This proposal to nullify all the components of a complex order that
traded with another complex order provides an important benefit to both
parties, neither of whom intended to end up with just one option.
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\9\ See proposed Rule 1092(c)(v)(A).
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This proposal does not address complex orders that do not trade
against other complex orders. Sometimes complex orders are executed by
the System by ``legging'' or executing the component parts against
other individual, unrelated orders/quotes rather than a single complex
order with the same component parts.\10\ The benefit of the legging
feature of the Exchange's complex order system is that it increases the
likelihood that a complex order will be executed. Nevertheless, it is
possible, at times, that after such a trade, only one leg of a complex
order may meet the obvious error threshold; thus, this could result in
a residual position of a single leg, rather than a complete complex
order execution. This will not change under this proposal.
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\10\ In the example above, the January 50 calls would be
purchased from seller A and the January 55 calls sold to buyer B,
both of whom are just bidding/offering one option, not a complex
order.
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In sum, Rule 1092 is proposed to be amended as enumerated above in
order to mitigate risk for parties of a complex order where a complex
order traded with another complex order at an erroneous price. By
creating uniformity for all trades that are ``complex to complex,''
parties will have less trading risk because all of the components will
be nullified under the proposal.
In addition, the Exchange also proposes to make three minor
corrections: (i) A reference in Rule 1092(b)(ii) to Rule
1014(c)(1)(A)(i)(a) is inverted and should instead say Rule
1014(c)(i)(A)(1)(a); (ii) the words ``obvious error'' in Rule
1092(e)(i)(B) are being capitalized to match the rest of the rule; and
(iii) a reference to ``AUTOM'' in Rule 1092(e)(ii) is outdated and will
be deleted, leaving reference to the ``Help Desk.''
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \11\ in general, and furthers the objectives of Section
6(b)(5) of the Act \12\ in particular, in that it is designed 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, by improving the obvious error process for complex orders
that trade with other complex orders. Recognition that a trade is part
of a complex order should help add more certainty to the obvious/
catastrophic error process and reduce the risk to parties trading on
the Exchange.
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\11\ 15 U.S.C. 78f(b).
\12\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.
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
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission shall: (a) By order approve
or disapprove such proposed rule change, or (b) institute proceedings
to determine whether the proposed rule change should be 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 Exchange 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 e-mail to [email protected]. Please include
File Number SR-Phlx-2010-163 on the subject line.
[[Page 74757]]
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington DC 20549-1090.
All submissions should refer to File Number SR-Phlx-2010-163. This file
number should be included on the subject line if e-mail 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
a.m. and 3 p.m. Copies of the 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-Phlx-2010-163 and should be
submitted on or before December 22, 2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-30225 Filed 11-30-10; 8:45 am]
BILLING CODE 8011-01-P