[Federal Register Volume 74, Number 194 (Thursday, October 8, 2009)]
[Notices]
[Pages 51914-51917]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-24248]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60760; File No. SR-CBOE-2009-071]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Regarding the CBSX Obvious Error Rule

October 1, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'')\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on September 25, 2009, the Chicago Board Options Exchange, Incorporated 
(``Exchange'' or ``CBOE'') 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. 
CBOE has designated the proposed rule change as constituting a rule 
change under Rule 19b-4(f)(6) under the Act,\3\ which renders the 
proposal effective upon filing with the Commission. 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.
    \3\ 17 CFR 240.19b-4(f)(6).
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 I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to modify the CBOE Stock Exchange (``CBSX'') 
obvious error rule. The text of the proposed rule change is available 
on the Exchange's Web site (http://www.cboe.org/Legal), at the 
Exchange's Office of the Secretary and at the Commission.

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

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of and basis for the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

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

 1. Purpose
    The Exchange proposes to amend Rule 52.4 in order to improve the 
CBSX rule regarding clearly erroneous executions. The proposed changes 
are part of a market-wide effort designed to provide transparency and 
finality with respect to clearly erroneous executions. This effort 
seeks to achieve consistent results for participants across U.S. 
equities exchanges while maintaining a fair and orderly market, 
protecting investors and protecting the public interest. The proposed 
changes are more fully discussed below.
    As proposed, the term ``clearly erroneous'' would be defined as 
when there is an obvious error in any term, such as price, number of 
shares or other unit of trading, or identification of the security. 
Further, a transaction made in clearly erroneous error and cancelled by 
both parties or determined by CBSX to be clearly erroneous will be 
removed from the Consolidated Tape. A trade will only be removed from 
the Consolidated Tape when the determination is deemed final and any 
applicable appeals have been exhausted.
    Under the proposed rule, a CBSX Trader \4\ that receives an 
execution on an order that was submitted erroneously to CBSX for its 
own or customer account may request that CBSX review the transaction. 
One or more senior level officials of CBSX designated by the President 
(``Official'') shall review the transaction under dispute and determine 
whether it is clearly erroneous, with a view toward maintaining a fair 
and orderly market and the protection of investors and the public 
interest. Such request for review shall be made in writing via e-mail 
or other electronic means specified from time to time by CBSX in a 
circular distributed to CBSX Traders. Requests for review must be 
received within thirty (30) minutes of execution time and shall include 
information concerning the time of the transaction(s), security 
symbol(s), number of shares, price(s), side (bought or sold), and 
factual basis for believing that the trade is clearly erroneous. Upon 
receipt of a timely filed request that satisfies the numerical 
guidelines set forth in paragraph (c)(1) of the Rule, the counterparty 
to the trade shall be notified by CBSX as soon as practicable,

[[Page 51915]]

but generally within 30 minutes. An Official may request additional 
supporting written information to aid in the resolution of the matter. 
If requested, each party to the transaction shall provide, within 
thirty (30) minutes of the request, any supporting written information. 
Either party to the disputed trade may request the supporting written 
information provided by the other party on the matter.
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    \4\ A CBSX Trader is defined as an individual who or 
organization which has the right to trade on CBSX (See Rule 50.1).
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    A transaction executed on CBSX may be found to be clearly erroneous 
only if the price of the transaction to buy (sell) that is the subject 
of the complaint is greater than (less than) the Reference Price by an 
amount that equals or exceeds the Numerical Guidelines set forth in the 
Rule (see chart below). The execution time of the transaction under 
review determines whether the guideline threshold is regular trading 
hours or between 8:15 a.m. CT to 8:30 a.m. CT (which occurs before 
regular trading hours).

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                                              Regular trading hours numerical     8:15 a.m. CT to 8:30 a.m. CT
                                             guidelines (subject transaction's    numerical guidelines (subject
  Reference price: Consolidated Last Sale           % difference from the        transaction's % difference from
                                                  consolidated  last sale)         the consolidated last sale)
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Greater than $0.00 and up to and including   10%..............................  20%.
 $25.00.
Greater than $25.00 and up to and including  5%...............................  10%.
 $50.00.
Greater than $50.00........................  3%...............................  6%.
Multi-Stock Event-Filings involving five or  10%..............................  10%.
 more securities by the same CBSX Trader
 will be aggregated into a single filing.
Leveraged ETF/ETN securities...............  Regular Trading Hours Numerical    Regular Trading Hours Numerical
                                              Guidelines multiplied by the       Guidelines multiplied by the
                                              leverage multiplier (i.e. 2x).     leverage multiplier (i.e. 2x)
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    Establishing Numerical Guidelines within the rule brings regulatory 
transparency and consistency in the application of the rules of the 
Exchange. The Numerical Guidelines represent the general consensus 
approach and were developed based on the collective experiences of a 
market-wide group. CBSX believes that the thresholds established are 
fair and appropriate and apply evenly to all participants.
    In Unusual Circumstances, which may include periods of extreme 
market volatility, sustained illiquidity, or widespread system issues, 
CBSX may, in its discretion and with a view toward maintaining a fair 
and orderly market and the protection of investors and the public 
interest, use a Reference Price other than the consolidated last sale. 
Other Reference Prices may include the consolidated inside price, the 
consolidated opening price, the consolidated prior close, or the 
consolidated last sale prior to a series of executions. It may also be 
necessary to use a higher Numerical Guideline if, after market 
participants have been alerted to the existence of erroneous activity, 
the price of the security returns toward its prior trading range but 
continues to trade beyond the price at which trades would normally be 
broken. CBSX also may use a different Reference Price and/or higher 
Numerical Guideline in events that involve other markets in an effort 
to coordinate a Reference Price and/or Numerical Guideline that is 
consistent across markets. In order to achieve consistent results 
across markets, when a ruling is made in conjunction with another 
market center it may be determined that the number of affected 
transactions is such that immediate finality is necessary to maintain a 
fair and orderly market and to protect investors and the public 
interest.
    In events that involve other markets, CBSX would have the ability 
to use a different reference price and/or numerical guidelines. In 
these instances, the reference price would be determined based on a 
consensus among the Exchanges where the transactions occurred. 
Furthermore, when a ruling is made across markets, CBSX may determine 
that the ruling is not eligible for appeal because immediate finality 
is necessary to maintain a fair and orderly market and to protect 
investors and the public interest.
    An Official may also consider additional factors to determine 
whether an execution is clearly erroneous, including but not limited 
to, system malfunctions or disruptions, volume and volatility for the 
security, derivative securities products that correspond to greater 
than 100% in the direction of a tracking index, news released for the 
security, whether trading in the security was recently halted/resumed, 
whether the security is an IPO, whether the security was subject to a 
stock-split, reorganization, or other corporate action, overall market 
conditions, validity of the consolidated tape's trades and quotes, 
consideration of primary market indications, and executions 
inconsistent with the trading pattern in the stock. Each additional 
factor shall be considered with a view toward maintaining a fair and 
orderly market and the protection of investors and the public interest.
    CBSX may expand the Numerical Guidelines applicable to transactions 
occurring between 8:30 a.m. CT and 9 a.m. CT based on the disseminated 
value of the S & P 500 Futures at 8:15 a.m. CT. When the S & P 500 
Futures are up or down from 3% to up to but not including 5% at 8:15 
a.m. the Numerical Guidelines are doubled for executions occurring 
between 8:30 a.m. and 9 a.m. Also, when the S & P 500 Futures are up or 
down 5% or greater at 8:15 a.m. the Numerical Guidelines are tripled 
for executions occurring between 8:30 a.m. and 9 a.m.
    In the case of an Outlier Transaction, an Official may at his or 
her sole discretion, and on a case-by-case basis, consider requests 
received after 30 minutes, but not longer than sixty minutes after the 
transaction in question, depending on the facts and circumstances 
surrounding such request. An ``Outlier Transaction'' is a transaction 
where: (i) The execution price of the security is greater than three 
times the current Numerical Guidelines set forth in paragraph (c)(1) of 
the Rule, or (ii) the execution price of the security in question is 
not within the Outlier Transaction parameters set forth in paragraph 
(d)(1)(A) of the Rule but breaches the 52-week high or 52-week low, 
CBSX may consider Additional Factors (as outlined in paragraph (c)(3) 
of the Rule), in determining if the transaction qualifies for further 
review or if the Corporation shall decline to act.
    Unless both parties to the disputed transaction agree to withdraw 
the initial request for review, the transaction under dispute shall be 
reviewed, and a determination shall be rendered by the Official. If the 
Official determines that

[[Page 51916]]

the transaction is not clearly erroneous, the Official shall decline to 
take any action in connection with the completed trade. In the event 
that the Official determines that the transaction in dispute is clearly 
erroneous, the Official shall declare the transaction null and void. A 
determination shall be made generally within 30 minutes of receipt of 
the complaint, but in no case later than the start of trading on the 
following trading day. The parties shall be promptly notified of the 
determination. Under the proposed rule, the Official will only have the 
authority to break the trades or rule to let the trades stand. This 
attempts to remove subjectivity that is necessitated by an adjustment.
    If a CBSX Trader affected by a determination made under this Rule 
so requests within the time permitted below, a Clearly Erroneous 
Execution Panel (``CEE Panel'') will review decisions made by the 
Official; provided however that the CEE Panel will not review decisions 
made by an official under paragraph (f) of the Rule (regarding system 
disruptions and malfunctions) if such Official also determines under 
paragraph (f) that the number of the affected transactions is such that 
immediate finality is necessary to maintain a fair and orderly market 
and to protect investors and the public interest.\5\
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    \5\ In the event of any disruption or a malfunction in the use 
or operation of any electronic communications and trading facilities 
of CBSX, or extraordinary market conditions or other circumstances 
in which the nullification of transactions may be necessary for the 
maintenance of a fair and orderly market or the protection of 
investors and the public interest exist, the Official, on his or her 
own motion, may review such transactions and declare such 
transactions arising out of the use or operation of such facilities 
during such period null and void. In such events, the Official will 
rely on the provisions of paragraph (c)(1)-(3) of the Rule, but in 
extraordinary circumstances may also use a lower Numerical Guideline 
if necessary to maintain a fair and orderly market, protect 
investors and the public interest. Absent extraordinary 
circumstances, any such action of the Official pursuant to paragraph 
(f) shall be taken within thirty (30) minutes of detection of the 
erroneous transaction. When extraordinary circumstances exist, any 
such action of the Official must be taken by no later than the start 
of trading on the day following the date of execution(s) under 
review. Each CBSX Trader involved in the transaction shall be 
notified as soon as practicable, and the CBSX Trader aggrieved by 
the action may appeal such action.
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    The CEE Panel will consist of the Exchange's Chief Regulatory 
Officer (``CRO''), or a designee of the CRO, and representatives from 
two (2) CBSX Traders. Further, CBSX shall designate at least ten (10) 
CBSX Trader representatives to be called upon to serve on the CEE Panel 
as needed. In no case shall a CEE Panel include a person affiliated 
with a party to the trade in question. To the extent reasonably 
possible, the Exchange shall call upon the designated representatives 
to participate on a CEE Panel on an equally frequent basis.
    A request for review on appeal must be made via e-mail within 
thirty (30) minutes after the party making the appeal is given 
notification of the initial determination being appealed. The CEE Panel 
shall review the facts and render a decision as soon as practicable, 
but generally on the same trading day as the execution(s) under review. 
On requests for appeal received between 2 CT and the close of trading, 
a decision will be rendered as soon as practicable, but in no case 
later than the trading day following the date of the execution under 
review. The CEE Panel may overturn or modify an action taken by the 
Official under the Rule. All determinations by the CEE Panel shall 
constitute final action by CBSX on the matter at issue.\6\
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    \6\ If the CEE Panel votes to uphold the decision made pursuant 
to paragraph (e)(1) of this Rule, CBSX will assess a $500.00 fee 
against the CBSX Trader(s) who initiated the request for appeal.
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    CBSX proposes to add a section to the Rule that will grant 
Officials the ability to act on their own motion to review potentially 
erroneous executions. The proposed rule would allow an Official to 
review executions and rely on the Numerical Guidelines, under any 
circumstance. In extraordinary circumstances an Official may apply a 
lower Numerical Guideline if it is determined that such action is 
necessary to maintain a fair and orderly market or protect investors 
and the public interest. In some instances the Exchange may detect a 
single execution that breaches the Numerical Guidelines but is not the 
subject of a ruling request. This provision gives the Exchange the 
ability to review such executions. Additionally, in practice, clearly 
erroneous executions commonly involve multiple parties and multiple 
executions. In such instances, all affected parties may not request a 
ruling. The Exchange proposes this provision to permit an Official to 
rule on a group of transactions related to the same occurrence or event 
as a whole, without a formal request for a ruling from every affected 
party.
    The proposed rule also modifies CBSX's policy on trade 
nullification and for UTP securities that are subject to initial public 
offerings. Under the proposed rule, Officials must either declare an 
opening transaction null and void or decline to take action, but can no 
longer be adjusted. Furthermore, the proposed rule requires that, in 
extraordinary circumstances, the reviewing Official must take action in 
a timely fashion.
    The proposed rule language is based on language adopted by NYSE 
Arca in SR-NYSEArca-2009-36.\7\ CBSX anticipates this new obvious error 
policy to become effective on October 5, 2009.
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    \7\ See Exchange Act Release No. 34-60706 (approving SR-
NYSEArca-2009-36).
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') \8\ and the rules and 
regulations thereunder and, in particular, the requirements of Section 
6(b) of the Act.\9\ Specifically, the Exchange believes the proposed 
rule change is consistent with the Section 6(b)(5) \10\ requirements 
that the rules of an exchange be designed to promote just and equitable 
principles of trade, to prevent fraudulent and manipulative acts, to 
remove impediments to and to perfect the mechanism for a free and open 
market and a national market system, and, in general, to promote the 
maintenance of fair and orderly markets, and to protect investors and 
the public interest. The proposed rule change provides transparency and 
finality for participants and creates consistent results across U.S. 
equities exchanges with respect to clearly erroneous executions.
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    \8\ 15 U.S.C. 78s(b)(1).
    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE 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

    The Exchange neither solicited nor received comments on the 
proposal.

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

[[Page 51917]]

19(b)(3)(A) of the Act \11\ and Rule 19b-4(f)(6) thereunder.\12\
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \13\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6) \14\ permits the Commission to 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange requests 
that the Commission waive the 30-day operative delay so that it may 
implement the new rule on October 5, 2009, the same date as the other 
equities exchanges. The Commission believes that waiving the 30-day 
operative delay is consistent with the protection of investors and the 
public interest because it will allow the Exchange to begin applying 
the new rule on the same date as the other equities exchanges.\15\ 
Application of the new rule on this date should help foster 
transparency and consistency among those exchanges that adopt clearly 
erroneous execution rules substantially similar to those previously 
approved by the Commission.\16\ For these reasons, the Commission 
designates that the proposed rule change become operative on October 5, 
2009.
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    \13\ 17 CFR 240.19b-4(f)(6).
    \14\ 17 CFR 240.19b-4(f)(6).
    \15\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposal's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \16\ See Securities Exchange Act Release No. 60706 (September 
22, 2009) 74 FR 49416 (September 28, 2009) (NYSEArca-2009-36).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

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 e-mail to [email protected]. Please include 
File Number SR-CBOE-2009-071 on the subject line.

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-CBOE-2009-071. 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 inspection and 
copying 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 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 publicly available. All 
submissions should refer to File Number SR-CBOE-2009-071 and should be 
submitted on or before October 29, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-24248 Filed 10-7-09; 8:45 am]
BILLING CODE 8011-01-P