[Federal Register Volume 75, Number 123 (Monday, June 28, 2010)]
[Notices]
[Pages 36739-36742]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-15591]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62337; File No. SR-CBOE-2010-056]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change Related to the 
CBSX Clearly Erroneous Policy

June 21, 2010.
    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 June 18, 2010, the Chicago Board Options Exchange, Incorporated 
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (the ``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 is proposing to amend CBOE Stock Exchange's (``CBSX'', 
the CBOE's stock trading facility) clearly erroneous policy . The text 
of the proposed rule change is available on the Exchange's Web site 
(http://www.cboe.org/Legal), at the Office of the Secretary, CBOE 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 is proposing modifications to its Rule 52.4, entitled 
``Clearly Erroneous Executions.'' First, the Exchange proposes 
replacing

[[Page 36740]]

existing paragraph (c)(2) of Rule 52.4, entitled ``Unusual 
Circumstances and Joint Market Rulings'' with a new paragraph, entitled 
``Multi-Stock Events Involving Twenty or More Securities.'' Second, the 
Exchange proposes replacing existing paragraph (c)(4) of Rule 52.4, 
entitled ``Numerical Guidelines Applicable to Volatile Market Opens'' 
with a new paragraph, entitled ``Individual Stock Trading Pauses.'' 
Third, the Exchange is proposing changes to existing paragraphs (f) and 
(g) of Rule 52.4 to eliminate the ability of the Exchange to deviate 
from the Numerical Guidelines contained in paragraph (c)(1) (other than 
under limited circumstances set forth in paragraph (f)) when deciding 
which transactions will be reviewed by the Exchange as potentially 
clearly erroneous. Finally, the Exchange proposes modifications to 
paragraphs (c)(1), (c)(3) and (e) of Rule 52.4 consistent with the 
proposed changes to paragraphs (c)(2) and (c)(4). As proposed, the 
provisions of paragraphs (c), (e)(2), (f), and (g) of Rule 52.4, as 
amended pursuant to this filing, would be in effect during a pilot 
period set to end on December 10, 2010. If the pilot is not either 
extended or approved permanent by December 10, 2010, the prior versions 
of paragraphs (c), (e)(2), (f), and (g) of Rule 52.4 would be in 
effect.
    The Exchange is proposing the rule changes described below in 
consultation with other markets and Commission staff to provide for 
uniform treatment: (i) Of clearly erroneous execution reviews in Multi-
Stock Events involving twenty or more securities; and (ii) in the event 
transactions occur that result in the issuance of an individual stock 
trading pause by the primary market and subsequent transactions that 
occur before the trading pause is in effect on the Exchange. The 
Exchange has also proposed additional changes to Rule 52.4 that reduce 
the ability of the Exchange to deviate from the objective standards set 
forth in the Rule. The proposed changes are described in further detail 
below.
    Revised Paragraph (c)(2) Related to Multi-Stock Events Involving 
Twenty or More Securities
    The Exchange proposes to eliminate the majority of existing 
paragraph (c)(2), which provides flexibility to the Exchange to use 
different Numerical Guidelines or Reference Prices in various ``Unusual 
Circumstances.'' The Exchange proposes to replace this paragraph with 
new language that would apply to Multi-Stock Events involving twenty or 
more securities whose executions occurred within a period of five 
minutes or less. The revised paragraph would retain language making 
clear that during Multi-Stock Events involving twenty or more 
securities the number of affected transactions may be such that 
immediate finality is necessary to maintain a fair and orderly market 
and to protect investors and the public interest. Accordingly, in such 
circumstances, decisions made by the Exchange in consultation with 
other markets could not be appealed. Further, as proposed, in 
connection with reviews of Multi-Stock Events involving twenty or more 
securities, the Exchange may use a Reference Price other than the 
consolidated last sale in its review of potentially clearly erroneous 
executions. With the exception of those securities under review that 
are subject to an individual stock trading pause as described in 
proposed paragraph (c)(4), and to ensure consistent application across 
market centers when proposed paragraph (c)(2) is invoked, the Exchange 
will promptly coordinate with the other market centers to determine the 
appropriate review period, which may be greater than the period of five 
minutes or less that triggered application of proposed paragraph 
(c)(2), as well as select one or more specific points in time prior to 
the transactions in question and use transaction prices at or 
immediately prior to the one or more specific points in time selected 
as the Reference Price. The Exchange will nullify as clearly erroneous 
all transactions that are at prices equal to or greater than 30% away 
from the Reference Price in each affected security during the review 
period selected by the Exchange and other markets consistent with the 
proposed paragraph (c)(2).
    Because the Exchange and other market centers are adopting a 
different threshold and standards to handle large-scale market events, 
which would include events occurring during times of high volatility at 
the beginning of regular trading hours, the Exchange proposes deletion 
of paragraph (c)(4) (``Numerical Guidelines Applicable to Volatile 
Market Opens'') of the existing rule. The Exchange believes that this 
provision is no longer necessary, and if maintained, could result in 
extremely high Numerical Guidelines (up to 90%) in certain 
circumstances.
    Revised Paragraph (c)(4) Related to Individual Stock Trading Pauses
    The primary listing markets for U.S. stocks recently amended their 
rules so that they may, from time to time, issue a trading pause for an 
individual security if the price of such security moves 10% or more 
from a sale in a preceding five-minute period. In this regard, the 
Exchange recently amended its rules to halt/pause trading in an 
individual stock when the primary listing market for such stock issues 
a trading pause in any Circuit Breaker Stocks, as defined in 
Interpretation and Policy .03 of Rule 6.3C.\3\ As described above, the 
Exchange is proposing to eliminate existing paragraph (c)(4) 
(``Numerical Guidelines Applicable to Volatile Market Opens''). The 
Exchange proposes adopting a rule, numbered as (c)(4) following such 
elimination, which will provide for uniform treatment of clearly 
erroneous execution reviews in the event transactions occur that result 
in the issuance of an individual stock trading pause by the primary 
listing market and subsequent transactions that occur before the 
trading pause is in effect on the Exchange. The proposed rule change is 
necessary to provide greater certainty of the clearly erroneous 
Reference Price for transactions that trigger a trading pause (the 
``Trigger Trade'') and subsequent transactions occurring between the 
time of the Trigger Trade and the time the trading pause message is 
received by the Exchange from the single plan processor responsible for 
consolidation and dissemination of information for the security and put 
into effect on the Exchange, especially under highly volatile and 
active market conditions.
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    \3\ See Rule 6.3C; see also Securities Exchange Act Release No. 
62252 (June 10, 2010), 75 FR 34186 (June 16, 2010) (SR-CBOE-2010-
047).
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    The Exchange proposes to revise paragraph (c)(4) of Rule 52.4 to 
allow the Exchange to use the price that triggered a trading pause in 
an individual stock (the ``Trading Pause Trigger Price'') as the 
Reference Price for clearly erroneous execution reviews of a Trigger 
Trade and transactions that occur immediately after a Trigger Trade but 
before a trading pause is in effect on the Exchange. As proposed, the 
phrase ``Trading Pause Trigger Price'' shall mean the price that 
triggered a trading pause in any Circuit Breaker Stocks as defined in 
Interpretation and Policy .03 of Rule 6.3C. The Trading Pause Trigger 
Price reflects a price calculated by the primary listing market over a 
rolling five-minute period and may differ from the execution price of a 
transaction that triggered a trading pause. The Exchange will rely on 
the primary listing market that issued an individual stock trading 
pause to determine and communicate the Trading Pause Trigger Price for 
such stock. The Exchange proposes to make clear in the text that the 
proposed standards in paragraph (c)(4) apply regardless of whether the 
security at

[[Page 36741]]

issue is part of a Multi-Stock Event involving five or more securities 
as described in proposed paragraphs (c)(1) and (c)(2).
    As proposed, the Numerical Guidelines set forth in Rule 52.4(c)(1), 
other than those Numerical Guidelines applicable to Multi-Stock Events, 
would apply to reviews of Trigger Trades and subsequent transactions. 
The Exchange proposes to review, on its own motion pursuant to 
paragraph (g) of the Rule, all transactions that trigger a trading 
pause and subsequent transactions occurring before the trading pause is 
in effect on the Exchange. The Exchange has proposed to limit such 
reviews to reviews of transactions that executed at a price lower than 
the Trading Pause Trigger Price in the event of a price decline and 
higher than the Trading Pause Trigger Price in the event of a price 
rise. Because the proposed rules for trading pauses would only apply 
within Regular Trading Hours,\4\ an execution would be reviewed and 
nullified as clearly erroneous if it exceeds the following thresholds:
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    \4\ Regular Trading Hours are defined in Rule 51.2 as the time 
between 8:30 a.m. and 3 p.m. Central Time. According to the rules of 
the primary listing markets, an individual stock trading pause can 
be issued based on a Trigger Trade that occurs at any time between 
8:45 a.m. and 2:35 p.m. Central Time. See NASDAQ Rule 4120(a)(11), 
NYSE Rule 80C, and NYSE Arca Rule 7.11.

------------------------------------------------------------------------
                                          Numerical guidelines (subject
                                            transaction's % difference
       Reference price or product         from the trading pause trigger
                                                      price)
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Greater than $0.00 up to and including   10
 $25.00.
Greater than $25.00 up to and including  5
 $50.00.
Greater than $50.00....................  3
Leveraged ETF/ETN securities...........  Regular Trading Hours Numerical
                                          Guidelines multiplied by the
                                          leverage multiplier (i.e.,
                                          2x).
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    Revisions to Paragraphs (f) and (g)
    Consistent with other proposals made in this filing, the Exchange 
proposes modifying paragraphs (f) and (g) to eliminate the ability of 
an Exchange official to deviate from the Numerical Guidelines contained 
in the Rule other than under very limited circumstances set forth in 
paragraph (f).
    Current paragraph (f) provides that an Official \5\ of this 
Exchange has the ability, on his or her own motion, to review and rule 
on executions that result from ``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 * * * ''. Without 
modification, the language ``extraordinary market conditions or other 
circumstances * * * '' would leave the Exchange with broad discretion 
to deviate from the Numerical Guidelines set forth in paragraph (c)(1). 
Thus, the Exchange proposes narrowing the scope of paragraph (f) so 
that it only permits the Exchange to nullify transactions consistent 
with that paragraph (including at a lower Numerical Guideline) if there 
is a disruption or malfunction in the operation of the Exchange's 
system. For the same reason, the Exchange proposes eliminating the 
words ``use or'' from the language in paragraph (f) to make clear that 
the provision only applies to a disruption or malfunction of the 
Exchange's system (and not of an Exchange user's systems).
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    \5\ For purposes of Rule 52.4, an ``Official'' is defined as one 
or more senior level officials of CBSX designated by the President. 
See Rule 52.4(b).
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    Paragraph (g) gives an Official of the Exchange the ability, on his 
or her own motion, to review transactions as potentially clearly 
erroneous. Consistent with the goal of achieving more objective and 
standard results, the Exchange proposes deleting language in existing 
paragraph (g) that would allow the Exchange to deviate from the 
Numerical Guidelines contained in paragraph (c)(1). In addition, the 
Exchange proposes to make clear that any Official of the Exchange 
reviewing transactions on his or her own motion must follow the 
guidelines set forth in proposed paragraph (c)(4), if applicable. 
Accordingly, the Exchange proposes to modify paragraph (g) to state 
that an officer must rely on paragraphs (c)(1)-(4) of Rule 52.4 when 
reviewing transactions on his or her own motion.
    Additional Conforming Revisions to Paragraphs (c)(1), (c)(3) and 
(e)
    Based on proposed paragraph (c)(2), the Exchange has proposed 
certain conforming changes to paragraphs (c)(1), (c)(3) and (e) of the 
existing Rule, as described below.
    Under current Rule 52.4, a transaction 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 paragraph (c)(1) of the Rule. The ``Reference Price'' is 
currently defined as ``the consolidated last sale immediately prior to 
the execution(s) under review except for in Unusual Circumstances as 
described in paragraph (c)(2)'' of Rule 53.4. The Exchange proposes 
modifying paragraph (c)(1) consistent with the changes described above 
such that the Exchange shall use the consolidated last sale immediately 
prior to the execution(s) under review as the Reference Price except 
for: (i) Multi-Stock Events involving twenty or more securities, as 
described in proposed paragraph (c)(2); (ii) transactions not involving 
a Multi-Stock Event as described in proposed paragraph (c)(2) that 
trigger a trading pause and subsequent transactions, as described in 
proposed paragraph (c)(4), in which case the Reference Price shall be 
determined in accordance with that paragraph (c)(4); and (iii) in other 
circumstances, such as, for example, relevant news impacting a security 
or securities, periods of extreme market volatility, sustained 
illiquidity, or widespread system issues, where use of a different 
Reference Price is necessary for the maintenance of a fair and orderly 
market and the protection of investors and the public interest. The 
Exchange also proposes modifying paragraph (c)(1) to reduce uncertainty 
as to the applicability of the Numerical Guidelines, by requiring a 
finding that an execution was clearly erroneous if such execution 
exceeds the Numerical Guidelines, subject only to the Additional 
Factors included in paragraph (c)(3). Moreover, the Exchange proposes 
revising the existing description for Multi-Stock Events that is 
contained on the Numerical Guidelines chart to make clear that 
different Numerical Guidelines apply for Multi-Stock Events involving 
five or more, but less than twenty, securities whose executions 
occurred within a period of five minutes or less. In

[[Page 36742]]

addition, the Exchange proposes adding to the Numerical Guidelines 
chart a row that contains the Numerical Guidelines (30%) for Multi-
Stock Events involving twenty or more securities whose executions 
occurred within a period of five minutes or less.
    The Exchange proposes clarifying paragraph (c)(3) to make clear 
that the additional factors set forth in that paragraph are not 
intended to provide any discretion to an Exchange Official to deviate 
from the guidelines that apply to Multi-Stock Events or to transactions 
in securities subject to individual stock trading pauses. The Exchange 
also proposes to add Extended Trading Hours executions as an additional 
factor that may be considered to determine whether an execution is 
clearly erroneous under paragraph (c)(3).\6\
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    \6\ This change would conform the list of additional factors 
identified in paragraph (c)(3) of the Exchange's Rule 52.4 to the 
list of additional factors identified in other markets' clearly 
erroneous rules. See, e.g., BATS Rule 11.17(c)(3).
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    Finally, the Exchange proposes amending paragraph (e)(2), related 
to appeals of clearly erroneous execution decisions by the Exchange, to 
preserve non-appealability of all joint rulings between the Exchange 
and one or more other market centers. The Exchange believes that 
certainty and consistency is critical to reviews of related executions 
that span multiple market centers. Accordingly, although the Exchange 
has proposed deletion of such language from existing paragraph (c)(3), 
the Exchange proposes adding such language back in to paragraph (e)(2) 
to make clear that joint market rulings are not appealable.
2. Statutory Basis
    Approval of the rule change proposed in this submission 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.\7\ In particular, the proposed change is consistent with 
Section 6(b)(5) of the Act,\8\ 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. The proposed 
rule change is also designed to support the principles of Section 
11A(a)(1) \9\ of the Act in that it seeks to assure fair competition 
among brokers and dealers and among exchange markets. The Exchange 
believes that the proposed rule meets these requirements in that it 
promotes transparency and uniformity across markets concerning reviews 
of potentially clearly erroneous executions in various contexts, 
including reviews in the context of a Multi-Stock Event involving 
twenty or more securities and reviews resulting from a Trigger Trade 
and any executions occurring immediately after a Trigger Trade but 
before a trading pause is in effect on the Exchange. Further, the 
Exchange believes that the proposed changes enhance the objectivity of 
decisions made by the Exchange with respect to clearly erroneous 
executions.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
    \9\ 15 U.S.C. 78k-1(a)(1).
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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

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    Within 35 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 self-regulatory organization consents, the Commission will:
    (A) By order approve 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 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-2010-056 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-2010-056. 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 such filing also will be 
available for inspection and copying at the principal office of the 
CBOE. 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-2010-056 and should be submitted on or before July 19, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-15591 Filed 6-25-10; 8:45 am]
BILLING CODE 8010-01-P