[Federal Register Volume 78, Number 35 (Thursday, February 21, 2013)]
[Notices]
[Pages 12123-12125]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-03965]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68926; File No. SR-NYSEMKT-2013-12]


Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing of 
Proposed Rule Change Amending Rule 975NY in Part and Adding a New 
Section To Address Errors That Involve Complex Orders

February 14, 2013.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on February 1, 2013, NYSE MKT LLC (the ``Exchange'' or 
``NYSE MKT'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.


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    \1\ 15 U.S.C.78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 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 975NY in part and add a new 
section to address errors that involve Complex Orders. The text of the 
proposed rule change is available on the Exchange's Web site at 
www.nyse.com, at the principal office of the Exchange, and at the 
Commission's Public Reference Room.

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

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

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

1. Purpose
    The Exchange is proposing to amend certain existing provisions of 
Rule 975NY (``Obvious Error Rule'').\4\ In addition, the Exchange is 
proposing to add new language to Rule 975NY specific to how errors 
involving Complex Orders will be addressed.
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    \4\ See Exchange Rule 975NY.
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Proposed Amendments to Existing Provisions of Rule 975NY
    The Exchange adopted the Obvious Error Rule to handle situations 
where an order receives an erroneous execution, such as receiving a 
price that is higher or lower than the Theoretical Price by a specified 
amount.\5\ The Exchange is proposing several amendments to the Obvious 
Error Rule. First, the Exchange is proposing to change the portion of 
the rule that addresses errors in series with zero or no bid. 
Specifically, the Exchange proposes replacing reference to ``series 
quoted no bid on the Exchange'' with ``series where the NBBO bid is 
zero.'' This is being done to ensure consistency in the language with 
other aspects of the existing rule that reference NBBO for 
determination of whether a transaction is deemed eligible for obvious 
error treatment. The Exchange believes the NBBO provides greater 
accuracy in determining the value or valueless of an option because it 
takes into account interest from all market participants and not just 
those active on the Exchange. The Exchange also believes that ensuring 
consistency throughout the rule text is important to help avoid 
investor confusion.
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    \5\ See e.g. Securities Exchange Act Release Nos. 59472 
(February 27, 2008), 74 FR 9843 (March 6, 2009) (NYSEALTR-2008-14); 
59575 (March 13, 2009), 74 FR 11803 (March 19, 2009) (NYSEALTR-2009-
24); 59736 (April 8, 2009), 74 FR 17708 (April 16, 2009) (NYSEAmex-
2009-10); 61394 (January 21, 2010), 75 FR 4435 (January 27, 2010) 
(NYSEAmex-2010-02); 65505 (October 6, 2011), 76 FR 63966 (October 
14, 2011) (NYSEAmex-2011-76); and 67037 (May 21, 2012), 77 FR 31415 
(May 25, 2012) (NYSEAmex-2012-32).
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    Second, the Exchange proposes to amend the times in which certain 
ATP Holders are required to notify the Exchange in order to have 
transactions reviewed under Rule 975NY. Specifically the Exchange is 
proposing to extend the time Market Makers have to notify the Exchange 
of a potential error from five minutes to ten minutes. The Exchange 
believes that the change is appropriate given the increase in the 
number of options series, as well as the number of exchanges in 
operation today. Market Makers providing liquidity on multiple 
exchanges potentially need to call and speak with someone at each of 
the nine exchanges to have transactions reviewed. As such, the existing 
five minute time limit makes this impractical if not impossible and 
therefore it is appropriate to extend the time limit to ten minutes. 
The Exchange notes that at least one other exchange already provides 
Market Makers with more than five minutes to request a review under 
their obvious error rules.\6\
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    \6\ See CBOE Rule 6.25(b)(1).
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    In addition, the Exchange is proposing to extend the time ATP 
Holders acting as agent for Customer orders have to notify the Exchange 
of a potential error from twenty minutes to thirty minutes. The 
Exchange believes that extending the time limit for Customer orders is 
warranted due to the degree in which many Customers are

[[Page 12124]]

removed from the operation of the execution. For a Customer order, the 
brokerage firm with which the customer has an account may not actually 
be the routing or execution broker for the Customer's options trades. 
It is fairly common for brokerage firms to route their Customer order 
flow through a different Broker Dealer that employs a router that 
weighs various best execution factors in arriving at a routing 
decision. In such situations, Customers who receive a fill they want 
reviewed under the obvious error rule must first call their brokerage 
firm, who will in turn contact the broker-dealer that routed the order 
to the Exchange for execution. ATP Holders have indicated to the 
Exchange that Customers may need more than 20 minutes for their 
requests for review to reach the Exchange. Other market participants, 
such as Firms, non-member Market Makers, and Professional Customers 
tend to route their own order flow directly to the Exchange and are not 
as far removed from the actual execution. Hence the Exchange believes 
it is appropriate to extend the time to request a review for ATP 
Holders acting as agent for Customer orders given these facts.\7\
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    \7\ While the Exchange acknowledges that extending the time a 
party can notify the Exchange of a potential error can increase 
uncertainty regarding the standing of a trade, it believes that such 
uncertainty will be limited only to those trades that are so outside 
of normal trading that they might qualify for obvious error 
treatment.
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Proposed Amendments To Address Complex Orders
    The Exchange also proposes adding new language to address Complex 
Orders in the context of Rule 975NY. Presently, the Obvious Error Rule 
is silent on how Complex Orders are handled under the bust and adjust 
provisions of the rule. The Exchange wants to include language that 
will give participants some degree of certainty regarding what they 
should expect when legs of a Complex Order are eligible for obvious 
error treatment. There are several scenarios in which Complex Orders 
may be involved in a transaction that is reviewed under the Obvious 
Error Rule. Each of those scenarios and the proposed approach will be 
covered below:
    Scenario 1: A Complex Order trades with another Complex Order in 
the Complex Order Book. Under this scenario, should any leg(s) upon 
review qualify for obvious error treatment under the provisions of Rule 
975NY, then all legs of the Complex Order will be busted unless both 
parties mutually agree to an adjustment price.
    The Exchange believes that this approach is similar to rules of 
other markets \8\ and appropriate due to several aspects unique to 
Complex Orders. In particular, the Exchange notes that Complex Orders 
often are used by participants to enter positions known as spreads that 
entail limited risk relative to an outright naked sale of a put or 
call. For example, buying 1 XYZ Dec 55 call and selling 1 XYZ Dec 50 
call has risk limited to $5, less the premium received for the spread. 
If the leg of the Complex Order consisting of the long 1 XYZ Dec 55 
call was eligible to be busted, the ATP Holder would be left with a 
riskier, naked short position in the single remaining leg of the 
spread. Given this, the Exchange has decided that the best approach for 
dealing with Complex Orders in the context of the Obvious Error Rule 
will be to preserve the spread whenever possible. Therefore, when a 
trade eligible for obvious error treatment has occurred that involves a 
Complex Order trading with another Complex Order in the COB, the 
Exchange believes it is appropriate to bust all legs of the trade 
involved unless both parties to the trade mutually agree to an 
adjustment price.
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    \8\ See PHLX Rule 1092(c)(v).
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    Scenario 2: A Complex Order trades with another Complex Order in 
the Complex Order Book where one leg qualifies for the no-bid provision 
of Rule 975NY(a)(6). If the only leg(s) of the Complex Order that 
qualifies for obvious error treatment is pursuant to the no-bid 
provisions of Rule 975NY(a)(6), then no legs of the Complex Order will 
be busted (the trade stands as executed), unless both parties to the 
trade mutually agree otherwise.
    The Exchange believes that busting trades solely the result of a 
leg(s) of a Complex Order executing in a no-bid series could result in 
abuse. In particular, by entering a spread priced slightly away from 
the market, the entering party can increase the chance that one of the 
legs will qualify for no-bid treatment upon execution. In such a 
scenario, the entity entering the Complex Order would have a window of 
time (equal to the notification provisions of the rule) to evaluate the 
market before claiming relief under the Obvious Error Rule (which would 
result in the busting of all legs). In order to prevent manipulation 
and a potential increase in nullified trades, the Exchange believes it 
is appropriate to not permit obvious error treatment for those 
situations where the only error occurred in a no-bid series.
    Scenario 3: A Complex Order trades with individual orders or quotes 
in the Consolidated Book. In such situations, each executed leg will be 
reviewed separately under Rule 975NY. As a result, it is possible that 
after such a trade, only one leg of a Complex Order may meet the 
Obvious Error threshold (resulting in a residual position of a single 
leg). When a Complex Order receives executions in the Consolidated 
Order Book, it is likely to involve multiple ATP Holders. Although the 
Exchange prefers to avoid partial execution of a Complex Order, it does 
not seek to nullify a valid execution in the Consolidated Order Book of 
an ATP Holder who unknowingly interacted with a leg of a Complex Order. 
While this is not a change from how the Exchange currently handles all 
Complex Orders, language is being added to the Obvious Error Rule for 
purposes of clarification.
2. Statutory Basis
    The Exchange believes that this proposed rule change is consistent 
with Section 6(b) of the Securities Exchange Act of 1934 (``Act''),\9\ 
in general, and furthers the objectives of Section 6(b)(5) of the Act 
\10\ in particular, in that it is designed to prevent fraudulent and 
manipulative acts and practices, 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, to protect 
investors and the public interest.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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    In particular, the proposed rule change relating to the handling of 
transactions in series quoted no bid at the NBBO will promote just and 
equitable principles of trade by adding more certainty and consistency 
to the obvious error. The proposed rule change to increase the time 
limit for both Market Makers and ATP Holders acting as agent for 
Customers to request a review of a transaction under the provisions of 
Rule 975NY is designed to protect investors and the public interest. 
Granting Market Makers more time to request a review of a trade for 
obvious error treatment will ensure they are comfortable they can meet 
the deadline. This comfort level should allow Market Makers to continue 
to aggressively provide that liquidity in a transparent and non-
discriminatory manner to all participants which is in the public 
interest. Further, ensuring Customers sufficient time to request a 
review for trades is also consistent with investor protection and 
furthering the public interest as it allows those market participants 
furthest removed from the

[[Page 12125]]

point of execution time to evaluate each trade and have adequate time 
to notify the Exchange of a potential error.
    The Exchange believes that the proposed rule changes that address 
the handling of Complex Orders involved in obvious errors are also 
consistent with Section 6(b) of the Act, in general, and furthers the 
objectives of Section 6(b)(5), in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, and, in general, to protect 
investors and the public interest. Detailing how Complex Orders 
involved in obvious errors will be busted and/or adjusted is important 
since it grants investors greater certainty. Preventing a market 
participant from busting trades solely the result of a leg(s) of a 
Complex Order executing in a no-bid series furthers the protection of 
investors and the public interest by preventing potential abuse. In the 
Exchange's view, the determination of whether an ``obvious error'' has 
occurred should be based on specific and objective criteria and subject 
to specific and objective procedures. The Exchange believes that the 
proposed rule change provides such objective guidelines for the 
determination of whether an obvious price error has occurred.

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. To the contrary, the proposal 
further promotes competition on the Exchange which should lead to 
tighter, more efficient markets to the benefit of market participants 
including public investors that engage in trading and hedging on the 
Exchange, and thereby make the Exchange a desirable market vis a vis 
other options exchanges.

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 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 self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the 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 email to [email protected]. Please include 
File Number SR-NYSEMKT-2013-12 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-NYSEMKT-2013-12. 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 publicly available. All 
submissions should refer to File Number SR-NYSEMKT-2013-12 and should 
be submitted on or before March 14, 2013.
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    \11\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-03965 Filed 2-20-13; 8:45 am]
BILLING CODE 8011-01-P