[Federal Register Volume 78, Number 101 (Friday, May 24, 2013)]
[Notices]
[Pages 31619-31621]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-12405]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69608; File No. SR-NYSEMKT-2013-12]


Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing of 
Amendment No. 1 and Order Granting Accelerated Approval of Proposed 
Rule Change, as Modified by Amendment No. 1, Amending Rule 975NY In 
Part and Adding a New Section To Address Errors That Involve Complex 
Orders

May 20, 2013.

I. Introduction

    On February 1, 2013, NYSE MKT LLC (``NYSE MKT'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend the Exchange's Obvious Error Rule in part 
and add a new section to address errors that involve Complex Orders. 
The proposed rule change was published for comment in the Federal 
Register on February 21, 2013.\3\ The Commission received no comment 
letters on the proposal. On April 23, 2013, the Exchange filed 
Amendment No. 1 to the proposed rule change.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 68926 (February 14, 
2013), 78 FR 12123 (``Notice'').
    \4\ In Amendment No. 1, the Exchange proposed to modify Rule 
975NY to provide that the proposed changes to Rule 975NY(b)(1) 
extending to thirty minutes the time for which a Customer must 
notify the Exchange that it participated in a transaction that may 
be subject to adjustment or nullification pursuant to provisions of 
the Obvious Error Rule shall not apply to Professional Customers, as 
defined by Rule 900.2NY(18A), and to add a corresponding internal 
reference to Rule 900.2NY(18A) that specifies that Professional 
Customers will be treated in the same manner as a Broker/Dealer (or 
non-Customer) for purposes of the Obvious Error Rule.
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    The Commission is publishing this notice to solicit comments on 
Amendment No. 1 from interested persons and is approving the proposed 
rule change, as modified by Amendment No. 1, on an accelerated basis.

II. Description of Proposal

    The Exchange proposes several changes to its Obvious Error Rule, 
Rule 975NY. 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.'' The Exchange believes that this change ensures consistency with 
other relevant parts of the rule.
    Second, the Exchange proposes to increase the amount of time in 
which Market Makers are required to notify the Exchange in order to 
have transactions reviewed under Rule 975NY. Under the proposal, the 
time would increase from five minutes to ten minutes. The Exchange 
represents that this additional time accommodates the potential need 
for Market Makers to potentially call multiple exchanges to have 
transactions reviewed.
    Third, the Exchange proposes to extend the time ATP Holders acting 
as agent for a Customer \5\ have to notify the Exchange of a potential 
error from twenty minutes to thirty minutes. Under the proposed rule, 
however, the time extension would not apply to ATP Holders acting as 
agent for Professional Customers.\6\ The Exchange states that because 
Customers are far removed from the execution of the trade, it believes 
that it is appropriate to give Customers more time for their requests 
for review to pass from their broker-dealer to the Exchange. In 
contrast, the Exchange notes that 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. The Exchange further explains that 
it is fairly common for broker-dealers that receive a Customer order to 
route that order to another broker-dealer that uses a router that 
evaluates best execution factors to determine where to ultimate route 
the order. In these situations, if a Customer chooses to request an 
Obvious Error review, Customers may need more than 20 minutes for their 
requests for review to reach the Exchange. The Exchange acknowledges 
that extending the notification period can increase the uncertainty of 
the standing of the trade, however, it believes that such uncertainty 
will be limited to trades that are so outside the bounds of normal 
trading that they might qualify for Obvious Error treatment.
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    \5\ Under NYSEMKT Rule 900.2NY(18) ``Customer'' means an 
individual or organization that is not a Broker/Dealer; when not 
capitalized, ``customer'' refers to any individual or organization 
whose order is being represented, including a Broker/Dealer.
    \6\ See Amendment No. 1, supra note 4. Under NYSEMKT Rule 
900.2NY(18A) ``Professional Customer'' means individual or 
organization that (i) is not a Broker/Dealer in securities, and (ii) 
places more than 390 orders in listed options per day on average 
during a calendar month for its own beneficial account(s).
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    Finally, the Exchange is proposing to add a new section to Rule 
975NY to

[[Page 31620]]

address Complex Orders in the Obvious Error context, as its current 
rule is silent on how such Complex Orders are handled. According to the 
Exchange, Complex Orders are often used by market participants to enter 
positions known as spreads that entail limited risk relative to an 
outright naked sale of a put or call. The Exchange believes that the 
best approach for dealing with Complex Orders in the Obvious Error 
context is to preserve the spread whenever possible to mitigate the 
risk of such trades. Therefore, in the situation where a Complex Order 
trades with another Complex Order in the Complex Order Book, and one of 
the legs qualifies for Obvious Error treatment under Rule 975NY, then 
all legs of the Complex Order will be busted unless both parties 
mutually agree to an adjustment price.
    The Exchange also believes that it is appropriate not to permit 
Obvious Error treatment in situations where the only error in the trade 
occurred in a no-bid series. Therefore, in situations where 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, the trade 
will stand as executed, unless both parties to the trade mutually agree 
otherwise. The Exchange believes that this provision will prevent 
manipulation and a potential increase in nullified trades, particularly 
because it prevents parties from being able to enter a spread price 
slightly away from the market, thus increasing the chance that one of 
the legs will qualify for no-bid treatment, and providing the party 
entering the order with a window of time to evaluate the market and 
decide if it would be to its benefit to nullify the trade.
    Finally, the Exchange is codifying its current practice for 
handling situations in which a Complex Order trades with individual 
orders or quotes in the Consolidated Book. Pursuant to the proposed 
rule, each executed leg will be reviewed separately under Rule 975NY. 
The Exchange notes that while it prefers to avoid the partial execution 
of a Complex Order, pursuant to this provision, it is possible that 
after a Complex Order trade, only one leg qualifies for Obvious Error 
treatment, resulting in the residual position of a single leg. The 
Exchange explains that is will 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.

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act\7\ 
and the rules and regulations thereunder applicable to a national 
securities exchange.\8\ In particular, the Commission finds that the 
proposed rule change, as amended, is consistent with Section 6(b)(5) of 
the Act,\9\ which requires, among other things, that the Exchange's 
rules be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities, 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.
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    \7\ 15 U.S.C. 78f.
    \8\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \9\ 15 U.S.C. 78f(b)(5).
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    The Exchange is replacing reference to ``series quoted no bid on 
the Exchange'' with ``series where the NBBO bid is zero'' because it 
believes that the NBBO provides greater accuracy in determining the 
value of an option because it takes into account interest from 
participants across all markets, not just those active on the Exchange. 
The Exchange also believes that this change will promote just and 
equitable principles of trade by adding more certainty and consistency 
to the Exchange's Obvious Error rule. This consistency, according to 
the Exchange, is important to help avoid investor confusion.
    The Exchange believes that the change to increase the time limit 
for Market Makers to request review of transactions protects investors 
and the public interest because it will ensure they are comfortable 
meeting the deadline, thereby allowing Market Makers to continue to 
aggressively provide liquidity in a transparent and nondiscriminatory 
manner to all participants. Further, the Exchange notes that increasing 
the time limit for ATP Holders acting as agent for Customers (but not 
acting as agent for Professional Customers) to request review of 
transactions should give those Customers that are not Professional 
Customers sufficient time to request a review for trades, which is also 
consistent with investor protection and furthering the public interest 
as it allows those market participants furthest removed from the 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 under the Obvious Error rule are 
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. The Exchange notes that 
detailing the treatment of Complex Orders involved in Obvious Errors 
provides investors with greater certainty. The Exchange also believes 
that the best approach for dealing with Complex Orders in the context 
of the Obvious Error rule is to preserve the spread whenever possible. 
Second, the Exchange believes that preventing market participants 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. Finally, the 
Exchange believes that the proposed rule change provides objective 
guidelines for the determination of whether an obvious price error has 
occurred, as it notes that the determination of whether an ``Obvious 
Error'' has occurred should be based on specific and objective criteria 
and subjective to specific and objective procedures.
    The Commission notes that, in approving past proposals relating to 
Obvious Errors, it has emphasized the importance of specific and 
objective criteria to determine how and when to nullify or adjust 
trades involving Obvious Errors.\10\ The Commission believes the 
changes that comprise this current proposal further this objective. For 
the reasons noted above, the Commission finds that the proposed rule 
change is consistent with Section 6(b)(5) of the Act,\11\ which 
requires, among other things, that the Exchange's rules be designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in

[[Page 31621]]

general, to protect investors and the public interest.
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    \10\ See, e.g., Securities Exchange Release Nos. 54228 (July 27, 
2006), 71 FR 44066 (August 3, 2006) (SR-CBOE-2006-14) and 58778 
(October 14, 2008), 73 FR 62577 (October 21, 2008) (SR-CBOE-2008-90) 
(both approving revisions to CBOE's Obvious Error Rules).
    \11\ 15 U.S.C. 78f(b)(5).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment No. 1 
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 June 14, 2013.

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1

    As discussed above, Amendment No. 1 revised the proposed rule 
change with respect to what types of entities would benefit from the 
proposed time extension for ATP Holders acting as agent for Customers 
to notify the Exchange of a potential error. The proposed rule change 
increases such time from twenty minutes to thirty minutes. In Amendment 
No. 1, the Exchange specifies that the extension would not apply to 
Professional Customers. The Commission believes that the amendment 
addresses potential concerns about whether the Exchange's justification 
for this proposed change applies to Professional Customers. The 
Exchange states that because Customers, a broadly defined term in the 
Exchange's rules that includes Professional Customers, are typically 
further removed from the trade execution and slower to receive 
information about the status of their orders and executions, it is 
appropriate to afford them more time to notify the Exchange of a 
potential error. Professional Customers, however, are frequent traders 
that are potentially more likely to closely follow their trade 
execution than other types of Customers according to the Exchange. The 
Exchange explained that Professional Customers tend to route their own 
order flow directly to the Exchange and are not as far removed from the 
actual execution. By revising the proposed rule change to specify that 
the time extension would not apply to Professional Customers, the 
Commission believes the Exchange has adequately addressed this 
potential inconsistency between the proposed change and its 
justification. Accordingly, the Commission also finds good cause, 
pursuant to Section 19(b)(2) of the Act,\12\ for approving the proposed 
rule change, as modified by Amendment No. 1, prior to the 30th day 
after the date of publication of notice in the Federal Register.
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    \12\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-NYSEMKT-2013-12), as 
modified by Amendment No. 1, is hereby approved on an accelerated 
basis.
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    \13\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
Kevin M. O'Neill,
Deputy Secretary.
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    \14\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2013-12405 Filed 5-23-13; 8:45 am]
BILLING CODE 8011-01-P