[Federal Register Volume 79, Number 68 (Wednesday, April 9, 2014)]
[Notices]
[Pages 19692-19695]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-07952]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71870; File No. SR-NYSEMKT-2014-31]


Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and 
Immediate Effectiveness of Proposed Rule Change Extending the Pilot 
Period Applicable to Rule 953.1NY(c), Which Addresses How the Exchange 
Treats Obvious and Catastrophic Errors During Periods of Extreme Market 
Volatility, Until February 20, 2015

April 4, 2014.
    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 April 1, 2014 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 and II 
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 extend the pilot period applicable to Rule 
953.1NY(c), which addresses how the Exchange treats Obvious and 
Catastrophic Errors during periods of extreme market volatility, until 
February 20, 2015. The pilot period for subsection (c) is currently set 
to expire on April 8, 2014. 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to extend the pilot period applicable to Rule 
953.1NY(c), which addresses how the Exchange treats Obvious and 
Catastrophic Errors during periods of extreme market volatility, until 
February 20, 2015. The pilot period for subsection (c) is currently set 
to expire on April 8, 2014.
Background
    Rule 953.1NY (described below) was adopted in connection with the 
Plan to Address Extraordinary Market Volatility Pursuant to Rule 608 of 
Regulation NMS, as it may be amended from time to time (the 
``Plan'').\4\ The Plan was developed in response to events that 
occurred on May 6, 2010.\5\ On May 6, 2010, the U.S. equity markets 
experienced excessive volatility in an abbreviated time period 
resulting in, among other things, the prices of a large number of 
individual securities declining by significant amounts in a very short 
time period before abruptly returning to prices consistent with their 
pre-decline levels.\6\ This extreme volatility resulted in a large 
number of trades being executed at temporarily depressed prices, 
including many that were more than 60% away from the pre-decline 
prices. As part of the effort to

[[Page 19693]]

address the events of May 6, 2010 and to restore investor confidence in 
the markets, the equity exchanges filed the Plan.
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    \4\ See Securities and Exchange Act Release No. 69339 (April 8, 
2013), 78 FR 22011 (April 12, 2013) (SR-NYSEMKT-2013-10) (``Approval 
Order'').
    \5\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631) (Order Approving, 
on a Pilot Basis, the Plan).
    \6\ See Approval Order, 78 FR, at 22011, n.7 (citing Report of 
the Staffs of the CFTC and SEC to the Joint Advisory Committee on 
Emerging Regulatory Issues, ``Findings Regarding the Market Events 
of May 6, 2010,'' dated September 30, 2010, available at, http://www.sec.gov/news/studies/2010/marketevents-report.pdf).
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    The Plan is designed to prevent trades in individual NMS Stocks 
from occurring outside of specified Price Bands, which are described in 
more detail in the Plan.\7\ In sum, the Price Bands consist of a Lower 
Price Band and an Upper Price Band for each NMS Stock and are 
calculated by the Processors.\8\ When the National Best Bid (Offer) is 
below (above) the Lower (Upper) Price Band, the Processors shall 
disseminate such National Best Bid (Offer) with an appropriate flag 
identifying it as unexecutable. When the National Best Bid (Offer) is 
equal to the Upper (Lower) Price Band, the Processors shall distribute 
such National Best Bid (Offer) with an appropriate flag identifying it 
as a Limit State Quotation.\9\
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    \7\ Unless otherwise specified, capitalized terms used in this 
rule filing are based on the defined terms of the Plan.
    \8\ See Section V(A) of the Plan.
    \9\ See Section VI(A) of the Plan.
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    Trading in an NMS Stock immediately enters a Limit State if the 
National Best Offer (Bid) equals but does not cross the Lower (Upper) 
Price Band.\10\ Trading for an NMS Stock exits a Limit State if, within 
15 seconds of entering the Limit State, all Limit State Quotations were 
executed or canceled in their entirety. If the market does not exit a 
Limit State within 15 seconds, then the Primary Listing Exchange would 
declare a five-minute trading pause pursuant to Section VII of the LULD 
Plan, which would be applicable to all markets trading the security. In 
addition, the Plan defines a Straddle State as when the National Best 
Bid (Offer) is below (above) the Lower (Upper) Price Band and the NMS 
Stock is not in a Limit State.\11\ If an NMS Stock is in a Straddle 
State and trading in that stock deviates from normal trading 
characteristics, the Primary Listing Exchange may declare a trading 
pause for that NMS Stock if such Trading Pause would support the Plan's 
goal to address extraordinary market volatility.
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    \10\ See Section VI(B)(1) of the Plan.
    \11\ See Section VII(A)(2) of the Plan.
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    The Plan was initially approved for a one-year pilot, which began 
on April 8, 2013, and would, if not amended, end on April 8, 2014.\12\ 
As initially contemplated, the Plan would have been fully implemented 
across all NMS Stocks within six months of initial Plan operations, 
which meant there would have been full implementation of the Plan for 
six months before the end of the pilot period.\13\ The Plan, however, 
was amended several times since inception and, ultimately, was not 
implemented across all NMS Stocks until February 24, 2014.\14\ As a 
result, if the pilot period were to end in April 2014, there would be 
less than two months of full operation of the Plan. Because the goal of 
the pilot was to provide an opportunity to assess whether the Plan 
should be modified prior to approval on a permanent basis, the 
Participants recently filed the Seventh Amendment to the Plan to extend 
the pilot period of the Plan until February 20, 2015 (the ``Seventh 
Amendment'').\15\
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    \12\ See supra n.5. See also Section VIII of the Plan.
    \13\ See Securities and Exchange Act Release No. 71649 (March 8, 
2014), 79 FR 13696 (March 11, 2014) (File No. 4-631) (notice) (the 
``Seventh Amendment'').
    \14\ Id.
    \15\ Id. The Seventh Amendment to the Plan also seeks to move 
the time by which Participants would be required to submit 
assessments of Plan operations, pursuant to Appendix B of the Plan, 
until September 30, 2014.
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Rule 953.1NY
    Coincident with the Plan, the Exchange adopted Rule 953.1NY, which 
provided for how the Exchange would treat orders, market-making quoting 
obligations, and errors in options overlying NMS Stocks when the Plan 
is in effect.\16\ Subsections (a) to (b) Rule 953.1NY, which address 
the treatment of orders when the underlying NMS Stock is in a Limit 
State or Straddle State, and Market Maker quoting obligations, 
respectively, ``shall be in effect during a pilot period to coincide 
with the pilot period for the Plan.'' \17\ These provisions need not be 
amended and will align with the Plan upon approval of the Seventh 
Amendment to the Plan.
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    \16\ See Approval Order.
    \17\ Subsection (a) to Rule 953.1NY provides that if the 
underlying NMS Stock is in a Limit State or Straddle State, the 
Exchange shall reject all incoming Market Orders and will not elect 
Stop Orders. Subsection (b) to Rule 953.1NY provides that when 
evaluating whether a Specialist has met its market-making quoting 
requirement pursuant to Rule 925.1NY(b) or a Market Maker has met 
its market-making quoting requirement pursuant to Rule 925.1NY(c) in 
options overlying NMS Stocks, the Exchange shall consider as a 
mitigating circumstance the frequency and duration of occurrences 
when an underlying NMS Stock is in a Limit State or a Straddle 
State.
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    Subsection (c) to Rule 953.1NY, which addresses how the Exchange 
treats Obvious and Catastrophic Errors during periods of extreme market 
volatility, ``shall be in effect for a one-year pilot period,'' which 
began on April 8, 2013.\18\ The pilot period will expire on April 8, 
2014. In order to align the pilot period for Rule 953.1NY(c) with the 
proposed Seventh Amendment to the Plan, the Exchange proposes to extend 
the pilot period for subsection (c) to Rule 953.1NY until February 20, 
2015. The Exchange believes that extending the pilot period for Rule 
953.1NY(c) would allow the Exchange additional time to collect and 
evaluate data related to this provision now that the Plan has been 
fully implemented.
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    \18\ Subsection (c) to Rule 953.1NY provides that electronic 
transactions in options that overlay an NMS Stock that occur during 
a Limit State or a Straddle State are not subject to review under 
Rule 975MY(a) for Obvious Errors or Rule 975NY(d) for Catastrophic 
Errors. Nothing in Rule 953.1NY(c) prevents electronic transactions 
in options that overlay an NMS Stock that occur during a Limit State 
or a Straddle State from being reviewed on Exchange motion pursuant 
to 975NY(b)(3).
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    When the Exchange initially adopted subsection (c), the Exchange 
committed to review the operation of this provision and to analyze the 
impact of Limit and Straddle States accordingly.\19\ In addition, at 
least two months prior to the end of the pilot--i.e., prior to February 
2014--the Exchange agreed to provide the Commission with certain data 
requested to evaluate the impact of the elimination of the Obvious 
Error rule under these circumstances.\20\ As noted above, however, the 
Plan was not fully implemented until February 24, 2014.
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    \19\ Specifically, the Exchange committed to: ``(1) Evaluate the 
options market quality during Limit States and Straddle States; (2) 
assess the character of incoming order flow and transactions during 
Limit States and Straddle States; and (3) review any complaints from 
members and their customers concerning executions during Limit 
States and Straddle States.'' See Approval Order, 78 FR at 22015.
    \20\ See Letter to Elizabeth M. Murphy, Secretary, Commission, 
from Janet L. McGinness, Executive Vice President and Corporate 
Secretary, General Counsel, NYSE Markets, dated April 5, 2013 
(``Comment Letter'').
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    Thus, in connection with the proposed amendment, the Exchange 
proposes to revise the data that the Exchange will gather in order to 
address the Commission's concern about whether market quality and 
liquidity for options is maintained despite these changes to the 
Obvious Error rules. In addition, the Exchange proposes to revise the 
date by which certain assessments will be provided to the Commission.
    First, in lieu of the dataset described in the Exchange's Comment 
Letter,\21\ the Exchange shall provide to the Commission and the public 
a revised dataset containing the data for each Straddle State and Limit 
State in NMS Stocks underlying options traded on the Exchange beginning 
in April 2013, limited to those option classes that have at least one 
(1) trade on the Exchange during a Straddle State or Limit State.

[[Page 19694]]

For each of those option classes affected, each data record will 
contain the following information:
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    \21\ Id.

 Stock symbol, option symbol, time at the start of the Straddle 
or Limit State, an indicator for whether it is a Straddle or Limit 
State.
 For activity on the Exchange:
 Executed volume, time-weighted quoted bid-ask spread, time-
weighted average quoted depth at the bid, time-weighted average quoted 
depth at the offer;
 high execution price, low execution price;
 number of trades for which a request for review for error was 
received during Straddle and Limit States;
 an indicator variable for whether those options outlined above 
have a price change exceeding 30% during the underlying stock's Limit 
or Straddle state compared to the last available option price as 
reported by OPRA before the start of the Limit or Straddle State (1 if 
observe 30% and 0 otherwise). Another indicator variable for whether 
the option price within five minutes of the underlying stock leaving 
the Limit or Straddle state (or halt if applicable) is 30% away from 
the price before the start of the Limit or Straddle state.

    The Exchange notes that it will update the data available on the 
Exchange's Web site for the period April 2013 through January 2014 with 
the revised dataset once the Exchange has completed its analysis and 
review of such data. Prospectively, the data made available to the 
public will be based on the proposed revised dataset described above.
    In addition, by September 30, 2014, the Exchange shall provide to 
the Commission assessments relating to the impact of the operation of 
the Obvious Error rules during Limit and Straddle States as follows: 
(1) Evaluate the statistical and economic impact of Limit and Straddle 
States on liquidity and market quality in the options markets; and (2) 
Assess whether the lack of Obvious Error rules in effect during the 
Straddle and Limit States are problematic. The timing of this 
submission would coordinate with Participants' proposed time frame to 
submit to the Commission assessments as required under Appendix B of 
the Plan, per the Seventh Amendment to the Plan.\22\
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    \22\ See supra n. 15.
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 2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act \23\ in general, and furthers the objectives of 
Section 6(b)(5),\24\ in particular, in that it is designed to promote 
just and equitable principles of trade, remove impediments to and 
perfect the mechanisms 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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    \23\ 15 U.S.C. 78f(b).
    \24\ 15 U.S.C. 78f(b)(5).
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    Specifically, the proposal to extend the pilot program of Rule 
953.1NY(c) until February 20, 2015, which will align that pilot program 
with the Pilot Period for the Plan, as proposed in the Seventh 
Amendment to the Plan, will ensure that trading in options that overlay 
NMS Stocks continues to be appropriately modified to reflect market 
conditions that occur during a Limit State or a Straddle State in a 
manner that promotes just and equitable principles of trade and removes 
impediments to, and perfects the mechanism of, a free and open market 
and a national market system. The Exchange believes that the extension 
of Rule 953.1NY(c) will help encourage market participants to continue 
to provide liquidity during extraordinary market volatility.
    Moreover, the Exchange believes that revising the dataset that it 
provides to the Commission and the public would remove impediments to, 
and perfect the mechanisms of, a free and open market because the 
revised dataset will provide more information from which to assess the 
impact of Rule 953.1NY(c). In addition, the Exchange believes that 
extending the time for the Exchange to provide its overall assessment 
of the Rule 953.1NY(c) pilot to September 30, 2014 is appropriate and 
in the public interest, for the protection of investors, and the 
maintenance of a fair and orderly market because it will align the 
timing of such assessments with the time that the Participants have 
proposed to provide the Commission with assessments pursuant to 
Appendix B of the Plan.

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 that is not necessary or appropriate 
in furtherance of the purposes of the Act. The proposed changes will 
not impose any burden on competition and will instead provide certainty 
regarding the treatment and execution of options orders, specifically 
the treatment of Obvious and Catastrophic Errors during periods of 
extraordinary volatility in the underlying NMS Stock, and will 
facilitate appropriate liquidity during a Limit State or Straddle 
State.

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

    Because the 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 if consistent with the protection of investors 
and the public interest, the proposed rule change has become effective 
pursuant to Section 19(b)(3)(A) of the Act \25\ and Rule 19b-
4(f)(6)(iii) thereunder.\26\
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    \25\ 15 U.S.C. 78s(b)(3)(A).
    \26\ 17 CFR 240.19b-4(f)(6)(iii). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and the text of 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.
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    The Exchange has asked the Commission to waive the 30-day operative 
delay so that the proposal may become operative immediately upon 
filing. The Exchange stated that waiver of this requirement will allow 
the Exchange to extend the pilot program prior to its expiration on 
April 8, 2014. The Exchange also stated that waiver of this requirement 
would ensure the pilot program would align with the pilot period for 
the Plan and would ensure that trading in options that overlay NMS 
Stocks continues to be appropriately modified to reflect market 
conditions that occur during a Limit State or a Straddle State. For 
these reasons, the Commission believes that the proposed rule change 
presents no novel issues and that waiver of the 30-day operative delay 
is consistent with the protection of investors and the public interest. 
Therefore, the Commission designates the proposed rule change to be 
operative upon filing.\27\
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    \27\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the

[[Page 19695]]

Commission summarily may temporarily suspend 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. If the Commission takes such 
action, the Commission shall institute proceedings to determine whether 
the proposed rule should be approved or 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-2014-31 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEMKT-2014-31. 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 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-NYSEMKT-2014-31 and should 
be submitted on or before April 30, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-07952 Filed 4-8-14; 8:45 am]
BILLING CODE 8011-01-P