[Federal Register Volume 79, Number 71 (Monday, April 14, 2014)]
[Notices]
[Pages 20946-20949]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-08285]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71902; File No. SR-NASDAQ-2014-033]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Extend the Pilot Program Regarding Options Obvious and Catastrophic 
Errors in Response to the Regulation NMS Plan To Address Extraordinary 
Market Volatility

April 8, 2014.
    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 April 7, 2014, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II, 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 submitting a proposal by the NASDAQ Options Market 
(``NOM'') to amend Chapter V, Regulation of Trading on NOM, to extend 
the pilot program under Section 3(d)(iv), which provides for how the

[[Page 20947]]

Exchange treats obvious and catastrophic options errors in response to 
the Plan to Address Extraordinary Market Volatility Pursuant to Rule 
608 of Regulation NMS under the Act (the ``Limit Up-Limit Down Plan'' 
or the ``Plan'').\3\ The Exchange proposes to extend the pilot period 
until February 20, 2015.
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    \3\ Securities Exchange Act Release Nos. 69142 (March 15, 2013), 
78 FR 17251 (March 20, 2013); and 69341 (April 8, 2013), 78 FR 21996 
(April 12, 2013) (SR-NASDAQ-2013-048).
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    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaq.cchwallstreet.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 Exchange 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 these 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 aspects of such 
statements.

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

1. Purpose
    In April 2013, the Commission approved a proposal, on a one year 
pilot basis, to adopt Chapter V, Section 3(d)(iv) to provide for how 
the Exchange will treat obvious and catastrophic options errors in 
response to the Plan, which is applicable to all NMS stocks, as defined 
in Regulation NMS Rule 600(b)(47).\4\ The Plan is designed to prevent 
trades in individual NMS stocks from occurring outside of specified 
Price Bands.\5\ The requirements of the Plan are coupled with Trading 
Pauses to accommodate more fundamental price moves (as opposed to 
erroneous trades or momentary gaps in liquidity).
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    \4\ The Plan was recently proposed to be extended until February 
20, 2015. See Securities Exchange Act Release No. 71649 (March 8, 
2014), 79 FR 13696 (March 11, 2014) (File No. 4-631). The Plan was 
initially approved for a one-year pilot, which began on April 8, 
2013 and the pilot period is currently scheduled to end on April 8, 
2014.
    \5\ Unless otherwise specified, capitalized terms used in this 
rule filing are based on the defined terms of the Plan.
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    The Exchange proposes to extend the operation of Chapter V, Section 
3(d)(iv), which provides that trades are not subject to an obvious 
error or catastrophic error review pursuant to Section 3 during a Limit 
State or Straddle State, for an additional pilot period ending February 
20, 2015.\6\ The Exchange believes conducting an obvious error or 
catastrophic error review is impracticable given the lack of a reliable 
National Best Bid/Offer (``NBBO'') in the options market during Limit 
States and Straddle States, and that the resulting actions (i.e., 
nullified trades or adjusted prices) may not be appropriate given 
market conditions. Under the pilot, limit orders that are filled during 
a Limit State or Straddle State have certainty of execution in a manner 
that promotes just and equitable principles of trade, removes 
impediments to, and perfects the mechanism of a free and open market 
and a national market system. Moreover, given that options prices 
during brief Limit States or Straddle States may deviate substantially 
from those available shortly following the Limit State or Straddle 
State, the Exchange believes giving market participants time to re-
evaluate a transaction would create an unreasonable adverse selection 
opportunity that would discourage participants from providing liquidity 
during Limit States or Straddle States. On balance, the Exchange 
believes that removing the potential inequity of nullifying or 
adjusting executions occurring during Limit States or Straddle States 
outweighs any potential benefits from applying those provisions during 
such unusual market conditions.
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    \6\ The Exchange also proposes to correct paragraph (d), which 
provides that such provision is in effect during a pilot period to 
coincide with the pilot period for the Plan, except as specified in 
subparagraph (v) (the obvious error provision that is the subject of 
this proposal), to reflect that the exception applies to 
subparagraph (iv) rather than (v). There is no paragraph (v).
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    The Exchange believes the benefits to market participants from the 
pilot program should continue on a pilot basis to coincide with the 
operation of the Limit Up-Limit Down Plan. The Exchange believes that 
continuing the pilot will protect against any unanticipated 
consequences and permit the industry to gain further experience 
operating the Plan.
    The Exchange will conduct an analysis concerning the elimination of 
obvious and catastrophic error provisions during Limit States and 
Straddle States and agrees to provide the Commission with relevant data 
to assess the impact of this proposed rule change. As part of its 
analysis, the Exchange will: (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. 
Additionally, the Exchange agrees to provide to the Commission data 
requested to evaluate the impact of the elimination of the obvious and 
catastrophic error provisions, including data relevant to assessing the 
various analyses noted above. 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.
    2. Assess whether the lack of obvious error rules in effect during 
the Straddle and Limit States are problematic.
Each month the Exchange shall provide to the SEC and the public a 
dataset containing the data for each Straddle and Limit State in 
optionable stocks that had at least one trade on the Exchange during a 
Straddle or Limit State. For each of those options affected, each data 
record should contain the following information:
     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.\7\
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    \7\ The Exchange agreed to provide similar data in the original 
proposal. See Securities Exchange Act Release No. 69341 (April 8, 
2013), 78 FR 21996 (April 12, 2013) (SR-NASDAQ-2013-048) at notes 4 
and 11. However, that data included two additional filters 
pertaining to the top 10 options and an in-the-money amount, which 
will no longer apply. The Exchange intends to provide historical 
data in the new form pursuant to this proposed rule change, going 
back to the beginning of the original pilot period once such data 
can be reasonably compiled.

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[[Page 20948]]

2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\8\ in general and with Section 
6(b)(5) of the Act,\9\ in particular, which requires that the rules of 
an exchange be designed to 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, because it should continue to 
provide certainty about how errors involving options orders and trades 
will be handled during periods of extraordinary volatility in the 
underlying security. The Exchange believes that it continues to be 
necessary and appropriate in the interest of promoting fair and orderly 
markets to exclude transactions executed during a Limit State or 
Straddle State from certain aspects of Chapter V, Section 6.\10\
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    \8\ 15 U.S.C. 78f.
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ The Exchange also believes that the proposal to correct the 
reference to subparagraph (iv) in paragraph (d) is consistent with 
promoting just and equitable principles of trade, because it 
corrects the rule to make it more understandable to participants.
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    Although the Limit Up-Limit Down Plan is operational, the Exchange 
believes that maintaining the pilot will help the industry gain further 
experience operating the Plan as well as the pilot provisions.
    Based on the foregoing, the Exchange believes the benefits to 
market participants should continue on a pilot basis to coincide with 
the operation of the Limit Up-Limit Down Plan.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, as amended. 
Specifically, the proposal does not impose an intra-market burden on 
competition, because it will apply to all members. Nor will the 
proposal impose a burden on competition among the options exchanges, 
because, in addition to the vigorous competition for order flow among 
the options exchanges, the proposal addresses a regulatory situation 
common to all options exchanges. To the extent that market participants 
disagree with the particular approach taken by the Exchange herein, 
market participants can easily and readily direct order flow to 
competing venues. The Exchange believes this proposal will not impose a 
burden on competition and will help provide certainty during periods of 
extraordinary volatility in an NMS stock.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

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 \11\ and Rule 19b-
4(f)(6)(iii) thereunder.\12\
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 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.\13\
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    \13\ 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 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-NASDAQ-2014-033 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-NASDAQ-2014-033. 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

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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-NASDAQ-2014-033 and should 
be submitted on or before May 5, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-08285 Filed 4-11-14; 8:45 am]
BILLING CODE 8011-01-P