[Federal Register Volume 80, Number 208 (Wednesday, October 28, 2015)]
[Notices]
[Pages 66094-66097]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-27350]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-76230; File No. SR-EDGX-2015-49]
Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change to Rule
20.6, Nullification and Adjustment of Options Transactions Including
Obvious Errors
October 22, 2015.
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 October 20, 2015, EDGX Exchange, Inc. (the ``Exchange'' or
``EDGX'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the Exchange. The Exchange
has designated this proposal as a ``non-controversial'' proposed rule
change pursuant to Section 19(b)(3)(A) of the Act \3\ and Rule 19b-
4(f)(6)(iii) thereunder,\4\ which renders it effective upon filing with
the Commission. 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.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(6)(iii).
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange filed a proposal for the Exchange's equity options
platform (``EDGX Options'') to extend the pilot program that suspends
certain obvious error provisions of Rule 20.6 during limit up-limit
down states in securities that underlie options traded on the Exchange.
The text of the proposed rule change is available at the Exchange's
Web site at www.batstrading.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 parts of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Earlier this year, the Exchange received approval of rules
governing the trading of equity options on EDGX Options, including Rule
20.6 related to the adjustment and nullification of transactions that
occur on EDGX Options.\5\ Interpretation and Policy .01 to Rule 20.6 is
designed to address certain issues related 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'').\6\
Specifically, pursuant to a pilot program set forth in Interpretation
and Policy .01 to Rule 20.6, the Exchange excludes from certain
provisions of Rule 20.6 transactions executed during a ``Limit
[[Page 66095]]
State'' or ``Straddle State,'' as such terms are defined in the Plan.
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\5\ See Securities Exchange Act Release No. 75650 (August 7,
2015), 80 FR 48600 (August 13, 2015) (SR-EDGX-2015-18).
\6\ See Securities Exchange Act Release No. 67091 (May 31,
2012), 77 FR 33498 (June 6, 2012) (the ``Limit Up-Limit Down
Release'').
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The purpose of this filing is to extend the effectiveness of the
pilot program of Interpretation and Policy .01 of Rule 20.6 to coincide
with the pilot period for the Limit Up-Limit Down Plan, including any
extensions to the pilot period for the Plan. The Exchange also proposes
to amend a cross-reference contained within Interpretation and Policy
.01, as described below. The Exchange notes that trading on EDGX
Options has not yet commenced. However, the Exchange anticipates
launching EDGX Options in the near future and wishes to update its
rules in the interim in anticipation of such launch.
The Exchange believes the benefits to market participants from
Interpretation and Policy .01 should continue on a pilot basis. The
Exchange continues to believe that adding certainty to the execution of
orders in Limit or Straddle States will encourage market participants
to continue to provide liquidity to the Exchange, and, thus, promote a
fair and orderly market during these periods. Barring this provision,
the obvious error provisions of Rule 20.6 would likely apply in many
instances during Limit States and Straddle States. The Exchange
believes that continuing the pilot will protect against any
unanticipated consequences in the options markets during a Limit State
or Straddle State. Thus, the Exchange believes that the protections of
the current rule should continue while the industry gains further
experience operating the Plan. Rather than extending the pilot program
to a specific date, the Exchange proposes to extend the pilot to
coincide with the operation of the Plan, which is also a pilot
program.\7\
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\7\ Currently, the pilot period for the Plan is proposed to be
extended to April 22, 2016. See Securities Exchange Act Release No.
75917 (September 14, 2015), 80 FR 56515 (September 18, 2015).
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The Exchange represents that it will conduct its own analysis
concerning the elimination of the Obvious Error and Catastrophic Error
provisions during Limit 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 evaluate (1)
the options market quality during Limit and Straddle States, (2) assess
the character of incoming order flow and transactions during Limit and
Straddle States, and (3) review any complaints from Members and their
customers concerning executions during Limit and Straddle States. The
Exchange also agrees to provide to the Commission data requested to
evaluate the impact of the inapplicability of the Obvious Error and
Catastrophic Error provisions, including data relevant to assessing the
various analyses noted above.
In connection with this proposal, each month the Exchange will
provide to the Commission and the public a dataset containing the data
for each Straddle State and Limit State in NMS Stocks underlying
options traded on the Exchange, limited to those option classes that
have at least one (1) trade on the Exchange during a Straddle State or
Limit State. For each of those option classes affected, each data
record will 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.
In addition, the Exchange shall provide to the Commission and the
public 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 Exchange agrees to
provide the analysis and data to the Commission to help evaluate the
impact of the pilot program no later than five months prior to the
pilot expiration, including any extensions. If the Plan extension is
approved, the next data assessment will be due on December 18, 2015.
As noted above, pursuant to the pilot program, the Exchange
excludes from certain provisions of Rule 20.6 transactions executed
during a Limit State or Straddle State, as such terms are defined in
the Plan. The Exchange, however, retains authority to review
transactions on an Official's own motion pursuant to sub-paragraph
(c)(3) of Rule 20.6 and to bust or adjust transactions pursuant to
provisions governing Significant Market Events, as defined in the Rule,
trading halts, erroneous prints and quotes in the underlying security,
and in connection with stop and stop limit orders that have been
triggered by an erroneous execution. The Exchange believes that these
safeguards will provide the Exchange with the flexibility to act when
necessary and appropriate to nullify or adjust a transaction, while
also providing market participants with certainty that, under normal
circumstances, the trades they affect with quotes and/or orders having
limit prices will stand irrespective of subsequent moves in the
underlying security. The Exchange proposes to extend the authority to
nullify transactions pursuant to paragraph (k) even in the event of a
Limit State or Straddle State for the underlying security, thereby
excluding such provision from the pilot program. The Exchange notes
that other options exchanges that have a provision governing erroneous
trades occurring from disruptions and/or malfunctions of Exchange
systems have also excluded such provision from the pilot program.\8\
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\8\ See, e.g., NYSE MKT Rule 975NY, Interpretation and Policy
.03, which excludes paragraph (l) of Rule 975NY from the pilot
program; see also, CBOE Rule 6.25, Interpretation and Policy .01,
which excludes Interpretation and Policy .05 from the pilot program.
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2. Statutory Basis
The Exchange believes that its proposal 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.\9\ In particular, the
proposal is consistent with Section 6(b)(5) of the Act \10\ 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. Additionally, the Exchange believes the
proposed rule change is consistent with the Section 6(b)(5) \11\
requirement that
[[Page 66096]]
the rules of an exchange not be designed to permit unfair
discrimination between customers, issuers, brokers, or dealers.
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\9\ 15 U.S.C. 78f(b).
\10\ 15 U.S.C. 78f(b)(5).
\11\ Id.
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In particular, the Exchange further believes that it is necessary
and appropriate in the interest of promoting fair and orderly markets
to exclude transactions executed during a Limit or Straddle State from
certain aspects of Rule 20.6. The Exchange believes the application of
the current rule will be impracticable given the lack of a reliable
national best bid or offer 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. Extension of this pilot to coincide with the pilot period
for the Limit Up-Limit Down Plan would ensure that limit orders that
are filled during a Limit or Straddle State would 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. Thus, the Exchange believes
that the protections of the pilot should continue while the industry
gains further experience operating the Plan. The Exchange also believes
it is necessary and appropriate in the interest of promoting fair and
orderly markets to retain authority to nullify erroneous trades
occurring from disruptions and/or malfunctions of Exchange systems
without regard to whether the underlying security was in a Limit State
or Straddle State. As noted above, this will ensure consistency with
the rules of other options exchanges.\12\
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\12\ See supra note 7.
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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. Specifically, the Exchange
believes that, by extending the expiration of the pilot, the proposed
rule change will allow for further analysis of the pilot and a
determination of how the pilot shall be structured in the future. In
doing so, the proposed rule change will also serve to promote
regulatory clarity and consistency, thereby reducing burdens on the
marketplace and facilitating investor protection.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any written comments from members or other interested parties.
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 \13\ and Rule 19b-
4(f)(6)(iii) thereunder.\14\
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\13\ 15 U.S.C. 78s(b)(3)(A).
\14\ 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 Commission believes that waiving the 30-day operative delay
is consistent with the protection of investors and the public interest,
as it will allow the obvious error pilot program to continue
uninterrupted while the industry gains further experience operating
under the Plan, and avoid any investor confusion that could result from
a temporary interruption in the pilot program. For this reason, the
Commission designates the proposed rule change to be operative upon
filing.\15\
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\15\ 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-EDGX-2015-49 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-EDGX-2015-49. 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 available publicly. All
submissions should refer to File Number SR-EDGX-2015-49, and should be
submitted on or before November 18, 2015.
[[Page 66097]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-27350 Filed 10-27-15; 8:45 am]
BILLING CODE 8011-01-P