[Federal Register Volume 84, Number 206 (Thursday, October 24, 2019)]
[Notices]
[Pages 57059-57063]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-23171]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87346; File No. SR-NYSEArca-2019-76]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Make Permanent 
Certain Options Market Rules That Are Linked to the Equity Market Plan 
To Address Extraordinary Market Volatility

October 18, 2019.
    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 October 16, 2019, NYSE Arca, Inc. (``NYSE Arca'' or the 
``Exchange'') 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 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 make permanent certain options market 
rules that are linked to the equity market Plan to Address 
Extraordinary Market Volatility. The proposed rule change is available 
on the Exchange's website at www.nyse.com, at the principal office of 
the Exchange, and at the Commission's Public Reference Room.

[[Page 57060]]

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 purpose of the proposed rule change is to make permanent 
certain options market rules that are linked to the equity market Plan 
to Address Extraordinary Market Volatility (the ``Limit Up-Limit Down 
Plan'' or the ``Plan''). This change is being proposed in connection 
with the recently approved amendment to the Limit Up-Limit Down Plan 
that allows the Plan to continue to operate on a permanent basis 
(``Amendment 18'').\4\ The Exchange understands that the other national 
securities exchanges have filed or will file similar proposals to make 
permanent their respective pilot programs; thus this proposal would 
align Exchange rules with the rules of other options exchanges.\5\
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    \4\ See Securities Exchange Act Release No. 85623 (April 11, 
2019), 84 FR 16086 (April 17, 2019) (Order Approving Amendment No. 
18).
    \5\ For example, Cboe Exchange, Inc. (``Cboe'') filed a proposal 
with the Commission to make permanent rules related to the Options 
Pilots, which filing has been approved. See Securities Exchange Act 
Release Nos. 86744 (August 23, 2019), 84 FR 45565 (August 29, 2019); 
87311 (October 15, 2019) (SR-CBOE-2019-049) (``Cboe filing''). The 
Exchange notes that the substance of this proposal is identical to 
the Cboe filing.
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    In an attempt to address extraordinary market volatility in NMS 
Stock, and, in particular, events like the severe volatility on May 6, 
2010, U.S. national securities exchanges and the Financial Industry 
Regulatory Authority, Inc. (collectively, ``Participants'') drafted the 
Plan pursuant to Rule 608 of Regulation NMS and under the Act.\6\ On 
May 31, 2012, the Commission approved the Plan, as amended, on a one-
year pilot basis.\7\ Though the Plan was primarily designed for equity 
markets, the Exchange believed it would, indirectly, potentially impact 
the options markets as well. Thus, the Exchange has previously adopted 
and amended Rule 6.65A-O and Commentary .03 to Rule 6.87-O to ensure 
the option markets were not harmed as a result of the Plan's 
implementation and has implemented such rules on a pilot basis that has 
coincided with the pilot period for the Plan (the ``Options 
Pilots'').\8\
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    \6\ See Securities Exchange Act Release No. 64547 (May 25, 
2011), 76 FR 31647 (June 1, 2011) (File No. 4-631).
    \7\ See Securities and Exchange Act Release No. 67091 (May 31, 
2012) 77 FR 33498 (June 6, 2012).
    \8\ See Securities Exchange Act Release Nos. 69340 (April 8, 
2013), 78 FR 22004 (April 12, 2013) (SR-NYSEArca-2013-10) (amending 
certain options rules to coincide with the pilot period for the 
Plan); 76246 (October 23, 2015), 80 FR 66603 (October 29, 2015) (SR-
NYSEArca-2015-101) (amending certain options rules to coincide with 
the pilot period for the Plan) and 85610 (April 11, 2019), 84 FR 
16053 (April 17, 2019) (SR-NYSEArca-2019-22) (amending Rules 6.65A-O 
and 6.87-O, to extend the pilot period in connection with the 
Plain).
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    Rule 6.65A-O essentially serves as a roadmap for the Exchange's 
universal changes due to the implementation of the Plan, and Commentary 
.03 to Rule 6.87-O provides that transactions executed during a limit 
or straddle state are not subject to the obvious and catastrophic error 
rules. A limit or straddle state occurs when at least one side of the 
National Best Bid (``NBB'') or Offer (``NBO'') bid/ask is priced at a 
non-tradable level. Specifically, a straddle state exists when the NBB 
is below the lower price band while the NBO is inside the prices band 
or when the NBO is above the upper price band and the NBB is within the 
band, while a limit state occurs when the NBO equals the lower price 
band (without crossing the NBB), or the NBB equals the upper price band 
(without crossing the NBO). The Exchange adopted the Options Pilots to 
protect investors because when an underlying security is in a limit or 
straddle state, there will not be a reliable price for the security to 
serve as a benchmark for the price of the option. Specifically, the 
Exchange adopted Commentary .03 to Rule 6.87-O because the application 
of the obvious and catastrophic error rules would be impracticable 
given the potential for lack of a reliable NBBO in the options market 
during limit and straddle states. When adjusting or busting a trade 
pursuant to the obvious error rule, the determination of theoretical 
value of a trade generally references the NBB (for erroneous sell 
transactions) or NBO (for erroneous buy transactions) just prior to the 
trade in question, and is therefore not reliable when at least one side 
of the NBBO is priced at a non-tradeable level, as is the case in limit 
and straddle states. In such a situation, determining theoretical value 
is often a subjective rather than an objective determination and could 
give rise to additional uncertainty and confusion for investors. As a 
result, application of the obvious and catastrophic error rules would 
be impracticable given the lack of a reliable NBBO in the options 
market during limit and straddle states, and may produce undesirable 
effects or unanticipated consequences.
    The Exchange adopted additional measures via other Options Pilot 
rules that are designed to protect investors during limit and straddle 
states. For example, the Exchange will reject market orders and not 
elect stop orders \9\ during a Limit Up-Limit Down state to ensure that 
only those orders with a limit price will be executed during a limit or 
straddle state given the uncertainty of market prices during such a 
state. Furthermore, the Exchange believes that eliminating the 
application of obvious error rules during a limit or straddle state 
eliminates the re-evaluation of a transaction executed during such a 
state that could potentially create an unreasonable adverse selection 
opportunity due to lack of a reliable reference price on one side of 
the market or another and discourage participants from providing 
liquidity during limit and straddle states, which is contrary to the 
goal in limiting participants' adverse selection with the application 
of the obvious error rule during normal trading states.
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    \9\ This includes rules in connection with special handling for 
market orders, market-on-close orders, stop orders, and stock-option 
orders, as well as for certain electronic order handling features in 
a Limit Up-Limit Down state, the obvious error rules, and providing 
that the Exchange will not require Market-Makers to quote in series 
of options when the underlying security is in a Limit Up-Limit Down 
state.
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    For these reasons, the Exchange believes the Options Pilots are 
designed to add certainty on the options markets, which encourages more 
investors to participate in light of the changes associated with the 
Plan. The Plan was originally implemented on a pilot-basis in order to 
allow the public, the participating exchanges, and the Commission to 
assess the operation of the Plan and whether the Plan should be 
modified prior to approval on a permanent basis. As stated, the 
Exchange adopted the Option Pilots to coincide with this pilot; to 
continue the protections therein while the industry gains further 
experience operating the Plan.
    In connection with the order approving the establishment of the 
obvious error pilot, as well as the extensions of the obvious error 
pilot, the Exchange committed to submit monthly data regarding the 
program and to

[[Page 57061]]

submit an overall analysis of the obvious error pilot in conjunction 
with the data submitted under the Plan and any other data as requested 
by the Commission. Pursuant to a rule filing, submitted on April 4, 
2014, each month, the Exchange committed to provide the Commission, 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 
(the ``LULD Limit and Straddle Reports'').\10\ The Exchange has 
continued to provide the Commission with this data on a monthly basis 
from October 2015. For each trade on the Exchange, the Exchange 
provides (a) the 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, and (b) for the trades on the Exchange, the 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. In 
addition, to help evaluate the impact of the pilot program, the 
Exchange has provided to the Commission, and the public, assessments 
relating to the impact of the operation of the obvious error rules 
during limit and straddle states including: (1) An evaluation of the 
statistical and economic impact of limit and straddle states on 
liquidity and market quality in the options markets, and (2) an 
assessment of whether the lack of obvious error rules in effect during 
the straddle and limit states are problematic. The Exchange has 
concluded that the obvious error pilot does not negatively impact 
market quality during normal market conditions,\11\ and that there has 
been insufficient data to assess whether a lack of obvious error rules 
is problematic, however, the Exchange believes the continuation of 
Commentary .03 to Rule 6.87-O functions to protect against any 
unanticipated consequences in the options markets during a limit or 
straddle state and add certainty on the options markets.
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    \10\ See Securities Exchange Act Release No. 71869 (April 4, 
2014), 79 FR 19689 (April 9, 2014) (SR-NYSEArca-2014-36); see also 
NYSE Arca, LULD Limit and Straddle Reports, available at: https://www.nyse.com/markets/arca-options/reports.
    \11\ See NYSE Arca, LULD Limit and Straddle Reports, available 
at: https://www.nyse.com/markets/arca-options/reports. During the 
most recent Review Period the Exchange did not receive any obvious 
error review requests for Limit-Up-Limit Down trades, and Limit Up-
Limit Down trade volume accounted for nominal overall trade volume.
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    The Commission recently approved the Plan on a permanent basis 
(Amendment 18).\12\ In connection with this approval, the Exchange now 
proposes to amend Rule 6.65A-O and Commentary .03 to Rule 6.87-O that 
currently implement the provisions of the Plan on a pilot basis to 
eliminate the pilot basis, which effectiveness expires on October 18, 
2019, and to make such rules permanent. In its approval order to make 
the Plan permanent, the Commission recognized that, as a result of the 
Participants' and industry analysis of the Plan's operation, the Limit 
Up-Limit Down mechanism effectively addresses extraordinary market 
volatility. Indeed, the Plan benefits markets and market participants 
by helping to ensure orderly markets, but also, the Exchange believes, 
based on the data made available to the public and the Commission 
during the pilot period, that the obvious error pilot does not 
negatively impact market quality during normal market conditions.\13\ 
Rather, the Exchange believes the obvious error pilot functions to 
protect against any unanticipated consequences in the options markets 
during a limit or straddle state and add certainty on the options 
markets.
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    \12\ See supra note 4.
    \13\ See supra note 11. The Exchange's obligation to submit and 
publish the LULD Limit and Straddle Reports was extinguished upon 
the approval of Amendment 18.
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    The Exchange also believes the other Options Pilots rules provide 
additional measures designed to protect investors during limit and 
straddle states. For example, the Exchange will reject market orders 
and not elect stop orders \14\ during a Limit Up-Limit Down state to 
ensure that only those orders with a limit price will be executed 
during a limit or straddle state given the uncertainty of market prices 
during such a state This removes impediments to and perfects the 
mechanism of a free and open market and national market system by 
encouraging more investors to participate in light of the changes 
associated with the Plan. The Exchange believes that if approved on a 
permanent basis, the Options Pilots would permanently provide investors 
with the above-described additional certainty of market prices and 
mitigation of unanticipated consequences and unreasonable adverse 
selection risk during limit and straddle states.
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    \14\ See supra note 9.
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    The Exchange understands that the other national securities 
exchanges have filed or will file similar proposals to make permanent 
their respective pilot programs. Since the Commission's approval of 
Amendment 18 allowing the Plan to operate on a permanent basis, the 
Exchange and other national securities exchanges have determined that 
no further amendments should be made to the Options Pilots; \15\ the 
current Options Pilots effectively address extraordinary market 
volatility, are reasonably designed to comply with the requirements of 
the Plan, facilitate compliance with the Plan and should now operate on 
a permanent basis, consistent with the Plan. The Exchange does not 
propose any additional changes to Rule 6.65A-O and Commentary .03 to 
Rule 6.87-O.
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    \15\ See Securities Exchange Act Release No. 85610 (April 11, 
2019), 84 FR 16053 (April 17, 2019) (SR-NYSEARCA-2019-22) (proposal 
to extend the pilot for certain options market rules linked to the 
Plan).
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the requirements of Section 6(b) of the Act,\16\ in general, and 
Section 6(b)(5) of the Act,\17\ in particular, in that it is designed 
to remove impediments to and perfect the mechanism of a free and open 
market and a national market system, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest and not to permit unfair discrimination between 
customers, issuers, brokers, or dealers. The Exchange believes that the 
proposed rule change promotes just and equitable principles of trade in 
that it promotes transparency and uniformity across markets concerning 
rules for options markets adopted to coincide with the Plan. The 
Exchange believes that eliminating the Options Pilots and making such 
rules permanent facilitates compliance with the Plan.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
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    In particular, the Exchange believes that the proposed rule 
supports the objectives of perfecting the mechanism of a free and open 
market and the national market system because it promotes transparency 
and uniformity across markets concerning rules for options markets 
adopted to coincide with the Plan. The Exchange believes that 
eliminating the pilot basis for the Options Pilots and making such 
rules permanent facilitates compliance with the Plan by adding 
certainty to the markets during periods of market

[[Page 57062]]

volatility, which has been approved and found by the Commission to be 
reasonably designed to prevent potentially harmful price volatility in 
NMS Stocks. It has been determined by the Commission that the Plan 
benefits markets and market participants by helping to ensure orderly 
markets, and, based on the data made available to the public and the 
Commission during the pilot period for Commentary .03 to Rule 6.87-O, 
the Plan does not negatively impact options market quality during 
normal market conditions. Rather, the Plan, as it is implemented under 
the obvious error pilot, functions to protect against any unanticipated 
consequences in the options markets during a limit or straddle state 
and add certainty on the options markets. During a limit or straddle 
state, determining theoretical value of an option may be a subjective 
rather than an objective determination given the lack of a reliable 
NBBO, which may create an unreasonable adverse selection opportunity 
and discourage participants from providing liquidity during limit and 
straddle states. Therefore, the Exchange believes eliminating obvious 
error review in such states would, in turn, eliminate uncertainty and 
confusion for investors and benefit investors by encouraging more 
participation in light of the changes associated with the Plan.
    As stated, the Exchange believes the other Options Pilots rules 
provide additional measures designed to protect investors during limit 
and straddle states. For example, the Exchange will reject market 
orders and not elect stop orders \18\ during a Limit Up-Limit Down 
state to ensure that only those orders with a limit price will be 
executed during a limit or straddle state given the uncertainty of 
market prices during such a state. Accordingly, the Exchange believes 
that making the Options Pilots permanent will further the goals of 
investor protection and fair and orderly markets as the rules 
effectively address extraordinary market volatility pursuant to the 
Plan.
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    \18\ See supra note 9.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change would 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The proposed rule change is 
necessary to reflect that the Plan no longer operates as a pilot and 
has been approved to operate on a permanent basis by the Commission. As 
such, Exchange Rules 6.65A-O and Commentary .03 to Rule 6.87-O, which 
implement protections in connection with the Plan, should be amended to 
operate on a permanent basis. The Exchange understands that the other 
national securities exchanges have filed or will also file similar 
proposals to make permanent their respective pilot programs.\19\ Thus, 
the proposed rule change will help to ensure consistency across market 
centers without implicating any competitive issues.
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    \19\ See e.g., Cboe filing, supra note 5.
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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 foregoing 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, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \20\ and Rule 19b-
4(f)(6) thereunder.\21\
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    \20\ 15 U.S.C. 78s(b)(3)(A).
    \21\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and 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. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) \22\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, Rule 19b-4(f)(6)(iii) \23\ permits the Commission to 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the proposed 
rule change may become effective and 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 current Options Pilots to continue on a permanent 
basis without any changes, prior to the pilot expiration on October 18, 
2019. For this reason, the Commission hereby waives the 30-day 
operative delay and designates the proposed rule change as operative 
upon filing.\24\
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    \22\ 17 CFR 240.19b-4(f)(6).
    \23\ 17 CFR 240.19b-4(f)(6)(iii).
    \24\ 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 change 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-NYSEArca-2019-76 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-NYSEArca-2019-76. 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 website (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 website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE,

[[Page 57063]]

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. Persons submitting 
comments are cautioned that we do not redact or edit personal 
identifying information from comment submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSEArca-2019-76 and should 
be submitted on or before November 14, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-23171 Filed 10-23-19; 8:45 am]
 BILLING CODE 8011-01-P