[Federal Register Volume 87, Number 187 (Wednesday, September 28, 2022)]
[Notices]
[Pages 58837-58843]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-20955]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95881; File No. SR-PEARL-2022-41]


Self-Regulatory Organizations: Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change by MIAX PEARL, LLC To Amend 
Exchange Rule 2621, Clearly Erroneous Executions

September 22, 2022.
    Pursuant to the provisions of 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 September 19, 2022 MIAX PEARL, LLC (``MIAX 
Pearl'' or the ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') a 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 filing a proposed rule change to amend Exchange 
Rule 2621, Clearly Erroneous Executions.
    The text of the proposed rule change is available on the Exchange's 
website at http://www.miaxoptions.com/rule-filings/pearl at MIAX 
PEARL's principal office, 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
    The purpose of the proposed rule change is to amend Exchange Rule 
2621, Clearly Erroneous Executions. Specifically, the Exchange proposes 
to

[[Page 58838]]

limit the circumstances where clearly erroneous review would continue 
to be available during Regular Trading Hours,\3\ when the LULD Plan to 
Address Extraordinary Market Volatility (the ``LULD Plan'') \4\ already 
provides similar protections for trades occurring at prices that may be 
deemed erroneous. The Exchange believes that these changes are 
appropriate as the LULD Plan has been approved by the Commission on a 
permanent basis,\5\ and in light of amendments to the LULD Plan, 
including changes to the applicable Price Bands \6\ around the open and 
close of trading. This proposed rule change is based on a recent rule 
change by Cboe BZX Exchange, Inc. (``BZX'') to amend certain provisions 
of the clearly erroneous pilot and to operate the clearly erroneous 
pilot on a permanent basis that was recently approved by the 
Commission.\7\
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    \3\ The term ``Regular Trading Hours'' means the time between 
9:30 a.m. and 4:00 p.m. Eastern Time. See Exchange Rule 1900.
    \4\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012).
    \5\ See Securities Exchange Act Release No. 84843 (December 18, 
2018), 83 FR 66464 (December 26, 2018) (``Notice''); 85623 (April 
11, 2019), 84 FR 16086 (April 17, 2019) (File No. 4-631) 
(``Amendment Eighteen'').
    \6\ ``Price Bands'' refers to the term provided in Section V of 
the LULD Plan.
    \7\ See Securities Exchange Act Release No. 95658 (September 1, 
2022), 87 FR 55060 (September 8, 2022) (SR-CboeBZX-2022-0037) 
(``Approval Order''). The Exchange notes that its Rule 2621 is 
basically identical to the clearly erroneous pilot rules of BZX with 
the following two key differences: (1) Exchange Rule 2621 does not 
include a provision stating it is operating on a pilot basis; and 
(2) Exchange Rule 2621 does not account for before or after hours 
trading because the Exchange currently provides trading during 
Regular Trading Hours. The Exchange will amend Exchange Rule 2621 to 
address the availability of the review of clearly erroneous 
executions as part of any potential proposed rule change to provide 
for before or after hours trading.
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Background
    On August 14, 2020, the Commission approved the adoption of 
Exchange Rule 2621 that, among other things: (i) provided for uniform 
treatment of clearly erroneous execution reviews in multi-stock events 
involving twenty or more securities; (ii) reduced the ability of the 
Exchange to deviate from the objective standards set forth in the rule; 
adopted a provision designed to address the operation of the LULD Plan; 
(iii) adopted a provision providing that a series of transactions in a 
particular security on one or more trading days may be viewed as one 
event if all such transactions were effected based on the same 
fundamentally incorrect or grossly misinterpreted issuance information 
resulting in a severe valuation error for all such transactions; and 
(iv) adopted a provision that in the event of any disruption or 
malfunction in the operation of the electronic communications and 
trading facilities of an Exchange, another SRO, or responsible single 
plan processor in connection with the transmittal or receipt of a 
trading halt, an Officer, acting on his or her own motion, shall 
nullify any transaction that occurs after a trading halt has been 
declared by the primary listing market for a security and before such 
trading halt has officially ended according to the primary listing 
market.\8\
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    \8\ See Securities Exchange Act Release No. 89563 (August 14, 
2020), 85 FR 51510 (August 20, 2020) (SR-PEARL-2020-03).
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    The clearly erroneous rules were first implemented by other equity 
exchanges on a pilot basis following a severe disruption in the U.S. 
equities markets on May 6, 2010 (``Flash Crash'') to ``provide greater 
transparency and certainty to the process of breaking trades.'' \9\ 
Largely, the pilot reduced the discretion of the Exchange, other 
national securities exchanges, and Financial Industry Regulatory 
Authority (``FINRA'') to deviate from the objective standards in their 
respective rules when dealing with potentially erroneous transactions. 
The pilot has thus helped afford greater certainty to Members and 
investors about when trades will be deemed erroneous pursuant to self-
regulatory organization (``SRO'') rules and has provided a more 
transparent process for conducting such reviews. The Commission 
recently approved a proposal by BZX to make the current pilot permanent 
in which BZX asserted that market participants should be able to 
continue to benefit from the increased certainty afforded by its 
clearly erroneous rule.\10\
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    \9\ See, e.g., Securities Exchange Act Release No. 62886 
(September 10, 2010), 75 FR 56613 (September 16, 2010) (SR-BATS-
2010-016).
    \10\ See Approval Order, supra note 7. See also Securities 
Exchange Act Release No. 95259 (July 12, 2022), 87 FR 42760 (July 
18, 2022) (SR-CboeBZX-2022-037) (``Notice'').
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Amendments to the Clearly Erroneous Rules
    When the Participants to the LULD Plan filed to introduce the Limit 
Up-Limit Down (``LULD'') mechanism, itself a response to the Flash 
Crash, a handful of commenters noted the potential discordance between 
the clearly erroneous rules and the Price Bands used to limit the price 
at which trades would be permitted to be executed pursuant to the LULD 
Plan. For example, two commenters requested that the clearly erroneous 
rules be amended so the presumption would be that trades executed 
within the Price Bands would not be not subject to review.\11\ While 
the Participants acknowledged that the potential to prevent clearly 
erroneous executions would be a ``key benefit'' of the LULD Plan, the 
Participants decided not to amend the clearly erroneous rules at that 
time.\12\ In the years since, industry feedback has continued to 
reflect a desire to eliminate the discordance between the LULD 
mechanism and the clearly erroneous rules so that market participants 
would have more certainty that trades executed with the Price Bands 
would stand. For example, the Equity Market Structure Advisory 
Committee (``EMSAC'') Market Quality Subcommittee included in its April 
19, 2016 status report a preliminary recommendation that clearly 
erroneous rules be amended to conform to the Price Bands--i.e., ``any 
trade that takes place within the band would stand and not be broken 
and trades outside the LU/LD bands would be eligible for the 
consideration of the Clearly Erroneous rules.'' \13\
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    \11\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631) (n. 33505).
    \12\ Id.
    \13\ See EMSAC Market Quality Subcommittee, Recommendations for 
Rulemaking on Issues of Market Quality (November 29, 2016), 
available at https://www.sec.gov/spotlight/emsac/emsac-recommendations-rulemaking-market-quality.pdf.
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    The Exchange believes that it is important for there to be some 
mechanism to ensure that investors' orders are either not executed at 
clearly erroneous prices or are subsequently busted as needed to 
maintain a fair and orderly market. At the same time, the Exchange 
believes that the LULD Plan, as amended, would provide sufficient 
protection for trades executed during Regular Trading Hours. Indeed, 
the LULD mechanism could be considered to offer superior protection as 
it prevents potentially erroneous trades from being executed in the 
first instance. After gaining experience with the LULD Plan, the 
Exchange now believes that it is appropriate to largely eliminate 
clearly erroneous review during Regular Trading Hours when Price Bands 
are in effect. Thus, as proposed, trades executed within the Price 
Bands would stand, barring one of a handful of identified scenarios 
where such review may still be necessary for the protection of 
investors. The Exchange believes that this change would be beneficial 
for the U.S. equities markets as it would ensure that trades executed 
within the Price Bands are subject to clearly erroneous review in only 
rare circumstances, resulting in

[[Page 58839]]

greater certainty for Members and investors.
    There would be much more limited potential to request that a 
transaction be reviewed as potentially erroneous during Regular Trading 
Hours.\14\ With the introduction of the LULD mechanism in 2013, clearly 
erroneous trades are largely prevented by the requirement that trades 
be executed within the Price Bands. In addition, in 2019, Amendment 
Eighteen to the LULD Plan eliminated double-wide Price Bands: (1) at 
the Open, and (2) at the Close for Tier 2 NMS Stocks 2 with a Reference 
Price above $3.00.\15\ Due to these changes, the Exchange believes that 
the Price Bands would provide sufficient protection to investor orders 
such that clearly erroneous review would no longer be necessary during 
Regular Trading Hours. As the Participants to the LULD Plan explained 
in Amendment Eighteen: ``Broadly, the Limit Up-Limit Down mechanism 
prevents trades from happening at prices where one party to the trade 
would be considered `aggrieved,' and thus could be viewed as an 
appropriate mechanism to supplant clearly erroneous rules.'' While the 
Participants also expressed concern that the Price Bands might be too 
wide to afford meaningful protection around the open and close of 
trading, amendments to the LULD Plan adopted in Amendment Eighteen 
narrowed Price Bands at these times in a manner that the Exchange 
believes is sufficient to ensure that investors' orders would be 
appropriately protected in the absence of clearly erroneous review. The 
Exchange therefore believes that it is appropriate to rely on the LULD 
mechanism as the primary means of preventing clearly erroneous trades 
during Regular Trading Hours.
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    \14\ The Exchange currently only provides for trading during 
Regular Trading Hours and does not offer a pre- or post-trading 
session.
    \15\ See Amendment Eighteen, supra note 5.
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    At the same time, the Exchange is cognizant that there may be 
limited circumstances where clearly erroneous review may continue to be 
appropriate. Thus, the Exchange proposes to amend its clearly erroneous 
rules to enumerate the specific circumstances where such review would 
remain available, as follows. All transactions that fall outside of 
these specific enumerated exceptions would be ineligible for clearly 
erroneous review.
    First, pursuant to proposed paragraph (c)(1)(A), a transaction 
would continue to be eligible for clearly erroneous review if the 
transaction is not subject to the LULD Plan. In such case, the 
Numerical Guidelines set forth in paragraph (c)(2) of Rule 2621 will be 
applicable to such NMS Stock. While the majority of securities traded 
on the Exchange would be subject to the LULD Plan, certain equity 
securities, such as rights and warrants, are explicitly excluded from 
the provisions of the LULD Plan and would therefore be eligible for 
clearly erroneous review instead.\16\ Similarly, there are instances, 
such as the opening auction on the primary listing market,\17\ where 
transactions are not ordinarily subject to the LULD Plan, or 
circumstances where a transaction that ordinarily would have been 
subject to the LULD Plan is not--due, for example, to some issue with 
processing the Price Bands. These transactions would continue to be 
eligible for clearly erroneous review, effectively ensuring that such 
review remains available as a backstop when the LULD Plan would not 
prevent executions from occurring at erroneous prices in the first 
instance.
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    \16\ See Appendix A of the LULD Plan.
    \17\ The initial Reference Price used to calculate Price Bands 
is typically set by the Opening Price on the primary listing market. 
See Section V(B) of the LULD Plan.
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    Second, investors would also continue to be able to request review 
of transactions that resulted from certain systems issues pursuant to 
proposed paragraph (c)(1)(B). This limited exception would help to 
ensure that trades that should not have been executed would continue to 
be subject to clearly erroneous review. Specifically, as proposed, 
transactions would be eligible for clearly erroneous review pursuant to 
proposed paragraph (c)(1)(B) if the transaction is the result of an 
Exchange technology or systems issue that results in the transaction 
occurring outside of the applicable LULD Price Bands pursuant to 
Exchange Rule 2621(g). A transaction subject to review pursuant to this 
paragraph shall be found to be clearly erroneous if the price of the 
transaction to buy (sell) that is the subject of the complaint is 
greater than (less than) the Reference Price, described in paragraph 
(d) of this Rule, by an amount that equals or exceeds the applicable 
Percentage Parameter defined in Appendix A to the LULD Plan 
(``Percentage Parameters'').
    Third, the Exchange proposes to narrowly allow for the review of 
transactions when the Reference Price, described in proposed paragraph 
(d), is determined to be erroneous by an Officer of the Exchange. 
Specifically, a transaction would be eligible for clearly erroneous 
review pursuant to proposed paragraph (c)(1)(C) if the transaction 
involved, in the case of (1) a corporate action or new issue or (2) a 
security that enters a Trading Pause pursuant to the LULD Plan and 
resumes trading without an auction,\18\ a Reference Price that is 
determined to be erroneous by an Officer of the Exchange because it 
clearly deviated from the theoretical value of the security. In such 
circumstances, the Exchange may use a different Reference Price 
pursuant to proposed paragraph (d)(2) of this Rule. A transaction 
subject to review pursuant to this paragraph shall be found to be 
clearly erroneous if the price of the transaction to buy (sell) that is 
the subject of the complaint is greater than (less than) the new 
Reference Price, described in paragraph (d)(2) below, by an amount that 
equals or exceeds the applicable Numerical Guidelines or Percentage 
Parameters, as applicable depending on whether the security is subject 
to the LULD Plan. Specifically, the Percentage Parameters would apply 
to all transactions except those in an NMS Stock that is not subject to 
the LULD Plan, as described in paragraph (c)(1)(A).
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    \18\ The Exchange notes that the ``resumption of trading without 
an auction'' provision of the proposed rule text applies only to 
securities that enter a Trading Pause pursuant to LULD and does not 
apply to a corporate action or new issue.
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    In the context of a corporate action or a new issue, there may be 
instances where the security's Reference Price is later determined by 
the Exchange to be erroneous (e.g., because of a bad first trade for a 
new issue), and subsequent LULD Price Bands are calculated from that 
incorrect Reference Price. In determining whether the Reference Price 
is erroneous in such instances, the Exchange would generally look to 
see if such Reference Price clearly deviated from the theoretical value 
of the security. In such cases, the Exchange would consider a number of 
factors to determine a new Reference Price that is based on the 
theoretical value of the security, including but not limited to, the 
offering price of the new issue, the ratio of the stock split applied 
to the prior day's closing price, the theoretical price derived from 
the numerical terms of the corporate action transaction such as the 
exchange ratio and spin-off terms, and the prior day's closing price on 
the OTC market for an OTC up-listing.\19\ In the foregoing instances, 
the theoretical value of the security would be used as the new 
Reference Price when applying the Percentage Parameters under the

[[Page 58840]]

LULD Plan (or Numerical Guidelines if the transaction is in an NMS 
Stock that is not subject to the LULD Plan) to determine whether 
executions would be cancelled as clearly erroneous.
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    \19\ Using transaction data reported to the FINRA OTC Reporting 
Facility, FINRA disseminates via the Trade Data Dissemination 
Service a final closing report for OTC equity securities for each 
business day that includes, among other things, each security's 
closing last sale price.
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    The following illustrate the proposed application of the rule in 
the context of a corporate action or new issue:
Example 1
1. ABCD is subject to a corporate action, 1 for 10 reverse split, and 
the previous day close was $5, but the new theoretical price based on 
the terms of the corporate action is $50
2. The security opens at $5, with LULD bands at $4.50 x $5.50
3. The bands will be calculated correctly but the security is trading 
at an erroneous price based on the valuation of the remaining 
outstanding shares
4. The theoretical price of $50 would be used as the new Reference 
Price when applying LULD bands to determine if executions would be 
cancelled as clearly erroneous
Example 2
1. ABCD is subject to a corporate action, the company is doing a spin 
off where a new issue will be listed, BCDE. ABCD trades at $50, and the 
spinoff company is worth \1/5\ of ABCD
2. BCDE opens at $50 in the belief it is the same company as ABCD
3. The theoretical values of the two companies are ABCD $40 and BCDE 
$10
4. BCDE would be deemed to have had an incorrect Reference Price and 
the theoretical value of $10 would be used as the new Reference Price 
when applying the LULD Bands to determine if executions would be 
cancelled as clearly erroneous
Example 3
1. ABCD is an uplift from the OTC market, the prior days close on the 
OTC market was $20
2. ABCD opens trading on the new listing exchange at $0.20 due to an 
erroneous order entry
3. The new Reference Price to determine clearly erroneous executions 
would be $20, the theoretical value of the stock from where it was last 
traded

    In the context of the rare situation in which a security that 
enters a LULD Trading Pause and resumes trading without an auction 
(i.e., reopens with quotations), the LULD Plan requires that the new 
Reference Price in this instance be established by using the mid-point 
of the best bid and offer (``BBO'') on the primary listing exchange at 
the reopening time.\20\ This can result in a Reference Price and 
subsequent LULD Price Band calculation that is significantly away from 
the security's last traded or more relevant price, especially in less 
liquid names. In such rare instances, the Exchange is proposing to use 
a different Reference Price that is based on the prior LULD Band that 
triggered the Trading Pause, rather than the midpoint of the BBO.
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    \20\ See LULD Plan, Section I(U) and V(C)(1).
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    The following example illustrates the proposed application of the 
rule in the context of a security that reopens without an auction:
Example 4
1. ABCD stock is trading at $20, with LULD Bands at $18 x $22
2. An incoming buy order causes the stock to enter a Limit State 
Trading Pause and then a Trading Pause at $22
3. During the Trading Pause, the buy order causing the Trading Pause is 
cancelled
4. At the end of the 5-minute halt, there is no crossed interest for an 
auction to occur, thus trading would resume on a quote
5. Upon resumption, a quote that was available prior to the Trading 
Pause (e.g. a quote was resting on the book prior to the Trading 
Pause), is widely set at $10 x $90
6. The Reference Price upon resumption is $50 (mid-point of BBO)
7. The SIP will use this Reference Price and publish LULD Bands of $45 
x $55 (i.e., far away from BBO prior to the halt)
8. The bands will be calculated correctly, but the $50 Reference Price 
is subsequently determined to be incorrect as the price clearly 
deviated from where it previously traded prior to the Trading Pause
9. The new Reference Price would be $22 (i.e., the last effective Price 
Band that was in a limit state before the Trading Pause), and the LULD 
Bands would be applied to determine if the executions should be 
cancelled as clearly erroneous

    In all of the foregoing situations, investors would be left with no 
remedy to request clearly erroneous review without the proposed carve 
outs in paragraph (c)(1)(C) because the trades occurred within the LULD 
Price Bands (albeit LULD Price Bands that were calculated from an 
erroneous Reference Price). The Exchange believes that removing the 
current ability for the Exchange to review in these narrow 
circumstances would lessen investor protections.
Numerical Guidelines
    Today, paragraph (c)(1) defines the Numerical Guidelines that are 
used to determine if a transaction is deemed clearly erroneous during 
Regular Trading Hours. With respect to Regular Trading Hours, trades 
are generally deemed clearly erroneous if the execution price differs 
from the Reference Price (i.e., last sale) by 10% if the Reference 
Price is greater than $0.00 up to and including $25.00; 5% if the 
Reference Price is greater than $25.00 up to and including $50.00; and 
3% if the Reference Price is greater than $50.00. Wider parameters are 
also used for reviews for Multi-Stock Events, as described in paragraph 
(c)(2). With respect to transactions in Leveraged ETF/ETN securities 
executed during Regular Trading Hours, trades are deemed clearly 
erroneous if the execution price exceeds the Regular Trading Hours 
Numerical Guidelines multiplied by the leverage multiplier.
    Given the changes described in this proposed rule change, the 
Exchange proposes to amend the way that the Numerical Guidelines are 
calculated during Regular Trading Hours in the handful of instances 
where clearly erroneous review would continue to be available. 
Specifically, the Exchange would base these Numerical Guidelines, as 
applied to the circumstances described in paragraph (c)(1)(A), on the 
Percentage Parameters used to calculate Price Bands, as set forth in 
Appendix A to the LULD Plan. Without this change, a transaction that 
would otherwise stand if Price Bands were properly applied to the 
transaction may end up being subject to review and deemed clearly 
erroneous solely due to the fact that the Price Bands were not 
available due to a systems or other issue. The Exchange believes that 
it makes more sense to instead base the Price Bands on the same 
parameters as would otherwise determine whether the trade would have 
been allowed to execute within the Price Bands. The Exchange also 
proposes to modify the Numerical Guidelines applicable to leveraged 
ETF/ETN securities during Regular Trading Hours. As noted above, the 
Numerical Guidelines will only be applicable to transactions eligible 
for review pursuant paragraph (c)(1)(A) (i.e., to NMS Stocks that are 
not subject to the LULD Plan). As leveraged ETF/ETN securities are 
subject to LULD and thus the Percentage Parameters will be applicable 
during Regular Trading Hours, the Exchange proposes to eliminate the 
Numerical Guidelines for leveraged ETF/ETN securities traded during 
Regular Trading Hours.
    The Exchange also proposes to move existing paragraphs (c)(2), 
(c)(3), and (d) to proposed paragraph (c)(2)(B), (c)(2)(C), and 
(C)(2)(D), respectively, as

[[Page 58841]]

Multi-Stock Events, Additional Factors, and Outlier Transactions will 
only be subject to review if those NMS Stocks are not subject to the 
LULD Plan. Proposed paragraph (c)(2)(B) is substantially similar to 
existing paragraph (c)(2) except for a change in rule reference to 
paragraph (c)(1) has been updated to paragraph (c)(1)(A). Further, 
given the proposal to move existing paragraph (c)(2) to paragraph 
(c)(2)(B), the Exchange also proposes to amend applicable rule 
references throughout paragraph (c)(2)(A). Finally, the Exchange 
proposes to update applicable rule references in paragraph (c)(2)(D) 
based on the above-described structural changes to the Rule.
Reference Price
    As proposed, the Reference Price used would continue to be based on 
last sale and would be memorialized in proposed paragraph (d). 
Continuing to use the last sale as the Reference Price is necessary for 
operational efficiency as it may not be possible to perform a timely 
clearly erroneous review if doing so required computing the arithmetic 
mean price of eligible reported transactions over the past five 
minutes, as contemplated by the LULD Plan. While this means that there 
would still be some differences between the Price Bands and the clearly 
erroneous parameters, the Exchange believes that this difference is 
reasonable in light of the need to ensure timely review if clearly 
erroneous rules are invoked. The Exchange also proposes to allow for an 
alternate Reference Price to be used as prescribed in proposed 
paragraphs (d)(1), (2), and (3). Specifically, the Reference Price may 
be a value other than the consolidated last sale immediately prior to 
the execution(s) under review (1) in the case of Multi-Stock Events 
involving twenty or more securities, as described in paragraph 
(c)(2)(B) above, (2) in the case of an erroneous Reference Price, as 
described in paragraph (c)(1)(C) above,\21\ or (3) in other 
circumstances, such as, for example, relevant news impacting a security 
or securities, periods of extreme market volatility, sustained 
illiquidity, or widespread system issues, where use of a different 
Reference Price is necessary for the maintenance of a fair and orderly 
market and the protection of investors and the public interest, 
provided that such circumstances are eligible for review pursuant to 
paragraph (c)(1)(A).
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    \21\ As discussed above, in the case of (c)(1)(C)(1), the 
Exchange would consider a number of factors to determine a new 
Reference Price that is based on the theoretical value of the 
security, including but not limited to, the offering price of the 
new issue, the ratio of the stock split applied to the prior day's 
closing price, the theoretical price derived from the numerical 
terms of the corporate action transaction such as the exchange ratio 
and spin-off terms, and the prior day's closing price on the OTC 
market for an OTC up-listing. In the case of (c)(1)(C)(2), the 
Reference Price will be the last effective Price Band that was in a 
limit state before the Trading Pause.
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Appeals
    As described more fully below, the Exchange proposes to eliminate 
paragraph (f), System Disruption or Malfunction. Accordingly, the 
Exchange proposes to remove from paragraph (e)(2), Appeals, each 
reference to paragraph (f), and include language referencing proposed 
paragraph (g), Transactions Occurring Outside of the LULD Bands.
System Disruption or Malfunction
    To conform with the structural changes descried above, the Exchange 
proposes to remove paragraph 2621(f), System Disruption or Malfunction, 
and propose new paragraph (c)(1)(B). Specifically, as described in 
proposed paragraph (c)(1)(B) above, transactions occurring during 
Regular Trading Hours that are executed outside of the LULD Price Bands 
due to an Exchange technology or system issue, may be subject to 
clearly erroneous review pursuant to proposed paragraphs 2621(g). 
Proposed paragraph 2621(c)(1)(B) further provides that a transaction 
subject to review pursuant to this paragraph shall be found to be 
clearly erroneous if the price of the transaction to buy (sell) that is 
the subject of the complaint is greater than (less than) the Reference 
Price, described in paragraph (d), by an amount that equals or exceeds 
the applicable Percentage Parameter defined in Appendix A to the LULD 
Plan.
Trade Nullification for UTP Securities That Are the Subject of Initial 
Public Offerings
    Current paragraph (h) of BZX Rule 11.17 provides different 
procedures for conducting clearly erroneous review in initial public 
offering (``IPO'') securities that are traded pursuant to unlisted 
trading privileges (``UTP'') after the initial opening of such IPO 
securities on the listing market. Specifically, this paragraph provides 
that a clearly erroneous error may be deemed to have occurred in the 
opening transaction of the subject security if the execution price of 
the opening transaction on the Exchange is the lesser of $1.00 or 10% 
away from the opening price on the listing exchange or association. The 
Exchange no longer believes that this provision is necessary as opening 
transactions on the Exchange following an IPO are subject to Price 
Bands pursuant to the LULD Plan. The Exchange therefore proposes to 
eliminate this provision in connection with the broader changes to 
clearly erroneous review during Regular Trading Hours.
Securities Subject To Limit Up-Limit Down Plan
    The Exchange proposes to renumber paragraph (i) to paragraph (h) 
based on the proposal to eliminate existing paragraph (h), and to 
rename the paragraph to provide for transactions occurring outside of 
LULD Price Bands. Given that proposed paragraph (c)(1) defines the LULD 
Plan, the Exchange also proposes to eliminate redundant language from 
proposed paragraph (h). Finally, the Exchange also proposes to update 
references to the LULD Plan and Price Bands so that they are uniform 
throughout the Rule and to update rule references throughout the 
paragraph to conform to the structural changes to the Rule described 
above.
Multi-Day Event and Trading Halts
    The Exchange proposes to renumber paragraphs (j) and (k) to 
paragraphs (h) and (i), respectively, based on the proposal to 
eliminate existing paragraph (h). Additionally, the Exchange proposes 
to modify the text of both paragraphs to reference the Percentage 
Parameters as well as the Numerical Guidelines. Specifically, the 
existing text of proposed paragraphs (h) and (i) provides that any 
action taken in connection with this paragraph will be taken without 
regard to the Numerical Guidelines set forth in this Rule. The Exchange 
proposes to amend the rule text to provide that any action taken in 
connection with this paragraph will be taken without regard to the 
Percentage Parameters or Numerical Guidelines set forth in this Rule, 
with the Percentage Parameters being applicable to an NMS Stock subject 
to the LULD Plan and the Numerical Guidelines being applicable to an 
NMS Stock not subject to the LULD Plan.
Implementation
    The proposed rule change would be effective on October 1, 2022.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the requirements of Section 6(b) of the Act,\22\ in general, and 
Section 6(b)(5) of the Act,\23\ in particular, in that it is designed 
to remove impediments to and perfect the mechanism of a free and

[[Page 58842]]

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.
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    \22\ 15 U.S.C. 78f(b).
    \23\ 15 U.S.C. 78f(b)(5).
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    As explained in the purpose section of this proposed rule change, 
the current program was implemented following the Flash Crash to bring 
greater transparency to the process for conducting clearly erroneous 
reviews, and to help assure that the review process is based on clear, 
objective, and consistent rules across the U.S. equities markets. The 
Exchange believes that the amended clearly erroneous rules have been 
successful in that regard and have thus furthered fair and orderly 
markets. Specifically, the Exchange believes that the program has 
successfully ensured that such reviews are conducted based on objective 
and consistent standards across SROs and has therefore afforded greater 
certainty to Members and investors. The Exchange therefore believes 
that equities market participants should continue to reap the benefits 
of a clear, objective, and transparent process for conducting clearly 
erroneous reviews. In addition, this proposed rule change present no 
new or novel issues because it is based on the rules of Cboe BZX 
Exchange, Inc. (``BZX'') which were recently approved by the 
Commission.\24\ The Exchange also understands that the other U.S. 
equities exchanges and FINRA will also file largely identical proposals 
to make their respective clearly erroneous pilots permanent. The 
Exchange therefore believes that the proposed rule change would promote 
transparency and uniformity across markets concerning review of 
transactions as clearly erroneous and would also help assure consistent 
results in handling erroneous trades across the U.S. equities markets, 
thus furthering fair and orderly markets, the protection of investors, 
and the public interest.
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    \24\ See supra note 7.
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    Similarly, the Exchange believes that it is consistent with just 
and equitable principles of trade to limit the availability of clearly 
erroneous review during Regular Trading Hours. The Plan was approved by 
the Commission to operate on a permanent rather than pilot basis. As a 
number of market participants have noted, the LULD Plan provides 
protections that ensure that investors' orders are not executed at 
prices that may be considered clearly erroneous. Further, amendments to 
the LULD Plan approved in Amendment Eighteen serve to ensure that the 
Price Bands established by the LULD Plan are ``appropriately tailored 
to prevent trades that are so far from current market prices that they 
would be viewed as having been executed in error.'' \25\ Thus, the 
Exchange believes that clearly erroneous review should only be 
necessary in very limited circumstances during Regular Trading Hours. 
Specifically, such review would only be necessary in instances where a 
transaction was not subject to the LULD Plan, or was the result of some 
form of systems issue, as detailed in the purpose section of this 
proposed rule change. Additionally, in narrow circumstances where the 
transaction was subject to the LULD Plan, a clearly erroneous review 
would be available in the case of (1) a corporate action or new issue 
or (2) a security that enters a Trading Pause pursuant to LULD and 
resumes trading without an auction, where the Reference Price is 
determined to be erroneous by an Officer of the Exchange because it 
clearly deviated from the theoretical value of the security. Thus, 
eliminating clearly erroneous review in all other instances will serve 
to increase certainty for Members and investors that trades executed 
during Regular Trading Hours would typically stand and would not be 
subject to review.
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    \25\ See Amendment Eighteen, supra note 5.
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    Given the fact that clearly erroneous review would largely be 
limited to transactions that were not subject to the LULD Plan, the 
Exchange also believes that it is necessary to change the parameters 
used to determine whether a trade is clearly erroneous. Specifically, 
due to the different parameters currently used for clearly erroneous 
review and for determining Price Bands, it is possible that a trade 
that would have been permitted to execute within the Price Bands would 
later be deemed clearly erroneous, if, for example, a systems issue 
prevented the dissemination of the Price Bands. The Exchange believes 
that this result is contrary to the principle that trades within the 
Price Bands should stand, and has the potential to cause investor 
confusion if trades that are properly executed within the applicable 
parameters described in the LULD Plan are later deemed erroneous. By 
using consistent parameters for clearly erroneous reviews conducted 
during Regular Trading Hours and the calculation of the Price Bands, 
the Exchange believes that this change would also serve to promote 
greater certainty with regards to when trades may be deemed erroneous.
    The Exchange believes that it is consistent with the protection of 
investors and the public interest to remove the current provision of 
the clearly erroneous rule dealing with UTP securities that are the 
subject of IPOs. This provision applies specifically to opening 
transactions on a non-listing market following an IPO on the listing 
market. As such, review under this paragraph is limited to trades 
conducted during Regular Trading Hours. As previously addressed, trades 
executed during Regular Trading Hours would generally not be subject to 
clearly erroneous review but would instead be protected by the Price 
Bands. The Exchange therefore no longer believes that this paragraph is 
necessary, as all trades subject to this provision today would either 
be subject to the LULD Plan, or, in the event of some systems or other 
issue, would be subject to the provisions that apply to transactions 
that are not adequately protected by the LULD Plan.
    Finally, the proposed rule changes make organizational updates to 
the Exchange's Clearly Erroneous Execution Rule as well as minor 
updates and corrections to the Rule to improve readability and clarity.

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 proposal would ensure 
the continued, uninterrupted operation of harmonized clearly erroneous 
execution rules across the U.S. equities markets while also amending 
those rules to provide greater certainty to Members and investors that 
trades will stand if executed during Regular Trading Hours where the 
LULD Plan provides adequate protection against trading at erroneous 
prices. This proposed rule change is based on changes to BZX Rule 
11.17, which were recently approved by the Commission.\26\ The Exchange 
understands that the other national securities exchanges and FINRA will 
also file similar proposals, the substance of which are identical to 
this proposal. Thus, the proposed rule change will help to ensure 
consistency across SROs without implicating any competitive issues.
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    \26\ See supra note 7.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

[[Page 58843]]

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 after the date of the filing, or such 
shorter time as the Commission may designate, it has become effective 
pursuant to 19(b)(3)(A) of the Act \27\ and Rule 19b-4(f)(6) \28\ 
thereunder.
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    \27\ 15 U.S.C. 78s(b)(3)(A).
    \28\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file 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) \29\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, Rule 19b-4(f)(6)(iii) \30\ 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 operative on October 1, 2022. 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 
Exchange to coordinate its implementation of the revised clearly 
erroneous execution rules with the other national securities exchanges 
and FINRA, and will help ensure consistency across the SROs.\31\ For 
this reason, the Commission hereby waives the 30-day operative delay 
and designates the proposed rule change as operative upon filing.\32\
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    \29\ 17 CFR 240.19b-4(f)(6).
    \30\ 17 CFR 240.19b-4(f)(6)(iii).
    \31\ See SR-CboeBZX-2022-37 (July 8, 2022).
    \32\ 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-PEARL-2022-41 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-PEARL-2022-41. 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, 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. 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-PEARL-2022-41 and should be submitted on 
or before October 19, 2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\33\
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    \33\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-20955 Filed 9-27-22; 8:45 am]
BILLING CODE 8011-01-P