18762 Federal Register / Vol. 74, No. 78 / Friday, April 24, 2009 / Notices 

10The function of the Vice Chair was to preside 

over meetings of the Board in the absence of the 

Chair. See Phlx By-Law Sec. 28–12. 

11With the acquisition of the Exchange by The 

NASDAQ OMX GROUP, Inc., the Philadelphia 

Board of Trade, Inc (‘‘PBOT’’) (n/k/a NASDAQ 

OMX Futures Exchange, Inc.) became a subsidiary 

of the parent holding company. Accordingly, the 

Exchange determined that it was no longer 

appropriate to provide for this special 

representation on the Board. See Notice, supra note 

3, at 74 FR 11157. 

12See the Exchange’s Certificate of Incorporation, 

Article Sixth. 

13The election of the Designated Governors is 

conducted pursuant to the Exchange’s Trust 

Agreement under which an independent trustee 

exercises voting authority with respect to the one 

outstanding share of Series A Preferred Stock, 

which share has the exclusive right to elect and 

remove such Governors. The Series A Preferred 

Stock is voted by the trustee, pursuant to the Trust 

Agreement, as directed by Phlx members in 

accordance with the Exchange’s governing 

documents. 

14 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3The term ‘‘Trading Officials’’ currently means 

two Exchange members designated as Floor 

Officials and one member of the Exchange’s staff 

designated to perform Trading Official functions. 

See Rules 6.25.02 and 24.16.02. 

vote for a Designated Governor position, 

Member Organization Representatives 

would have the opportunity to vote on 

the list of candidates, and the Exchange 

would utilize a balloting process rather 

than hold a formal meeting of members. 

The Exchange also proposed to delete 

the position of Vice Chair, which is a 

position that Nasdaq does not 

maintain.10 In addition, the Exchange 

proposed to eliminate the PBOT 

Governor position and replace it with a 

new Designated Independent Governor 

position.11 The Exchange’s current 

Certificate of Incorporation specifies 

that the Board shall be composed of ‘‘[a] 

number of Designated Independent 

Governors, which, together with the 

Member Governor and the PBOT 

Governor, shall equal at least 20% of the 

total number of Governors* * *’’ 12

Because the Exchange proposed to 

replace the PBOT Governor position 

with a new Designated Independent 

Governor, which position, like all other 

‘‘Designated’’ Governor positions, 

would be selected pursuant to a process 

that involves member input, the 

proposal does not change the 

composition of the Board with respect 

to the minimum percentage of 

Governors that would be selected 

pursuant to member input.13

Finally, the Exchange proposed to 

modify the process for filing vacancies 

on the Board to reflect the newly 

proposed structure. Among other things, 

in the event of a vacancy, the 

appropriate nominating committee 

would nominate, and the Board would 

appoint, a replacement Governor. For 

example, in the event of a vacancy in 

the Member Governor position, the new 

Member Nominating Committee would 

nominate a replacement. 

Accordingly, the proposed changes 

will more closely align Phlx’s 

governance structure to that of Nasdaq, 

which, like the Exchange, is a 

subsidiary of NASDAQ OMX GROUP, 

Inc. At the same time, the proposed 

changes will continue to assure the fair 

representation of the Exchange’s 

members in the selection of the 

Exchange’s directors and administration 

of its affairs. 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act, that the 

proposed rule change (SR–Phlx–2009– 

17) be, and it hereby is, approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.14

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–9389 Filed 4–23–09; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–59793; File No. SR–CBOE– 

2009–024] 

Self-Regulatory Organizations; 

Chicago Board Options Exchange, 

Incorporated; Notice of Filing of a 

Proposed Rule Change Related to Its 

Obvious Error Rules 

April 20, 2009. 

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 April 8, 

2009, the Chicago Board Options 

Exchange, Incorporated (the ‘‘Exchange’’ 

or ‘‘CBOE’’) filed with the Securities 

and Exchange Commission (the 

‘‘Commission’’) the proposed rule 

change as described in Items I, II, and 

III 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. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange proposes to amend 

Rules 6.25, Nullification and 

Adjustment of Equity Options 

Transactions, and 24.16, Nullification 

and Adjustment of Transactions in 

Index Options, Options on ETFs and 

Options on HOLDRS. The text of the 

proposed rule change is available on the 

Exchange’s Web site (http:// 

www.cboe.org/Legal), at the Office of the 

Secretary, CBOE and at the Commission. 

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 the 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

CBOE proposes to amend Rules 6.25 

and 24.16, pertaining to the nullification 

and adjustment of options transactions, 

in several respects. 

Merging Rules. The Exchange is 

proposing to merge Rule 24.16 (which 

currently relates to only index, ETF and 

HOLDRS options) into Rule 6.25 (which 

currently relates to only equity options) 

to form a single obvious error rule. This 

merger will simplify the administration 

of the rules and incorporate a uniform 

obvious error approach for all equity, 

index, ETF, and HOLDRS options. 

Obvious Pricing Errors. The Exchange 

is proposing certain changes to the 

Obvious Pricing Error provision of Rule 

6.25. Under the current rule, an Obvious 

Pricing Error occurs when the execution 

price of an electronic transaction is 

above or below the Theoretical Price for 

the series by a specified amount. For 

purpose of the rule, the ‘‘Theoretical 

Price’’ of an option series is currently 

defined, for series traded on at least one 

other options exchange, as the last bid 

price with respect to an erroneous sell 

transaction and the last offer price with 

respect to an erroneous buy transaction, 

just prior to the trade, disseminated by 

the competing options exchange that 

has the most liquidity in that option 

class in the previous two calendar 

months. If there are no quotes for 

comparison, Trading Officials 3

determine the Theoretical Price. 

First, the Exchange is proposing to 

amend Rule 6.25’s definition of 

‘‘Theoretical Price’’ to base it on the 

national best bid or offer (‘‘NBBO’’) 

instead of the market with the most 

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4Under Rule 24.16, an Obvious Pricing Error is 

currently deemed to have occurred when the 

execution price of a transaction is above or below 

the fair market value of the option by at least a 

prescribed minimum error amount. The ‘‘fair 

market value’’ of an option is currently defined as 

the midpoint of the national best bid and national 

best offer for the series (across all exchanges trading 

the option). In multiply listed issues, if there are no 

quotes for comparison purposes, fair market value 

is determined by Trading Officials. For singly listed 

issues, fair market value is the midpoint of the first 

quote after the transaction(s) in question that does 

not reflect the erroneous transaction(s). 

5For erroneous sell transactions, the size of the 

bid would be used. For erroneous buy transactions, 

the size of the offer would be used. For example, 

assume that the opening transactions in series XYZ 

totaled 200 contracts at a price $0.75. Also assume 

that a member representing non-CBOE MarketMaker A sold 200 contracts, trading 100 contracts 

with CBOE Market-Maker B and 100 contracts with 

non-CBOE Market-Maker C. Finally, assume that 

the first quote after the transaction in question that 

does not reflect the erroneous transaction is bid 100 

contracts for $1.10 and offered 150 contracts at 

$1.25. In this scenario, an erroneous sell transaction 

would be deemed to have occurred in accordance 

with the obvious price error provision because the 

$0.75 price received by non-CBOE Market-Maker A 

is lower than the fair market value of $1.10 by at 

least the prescribed minimum error amount of 

$0.25. In addition, because the size of the bid in the 

first quote after that does not reflect the erroneous 

transaction is for 100 contracts, up to 100 contracts 

executed on the opening on behalf of non-CBOE 

Market-Maker A would be subject to nullification 

or adjustment under the Obvious Pricing Error 

provision. 

6Thus, 50 contracts executed against CBOE 

Market-Maker B would have a price adjustment to 

$1.10 (provided the adjusted price does not violate 

A’s limit price) and 50 contracts executed against 

non-CBOE Market-Maker C would have a price 

adjustment to $1.10 (provided the adjusted price 

does not violate C’s limit price). 

7CBOE’s and the CBOE Futures Exchange, LLC’s 

(a designated contract market approved by the 

Commodity Futures Trading Commission and a 

wholly-owned subsidiary of CBOE) rules provide 

for the listing and trading of options and futures, 

as applicable, on various volatility indexes. The 

Obvious Pricing Error provision would be utilized 

only for those index options series used to calculate 

the final settlement price of a volatility index and 

only on the final settlement date of the options and 

futures contracts on the applicable volatility index 

in each expiration month. Thus, for example, the 

proposed obvious price error provision would be 

used for the relevant Standard & Poor’s 500 Stock 

Index (‘‘SPX’’) options series on settlement days for 

CBOE Volatility Index (‘‘VIX’’) options and futures 

contracts. 

8For example, if the opening trade in Series XYZ 

is for a total of 200 contracts and the bid or offer, 

as applicable, of the first quote after the 

transaction(s) in question that does not reflect the 

erroneous transaction(s) is for 500 contracts, then 

the quote would be used to determine Theoretical 

Price and whether an Obvious Pricing Error 

occurred. If the bid or offer, as applicable, of the 

quote is for only 100 contracts, then the trade 

would not be subject to nullification or adjustment 

under the Obvious Pricing Error provision. 

liquidity. Using the NBBO to define 

Theoretical Price is similar to how ‘‘fair 

market value’’ is currently defined for 

obvious pricing errors under Rule 

24.16.4

Second, the Exchange is proposing to 

permit Trading Officials to establish the 

Theoretical Price when the NBBO for 

the affected series, just prior to the 

erroneous transaction, is at least two 

times the permitted bid/ask differential 

under subparagraph (b)(iv)(A) of Rule 

8.7, Obligations of Market-Makers. This 

provision is similar to a provision in the 

Nasdaq OMX Phlx’s (‘‘Phlx’’) obvious 

error rule, Phlx Rule 1092. 

Third, the Exchange is proposing to 

provide for the adjustment of Obvious 

Pricing Error transactions involving 

non-CBOE Market-Makers provided the 

adjusted price does not violate the nonCBOE Market-Maker’s limit price. By 

comparison, under the current 

provisions of Rule 6.25, such Obvious 

Pricing Error transactions involving 

non-CBOE Market-Makers are generally 

nullified (though certain transactions 

involving non-broker-dealer Customer 

orders are subject to adjustment if 

notification of the error is received more 

than fifteen minutes after the 

transaction). Allowing for adjustments 

to the extent possible within a nonCBOE Market-Maker’s limit price is 

similar to how Rule 24.16 currently 

operates. 

Fourth, the Exchange is proposing to 

revise the Obvious Pricing Error 

provision as it pertains to transactions 

occurring as part of the Rule 6.2A, 

Rapid Opening System (‘‘ROS’’), or Rule 

6.2B, Hybrid Opening System (‘‘HOSS’’), 

rotations. Currently, for transactions 

occurring as part of ROS or HOSS, 

Theoretical Price is defined as the first 

quote after the transaction(s) in question 

that does not reflect the erroneous 

transaction(s). The Exchange is 

proposing to revise the Theoretical Price 

calculation to provide additional 

conditions that would apply during 

regular ROS and HOSS rotations and 

during HOSS rotations in index options 

series that are being used to calculate 

the final settlement price of volatility 

indexes. The additional conditions, 

which are the same as the conditions 

that currently apply for HOSS 

transactions under Rule 24.16, are 

intended to reasonably factor the 

amount of available liquidity into the 

Theoretical Price calculation during 

these rotations. Specifically, with 

respect to regular ROS and HOSS 

rotations, the Exchange is proposing to 

add a condition that the option contract 

quantity subject to nullification or 

adjustment would not exceed the size of 

the first quote after the transaction(s) in 

question that does not reflect the 

erroneous transaction(s).5 Any 

nullifications or adjustments would 

occur on a pro rata basis considering the 

overall size of the ROS or HOSS 

opening trade.6

With respect to HOSS rotations in 

index options series being used to 

calculate the final settlement price of a 

volatility index,7 the Exchange is 

proposing to carryover a condition from 

Rule 24.16 that the first quote after the 

transaction(s) in question that does not 

reflect the erroneous transaction(s) must 

be for at least the size of the HOSS 

opening transaction(s). If the size of the 

quote is less than the size of the opening 

transaction(s), then the Obvious Pricing 

Error provision shall not apply.8

Fifth, the Exchange is proposing to 

extend the expanded notification period 

applicable to transactions during 

opening rotations involving non-brokerdealer Customers to include certain 

orders entered before the opening that 

are executed immediately following the 

opening rotation. Specifically, Rule 6.25 

currently requires that members notify 

CBOE Trading Officials or designated 

personnel in the control room within a 

short time period following the 

execution of a trade (generally 15 

minutes) if they believe the trade 

qualifies as an Obvious Pricing Error. 

However, an expanded notification 

period is available for transactions 

during option rotation where at least 

one party to the transaction is a nonbroker-dealer Customer. The application 

of this expanded notification period is 

currently limited to executions during 

opening rotations occurring as part of 

ROS or HOSS. The Exchange is 

proposing to amend the expanded 

notification period to be applicable to 

transactions involving non-brokerdealer Customers’ marketable orders 

that are entered before the opening 

rotation and that are executed as part of 

the Hybrid Agency Liaison (‘‘HAL’’) on 

the opening process, which is an 

automated procedure that auctions 

marketable orders entered prior to the 

opening rotation but that are not able to 

be executed as part of the HOSS single 

clearing price under Rule 6.2B.03. The 

Exchange is also proposing to make the 

expanded notification period applicable 

to transactions involving non-brokerdealer Customers’ complex orders that 

are entered before the opening rotation 

and that are executed immediately 

following the opening rotation through 

the Exchange’s electronic Complex 

Order Book under Rule 6.53C, Complex 

Orders on the Hybrid System, provided 

such a complex order would have been 

marketable against the opening rotation 

price(s) but for the fact that the complex 

orders do not eligible to participate in 

the opening rotation process under Rule 

6.2B. As with our reasoning for adopting 

the existing relief for transactions 

during ROS and HOSS opening 

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18764 Federal Register / Vol. 74, No. 78 / Friday, April 24, 2009 / Notices 

9As discussed further below, Rule 6.25 assesses 

a ‘‘penalty’’ in that the adjustment price is not as 

favorable as what the party making the error would 

have received had it not made the error. 

10This proposed limitation on obvious pricing 

error adjustments for binary options is similar to an 

existing limitation on obvious pricing error 

adjustments for Credit Options. See Rule 29.15, 

Nullification and Adjustments for Credit Option 

Transactions. 11The Exchange does not believe the type of 

extreme situation that is covered by the proposed 

rule would occur in the normal course of trading. 

Rather, this type of situation could potentially 

occur as a result of, for example, an error in a 

member’s quotation system that causes a market 

maker to severely misprice an option. 

12Under the proposal, the proposed Minimum 

Amount would be the same as the corresponding 

Adjustment Values for Catastrophic Errors. By 

contrast, under ISE’s rule for catastrophic errors, the 

minimum error amount and corresponding 

adjustment value may vary. See proposed CBOE 

Rule 6.25(a)(1) and (d), and ISE Rule 720(a)(2) and 

(d)(3). 

rotations, our intention of extending the 

expanded notification period to cover 

these two scenarios involving orders 

entered prior to the opening rotation is 

to protect the non-broker-dealer 

Customer who fails to discover an 

Obvious Pricing Error within 15 

minutes of execution from being forced 

to accept an execution price that results 

from an Obvious Pricing Error. 

Lastly with respect to Obvious Pricing 

Errors in binary options, the Exchange 

is proposing to provide that any price 

adjustment for a binary option series 

(including any adjustment penalty that 

may be applicable to transactions 

between CBOE Market-Makers) 9 shall 

not exceed the applicable exercise 

settlement amount for the binary option. 

As defined in CBOE Rule 22.1(e), the 

term ‘‘exercise settlement amount’’ as 

when used in reference to a binary 

option means the amount of cash that a 

holder will receive upon exercise of the 

contract.10

Catastrophic Pricing Errors 

The Exchange is proposing to adopt a 

Catastrophic Pricing Error provision to 

address certain extreme circumstances, 

which provision would be similar to 

International Securities Exchange’s 

(‘‘ISE’’) catastrophic pricing error 

provision, ISE Rule 720. In particular, 

the Exchange proposes to add criteria 

for identifying ‘‘Catastrophic Errors’’ 

and making adjustments when 

Catastrophic Errors occur, as well as a 

streamlined procedure for reviewing 

actions taken in these extreme 

circumstances. As discussed above, 

currently under Rule 6.25, trades that 

result from an Obvious Pricing Error 

may be adjusted or busted according to 

objective standards. Under the Rule, 

whether an Obvious Pricing Error has 

occurred is determined by comparing 

the execution price to the Theoretical 

Price of the option. The rule requires 

that members notify CBOE Trading 

Officials or designated personnel in the 

control room within a short time period 

following the execution of a trade 

(generally 15 minutes) if they believe 

the trade qualifies as an Obvious Pricing 

Error. Trades that qualify for adjustment 

or nullified under the Rule to a price 

that matches the theoretical price plus 

or minus an adjustment penalty for 

transactions between CBOE MarketMakers, which is $0.15 if the 

Theoretical Value is under $3 and $0.30 

if the Theoretical Value is at or above 

$3. 

In formulating the Obvious Pricing 

Error rule, the Exchange has weighed 

carefully the need to assure that one 

market participant is not permitted to 

receive a windfall at the expense of 

another market participant that made an 

Obvious Pricing Error, against the need 

to assure that market participants are 

not simply being given an opportunity 

to reconsider poor trading decisions. 

The Exchange states that, while it 

believes that the Obvious Pricing Error 

rule strikes the correct balance in most 

situations, in some extreme situations, 

members may not be aware of errors that 

result in very large losses within the 

time periods required under the Rule. In 

this type of extreme situation, CBOE 

believes members should be given more 

time to seek relief so that there is a 

greater opportunity to mitigate very 

large losses and reduce the 

corresponding large windfalls. However, 

to maintain the appropriate balance, the 

Exchange believes members should only 

be given more time when the execution 

price is much further away from the 

Theoretical Price than is required for 

Obvious Pricing Errors, and that the 

adjustment ‘‘penalty’’ should be much 

greater, so that relief is only provided in 

extreme circumstances.11

Accordingly, the Exchange proposes 

to amend Rule 6.25 to address 

‘‘Catastrophic Errors.’’ Under the new 

provision, members will have until 7:30 

a.m. Central Time on the day following 

the trade to notify Trading Officials or 

designated personnel in the control 

room of a potential Catastrophic Error. 

For trades that take place in an expiring 

series on expiration Friday, notification 

must be received by 4 p.m. Central Time 

that same day. Once notification of a 

Catastrophic Error has been received 

within the required time period, a panel 

comprised of at least one (1) member of 

the Exchange’s staff designated to 

perform Catastrophic Error Panel 

functions and four (4) Exchange 

members (the ‘‘Panel’’) will review the 

Catastrophic Error claim. Fifty percent 

of the number of Exchange members on 

the Panel must be directly engaged in 

market making activity and fifty percent 

of the number of Exchange members on 

the Panel must act in the capacity of a 

floor broker. 

In the event the Panel determines that 

a Catastrophic Error did not occur, the 

member that initiated the review will be 

charged $5,000 to reimburse the 

Exchange for the costs associated with 

reviewing the claim. A Catastrophic 

Error would be deemed to have 

occurred when the execution price of a 

transaction is higher or lower than the 

Theoretical Price for the option by an 

amount equal to at least the amount 

shown in the second column of the 

chart below (the ‘‘Minimum Amount’’), 

and the adjustment would be made plus 

or minus the amount shown in column 

three of the chart below (the 

‘‘Adjustment Value’’).12 At all price 

levels, the Minimum Amount and the 

Adjustment Value for Catastrophic 

Errors would be significantly higher 

than for Obvious Pricing Errors, which 

the Exchange believes, would limit the 

application of the proposed rule to 

situations where the losses are very 

large. 

Theoretical price Minimum 

amount 

Adjustment 

value 

Below $2 .................................................................................................................................................................. $1 $1 

$2 to $5 .................................................................................................................................................................... 2 2 

Above $5 to $10 ...................................................................................................................................................... 3 3 

Above $10 to $50 .................................................................................................................................................... 5 5 

Above $20 to $50 .................................................................................................................................................... 7 7 

Above $50 to $100 .................................................................................................................................................. 10 10 

Above $100 .............................................................................................................................................................. 15 15 

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13An ‘‘index value’’ is the value of an index as 

calculated and reported by the index’s reporting 

authority. Use of an index value would only be 

applicable for purposes of identifying an erroneous 

print in the underlying (and not an erroneous 

quote). See Rule 24.16(a)(3). 

14As with Rule 24.16, under Rule 6.25 the 

Exchange is only proposing that it may designate 

underlying or related ETF(s), HOLDRS(s), and/or 

index value(s), and/or related futures product(s). 

The Exchange is not proposing to designate any of 

the individual underlying stocks (or related options 

or futures on any of the individual underlying 

stocks) that comprise a particular ETF, HOLDR or 

index. (Any such proposal would be the subject of 

a separate rule filing.) 

15Using this example, under the revised rule, the 

designated instruments and markets would be 

announced by Regulatory Circular. Thereafter, for a 

transaction in the QQQ options class to be adjusted 

or nullified due to an erroneous print in an 

underlying or related instrument that is later 

cancelled or corrected, the trade must be the result 

of: (i) An erroneous print in the underlying Nasdaq 

100 ETF that is higher or lower than the average 

trade in the underlying Nasdaq 100 ETF on the 

primary market during a two-minute period before 

and after the erroneous print by an amount at least 

five times greater than the average quote width for 

the ETF during the same period, or (ii) an erroneous 

print in the designated futures product overlying 

the Nasdaq 100 Index that is higher or lower than 

the average trade in the designated futures product 

on the designated market during a two-minute 

period before and after the erroneous print by an 

amount at least five times greater than the average 

quote width for the futures product during the same 

period. For an options transaction to be adjusted or 

nullified due to an erroneous quote in an 

underlying or related instrument, an erroneous 

quote would occur when: (i) The underlying 

Nasdaq 100 ETF has a width of at least $1.00 and 

has a width at least five times greater than the 

average quote width for such ETF on the primary 

market during the time period encompassing two 

minutes before and after the dissemination of such 

quote, or (ii) the designated futures product 

overlying the Nasdaq 100 Index has a width of at 

least $1.00 and has a width at least five times 

greater than the average quote width for such 

futures product on the designated market during the 

period encompassing two minutes before and after 

the dissemination of such quote. 

16Using this example, under the revised rule, the 

relevant market(s) would be announced by 

Regulatory Circular. Thereafter, for a transaction in 

the IBM options class to be adjusted or nullified 

due to an erroneous print in an underlying security 

that is later cancelled or corrected, the trade must 

be the result of an erroneous report of the 

underlying IBM stock value on NYSE or CBSX that 

is higher or lower than the average price in the 

stock on the NYSE or CBSX market, as applicable, 

during a two-minute period before and after the 

erroneous report by an amount at least five times 

higher or lower than the difference between the 

highest and lowest index values during the same 

period. To be adjusted or nullified due to an 

erroneous quote in the underlying security, an 

erroneous quote would occur when the IBM quote 

Continued 

Erroneous Prints & Quotes in the 

Underlying. The Exchange is proposing 

various changes to the provisions of 

Rule 6.25 relating to erroneous prints 

and quotes in the underlying. Under the 

current rule, an option trade resulting 

from an erroneous print disseminated 

by the underlying market which is later 

cancelled or corrected by the underlying 

market may be nullified, provided the 

option trade results from a print that is 

higher or lower than the average trade 

in the underlying security during a twominute period before and after the 

erroneous print by an amount at least 

five times greater than the average quote 

width for such underlying security for 

the same period. For purposes of the 

erroneous print provision, the ‘‘average 

trade’’ in the underlying security is 

determined by adding the prices of each 

trade during the four minute period 

(excluding the trade in question) and 

dividing by the number of trades during 

such time period (excluding the trade in 

question). The ‘‘average quote width’’ is 

determined by adding the quote widths 

for each separate quote during the four 

minute period (excluding the quote in 

question) and dividing by the number of 

quotes during such time period 

(excluding the quote in question). In 

addition, electronic trades resulting 

from an erroneous quote in the 

underlying security may be adjusted or 

nullified in accordance with the 

adjustment calculation for Obvious 

Pricing Errors. An ‘‘erroneous quote’’ 

occurs when the underlying security has 

a width of $1 and has a width at least 

five times greater than the average quote 

width (as defined above) for such 

underlying security on the primary 

market during the period encompassing 

two minutes before and after the 

dissemination of the quote. 

First, for consistency, the Exchange is 

proposing to amend the provision to 

allow for adjustments and nullifications 

of erroneous prints in the underlying 

(currently the provision calls for 

nullifications only). This change to 

allow for adjustments or nullifications is 

consistent with Rule 6.25’s existing 

treatment of erroneous quotes in the 

underlying market and Rule 24.16’s 

existing treatment of erroneous prints 

and quotes in underlying or related 

instruments. 

Second, to make the administration of 

the rule less time consuming and less 

burdensome, the Exchange is also 

proposing to revise the provisions to 

determine the ‘‘average quote width’’ in 

the underlying by adding the quote 

widths of sample quotations at regular 

15-second intervals during the two 

minutes preceding and following an 

erroneous transaction. This sampling 

approach is similar to Phlx Rule 1092. 

Third, the Exchange is proposing to 

modify the erroneous trade and quote 

provisions to allow the Exchange to 

designate the applicable underlying 

security(ies) or related instruments for 

any option, which is how Rule 24.16 

currently operates for ETF, HOLDRS, 

and index options. Under the revised 

rule, the Exchange would identify 

particular underlying or, with respect to 

ETF(s), HOLDRS(s), and index options, 

related instrument(s) that would be used 

to determine an erroneous print or quote 

and would also identify the relevant 

market(s) trading the underlying or 

related instrument to which the 

Exchange would look for purposes of 

applying the obvious error analysis. The 

‘‘related instrument(s)’’ may include 

related ETF(s), HOLDRS(s), and/or 

index value(s),13 and/or related futures 

product(s),14 and the ‘‘relevant 

market(s)’’ may include one or more 

markets. The underlying or related 

instrument(s) and relevant market(s) 

will be designated by the Exchange and 

announced to the membership via 

Regulatory Circular. For a particular 

ETF, HOLDRS, index value and/or 

futures product to qualify for 

consideration as a ‘‘related instrument,’’ 

the revised rule requires that: (i) The 

option class and related instrument 

must be derived from or designed to 

track the same underlying index; or (ii) 

in the case of S&P 100-related options, 

the options class and related instrument 

must be derived from or designed to 

track the S&P 100 Index or the S&P 500 

Index. Again, this is currently how Rule 

24.16 operates for ETF, HOLDRS and 

index options. The only substantive 

change being made by incorporating this 

provision into Rule 6.25, is that the 

Exchange would now have the ability to 

designate the ‘‘relevant market(s)’’ for 

equity options (whereas currently the 

Rule 6.25 references only the ‘‘primary 

market’’). 

Thus, as an example for illustrative 

purposes only, for options on the 

Powershares QQQ Trust (the ‘‘Nasdaq 

100 ETF’’), the Exchange may determine 

to designate the underlying ETF (ETF 

symbol ‘‘QQQQ’’) and the primary 

market where it trades, as well as a 

related futures product overlying the 

Nasdaq 100 Index and the primary 

market where that futures product 

trades, as the instruments that would be 

considered by the Exchange in 

determining whether an erroneous print 

or an erroneous quote has occurred that 

would form the basis for an adjustment 

or nullification to a transaction in the 

related options.15 As another example 

for illustrative purposes only, for the 

Exchange’s class of options on 

International Business Machines 

Corporation, the underlying instrument 

would be IBM. The Exchange may 

determine to designate one or more 

underlying stock exchanges as the 

‘‘relevant market(s),’’ such as the New 

York Stock Exchange (‘‘NYSE’’) and the 

CBOE Stock Exchange (‘‘CBSX’’).16 The 

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18766 Federal Register / Vol. 74, No. 78 / Friday, April 24, 2009 / Notices 

on the NYSE or CBSX market, as applicable, has a 

width of at least $1.00 and has a width at least five 

times greater than the average quote width for IBM 

on the relevant market during the time period 

encompassing two minutes before and after the 

dissemination of such quote. 

17Currently, Rule 6.25(c)(i) provides that an 

Obvious Error Panel is compromised [sic] of at least 

one (1) member of the Exchange’s staff designated 

to perform Obvious Error Panel functions and four 

(4) Exchange members. The rule also provides that 

fifty percent of the Exchange members on the 

Obvious Error Panel must be directly engaged in 

market making activity and fifty percent must act 

in the capacity of a non-DPM floor broker. 

18See Securities Exchange Act Release No. 52798 

(November 18, 2005), 70 FR 71344 (November 28, 

2005) (SR–CBOE–2005–46) (order approving a rule 

change related to the removal of agency 

responsibilities from DPMs and the establishment 

of PAR Officials). 

19 15 U.S.C. 78s(b)(1). 

20 15 U.S.C. 78f(b). 

21 15 U.S.C. 78f(b)(5). 

proposed change is intended to address 

member feedback and to provide relief 

in those scenarios where an erroneous 

options transaction may occur as the 

result of an erroneous print or erroneous 

quote in markets other than the primary 

market for the underlying security. The 

Exchange believes the proposed change 

recognizes that market participants 

trading in the overlying equity, index, 

ETF and HOLDRS options may base 

their options prices on trading in 

various products and markets, while 

maintaining reasonable and objective 

criteria for these types of obvious error 

reviews. 

Trading Officials & Obvious Error 

Panels. The Exchange is proposing to 

amend its definition of the term Trading 

Officials. The term ‘‘Trading Officials’’ 

is currently defined in Rule 6.25 to 

mean two Exchange members 

designated as Floor Officials and one 

member of the Exchange’s staff 

designated to perform Trading Official 

functions. The Exchange is proposing to 

change this definition to mean three 

Exchange officials designated to perform 

Trading Official functions, at least one 

of which is an Exchange member 

designated as a Floor Official and at 

least one of which is a member of the 

Exchange’s staff designated to perform 

Trading Official functions. The 

Exchange is proposing to make the 

change at this time because it recently 

determined to change the composition 

of its Floor Officials committee to 

include more Exchange staff and the 

change in composition of the Trading 

Officials is more in keeping with the 

increasing role of the Exchange staff. 

Finally, the Exchange is proposing to 

change a reference from ‘‘non-DPM floor 

brokers’’ to simply ‘‘floor brokers’’ in 

the composition requirements for 

Obvious Error Panels, which review 

certain determinations rendered by 

Trading Officials and the senior official 

in the Exchange’s control room under 

Rule 6.25(b).17 DPMs (which stands for 

Designated Primary Market-Makers) no 

longer function as floor brokers under 

CBOE Rules, so the Exchange is 

proposing that the outdated reference be 

removed.18

2. Statutory Basis 

The Exchange believes the proposed 

rule change is consistent with the Act 19

and the rules and regulations 

thereunder and, in particular, the 

requirements of Section 6(b) of the 

Act.20 Specifically, the Exchange 

believes the proposed rule change is 

consistent with the Section 6(b)(5) 21

requirements that the rules of an 

exchange be designed to promote just 

and equitable principles of trade, to 

prevent fraudulent and manipulative 

acts, to remove impediments to and to 

perfect the mechanism for a free and 

open market and a national market 

system, and, in general, to protect 

investors and the public interest. The 

proposed rule changes will simplify the 

administration of the Exchange’s 

obvious error rules and incorporate a 

uniform obvious error approach for all 

equity, index, ETF, and HOLDRS 

options while maintaining reasonable 

and objective criteria for these types of 

reviews. 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

CBOE does not believe that the 

proposed rule change will impose any 

burden on competition not necessary or 

appropriate in furtherance of the 

purposes of the Act. 

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 

Within 35 days of the date of 

publication of this notice in the Federal 

Register or within such longer period (i) 

as the Commission may designate up to 

90 days of such date if it finds such 

longer period to be appropriate and 

publishes its reasons for so finding or 

(ii) as to which the self-regulatory 

organization consents, the Commission 

will: 

(A) By order approve such proposed 

rule change, or 

(B) Institute proceedings to determine 

whether the proposed rule change 

should be disapproved. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views and 

arguments concerning the foregoing, 

including whether the proposal 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 e-mail to rulecomments@sec.gov. Please include File 

No. SR–CBOE–2009–024 on the subject 

line. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File No. 

SR–CBOE–2009–024. This file number 

should be included on the subject line 

if e-mail 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 changes 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 inspection and copying in 

the Commission’s Public Reference 

Room, 100 F Street, NE., Washington, 

DC 20549, on official business days 

between the hours of 10 a.m. and 3 p.m. 

Copies of such filing also will be 

available for inspection and copying at 

the principal office of CBOE. 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 No. 

SR–CBOE–2009–024 and should be 

submitted on or before May 15, 2009. 

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Federal Register / Vol. 74, No. 78 / Friday, April 24, 2009 / Notices 18767 

22 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3The current FINRA rulebook consists of two sets 

of rules: (1) NASD Rules and (2) rules incorporated 

from NYSE (‘‘Incorporated NYSE Rules’’) (together 

referred to as the ‘‘Transitional Rulebook’’). The 

Incorporated NYSE Rules apply only to those 

members of FINRA that are also members of the 

NYSE (‘‘Dual Members’’). Dual members must also 

comply with NASD Rules. For more information 

about the rulebook consolidation process, see 

FINRA Information Notice, March 12, 2008 

(‘‘Rulebook Consolidation Process’’). 

4See Securities Exchange Act Release No. 59563 

(March 12, 2009), 74 FR 11792. 

5 In approving this proposal, the Commission has 

considered the proposed rule’s impact on 

efficiency, competition and capital formation. See 

15 U.S.C. 78c(f). 

6 15 U.S.C. 78o–3(b)(6). 

7 15 U.S.C. 78s(b)(2). 

8 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3 15 U.S.C. 78s(b)(3)(A)(ii). 

4 17 CFR 240.19b–4(f)(2). 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.22

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–9388 Filed 4–23–09; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–59789; File No. SR–FINRA– 

2009–009] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Order Approving 

Proposed Rule Change To Adopt 

FINRA Rule 1122 (Filing of Misleading 

Information as to Membership or 

Registration) in the Consolidated 

FINRA Rulebook 

April 20, 2009. 

On March 3, 2009, the Financial 

Industry Regulatory Authority, Inc. 

(‘‘FINRA’’) (f/k/a National Association 

of Securities Dealers, Inc. (‘‘NASD’’)), 

filed with the Securities and Exchange 

Commission (‘‘Commission’’ or ‘‘SEC’’), 

pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a 

proposed rule change to adopt NASD 

IM–1000–1 as FINRA Rule 1122 in the 

consolidated FINRA rulebook 

(‘‘Consolidated FINRA Rulebook’’) 3

without material change. The proposed 

rule change was published for comment 

in the Federal Register on March 19, 

2009.4 The Commission received no 

comment letters in response to the 

proposed rule change. This order 

approves the proposed rule change. 

NASD IM–1000–1 provides that the 

filing of membership or registration 

information as a Registered 

Representative with FINRA which is 

incomplete or inaccurate so as to be 

misleading, or which could in any way 

tend to mislead, or the failure to correct 

such filing after notice thereof, may be 

deemed conduct inconsistent with just 

and equitable principles of trade and 

may be subject to disciplinary action. 

The proposed rule change renumbers 

NASD IM–1000–1 as FINRA Rule 1122 

in the Consolidated FINRA Rulebook 

and clarifies its applicability to 

members and persons associated with 

members by specifying that ‘‘no member 

or person associated with a member’’ 

shall file incomplete or misleading 

membership or registration information. 

FINRA also eliminates the reference to 

the filing of registration information ‘‘as 

a Registered Representative’’ to clarify 

that the rule applies to the filing of 

registration information regarding any 

category of registration. In addition, 

FINRA deletes the reference that the 

prohibited conduct may be deemed 

inconsistent with just and equitable 

principles of trade and subject to 

disciplinary action as unnecessary and 

to better reflect the proposed adoption 

of the NASD IM as a stand-alone FINRA 

rule. 

After careful review, the Commission 

finds that the proposed rule change is 

consistent with the requirements of the 

Act, and the rules and regulations 

thereunder that are applicable to a 

national securities association,5 and in 

particular, with Section 15A(b)(6) of the 

Act,6 which requires, among other 

things, that FINRA rules be designed to 

prevent fraudulent and manipulative 

acts and practices, to promote just and 

equitable principles of trade, and, in 

general, to protect investors and the 

public interest. FINRA’s adoption of 

NASD IM–1000–1 as FINRA Rule 1122 

in the Consolidated FINRA Rulebook 

clarifies its applicability and provides 

notice to members of behavior that 

violates just and equitable principles of 

trade. 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,7 that the 

proposed rule change (SR–FINRA– 

2009–009) be, and hereby is, approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.8

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–9386 Filed 4–23–09; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–59782; File No. SR–BATS– 

2009–009] 

Self-Regulatory Organizations; BATS 

Exchange, Inc.; Notice of Filing and 

Immediate Effectiveness of Proposed 

Rule Change Related to Fees for Use 

of BATS Exchange, Inc. 

April 17, 2009. 

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 April 14, 

2009, BATS Exchange, Inc. (‘‘BATS’’ or 

the ‘‘Exchange’’) filed with the 

Securities and Exchange Commission 

(‘‘Commission’’) the proposed rule 

change as described in Items I, II and III 

below, which Items have been prepared 

by the Exchange. BATS has designated 

the proposed rule change as one 

establishing or changing a member due, 

fee, or other charge imposed by the 

Exchange under Section 19(b)(3)(A)(ii) 

of the Act 3 and Rule 19b–4(f)(2) 

thereunder,4 which renders the 

proposed rule change effective upon 

filing with the Commission. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange proposes to modify its 

fee schedule applicable to use of the 

Exchange. While changes to the fee 

schedule pursuant to this proposal will 

be effective upon filing, the changes will 

become operative on April 15, 2009. 

The text of the proposed rule change 

is available at the Exchange’s Web site 

at http://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 

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