Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Notices 77557 

13 15 U.S.C. 78s(b)(2)(B). 

14 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

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 

under section 19(b)(2)(B) 13 of the Act to 

determine whether the proposed rule 

change should be approved or 

disapproved. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning the foregoing, 

including whether the proposed rule 

change is consistent with the Act. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/

rules/sro.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include File Number SR– 

BYX–2014–039 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–BYX–2014–039. This file 

number should be included on the 

subject line if email is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for Web site viewing and 

printing in the Commission’s Public 

Reference Room at 100 F Street NE., 

Washington, DC 20549–1090 on official 

business days between the hours of 

10:00 a.m. and 3:00 p.m. Copies of such 

filing also will be available for 

inspection and copying at the principal 

office of the Exchange. All comments 

received will be posted without change; 

the Commission does not edit personal 

identifying information from 

submissions. You should submit only 

information that you wish to make 

available publicly. All submissions 

should refer to File Number SR–BYX– 

2014–039, and should be submitted on 

or before January 14, 2015. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.14

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2014–30118 Filed 12–23–14; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–73884; File No. SR–BATS– 

2014–067] 

Self-Regulatory Organizations; BATS 

Exchange, Inc.; Notice of Filing of a 

Proposed Rule Change, as Modified by 

Amendment No. 1, to Rule 20.6 of 

BATS Exchange, Inc. 

December 18, 2014. 

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 December 

4, 2014, BATS Exchange, Inc. (the 

‘‘Exchange’’ or ‘‘BATS’’) filed with the 

Securities and Exchange Commission 

(‘‘Commission’’) the proposed rule 

change as described in Items I and II 

below, which Items have been prepared 

by the Exchange. On December 17, 

2014, the Exchange filed Amendment 

No. 1 to the proposed rule change, 

which amended and replaced the 

proposed rule change in its entirety. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change, as amended, from interested 

persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange filed a proposal to 

replace current Rule 20.6 (‘‘Current 

Rule’’), entitled ‘‘Obvious Error,’’ with 

new Rule 20.6 (‘‘Proposed Rule’’), 

entitled ‘‘Nullification and Adjustment 

of Options Transactions including 

Obvious Errors.’’ Rule 20.6 relates to the 

adjustment and nullification of 

transactions that occur on the 

Exchange’s equity options platform 

(‘‘BATS Options’’). 

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 

forth in sections A, B, and C below, of 

the most significant parts of such 

statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

Background 

For several months the Exchange has 

been working with other options 

exchanges to identify ways to improve 

the process related to the adjustment 

and nullification of erroneous options 

transactions. The goal of the process 

that the options exchanges have 

undertaken is to adopt harmonized rules 

related to the adjustment and 

nullification of erroneous options 

transactions as well as a specific 

provision related to coordination in 

connection with large-scale events 

involving erroneous options 

transactions. As described below, the 

Exchange believes that the changes the 

options exchanges and the Exchange 

have agreed to propose will provide 

transparency and finality with respect to 

the adjustment and nullification of 

erroneous options transactions. 

Particularly, the proposed changes seek 

to achieve consistent results for 

participants across U.S. options 

exchanges while maintaining a fair and 

orderly market, protecting investors and 

protecting the public interest. 

The Proposed Rule is the culmination 

of this coordinated effort and reflects 

discussions by the options exchanges to 

universally adopt: (1) Certain provisions 

already in place on one or more options 

exchanges; and (2) new provisions that 

the options exchanges collectively 

believe will improve the handling of 

erroneous options transactions. Thus, 

although the Proposed Rule is in many 

ways similar to and based on the 

Exchange’s Current Rule, the Exchange 

is adopting various provisions to 

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77558 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Notices 

3A ‘‘Professional’’ is any person or entity that (A) 

is not a broker or dealer in securities; and (B) places 

more than 390 orders in listed options per day on 

average during a calendar month for its own 

beneficial account(s). See Rule 16.1(a)(45). 

conform with existing rules of one or 

more options exchanges and also to 

adopt rules that are not currently in 

place on any options exchange. As 

noted above, in order to adopt a rule 

that is similar in most material respects 

to the rules adopted by other options 

exchanges, the Exchange proposes to 

delete the Current Rule in its entirety 

and to replace it with the Proposed 

Rule. 

The Exchange notes that it has 

proposed additional objective standards 

in the Proposed Rule as compared to the 

Current Rule. The Exchange also notes 

that the Proposed Rule will ensure that 

the Exchange will have the same 

standards as all other options 

exchanges. However, there are still areas 

under the Proposed Rule where 

subjective determinations need to be 

made by Exchange personnel with 

respect to the calculation of Theoretical 

Price. The Exchange notes that the 

Exchange and all other options 

exchanges have been working to further 

improve the review of potentially 

erroneous transactions as well as their 

subsequent adjustment by creating an 

objective and universal way to 

determine Theoretical Price in the event 

a reliable NBBO is not available. For 

instance, the Exchange and all other 

options exchanges may utilize an 

independent third party to calculate and 

disseminate or make available 

Theoretical Price. However, this 

initiative requires additional exchange 

and industry discussion as well as 

additional time for development and 

implementation. The Exchange will 

continue to work with other options 

exchanges and the options industry 

towards the goal of additional 

objectivity and uniformity with respect 

to the calculation of Theoretical Price. 

As additional background, the 

Exchange believes that the Proposed 

Rule supports an approach consistent 

with long-standing principles in the 

options industry under which the 

general policy is to adjust rather than 

nullify transactions. The Exchange 

acknowledges that adjustment of 

transactions is contrary to the operation 

of analogous rules applicable to the 

equities markets, where erroneous 

transactions are typically nullified 

rather than adjusted and where there is 

no distinction between the types of 

market participants involved in a 

transaction. For the reasons set forth 

below, the Exchange believes that the 

distinctions in market structure between 

equities and options markets continue 

to support these distinctions between 

the rules for handling obvious errors in 

the equities and options markets. The 

Exchange also believes that the 

Proposed Rule properly balances several 

competing concerns based on the 

structure of the options markets. 

Various general structural differences 

between the options and equities 

markets point toward the need for a 

different balancing of risks for options 

market participants and are reflected in 

the Proposed Rule. Option pricing is 

formulaic and is tied to the price of the 

underlying stock, the volatility of the 

underlying security and other factors. 

Because options market participants can 

generally create new open interest in 

response to trading demand, as new 

open interest is created, correlated 

trades in the underlying or related series 

are generally also executed to hedge a 

market participant’s risk. This pairing of 

open interest with hedging interest 

differentiates the options market 

specifically (and the derivatives markets 

broadly) from the cash equities markets. 

In turn, the Exchange believes that the 

hedging transactions engaged in by 

market participants necessitates 

protection of transactions through 

adjustments rather than nullifications 

when possible and otherwise 

appropriate. 

The options markets are also quote 

driven markets dependent on liquidity 

providers to an even greater extent than 

equities markets. In contrast to the 

approximately 7,000 different securities 

traded in the U.S. equities markets each 

day, there are more than 500,000 

unique, regularly quoted option series. 

Given this breadth in options series the 

options markets are more dependent on 

liquidity providers than equities 

markets; such liquidity is provided most 

commonly by registered market makers 

but also by other professional traders. 

With the number of instruments in 

which registered market makers must 

quote and the risk attendant with 

quoting so many products 

simultaneously, the Exchange believes 

that those liquidity providers should be 

afforded a greater level of protection. In 

particular, the Exchange believes that 

liquidity providers should be allowed 

protection of their trades given the fact 

that they typically engage in hedging 

activity to protect them from significant 

financial risk to encourage continued 

liquidity provision and maintenance of 

the quote-driven options markets. 

In addition to the factors described 

above, there are other fundamental 

differences between options and 

equities markets which lend themselves 

to different treatment of different classes 

of participants that are reflected in the 

Proposed Rule. For example, there is no 

trade reporting facility in the options 

markets. Thus, all transactions must 

occur on an options exchange. This 

leads to significantly greater retail 

customer participation directly on 

exchanges than in the equities markets, 

where a significant amount of retail 

customer participation never reaches 

the Exchange but is instead executed in 

off-exchange venues such as alternative 

trading systems, broker-dealer market 

making desks and internalizers. In turn, 

because of such direct retail customer 

participation, the exchanges have taken 

steps to afford those retail customers— 

generally Priority Customers—more 

favorable treatment in some 

circumstances. 

Definitions 

The Exchange proposes to adopt 

various definitions that will be used in 

the Proposed Rule, as described below. 

First, the Exchange proposes to adopt 

a definition of ‘‘Customer,’’ to make 

clear that this term would not include 

any broker-dealer or Professional 

Customer.3 Although other portions of 

the Exchange’s rules address the 

capacity of market participants, 

including customers, the proposed 

definition is consistent with such rules 

and the Exchange believes it is 

important for all options exchanges to 

have the same definition of Customer in 

the context of nullifying and adjusting 

trades in order to have harmonized 

rules. As set forth in detail below, 

orders on behalf of a Customer are in 

many cases treated differently than nonCustomer orders in light of the fact that 

Customers are not necessarily immersed 

in the day-to-day trading of the markets, 

are less likely to be watching trading 

activity in a particular option 

throughout the day, and may have 

limited funds in their trading accounts. 

Second, the Exchange proposes to 

adopt definitions for both an ‘‘erroneous 

sell transaction’’ and an ‘‘erroneous buy 

transaction.’’ As proposed, an erroneous 

sell transaction is one in which the 

price received by the person selling the 

option is erroneously low, and an 

erroneous buy transaction is one in 

which the price paid by the person 

purchasing the option is erroneously 

high. This provision helps to reduce the 

possibility that a party can intentionally 

submit an order hoping for the market 

to move in their favor while knowing 

that the transaction will be nullified or 

adjusted if the market does not. For 

instance, when a market participant 

who is buying options in a particular 

series sees an aggressively priced sell 

order posted on the Exchange, and the 

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Notices 77559 

4See 17 CFR 240.10b–18(a)(5)(ii). 

buyer believes that the price of the 

options is such that it might qualify for 

obvious error, the option buyer can 

trade with the aggressively priced order, 

then wait to see which direction the 

market moves. If the market moves in 

their direction, the buyer keeps the 

trade and if it moves against them, the 

buyer calls the Exchange hoping to get 

the trade adjusted or busted. 

Third, the Exchange proposes to 

adopt a definition of ‘‘Official,’’ which 

would mean an Officer of the Exchange 

or such other employee designee of the 

Exchange that is trained in the 

application of the Proposed Rule. The 

Exchange notes that this definition is 

consistent with the definition of Official 

currently contained in the Exchange’s 

Current Rule. 

Fourth, the Exchange proposes to 

adopt a new term, a ‘‘Size Adjustment 

Modifier,’’ which would apply to 

individual transactions and would 

modify the applicable adjustment for 

orders under certain circumstances, as 

discussed in further detail below. As 

proposed, the Size Adjustment Modifier 

will be applied to individual orders as 

follows: 

Number of 

contracts per 

execution 

Adjustment—TP plus/minus 

1–50 ............ N/A. 

51–250 ........ 2 times adjustment amount. 

251–1000 .... 2.5 times adjustment amount. 

1001 or more 3 times adjustment amount. 

The Size Adjustment Modifier 

attempts to account for the additional 

risk that the parties to the trade 

undertake for transactions that are larger 

in scope. The Exchange believes that the 

Size Adjustment Modifier creates 

additional incentives to prevent more 

impactful Obvious Errors and it lessens 

the impact on the contra-party to an 

adjusted trade. The Exchange notes that 

these contra-parties may have preferred 

to only trade the size involved in the 

transaction at the price at which such 

trade occurred, and in trading larger size 

has committed a greater level of capital 

and bears a larger hedge risk. 

When setting the proposed size 

adjustment modifier thresholds the 

Exchange has tried to correlate the size 

breakpoints with typical small and 

larger ‘‘block’’ execution sizes of 

underlying stock. For instance, SEC 

Rule 10b–18(a)(5)(ii) defines a ‘‘block’’ 

as a quantity of stock that is at least 

5,000 shares and a purchase price of at 

least $50,000, among others.4 Similarly, 

NYSE Rule 72 defines a ‘‘block’’ as an 

order to buy or sell ‘‘at least 10,000 

shares or a quantity of stock having a 

market value of $200,000 or more, 

whichever is less.’’ Thus, executions of 

51 to 100 option contracts, which are 

generally equivalent to executions of 

5,100 and 10,000 shares of underlying 

stock, respectively, are proposed to be 

subject to the lowest size adjustment 

modifier. An execution of over 1,000 

contracts is roughly equivalent to a 

block transaction of more than 100,000 

shares of underlying stock, and is 

proposed to be subject to the highest 

size adjustment modifier. The Exchange 

has correlated the proposed size 

adjustment modifier thresholds to 

smaller and larger scale blocks because 

the Exchange believes that the execution 

cost associated with transacting in block 

sizes scales according to the size of the 

block. In other words, in the same way 

that executing a 100,000 share stock 

order will have a proportionately larger 

market impact and will have a higher 

overall execution cost than executing a 

500, 1,000 or 5,000 share order in the 

same stock, all other market factors 

being equal, executing a 1,000 option 

contract order will have a larger market 

impact and higher overall execution 

cost than executing a 5, 10 or 50 

contract option order. 

Calculation of Theoretical Price 

Theoretical Price in Normal 

Circumstances 

Under both the Current Rule and the 

Proposed Rule, when reviewing a 

transaction as potentially erroneous, the 

Exchange needs to first determine the 

‘‘Theoretical Price’’ of the option, i.e., 

the Exchange’s estimate of the correct 

market price for the option. Pursuant to 

the Proposed Rule, if the applicable 

option series is traded on at least one 

other options exchange, then the 

Theoretical Price of an option series is 

the last national best bid (‘‘NBB’’) just 

prior to the trade in question with 

respect to an erroneous sell transaction 

or the last national best offer (‘‘NBO’’) 

just prior to the trade in question with 

respect to an erroneous buy transaction 

unless one of the exceptions described 

below exists. Thus, the Exchange 

proposes that whenever the Exchange 

has a reliable NBB or NBO, as 

applicable, just prior to the transaction, 

then the Exchange will use this NBB or 

NBO as the Theoretical Price. 

The Exchange also proposes to specify 

in the Proposed Rule that when a single 

order received by the Exchange is 

executed at multiple price levels, the 

Theoretical Price for the execution at 

the initial price level will be the last 

NBB and last NBO just prior to the 

Exchange’s receipt of the order, and the 

Theoretical Price for all subsequent 

executions at other price levels will be 

determined by the Exchange. The 

Exchange believes that it is necessary to 

retain discretion for the handling of an 

order that drills-through several price 

levels consistent with the reasons for 

the wide quote provision described 

below, where the Exchange too has 

proposed to retain discretion. The 

Exchange believes this is important, 

among other reasons, to ensure that a 

market participant is not intentionally 

targeting quotations that it knows are at 

other price levels in order to get an 

adjustment to a better price. For 

example, if the market in an option is 

$1.00 x $1.05 and a member sends a 

large erroneously aggressively priced 

buy order that will execute at multiple 

price points while driving the price 

from $1.05 to $2.50, the Exchange 

believes that it needs discretion in order 

to determine whether executions that 

occurred as the order made it through 

various price levels were erroneous or if 

they should be upheld. If, during the 

handling of the order, executions took 

place originally at $1.05 and then at 

$1.06, $1.08, $1.50, $2.00 and $2.50, 

these price levels were the result of the 

handling of the order in question. The 

Exchange would consider the 

Theoretical Price of the option to be 

$1.05 for the initial execution and 

would determine Theoretical Price for 

executions at all other price levels. If the 

market participant sending the order 

aggressively priced the order in a way 

that it would drill-through all available 

liquidity and buy at a price up to $2.50, 

then the Exchange does not believe that 

the market participants providing 

liquidity in the option on the Exchange 

that are on the other side of such 

transactions should be forced to accept 

an adjustment to a different price level. 

The Exchange believes that this 

situation is different than, for example, 

an order received during a momentary 

gap in liquidity. 

The Exchange also proposes to set 

forth in the Proposed Rule various 

provisions governing specific situations 

where the NBB or NBO is not available 

or may not be reliable. Specifically, the 

Exchange is proposing additional detail 

specifying situations in which there are 

no quotes or no valid quotes (as defined 

below), when the national best bid or 

offer (‘‘NBBO’’) is determined to be too 

wide to be reliable, and at the open of 

trading on each trading day. 

No Valid Quotes 

As is true under the Current Rule, 

pursuant to the Proposed Rule the 

Exchange will determine the Theoretical 

Price if there are no quotes or no valid 

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77560 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Notices 

5See, e.g., NYSE Arca Options Rule 6.37(b)(1). 

6See, e.g., Exchange Rule 22.12, which requires 

certain orders to be exposed on BATS Options for 

at least one second before they can be executed; see 

also Securities Exchange Act Release No. 66306 

(February 2, 2012), 77 FR 6608 (February 8, 2012) 

(SR–BX–2011–084) (order granting approval of 

proposed rule change to reduce the duration of the 

PIP from one second to one hundred milliseconds). 

7See Exchange Rule 21.7 for a description of the 

Exchange’s Opening Process. 

quotes for comparison purposes. As 

proposed, quotes that are not valid are 

all quotes in the applicable option series 

published at a time where the last NBB 

is higher than the last NBO in such 

series (a ‘‘crossed market’’), quotes 

published by the Exchange that were 

submitted by either party to the 

transaction in question, and quotes 

published by another options exchange 

against which the Exchange has 

declared self-help. Thus, in addition to 

scenarios where there are literally no 

quotes to be used as Theoretical Price, 

the Exchange will exclude quotes in 

certain circumstances if such quotes are 

not deemed valid. The Proposed Rule is 

consistent with the Exchange’s 

application of the Current Rule but the 

descriptions of the various scenarios 

where the Exchange considers quotes to 

be invalid represent additional detail 

that is not included in the Current Rule. 

The Exchange notes that Exchange 

personnel currently are required to 

determine Theoretical Price in certain 

circumstances. While the Exchange 

continues to pursue alternative 

solutions that might further enhance the 

objectivity and consistency of 

determining Theoretical Price, the 

Exchange believes that the discretion 

currently afforded to Exchange Officials 

is appropriate in the absence of a 

reliable NBBO that can be used to set 

the Theoretical Price. Under the current 

Rule, Exchange personnel will generally 

consult and refer to data such as the 

prices of related series, especially the 

closest strikes in the option in question. 

Exchange personnel may also take into 

account the price of the underlying 

security and the volatility 

characteristics of the option as well as 

historical pricing of the option and/or 

similar options. 

Wide Quotes 

Similarly, pursuant to the Proposed 

Rule the Exchange will determine the 

Theoretical Price if the bid/ask 

differential of the NBB and NBO for the 

affected series just prior to the 

erroneous transaction was equal to or 

greater than the Minimum Amount set 

forth below and there was a bid/ask 

differential less than the Minimum 

Amount during the 10 seconds prior to 

the transaction. If there was no bid/ask 

differential less than the Minimum 

Amount during the 10 seconds prior to 

the transaction then the Theoretical 

Price of an option series is the last NBB 

or NBO just prior to the transaction in 

question. The Exchange proposes to use 

the following chart to determine 

whether a quote is too wide to be 

reliable: 

Bid price at time of trade Minimum 

amount 

Below $2.00 .......................... $0.75 

$2.00 to $5.00 ...................... 1.25 

Above $5.00 to $10.00 ......... 1.50 

Above $10.00 to $20.00 ....... 2.50 

Above $20.00 to $50.00 ....... 3.00 

Above $50.00 to $100.00 ..... 4.50 

Above $100.00 ..................... 6.00 

The Exchange notes that the values 

set forth above generally represent a 

multiple of 3 times the bid/ask 

differential requirements of other 

options exchanges, with certain 

rounding applied (e.g., $1.25 as 

proposed rather than $1.20).5 The 

Exchange believes that basing the Wide 

Quote table on a multiple of the 

permissible bid/ask differential rule 

provides a reasonable baseline for 

quotations that are indeed so wide that 

they cannot be considered reliable for 

purposes of determining Theoretical 

Price unless they have been consistently 

wide. As described above, while the 

Exchange will determine Theoretical 

Price when the bid/ask differential 

equals or exceeds the amount set forth 

in the chart above and within the 

previous 10 seconds there was a bid/ask 

differential smaller than such amount, if 

a quote has been persistently wide for 

at least 10 seconds the Exchange will 

use such quote for purposes of 

Theoretical Price. The Exchange 

believes that there should be a greater 

level of protection afforded to market 

participants that enter the market when 

there are liquidity gaps and price 

fluctuations. The Exchange does not 

believe that a similar level of protection 

is warranted when market participants 

choose to enter a market that is wide 

and has been consistently wide for some 

time. The Exchange notes that it has 

previously determined that, given the 

largely electronic nature of today’s 

markets, as little as one second (or less) 

is a long enough time for market 

participants to receive, process and 

account for and respond to new market 

information.6 While introducing this 

new provision the Exchange believes it 

is being appropriately cautious by 

selecting a time frame that is an order 

of magnitude above and beyond what 

the Exchange has previously determined 

is sufficient for information 

dissemination. The table above bases 

the wide quote provision off of bid price 

in order to provide a relatively 

straightforward beginning point for the 

analysis. 

As an example, assume an option is 

quoted $3.00 by $6.00 with 50 contracts 

posted on each side of the market for an 

extended period of time. If a market 

participant were to enter a market order 

to buy 20 contracts the Exchange 

believes that the buyer should have a 

reasonable expectation of paying $6.00 

for the contracts which they are buying. 

This should be the case even if 

immediately after the purchase of those 

options, the market conditions change 

and the same option is then quoted at 

$3.75 by $4.25. Although the quote was 

wide according to the table above at the 

time immediately prior to and the time 

of the execution of the market order, it 

was also well established and well 

known. The Exchange believes that an 

execution at the then prevailing market 

price should not in and of itself 

constitute an erroneous trade. 

Transactions at the Open 

Under the Proposed Rule, for a 

transaction occurring as part of the 

Opening Process 7 the Exchange will 

determine the Theoretical Price where 

there is no NBB or NBO for the affected 

series just prior to the erroneous 

transaction or if the bid/ask differential 

of the NBBO just prior to the erroneous 

transaction is equal to or greater than 

the Minimum Amount set forth in the 

chart proposed for the wide quote 

provision described above. The 

Exchange believes that this discretion is 

necessary because it is consistent with 

other scenarios in which the Exchange 

will determine the Theoretical Price if 

there are no quotes or no valid quotes 

for comparison purposes, including the 

wide quote provision proposed by the 

Exchange as described above. If, 

however, there are valid quotes and the 

bid/ask differential of the NBBO is less 

than the Minimum Amount set forth in 

the chart proposed for the wide quote 

provision described above, then the 

Exchange will use the NBB or NBO just 

prior to the transaction as it would in 

any other normal review scenario. 

As an example of an erroneous 

transaction for which the NBBO is wide 

at the open, assume the NBBO at the 

time of the opening transaction is $1.00 

x $5.00 and the opening transaction 

takes place at $1.25. The Exchange 

would be responsible for determining 

the Theoretical Price because the NBBO 

was wider than the applicable minimum 

amount set forth in the wide quote 

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Notices 77561 

provision as described above. The 

Exchange believes that it is necessary to 

determine theoretical price at the open 

in the event of a wide quote at the open 

for the same reason that the Exchange 

has proposed to determine theoretical 

price during the remainder of the 

trading day pursuant to the proposed 

wide quote provision, namely that a 

wide quote cannot be reliably used to 

determine Theoretical Price because the 

Exchange does not know which of the 

two quotes, the NBB or the NBO, is 

closer to the real value of the option. 

Obvious Errors 

The Exchange proposes to adopt 

numerical thresholds that would qualify 

transactions as ‘‘Obvious Errors.’’ These 

thresholds are similar to those in place 

under the Current Rule. As proposed, a 

transaction will qualify as an Obvious 

Error if the Exchange receives a properly 

submitted filing and the execution price 

of a transaction is higher or lower than 

the Theoretical Price for the series by an 

amount equal to at least the amount 

shown below: 

Theoretical price Minimum 

amount 

Below $2.00 .......................... $0.25 

$2.00 to $5.00 ...................... 0.40 

Above $5.00 to $10.00 ......... 0.50 

Above $10.00 to $20.00 ....... 0.80 

Above $20.00 to $50.00 ....... 1.00 

Above $50.00 to $100.00 ..... 1.50 

Above $100.00 ..................... 2.00 

Applying the Theoretical Price, as 

described above, to determine the 

applicable threshold and comparing the 

Theoretical Price to the actual execution 

price provides the Exchange with an 

objective methodology to determine 

whether an Obvious Error occurred. The 

Exchange believes that the proposed 

amounts are reasonable as they are 

generally consistent with the standards 

of the Current Rule and reflect a 

significant disparity from Theoretical 

Price. The Exchange notes that the 

Minimum Amounts in the Proposed 

Rule and as set forth above are identical 

to the Current Rule except for the last 

two categories, for options where the 

Theoretical Price is above $50.00 to 

$100.00 and above $100.00. The 

Exchange believes that this additional 

granularity is reasonable because given 

the proliferation of additional strikes 

that have been created in the past 

several years there are many more highpriced options that are trading with 

open interest for extended periods. The 

Exchange believes that it is appropriate 

to account for these high-priced options 

with additional Minimum Amount 

levels for options with Theoretical 

Prices above $50.00. 

Under the Proposed Rule, a party that 

believes that it participated in a 

transaction that was the result of an 

Obvious Error must notify the 

Exchange’s Trade Desk in the manner 

specified from time to time by the 

Exchange in a circular distributed to 

Members. The Exchange currently 

requires electronic notification through 

a web-based application but believes 

that maintaining flexibility in the Rule 

is important to allow for changes to the 

process. 

The Exchange also proposes to adopt 

notification timeframes that must be met 

in order for a transaction to qualify as 

an Obvious Error. Specifically, as 

proposed a filing must be received by 

the Exchange within thirty (30) minutes 

of the execution with respect to an 

execution of a Customer order and 

within fifteen (15) minutes of the 

execution for any other participant. The 

Exchange also proposes to provide 

additional time for trades that are routed 

through other options exchanges to the 

Exchange. Under the Proposed Rule, 

any other options exchange will have a 

total of forty-five (45) minutes for 

Customer orders and thirty (30) minutes 

for non-Customer orders, measured from 

the time of execution on the Exchange, 

to file with the Exchange for review of 

transactions routed to the Exchange 

from that options exchange and 

executed on the Exchange (‘‘linkage 

trades’’). This includes filings on behalf 

of another options exchange filed by a 

third-party routing broker if such thirdparty broker identifies the affected 

transactions as linkage trades. In order 

to facilitate timely reviews of linkage 

trades the Exchange will accept filings 

from either the other options exchange 

or, if applicable, the third-party routing 

broker that routed the applicable 

order(s). The additional fifteen (15) 

minutes provided with respect to 

linkage trades shall only apply to the 

extent the options exchange that 

originally received and routed the order 

to the Exchange itself received a timely 

filing from the entering participant (i.e., 

within 30 minutes if a Customer order 

or 15 minutes if a non-Customer order). 

The Exchange believes that additional 

time for filings related to Customer 

orders is appropriate in light of the fact 

that Customers are not necessarily 

immersed in the day-to-day trading of 

the markets and are less likely to be 

watching trading activity in a particular 

option throughout the day. The 

Exchange believes that the additional 

time afforded to linkage trades is 

appropriate given the interconnected 

nature of the markets today and the 

practical difficulty that an end user may 

face in getting requests for review filed 

in a timely fashion when the transaction 

originated at a different exchange than 

where the error took place. Without this 

additional time the Exchange believes it 

would be common for a market 

participant to satisfy the filing deadline 

at the original exchange to which an 

order was routed but that requests for 

review of executions from orders routed 

to other options exchanges would not 

qualify for review as potential Obvious 

Errors by the time filings were received 

by such other options exchanges, in turn 

leading to potentially disparate results 

under the applicable rules of options 

exchanges to which the orders were 

routed. 

Pursuant to the Proposed Rule, an 

Official may review a transaction 

believed to be erroneous on his/her own 

motion in the interest of maintaining a 

fair and orderly market and for the 

protection of investors. This proposed 

provision is designed to give an Official 

the ability to provide parties relief in 

those situations where they have failed 

to report an apparent error within the 

established notification period. A 

transaction reviewed pursuant to the 

proposed provision may be nullified or 

adjusted only if it is determined by the 

Official that the transaction is erroneous 

in accordance with the provisions of the 

Proposed Rule, provided that the time 

deadlines for filing a request for review 

described above shall not apply. The 

Proposed Rule would require the 

Official to act as soon as possible after 

becoming aware of the transaction; 

action by the Official would ordinarily 

be expected on the same day that the 

transaction occurred. However, because 

a transaction under review may have 

occurred near the close of trading or due 

to unusual circumstances, the Proposed 

Rule provides that the Official shall act 

no later than 8:30 a.m. Eastern Time on 

the next trading day following the date 

of the transaction in question. 

The Exchange also proposes to state 

that a party affected by a determination 

to nullify or adjust a transaction after an 

Official’s review on his or her own 

motion may appeal such determination 

in accordance with paragraph (k), which 

is described below. The Proposed Rule 

would make clear that a determination 

by an Official not to review a 

transaction or determination not to 

nullify or adjust a transaction for which 

a review was conducted on an Official’s 

own motion is not appealable and 

further that if a transaction is reviewed 

and a determination is rendered 

pursuant to another provision of the 

Proposed Rule, no additional relief may 

be granted by an Official. 

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77562 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Notices 

8The Exchange notes that in the third quarter of 

this year across all options exchanges the average 

number of valid Customer orders received and 

executed was less than 38 valid orders every two 

minutes. The number of obvious errors resulting 

from valid orders is, of course, a very small fraction 

of such orders. 

If it is determined that an Obvious 

Error has occurred based on the 

objective numeric criteria and time 

deadlines described above, the 

Exchange will adjust or nullify the 

transaction as described below and 

promptly notify both parties to the trade 

electronically or via telephone. The 

Exchange proposes different adjustment 

and nullification criteria for Customers 

and non-Customers. 

As proposed, where neither party to 

the transaction is a Customer, the 

execution price of the transaction will 

be adjusted by the Official pursuant to 

the table below. 

Theoretical price 

(TP) 

Buy 

transaction 

adjustment— 

TP plus 

Sell 

transaction 

adjustment— 

TP minus 

Below $3.00 ...... $0.15 $0.15 

At or above 

$3.00 ............. 0.30 0.30 

The Exchange believes that it is 

appropriate to adjust to prices a 

specified amount away from Theoretical 

Price rather than to adjust to Theoretical 

Price because even though the Exchange 

has determined a given trade to be 

erroneous in nature, the parties in 

question should have had some 

expectation of execution at the price or 

prices submitted. Also, it is common 

that by the time it is determined that an 

obvious error has occurred additional 

hedging and trading activity has already 

occurred based on the executions that 

previously happened. The Exchange is 

concerned that an adjustment to 

Theoretical Price in all cases would not 

appropriately incentivize market 

participants to maintain appropriate 

controls to avoid potential errors. 

Further, as proposed any nonCustomer Obvious Error exceeding 50 

contracts will be subject to the Size 

Adjustment Modifier described above. 

The Exchange believes that it is 

appropriate to apply the Size 

Adjustment Modifier to non-Customer 

orders because the hedging cost 

associated with trading larger sized 

options orders and the market impact of 

larger blocks of underlying can be 

significant. 

As an example of the application of 

the Size Adjustment Modifier, assume 

Exchange A has a quoted bid to buy 50 

contracts at $2.50, Exchange B has a 

quoted bid to buy 100 contracts at $2.05 

and there is no other options exchange 

quoting a bid priced higher than $2.00. 

Assume that the NBBO is $2.50 by 

$3.00. Finally, assume that all orders 

quoted and submitted to Exchange B in 

connection with this example are nonCustomer orders. 

• Assume Exchange A’s quoted bid at 

$2.50 is either executed or cancelled. 

• Assume Exchange B immediately 

thereafter receives an incoming market 

order to sell 100 contracts. 

• The incoming order would be 

executed against Exchange B’s resting 

bid at $2.05 for 100 contracts. 

• Because the 100 contract execution 

of the incoming sell order was priced at 

$2.05, which is $0.45 below the 

Theoretical Price of $2.50, the 100 

contract execution would qualify for 

adjustment as an Obvious Error. 

• The normal adjustment process 

would adjust the execution of the 100 

contracts to $2.35 per contract, which is 

the Theoretical Price minus $0.15. 

• However, because the execution 

would qualify for the Size Adjustment 

Modifier of 2 times the adjustment 

price, the adjusted transaction would 

instead be to $2.20 per contract, which 

is the Theoretical Price minus $0.30. 

By reference to the example above, 

the Exchange reiterates that it believes 

that a Size Adjustment Modifier is 

appropriate, as the buyer in this 

example was originally willing to buy 

100 contracts at $2.05 and ended up 

paying $2.20 per contract for such 

execution. Without the Size Adjustment 

Modifier the buyer would have paid 

$2.35 per contract. Such buyer may be 

advantaged by the trade if the 

Theoretical Price is indeed closer to 

$2.50 per contract, however the buyer 

may not have wanted to buy so many 

contracts at a higher price and does 

incur increasing cost and risk due to the 

additional size of their quote. Thus, the 

proposed rule is attempting to strike a 

balance between various competing 

objectives, including recognition of cost 

and risk incurred in quoting larger size 

and incentivizing market participants to 

maintain appropriate controls to avoid 

errors. 

In contrast to non-Customer orders, 

where trades will be adjusted if they 

qualify as Obvious Errors, pursuant the 

Proposed Rule a trade that qualifies as 

an Obvious Error will be nullified where 

at least one party to the Obvious Error 

is a Customer. The Exchange also 

proposes, however, that if any Member 

submits requests to the Exchange for 

review of transactions pursuant to the 

Proposed Rule, and in aggregate that 

Member has 200 or more Customer 

transactions under review concurrently 

and the orders resulting in such 

transactions were submitted during the 

course of 2 minutes or less, where at 

least one party to the Obvious Error is 

a non-Customer, the Exchange will 

apply the non-Customer adjustment 

criteria described above to such 

transactions. The Exchange based its 

proposal of 200 transactions on the fact 

that the proposed level is reasonable as 

it is representative of an extremely large 

number of orders submitted to the 

Exchange that are, in turn, possibly 

erroneous. Similarly, the Exchange 

based its proposal of orders received in 

2 minutes or less on the fact that this is 

a very short amount of time under 

which one Member could generate 

multiple erroneous transactions. In 

order for a participant to have more than 

200 transactions under review 

concurrently when the orders triggering 

such transactions were received in 2 

minutes or less, the market participant 

will have far exceeded the normal 

behavior of customers deserving 

protected status.8 While the Exchange 

continues to believe that it is 

appropriate to nullify transactions in 

such a circumstance if both participants 

to a transaction are Customers, the 

Exchange does not believe it is 

appropriate to place the overall risk of 

a significant number of trade breaks on 

non-Customers that in the normal 

course of business may have engaged in 

additional hedging activity or trading 

activity based on such transactions. 

Thus, the Exchange believes it is 

necessary and appropriate to protect 

non-Customers in such a circumstance 

by applying the non-Customer 

adjustment criteria, and thus adjusting 

transactions as set forth above, in the 

event a Member has more than 200 

transactions under review concurrently. 

Catastrophic Errors 

Consistent with the Current Rule, the 

Exchange proposes to adopt separate 

numerical thresholds for review of 

transactions for which the Exchange 

does not receive a filing requesting 

review within the Obvious Error 

timeframes set forth above. Based on 

this review these transactions may 

qualify as ‘‘Catastrophic Errors.’’ As 

proposed, a Catastrophic Error will be 

deemed to have occurred when the 

execution price of a transaction is 

higher or lower than the Theoretical 

Price for the series by an amount equal 

to at least the amount shown below: 

Theoretical price Minimum 

amount 

Below $2.00 .......................... $0.50 

$2.00 to $5.00 ...................... 1.00 

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Notices 77563 

9Although the Exchange has proposed a specific 

provision related to coordination amongst options 

exchanges in the context of a widespread event, the 

Exchange does not believe that the Significant 

Market Event provision or any other provision of 

the proposed rule alters the Exchange’s ability to 

coordinate with other options exchanges in the 

normal course of business with respect to market 

events or activity. The Exchange does already 

coordinate with other options exchanges to the 

Continued 

Theoretical price Minimum 

amount 

Above $5.00 to $10.00 ......... 1.50 

Above $10.00 to $20.00 ....... 2.00 

Above $20.00 to $50.00 ....... 2.50 

Above $50.00 to $100.00 ..... 3.00 

Above $100.00 ..................... 4.00 

Based on industry feedback on the 

Catastrophic Error thresholds set forth 

under the Current Rule, the thresholds 

proposed as set forth above are more 

granular and lower (i.e., more likely to 

qualify) than the thresholds under the 

Current Rule. As noted above, under the 

Proposed Rule as well as the Current 

Rule, parties have additional time to 

submit transactions for review as 

Catastrophic Errors. As proposed, 

notification requesting review must be 

received by the Exchange’s Trade Desk 

by 8:30 a.m. Eastern Time on the first 

trading day following the execution. For 

transactions in an expiring options 

series that take place on an expiration 

day, a party must notify the Exchange’s 

Trade Desk within 45 minutes after the 

close of trading that same day. As is true 

for requests for review under the 

Obvious Error provision of the Proposed 

Rule, a party requesting review of a 

transaction as a Catastrophic Error must 

notify the Exchange’s Trade Desk in the 

manner specified from time to time by 

the Exchange in a circular distributed to 

Members. By definition, any execution 

that qualifies as a Catastrophic Error is 

also an Obvious Error. However, the 

Exchange believes it is appropriate to 

maintain these two types of errors 

because the Catastrophic Error 

provisions provide market participants 

with a longer notification period under 

which they may file a request for review 

with the Exchange of a potential 

Catastrophic Error than a potential 

Obvious Error. This provides an 

additional level of protection for 

transactions that are severely erroneous 

even in the event a participant does not 

submit a request for review in a timely 

fashion. 

The Proposed Rule would specify the 

action to be taken by the Exchange if it 

is determined that a Catastrophic Error 

has occurred, as described below, and 

would require the Exchange to promptly 

notify both parties to the trade 

electronically or via telephone. In the 

event of a Catastrophic Error, the 

execution price of the transaction will 

be adjusted by the Official pursuant to 

the table below. 

Theoretical price (TP) 

Buy 

transaction 

adjustment— 

TP plus 

Sell 

transaction 

adjustment— 

TP minus 

Below $2.00 ............................................................................................................................................................. $0.50 $0.50 

$2.00 to $5.00 .......................................................................................................................................................... 1.00 1.00 

Above $5.00 to $10.00 ............................................................................................................................................ 1.50 1.50 

Above $10.00 to $20.00 .......................................................................................................................................... 2.00 2.00 

Above $20.00 to $50.00 .......................................................................................................................................... 2.50 2.50 

Above $50.00 to $100.00 ........................................................................................................................................ 3.00 3.00 

Above $100.00 ......................................................................................................................................................... 4.00 4.00 

Although Customer orders would be 

adjusted in the same manner as nonCustomer orders, any Customer order 

that qualifies as a Catastrophic Error 

will be nullified if the adjustment 

would result in an execution price 

higher (for buy transactions) or lower 

(for sell transactions) than the 

Customer’s limit price. Based on 

industry feedback, the levels proposed 

above with respect to adjustment 

amounts are the same levels as the 

thresholds at which a transaction may 

be deemed a Catastrophic Error 

pursuant to the chart set forth above. 

As is true for Obvious Errors as 

described above, the Exchange believes 

that it is appropriate to adjust to prices 

a specified amount away from 

Theoretical Price rather than to adjust to 

Theoretical Price because even though 

the Exchange has determined a given 

trade to be erroneous in nature, the 

parties in question should have had 

some expectation of execution at the 

price or prices submitted. Also, it is 

common that by the time it is 

determined that a Catastrophic Error has 

occurred additional hedging and trading 

activity has already occurred based on 

the executions that previously 

happened. The Exchange is concerned 

that an adjustment to Theoretical Price 

in all cases would not appropriately 

incentivize market participants to 

maintain appropriate controls to avoid 

potential errors. Further, the Exchange 

believes it is appropriate to maintain a 

higher adjustment level for Catastrophic 

Errors than Obvious Errors given the 

significant additional time that can 

potentially pass before an adjustment is 

requested and applied and the amount 

of hedging and trading activity that can 

occur based on the executions at issue 

during such time. For the same reasons, 

other than honoring the limit prices 

established for Customer orders, the 

Exchange has proposed to treat all 

market participants the same in the 

context of the Catastrophic Error 

provision. Specifically, the Exchange 

believes that treating market 

participants the same in this context 

will provide additional certainty to 

market participants with respect to their 

potential exposure and hedging 

activities, including comfort that even if 

a transaction is later adjusted (i.e., past 

the standard time limit for filing under 

the Obvious Error provision), such 

transaction will not be fully nullified. 

However, as noted above, under the 

Proposed Rule where at least one party 

to the transaction is a Customer, the 

trade will be nullified if the adjustment 

would result in an execution price 

higher (for buy transactions) or lower 

(for sell transactions) than the 

Customer’s limit price. The Exchange 

has retained the protection of a 

Customer’s limit price in order to avoid 

a situation where the adjustment could 

be to a price that the Customer could 

not afford, which is less likely to be an 

issue for a market professional. 

Significant Market Events 

In order to improve consistency for 

market participants in the case of a 

widespread market event and in light of 

the interconnected nature of the options 

exchanges, the Exchange proposes to 

adopt a new provision that calls for 

coordination between the options 

exchanges in certain circumstances and 

provides limited flexibility in the 

application of other provisions of the 

Proposed Rule in order to promptly 

respond to a widespread market event.9

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77564 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Notices 

extent possible if such coordination is necessary to 

maintain a fair and orderly market and/or to fulfill 

the Exchange’s duties as a self-regulatory 

organization. 

The Exchange proposes to describe such 

an event as a Significant Market Event, 

and to set forth certain objective criteria 

that will determine whether such an 

event has occurred. The Exchange 

developed these objective criteria in 

consultation with the other options 

exchanges by reference to historical 

patterns and events with a goal of 

setting thresholds that very rarely will 

be triggered so as to limit the 

application of the provision to truly 

significant market events. As proposed, 

a Significant Market Event will be 

deemed to have occurred when 

proposed criterion (A) below is met or 

the sum of all applicable event statistics, 

where each is expressed as a percentage 

of the relevant threshold in criteria (A) 

through (D) below, is greater than or 

equal to 150% and 75% or more of at 

least one category is reached, provided 

that no single category can contribute 

more than 100% to the sum. All criteria 

set forth below will be measured in 

aggregate across all exchanges. 

The proposed criteria for determining 

a Significant Market Event are as 

follows: 

(A) Transactions that are potentially 

erroneous would result in a total WorstCase Adjustment Penalty greater than or 

equal to $30,000,000, where the WorstCase Adjustment Penalty is computed as 

the sum, across all potentially erroneous 

trades, of: (i) $0.30 (i.e., the largest 

Transaction Adjustment value listed in 

sub-paragraph (e)(3)(A) below); times; 

(ii) the contract multiplier for each 

traded contract; times (iii) the number of 

contracts for each trade; times (iv) the 

appropriate Size Adjustment Modifier 

for each trade, if any, as defined in subparagraph (e)(3)(A) below; 

(B) Transactions involving over 

500,000 options contracts are 

potentially erroneous; 

(C) Transactions with a notional value 

(i.e., number of contracts traded 

multiplied by the option premium 

multiplied by the contract multiplier) of 

more than $100,000,000 are potentially 

erroneous; 

(D) Over 10,000 transactions are 

potentially erroneous. 

As described above, the Exchange 

proposes to adopt a Worst Case 

Adjustment Penalty, proposed as 

criterion (A), which is the only criterion 

that can on its own result in an event 

being designated as a significant market 

event. The Worst Case Adjustment 

Penalty is intended to develop an 

objective criterion that can be quickly 

determined by the Exchange in 

consultation with other options 

exchanges that approximates the total 

overall exposure to market participants 

on the negatively impacted side of each 

transaction that occurs during an event. 

If the Worst Case Adjustment criterion 

exceeds $30,000,000, then an event is a 

Significant Market Event. As an 

example of the Worst Case Adjustment 

Penalty, assume that a single potentially 

erroneous transaction in an event is as 

follows: Sale of 100 contracts of a 

standard option (i.e., an option with a 

100 share multiplier). The highest 

potential adjustment penalty for this 

single transaction would be $6,000, 

which would be calculated as $0.30 

times 100 (contract multiplier) times 

100 (number of contracts) times 2 

(applicable Size Adjustment Modifier). 

The Exchange would calculate the 

highest potential adjustment penalty for 

each of the potentially erroneous 

transactions in the event and the Worst 

Case Adjustment Penalty would be the 

sum of such penalties on the Exchange 

and all other options exchanges with 

affected transactions. 

As described above, under the 

Proposed Rule if the Worst Case 

Adjustment Penalty does not exceed 

$30,000,000, then a Significant Market 

Event has occurred if the sum of all 

applicable event statistics (expressed as 

a percentage of the relevant thresholds), 

is greater than or equal to 150% and 

75% or more of at least one category is 

reached. The Proposed Rule further 

provides that no single category can 

contribute more than 100% to the sum. 

As an example of the application of this 

provision, assume that in a given event 

across all options exchanges that: (A) 

The Worst Case Adjustment Penalty is 

$12,000,000 (40% of $30,000,000), (B) 

300,000 options contracts are 

potentially erroneous (60% of 500,000), 

(C) the notional value of potentially 

erroneous transactions is $30,000,000 

(30% of $100,000,000), and (D) 12,000 

transactions are potentially erroneous 

(120% of 10,000). This event would 

qualify as a Significant Market Event 

because the sum of all applicable event 

statistics would be 230%, far exceeding 

the 150% threshold. The 230% sum is 

reached by adding 40%, 60%, 30% and 

last, 100% (i.e., rounded down from 

120%) for the number of transactions. 

The Exchange notes that no single 

category can contribute more than 100% 

to the sum and any category 

contributing more than 100% will be 

rounded down to 100%. 

As an alternative example, assume a 

large-scale event occurs involving lowpriced options with a small number of 

contracts in each execution. Assume in 

this event across all options exchanges 

that: (A) The Worst Case Adjustment 

Penalty is $600,000 (2% of 

$30,000,000), (B) 20,000 options 

contracts are potentially erroneous (4% 

of 500,000), (C) the notional value of 

potentially erroneous transactions is 

$20,000,000 (20% of $100,000,000), and 

(D) 20,000 transactions are potentially 

erroneous (200% of 10,000, but rounded 

down to 100%). This event would not 

qualify as a Significant Market Event 

because the sum of all applicable event 

statistics would be 126%, below the 

150% threshold. The Exchange 

reiterates that as proposed, even when 

a single category other than criterion (A) 

is fully met, that does not necessarily 

qualify an event as a Significant Market 

Event. 

The Exchange believes that the 

breadth and scope of the obvious error 

rules are appropriate and sufficient for 

handling of typical and common 

obvious errors. Coordination between 

and among the exchanges should 

generally not be necessary even when a 

member has an error that results in 

executions on more than one exchange. 

In setting the thresholds above the 

Exchange believes that the requirements 

will be met only when truly widespread 

and significant errors happen and the 

benefits of coordination and information 

sharing far outweigh the costs of the 

logistics of additional intra-exchange 

coordination. The Exchange notes that 

in addition to its belief that the 

proposed thresholds are sufficiently 

high, the Exchange has proposed the 

requirement that either criterion (A) is 

met or the sum of applicable event 

statistics for proposed (A) through (D) 

equals or exceeds 150% in order to 

ensure that an event is sufficiently large 

but also to avoid situations where an 

event is extremely large but just misses 

potential qualifying thresholds. For 

instance, the proposal is designed to 

help avoid a situation where the Worst 

Case Adjustment Penalty is $15,000,000, 

so the event does not qualify based on 

criterion (A) alone, but there are 

transactions in 490,000 options 

contracts that are potentially erroneous 

(missing criterion (B) by 10,000 

contracts), there transactions with a 

notional value of $99,000,000 (missing 

criterion (C) by $1,000,000), and there 

are 9,000 potentially erroneous 

transactions overall (missing criterion 

(D) by 1,000 transactions). The 

Exchange believes that the proposed 

formula, while slightly more 

complicated than simply requiring a 

certain threshold to be met in each 

category, may help to avoid 

inapplicability of the proposed 

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Notices 77565 

provisions in the context of an event 

that would be deemed significant by 

most subjective measures but that barely 

misses each of the objective criteria 

proposed by the Exchange. 

To ensure consistent application 

across options exchanges, in the event 

of a suspected Significant Market Event, 

the Exchange shall initiate a 

coordinated review of potentially 

erroneous transactions with all other 

affected options exchanges to determine 

the full scope of the event. Under the 

Proposed Rule, the Exchange will 

promptly coordinate with the other 

options exchanges to determine the 

appropriate review period as well as 

select one or more specific points in 

time prior to the transactions in 

question and use one or more specific 

points in time to determine Theoretical 

Price. Other than the selected points in 

time, if applicable, the Exchange will 

determine Theoretical Price as 

described above. For example, around 

the start of a SME that is triggered by a 

large and aggressively priced buy order, 

three exchanges have multiple orders on 

the offer side of the market: Exchange A 

has offers priced at $2.20, $2.25, $2.30 

and several other price levels to $3.00, 

Exchange B has offers at $2.45, $2.30 

and several other price levels to $3.00, 

Exchange C has offers at price levels 

between $2.50 and $3.00. Assume an 

event occurs starting at 10:05:25 a.m. ET 

and in this particular series the 

executions begin on Exchange A and 

subsequently begin to occur on 

Exchanges B and C. Without 

coordination and information sharing 

between the exchanges, Exchange B and 

Exchange C cannot know with certainty 

that whether or not the execution at 

Exchange A that happened at $2.20 

immediately prior to their executions at 

$2.45 and $2.50 is part of the same 

erroneous event or not. With proper 

coordination, the exchanges can 

determine that in this series, the proper 

point in time from which the event 

should be analyzed is 10:05:25 a.m. ET, 

and thus, the NBO of $2.20 should be 

used as the Theoretical Price for 

purposes of all buy transactions in such 

options series that occurred during the 

event. 

If it is determined that a Significant 

Market Event has occurred then, using 

the parameters agreed with respect to 

the times from which Theoretical Price 

will be calculated, if applicable, an 

Official will determine whether any or 

all transactions under review qualify as 

Obvious Errors. The Proposed Rule 

would require the Exchange to use the 

criteria in Proposed Rule 20.6(c), as 

described above, to determine whether 

an Obvious Error has occurred for each 

transaction that was part of the 

Significant Market Event. Upon taking 

any final action, the Exchange would be 

required to promptly notify both parties 

to the trade electronically or via 

telephone. 

The execution price of each affected 

transaction will be adjusted by an 

Official to the price provided below, 

unless both parties agree to adjust the 

transaction to a different price or agree 

to bust the trade. 

Theoretical 

price (TP) 

Buy 

transaction 

adjustment— 

TP plus 

Sell 

transaction 

adjustment— 

TP minus 

Below 

$3.00 ..... $0.15 $0.15 

At or above 

$3.00 ..... $0.30 $0.30 

Thus, the proposed adjustment criteria 

for Significant Market Events are 

identical to the proposed adjustment 

levels for Obvious Errors generally. In 

addition, in the context of a Significant 

Market Event, any error exceeding 50 

contracts will be subject to the Size 

Adjustment Modifier described above. 

Also, the adjustment criteria would 

apply equally to all market participants 

(i.e., Customers and non-Customers) in 

a Significant Market Event. However, as 

is true for the proposal with respect to 

Catastrophic Errors, under the Proposed 

Rule where at least one party to the 

transaction is a Customer, the trade will 

be nullified if the adjustment would 

result in an execution price higher (for 

buy transactions) or lower (for sell 

transactions) than the Customer’s limit 

price. The Exchange has retained the 

protection of a Customer’s limit price in 

order to avoid a situation where the 

adjustment could be to a price that the 

Customer could not afford, which is less 

likely to be an issue for a market 

professional. The Exchange has 

otherwise proposed to treat all market 

participants the same in the context of 

a Significant Market Event to provide 

additional certainty to market 

participants with respect to their 

potential exposure as soon as an event 

has occurred. 

Another significant distinction 

between the proposed Obvious Error 

provision and the proposed Significant 

Market Event provision is that if the 

Exchange, in consultation with other 

options exchanges, determines that 

timely adjustment is not feasible due to 

the extraordinary nature of the situation, 

then the Exchange will nullify some or 

all transactions arising out of the 

Significant Market Event during the 

review period selected by the Exchange 

and other options exchanges. To the 

extent the Exchange, in consultation 

with other options exchanges, 

determines to nullify less than all 

transactions arising out of the 

Significant Market Event, those 

transactions subject to nullification will 

be selected based upon objective criteria 

with a view toward maintaining a fair 

and orderly market and the protection of 

investors and the public interest. For 

example, assume a Significant Market 

Event causes 25,000 potentially 

erroneous transactions and impacts 51 

options classes. Of the 25,000 

transactions, 24,000 of them are 

concentrated in a single options class. 

The exchanges may decide the most 

appropriate solution because it will 

provide the most certainty to 

participants and allow for the prompt 

resumption of regular trading is to bust 

all trades in the most heavily affected 

class between two specific points in 

time, while the other 1,000 trades across 

the other 50 classes are reviewed and 

adjusted as appropriate. A similar 

situation might arise directionally 

where a Customer submits both 

erroneous buy and sell orders and the 

number of errors that happened that 

were erroneously low priced (i.e., 

erroneous sell orders) were 50,000 in 

number but the number of errors that 

were erroneously high (i.e., erroneous 

buy orders) were only 500 in number. 

The most effective and efficient 

approach that provides the most 

certainty to the marketplace in a 

reasonable amount of time while most 

closely following the generally 

prescribed obvious error rules could be 

to bust all of the erroneous sell 

transactions but to adjust the erroneous 

buy transactions. 

With respect to rulings made pursuant 

to the proposed Significant Market 

Event provision the Exchange believes 

that the number of affected transactions 

is such that immediate finality is 

necessary to maintain a fair and orderly 

market and to protect investors and the 

public interest. Accordingly, rulings by 

the Exchange pursuant to the Significant 

Market Event provision would be nonappealable pursuant to the Proposed 

Rule. 

Additional Provisions 

Mutual Agreement 

In addition to the objective criteria 

described above, the Proposed Rule also 

proposes to make clear that the 

determination as to whether a trade was 

executed at an erroneous price may be 

made by mutual agreement of the 

affected parties to a particular 

transaction. The Proposed Rule would 

state that a trade may be nullified or 

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77566 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Notices 

10The Exchange has proposed the price and time 

parameters for quote width and average quote width 

used to determine whether an erroneous quote has 

occurred based on established rules of options 

exchanges that currently apply such parameters. 

See, e.g., CBOE Rule 6.25(a)(5); NYSE Arca Rule 

6.87(a)(5). Based on discussions with these 

exchanges, the Exchange believes that the 

parameters are a reasonable approach to determine 

whether an erroneous quote has occurred for 

purposes of the proposed rule. 

adjusted on the terms that all parties to 

a particular transaction agree, provided, 

however, that such agreement to nullify 

or adjust must be conveyed to the 

Exchange in a manner prescribed by the 

Exchange prior to 8:30 a.m. Eastern 

Time on the first trading day following 

the execution. 

The Exchange also proposes to 

explicitly state that it is considered 

conduct inconsistent with just and 

equitable principles of trade for any 

Member to use the mutual adjustment 

process to circumvent any applicable 

Exchange rule, the Act or any of the 

rules and regulations thereunder. Thus, 

for instance, a Member is precluded 

from seeking to avoid applicable tradethrough rules by executing a transaction 

and then adjusting such transaction to a 

price at which the Exchange would not 

have allowed it to execute at the time of 

the execution because it traded through 

the quotation of another options 

exchange. The Exchange notes that in 

connection with its obligations as a selfregulatory organization, the Exchange’s 

Regulatory Department reviews 

adjustments to transactions to detect 

potential violations of Exchange rules or 

the Act and the rules and regulations 

thereunder. 

Trading Halts 

Exchange Rule 20.3 describes the 

Exchange’s authority to declare trading 

halts in one or more options traded on 

the Exchange. The Exchange proposes to 

make clear in the Proposed Rule that it 

will nullify any transaction that occurs 

during a trading halt in the affected 

option on the Exchange pursuant to 

Rule 20.3. If any trades occur 

notwithstanding a trading halt then the 

Exchange believes it appropriate to 

nullify such transactions. While the 

Exchange may halt options trading for 

various reasons, such a scenario almost 

certainly is due to extraordinary 

circumstances and is potentially the 

result of market-wide coordination to 

halt options trading or trading generally. 

Accordingly, the Exchange does not 

believe it is appropriate to allow trades 

to stand if such trades should not have 

occurred in the first place. 

The Exchange proposes to modify 

Interpretation and Policy .01 to Rule 

20.3. Currently, Interpretation and 

Policy .01 states that the Exchange 

‘‘may’’ nullify any transaction that 

occurs: (a) During a trading halt in the 

affected option on the Exchange; or (b) 

with respect to equity options 

(including options overlying ETFs), 

during a trading halt on the primary 

listing market for the underlying 

security. To ensure consistency with the 

trading halt provision of the Proposed 

Rule, the Exchange proposes to modify 

Interpretation and Policy .01 to Rule 

20.3 to state that in either situation the 

Exchange ‘‘shall’’ nullify transactions. 

Erroneous Print and Quotes in 

Underlying Security 

Market participants on the Exchange 

likely base the pricing of their orders 

submitted to the Exchange on the price 

of the underlying security for the 

option. Thus, the Exchange believes it is 

appropriate to adopt provisions that 

allow adjustment or nullification of 

transactions based on erroneous prints 

or erroneous quotes in the underlying 

security. 

The Exchange proposes to adopt 

language in the Proposed Rule stating 

that a trade resulting from an erroneous 

print(s) disseminated by the underlying 

market that is later nullified by that 

underlying market shall be adjusted or 

busted as set forth in the Obvious Error 

provisions of the Proposed Rule, 

provided a party notifies the Exchange’s 

Trade Desk in a timely manner, as 

further described below. The Exchange 

proposes to define a trade resulting from 

an erroneous print(s) as any options 

trade executed during a period of time 

for which one or more executions in the 

underlying security are nullified and for 

one second thereafter. The Exchange 

believes that one second is an 

appropriate amount of time in which an 

options trade would be directly based 

on executions in the underlying equity 

security. The Exchange also proposes to 

require that if a party believes that it 

participated in an erroneous transaction 

resulting from an erroneous print(s) 

pursuant to the proposed erroneous 

print provision it must notify the 

Exchange’s Trade Desk within the 

timeframes set forth in the Obvious 

Error provision described above. The 

Exchange has also proposed to state that 

the allowed notification timeframe 

commences at the time of notification 

by the underlying market(s) of 

nullification of transactions in the 

underlying security. Further, the 

Exchange proposes that if multiple 

underlying markets nullify trades in the 

underlying security, the allowed 

notification timeframe will commence 

at the time of the first market’s 

notification. 

As an example of a situation in which 

a trade results from an erroneous print 

disseminated by the underlying market 

that is later nullified by the underlying 

market, assume that a given underlying 

is trading in the $49.00–$50.00 price 

range then has an erroneous print at 

$5.00. Given that there is the potential 

perception that the underlying has gone 

through a dramatic price revaluation, 

numerous options trades could 

promptly trigger based off of this new 

price. However, because the price that 

triggered them was not a valid price it 

would be appropriate to review said 

option trades when the underlying print 

that triggered them is removed. 

The Exchange also proposes to add a 

provision stating that a trade resulting 

from an erroneous quote(s) in the 

underlying security shall be adjusted or 

busted as set forth in the Obvious Error 

provisions of the Proposed Rule, 

provided a party notifies the Exchange’s 

Trade Desk in a timely manner, as 

further described below. Pursuant to the 

Proposed Rule, an erroneous quote 

occurs when the underlying security has 

a width of at least $1.00 and has a width 

at least five times greater than the 

average quote width for such underlying 

security during the time period 

encompassing two minutes before and 

after the dissemination of such quote. 

For purposes of the Proposed Rule, the 

average quote width will be determined 

by adding the quote widths of sample 

quotations at regular 15-second intervals 

during the four-minute time period 

referenced above (excluding the quote(s) 

in question) and dividing by the number 

of quotes during such time period 

(excluding the quote(s) in question).10

Similar to the proposal with respect to 

erroneous prints described above, if a 

party believes that it participated in an 

erroneous transaction resulting from an 

erroneous quote(s) it must notify the 

Exchange’s Trade Desk in accordance 

with the notification provisions of the 

Obvious Error provision described 

above. The Proposed Rule, therefore, 

puts the onus on each Member to notify 

the Exchange if such Member believes 

that a trade should be reviewed 

pursuant to either of the proposed 

provisions, as the Exchange is not in 

position to determine the impact of 

erroneous prints or quotes on individual 

Members. The Exchange notes that it 

does not believe that additional time is 

necessary with respect to a trade based 

on an erroneous quote because a 

Member has all information necessary to 

detect the error at the time of an option 

transaction that was triggered by an 

erroneous quote, which is in contrast to 

the proposed erroneous print provision 

that includes a dependency on an action 

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Notices 77567 

11As defined in Exchange Rule 27.1(17). 

12Securities Exchange Act Release No. 67091 

(May 31, 2012), 77 FR 33498 (June 6, 2012) (order 

approving the Plan on a pilot basis). 

13 17 CFR 242.600(b)(47). 

by the market where the underlying 

security traded. 

As an example of a situation in which 

a trade results from an erroneous quote 

in the underlying security, assume again 

that a given underlying is quoting and 

trading in the $49.00–$50.00 price range 

then a liquidity gap occurs, with bidders 

not representing quotes in the market 

place and an offer quoted at $5.00. 

Quoting may quickly return to normal, 

again in the $49.00–$50.00 price range, 

but due to the potential perception that 

the underlying has gone through a 

dramatic price revaluation, numerous 

options trades could trigger based off of 

this new quoted price in the interim. 

Because the price that triggered such 

trades was not a valid price it would be 

appropriate to review said option trades. 

Stop (and Stop-Limit) Order Trades 

Triggered by Erroneous Trades 

The Exchange notes that certain 

market participants and their customers 

enter stop or stop limit orders that are 

triggered based on executions in the 

marketplace. As proposed, transactions 

resulting from the triggering of a stop or 

stop-limit order by an erroneous trade in 

an option contract shall be nullified by 

the Exchange, provided a party notifies 

the Exchange’s Trade Desk in a timely 

manner as set forth below. The 

Exchange believes it is appropriate to 

nullify executions of stop or stop-limit 

orders that were wrongly triggered 

because such transactions should not 

have occurred. If a party believes that it 

participated in an erroneous transaction 

pursuant to the Proposed Rule it must 

notify the Exchange’s Trade Desk within 

the timeframes set forth in the Obvious 

Error Rule above, with the allowed 

notification timeframe commencing at 

the time of notification of the 

nullification of transaction(s) that 

triggered the stop or stop-limit order. 

Linkage Trades 

The Exchange also proposes to adopt 

language that clearly provides the 

Exchange with authority to take 

necessary actions when another options 

exchange nullifies or adjusts a 

transaction pursuant to its respective 

rules and the transaction resulted from 

an order that has passed through the 

Exchange and been routed on to another 

options exchange on behalf of the 

Exchange. Specifically, if the Exchange 

routes an order pursuant to the 

Intermarket Option Linkage Plan 11 that 

results in a transaction on another 

options exchange (a ‘‘Linkage Trade’’) 

and such options exchange 

subsequently nullifies or adjusts the 

Linkage Trade pursuant to its rules, the 

Exchange will perform all actions 

necessary to complete the nullification 

or adjustment of the Linkage Trade. 

Although the Exchange is not utilizing 

its own authority to nullify or adjust a 

transaction related to an action taken on 

a Linkage Trade by another options 

exchange, the Exchange does have to 

assist in the processing of the 

adjustment or nullification of the order, 

such as notification to the Member and 

the OCC of the adjustment or 

nullification. Thus, the Exchange 

believes that the proposed provision 

adds additional transparency to the 

Proposed Rule. 

Appeals 

The Exchange proposes to maintain 

its current appeals process in 

connection with the Proposed Rule. 

Specifically, if a member of BATS 

Options (‘‘Options Member’’) affected 

by a determination made under the 

Proposed Rule requests within the time 

permitted below, the Obvious Error 

Panel (‘‘Obvious Error Panel’’) will 

review decisions made by the BATS 

Official, including whether an obvious 

error occurred and whether the correct 

determination was made. 

In order to maintain a diverse group 

of participants, the Obvious Error Panel 

will be comprised of the Exchange’s 

Chief Regulatory Officer (‘‘CRO’’) or a 

designee of the CRO, a representative of 

one (1) Options Member engaged in 

market making (any such representative, 

a ‘‘MM Representative’’) and 

representatives from two (2) Options 

Members satisfying one or both of the 

criteria set forth below (any such 

representative, a ‘‘Non-MM 

Representative’’). To qualify as a NonMM Representative a person must: Be 

employed by an Options Member whose 

revenues from options market making 

activity do not exceed ten percent (10%) 

of its total revenues; or have as his or 

her primary responsibility the handling 

of Public Customer orders or 

supervisory responsibility over persons 

with such responsibility, and not have 

any responsibilities with respect to 

market making activities. 

In order to further assure a diverse 

group of potential participants on an 

Obvious Error Panel, the Exchange shall 

designate at least ten (10) MM 

Representatives and at least ten (10) 

Non-MM Representatives to be called 

upon to serve on the Obvious Error 

Panel as needed. To assure fairness, in 

no case shall an Obvious Error Panel 

include a person affiliated with a party 

to the trade in question. Also, to the 

extent reasonably possible, the 

Exchange shall call upon the designated 

representatives to participate on an 

Obvious Error Panel on an equally 

frequent basis. 

Under the Proposed Rule a request for 

review on appeal must be made in 

writing via email or other electronic 

means specified from time to time by 

the Exchange in a circular distributed to 

Options Members within thirty (30) 

minutes after the party making the 

appeal is given notification of the initial 

determination being appealed. The 

Obvious Error Panel shall review the 

facts and render a decision as soon as 

practicable, but generally on the same 

trading day as the execution(s) under 

review. On requests for appeal received 

after 3:00 p.m. Eastern Time, a decision 

will be rendered as soon as practicable, 

but in no case later than the trading day 

following the date of the execution 

under review. 

The Obvious Error Panel may 

overturn or modify an action taken by 

the BATS Official under this Rule. All 

determinations by the Obvious Error 

Panel shall constitute final action by the 

Exchange on the matter at issue. The 

Exchange believes that this is necessary 

given the purpose of the appeal is 

finality. 

In order to deter frivolous appeals, if 

the Obvious Error Panel votes to uphold 

the decision made pursuant to the 

Proposed Rule, the Exchange will assess 

a $500.00 fee against the Options 

Member(s) who initiated the request for 

appeal. In addition, in instances where 

the Exchange, on behalf of an Options 

Member, requests a determination by 

another market center that a transaction 

is clearly erroneous, the Exchange will 

pass any resulting charges through to 

the relevant Options Member. 

Any determination by an Officer or by 

the Obvious Error Panel shall be 

rendered without prejudice as to the 

rights of the parties to the transaction to 

submit their dispute to arbitration. 

Limit Up-Limit Down Plan 

The Exchange is proposing to adopt 

Interpretation and Policy .01 to the 

Proposed Rule to provide for how the 

Exchange will treat Obvious and 

Catastrophic Errors in response to the 

Regulation NMS Plan to Address 

Extraordinary Market Volatility 

Pursuant to Rule 608 of Regulation NMS 

under the Act (the ‘‘Limit Up-Limit 

Down Plan’’ or the ‘‘Plan),12 which is 

applicable to all NMS stocks, as defined 

in Regulation NMS Rule 600(b)(47).13

Under the Proposed Rule, during a pilot 

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14See Securities and Exchange Act Release No. 

63241 (November 3, 2010), 75 FR 69791 (November 

15, 2010) (File No. S7–03–10). 

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

16 15 U.S.C. 78f(b)(5). 

period to coincide with the pilot period 

for the Plan, including any extensions to 

the pilot period for the Plan, an 

execution will not be subject to review 

as an Obvious Error or Catastrophic 

Error pursuant to paragraph (c) or (d) of 

the Proposed Rule if it occurred while 

the underlying security was in a ‘‘Limit 

State’’ or ‘‘Straddle State,’’ as defined in 

the Plan. The Exchange, however, 

proposes to retain authority to review 

transactions on an Official’s own motion 

pursuant to sub-paragraph (c)(3) of the 

Proposed Rule and to bust or adjust 

transactions pursuant to the proposed 

Significant Market Event provision, the 

proposed trading halts provision, the 

proposed provisions with respect to 

erroneous prints and quotes in the 

underlying security, or the proposed 

provision related to stop and stop limit 

orders that have been triggered by an 

erroneous execution. The Exchange 

believes that these safeguards will 

provide the Exchange with the 

flexibility to act when necessary and 

appropriate to nullify or adjust a 

transaction, while also providing market 

participants with certainty that, under 

normal circumstances, the trades they 

affect with quotes and/or orders having 

limit prices will stand irrespective of 

subsequent moves in the underlying 

security. 

During a Limit or Straddle State, 

options prices may deviate substantially 

from those available immediately prior 

to or following such States. Thus, 

determining a Theoretical Price in such 

situations would often be very 

subjective, creating unnecessary 

uncertainty and confusion for investors. 

Because of this uncertainty, the 

Exchange is proposing to amend Rule 

20.6 to provide that the Exchange will 

not review transactions as Obvious 

Errors or Catastrophic Errors when the 

underlying security is in a Limit or 

Straddle State. 

The Exchange notes that there are 

additional protections in place outside 

of the Obvious and Catastrophic Error 

Rule that will continue to safeguard 

customers. First, the Exchange rejects all 

un-priced options orders received by the 

Exchange (i.e., Market Orders) during a 

Limit or Straddle State for the 

underlying security. Second, SEC Rule 

15c3–5 requires that, ‘‘financial risk 

management controls and supervisory 

procedures must be reasonably designed 

to prevent the entry of orders that 

exceed appropriate pre-set credit or 

capital thresholds, or that appear to be 

erroneous.’’ 14 Third, the Exchange has 

price checks applicable to limit orders 

that reject limit orders that are priced 

sufficiently far through the national best 

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

it seems likely an error occurred. The 

rejection of Market Orders, the 

requirements placed upon broker 

dealers to adopt controls to prevent the 

entry of orders that appear to be 

erroneous, and Exchange functionality 

that filters out orders that appear to be 

erroneous, will all serve to sharply 

reduce the incidence of erroneous 

transactions. 

The Exchange represents that it will 

conduct its own analysis concerning the 

elimination of the Obvious Error and 

Catastrophic Error provisions during 

Limit and Straddle States and agrees to 

provide the Commission with relevant 

data to assess the impact of this 

proposed rule change. As part of its 

analysis, the Exchange will evaluate (1) 

the options market quality during Limit 

and Straddle States, (2) assess the 

character of incoming order flow and 

transactions during Limit and Straddle 

States, and (3) review any complaints 

from Members and their customers 

concerning executions during Limit and 

Straddle States. The Exchange also 

agrees to provide to the Commission 

data requested to evaluate the impact of 

the inapplicability of the Obvious Error 

and Catastrophic Error provisions, 

including data relevant to assessing the 

various analyses noted above. 

In connection with this proposal, the 

Exchange will provide to the 

Commission and the public a dataset 

containing the data for each Straddle 

State and Limit State in NMS Stocks 

underlying options traded on the 

Exchange beginning in the month 

during which the proposal is approved, 

limited to those option classes that have 

at least one (1) trade on the Exchange 

during a Straddle State or Limit State. 

For each of those option classes 

affected, each data record will contain 

the following information: 

• Stock symbol, option symbol, time 

at the start of the Straddle or Limit 

State, an indicator for whether it is a 

Straddle or Limit State. 

• For activity on the Exchange: 

Æ executed volume, time-weighted 

quoted bid-ask spread, time-weighted 

average quoted depth at the bid, timeweighted average quoted depth at the 

offer; 

Æ high execution price, low execution 

price; 

Æ number of trades for which a 

request for review for error was received 

during Straddle and Limit States; 

Æ an indicator variable for whether 

those options outlined above have a 

price change exceeding 30% during the 

underlying stock’s Limit or Straddle 

State compared to the last available 

option price as reported by OPRA before 

the start of the Limit or Straddle State 

(1 if observe 30% and 0 otherwise). 

Another indicator variable for whether 

the option price within five minutes of 

the underlying stock leaving the Limit 

or Straddle state (or halt if applicable) 

is 30% away from the price before the 

start of the Limit or Straddle State. 

In addition, the Exchange shall 

provide to the Commission assessments 

relating to the impact of the operation 

of the Obvious Error rules during Limit 

and Straddle States as follows: (1) 

Evaluate the statistical and economic 

impact of Limit and Straddle States on 

liquidity and market quality in the 

options markets; and (2) Assess whether 

the lack of Obvious Error rules in effect 

during the Straddle and Limit States are 

problematic. The timing of this 

submission would coordinate with 

Participants’ proposed time frame to 

submit to the Commission assessments 

as required under Appendix B of the 

Plan. 

No Adjustments to a Worse Price 

Finally, the Exchange proposes to 

include Interpretation and Policy .02 to 

the Proposed Rule, which would make 

clear that to the extent the provisions of 

the proposed Rule would result in the 

Exchange applying an adjustment of an 

erroneous sell transaction to a price 

lower than the execution price or an 

erroneous buy transaction to a price 

higher than the execution price, the 

Exchange will not adjust or nullify the 

transaction, but rather, the execution 

price will stand. 

2. Statutory Basis 

The Exchange believes that its 

proposal is consistent with the 

requirements of the Act and the rules 

and regulations thereunder that are 

applicable to a national securities 

exchange, and, in particular, with the 

requirements of section 6(b) of the 

Act.15 Specifically, the proposal is 

consistent with section 6(b)(5) of the 

Act 16 because it would promote just 

and equitable principles of trade, 

remove impediments to, and perfect the 

mechanism of, a free and open market 

and a national market system, and, in 

general, protect investors and the public 

interest. 

As described above, the Exchange and 

other options exchanges are seeking to 

adopt harmonized rules related to the 

adjustment and nullification of 

erroneous options transactions. The 

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17 15 U.S.C. 78f(b)(5). 

Exchange believes that the Proposed 

Rule will provide greater transparency 

and clarity with respect to the 

adjustment and nullification of 

erroneous options transactions. 

Particularly, the proposed changes seek 

to achieve consistent results for 

participants across U.S. options 

exchanges while maintaining a fair and 

orderly market, protecting investors and 

protecting the public interest. Based on 

the foregoing, the Exchange believes 

that the proposal is consistent with 

section 6(b)(5) of the Act 17 in that the 

Proposed Rule will foster cooperation 

and coordination with persons engaged 

in regulating and facilitating 

transactions. 

The Exchange believes the various 

provisions allowing or dictating 

adjustment rather than nullification of a 

trade are necessary given the benefits of 

adjusting a trade price rather than 

nullifying the trade completely. Because 

options trades are used to hedge, or are 

hedged by, transactions in other 

markets, including securities and 

futures, many Members, and their 

customers, would rather adjust prices of 

executions rather than nullify the 

transactions and, thus, lose a hedge 

altogether. As such, the Exchange 

believes it is in the best interest of 

investors to allow for price adjustments 

as well as nullifications. The Exchange 

further discusses specific aspects of the 

Proposed Rule below. 

The Exchange does not believe that 

the proposal is unfairly discriminatory, 

even though it differentiates in many 

places between Customers and nonCustomers. The rules of the options 

exchanges, including the Exchange’s 

existing Obvious Error provision, often 

treat Customers differently, often 

affording them preferential treatment. 

This treatment is appropriate in light of 

the fact that Customers are not 

necessarily immersed in the day-to-day 

trading of the markets, are less likely to 

be watching trading activity in a 

particular option throughout the day, 

and may have limited funds in their 

trading accounts. At the same time, the 

Exchange reiterates that in the U.S. 

options markets generally there is 

significant retail customer participation 

that occurs directly on (and only on) 

options exchanges such as the 

Exchange. Accordingly, differentiating 

among market participants with respect 

to the adjustment and nullification of 

erroneous options transactions is not 

unfairly discriminatory because it is 

reasonable and fair to provide 

Customers with additional protections 

as compared to non-Customers. 

The Exchange believes that its 

proposal with respect to the allowance 

of mutual agreed upon adjustments or 

nullifications is appropriate and 

consistent with the Act, as such 

proposal removes impediments to and 

perfects the mechanism of a free and 

open market and a national market 

system, allowing participants to 

mutually agree to correct an erroneous 

transactions without the Exchange 

mandating the outcome. The Exchange 

also believes that its proposal with 

respect to mutual adjustments is 

consistent with the Act because it is 

designed to prevent fraudulent and 

manipulative acts and practices by 

explicitly stating that it is considered 

conduct inconsistent with just and 

equitable principles of trade for any 

Member to use the mutual adjustment 

process to circumvent any applicable 

Exchange rule, the Act or any of the 

rules and regulations thereunder. 

The Exchange believes its proposal to 

provide within the Proposed Rule 

definitions of Customer, erroneous sell 

transaction and erroneous buy 

transaction, and Official is consistent 

with section 6(b)(5) of the Act because 

such terms will provide more certainty 

to market participants as to the meaning 

of the Proposed Rule and reduce the 

possibility that a party can intentionally 

submit an order hoping for the market 

to move in their favor in reliance on the 

Rule as a safety mechanism, thereby 

promoting just and fair principles of 

trade. Similarly, the Exchange believes 

that proposed Interpretation and Policy 

.02 is consistent with the Act as it 

would make clear that the Exchange 

will not adjust or nullify a transaction, 

but rather, the execution price will 

stand when the applicable adjustment 

criteria would actually adjust the price 

of the transaction to a worse price (i.e., 

higher for an erroneous buy or lower for 

an erroneous sell order). 

As set forth below, the Exchange 

believes it is consistent with section 

6(b)(5) of the Act for the Exchange to 

determine Theoretical Price when the 

NBBO cannot reasonably be relied upon 

because the alternative could result in 

transactions that cannot be adjusted or 

nullified even when they are otherwise 

clearly at a price that is significantly 

away from the appropriate market for 

the option. Similarly, reliance on an 

NBBO that is not reliable could result in 

adjustment to prices that are still 

significantly away from the appropriate 

market for the option. 

The Exchange believes that its 

proposal with respect to determining 

Theoretical Price is consistent with the 

Act in that it has retained the standard 

of the current rule, which is to rely on 

the NBBO to determine Theoretical 

Price if such NBBO can reasonably be 

relied upon. Because, however, there is 

not always an NBBO that can or should 

be used in order to administer the rule, 

the Exchange has proposed various 

provisions that provide the Exchange 

with the authority to determine a 

Theoretical Price. The Exchange 

believes that the Proposed Rule is 

transparent with respect to the 

circumstances under which the 

Exchange will determine Theoretical 

Price, and has sought to limit such 

circumstances as much as possible. The 

Exchange notes that Exchange personnel 

currently are required to determine 

Theoretical Price in certain 

circumstances. While the Exchange 

continues to pursue alternative 

solutions that might further enhance the 

objectivity and consistency of 

determining Theoretical Price, the 

Exchange believes that the discretion 

currently afforded to Exchange Officials 

is appropriate in the absence of a 

reliable NBBO that can be used to set 

the Theoretical Price. 

With respect to the specific proposed 

provisions for determining Theoretical 

Price for transactions that occur as part 

of the Exchange’s Opening Process and 

in situations where there is a wide 

quote, the Exchange believes both 

provisions are consistent with the Act 

because they provide objective criteria 

that will determine Theoretical Price 

with limited exceptions for situations 

where the Exchange does not believe the 

NBBO is a reasonable benchmark or 

there is no NBBO. The Exchange notes 

in particular with respect to the wide 

quote provision that the Proposed Rule 

will result in the Exchange determining 

Theoretical Price less frequently than it 

would pursuant to wide quote 

provisions that have previously been 

approved. The Exchange believes that it 

is appropriate and consistent with the 

Act to afford protections to market 

participants by not relying on the NBBO 

to determine Theoretical Price when the 

quote is extremely wide but had been, 

in the prior 10 seconds, at much more 

reasonable width. The Exchange also 

believes it is appropriate and consistent 

with the Act to use the NBBO to 

determine Theoretical Price when the 

quote has been wider than the 

applicable amount for more than 10 

seconds, as the Exchange does not 

believe it is necessary to apply any other 

criteria in such a circumstance. The 

Exchange believes that market 

participants can easily use or adopt 

safeguards to prevent errors when such 

market conditions exist. When entering 

an order into a market with a 

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persistently wide quote, the Exchange 

does not believe that the entering party 

should reasonably expect anything other 

than the quoted price of an option. 

The Exchange believes that its 

proposal to adopt clear but disparate 

standards with respect to the deadline 

for submitting a request for review of 

Customer and non-Customer 

transactions is consistent with the Act, 

particularly in that it creates a greater 

level of protection for Customers. As 

noted above, the Exchange believes that 

this is appropriate and not unfairly 

discriminatory in light of the fact that 

Customers are not necessarily immersed 

in the day-to-day trading of the markets 

and are less likely to be watching 

trading activity in a particular option 

throughout the day. Thus, Members 

representing Customer orders 

reasonably may need additional time to 

submit a request for review. The 

Exchange also believes that its proposal 

to provide additional time for 

submission of requests for review of 

linkage trades is reasonable and 

consistent with the protection of 

investors and the public interest due to 

the time that it might take an options 

exchange or third-party routing broker 

to file a request for review with the 

Exchange if the initial notification of an 

error is received by the originating 

options exchange near the end of such 

options exchange’s filing deadline. 

Without this additional time, there 

could be disparate results based purely 

on the existence of intermediaries and 

an interconnected market structure. 

In relation to the aspect of the 

proposal giving Officials the ability to 

review transactions for obvious errors 

on their own motion, the Exchange 

notes that an Official can adjust or 

nullify a transaction under the authority 

granted by this provision only if the 

transaction meets the specific and 

objective criteria for an Obvious Error 

under the Proposed Rule. As noted 

above, this is designed to give an 

Official the ability to provide parties 

relief in those situations where they 

have failed to report an apparent error 

within the established notification 

period. However, the Exchange will 

only grant relief if the transaction meets 

the requirements for an Obvious Error as 

described in the Proposed Rule. 

The Exchange believes that its 

proposal to adjust non-Customer 

transactions and to nullify Customer 

transactions that qualify as Obvious 

Errors is appropriate for reasons 

consistent with those described above. 

In particular, Customers are not 

necessarily immersed in the day-to-day 

trading of the markets, are less likely to 

be watching trading activity in a 

particular option throughout the day, 

and may have limited funds in their 

trading accounts. 

The Exchange acknowledges that the 

proposal contains some uncertainty 

regarding whether a trade will be 

adjusted or nullified, depending on 

whether one of the parties is a 

Customer, because a party may not 

know whether the other party to a 

transaction was a Customer at the time 

of entering into the transaction. 

However, the Exchange believes that the 

proposal nevertheless promotes just and 

equitable principles of trade and 

protects investors as well as the public 

interest because it eliminates the 

possibility that a Customer’s order will 

be adjusted to a significantly different 

price. As noted above, the Exchange 

believes it is consistent with the Act to 

afford Customers greater protections 

under the Proposed Rule than are 

afforded to non-Customers. Thus, the 

Exchange believes that its proposal is 

consistent with the Act in that it 

protects investors and the public 

interest by providing additional 

protections to those that are less 

informed and potentially less able to 

afford an adjustment of a transaction 

that was executed in error. Customers 

are also less likely to have engaged in 

significant hedging or other trading 

activity based on earlier transactions, 

and thus, are less in need of maintaining 

a position at an adjusted price than nonCustomers. 

If any Member submits requests to the 

Exchange for review of transactions 

pursuant to the Proposed Rule, and in 

aggregate that Member has 200 or more 

Customer transactions under review 

concurrently and the orders resulting in 

such transactions were submitted 

during the course of 2 minutes or less, 

the Exchange believes it is appropriate 

for the Exchange apply the nonCustomer adjustment criteria described 

above to such transactions. The 

Exchange believes that the proposed 

aggregation is reasonable as it is 

representative of an extremely large 

number of orders submitted to the 

Exchange over a relatively short period 

of time that are, in turn, possibly 

erroneous (and within a time frame 

significantly less than an entire day), 

and thus is most likely to occur because 

of a systems issue experienced by an 

Options Member representing Customer 

orders or a systems issue coupled with 

the erroneous marking of orders. The 

Exchange does not believe it is possible 

at a level of 200 Customer orders over 

a 2 minute period that are under review 

at one time that multiple, separate 

Customers were responsible for the 

errors in the ordinary course of trading. 

In the event of a large-scale issue caused 

by an Options Member that has 

submitted orders over a 2 minute period 

marked as Customer that resulted in 

more than 200 transactions under 

review, the Exchange does not believe it 

is appropriate to nullify all such 

transactions because of the negative 

impact that nullification could have on 

the market participants on the contraside of such transactions, who might 

have engaged in hedging and trading 

activity following such transactions. In 

order for a participant to have more than 

200 transactions under review 

concurrently when the orders triggering 

such transactions were received in 2 

minutes or less, the Exchange believes 

that a market participant will have far 

exceeded the normal behavior of 

customers deserving protected status. 

While the Exchange continues to believe 

that it is appropriate to nullify 

transactions in such a circumstance if 

both participants to a transaction are 

Customers, the Exchange does not 

believe it is appropriate to place the 

overall risk of a significant number of 

trade breaks on non-Customers that in 

the normal course of business may have 

engaged in additional hedging activity 

or trading activity based on such 

transactions. Thus, the Exchange 

believes it is necessary and appropriate 

to protect non-Customers in such a 

circumstance by applying the nonCustomer adjustment criteria, and thus 

adjusting transactions as set forth above, 

in the event a Member has more than 

200 transactions under review 

concurrently. In summary, due to the 

extreme level at which the proposal is 

set, the Exchange believes that the 

proposal is consistent with section 

6(b)(5) of the Act in that it promotes just 

and equitable principles of trade by 

encouraging market participants to 

retain appropriate controls over their 

systems to avoid submitting a large 

number of erroneous orders in a short 

period of time. 

Similarly, the Exchange believes that 

the proposed Size Adjustment Modifier, 

which would increase the adjustment 

amount for non-Customer transactions, 

is appropriate because it attempts to 

account for the additional risk that the 

parties to the trade undertake for 

transactions that are larger in scope. The 

Exchange believes that the Size 

Adjustment Modifier creates additional 

incentives to prevent more impactful 

Obvious Errors and it lessens the impact 

on the contra-party to an adjusted trade. 

The Exchange notes that these contraparties may have preferred to only trade 

the size involved in the transaction at 

the price at which such trade occurred, 

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and in trading larger size has committed 

a greater level of capital and bears a 

larger hedge risk. 

The Exchange similarly believes that 

its Proposed Rule with respect to 

Catastrophic Errors is consistent with 

the Act as it affords additional time for 

market participants to file for review of 

erroneous transactions that were further 

away from the Theoretical Price. At the 

same time, the Exchange believes that 

the Proposed Rule is consistent with the 

Act in that it generally would adjust 

transactions, including Customer 

transactions, because this will protect 

against hedge risk, particularly for 

transactions that may have occurred 

several hours earlier and thus, which all 

parties to the transaction might presume 

are protected from further modification. 

Similarly, by providing larger 

adjustment amounts away from 

Theoretical Price than are set forth 

under the Obvious Error provision, the 

Catastrophic Error provision also takes 

into account the possibility that the 

party that was advantaged by the 

erroneous transaction has already taken 

actions based on the assumption that 

the transaction would stand. The 

Exchange believes it is reasonable to 

specifically protect Customers from 

adjustments through their limit prices 

for the reasons stated above, including 

that Customers are less likely to be 

watching trading throughout the day 

and that they may have less capital to 

afford an adjustment price. The 

Exchange believes that the proposal 

provides a fair process that will ensure 

that Customers are not forced to accept 

a trade that was executed in violation of 

their limit order price. In contrast, 

market professionals are more likely to 

have engaged in hedging or other 

trading activity based on earlier trading 

activity, and thus, are more likely to be 

willing to accept an adjustment rather 

than a nullification to preserve their 

positions even if such adjustment is to 

a price through their limit price. 

The Exchange believes that proposed 

rule change to adopt the Significant 

Market Event provision is consistent 

with section 6(b)(5) of the Act in that it 

will foster cooperation and coordination 

with persons engaged in regulating the 

options markets. In particular, the 

Exchange believes it is important for 

options exchanges to coordinate when 

there is a widespread and significant 

event, as commonly, multiple options 

exchanges are impacted in such an 

event. Further, while the Exchange 

recognizes that the Proposed Rule will 

not guarantee a consistent result for all 

market participants on every market, the 

Exchange does believe that it will assist 

in that outcome. For instance, if options 

exchanges are able to agree as to the 

time from which Theoretical Price 

should be determined and the period of 

time that should be reviewed, the likely 

disparity between the Theoretical Prices 

used by such exchanges should be very 

slight and, in turn, with otherwise 

consistent rules, the results should be 

similar. The Exchange also believes that 

the Proposed Rule is consistent with the 

Act in that it generally would adjust 

transactions, including Customer 

transactions, because this will protect 

against hedge risk, particularly for 

liquidity providers that might have been 

quoting in thousands or tens of 

thousands of different series and might 

have affected executions throughout 

such quoted series. The Exchange 

believes that when weighing the 

competing interests between preferring 

a nullification for a Customer 

transaction and an adjustment for a 

transaction of a market professional, 

while nullification is appropriate in a 

typical one-off situation that it is 

necessary to protect liquidity providers 

in a widespread market event because, 

presumably, they will be the most 

affected by such an event (in contrast to 

a Customer who, by virtue of their status 

as such, likely would not have more 

than a small number of affected 

transactions). The Exchange believes 

that the protection of liquidity providers 

by favoring adjustments in the context 

of Significant Market Events can also 

benefit Customers indirectly by better 

enabling liquidity providers, which 

provides a cumulative benefit to the 

market. Also, as stated above with 

respect to Catastrophic Errors, the 

Exchange believes it is reasonable to 

specifically protect Customers from 

adjustments through their limit prices 

for the reasons stated above, including 

that Customers are less likely to be 

watching trading throughout the day 

and that they may have less capital to 

afford an adjustment price. The 

Exchange believes that the proposal 

provides a fair process that will ensure 

that Customers are not forced to accept 

a trade that was executed in violation of 

their limit order price. In contrast, 

market professionals are more likely to 

have engaged in hedging or other 

trading activity based on earlier trading 

activity, and thus, are more likely to be 

willing to accept an adjustment rather 

than a nullification to preserve their 

positions even if such adjustment is to 

a price through their limit price. In 

addition, the Exchange believes it is 

important to have the ability to nullify 

some or all transactions arising out of a 

Significant Market Event in the event 

timely adjustment is not feasible due to 

the extraordinary nature of the situation. 

In particular, although the Exchange has 

worked to limit the circumstances in 

which it has to determine Theoretical 

Price, in a widespread event it is 

possible that hundreds if not thousands 

of series would require an Exchange 

determination of Theoretical Price. In 

turn, if there are hundreds or thousands 

of trades in such series, it may not be 

practicable for the Exchange to 

determine the adjustment levels for all 

non-Customer transactions in a timely 

fashion, and in turn, it would be in the 

public interest to instead more promptly 

deliver a simple, consistent result of 

nullification. 

The Exchange believes that proposed 

rule change related to review, 

nullification and/or adjustment of 

erroneous transactions during a trading 

halt (including the proposed 

modification to Rule 20.3), an erroneous 

print in the underlying security, an 

erroneous quote in the underlying 

security, or an erroneous transaction in 

the option with respect to stop and stop 

limit orders is likewise consistent with 

section 6(b)(5) of the Act because the 

proposal provides for the adjustment or 

nullification of trades executed at 

erroneous prices through no fault on the 

part of the trading participants. 

Allowing for Exchange review in such 

situations will promote just and fair 

principles of trade by protecting 

investors from harm that is not of their 

own making. Specifically with respect 

to the proposed provisions governing 

erroneous prints and quotes in the 

underlying security, the Exchange notes 

that market participants on the 

Exchange base the value of their quotes 

and orders on the price of the 

underlying security. The provisions 

regarding errors in prints and quotes in 

the underlying security cover instances 

where the information market 

participants use to price options is 

erroneous through no fault of their own. 

In these instances, market participants 

have little, if any, chance of pricing 

options accurately. Thus, these 

provisions are designed to provide relief 

to market participants harmed by such 

errors in the prints or quotes of the 

underlying security. 

The Exchange believes that the 

proposed provision related to Linkage 

Trades is consistent with the Act 

because it adds additional transparency 

to the Proposed Rule and makes clear 

that when a Linkage Trade is adjusted 

or nullified by another options 

exchange, the Exchange will take 

necessary actions to complete the 

nullification or adjustment of the 

Linkage Trade. 

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77572 Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Notices 

18 15 U.S.C. 78f(b)(8). 

The Exchange believes that retaining 

the same appeals process as the 

Exchange maintains under the Current 

Rule is consistent with the Act because 

such process provides Options Members 

with due process in connection with 

decisions made by Exchange Officials 

under the Proposed Rule. The Exchange 

believes that this process provides fair 

representation of Options Members by 

ensuring diversity amongst the members 

of any Obvious Error Review Panel, 

which is consistent with sections 6(b)(3) 

and 6(b)(7) of the Act. The Exchange 

also believes that the proposed appeals 

process is appropriate with respect to 

financial penalties for appeals that 

result in a decision of the Exchange 

being upheld because it discourages 

frivolous appeals, thereby reducing the 

possibility of overusing Exchange 

resources that can instead be focused on 

other, more productive activities. The 

fees with respect to such financial 

penalties are the same as under the 

Current Rule, and are equitable and not 

unfairly discriminatory because they 

will be applied uniformly to all Options 

Members and are designed to reduce 

administrative burden on the Exchange 

as well as market participants that 

volunteer to participate on Obvious 

Error Review Panels. 

With regard to the portion of the 

Exchange’s proposal related to the 

applicability of the Obvious Error Rule 

when the underlying security is in a 

Limit or Straddle State, the Exchange 

believes that the proposed rule change 

is consistent with section 6(b)(5) of the 

Act because it will provide certainty 

about how errors involving options 

orders and trades will be handled 

during periods of extraordinary 

volatility in the underlying security. 

Further, the Exchange believes that it is 

necessary and appropriate in the 

interest of promoting fair and orderly 

markets to exclude from Rule 20.6 those 

transactions executed during a Limit or 

Straddle State. 

The Exchange believes the application 

of the Proposed Rule without the 

proposed provision would be 

impracticable given the lack of reliable 

NBBO in the options market during 

Limit and Straddle States, and that the 

resulting actions (i.e., nullified trades or 

adjusted prices) may not be appropriate 

given market conditions. The Proposed 

Rule change would ensure that limit 

orders that are filled during a Limit 

State or Straddle State would have 

certainty of execution in a manner that 

promotes just and equitable principles 

of trade, removes impediments to, and 

perfects the mechanism of a free and 

open market and a national market 

system. 

Moreover, given the fact that options 

prices during brief Limit or Straddle 

States may deviate substantially from 

those available shortly following the 

Limit or Straddle State, the Exchange 

believes giving market participants time 

to re-evaluate a transaction would create 

an unreasonable adverse selection 

opportunity that would discourage 

participants from providing liquidity 

during Limit or Straddle States. In this 

respect, the Exchange notes that only 

those orders with a limit price will be 

executed during a Limit or Straddle 

State. Therefore, on balance, the 

Exchange believes that removing the 

potential inequity of nullifying or 

adjusting executions occurring during 

Limit or Straddle States outweighs any 

potential benefits from applying certain 

provisions during such unusual market 

conditions. Additionally, as discussed 

above, there are additional pre-trade 

protections in place outside of the 

Obvious and Catastrophic Error Rule 

that will continue to safeguard 

customers. 

The Exchange notes that under certain 

limited circumstances the Proposed 

Rule will permit the Exchange to review 

transactions in options that overlay a 

security that is in a Limit or Straddle 

State. Specifically, an Official will have 

authority to review a transaction on his 

or her own motion in the interest of 

maintaining a fair and orderly market 

and for the protection of investors. 

Furthermore, the Exchange will have 

the authority to adjust or nullify 

transactions in the event of a Significant 

Market Event, a trading halt in the 

affected option, an erroneous print or 

quote in the underlying security, or with 

respect to stop and stop limit orders that 

have been triggered based on erroneous 

trades. The Exchange believes that the 

safeguards described above will protect 

market participants and will provide the 

Exchange with the flexibility to act 

when necessary and appropriate to 

nullify or adjust a transaction, while 

also providing market participants with 

certainty that, under normal 

circumstances, the trades they effect 

with quotes and/or orders having limit 

prices will stand irrespective of 

subsequent moves in the underlying 

security. The right to review those 

transactions that occur during a Limit or 

Straddle State would allow the 

Exchange to account for unforeseen 

circumstances that result in Obvious or 

Catastrophic Errors for which a 

nullification or adjustment may be 

necessary in the interest of maintaining 

a fair and orderly market and for the 

protection of investors. Similarly, the 

ability to nullify or adjust transactions 

that occur during a Significant Market 

Event or trading halt, erroneous print or 

quote in the underlying security, or 

erroneous trade in the option (i.e., stop 

and stop limit orders) may also be 

necessary in the interest of maintaining 

a fair and orderly market and for the 

protection of investors. Furthermore, the 

Exchange will administer this provision 

in a manner that is consistent with the 

principles of the Act and will create and 

maintain records relating to the use of 

the authority to act on its own motion 

during a Limit or Straddle State or any 

adjustments or trade breaks based on 

other proposed provisions under the 

Rule. 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

BATS believes the entire proposal is 

consistent with section 6(b)(8) of the 

Act 18 in that it does not impose any 

burden on competition that is not 

necessary or appropriate in furtherance 

of the purposes of the Act as explained 

below. 

Importantly, the Exchange believes 

the proposal will not impose a burden 

on intermarket competition but will 

rather alleviate any burden on 

competition because it is the result of a 

collaborative effort by all options 

exchanges to harmonize and improve 

the process related to the adjustment 

and nullification of erroneous options 

transactions. The Exchange does not 

believe that the rules applicable to such 

process is an area where options 

exchanges should compete, but rather, 

that all options exchanges should have 

consistent rules to the extent possible. 

Particularly where a market participant 

trades on several different exchanges 

and an erroneous trade may occur on 

multiple markets nearly simultaneously, 

the Exchange believes that a participant 

should have a consistent experience 

with respect to the nullification or 

adjustment of transactions. The 

Exchange understands that all other 

options exchanges intend to file 

proposals that are substantially similar 

to this proposal. 

The Exchange does not believe that 

the proposed rule change imposes a 

burden on intramarket competition 

because the provisions apply to all 

market participants equally within each 

participant category (i.e., Customers and 

non-Customers). With respect to 

competition between Customer and 

non-Customer market participants, the 

Exchange believes that the Proposed 

Rule acknowledges competing concerns 

and tries to strike the appropriate 

balance between such concerns. For 

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Federal Register / Vol. 79, No. 247 / Wednesday, December 24, 2014 / Notices 77573 

19 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

instance, as noted above, the Exchange 

believes that protection of Customers is 

important due to their direct 

participation in the options markets as 

well as the fact that they are not, by 

definition, market professionals. At the 

same time, the Exchange believes due to 

the quote-driven nature of the options 

markets, the importance of liquidity 

provision in such markets and the risk 

that liquidity providers bear when 

quoting a large breadth of products that 

are derivative of underlying securities, 

that the protection of liquidity providers 

and the practice of adjusting 

transactions rather than nullifying them 

is of critical importance. As described 

above, the Exchange will apply specific 

and objective criteria to determine 

whether an erroneous transaction has 

occurred and, if so, how to adjust or 

nullify a transaction. 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants, or Others 

The Exchange has neither solicited 

nor received written comments on the 

proposed rule change. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

Within 45 days of the date of 

publication of this notice in the Federal 

Register or within such longer period 

up to 90 days after publication (i) as the 

Commission may designate 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 or disapprove 

the 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 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 rule-comments@

sec.gov. Please include File Number SR– 

BATS–2014–067 on the subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Brent J. Fields, Secretary, Securities 

and Exchange Commission, 100 F Street 

NE., Washington, DC 20549–1090. 

All submissions should refer to File 

Number SR–BATS–2014–067. This file 

number should be included on the 

subject line if email is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for Web site viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street NE., 

Washington, DC 20549, on official 

business days between the hours of 

10:00 a.m. and 3:00 p.m. Copies of the 

filing also will be available for 

inspection and copying at the principal 

office of the Exchange. All comments 

received will be posted without change; 

the Commission does not edit personal 

identifying information from 

submissions. You should submit only 

information that you wish to make 

available publicly. All submissions 

should refer to File Number SR–BATS– 

2014–067 and should be submitted on 

or before January 14, 2015.19

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority. 

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2014–30127 Filed 12–23–14; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–73883; File No. SR–NYSE– 

2014–66] 

Self-Regulatory Organizations; New 

York Stock Exchange LLC; Notice of 

Filing and Immediate Effectiveness of 

Proposed Rule Change Amending Rule 

342 To Remove the Three Years’ 

Experience Requirement for 

Supervisory Personnel and To Add 

Supplementary Material to Rule 3110 

Stating That Supervisors Must 

Reasonably Discharge Their 

Supervisory Duties and Obligations 

December 18, 2014. 

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

Securities Exchange Act of 1934 (‘‘Act’’ 

or ‘‘Exchange Act’’) 1 and Rule 19b–4 

thereunder,2 notice is hereby given that 

on December 8, 2014, New York Stock 

Exchange LLC (‘‘NYSE’’ or ‘‘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 substantially prepared by the 

Exchange. The Commission is 

publishing this notice to solicit 

comments on the proposed rule change 

from interested persons. The Exchange 

has designated the proposed rule change 

as constituting a ‘‘non-controversial’’ 

rule change under Exchange Act Rule 

19b–4(f)(6), which renders the proposal 

effective upon receipt of this filing by 

the Commission. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange proposes to amend 

NYSE Rule 342 to remove the three 

years’ experience requirement for 

supervisory personnel and to add 

supplementary material to NYSE Rule 

3110 stating that supervisors must 

reasonably discharge their supervisory 

duties and obligations. The text of the 

proposed rule change is available on the 

Exchange’s Web site at www.nyse.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 

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