Federal Register / Vol. 74, No. 104 / Tuesday, June 2, 2009 / Notices 26447 

24 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3Securities Exchange Act Release No. 59793 

(April 20, 2009), 74 FR 18762. 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to File 

Number SR–BX–2009–027 and should 

be submitted on or before June 23, 2009. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.24

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–12718 Filed 6–1–09; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–59981; File No. SR–CBOE– 

2009–024] 

Self-Regulatory Organizations; 

Chicago Board Options Exchange, 

Incorporated; Order Granting Approval 

of a Proposed Rule Change Related to 

Its Obvious Error Rules 

May 27, 2009. 

I. Introduction 

On April 8, 2009, the Chicago Board 

Options Exchange, Incorporated 

(‘‘CBOE’’ or ‘‘Exchange’’) filed with the 

Securities and Exchange Commission 

(‘‘Commission’’), pursuant to Section 

19(b)(1) of the Securities Exchange Act 

of 1934 (‘‘Act’’) 1 and Rule 19b–4 

thereunder,2 a proposed rule change to 

amend CBOE Rules 6.25 and 24.16 

(collectively, the ‘‘Obvious Error Rules’’) 

pertaining to the nullification and 

adjustment of options transactions. The 

proposed rule change was published for 

comment in the Federal Register on 

April 24, 2009.3 The Commission 

received no comment letters on the 

proposal. This order approves the 

proposed rule change. 

II. Discussion 

A. Merging Rules 

The Exchange proposes to merge Rule 

24.16 (which currently relates to only 

index, ETF and HOLDRS options) into 

Rule 6.25 (which currently relates to 

only equity options) to form a single 

obvious error rule. 

B. Obvious Pricing Errors 

1. Definition of Theoretical Price 

The Exchange proposes to amend 

Rule 6.25’s definition of ‘‘Theoretical 

Price’’ to base it on the national best bid 

or offer (‘‘NBBO’’) instead of the market 

with the most liquidity. Using the 

NBBO to define Theoretical Price is 

similar to how ‘‘fair market value’’ is 

currently defined for obvious pricing 

errors under Rule 24.16. The Exchange 

also proposes to permit Trading 

Officials to establish the Theoretical 

Price when the NBBO for the affected 

series, just prior to the erroneous 

transaction, is at least two times the 

permitted bid/ask differential under 

subparagraph (b)(iv)(A) of Rule 8.7. 

2. Non-CBOE Market Makers 

The Exchange proposes to provide for 

the adjustment of Obvious Pricing Error 

transactions involving non-CBOE 

Market-Makers, provided the adjusted 

price does not violate the non-CBOE 

Market-Maker’s limit price. 

3. ROS and HOSS Rotations 

The Exchange proposes to revise the 

Obvious Pricing Error provision as it 

pertains to transactions occurring as 

part of the Rule 6.2A, Rapid Opening 

System (‘‘ROS’’), or Rule 6.2B, Hybrid 

Opening System (‘‘HOSS’’), rotations. 

With respect to regular ROS and HOSS 

rotations, the Exchange is proposing to 

add a condition that the option contract 

quantity subject to nullification or 

adjustment would not exceed the size of 

the first quote after the transaction(s) in 

question that does not reflect the 

erroneous transaction(s). Any 

nullifications or adjustments would 

occur on a pro rata basis considering the 

overall size of the ROS or HOSS 

opening trade. With respect to HOSS 

rotations in index options series being 

used to calculate the final settlement 

price of a volatility index, the Exchange 

proposes to carryover a condition from 

Rule 24.16 that the first quote after the 

transaction(s) in question that does not 

reflect the erroneous transaction(s) must 

be for at least the size of the HOSS 

opening transaction(s). If the size of the 

quote is less than the size of the opening 

transaction(s), then the Obvious Pricing 

Error provision shall not apply. 

4. Non-Broker-Dealer Customer Orders 

Entered Before the Opening Rotation 

The Exchange proposes to extend the 

expanded notification period applicable 

to transactions during opening rotations 

involving non-broker-dealer Customers 

to include certain orders entered before 

the opening that are executed 

immediately following the opening 

rotation. Specifically, Rule 6.25 

currently requires that members notify 

CBOE Trading Officials or designated 

personnel in the control room within a 

short time period following the 

execution of a trade (generally 15 

minutes) if they believe the trade 

qualifies as an Obvious Pricing Error. 

However, an expanded notification 

period is available for transactions 

during option rotation occurring as part 

of ROS or HOSS where at least one 

party to the transaction is a non-brokerdealer Customer. The Exchange 

proposes to make the expanded 

notification period applicable to 

transactions involving non-brokerdealer Customers’ marketable orders 

that are entered before the opening 

rotation and that are executed as part of 

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

the opening process and certain 

transactions involving non-brokerdealer Customers’ complex orders that 

are entered before the opening rotation 

and that are executed immediately 

following the opening rotation through 

the Exchange’s electronic Complex 

Order Book. 

5. Binary Options 

The Exchange proposes to provide 

that any price adjustment for a binary 

option series (including any adjustment 

penalty that may be applicable to 

transactions between CBOE MarketMakers) shall not exceed the applicable 

exercise settlement amount for the 

binary option. 

C. Catastrophic Pricing Errors 

The Exchange proposes to amend 

Rule 6.25 to add criteria for identifying 

‘‘Catastrophic Errors’’ and making 

adjustments when Catastrophic Errors 

occur, as well as a streamlined 

procedure for reviewing actions taken in 

these extreme circumstances. Under 

Rule 6.25, trades that result from an 

Obvious Pricing Error may be adjusted 

or busted according to objective 

standards. Under the Rule, whether an 

Obvious Pricing error has occurred is 

determined by comparing the execution 

price to the Theoretical Price of the 

option. The rule requires that members 

notify CBOE Trading Officials or 

designated personnel in the control 

room within a short time period 

following the execution of a trade 

(generally 15 minutes) if they believe 

the trade qualifies as an Obvious Pricing 

Error. Trades that qualify for adjustment 

or are nullified under the Rule are 

compared to a price that matches the 

theoretical price plus or minus an 

adjustment value for transactions 

between CBOE Market Makers, which is 

$0.15 if the Theoretical Value is under 

$3 and $0.30 if the Theoretical Value is 

at or above $3. By adjusting trades above 

or below the Theoretical Price, the rule 

assesses a ‘‘penalty’’ in that the 

adjustment price is not as favorable as 

the amount the party making the error 

26448 Federal Register / Vol. 74, No. 104 / Tuesday, June 2, 2009 / Notices 

4 In approving this proposed rule change, the 

Commission has considered the proposed rule’s 

impact on efficiency, competition, and capital 

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

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

6 15 U.S.C. 78f(b)(5). 

7See, e.g., Securities Exchange Act Release Nos. 

58778 (October 14, 2008), 73 FR 62577 (October 21, 

2008) and 58460 (September 4, 2008), 73 FR 53060 

(September 12, 2008) (approving revisions to 

CBOE’s Obvious Error Rules). 

would have received had it not made 

the error. 

In some extreme situations, members 

may not be aware of errors that result in 

very large losses within the time periods 

required under the Rule. In this type of 

extreme situation, CBOE proposes to 

give members more time to seek relief 

so that there is a greater opportunity to 

mitigate very large losses and reduce the 

corresponding large windfalls. In such 

cases, the proposal sets forth the 

minimum amount by which the options 

execution price must differ from the 

Theoretical Price for a Catastrophic 

Error to occur. The proposal also sets 

forth the adjustment value to be used by 

CBOE when it makes a Catastrophic 

Error determination. A Catastrophic 

Error would be deemed to have 

occurred when the execution price of a 

transaction is higher or lower than the 

Theoretical Price for the option by an 

amount equal to at least the ‘‘Minimum 

Amount,’’ and the adjustment would be 

made plus or minus the ‘‘Adjustment 

Value.’’ At all price levels, the 

Minimum Amount and the Adjustment 

Value for Catastrophic Errors would be 

significantly higher than for Obvious 

Pricing Errors, which the Exchange 

believes would limit the application of 

the proposed rule to situations where 

the losses are very large. 

Under the new provision, generally, 

members will have until 7:30 a.m. 

Central Time on the day following the 

trade to notify Trading Officials or 

designated personnel in the control 

room of a potential Catastrophic Error. 

Once notification has been received 

within the required time period, a panel 

comprised of at least one member of the 

Exchange’s staff designated to perform 

Catastrophic Error Panel functions and 

four Exchange members (the ‘‘Panel’’) 

will review the claim. Fifty percent of 

the number of Exchange members on 

the Panel must be directly engaged in 

market making activity and fifty percent 

of the number of Exchange members on 

the Panel must act in the capacity of a 

floor broker. In the event the Panel 

determines that a Catastrophic Error did 

not occur, the member that initiated the 

review will be charged $5,000. 

D. Erroneous Prints & Quotes in the 

Underlying 

1. Adjustments 

For consistency, the Exchange 

proposes to amend Rule 6.25 to allow 

for adjustments and nullifications of 

erroneous prints in the underlying 

(currently the provision calls for 

nullifications only). 

2. Average Quote Width 

The Exchange is also proposing to 

revise the provisions to determine the 

‘‘average quote width’’ in the underlying 

by adding the quote widths of sample 

quotations at regular 15-second intervals 

during the two minutes preceding and 

following an erroneous transaction. 

3. Designation of Underlying 

The Exchange proposes to modify the 

erroneous trade and quote provisions to 

allow the Exchange to designate the 

applicable underlying security(ies) or 

related instruments for any option. 

Under the revised rule, the Exchange 

would identify particular underlying or, 

with respect to ETF(s), HOLDRS(s), and 

index options, related instrument(s) that 

would be used to determine an 

erroneous print or quote and would also 

identify the relevant market(s) trading 

the underlying or related instrument to 

which the Exchange would look for 

purposes of applying the obvious error 

analysis. The underlying or related 

instrument(s) and relevant market(s) 

will be designated by the Exchange and 

announced via Regulatory Circular. For 

a particular ETF, HOLDRS, index value 

and/or futures product to qualify for 

consideration as a ‘‘related instrument,’’ 

the revised rule requires that: (i) The 

option class and related instrument 

must be derived from or designed to 

track the same underlying index; or (ii) 

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

the options class and related instrument 

must be derived from or designed to 

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

Index. 

E. Trading Officials 

The Exchange is proposing to change 

the definition of the term Trading 

Officials to mean three Exchange 

officials designated to perform Trading 

Official functions, at least one of which 

is an Exchange member designated as a 

Floor Official and at least one of which 

is a member of the Exchange’s staff 

designated to perform Trading Official 

functions. The term is currently defined 

to mean two Exchange members 

designated as Floor Officials and one 

member of the Exchange’s staff 

designated to perform Trading Official 

functions. 

F. Obvious Error Panel 

The Exchange is proposing to change 

a reference from ‘‘non-DPM floor 

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

the composition requirements for 

Obvious Error Panels, which review 

certain determinations rendered by 

Trading Officials and the senior official 

in the Exchange’s control room under 

Rule 6.25(b). 

III. Commission Findings 

The Commission finds that the 

proposed rule change is consistent with 

the requirements of the Act and the 

rules and regulations thereunder 

applicable to a national securities 

exchange4 and, in particular, the 

requirements of Section 6(b) of the Act 5

and the rules and regulations 

thereunder. Specifically, the 

Commission finds that the proposal is 

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

Act,6 in that the proposal is designed to 

promote just and equitable principles of 

trade, to prevent fraudulent and 

manipulative acts, to remove 

impediments and to perfect the 

mechanism for a free and open market 

and a national market system, and, in 

general, to protect investors and the 

public interest. 

The Commission considers that in 

most circumstances trades that are 

executed between parties should be 

honored. On rare occasions, the price of 

the executed trade indicates an obvious 

error may exist, suggesting that it is 

unrealistic to expect that the parties to 

the trade had come to a meeting of the 

minds regarding the terms of the 

transaction. In approving proposals 

relating to adjustment or nullification of 

trades involving obvious errors, the 

Commission has stated that the 

determination of whether an obvious 

error has occurred and the process for 

reviewing such a determination should 

be based on specific and objective 

criteria and subject to specific and 

objective procedures.7 The Commission 

believes that the rule changes proposed 

by the CBOE are clear, specific, and 

objective. 

Merging Rules 

Merging CBOE Rules 6.25 and 24.16 

improves clarity and efficiency by 

harmonizing the obvious error provision 

across all equity option transactions into 

one rule. 

Obvious Pricing Errors 

The modifications to CBOE’s pricing 

error provision clarify the objective 

standards that are to be applied in 

determining whether an obvious error 

has occurred. Utilizing the NBBO as a 

reference point for theoretical price is in 

Federal Register / Vol. 74, No. 104 / Tuesday, June 2, 2009 / Notices 26449 

8See, e.g., Securities Exchange Act Release No. 

57712 (April 24, 2008), 73 FR 24100 (May 1, 2008) 

(approving revisions to the Philadelphia Stock 

Exchange’s Obvious Error Rule). 

9See, e.g., CBOE Rule 24.16. 

10See Securities Exchange Act Release No. 57398 

(February 28, 2008), 73 FR 12240 (March 6, 2008). 

11See supra, note 8, and Rule 6.25(a)(5) (relating 

to an erroneous quote in the underlying). 

12 15 U.S.C. 78s(b)(2). 

13 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 59655 

(March 30, 2009), 74 FR 15563 (‘‘NYSE Notice’’). 

4See Securities Exchange Act Release No. 59965 

(May 21, 2009) (‘‘NYSE Order’’). 

5See Securities Exchange Act Release No. 58461 

(September 4, 2008), 73 FR 52710 (September 10, 

2008) (SR–FINRA–2008–033); Securities Exchange 

Act Release No. 58514 (September 11, 2008), 73 FR 

54190 (September 18, 2008) (SR–FINRA–2008–039); 

Securities Exchange Act Release No. 58643 

(September 25, 2008), 73 FR 57174 (October 1, 

2008) (SR–FINRA–2008–021, –022, –026, –028, 

–029); Securities Exchange Act Release No. 58660 

(September 26, 2008), 73 FR 57393 (October 2, 

2008) (SR–FINRA–2008–027); Securities Exchange 

Act Release No. 58661 (September 26, 2008), 73 FR 

57395 (October 2, 2008) (SR–FINRA–2008–030); 

and Securities Exchange Act Release No. 59097 

(December 12, 2008), 73 FR 78412 (December 22, 

2008) (SR–FINRA–2008–057). 

6Amendment No. 1 to SR–NYSEALTR–2009–26 

superseded and replaced the original filing in its 

entirety. 

7See Securities Exchange Act Release No. 59656 

(March 30, 2009), 74 FR 15540 (‘‘Notice’’). 

8Amendment No. 2 to SR–NYSEALTR–2009–26 

clarified certain points set forth in the purpose 

section of Amendment No. 1 to SR–NYSEALTR– 

2009–026 relating to certain NYSE Amex Equities 

rules. 

9See Securities Exchange Act Release No. 58673 

(September 29, 2008), 73 FR 57707 (October 3, 

2008) (SR–NYSE–2008–60 and SR–Amex–2008–62) 

(approving the Merger). 

10 15 U.S.C. 78f. 

conformity with other obvious error 

provisions previously approved by the 

Commission.8 The amendments relating 

to non-CBOE market-makers and ROS 

and HOSS rotations also conform 

CBOE’s rule to rules already approved 

by the Commission.9 The Commission 

believes that expanding the 

applicability of the extended customer 

obvious error notification provision for 

transactions involving certain nonbroker-dealer customer orders that are 

entered before the opening rotation and 

that are executed as part of HAL on the 

opening process or that are executed 

immediately following the opening 

rotation through the Complex Order 

Book would give those customers a 

reasonable amount of time to discover 

an obvious error transaction and to 

request an obvious error review. The 

Commission believes that limiting the 

price adjustment for binary options is 

reasonable and objective in light of the 

payout structure of those options. 

Catastrophic Error 

The Commission believes that the 

proposed catastrophic error provision 

balances the need for certainty of trades 

and mitigating large losses due to errors 

in extreme circumstances through clear 

and objective procedures.10 Moreover, 

the Commission believes that the 

proposed Catastrophic Error Panel, the 

streamlined review process, and the 

proposed fee for unsuccessful claims are 

appropriate to accomplish this balance. 

Erroneous Prints and Quotes in the 

Underlying 

The Commission deems that the 

provision allowing CBOE to designate 

the applicable underlying securities (or 

related instruments) and relevant 

markets for any option is beneficial to 

members in determining whether an 

erroneous print or quote has occurred. 

The provision takes into account the 

fact that members often base their 

options prices on various products in 

various markets and that erroneous 

options transactions may be a result of 

erroneous prints or quotes in markets 

other than the primary market for an 

underlying security. The changes to the 

calculation of average quote width and 

allowing adjustments in addition to 

nullifications are appropriate and 

consistent with other rules previously 

approved by the Commission.11

Trading Officials and Obvious Error 

Panel 

The Commission believes that the 

change to the definition of ‘‘Trading 

Officials’’ is appropriate and does not 

negatively impact the objectiveness or 

fairness of CBOE’s obvious error 

provisions. Lastly, the Commission 

notes that deleting ‘‘non-DPM’’ from the 

definition of floor brokers is a nonsubstantive technical change and is 

appropriate. 

IT IS THEREFORE ORDERED, 

pursuant to Section 19(b)(2) of the 

Act,12 that the proposed rule change 

(SR–CBOE–2009–024) is hereby 

approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.13

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–12717 Filed 6–1–09; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–59975; File No. SR– 

NYSEALTR–2009–26] 

Self-Regulatory Organizations; NYSE 

Alternext US LLC; Notice of Filing of 

Amendment No. 2 and Order Granting 

Accelerated Approval to a Proposed 

Rule Change, as Modified by 

Amendment Nos. 1 and 2, Changing 

Certain NYSE Amex Equities Rules To 

Conform Them With Changes to 

Corresponding Rules Filed by the New 

York Stock Exchange LLC 

May 26, 2009. 

I. Introduction 

On March 9, 2009, the NYSE 

Alternext LLC (n/k/a NYSE Amex LLC) 

(‘‘NYSE Amex’’ or ‘‘Exchange’’) filed 

with the Securities and Exchange 

Commission (‘‘Commission’’) pursuant 

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

Exchange Act of 1934 (‘‘Act’’) 1 and Rule 

19b–4 thereunder,2 a proposed rule 

change to make changes to certain NYSE 

Amex Equities rules, to be effective 

retroactively to December 15, 2008, to 

conform them with changes to 

corresponding rules filed by the New 

York Stock Exchange LLC (‘‘NYSE’’) on 

March 9, 2009,3 and approved by the 

Commission on May 21, 2009.4 NYSE 

had proposed the rule changes 

described in the NYSE Notice to 

harmonize NYSE rules with 

corresponding rules that were filed by 

the Financial Industry Regulatory 

Authority, Inc. (‘‘FINRA’’), and 

approved by the Commission or were 

effective upon filing with the 

Commission.5 On March 27, 2009, the 

Exchange filed Amendment No. 1 to the 

proposed rule change.6 The proposed 

rule change was published in the 

Federal Register on April 6, 2009.7 The 

Commission received no comments on 

the proposal. On May 11, 2009, the 

Exchange filed Amendment No. 2 to the 

proposed rule change.8 This order 

provides notice of the proposed rule 

change, as modified by Amendment No. 

2, and approves the proposed rule 

change, as amended, on an accelerated 

basis. 

II. Description of the Proposal 

NYSE Euronext acquired The Amex 

Membership Corporation (‘‘AMC’’) 

pursuant to an Agreement and Plan of 

Merger, dated January 17, 2008 

(‘‘Merger’’).9 In connection with the 

Merger, the Exchange’s predecessor, the 

American Stock Exchange LLC 

(‘‘Amex’’), a subsidiary of AMC, became 

a subsidiary of NYSE Euronext called 

NYSE Amex US LLC, and continues to 

operate as a national securities exchange 

registered under Section 6 of the Act.10