Document ID: SEC-2008-0862-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Philadelphia Stock Exchange, Inc.
Posted Date: 2008-06-27T04:00Z

[Federal Register: June 27, 2008 (Volume 73, Number 125)]
[Notices]               
[Page 36581-36583]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27jn08-110]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58002; File No. SR-Phlx-2008-42]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
Relating to Catastrophic Errors

June 23, 2008.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 17, 2008, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been substantially prepared by the Exchange. 
The Exchange filed the proposal as a ``non-controversial'' proposed 
rule change pursuant to section 19(b)(3)(A) of the Act \3\ and Rule 
19b-4(f)(6) thereunder,\4\ which renders the proposal effective upon 
filing with the Commission. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to adopt amendments to Exchange Rule 1092 
(``Rule'') to: (i) Define a ``Catastrophic Error''; (ii) extend the 
time period for member notification to Exchange staff that the member 
believes it has participated in a trade that resulted from a 
Catastrophic Error; and (iii) state in the Rule that, if the parties to 
such a trade do not agree on an adjustment price, trades resulting from 
a Catastrophic Error will be adjusted to the Theoretical Price of the 
affected option series, plus or minus a pre-determined adjustment 
value, depending on the Theoretical Price of the series.
    The text of the proposed rule change is available at the Exchange, 
the Commission's Public Reference Room, and http://www.phlx.com.

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. Phlx has prepared summaries, set forth in sections A, B, 
and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange states that the purpose of the proposed rule change is 
to help its members better manage risk by affording them relief from 
trades that result from a Catastrophic Error.
    The proposed rule change would address particularly egregious 
options trading errors, called Catastrophic Errors. An Options Exchange 
Official \5\

[[Page 36582]]

would determine that a Catastrophic Error 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 minimum amount shown 
below:
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    \5\ See Exchange Rules 124(a) and (b).

------------------------------------------------------------------------
                    Theoretical price                     Minimum amount
------------------------------------------------------------------------
Below $2................................................              $1
$2 to $5................................................               2
Above $5 to $10.........................................               5
Above $10 to $50........................................              10
Above $50 to $100.......................................              20
Above $100..............................................              30
------------------------------------------------------------------------

    The proposed rule change would also set forth the procedure to be 
followed when an Exchange member believes that he/she has participated 
in a trade resulting from a Catastrophic Error. Significantly, the time 
period within which such a member would be required to notify the 
Exchange's Market Surveillance staff that such an error may have 
occurred would be extended well beyond the time period applicable to an 
Obvious Error under current Phlx Rule 1092. Members would have until 
8:30 a.m. Eastern Time on the first trading day following the date on 
which the Catastrophic Error occurred to make such a notification, 
except that for such transactions in an expiring options series that 
take place on an expiration day, an Exchange member must notify the 
Exchange by 5 p.m. Eastern Time that same day.
    If it is determined that a Catastrophic Error has occurred, unless 
both (all) parties agree to adjust the transaction to a different 
price, the execution price(s) of the transaction(s) will be adjusted to 
the theoretical price: (i) Plus the adjustment value provided below for 
erroneous buy transactions; and (ii) minus the adjustment value 
provided for erroneous sell transactions, as described below:

------------------------------------------------------------------------
                                                              Adjustment
                     Theoretical price                          value
------------------------------------------------------------------------
Below $2...................................................           $1
$2 to $5...................................................            2
Above $5 to $10............................................            3
Above $10 to $50...........................................            5
Above $50 to $100..........................................            7
Above $100.................................................           10
------------------------------------------------------------------------

    The Exchange believes that the proposed longer time period is 
appropriate to allow members to discover, and seek relief from, trading 
errors that result in extreme losses. At the same time, the Exchange 
believes that the proposed Minimum Amounts required for a trade to 
qualify as a Catastrophic Error, in combination with the large 
Adjustment Values, assures that only those transactions where the price 
of the execution results in very high losses will be eligible for 
adjustment under the new provisions. While the Exchange believes it is 
important to identify and resolve trading errors quickly, it also 
believes it is important to the integrity of the marketplace to have 
the authority to mitigate extreme losses resulting from errors.
    A member that requests a review under the proposed rule would be 
charged $5,000 by the Exchange if there is no adjustment or 
nullification of the transaction. The initial ruling by the Options 
Exchange Official would be appealable to the Exchange's Referee.\6\
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    \6\ See Exchange Rule 124, Commentary .02 and current Exchange 
Rule 1092(f).
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    The Exchange states that it has weighed carefully the need to 
assure that one market participant is not permitted to receive a 
windfall at the expense of another market participant that made an 
Obvious Error, against the need to assure that market participants are 
not simply being given an opportunity to reconsider poor trading 
decisions. The Exchange states that, while it believes that the Obvious 
Error Rule strikes the correct balance in most situations, in some 
extreme situations, trade participants may not be aware of errors that 
result in very large losses within the time periods currently required 
under the rule. In this type of extreme situation, the Exchange 
believes its members should be given more time to seek relief so that 
there is a greater opportunity to mitigate very large losses and reduce 
the corresponding large wind-falls. However, to maintain the 
appropriate balance, the Exchange believes members should only be given 
more time when the execution price is much further away from the 
theoretical price than is required for Obvious Errors so that relief is 
only provided in extreme circumstances.\7\
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    \7\ The Exchange does not believe the type of extreme situation 
that is covered by the proposed rule would occur in the normal 
course of trading. Rather, this type of situation could potentially 
occur as a result of, for example, an error in a member's quotation 
system that causes a market maker to severely misprice an option.
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    Under the proposed rule, members will have until 8:30 a.m. Eastern 
Time on the trading day following the trade to notify the Exchange of a 
potential Catastrophic Error. For trades that take place in an expiring 
series on the day of expiration, members must notify the Exchange's 
Market Surveillance Department of a potential Catastrophic Error by 5 
p.m. Eastern Time that same day. Once a member has notified Market 
Surveillance of a potential Catastrophic Error, within the required 
time period, an Options Exchange Official would review and make a 
determination as to the claim.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act,\8\ in general, and furthers the 
objectives of section 6(b)(5) of the Act,\9\ in particular, in that it 
is designed to promote just and equitable principles of trade, to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general to protect 
investors and the public interest, by helping Exchange members better 
manage risk through the Catastrophic Error rule. In particular, the 
proposal would allow members a longer opportunity to seek relief from 
errors that result in large losses.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change would 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

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

    Because the proposed rule change does not: (i) Significantly affect 
the protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative for 30 
days after the date of filing (or such shorter time as the Commission 
may designate if consistent with the protection of investors and the 
public interest), the proposed rule change has become effective 
pursuant to section 19(b)(3)(A) of the Act \10\ and subparagraph (f)(6) 
of Rule 19b-4 thereunder.\11\
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative prior to 30 days after the date of filing.\12\ 
However, Rule 19b-4(f)(6)(iii) permits the Commission to

[[Page 36583]]

designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has 
requested that the Commission waive the 30-day operative delay and 
designate the proposed rule change operative upon filing. The 
Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest. 
Given that the Exchange's proposed catastrophic error rule is 
substantially similar to that of the International Securities Exchange 
and that of NYSE Arca,\13\ the proposal does not appear to present any 
novel regulatory issues. Therefore, the Commission designates the 
proposal operative upon filing.\14\
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    \12\ 17 CFR 240.19b-4(f)(6)(iii). The Exchange has satisfied the 
five-day pre-filing requirement of Rule 19b-4(f)(6)(iii).
    \13\ See Securities Exchange Act Release Nos. 57398 (February 
28, 2008), 73 FR 12240 (March 6, 2008) (SR-ISE-2007-112) and 57653 
(April 11, 2008), 73 FR 20996 (April 17, 2008) (SR-NYSEArca-2008-
41).
    \14\ For purposes only of waiving the operative delay of this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate 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 the furtherance of the purposes of the Act.

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 e-mail to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2008-42 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-Phlx-2008-42. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/
sro.shtml).
    Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule 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 inspection and copying in the 
Commission's Public Reference Room, 100 F Street, NE., Washington, DC 
20549, on official business days between the hours of 10 a.m. and 3 
p.m. Copies of such filing also will be available for inspection and 
copying at the principal office of 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-Phlx-2008-42 and should be submitted on 
or before July 18, 2008.
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    \15\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-14566 Filed 6-26-08; 8:45 am]

BILLING CODE 8010-01-P