Document ID: SEC-2007-0299-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: NYSE Arca, Inc.
Posted Date: 2007-02-28T05:00Z

[Federal Register: February 28, 2007 (Volume 72, Number 39)]
[Notices]               
[Page 9052-9054]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28fe07-105]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55330; File No. SR-NYSEArca-2007-06]

 
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of a Proposed Rule Change Relating to 
Obvious Errors in Option Transactions

February 21, 2007.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 9053]]

(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on January 18, 2007, NYSE Arca, Inc. (``NYSE Arca'' 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 Exchange 
filed the proposed rule change as a ``non-controversial'' proposed rule 
change pursuant to Section 19(b)(3)(A) \3\ of the Act 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 Exchange proposes to amend NYSE Arca Rule 6.87, which contains 
procedures for trade nullification and price adjustments on obvious 
errors in option transactions. The text of the proposed rule change is 
available at the Exchange, the Commission's Public Reference Room, and 
http://www.nysearca.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. NYSE Arca has substantially prepared summaries, set 
forth in Sections A, B, and C below, of the most significant aspects of 
such statements.

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

1. Purpose
    The purpose of this filing is to amend Rule 6.87 in order to offer 
an extra level of protection for Customers \5\ who are a party to a 
transaction involving an obvious error during the opening. Under 
existing rules, OTP Holders that have executed a trade on behalf of a 
Customer have a twenty (20) minute period from the time of execution to 
notify the Exchange and request a review of the trade for either 
nullification or price adjustment. The current twenty minute window, 
for nullification purposes, would not be changed by this proposal. 
However, under the proposed rule change, OTP Holders representing 
Customers would now have an extended period of time to request an 
obvious error review for adjustment purposes. OTP Holders would now be 
able to make a request to Trading Officials \6\ to make price 
adjustments on transactions that occur on the opening, until 4:30 p.m. 
(ET) on the day that the transaction occurs. The intention of this 
filing is to protect Customers who fail to discover an obvious error 
within twenty minutes of execution from being forced to accept an 
execution that results from an obvious error during the opening 
auction.
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    \5\ ``Customer'' as defined in NYSE Arca Rule 6.1(b)(29) and 
NYSEArca 6.1A(a)(4) shall mean a non-broker dealer.
    \6\ ``Trading Official'' as defined in NYSE Arca Rule 
6.1(b)(34).
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    An obvious pricing error is 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:

------------------------------------------------------------------------
                                                               Minimum
                     Theoretical price                          amount
------------------------------------------------------------------------
Below $2...................................................        $0.25
$2 to $5...................................................         0.40
Above $5 to $10............................................         0.50
Above $10 to $20...........................................         0.80
Above $20..................................................         1.00
------------------------------------------------------------------------

    The theoretical price of an option is, for series that are traded 
on at least one other exchange, the last bid price with respect to an 
erroneous sell transaction and the last offer price with respect to an 
erroneous buy transaction, just prior to the trade, disseminated by the 
competing options exchange that has the most liquidity in the option 
class over the previous two calendar months. If there are no quotes for 
comparison, the theoretical price shall be determined by designated 
Trading Officials.
    For transactions during the opening auction between a Customer and 
a Market Maker,\7\ after the twenty minute notification period has 
elapsed since the trade containing the obvious error occurred but 
before 4:30 p.m. (ET) on the same trading day, the OTP Holder, on 
behalf of its Customer, could request an obvious error review for 
possible adjustment to the theoretical price. In determining the 
theoretical price of an option series, the Trading Official would look 
to the away competing exchange with the most liquidity in the option 
class over the two preceding months. The transaction would be adjusted 
to the competing exchanges' disseminated theoretical price at the time 
the trade occurred. With respect to sell transactions the last bid 
price, just prior to the trade, would be used. With respect to buy 
transactions the last offer price, just prior to the trade would be 
used.\8\ Price adjustments would be made up to the equivalent number of 
contracts that the competing exchange was listing as its disseminated 
size at the time the trade occurred.
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    \7\ ``Market Maker'' as defined in NYSE Arca Rule 6.32 or 6.32A.
    \8\ The Exchange believes that the proposed basis for 
determining the theoretical price for transactions occurring during 
the opening does not implicate NYSE Arca users' trade through 
liability, because the Linkage Plan provides for an exception to 
trade through liability for transactions occurring on the opening.
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    For transactions during the opening auction between a Customer and 
a non-Market Maker,\9\ after the twenty minute notification period has 
elapsed but before 4:30 p.m. (ET) on the same trading day, an OTP 
Holder, on behalf of its Customer, could request an obvious error 
review. In determining how to adjust the transaction to the theoretical 
price, the Trading Official would look to the away competing exchange 
with the most liquidity in the option class over the two preceding 
months. The transaction would be adjusted to the competing exchanges' 
disseminated theoretical price at the time the trade occurred. With 
respect to sell transactions the last bid price, just prior to the 
trade, would be used. With respect to buy transactions the last offer 
price, just prior to the trade would be used.\10\ Price adjustments 
would be made up to the equivalent number of contracts that the 
competing exchange was listing as its disseminated size at the time the 
trade occurred.
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    \9\ For the purpose of this rule ``non-Market Maker'' could 
include (but is not limited to) an away specialist, an off-floor 
firm or another Customer.
    \10\ See, supra note 8.
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    The rule changes proposed in this filing are similar to those 
presented by the Chicago Board Options Exchange (``CBOE'') in SR-CBOE-
2005-63.\11\ In that filing, the CBOE amended CBOE Rule 6.25 to include 
substantially similar provisions that NYSE Arca is presenting at this 
time. The Exchange notes that the Commission did receive one comment 
letter from Citadel Investment Group L.L.C. (the ``Citadel

[[Page 9054]]

Letter'') regarding the CBOE proposal.\12\ In its approval notice, the 
Commission stated that ``the Citadel Letter does not raise any issues 
that would preclude approval of the proposed rule change.'' NYSE Arca 
feels that any similar issues contained in the Citadel Letter that may 
be raised in regard to proposed rule changes contained in this filing 
would not preclude approval.
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    \11\ See Securities Exchange Act Release No. 54004 (June 16, 
2006), 71 FR 36139 (June 23, 2006) (approval order for SR-CBOE-2005-
63).
    \12\ See letter dated May 17, 2006 to Mr. Jonathan Katz, 
Secretary, Commission, from Mr. Matthew Hinerfeld, Deputy General 
Counsel, Citadel Investment Group, L.L.C. on behalf of Citadel 
Derivatives Group LLC.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\13\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\14\ in particular, because it 
is designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities, and to remove impediments to and perfect 
the mechanism of a free and open market and a national market system.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 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 \15\ and subparagraph (f)(6) 
of Rule 19b-4 thereunder.\16\
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6).
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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-NYSEArca-2007-06 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEArca-2007-06. 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. Copies of such 
filing also will be available for inspection and copying at the 
principal office of NYSE Arca. 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-NYSEArca-2007-06 and should be submitted on or before 
March 21, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-3494 Filed 2-27-07; 8:45 am]

BILLING CODE 8010-01-P