Document ID: SEC-2014-0734-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX, LLC
Posted Date: 2014-05-06T04:00Z

[Federal Register Volume 79, Number 87 (Tuesday, May 6, 2014)]
[Notices]
[Pages 25961-25965]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-10291]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72055; File No. SR-Phlx-2014-27]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing of Proposed Rule Change To Add New Paragraphs (h) and (i) to 
Rule 3312, entitled ``Clearly Erroneous Transactions''

April 30, 2014.
    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 April 17, 2014, NASDAQ OMX PHLX LLC (``Phlx'' 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 prepared by the Exchange. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to add new paragraphs (h) and (i) to Rule 
3312, entitled ``Clearly Erroneous Transactions.''
    The text of the proposed rule change is available from Phlx's Web 
site at http://nasdaqomxphlx.cchwallstreet.com, at Phlx's principal 
office, 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 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 add new paragraph (h) to Rule 3312 
to

[[Page 25962]]

provide the Exchange with authority to nullify transactions that were 
effected based on the same fundamentally incorrect or grossly 
misinterpreted issuance information even if such transactions occur 
over a period of several days, as further described below. An example 
of fundamentally incorrect and grossly misinterpreted issuance 
information that led to a severe valuation error is included below for 
illustrative purposes.
    The Exchange also proposes to add new paragraph (i) to Rule 3312 to 
make clear that in the event of any disruption or malfunction in the 
operation of the electronic communications and trading facilities of 
the Exchange, another market center or responsible single plan 
processor in connection with the transmittal or receipt of a regulatory 
trading halt, suspension or pause (hereafter generally referred to as a 
``trading halt'' for ease of reference), the Exchange will nullify any 
transaction that occurs after the primary listing market for a security 
declares a trading halt with respect to such security. In the event a 
trading halt is declared, then prematurely lifted in error, and then 
re-instituted, proposed paragraph (i) would also result in 
nullification of any transactions that occur before the official, final 
end of the trading halt according to the primary listing market.
    The Exchange also proposes a change to certain cross-references in 
Rule 3312, due to the addition of paragraphs (h) and (i). Specifically, 
the Exchange proposes to update cross-references in existing paragraph 
(g) of Rule 3312 in order to make clear that the provisions of 
paragraph (g) do not alter the application of other provisions of Rule 
3312, including new paragraphs (h) and (i).
Background
    On September 10, 2010, the Commission approved, on a pilot basis, 
changes to the clearly erroneous rules of the national securities 
exchanges to provide for uniform treatment: (1) Of clearly erroneous 
execution reviews in multi-stock events involving twenty or more 
securities; and (2) in the event transactions occur that result in the 
issuance of an individual stock trading pause by the primary listing 
market and subsequent transactions that occur before the trading pause 
is in effect on the Exchange.\3\ The national securities exchanges 
adopted additional changes to their clearly erroneous rules that 
reduced the ability of the national securities exchanges to deviate 
from the objective standards set forth in their respective clearly 
erroneous rules.\4\ In connection with its resumption of trading of NMS 
Stocks through the NASDAQ OMX PSX system, the Exchange amended Rule 
3312 to conform it to the newly-adopted changes to the national 
securities exchanges' clearly erroneous rules, so that it could 
participate in the pilot program.\5\ In 2013, the Exchange adopted a 
provision designed to address the operation of the 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'').\6\ 
The Exchange removed the specific provisions related to individual 
stock trading pauses and extended to April 8, 2014 the pilot program 
applicable to certain provisions of Rule 3312.\7\ Most recently, the 
Exchange extended the effectiveness of the pilot program under Rule 
3312 to coincide with the pilot period for the Plan, including any 
extensions to the pilot period for the Plan.\8\
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    \3\ Securities Exchange Act Release No. 62886 (Sept. 10, 2010), 
75 FR 56613 (Sept. 16, 2010).
    \4\ Id.
    \5\ Securities Exchange Act Release No. 63023 (Sept. 30, 2010), 
75 FR 61802 (Oct. 6, 2010) (SR-Phlx-2010-125).
    \6\ See Securities Exchange Act Release No. 68820 (Feb. 1, 
2013), 78 FR 9436 (Feb. 8, 2013) (SR-Phlx-2013-12); Securities 
Exchange Act Release No. 67091 (May 31, 2012), 77 FR 33498 (June 6, 
2012) (the ``Limit Up-Limit Down Release''); see also Exchange Rule 
3312(g).
    \7\ Paragraphs (a)(2)(C), (b), (c)(1) and (g) of Rule 3312 are 
currently subject to a pilot program. See Securities Exchange Act 
Release No. 70541 (Sept. 27, 2013), 78 FR 61431 (Oct. 3, 2013) (SR-
Phlx-2013-97).
    \8\ Securities Exchange Act Release No. 71783 (Mar. 24, 2014), 
79 FR 17617 (Mar. 28, 2014) (SR-Phlx-2014-18).
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    As proposed, similar to other provisions added in recent years, as 
described above, both paragraph (h) and paragraph (i) would be subject 
to the pilot period, and thus, will coincide with the pilot period for 
the Plan, including any extensions to the pilot period for the Plan.
Executions Based on Incorrect or Grossly Misinterpreted Issuance 
Information
    The Exchange proposes to adopt a new provision, paragraph (h), to 
Rule 3312, which would provide that a series of transactions in a 
particular security on one or more trading days may be viewed as one 
event if all such transactions were effected based on the same 
fundamentally incorrect or grossly misinterpreted issuance information 
(e.g., with respect to a stock split or corporate dividend) resulting 
in a severe valuation error for all such transactions (the ``Event'').
    As proposed, an Officer of the Exchange or senior level employee 
designee, acting on his or her own motion, would be required to take 
action to declare all transactions that occurred during the Event null 
and void not later than the start of trading on the day following the 
last transaction in the Event. If trading in the security is halted 
before the valuation error is corrected, the Officer of the Exchange or 
senior level employee designee would be required to take action to 
declare all transactions that occurred during the Event null and void 
prior to the resumption of trading. The Exchange proposes to make clear 
that no action can be taken pursuant to proposed paragraph (h) with 
respect to any transactions that have reached settlement date for the 
security or that result from an initial public offering of a security. 
The Exchange believes that declaring a trade null and void after 
settlement date would be complex to administer and unfair to the 
affected parties. The Exchange also believes that excluding IPOs from 
the proposed rule will ensure that transactions in a new security for 
which there is no benchmark information are not called into question, 
as it is the IPO process itself, including the extensive public 
disclosure associated with IPOs, that is intended to drive price 
formation.
    Further, the Exchange proposes that to the extent transactions 
related to an Event occur on one or more other market centers, the 
Exchange will promptly coordinate with such other market center(s) to 
ensure consistent treatment of the transactions related to the Event, 
if practicable. The Exchange also proposes to state in the Rule that 
any action taken in connection with paragraph (h) will be taken without 
regard to the Numerical Guidelines set forth in paragraph (a)(2)(C)(i) 
of Rule 3312. In particular, the Exchange believes that there could be 
scenarios where there are erroneous transactions related to an Event 
that do not meet applicable Numerical Guidelines but that are, upon 
review, clearly erroneous. One example of a situation that could occur 
is a corporate action, such as a stock split, that results in the 
dissemination of fundamentally incorrect or grossly misinterpreted 
issuance information and leads to erroneous transactions at a price 
that is close to the price at which the security was previously 
trading. Even if such trading is consistent with prior trading activity 
for the security, and thus would not meet applicable Numerical 
Guidelines, the Exchange would have the authority to nullify such

[[Page 25963]]

transactions if they were affected based on the same fundamentally 
incorrect or grossly misinterpreted issuance information and there was 
a severe valuation error as a result (i.e., although the security 
should be trading at a price further away from its previous range, due 
to fundamentally incorrect or grossly misinterpreted issuance 
information with respect to the corporate action the security continues 
to trade at a price that does not meet applicable Numerical 
Guidelines).
    The Exchange also proposes to include a provision, as it does in 
many other sub-paragraphs of Rule 3312, stating that each Member 
involved in a transaction subject to proposed paragraph (h) shall be 
notified as soon as practicable by the Exchange, and that the party 
aggrieved by the action may appeal such action in accordance with 
Exchange Rule 3312(c).
    In particular, the Exchange believes it is necessary to have 
authority to nullify trades that occur in an event similar to an event 
involving an exchange offer (``Exchange Offer'') made by U.S. Bancorp 
on the New York Stock Exchange (``NYSE'') in 2010 in which there were a 
series of executions based on incorrect or grossly misinterpreted 
issuance information. As a result of such information, the securities 
traded at severely dislocated prices. At the time, the NYSE filed an 
emergency rule filing in order to respond to that event.\9\ With the 
filing the NYSE interpreted the rule applicable to clearly erroneous 
executions as permitting the NYSE to nullify all trades resulting after 
the Exchange Offer at severely dislocated prices.\10\ The Exchange 
believes it is important to have in place a rule to break such trades 
if an event like the U.S. Bancorp event occurs again in the future. The 
U.S. Bancorp event is described in further detail below and is intended 
to be illustrative of the manner in which the Exchange proposes to 
utilize proposed paragraph (h), if necessary.
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    \9\ Securities Exchange Act Release No. 62609 (July 30, 2010), 
75 FR 47327 (Aug. 5, 2010) (SR-NYSE-2010-55).
    \10\ Id.
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    In May 2010, U.S. Bancorp commenced an offer to exchange up to 
1,250,000 Depositary Shares, each representing a 1/100 interest in a 
share of Series A Non-Cumulative Perpetual Preferred Stock, $100,000 
liquidation preference per share (the ``Depositary Shares'') for any 
and all of the 1,250,000 outstanding 6.189% Fixed-to-Floating Rate 
Normal ITS issued by U.S. Bancorp Capital IX, each with a liquidation 
amount of $1,000 (the ``Normal ITS''). The Depositary Shares were 
approved for listing on the NYSE under the symbol USB PRA. On June 11, 
2010, the NYSE opened the shares on a quote, but trading did not 
commence until June 16, 2010 at prices in the range of $79.00 per 
share. There were additional executions on the NYSE in that price range 
on June 17 and 18, 2010. On June 18, 2010, NYSE staff learned that the 
prices at which trades had executed were not consistent with the value 
of the security, which was closer to an $800 price. Upon learning of 
the pricing disparity, NYSE immediately halted trading in the 
Depositary Shares on all markets and alerted U.S. Bancorp and other 
exchanges that traded the Depositary Shares of the pricing discrepancy.
    In order to address the situation, the NYSE filed a proposal to 
interpret its existing clearly erroneous execution rule such that the 
trading in Depositary Shares from June 16 to June 18 constituted a 
single event because that trading was based on incorrect or grossly 
misinterpreted issuance information that resulted in severe price 
dislocation (the ``U.S. Bancorp Event'').\11\ Because the Depositary 
Shares were halted before the price of the Depositary Shares ceased to 
be dislocated, and remained halted, the NYSE was able to review trading 
in Depositary Shares and declare null and void all trading in the U.S. 
Bancorp Event before the security resumed trading.
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    \11\ Id.
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    Rather than filing a proposal in response to a similar event 
happening again, the Exchange proposes to add paragraph (h) in order to 
nullify transactions consistent with the description of the proposed 
Rule above.
Executions After a Trading Halt Has Been Declared
    The Exchange proposes to add new paragraph (i) to Rule 3312 to make 
clear that in the event of any disruption or malfunction in the 
operation of the electronic communications and trading facilities of 
the Exchange, another market center or responsible single plan 
processor in connection with the transmittal or receipt of a trading 
halt, the Exchange will nullify any transaction that occurs after the 
primary listing market for a security declares a trading halt and 
before such trading halt with respect to such security has officially 
ended according to the primary listing market. In addition, proposed 
paragraph (i) will make clear that in the event a trading halt is 
declared, then prematurely lifted in error and then re-instituted, the 
Exchange will nullify transactions that occur before the official, 
final end of the trading halt according to the primary listing market.
    As with other provisions in Rule 3312, including proposed paragraph 
(h) as discussed above, the authority to nullify transactions pursuant 
to paragraph (i) would be vested in an officer of the Exchange or other 
senior level employee designee, acting on his or her own motion. Any 
action taken in connection with paragraph (i) would be taken in a 
timely fashion, generally within thirty (30) minutes of the detection 
of the erroneous transaction and in no circumstances later than the 
start of Regular Market Session \12\ on the trading day following the 
date of execution(s) under review. The Exchange also proposes to 
specify that any action taken in connection with proposed paragraph (i) 
will be taken without regard to the Numerical Guidelines set forth in 
paragraph (a)(2)(C)(i) of Rule 3312. The Exchange believes it is 
appropriate to act to nullify transactions pursuant to proposed 
paragraph (i) without regard to applicable Numerical Guidelines because 
in the situations covered by paragraph (i), such transactions should 
not have occurred in the first instance, and thus, their nullification 
does not put parties in any different position than they should have 
been. The Exchange also believes that the certainty that the proposed 
rule provides is critical in situations involving trading halts.
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    \12\ Regular Market Session is defined in Exchange Rule 
3100(b)(4)(D) as the trading session from 9:30 a.m. until 4:00 p.m. 
or 4:15 p.m.
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    As it has proposed for paragraph (h), as described above, the 
Exchange also proposes to include a provision stating that each Member 
involved in a transaction subject to proposed paragraph (i) shall be 
notified as soon as practicable by the Exchange, and that the party 
aggrieved by the action may appeal such action in accordance with 
Exchange Rule 3312(c).
    The Exchange notes that trading in a security is typically halted 
immediately on the Exchange when the primary listing market issues a 
trading halt in such security. However, in certain circumstances, due 
to a technical issue related to the transmission or receipt of the 
electronic message instituting such trading halt or due to other 
extraordinary circumstances, executions can occur on the Exchange 
following the declaration of such a trading halt. Similarly, although 
rare, the Exchange has witnessed scenarios where due to extraordinary 
circumstances a trading

[[Page 25964]]

halt is declared, then prematurely lifted in error and then re-
instituted. It is these types of extraordinary circumstances that the 
Exchange believes require certainty, and thus, the Exchange believes it 
necessary to make clear that in such a circumstance any transactions 
after a trading halt has been declared will be nullified. In the event 
that a trading halt is declared as of a future time (i.e., if the 
primary listing exchange declares a trading halt as of a specific, 
future time in order to ensure coordination amongst market 
participants), the Exchange would only nullify transactions occurring 
after the time the trading halt was supposed to be in place until the 
official end of the trading halt according to the primary listing 
market.
    The Exchange also notes that it currently has authority pursuant to 
paragraph (b)(1) of Rule 3312 to review and nullify transactions that 
arise during a disruption or malfunction in the operation of any 
electronic communications and trading facilities of the Exchange. 
Further, paragraph (b)(1) of Rule 3312 gives the Exchange authority to 
use a lower numerical guideline than is set forth in paragraph 
(a)(2)(C)(i) of Rule 3312 when necessary to maintain a fair and orderly 
market and to protect investors and the public interest. Thus, while 
the Exchange believes that paragraph (b)(1) does give the Exchange the 
authority to nullify transactions occurring when there is an Exchange 
technical issue related to the transmission or receipt of the 
electronic message instituting a trading halt or with respect to a 
technical issue related to a prematurely lifted trading halt, the 
Exchange believes that proposed paragraph (i) will provide appropriate 
authority for the Exchange to nullify all such transactions whether or 
not the systems problem occurs on the Exchange with respect to trading 
halts and explicit clarity for market participants that such 
transactions will be nullified. The Exchange believes that such 
authority is appropriate because when relied upon the Exchange will be 
cancelling trades that should not have occurred in the first instance. 
Finally, the Exchange believes that such authority is appropriate 
because a trading halt declared by the primary listing market is 
indicative of an issue with respect to the applicable security or a 
larger set of securities.
 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.\13\ In particular, 
the proposal is consistent with Section 6(b)(5) of the Act,\14\ 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.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that it is appropriate to adopt a provision 
granting the Exchange authority to nullify trades that occur if an 
Event similar to the U.S. Bancorp Event occurs again. The Exchange 
believes that this provision will allow the Exchange to act in the 
event of such a severe valuation error, that such action would promote 
just and equitable principles of trade and that the proposal is 
therefore consistent with the Act. Similarly, the Exchange believes 
that adding a provision allowing the Exchange to nullify transactions 
that occur when a trading halt is declared, then prematurely lifted in 
error and then reinstituted, and providing that in the event of any 
disruption or malfunction in the operation of the electronic 
communications and trading facilities of the Exchange, another market 
center or responsible single plan processor in connection with the 
transmittal or receipt of a trading halt the Exchange will nullify 
trades occurring after a trading halt has been declared by the primary 
listing market for the security will help to avoid confusion amongst 
market participants, which is consistent with the protection of 
investors and the public interest and therefore consistent with the 
Act. The Exchange further believes that the proposal is appropriate and 
consistent with the Act because when relied upon the Exchange will be 
cancelling trades that should not have occurred in the first instance. 
The Exchange also believes that the proposal is appropriate because a 
trading halt declared by the primary listing market is indicative of an 
issue with respect to the applicable security or a larger set of 
securities.
    The Exchange believes that the proposal to update cross-references 
in existing paragraph (g) of Rule 3312 to include new paragraphs (h) 
and (i) is consistent with the Act because, as is the case with respect 
to the current rule, this change makes clear that the provisions of 
paragraph (g) do not alter the application of other provisions of Rule 
3312.
    The Exchange believes that the Financial Industry Regulatory 
Authority (``FINRA'') and other national securities exchanges are also 
filing similar proposals to add provisions similar to the provisions 
proposed by the Exchange above. Therefore, the proposal promotes just 
and equitable principles of trade in that it promotes transparency and 
uniformity across markets concerning treatment of transactions as 
clearly erroneous. The proposed rule change would also help to assure 
consistent results in handling erroneous trades across the U.S. 
markets, thus furthering fair and orderly markets, the protection of 
investors and the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change 
implicates any competitive issues. To the contrary, as noted above, the 
Exchange believes FINRA and other national securities exchanges are 
also filing similar proposals, and thus, that the proposal will help to 
ensure consistency across market centers.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any written comments from members or other interested parties.

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 (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall: (a) By order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the 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

[[Page 25965]]

     Send an email to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2014-27 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-2014-27. 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-Phlx-2014-27 and should be 
submitted on or before May 27, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-10291 Filed 5-5-14; 8:45 am]
BILLING CODE 8011-01-P