Document ID: SEC-2013-0691-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order Granting Approval of Proposed Rule Change Regarding Catastrophic Errors
Posted Date: 2013-04-10T04:00Z

[Federal Register Volume 78, Number 69 (Wednesday, April 10, 2013)]
[Notices]
[Pages 21482-21483]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-08328]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69304; File No. SR-PHLX-2013-005]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order 
Granting Approval of Proposed Rule Change Regarding Catastrophic Errors

April 4, 2013.

I. Introduction

    On January 31, 2013, NASDAQ OMX PHLX LLC (``PHLX'' 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 Rule 1092, Obvious Errors and Catastrophic Errors. The proposed 
rule change was published for comment in the Federal Register on 
February 19, 2013.\3\ The Commission received one comment letter on the 
proposed rule change.\4\ This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 68907 (February 12, 
2013), 78 FR 11705 (``Notice'').
    \4\ See Letter from Ellen Greene, Vice President, Securities 
Industry and Financial Markets Association to Elizabeth M. Murphy, 
Secretary, Commission, dated March 14, 2013.
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II. Background

    The Exchange proposes to amend Rule 1092(f)(ii) to permit the 
nullification of trades involving catastrophic errors in certain 
situations. Specifically, the proposed rule would enable a non-broker 
dealer customer \5\ who is the contra-side to a trade that is deemed to 
be a catastrophic error to have the trade nullified in instances where 
the adjusted price would violate the customer's limit price. Trades 
would adjusted in these circumstances if the customer, or his agent, 
affirms the customer's willingness to accept the adjusted price through 
the customer's limit price within 20 minutes of notification of the 
catastrophic error ruling.\6\
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    \5\ The Exchange notes that a professional customer is a 
customer for purposes of Rule 1092.
    \6\ The Exchange notes that the 20 minute notification period is 
similar to the time period used currently with respect to triggering 
the obvious error review process.
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    Under the current rule, and under the rules of all options 
exchanges, all transactions that qualify as a catastrophic error are 
adjusted, not nullified. The purpose of the proposal is to help market 
participants better manage their risk by addressing the situation 
where, under current rules, a trade can be adjusted to a price outside 
of a customer's limit price, forcing the customer to spend additional 
money for a trade that it may not be able to afford. The Exchange notes 
that this proposal is a fair way to address the issue of a customer's 
limit price while balancing the competing interests of certainty that 
trades stand with the policy concerns about dealing with true 
errors.\7\
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    \7\ The Exchanges noted that it is focused on this particular 
situation because of a recent catastrophic error ruling that 
resulted in an appeal pursuant to Rule 1092(f)(iv).
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act \8\ and the rules 
and regulations thereunder applicable to a national securities 
exchange.\9\ In particular, the Commission finds that the proposed rule 
change is consistent with Section 6(b)(5) of the Act,\10\ which 
requires, among other things, that the Exchange's rules be 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, 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.
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    \8\ 15 U.S.C. 78f.
    \9\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78f(b)(5).
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    The Commission received one comment letter expressing support for 
the proposed rule change.\11\ The commenter believes that the special 
treatment afforded by the rule change to non-broker-dealer customers is 
appropriate because, unlike market makers or broker-dealers, non-
broker-dealer customers are less likely to be able to absorb the 
monetary penalty of being forced into a situation where their

[[Page 21483]]

original limit price is violated.\12\ The commenter points to other 
precedents in the options markets for non-broker-dealer customers 
getting special treatment for similar reasons to the proposed rule 
change, namely because they are less active in the markets and often 
have limited funds in their accounts.\13\ Finally, the commenter 
encourages other options exchanges to adopt similar amendments to their 
Obvious and Catastrophic Error rules.\14\
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    \11\ See note 4, supra.
    \12\ Id.
    \13\ Id.
    \14\ Id.
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    The Exchange notes that the proposed rule change is not unfairly 
discriminatory, even though it offers non-broker dealer customers a 
choice not provided to other market participants. Specifically, the 
Exchange notes that the existing obvious error rules differentiate 
among market participants.\15\ The Exchange notes further that 
customers often are treated specially in the options markets, 
recognizing that they 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.\16\ The Exchange goes on to note that, while 
the proposed rule change may introduce uncertainty regarding whether a 
trade will be adjusted or nullified, it eliminates price uncertainty, 
as customer orders can be adjusted to significantly different prices 
than their limit prices under the rule prior to this proposed rule 
change. For this reason, the Exchange believes that the proposed rule 
change promotes just and equitable principles of trade and protects 
investors and the public interest.
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    \15\ The Exchange notes, for example, that the notification 
period to begin the obvious error process is shorter for specialists 
and Registered Options Traders than it is for other market 
participants.
    \16\ The Exchange notes that customers often have favorable fees 
relative to other market participants.
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    The Commission notes that in considering the proposed rule change 
the Exchange has weighed the benefits of certainty to non-broker-dealer 
customers that their limit price will not be violated against the costs 
of increased uncertainty to market makers and broker-dealers that their 
trades may be nullified instead of adjusted depending on whether the 
other party to the transaction is or is not a customer.\17\ The 
proposed rule change strikes a similar balance on this issue to the 
approach taken in the Exchange's Obvious Error Rule, whereby 
transactions in which an Obvious Error occurred with at least one party 
as a non-specialist are nullified unless both parties agree to adjust 
the price of the transaction within 30 minutes of being notified of the 
Obvious Error.\18\ For the reasons noted above, the Commission believes 
that the proposed rule change is consistent with the Act.
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    \17\ See Notice, supra note 3.
    \18\ Id.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-PHLX-2013-005) is hereby 
approved.
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    \19\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-08328 Filed 4-9-13; 8:45 am]
BILLING CODE 8011-01-P