Document ID: SEC-2011-0084-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2011-01-18T05:00Z

[Federal Register: January 18, 2011 (Volume 76, Number 11)]
[Notices]               
[Page 2940-2941]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18ja11-103]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63692; File No. SR-Phlx-2010-163]

 
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order 
Granting Approval of Proposed Rule Change Relating to Obvious Errors 
Respecting Complex Trades

January 11, 2011.
    On November 17, 2010, 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, to address obvious and catastrophic errors 
involving complex orders. The proposed rule change was published for 
comment in the Federal Register on December 1, 2010.\3\ The Commission 
received no comment letters on the proposal. 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. 63367 (November 23, 
2010), 75 FR 74755 (``Notice'').
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    The proposed rule change would amend Rule 1092, Obvious Errors and 
Catastrophic Errors, to address obvious and catastrophic errors 
involving trades of one complex order against another complex order. 
Specifically, the proposal is designed to address a situation in which 
one component (or leg) of a complex order is deemed an obvious (or 
catastrophic) error, but the other component(s) are not. In such 
situation, the proposed rule change would permit all legs of a complex 
order execution to be nullified when one leg of such complex order can 
be nullified as an obvious or catastrophic error under Rule 1092,\4\ 
provided that the execution involved a complex order executing against 
another complex order (such that all of the same parties are involved 
in the trade).\5\ The proposed rule does not address complex orders 
that do not trade against other complex orders.
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    \4\ Rule 1092 provides a framework for reviewing the price of a 
transaction to determine whether that price was an ``obvious error'' 
pursuant to objective standards. When a participant believes he/she 
received one or more executions at an erroneous price, a participant 
may notify the Options Exchange Officials (``OEOs'') and request the 
review of a trade as a possible obvious error. An obvious error will 
be deemed to have occurred when the execution price of a transaction 
is higher or lower than the theoretical price for a series by a 
certain amount depending on the type of option. OEOs use one of 
three criteria when determining the theoretical price of an options 
execution, which are enumerated in Rule 1092(b). The theoretical 
price is then compared to an obvious/catastrophic error chart within 
Rule 1092(a). If the transaction price meets this threshold, the 
transaction may be adjusted or nullified.
    \5\ See proposed Rule 1092(c)(v)(A). This would occur when a 
complex order executes against another complex order, with each 
piece executing through the System against each other. The Notice 
provides the following example of such a trade. Assume a customer 
trades a call spread at a net price of $0.50 by buying the January 
50 calls at $3.00 and selling the January 55 calls at $2.50. If the 
January 50 calls should have been trading at $7.00 and thus met the 
obvious error threshold in Rule 1092, then the entire complex trade 
would be nullified only if the January 50 and 55 calls traded as a 
complex order against another complex order, rather than as two 
separate trades. Currently, the trade involving the January 50 calls 
is nullified and the January 55 Calls trade would stand, which, 
according to the Exchange, likely was not intended by either party.
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    In addition, the proposal would make three minor corrections: (i) A 
reference in Rule 1092(b)(ii) to Rule 1014(c)(1)(A)(i)(a) is inverted 
and should instead say Rule 1014(c)(i)(A)(1)(a); (ii) the words 
``obvious error'' in Rule 1092(e)(i)(B) are being capitalized to match 
the rest of the rule; and (iii) a reference to ``AUTOM'' in Rule 
1092(e)(ii) is outdated and will be deleted, leaving reference to the 
``Help Desk.''
    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 exchange \6\ and, in 
particular, the

[[Page 2941]]

requirements of Section 6(b) of the Act \7\ and the rules and 
regulations thereunder. Specifically, the Commission finds that the 
proposal is consistent with Section 6(b)(5) of the Act,\8\ in that the 
proposal is designed to promote just and equitable principles of trade, 
to prevent fraudulent and manipulative acts, to remove impediments to 
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.
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    \6\ 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).
    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that, in approving proposals relating to 
adjustment or nullification of trades involving obvious errors, it 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.\9\ The Commission notes that the proposed change to Rule 
1092 provides specific and objective procedures for determining whether 
a trade should be nullified. The purpose of the new provision is to 
provide that obvious and catastrophic errors related to complex orders 
that trade against other complex orders will be nullified. The 
Commission also notes that the proposed rule change, by providing that 
obvious and catastrophic errors related to complex orders that trade 
against other complex orders will be nullified, is designed to mitigate 
the risk to both parties to a complex order trade involving two complex 
orders, neither or whom, according to the Exchange, intended to end up 
with just one piece of the complex order.\10\ Therefore, the Commission 
believes that the proposed rule change is consistent with the Act.
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    \9\ See, e.g., Securities Exchange Release Nos. 58778 (October 
14, 2008), 73 FR 62577 (October 21, 2008) and 54228 (July 27, 2006), 
71 FR 44066 (August 3, 2006) (SR-CBOE-2006-14) (approving revisions 
to CBOE's Obvious Error Rules).
    \10\ See Notice, supra note 3.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-Phlx-2010-163) is hereby 
approved.
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    \11\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-891 Filed 1-14-11; 8:45 am]
BILLING CODE 8011-01-P