Document ID: SEC-2013-1903-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Stock Exchange, Inc.
Posted Date: 2013-11-06T05:00Z

[Federal Register Volume 78, Number 215 (Wednesday, November 6, 2013)]
[Notices]
[Pages 66791-66794]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-26555]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70791; File No. SR-CHX-2013-16]

Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Order Approving a Proposed Rule Change To Adopt Standards for the 
Cancellation or Adjustment of Bona Fide Error Trades, the Submission of 
Error Correction Transactions, and the Cancellation or Adjustment of 
Stock Leg Trades of Stock-Option or Stock-Future Orders

October 31, 2013.

I. Introduction

    On September 4, 2013, Chicago Stock Exchange, Inc. (``Exchange'' or 
``CHX'') 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 CHX Article 20, Rule 9 to outline and 
clarify the Exchange's current requirements for the cancellation of 
trades based on Bona Fide Error and to establish new requirements for 
the adjustment of trades based on Bona Fide Error; to adopt CHX Article 
20, Rule 9A to detail the Exchange's current requirements for Error 
Correction Transactions; and to adopt CHX Article 20, Rule 11 to amend

[[Page 66792]]

the Exchange's current requirements for the cancellation of the stock 
leg trade of a Stock-Option order, to establish new requirements for 
the adjustment of the stock leg trade of a Stock-Option order, and to 
allow the stock leg trade of Stock-Future orders to be cancelled or 
adjusted. The proposed rule change was published for comment in the 
Federal Register on September 18, 2013.\3\ The Commission received no 
comments 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\ See Securities Exchange Act Release No. 70381 (September 12, 
2013), 78 FR 57431 (SR-CHX-2013-16) (``Notice'').
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II. Description of the Proposed Rule Change \4\
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    \4\ A more detailed description of the proposal is contained in 
the Notice. See id.
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    Current Article 20, Rule 9 governs the cancellation of both trades 
based on demonstrable error and stock legs of Stock-Option orders. 
Among other things, the Exchange proposes to separate current Article 
20, Rule 9 into two different rules: proposed Rule 9 sets forth the 
requirements for the cancellation of trades based on demonstrable 
error, and proposed Rule 11 sets forth the requirements for the 
cancellation of the stock leg of a Stock-Option order.

A. Proposed Article 20, Rule 9: Cancellation or Adjustment of Bona Fide 
Error Trades

    Proposed Rule 9(a) states that a trade executed on the Exchange in 
``Bona Fide Error'' \5\ may be cancelled or adjusted pursuant to this 
Rule, subject to the approval of the Exchange. The Exchange notes that 
proposed Rule 9 only applies to Bona Fide Error trades that were 
executed on the Exchange and, as such, orders that are routed to other 
market centers and executed at such away market centers are not within 
the purview of proposed Rule 9.\6\
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    \5\ Proposed Article 1, Rule 1(hh) defines ``Bona Fide Error'' 
as: (1) The inaccurate conveyance or execution of any term of an 
order, including, but not limited to, price, number of shares or 
other unit of trading; identification of the security; 
identification of the account for which securities are purchased or 
sold; lost or otherwise misplaced order tickets; or the execution of 
an order on the wrong side of a market; (2) the unauthorized or 
unintended purchase, sale, or allocation of securities, or the 
failure to follow specific client instructions; (3) the incorrect 
entry of data into relevant systems, including reliance on incorrect 
cash positions, withdrawals, or securities positions reflected in an 
account; or (4) a delay, outage, or failure of a communication 
system used to transmit market data prices or to facilitate the 
delivery or execution of an order. Proposed paragraph .01 provides 
that proposed Rule 9 applies only to Bona Fide Errors committed by 
the Participant that submitted the order to the Matching System or 
the customer of the Participant that submitted the order to the 
Matching System.
    \6\ Although the Exchange anticipates implementing it in the 
near future, the Exchange does not currently offer order routing. 
See Notice, supra note 3, 78 FR at 57432 n.10.
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    Proposed paragraph (b) states that the Exchange may approve a 
request for a trade cancellation or adjustment pursuant to this Rule 
and take the corrective action(s) necessary to effectuate such a 
cancellation or adjustment, provided that the items listed thereunder 
are submitted to the Exchange, in a form prescribed by the Exchange, by 
the Participant that submitted the erroneous trade. Proposed Rule 9 
requires the Participant that submitted the erroneous trade to: (1) 
Submit a written request for cancellation or adjustment, including all 
information and supporting documentation required by proposed Rule 9, 
no later than 4:30 p.m. CST on T+1, except such a request may be 
submitted after T+1 in extraordinary circumstances with the approval of 
an officer of the Exchange; (2) identify the error that is a ``Bona 
Fide Error'' and the source of the Bona Fide Error, and provide 
supporting documentation showing the objective facts and circumstances 
concerning the Bona Fide Error; and (3) provide supporting 
documentation evidencing that all parties consent to the requested 
cancellation or adjustment.
    Proposed Rule 9(c) provides that a trade adjustment will be made 
only to the extent necessary to correct the Bona Fide Error (i.e., to 
reflect the original terms of the order).\7\ Under proposed Rule 9(d), 
if the Exchange approves a request for a trade cancellation or 
adjustment, Exchange operations personnel will effect all corrective 
action(s) necessary to effectuate the cancellation or adjustment. 
Finally, proposed Rule 9(e) mirrors current Article 20, Rule 9(b)(5) 
which provides that failure to comply with the provisions of this Rule 
will be considered conduct inconsistent with just and equitable 
principles of trade and a violation of Article 9, Rule 2.
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    \7\ Proposed Rule 9(c) states that, prior to approving an 
adjustment, the Exchange will validate that the proposed adjusted 
trade could have been executed in the Matching System at the time 
the trade was initially executed, in compliance with all applicable 
CHX and Commission rules.
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B. Proposed Article 20, Rule 9A ``Error Correction Transactions''

    Proposed Rule 9A adopts requirements for Error Correction 
Transactions (``ECTs''). Proposed 9A(a) provides that a Participant may 
submit an ECT to remedy the execution of customer orders that have been 
placed in error, provided that the following requirements are 
satisfied: (1) The erroneous transaction was the result of a ``Bona 
Fide Error,'' as defined under proposed Article 1, Rule 1(hh); (2) the 
Bona Fide Error is evidenced by objective facts and circumstances and 
the Participant maintains documentation of such facts and 
circumstances; (3) the Participant recorded the ECT in its error 
account; (4) the Participant established, maintained, and enforced 
written policies and procedures that were reasonably designed to 
address the occurrence of errors and, in the event of an error, the use 
and terms of an ECT to correct the error in compliance with this Rule; 
and (5) the Participant regularly surveilled to ascertain the 
effectiveness of its policies and procedures to address errors and 
transactions to correct errors and took prompt action to remedy 
deficiencies in such policies and procedures.
    Proposed Rule 9A(b) states that an ECT may execute without the 
restrictions of the trade-through prohibition of Rule 611, provided 
that the ECT is marked with a special Bona Fide Error trade indicator. 
Proposed Rule 9A(b) further states that this exemption applies only to 
the ECT itself and does not, for example, apply to any subsequent 
trades made by a Participant to eliminate a proprietary position 
connected with the ECT. Proposed Rule 9A(c) provides that failure to 
comply with the provisions of this Rule will be considered conduct 
inconsistent with just and equitable principles of trade and a 
violation of Article 9, Rule 2.

C. Proposed Article 20, Rule 11: Cancelation or Adjustment of Stock Leg 
Trades

    Proposed Rule 11(a) states that, unless otherwise expressly 
prohibited by the Exchange's rules, a trade representing the stock leg 
of a Stock-Option order, as defined under proposed
    Article 1, Rule 1(ii) \8\ or a Stock-Future order, as defined under 
proposed Article 1, Rule 1(jj),\9\ may be subject to

[[Page 66793]]

cancellation or adjustment by the Exchange pursuant to proposed Rule 
11, if the stock leg trade was marked by a special trade indicator when 
it was originally submitted to the Matching System.\10\ Proposed Rule 
11(a) clarifies that if the stock leg trade was not originally marked 
by a special trade indicator, the trade will not be eligible for 
cancellation or adjustment, notwithstanding compliance with the other 
requirements of this Rule.
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    \8\ Proposed Article 1, Rule 1(ii) provides that a ``Stock-
Option'' order is a combination order where at least one component 
is a cross order for a stated number of units of an underlying or 
related security coupled with the purchase or sale of options 
contract(s) on the opposite side of the market representing at least 
the same number of units as the underlying or related security 
portion of the order.
    \9\ Proposed Article 1, Rule 1(jj) provides that a ``Stock-
Future'' order is a combination order where at least one component 
is a cross order for a stated number of units of an underlying or a 
related security coupled with the purchase or sale of futures 
contract(s) on the opposite side of the market representing at least 
the same number of units of the underlying or related security 
portion of the order.
    \10\ This special trade indicator requirement is in current 
Article 20, Rule 9(b)(6). The Exchange notes that the purpose of the 
special trade indicator is to mark a stock leg trade as being part 
of a Stock-Option order and consequently notifies the market after 
execution that the trade may be cancelled, as the trade is 
contingent upon the execution of non-stock legs that comprise the 
total Stock-Option order.
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Cancellation of Stock Leg Trades
    Proposed Rule 11(b) outlines the requirements for cancelling a 
stock leg trade that is a component of a Stock-Option/Stock-Future 
order. Proposed Rule 11(b)(1) provides that the Exchange may approve a 
request to cancel a stock leg trade that was originally marked by a 
special trade indicator and take the corrective action(s) necessary to 
effectuate such a cancellation, provided that certain items are 
submitted to the Exchange, in a form prescribed by the Exchange, by the 
Participant that submitted the stock leg trade. Proposed Rule 11(b) 
requires the Participant that submitted the stock leg trade to: (1) 
Submit a written request for cancellation, including all information 
and supporting documentation required by proposed Rule 9, no later than 
4:30 p.m. CST on T+1, except such a request may be submitted after T+1 
in extraordinary circumstances with the approval of an officer of the 
Exchange; (2) identify the Qualified Cancellation Basis \11\ and 
provide supporting documentation showing the objective facts and 
circumstances supporting the Qualified Cancellation Basis; and (3) 
provide supporting documentation evidencing that all parties consent to 
the requested cancellation.
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    \11\ Proposed Rule 11(b)(2) defines the ``Qualified Cancellation 
Basis'' as follows: (A) A non-stock leg executed at a price/quantity 
or was adjusted to a price/quantity other than the price/quantity 
originally agreed upon by all of the parties to the Stock-Option or 
Stock-Future order; (B) a non-stock leg could not be executed; or 
(C) a non-stock leg was cancelled by the exchange on which it was 
executed.
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Adjustments of Stock Leg Trades
    Proposed Rule 11(c) adopts new requirements that allow under 
specified circumstances adjustments to a stock leg trade that is a 
component of a Stock-Option or Stock-Future order. Proposed Rule 
11(c)(1) provides that the Exchange may approve a request to adjust a 
stock leg trade that was originally marked by a special trade indicator 
and take the corrective action(s) necessary to effectuate such an 
adjustment, provided that certain items are submitted to the Exchange, 
in a form prescribed by the Exchange, by the Participant that submitted 
the stock leg trade. It further states that the requirements of 
proposed Rule 11(c) must be complied with, to the satisfaction of the 
Exchange, before a stock leg trade adjustment pursuant to this Rule may 
be approved or any corrective action may be taken.
    Proposed Rule 11(c) requires the Participant that submitted the 
stock leg trade to: (1) submit a written request for adjustment, 
including all information and supporting documentation required by 
proposed Rule 9, no later than 4:30 p.m. CST on T+1, except such a 
request may be submitted after T+1 in extraordinary circumstances with 
the approval of an officer of the Exchange; (2) identify the Qualified 
Cancellation Basis \12\ and provide supporting documentation showing 
the objective facts and circumstances supporting the Qualified 
Cancellation Basis; (3) provide supporting documentation evidencing 
that all parties consent to the requested adjustment; and (4) submit a 
proposed Adjusted Stock Price or Adjusted Stock Quantity, as detailed 
under proposed Rule 11(c)(3).
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    \12\ Proposed Rule 11(c)(2) defines the ``Qualified Adjustment 
Basis'' as when a non-stock leg executed at a price/quantity or was 
adjusted to a price/quantity other than the price/quantity 
originally agreed upon by all of the parties to the Stock-Option or 
Stock-Future order.
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    Proposed Rule 11(c)(3) provides that the Participant that submitted 
the stock leg trade may request only one of the following adjustments 
per Stock-Option or Stock-Future order: Adjusted Stock Price; Adjusted 
Stock Quantity; or Adjusted Stock Quantity (Stock-Option trade only). 
Proposed Rule 11(c)(3)(A) details the necessary calculations for 
Adjusted Stock Price, where a non-stock leg executed at a price or was 
adjusted to a price other than the price originally agreed upon by all 
of the parties to the Stock-Option or Stock-Future order and the 
parties wish to maintain the original aggregate cash flow of the Stock-
Option or Stock-Future order. Proposed Rule 11(c)(3)(B) details the 
necessary calculations for Adjusted Stock Quantity, where a non-stock 
leg executed at a quantity or was adjusted to a quantity other than the 
quantity originally agreed upon by all of the parties to the Stock-
Option or Stock-Future order. Proposed Rule 11(c)(3)(C) details the 
necessary calculations for Adjusted Stock Quantity for a Stock-Option 
order only, where an options leg trade executed at a price or was 
adjusted to a price other than the price originally agreed upon by all 
of the parties to the Stock-Option order and the parties wish to 
maintain the original delta-based hedge ratio.
    Once the Adjusted Stock Quantity or Adjusted Stock Price has been 
presented to the Exchange pursuant to proposed Rule 11(c)(3), pursuant 
to proposed Rule 11(c)(4), the Exchange will ascertain whether the 
proposed adjusted stock leg trade could have been executed in the 
Matching System at the time the trade was initially executed, in 
compliance with all applicable CHX and Commission rules. Proposed Rule 
11(c)(4) provides that, if the trade adjustment is approved, the 
adjustment will be accepted, recorded, and submitted to a Qualified 
Clearing Agency, without regard to orders residing in the Matching 
System at the time the adjustment is made.
    Proposed Rule 11(d) provides that if the Exchange approves a 
request for a stock leg trade cancellation or adjustment, any 
corrective action(s) necessary to effectuate the cancellation or 
adjustment, including, but not limited to, corrective entries into the 
Exchange's records and/or corrective clearing submissions to a 
Qualified Clearing Agency, will be taken only by Exchange operations 
personnel. Finally, proposed Rule 11(e) provides that failure to comply 
with the provisions of this Rule will be considered conduct 
inconsistent with just and equitable principles of trade and a 
violation of Article 9, Rule 2.

III. Discussion and Commission Findings

    After careful review, the Commission finds that the Exchange's 
proposal is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\13\ In 
particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\14\ which requires that the 
rules of a national securities exchange be designed, among other 
things, to prevent fraudulent and manipulative acts and practices; 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

[[Page 66794]]

system, and, in general, to protect investors and the public interest.
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    \13\ In approving the CHX proposed rule change, the Commission 
has considered its impact on efficiency, competition and capital 
formation. 15 U.S.C. 78c(f).
    \14\ 15 U.S.C. 78f(b)(5).
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    As discussed above, the Exchange proposes to expand Article 20, 
Rule 9 to permit the adjustment of Bona Fide Error trades and to 
clarify the requirements for cancelling a Bona Fide Error trade. The 
Commission finds that proposed Rule 9 is consistent with Section 
6(b)(5) of the Act because it should allow the Exchange, through the 
cancellation and adjustment of Bona Fide Error trades, to promote the 
proper execution of trades, to promote the accurate reporting of 
trades, and to potentially prevent excessive reporting of trade 
activity to the Consolidated Tape.
    Proposed Rule 9(b) enumerates the specific requirements that must 
be met by the executing broker Participant before the Exchange can 
consider a request to cancel or adjust an erroneous trade. The 
Commission believes that these requirements, which are designed to 
ensure that Participants can cancel or adjust erroneous trades while 
also creating the necessary filters to ensure that the Exchange only 
acts upon truly erroneous trades, are reasonable and provide a fair, 
objective process by which the Exchange may review requests to cancel 
or adjust an erroneous trade. Specifically, the Commission believes 
that the requirement that the written request for cancellation or 
adjustment be submitted no later than 4:30 p.m. CST on T+1 except in 
extraordinary circumstances is reasonable because it affords 
Participants with adequate time to identify an erroneous trade and to 
prepare its submission request. Additionally, the Commission believes 
that the requirements that all parties to a Bona Fide Error trade must 
consent to the Participant's request to cancel or adjust the erroneous 
trade and that the request to cancel or adjust be supported with 
documentation showing the objective facts and circumstances evidencing 
the Bona Fide Error should protect all parties to a trade and should 
prevent unfair or fraudulent cancellations or adjustments of trades 
from taking place. Similarly, the Commission believes that the 
requirement in proposed Rule 9(c), that the any potential trade 
adjustment will only be taken to the extent necessary to correct the 
Bona Fide Error and only if the proposed adjusted trade could have been 
executed in the Matching System at the time the trade was initially 
executed, should promote the integrity of the market system by ensuring 
that all adjusted trades comply with Exchange and Commission rules.
    The Commission also finds that proposed Rule 9A, which codifies in 
CHX's rules the requirements that a Participant must follow when 
submitting an ECT, is consistent with the Act. The Exchange currently 
accepts ECTs to remedy the execution of customer orders that have been 
placed in error, but does not explain these requirements in its rules. 
The Commission believes that the inclusion of these requirements in 
CHX's rules should provide clarity and guidance to Participants and 
thereby promote the efficient functioning of the securities 
markets.\15\
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    \15\ The Commission also notes that that the language of 
proposed Rule 9A is substantially similar to the key portions of the 
Commission order exempting certain error correction transactions 
From Rule 611 of Regulation NMS. See Securities Exchange Act Release 
No. 55884 (June 8, 2007), 72 FR 32926 (June 14, 2007).
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    As discussed in further detail above, proposed Rule 11 expands 
situations where a stock leg of a Stock-Option order or Stock-Future 
order stock leg may be cancelled and to permit the adjustment of stock 
leg trades if the stock leg trade was marked by a special trade 
indicator when it was originally submitted to the Matching System. This 
proposal allows Participants to adapt to changes to the options or 
futures leg of a trade and thereby facilitate the execution of Stock-
Option or Stock-Future orders in ratios as originally agreed by the 
parties to the order, which the Commission believes should promote the 
efficient functioning of the securities market.
    The Commission also finds that the requirements in proposed Rule 
11(b) that a Participant must satisfy to request cancellation of a 
stock leg trade are consistent with the Act. The requirements contained 
in Rule 11(b)--that all parties submit a timely request no later than 
4:30 p.m. CST on T+1, that the submitting Participant supports its 
request with appropriate documentation, and that all parties consent to 
the submission of the cancellation request--track those of Rule 9(b), 
and the Commission believes they are consistent with the Act for the 
reasons discussed above. In addition, the Commission believes that 
requiring the submitting Participant to identify the Qualified 
Adjustment Basis is reasonable because it should allow the Exchange to 
more quickly act upon the Participant's request for cancellation under 
proposed Rule 11(b).
    Further, the Commission believes that proposed Rule 11(c), which 
proposes to allow adjustments of the stock leg trade, should prevent 
excessive reporting of activity to the Consolidated Tape and thereby 
should enhance the integrity of the securities markets by removing 
duplicative trade reports. As with proposed Rules 9(b) and 11(b), the 
Commission believes that the requirements of proposed Rule 11(c)--that 
a submitting Participant must comply with T+1 requirement, identify the 
qualified adjustment basis, ensure that all parties consent to the 
request, and support its submission with a proposed Adjusted Stock 
Price or Adjusted Stock Quantity--are consistent with the Act for the 
reasons discussed above. The Commission also believes that the 
Exchange's detailed methodology for determining and verifying the exact 
adjusted terms of a trade are adequate to effect the intent of the 
parties to the trade and ensure that any adjustments will be consistent 
with the rules of the Exchange and the Commission, including Rule 611 
of Regulation NMS.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\16\ that the proposed rule change (SR-CHX-2013-16) be, and it 
hereby is, approved.
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    \16\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-26555 Filed 11-5-13; 8:45 am]
BILLING CODE 8011-01-P