Document ID: SEC-2010-1820-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2010-12-01T05:00Z

[Federal Register: December 1, 2010 (Volume 75, Number 230)]
[Notices]               
[Page 74755-74757]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01de10-95]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63367; File No. SR-Phlx-2010-163]

 
Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by NASDAQ OMX PHLX LLC Relating to Obvious Errors Respecting 
Complex Trades

November 23, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on November 17, 2010, NASDAQ OMX PHLX LLC (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``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, pursuant to Section 19(b)(1) of the Act \3\ and Rule 
19b-4 thereunder,\4\ proposes to amend Rule 1092, Obvious Errors and 
Catastrophic Errors, to address obvious and catastrophic errors 
involving complex orders.
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    \3\ 15 U.S.C. 78s(b)(1).
    \4\ 17 CFR 240.19b-4.
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    The text of the proposed rule change is available on the Exchange's 
website at http://www.nasdaqtrader.com/micro.aspx?id=PHLXRulefilings, 
at the principal office of the Exchange, on the Commission's Web site 
at http://www.sec.gov, 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 the proposed rule change is to mitigate the risk to 
parties using complex orders, where part or all of a complex order 
traded at an erroneous price; specifically, the proposal addresses the 
situation where one component (or leg) of a complex order is deemed an 
obvious (or catastrophic) error but the other component(s) is (are) 
not.
Background
    Complex orders are orders with more than one component, and take 
many

[[Page 74756]]

forms, such as spreads and straddles.\5\ Complex orders have been 
trading electronically on the Exchange's trading system since 2008.\6\ 
At this time, the Exchange is proposing to amend its Rule 1092 to 
address complex orders that have at least one leg that trades at an 
erroneous price. Rule 1092 is the Exchange's rule that governs obvious 
errors and catastrophic errors in options. Most options exchanges have 
similar but not identical rules; this proposal would adopt a new 
process of determining how to deal with obvious/catastrophic errors 
when a complex order trades with another complex order.
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    \5\ See Rule 1080.08.
    \6\ See Securities Exchange Act Release No. 58361 (August 14, 
2008), 73 FR 49529 (August 21, 2008) (SR-Phlx-2008-50). Complex 
orders have long been executed on the trading floor verbally using 
contingent orders and the rules that apply to such executions.
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    Rule 1092 provides a framework for reviewing the price of a 
transaction to determine whether that price was an ``obvious error'' 
\7\ 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.\8\ 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 
is 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.
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    \7\ This proposal also covers catastrophic errors.
    \8\ See Rule 1092(e).
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Proposal
    The proposal at hand would permit all legs of a complex order 
execution to be nullified when one leg can be nullified under this 
Rule, only if the execution was a complex order versus a complex order 
(such that all of the same parties are involved in the trade).\9\ This 
occurs when a complex order executes against another complex order, 
with each piece executing through the System against each other. For 
example, assume a customer trades a call spread at a net price of $.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 meet the obvious error threshold in Rule 1092, then the 
entire complex trade will 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, once the trade involving the 
January 50 calls is nullified, both parties are stuck with a 
transaction in the January 55 calls, which was not intended by either. 
This proposal to nullify all the components of a complex order that 
traded with another complex order provides an important benefit to both 
parties, neither of whom intended to end up with just one option.
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    \9\ See proposed Rule 1092(c)(v)(A).
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    This proposal does not address complex orders that do not trade 
against other complex orders. Sometimes complex orders are executed by 
the System by ``legging'' or executing the component parts against 
other individual, unrelated orders/quotes rather than a single complex 
order with the same component parts.\10\ The benefit of the legging 
feature of the Exchange's complex order system is that it increases the 
likelihood that a complex order will be executed. Nevertheless, it is 
possible, at times, that after such a trade, only one leg of a complex 
order may meet the obvious error threshold; thus, this could result in 
a residual position of a single leg, rather than a complete complex 
order execution. This will not change under this proposal.
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    \10\ In the example above, the January 50 calls would be 
purchased from seller A and the January 55 calls sold to buyer B, 
both of whom are just bidding/offering one option, not a complex 
order.
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    In sum, Rule 1092 is proposed to be amended as enumerated above in 
order to mitigate risk for parties of a complex order where a complex 
order traded with another complex order at an erroneous price. By 
creating uniformity for all trades that are ``complex to complex,'' 
parties will have less trading risk because all of the components will 
be nullified under the proposal.
    In addition, the Exchange also proposes to 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.''
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \11\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \12\ in particular, in that it is designed 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 system, and, in general to protect investors and the public 
interest, by improving the obvious error process for complex orders 
that trade with other complex orders. Recognition that a trade is part 
of a complex order should help add more certainty to the obvious/
catastrophic error process and reduce the risk to parties trading on 
the Exchange.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 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 will 
impose any burden on competition 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

    No written comments were either solicited or received.

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 Exchange 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-Phlx-2010-163 on the subject line.

[[Page 74757]]

Paper Comments

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

All submissions should refer to File Number SR-Phlx-2010-163. 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 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 
a.m. and 3 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-2010-163 and should be 
submitted on or before December 22, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-30225 Filed 11-30-10; 8:45 am]
BILLING CODE 8011-01-P