[Federal Register: March 29, 2004 (Volume 69, Number 60)]
[Notices]
[Page 16327-16331]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29mr04-99]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-49435; File No. SR-Phlx-2003-68]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment Nos. 1 and 2 Thereto by the Philadelphia Stock
Exchange, Inc. Relating to Options Transactions Resulting From Obvious
Errors
March 17, 2004.
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 September 29, 2003, the Philadelphia Stock Exchange, Inc. (``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. On
November 25, 2003, Phlx filed Amendment No. 1 to the proposed rule
change.\3\ On January 15, 2004, Phlx filed Amendment No. 2 to the
proposed rule change.\4\ The Commission is publishing this notice to
solicit comments on the proposed rule change, as amended, from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Letter from Richard S. Rudolph, Director and Counsel,
Phlx, to Nancy J. Sanow, Assistant Director, Division of Market
Regulation (``Division''), Commission, dated November 24, 2003
(``Amendment No. 1''). Amendment No. 1 replaced the original
proposed rule change in its entirety.
\4\ See Letter from Richard S. Rudolph, Director and Counsel,
Phlx, to Susie Cho, Special Counsel, Division, Commission, dated
January 14, 2004 (``Amendment No. 2''). In Amendment No. 2, Phlx
amended the proposed rule change by: (1) Clarifying that proposed
Phlx Rule 1092(c)(ii)(A) does not apply to a verifiable disruption
or malfunction of an execution, dissemination, or communication
system of a Specialized Quote Feed user; (2) clarifying that the
term ``primary market,'' used in proposed Phlx Rule 1092(c)(ii)(D),
means, in respect of an underlying stock or exchange-traded fund
share, the principal market in which the underlying stock or
exchange-traded fund share is traded; (3) amending proposed Phlx
Rule 1092(e)(ii) to provide that, in the case of an obvious error
determination, where at least one party to the transaction in which
an obvious error occurred is not a specialist or ROT on the
Exchange, two Floor Officials will nullify the transaction, unless
both parties agree to adjust the price of the transaction within 30
minutes of being notified by Market Surveillance of the obvious
error; (4) amending proposed Phlx Rule 1092(f) to require that a
request for review of Floor Official rulings under proposed Phlx
Rule 1092 must be in writing; and (5) amending the paragraph
numbering contained in Commentaries .02 and .03 of proposed Phlx
Rule 1092.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to adopt new Phlx Rule 1092, which would
permit the Exchange to nullify or adjust a transaction resulting from
an obvious error. The Exchange further proposes to amend Phlx Rule 124
(Disputes) to provide that Phlx Rule 124(a) would not apply to options
transactions that are the result of an obvious error (as defined in
proposed Phlx Rule 1092). Options transactions that are the result of
an obvious error would be subject to the provisions and procedures set
forth in proposed Phlx Rule 1092. Below is the text of the proposed
rule change. Proposed new language is italicized.
* * * * *
Obvious Errors \5\
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\5\ The text of the proposed rule reflects a few technical
corrections from the text contained in Amendment No. 2. Telephone
conversation between Richard S. Rudolph, Director and Counsel, Phlx,
and Frank N. Genco, Attorney, Division, Commission on February 12,
2004.
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Rule 1092. The Exchange shall either nullify a transaction or
adjust the execution price of a transaction that results in an Obvious
Error as provided in this Rule. (a) Definition of Obvious Error. For
purposes of this Rule only, an Obvious Error will be deemed to have
occurred when:
(i) If the Theoretical Price of the option is less than $3.00:
(A) during regular market conditions (including rotations), the
execution price of a transaction is higher or lower than the
Theoretical Price for the series by an amount of 35 cents or more; or,
(B) during unusual market conditions (i.e., the Exchange has
declared an unusual market condition status for the option in
question), the execution price of a transaction is higher or lower than
the Theoretical Price for the series by an amount of 50 cents or more.
(ii) If the Theoretical Price of the option is $3.00 or more:
(A) during regular market conditions (including rotations), the
execution price of a transaction is higher or lower than the
Theoretical Price for the series by an amount equal to at least two
times the maximum bid/ask spread allowed for the series, so long as
such amount is 50 cents or more; or
(B) during unusual market conditions i.e., the Exchange has
declared an unusual market condition status for the option in
question), the execution price of a transaction is higher or lower than
the Theoretical Price for the series by an amount equal to at least
three times the maximum bid/ask spread allowed for the series, so long
as such amount is 50 cents or more.
(b) Definition of Theoretical Price. For purposes of this Rule
only, the Theoretical Price of an option is:
(i) if the series is traded on at least one other options exchange,
the last bid or offer, just prior to the transaction, on the exchange
that has the most total volume in that option over the most recent 60
calendar days; or
(ii) if there are no quotes for comparison purposes, as determined
by two Floor Officials and designated personnel in the Exchange's
Market Surveillance Department.
(c) Absent Mutual Agreement as provided in Rule 1092(c)(iii) below,
parties to a trade may have a trade nullified or its price adjusted if:
(i) any such party makes a documented request within the time
specified in Rule 1092(e)(i); and
(ii) one of the conditions below is met:
(A) The trade resulted from a verifiable disruption or malfunction
of an Exchange execution, dissemination, or communication system that
caused a quote/order to trade in excess of its disseminated size (e.g.
a quote/order that is frozen, because of an Exchange system error, and
repeatedly traded) in which case trades in excess of the disseminated
size may be nullified; or
(B) The trade resulted from a verifiable disruption or malfunction
of an Exchange dissemination or communication system that prevented a
member from updating or canceling a quote/order for which the member is
responsible where there is Exchange documentation providing that the
member sought to update or cancel the quote/order; or
(C) The trade resulted from an erroneous print disseminated by the
underlying market which is later cancelled or corrected by the
underlying market where such erroneous print resulted in a trade higher
or lower than the average trade in the underlying security during the
time period encompassing two minutes before and after the erroneous
print, by an amount at least five times greater than the average quote
width for such underlying security during the time period encompassing
two minutes before and after the erroneous print. For purposes of this
Rule, the average trade in the underlying security shall be determined
by adding the prices of each trade during the four minute time period
referenced above (excluding the trade in question) and dividing by the
number of trades during such time period (excluding the trade in
question); or
(D) The trade resulted from an erroneous quote in the Primary
Market
[[Page 16328]]
for the underlying security that has a width of at least $1.00 and that
width is at least five times greater than the average quote width for
such underlying security during the time period encompassing two
minutes before and after the dissemination of such quote. For the
purposes of this rule, the average quote width shall be determined by
adding the quote widths of each separate quote during the four minute
time period referenced above (excluding the quote in question) and
dividing by the number of quotes during such time period (excluding the
quote in question); or
(E) The trade resulted in an execution price in a series quoted no
bid and at least one strike price below (for calls) or above (for puts)
in the same class were quoted no bid at the time of the erroneous
execution.
(F) The trade is automatically executed at a price where the
specialist or ROT sells $0.10 or more below parity. Parity describes an
option contract's total premium when that premium is equal to its
intrinsic value. Parity for calls is measured by reference to the offer
price of the underlying security in the Primary Market at the time of
the transaction minus the strike price for the call. Parity for puts is
measured by the strike price of an underlying security minus its bid
price in the Primary Market at the time of the transaction.
(iii) Mutual Agreement. The determination as to whether a trade was
automatically executed at an erroneous price may be made by mutual
agreement of the affected parties to a particular transaction. A trade
may be nullified or adjusted on the terms that all parties to a
particular transaction agree. In the absence of mutual agreement by the
parties, a particular trade may only be nullified or adjusted when the
transaction results from an Obvious Error as provided in this Rule.
(d) Adjustments. Where the execution price of a transaction
executed as the result of an Obvious Error is adjusted, the adjusted
price will be:
(i) the Theoretical Price of the option in the case where the
erroneous price is displayed in the market and subsequently executed
against quotes or orders that did not exist on the Exchange at the time
the erroneous price was entered; or
(ii) the last bid or offer, just prior to the transaction, on the
exchange that was disseminating the National Best Bid or Offer for the
series at the time of the transaction that was the result of an Obvious
Error in the case where an erroneous price executes against quotes or
orders already existing on the Exchange at the time the erroneous price
was entered.
(e) Obvious Error Procedure. Market Surveillance shall administer
the application of this Rule as follows:
(i) Notification. If a specialist or Registered Options Trader
(``ROT'') on the Exchange believes that he/she participated in a
transaction that was the result of an Obvious Error, he/she must notify
Market Surveillance within five minutes of the transaction. If a member
or member organization that initiated the order from off the floor of
the Exchange believes a transaction on the Exchange was the result of
an Obvious Error, such member or member organization must notify Market
Surveillance within fifteen minutes of the execution. Absent unusual
circumstances, Market Surveillance will not grant relief under this
Rule unless notification is made within the prescribed time period.
(ii) Adjust or Bust. A Floor Official will determine whether there
is an Obvious Error as defined in this Rule. If it is determined that
an Obvious Error has occurred: (A) where each party to the transaction
is either a specialist or ROT on the Exchange, the execution price of
the transaction will be adjusted by one Floor Official, unless both
parties agree to nullify the transaction within ten minutes of being
notified by Market Surveillance of the Obvious Error; or (B) where at
least one party to the transaction in which an Obvious Error occurred
is not a specialist or ROT on the Exchange, two Floor Officials will
nullify the transaction, unless both parties agree to adjust the price
of the transaction within 30 minutes of being notified by Market
Surveillance of the Obvious Error. Upon final Floor Official action,
Market Surveillance, in conjunction with the AUTOM Help Desk, where
appropriate, shall promptly notify both parties to the trade.
(f) Request for Review. If a party affected by a determination made
under this Rule so requests within the time permitted, a Review Panel
of Floor Officials will review decisions made under this Rule in
accordance with Exchange Rule 124(d). A request for review under this
paragraph must be made within thirty minutes after a party receives
verbal notification of a final determination by the Floor Official(s)
under this Rule, except that if such notification is made after 3:30
p.m. Eastern Time, either party has until 9:30 a.m. Eastern Time on the
next trading day to request a review. Such a request for review must be
in writing or otherwise documented. The Review Panel shall review the
facts and render a decision on the day of the transaction, or the next
trade day in the case where a request is properly made after 3:30 p.m.
on the day of the transaction or where the request is properly made the
next trade day.
Commentary.
.01. For purposes of paragraph (a) of this Rule, the maximum bid/
ask spread shall be the maximum bid/ask spread allowed pursuant to
Exchange Rule 1014(c)(i)(A), unless a wider spread has been allowed by
the Exchange for the option because of unusual market conditions.
.02. The Theoretical Price will be determined under paragraph
(b)(i) of this Rule as follows: (i) the bid price from the exchange
providing the most total volume in the option over the most recent 60
calendar days will be used with respect to an erroneous bid price
entered on the Exchange, and (ii) the offer price from the exchange
providing the most total volume in the option over the most recent 60
calendar days will be used with respect to an erroneous offer price
entered on the Exchange.
.03. The price to which a transaction is adjusted under paragraph
(d)(ii) of this Rule will be determined as follows: (i) The bid price
from the exchange disseminating the National Best Bid for the series at
the time of the transaction that was the result of an obvious error
will be used with respect to an erroneous offer price entered on the
Exchange, and (ii) the offer price from the exchange disseminating the
National Best Offer for the series at the time of the transaction that
was the result of an obvious error will be used with respect to an
erroneous bid price entered on the Exchange. If there are no quotes for
comparison purposes, the adjustment price will be determined by two
Floor Officials and Market Surveillance.
Disputes
Rule 124. (a) Disputes occurring on and relating to the trading
floor, if not settled by agreement between the members interested,
shall be settled, if practicable, by vote of the members knowing of the
transaction in question; if not so settled, they shall be settled by a
Floor Official summoned to the trading crowd.
In issuing decisions for the resolution of trading disputes, Floor
Officials may institute the course of action deemed to be most fair to
all parties under the circumstances at the time. A Floor Official may
direct the execution of an order on the floor, or adjust the
transaction terms or participants to an executed order on the floor.
However, two Option Floor Officials may nullify a transaction if they
determine the
[[Page 16329]]
transaction to have been in violation of Rules 1014 (Obligations and
Restrictions Applicable to Specialist and ROTs), 1015 (Quotation
Guarantees), 1017 (Priority and Parity at Openings in Options), 1033
(Bids and Offers) or 1080 (AUTOM). Two Equity Floor Officials may
nullify a transaction if they determine the transaction to have been in
violation of Rules 110 (Bids and Offers--Precedence), 111 (Bids and
Offers--Binding), 118 (Bids and Offers Outside Best Bid and Offer), 119
(Precedence of Highest Bid), 120 (Precedence of Offers at Same Price),
126 (Crossing), 203 (Agreement of Specialists), 218 (Customer Order
Receives Priority), 229 (PACE System), 232 (Handling Orders When the
Primary Market is Not Open for Free Trading), or 455 (Short Sales).
This Rule 124(a) shall not apply to options transactions that are the
result of an Obvious Error (as defined in Rule 1092). Options
transactions that are the result of an Obvious Error shall be subject
to the provisions and procedures set forth in Rule 1092.
(b)-(d) No change.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, Phlx 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 adopt Exchange Rule
1092, which would allow the Exchange to either nullify or adjust a
transaction in circumstances where a member or its customer has made an
error and the terms of the trade execution are obviously not correct.
The Exchange believes that it is inconsistent with just and equitable
principles of trade to allow one market participant to receive a
windfall at the expense of another market participant that made an
obvious error; on the other hand, the Exchange does not believe that
market participants should be permitted to reconsider poor trading
decisions. Accordingly, the Exchange represents that the proposed rule
includes objective criteria for determining when a transaction is
clearly the result of an obvious error; under what circumstances a
trade will be adjusted or nullified; and to what price a trade would be
adjusted if appropriate.
a. Notification
Under proposed Phlx Rule 1092(e), when a member or member
organization believes it has participated in a transaction that was the
result of an obvious error, it must notify the Exchange's Market
Surveillance Department (``Market Surveillance'') within a specified
time of the execution in order to allow the transaction to be nullified
or adjusted. Exchange specialists and Registered Options Traders
(``ROTs''), who are located on the floor of the Exchange and
continuously monitor their transactions, would be required to notify
Market Surveillance within five minutes of the transaction. Off-floor
members and member organizations, many of which handle customer orders
on multiple exchanges simultaneously, and which may need to contact
customers for instruction, would be required to notify Market
Surveillance within 15 minutes of the transaction.
The purpose of the notification requirement is to provide
reasonably prompt notice to Market Surveillance and to participants in
a transaction subject to proposed Phlx Rule 1092 that such transaction
may have been the result of an obvious error and that the process set
forth in the proposed rule change has begun, and ultimately a decision
concerning the transaction will be made.
b. Theoretical Price
Once Market Surveillance has been timely notified of a
participant's belief that he or she has participated in a transaction
that was the result of an obvious error, Market Surveillance would be
required to determine the ``Theoretical Price'' of the option series in
question, against which the price at which the trade was executed would
be compared to determine if there was indeed an obvious error. For
purposes of proposed Phlx Rule 1092 only, if the series is traded on at
least one other options exchange, the Theoretical Price is the last bid
or offer just prior to the trade found on the exchange that has the
most total volume in that option over the most recent 60 calendar days.
If there are no quotes for comparison purposes, the Theoretical Price
would be determined by two Floor Officials and designated personnel in
the Exchange's Market Surveillance Department.
Proposed Phlx Rule 1092, Commentary .02 provides that the
Theoretical Price would be: (1) The bid price from the exchange
providing the most total volume in the option over the most recent 60
calendar days with respect to an erroneous bid price entered on the
Exchange; and (ii) the offer price from the exchange providing the most
total volume in the option over the most recent 60 calendar days with
respect to an erroneous offer price entered on the Exchange.
The purpose of the Theoretical Price is to establish an objective
price against which transactions that may have been the result of an
obvious error may be measured to determine whether nullification or
adjustment of the transaction is warranted under the proposed rule.
c. Definition of Obvious Error
Proposed Phlx Rule 1092(a) would define ``obvious error'' based on
the Theoretical Price of the option and market conditions.
Specifically, if the Theoretical Price of the option is less than
$3.00, during regular market conditions (including rotations), and the
execution price of a transaction is higher or lower than the
Theoretical Price for the series by an amount of 35 cents or more, such
an execution price would be considered an obvious error and, if
notification of the obvious error is made in accordance with the
requirements set forth above, the transaction would be subject to
nullification or adjustment.
During unusual market conditions (i.e., the Exchange has declared
an unusual market condition status for the option in question), if the
execution price of a transaction is higher or lower than the
Theoretical Price for the series by an amount of 50 cents or more, such
an execution price would be considered an obvious error and, if
notification of the obvious error is made in accordance with the
requirements set forth above, the transaction would be subject to
nullification or adjustment.
If the Theoretical Price of the option is $3.00 or more, during
regular market conditions (including rotations), if the execution price
of a transaction is higher or lower than the Theoretical Price for the
series by an amount equal to at least two times the maximum bid/ask
spread allowed for the series, so long as such amount is 50 cents or
more, such an execution price would be considered an obvious error and,
if notification of the obvious error is made in accordance with the
requirements set
[[Page 16330]]
forth above, the transaction would be subject to nullification or
adjustment.
During unusual market conditions (i.e., the exchange has declared
an unusual market condition status for the option in question), if the
Theoretical Price of the option is $3.00 or more, and the execution
price of a transaction is higher or lower than the Theoretical Price
for the series by an amount equal to at least three times the maximum
bid/ask spread allowed for the series, so long as such amount is 50
cents or more, such an execution price would be considered an obvious
error and, if notification of the obvious error is made in accordance
with the requirements set forth above, the transaction would be subject
to nullification or adjustment.
d. Trade Adjustment and Nullification
Proposed Phlx Rule 1092(c) would allow a Floor Official(s) to
adjust or nullify a transaction in the following circumstances:
Verifiable System Disruption or Malfunction
The trade resulted from a verifiable disruption or malfunction of
an Exchange's execution, dissemination, or communication system that
caused a quote/order to trade in excess of its disseminated size (e.g.,
a quote/order that is frozen, because of an Exchange system error, and
repeatedly traded) in which case trades in excess of the disseminated
size may be nullified; or the trade resulted from a verifiable
disruption or malfunction of an Exchange dissemination or communication
system that prevented a member from updating or canceling a quote/order
for which the member is responsible where there is Exchange
documentation providing that the member sought to update or cancel the
quote/order.
Erroneous Print in Underlying Market Which is Later
Cancelled or Corrected
The trade resulted from an erroneous print disseminated by the
underlying market which is later cancelled or corrected by the
underlying market where such erroneous print resulted in a trade higher
or lower than the average trade in the underlying security during the
time period encompassing two minutes before and after the erroneous
print, by an amount at least five times greater than the average quote
width for such underlying security during the time period encompassing
two minutes before and after the erroneous print. For purposes of
proposed Phlx Rule 1092, the average trade in the underlying security
would be determined by adding the prices of each trade during the four
minute time period referenced above (excluding the trade in question)
and dividing by the number of trades during such time period (excluding
the trade in question).
Erroneous Quote in Underlying Market
The trade resulted from an erroneous quote in the primary market
\6\ for the underlying security that has a width of at least $1.00 and
that width is at least five times greater than the average quote width
for such underlying security during the time period encompassing two
minutes before and after the dissemination of such quote. For purposes
of proposed Phlx Rule 1092, the average quote width would be determined
by adding the quote widths of each separate quote during the four
minute time period referenced above (excluding the quote in question)
and dividing by the number of quotes during such time period (excluding
the quote in question).
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\6\ Phlx represents that the term ``primary market,'' as used in
proposed Phlx Rule 1092(c)(ii)(D) and (F), means, in respect of an
underlying stock or exchange-traded fund share, the principal market
in which the underlying stock or exchange-traded fund share is
traded. See Amendment No. 2, supra note 4; see also Phlx Rule
1000(a)(31).
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Series Quoted No Bid
The trade resulted in an execution price in a series quoted no bid,
and at least one strike price below (for calls) or above (for puts) in
the same class were quoted no bid at the time of the erroneous
execution.
$0.10 or More Below Parity
The trade is automatically executed at a price where the specialist
or ROT sells $0.10 or more below parity. Parity describes an option
contract's total premium when that premium is equal to its intrinsic
value. Parity for calls is measured by reference to the offer price of
the underlying security in the primary market at the time of the
transaction minus the strike price for the call. Parity for puts is
measured by the strike price of an underlying security minus its bid
price in the primary market at the time of the transaction.
In addition to the circumstances described above, the determination
as to whether a trade was automatically executed at an erroneous price
may be made by mutual agreement of the affected parties to a particular
transaction. The trade may be nullified or adjusted on terms to which
all parties to a particular transaction agree. In the absence of mutual
agreement by the parties, a particular trade may only be nullified or
adjusted when the transaction results from an obvious error as provided
in proposed Phlx Rule 1092.
e. Procedure
If it is determined that a transaction is the result of an obvious
error, Market Surveillance would take one of the following actions: (i)
Where each party to the transaction is either a specialist or ROT on
the Exchange, the execution price of the transaction would be adjusted
by one Floor Official, unless both parties agree to nullify the
transaction within ten minutes of being notified by Market Surveillance
of the obvious error; or (ii) where at least one party to the
transaction in which an obvious error occurred is not a specialist or
ROT on the Exchange, two Floor Officials would nullify the transaction
unless both parties agree to adjust the price of the transaction within
30 minutes of being notified by Market Surveillance of the obvious
error. Upon final Floor Official action, Market Surveillance, in
conjunction with the AUTOM Help Desk, where appropriate, would promptly
notify both parties to the transaction. The purpose of this procedure
is to provide Exchange staff and Floor Officials with a consistent,
established course of action to be taken when a transaction has
resulted from an obvious error, and to ensure prompt notification of an
adjustment or nullification of such a transaction.
Where an adjustment is made to a transaction price, proposed Phlx
Rule 1092, Commentary .03 would provide that the bid price from the
exchange disseminating the national best bid for the series at the time
of the transaction that was the result of an obvious error would be
used with respect to an erroneous offer price entered on the Exchange,
and the offer price from the exchange disseminating the national best
offer for the series at the time of the transaction that was the result
of an obvious error would be used with respect to an erroneous bid
price entered on the Exchange. If there are no quotes for comparison
purposes, the adjustment price would be determined by two Floor
Officials and Market Surveillance.
f. Review
If a party affected by a determination made under proposed Phlx
Rule 1092 so requests within the time permitted, a Review Panel of at
least three Floor Officials would review Floor Official rulings made
under this Rule in accordance with Phlx Rule 124(d).\7\ A
[[Page 16331]]
request for review under this paragraph must be made within thirty
minutes after a party receives verbal notification of a final
determination by the Floor Official(s) under Phlx Rule 1092, except
that if such notification is made after 3:30 p.m. Eastern Time, either
party has until 9:30 a.m. Eastern Time on the next trading day to
request a review. The Review Panel shall review the facts and render a
decision on the day of the transaction, or the next trade day in the
case where a request is properly made after 3:30 p.m. on the day of the
transaction or where the request is properly made the next trade day.
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\7\ Phlx Rule 124 (Disputes) governs situations where trading
disputes cannot be settled by agreement between the members
interested. Phlx Rule 124(d) sets forth procedures to be followed
for the appeal of Floor Official rulings.
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As stated above, proposed Phlx Rule 1092 would allow Exchange Floor
Officials to nullify certain transactions based on the stated objective
criteria set forth in the proposed Rule. Current Phlx Rule 124(a)
allows Exchange Floor Officials to nullify transactions in certain
cases in which any of the specifically enumerated Exchange Rules listed
in Phlx Rule 124(a) have been violated.\8\ In order to provide clarity
as to the application of each rule, the Exchange is proposing to amend
Phlx Rule 124(a) to state that Phlx Rule 124(a) would not apply to
options transactions that are the result of an obvious error (as
defined in Phlx Rule 1092). Options transactions that are the result of
an obvious error would be subject to the provisions and procedures set
forth in Phlx Rule 1092.
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\8\ Under Phlx Rule 124(a), two Option Floor Officials may
nullify a transaction if they determine the transaction to have been
in violation of Phlx Rules 1014 (Obligations and Restrictions
Applicable to Specialist and ROTs), 1015 (Quotation Guarantees),
1017 (Priority and Parity at Openings in Options), 1033 (Bids and
Offers), or 1080 (AUTOM). Two Equity Floor Officials may nullify a
transaction if they determine the transaction to have been in
violation of Phlx Rules 110 (Bids and Offers--Precedence), 111 (Bids
and Offers--Binding), 118 (Bids and Offers Outside Best Bid and
Offer), 119 (Precedence of Highest Bid), 120 (Precedence of Offers
at Same Price), 126 (Crossing), 203 (Agreement of Specialists), 218
(Customer Order Receives Priority), 229 (PACE System), 232 (Handling
Orders When the Primary Market is Not Open for Free Trading), or 455
(Short Sales).
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g. Conclusion
The proposed rule change is intended to address the situation in
which the price of an executed trade indicates that an obvious error
exists, suggesting that it is unrealistic to expect that the parties to
the transaction have come to a meeting of the minds regarding the terms
of the transaction. The proposed rule change contemplates that the
determination of whether such an obvious error has occurred should be
based on objective criteria, and subject to specific objective
procedures, including making an appeal process available to the parties
to such transactions.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\9\ in general, and Section 6(b)(5),\10\ in particular,
in that it is designed 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 system, and, in general, to protect investors and the
public interest. The Exchange believes that the proposed rule change
will provide objective means for both on and off-floor participants on
the Exchange to adjust or nullify transactions that result from an
obvious error, and objective procedures and a process to be followed
when a transaction results from an obvious error.
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\9\ 15 U.S.C. 78f(b).
\10\ 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 inappropriate burden on competition that is 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 35 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 will:
(A) By order approve 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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609.
Comments may also be submitted electronically at the following e-mail
address: rule-comments@sec.gov. All comment letters should refer to
File No. SR-Phlx-2003-68. 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, comments should be sent in
hardcopy or by e-mail but not by both methods. 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 inspection and copying in the Commission's
Public Reference Room. Copies of the filing will also be available for
inspection and copying at the principal offices of the Exchange. All
comments should be submitted by April 19, 2004.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-6816 Filed 3-26-04; 8:45 am]
BILLING CODE 8010-01-P