[Federal Register: April 17, 2008 (Volume 73, Number 75)]
[Notices]
[Page 20996-20999]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17ap08-107]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-57653; File No. SR-NYSEArca-2008-41]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change Amending Rule
6.87 To Include Procedures for Handling Catastrophic Errors
April 11, 2008.
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 April 8, 2008, NYSE Arca, Inc. (``NYSE Arca'' or ``Exchange'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been substantially prepared by the Exchange. The Exchange filed
the proposal as a ``non-controversial'' proposed rule change pursuant
to Section 19(b)(3)(A) \3\ of the Act and Rule 19b-(f)(6)
thereunder,\4\ which renders the proposal effective upon filing with
the Commission. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend NYSE Arca Rule 6.87 to include
procedures for handling Catastrophic Errors. The Exchange also proposes
to revise the methodology used for determining the theoretical value of
an option, as used in Rule 6.87. The text of the proposed rule change
is available at the Exchange, the Commission's Public Reference Room,
and http://www.nysearca.com.
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. NYSE Arca 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 Exchange states that the purpose of the proposed rule change is
to amend NYSE Arca Rule 6.87 to add provisions for price adjustment
under certain extreme circumstances. In particular, the Exchange
proposes to add criteria for identifying ``Catastrophic Errors,'' and
making adjustments when Catastrophic Errors occur, as well as a
streamlined procedure for reviewing actions taken in these extreme
circumstances. The Exchange is also proposing revisions to Rule 6.87
related to: (i) Determining the theoretical price of an option; and
(ii) formatting and making non-substantive changes involving certain
language contained in existing rule text.
Catastrophic Error Proposal
The Exchange notes that, currently under Rule 6.87, the Exchange's
Obvious Error Rule, trades that result from an Obvious Error may be
adjusted or busted according to objective standards. Under the rule,
whether an Obvious Error has occurred is determined by comparing the
execution price to the theoretical price of the option. The rule
generally requires that OTP Holders\5\ notify the Exchange within a
short time period following the execution of a trade (five minutes for
Market Makers and twenty minutes for non-Market Makers) if they believe
the trade qualifies as an Obvious Error. Trades that qualify for
adjustment are adjusted under the rule to a price that
[[Page 20997]]
matches the theoretical price plus or minus an adjustment value, which
is $.15 if the theoretical value is under $3 and $.30 if the
theoretical value is at or above $3. By adjusting trades above or below
the theoretical price, the rule assesses a ``penalty'' in that the
adjustment price is not as favorable as what the party making the error
would have received had it not made the error.
---------------------------------------------------------------------------
\5\ The Exchange states that ``members'' refers to OTP Holders.
For clarity, ``member'' has been replaced with ``OTP Holder''
throughout the filing. Telephone conversation between Glenn H.
Gsell, Managing Director, NYSE Regulation, Exchange and Michou H.M.
Nguyen, Special Counsel, Division of Trading and Markets, Commission
on April 10, 2008.
---------------------------------------------------------------------------
In formulating the Obvious Error Rule, the Exchange states that it
has weighed carefully the need to assure that one market participant is
not permitted to receive a wind-fall at the expense of another market
participant that made an Obvious Error, against the need to assure that
market participants are not simply being given an opportunity to
reconsider poor trading decisions. The Exchange states that, while it
believes that the Obvious Error Rule strikes the correct balance in
most situations, in some extreme situations, trade participants may not
be aware of errors that result in very large losses within the time
periods required under the rule. In this type of extreme situation,
NYSE Arca believes OTP Holders should be given more time to seek relief
so that there is a greater opportunity to mitigate very large losses
and reduce the corresponding large wind-falls. However, to maintain the
appropriate balance, the Exchange believes OTP Holders should only be
given more time when the execution price is much further away from the
theoretical price than is required for Obvious Errors, and that the
adjustment ``penalty'' should be much greater, so that relief is only
provided in extreme circumstances.\6\
---------------------------------------------------------------------------
\6\ The Exchange does not believe the type of extreme situation
that is covered by the proposed rule would occur in the normal
course of trading. Rather, this type of situation could potentially
occur as a result of, for example, an error in an OTP Holder's
quotation system that causes a market maker to severely misprice an
option.
---------------------------------------------------------------------------
Accordingly, the Exchange proposes to establish a new paragraph (b)
to Rule 6.87 to address ``Catastrophic Errors.'' Under the proposed
rule, OTP Holders will have until 8:30 a.m. Eastern Time on the day
following the trade to notify the Exchange of a potential Catastrophic
Error. For trades that take place in an expiring series on the day of
expiration, OTP Holders must notify the Exchange of a potential
Catastrophic Error by 5 p.m. Eastern Time that same day. Once an OTP
Holder has notified the Exchange of a potential Catastrophic Error,
within the required time period, a three-person panel (``Catastrophic
Error Review Panel'') would review and make a determination as to the
claim. The Catastrophic Error Review Panel (``Panel''), as described in
proposed Rule 6.87(b)(3)(C), would be comprised of the NYSE Arca Chief
Regulatory Officer (``CRO''), or a designee of the CRO, and a
representative from two different OTP Firms. One representative on the
Panel would always be from an OTP Firm directly engaged in market
making activities, and one representative on the Panel would always be
from an OTP Firm directly engaged in the handling of options orders for
public customers.\7\ The Exchange feels that having a three-person
panel, of which the majority is made up of individuals from OTP Holder
firms, will help ensure that Catastrophic Error determinations are made
by a diverse, representative group in a manner that fosters fairness
and impartiality.
---------------------------------------------------------------------------
\7\ The Exchange states that the composition of the Catastrophic
Error Review Panel is similar to that of the NYSE Arca Obvious Error
Panel, as defined in Rule 6.87(a)(4)(A)(i).
---------------------------------------------------------------------------
The Exchange shall designate at least ten OTP Firm representatives
to be called upon to serve on the Panel, as needed. In no case shall a
Panel include a person related to a party to the trade in question. To
the extent reasonably possible, the Exchange shall call upon the
designated representatives to participate in a Panel on an equally-
frequent basis.
In the event the Panel determines that a Catastrophic Error did not
occur, the OTP Holder that initiated the review would be charged $5,000
to reimburse the Exchange for the costs associated with reviewing the
claim. All determinations by the Catastrophic Error Review Panel would
constitute final Exchange action on the matter at issue.
A Catastrophic Error would be deemed to have occurred when the
execution price(s) of a transaction(s) is higher or lower than the
theoretical price for the option by an amount equal to at least the
amount shown in the second column of the chart below (the ``Minimum
Amount''), and the adjustment(s) would be made plus or minus the
amount(s) shown in column three of the chart below (the ``Adjustment
Value''). At all price levels, the Minimum Amount and the Adjustment
Value for Catastrophic Errors would be significantly higher than for
Obvious Errors, which the Exchange believes, would limit the
application of the proposed rule to situations where the losses are
very large.
------------------------------------------------------------------------
Minimum Adjustment
Theoretical price amount value
------------------------------------------------------------------------
Below $2...................................... $1 $1
2 to 5........................................ 2 2
Above 5 to 10................................. 5 3
Above 10 to 50................................ 10 5
Above 50 to 100............................... 20 7
Above 100..................................... 30 10
------------------------------------------------------------------------
The following example demonstrates how the proposed Catastrophic
Error provisions would operate within the Obvious Error framework.
Assume an OTP Holder notifies the Exchange within two minutes of a
trade where 100 contracts of an option with a theoretical price of $9
were purchased for $17, resulting in an $80,000 error.\8\ The trade
would qualify as an Obvious Error because the purchase price is more
than $.50 above the theoretical price and the OTP Holder notified the
Exchange within the required time period. The Exchange would review the
trade and either bust it or adjust it to a purchase price of $9.30,\9\
which reduces the cost of the error to $3,000.\10\ If, however, the OTP
Holder failed to identify the same error and notify the Exchange until
four hours after the trade, it could not be reviewed under the current
Obvious Error Rule. Under the proposal, this trade would qualify as a
Catastrophic Error because the purchase price is more than $5 above the
theoretical price. Under the proposal, the Panel would review the trade
and adjust the purchase price to $12, which reduces the cost of the
error to $30,000.\11\
---------------------------------------------------------------------------
\8\ One hundred contracts equal 10,000 shares, and the purchase
price is $8 per share above the theoretical price. Therefore, the
purchaser paid $80,000 over the theoretical value.
\9\ NYSE Arca Rule 6.87(a)(3)(B).
\10\ 10,000 shares at $.30 per share over the theoretical value.
\11\ 10,000 shares at $3.00 per share over the theoretical
value.
---------------------------------------------------------------------------
The Exchange believes that the proposed longer time period is
appropriate to allow OTP Holders to discover, and seek relief from,
trading errors that result in extreme losses. At the same time, the
Exchange believes that the proposed Minimum Amounts required for a
trade to qualify as a Catastrophic Error, in combination with the large
Adjustment Values, assures that only those transactions where the price
of the execution results in very high losses will be eligible for
adjustment under the new provisions. While the Exchange believes it is
important to identify and resolve trading errors quickly, it also
believes it is important to the integrity of the marketplace to have
the authority to mitigate extreme losses resulting from errors. In this
respect, the Exchange
[[Page 20998]]
believes that the above example illustrates how market participants
would continue to be encouraged to identify errors quickly, as losses
will be significantly lower if the erroneous trades are busted or
adjusted under the Obvious Error provisions of the rule.
In consideration of the extreme nature of situations that will be
addressed under the proposed Catastrophic Error provisions, the
Exchange proposes a streamlined procedure for making determinations and
adjustments. Under the current rule for Obvious Errors, exchange staff
makes determinations that can then be appealed to the Obvious Error
Appeal Panel (``OE Panel''). For Catastrophic Errors, the Exchange
proposes to have a one-step process where the Catastrophic Error Review
Panel makes determinations and adjustments. Additionally, given the
burden that reviews under the Catastrophic Error provisions of the rule
would have on exchange staff and OTP Holder representatives, the
Exchange proposes to include a $5,000 fee in the event that the Panel
determines that a Catastrophic Error did not occur. The Exchange
believes that this is reasonable to encourage OTP Holders and OTP Firms
to requests reviews only in appropriate situations, particularly given
the objective criteria used to determine whether a Catastrophic Error
occurred and the considerable amount of time participants are given
under the proposal to assess whether a trade falls within those
criteria.
Obvious Error Revisions
Existing Rule 6.87(a)(2)(A)-(B) describes procedures for
determining the theoretical value of an option based on the last bid
price with respect to an erroneous sell transaction and the last offer
price with respect to an erroneous buy transaction, just prior to the
trade, disseminated by the competing options exchange that has the most
liquidity in that option, or if there are not quotes for comparison
purposes, as determined by designated personnel of the Exchange. NYSE
Arca now proposes two changes of this rule:
(1) In lieu of using the best bid or offer from a single competing
options exchange when determining the theoretical price of an option,
the Exchange would now use the last bid price or the last offer price,
just prior to the trade, that comprise the National Best Bid/Offer
(``NBBO'') \12\ as disseminated by the Options Price Reporting
Authority (``OPRA''). By using the NBBO prices, the Exchange would be
able to more accurately calculate the theoretical price of an option.
---------------------------------------------------------------------------
\12\ NYSE Arca notes that the Philadelphia Stock Exchange
(``Phlx''), see Phlx Rule 1092(b), and the American Stock Exchange
(``Amex''), see Amex Rule 936-ANTE, use the midpoint of the NBBO to
determine the theoretical price of an option.
---------------------------------------------------------------------------
(2) In the event that there are no quotes for comparison, the
determination of the theoretical price is presently made by designated
personnel of the Exchange. The Exchange now proposes that in the event
that there are no quotes for comparison, the determination would be
made by a designated Trading Official.\13\
---------------------------------------------------------------------------
\13\ The Exchange states that a Trading Official, as defined in
Rule 6.1(b)(34), is an Exchange employee or officer, who is
designated by the Chief Executive Officer or his designee or by the
Chief Regulatory Officer or his designee. Exchange employees or
officers designated as Trading Officials recommend and enforce rules
and regulations relating to trading, decorum, health, safety, and
welfare on the Exchange.
---------------------------------------------------------------------------
The Exchange also proposes to delete existing Commentaries .05 and
.06 to Rule 6.87. Commentary .05 refers to Rule 6.87(a)(2)(A) and deals
with the competing options exchange with the most liquidity in an
option series. This information would no longer be relevant, pursuant
to proposed changes to Rule 6.87(a)(2)(A) as part of this filing.
Existing Commentary .06 would be deleted and the relevant rule text
incorporated into proposed Commentary .02.
The Exchange is also proposing at this time to correct a
typographical error in the commentary section of Rule 6.87.
Commentaries .07 and .08 \14\ incorrectly reference Rule 6.78, instead
of Rule 6.87. The Exchange states that this was simply a case of
transposed numbers and that the change would have no bearing on the
interpretation of the actual rule.
---------------------------------------------------------------------------
\14\ Under this proposal, current Commentaries .07 and .08 are
being renumbered .05 and .06.
---------------------------------------------------------------------------
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act,\15\ in general, and furthers the
objectives of Section 6(b)(5) of the Act,\16\ in particular, in that it
is designed to prevent fraudulent and manipulative acts, remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general, protect investors and the
public interest. In particular, the proposal would allow OTP Holders a
longer opportunity to seek relief from errors that result in large
losses. Also, adopting the NBBO market for use when determining the
theoretical price of an option, assures that any price adjustments made
to Obvious or Catastrophic Errors will not violate the terms of the
Options Intermarket Linkage Plan.\17\
---------------------------------------------------------------------------
\15\ 15 U.S.C. 78f(b).
\16\ 15 U.S.C. 78f(b)(5).
\17\ See Securities Exchange Act Release No. 43086 (July 28,
2000), 65 FR 48023 (August 4, 2000) (File No. 4-429) (order
approving the Options Intermarket Linkage Plan).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change would
impose any 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
The Exchange has neither solicited nor received written comments on
the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the proposed rule change does not: (i) Significantly affect
the protection of investors or the public interest; (ii) impose any
significant burden on competition; and (iii) become operative for 30
days after the date of filing (or such shorter time as the Commission
may designate if consistent with the protection of investors and the
public interest), the proposed rule change has become effective
pursuant to Section 19(b)(3)(A) of the Act \18\ and subparagraph (f)(6)
of Rule 19b-4 thereunder.\19\
---------------------------------------------------------------------------
\18\ 15 U.S.C. 78s(b)(3)(A).
\19\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------
A proposed rule change filed under Rule 19b-4(f)(6) normally does
not become operative prior to 30 days after the date of filing.\20\
However, Rule 19b-4(f)(6)(iii) permits the Commission to designate a
shorter time if such action is consistent with the protection of
investors and the public interest. The Exchange has requested that the
Commission waive the 30-day operative delay and designate the proposed
rule change operative upon filing. The Commission believes that waiving
the 30-day operative delay is consistent with the protection of
investors and the public interest. Given that the Exchange's proposed
catastrophic error relief is substantially the same as that of the
International Securities Exchange (``ISE''), previously approved by the
Commission,\21\ the proposal does not
[[Page 20999]]
appear to present any novel regulatory issues. In addition, waiving the
30-day operative delay ensures that the Exchange's obvious error rule
conforms to the Options Intermarket Linkage Plan without delay.
Therefore, the Commission designates the proposal operative upon
filing.\22\
---------------------------------------------------------------------------
\20\ 17 CFR 240.19b-4(f)(6)(iii). The Exchange has satisfied the
five-day pre-filing requirement of Rule 19b-4(f)(6)(iii).
\21\ See Securities Exchange Act Release No. 57398 (February 28,
2008), 73 FR 12240 (March 6, 2008) (order approving SR-ISE-2007-
112).
\22\ For purposes only of waiving the operative delay of this
proposal, the Commission has considered the proposed rule's impact
on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------
At any time within 60 days of the filing of the proposed rule
change, the Commission may summarily abrogate such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in the furtherance of the purposes of the Act.
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. 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-NYSEArca-2008-41 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEArca-2008-41. 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 inspection
and copying 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 such 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-NYSEArca-2008-41 and should
be submitted on or before May 8, 2008.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
---------------------------------------------------------------------------
\23\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Nancy M. Morris,
Secretary.
[FR Doc. E8-8276 Filed 4-16-08; 8:45 am]
BILLING CODE 8010-01-P