
[Federal Register: January 9, 2009 (Volume 74, Number 6)]
[Notices]               
[Page 969-972]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09ja09-71]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59197; File No. SR-BSE-2008-52]

 
Self-Regulatory Organizations; the Boston Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
To Amend BOX Rules Relating to Obvious Error Provisions To Address 
Catastrophic Errors, Erroneous Quotes or Prints in the Underlying 
Security, and Some Additional Modifications

January 5, 2009.
    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 December 24, 2008, the Boston Stock Exchange, Inc.) (``BSE'' or 
the ``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 prepared by BSE. The Exchange filed the 
proposed rule change as a ``non-controversial'' proposed rule change 
pursuant to Section 19(b)(3)(A) of the Act \3\ and Rule 19b-4(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.
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    \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).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Chapter V, Section 20 (Obvious 
Errors) of the Rules of the Boston Options Exchange Group, LLC ) 
(``BOX'') to address catastrophic errors ) (``Catastrophic Errors'') as 
well as erroneous quotes or prints in the underlying security and some 
additional modifications to this section. The text of the proposed rule 
change is available from the principal office of the Exchange, at the 
Commission's Public Reference Room and also on the Exchange's Internet 
Web site at http://nasdaqtrader.com/Trader.aspx?id=Boston_Stock_
Exchange.

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 self-regulatory organization 
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 self-regulatory organization 
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 amend Chapter V, 
Section 20 of the BOX Rules (the ``Obvious Error Rule'') to address 
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. 
This proposed rule change also seeks to incorporate provisions within 
the BOX Obvious Error Rule which will allow for the nullification or 
adjustment of trades that are the result of either an erroneous quote 
or print in the underlying security. In addition, the proposed rule 
also amends the Supplementary Material to remove references to a $.05 
offer and to provide that executions may be busted, if at least one 
strike below (for calls) or above (for puts), rather than the three 
strikes.
    The Exchange notes that, currently under the 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 requires that 
participants notify the Market Operations Center ) (``MOC'') within a 
short time period following the execution of a trade (five minutes for 
market makers and 20 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 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.
    In formulating the Obvious Error Rule, the Exchange 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, 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, the 
Exchange believes participants 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 participants 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.\5\
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    \5\ 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 a paticipant's 
quotation system that causes a market maker to severly misprice an 
option.
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    Accordingly, the Exchange proposes to amend the Obvious Error Rule 
to address ``Catastrophic Errors.'' Under the proposed rule, 
participants will have until 8:30 a.m. Eastern Time on the day 
following the trade to notify the MOC of a potential Catastrophic 
Error. For trades that take place in an expiring series on expiration 
Friday, participants must notify the MOC of a potential Catastrophic 
Error by 5 p.m. Eastern Time that same day. Once a participant has 
notified the MOC of a Catastrophic Error within the required time 
period,

[[Page 970]]

the Market Regulation Center ) (``MRC'') will review the Catastrophic 
Error claim.
    A Catastrophic Error would be deemed to have occurred when the 
execution price of a transaction 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 would be made plus or minus the amount 
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
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    The following example demonstrates how the proposed Catastrophic 
Error provisions would operate within the Obvious Error framework. 
Assume a participant notifies the MOC within 2 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.\6\ The trade would 
qualify as an Obvious Error because the purchase price is more than 
$.50 above the Theoretical Price and the participant notified the MOC 
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,\7\ which 
reduces the cost of the error to $3,000.\8\ If, however, the 
participant failed to identify the same error and notify the MOC until 
four hours after the trade, it may 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 MRC would review the trade 
and adjust the purchase price to $12, which reduces the cost of the 
error to $30,000.\9\
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    \6\ 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.
    \7\ See Proposed Chapter V, Section 20(g)(ii) of the BOX Rules.
    \8\ 10,000 shares at $.30 per share over the theoretical value.
    \9\ 10,000 shares at $3.00 per share over the theoretical value.
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    The Exchange believes that the proposed longer time period is 
appropriate to allow participants 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 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, the MRC makes 
determinations that can then be appealed to the Boston Options Exchange 
Regulation (``BOXR'') Chief Regulatory Officer (``CRO''). For 
Catastrophic Errors, the Exchange proposes to have a one-step process 
where the MRC, with the approval of the CRO or an Options Official,\10\ 
who is not a participant, designated by the CRO (``CRO or designee'') 
makes determinations and adjustments. If it is determined that a 
Catastrophic Error has occurred, the CRO or its designee will instruct 
the MRC to adjust the execution price of the transaction(s) according 
to proposed subparagraph (g)(iii). All determinations by the CRO or its 
designee shall constitute final Exchange action on the matter at issue. 
The Exchange encourages participants to request 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 that criteria.
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    \10\ See BOX Rules Chapter I, Section 1(43) which defines 
``Options Official'' as an officer of BOX Regulation vested by the 
BOX Regulation Board with certain authority to supervise option 
trading on BOX.
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    Additionally, the Exchange proposes to amend the Obvious Error Rule 
to address an occurrence of an erroneous quote or print in the 
underlying security. Participants on BOX base the value of their quotes 
and orders off of the price of underlying security. The two provisions 
which the Exchange proposes to add to the BOX Obvious Error Rule cover 
instances where the information that the participants are using to 
price options is erroneous, through no fault of their own. An erroneous 
quote or print in an underlying security, which is disseminated by the 
Primary Market \11\ for that security, means that participants are 
receiving erroneous information which they then incorporate into 
trading decisions. In these instances, participants have little if any 
chance of pricing options accurately. In order to provide relief from 
transactions that occur as a result of these erroneous quotes and/or 
prints, the Exchange proposes the following provisions.
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    \11\ See BOX Rules Chapter I, Section 1(50) which defines 
``Primary Market'' as the principal market where the underlying 
security is traded.
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Chapter V, Section 20(d) Erroneous Print in Underlying
    An electronic trade resulting from an erroneous print disseminated 
by the Primary Market which is later cancelled or corrected by that 
Primary Market may be nullified. In order to be nullified, however, the 
trade must be the result of an erroneous print that is higher or lower 
than the average trade in the

[[Page 971]]

underlying security during a two-minute period 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 same 
period. For purposes of this paragraph, 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). For purposes of this 
paragraph, 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).
Chapter V, Section 20(e) Erroneous Quote in Underlying
    Trades resulting from an erroneous quote in the underlying security 
may be adjusted or nullified as set forth in Chapter V, Section 20(f). 
An erroneous quote occurs when the underlying security has a width of 
at least $1.00 and has a width at least five times greater than the 
average quote width for such underlying security on the Primary Market 
(as defined in BOX Rules Chapter I, Section 1(50)) during the time 
period encompassing two minutes before and after the dissemination of 
such quote. For purposes of this paragraph, 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) and dividing by the 
number of quotes during such time period (excluding the quote in 
question).
    These proposed rule changes will provide participants on BOX with 
the same opportunities for price adjustment or trade nullification that 
are available on other options exchanges. The Exchange notes that these 
provisions are similar in all respects to rules already approved for 
use at The Chicago Board Options Exchange (``CBOE''),\12\ The American 
Stock Exchange (``Amex''),\13\ and NYSE Arca.\14\
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    \12\ See CBOE Rules 6.25(a)(4)-(5).
    \13\ See Amex Rules 936-ANTE(a)(4)-(5).
    \14\ See NYSE Arca Rules 6.87(a)(4)-(5).
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    In addition, the proposed rule also amends the Supplementary 
Material to remove references to a $.05 offer. The Exchange also 
proposes to provide that buyers of options with a zero bid may request 
their execution be busted, if at least one strike below (for calls) or 
above (for puts), in the same options class were quoted with a zero bid 
at the time of execution rather than the three strikes, which is 
currently in the rule. Removing the references to a $.05 offer will 
allow errors resulting from trades in penny pilot issues be treated in 
the same manner as non-penny classes. Moreover, these proposed changes 
will provide participants on BOX with similar opportunities for price 
adjustment or trade nullification that are available on other options 
exchanges.\15\
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    \15\ See e.g. CBOE Rules 6.25(a)(2); Amex Rules 936-ANTE(a)(2).
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2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirements of Section 6(b) of the Act,\16\ in general, and Section 
6(b)(5) of the Act,\17\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, 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. Specifically, the proposal 
will, under certain circumstances, provide participants with the 
opportunity for a longer period within which to seek relief from errors 
that result in large losses. The proposal is also appropriate given 
that it provides for the adjustment or nullification of trades which 
are executed at clearly erroneous prices due to no fault of the parties 
to the trade. Finally, removing the references to a $.05 offer in the 
Supplementary Material will allow errors resulting from trades in penny 
pilot issues be treated in the same manner as non-penny classes.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 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

    The Exchange has neither solicited nor received comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing 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 from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \18\ and Rule 19b-
4(f)(6) thereunder.\19\
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    \18\ 15 U.S.C. 78s(b)(3)(A).
    \19\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
BSE has satisfied this requirement.
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    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 furtherance of the purposes of the Act.
    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \20\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6) \21\ permits the Commission to 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. BSE requests that the 
Commission waive the 30-day operative delay to immediately offer market 
participants on BSE the same potential for relief that is available at 
other options exchanges for certain obvious errors, catastrophic 
errors, or erroneous quotes or prints in the underlying security. The 
Exchange stated that the proposed changes are not novel and are 
necessary to eliminate any confusion among members of multiple 
exchanges regarding the handling and treatment of requests for review 
of Catastrophic Errors and instances of erroneous quotes or prints in 
the underlying security and for purposes of maintaining a fair and 
orderly market. The Commission believes that waiving the 30-day

[[Page 972]]

operative delay \22\ is consistent with the protection of investors and 
the public interest. Given that the Exchange's proposed rule change is 
substantially similar to the rules of other exchanges previously 
approved by the Commission, the proposal does not appear to present any 
novel regulatory issues. Therefore, the Commission designates the 
proposal as operative upon filing.
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    \20\ 17 CFR 240.19b-4(f)(6).
    \21\ Id.
    \22\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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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-BSE-2008-52 on the subject line.

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-BSE-2008-52. 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 publicly available. All 
submissions should refer to File Number SR-BSE-2008-52 and should be 
submitted on or before January 30, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E9-158 Filed 1-8-09; 8:45 am]

BILLING CODE 8011-01-P
