
[Federal Register Volume 78, Number 17 (Friday, January 25, 2013)]
[Notices]
[Pages 5525-5527]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-01487]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68693; File No. SR-ISE-2013-04]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change To Amend the Exchange's Obvious and Catastrophic Error Rule

January 18, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on January 8, 2013, the International Securities Exchange, LLC 
(the ``Exchange'' or the ``ISE'') 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 
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 proposes to amend ISE Rule 720, Obvious and 
Catastrophic Errors, to address obvious and catastrophic errors 
involving complex orders. The text of the proposed rule change is 
available on the Exchange's Web site www.ise.com, at the principal 
office of the Exchange, 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 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 this proposed rule change is to amend ISE Rule 720 
regarding Obvious and Catastrophic Errors to mitigate the risk to 
parties using complex orders, where part or all of a complex order 
traded at an erroneous price. Specifically, this proposed rule change 
addresses situations where one component (or leg) of a complex order is 
deemed an obvious (or catastrophic) error but the other component(s) is 
(are) not.
    Complex orders are orders involving the simultaneous purchase and/
or sale of two or more different options series in the same underlying 
security, for the same account, in a ratio that is equal to or greater 
than one-to-three (.333) and less than or equal to three-to-one (3.00) 
and for the purpose of executing a particular investment strategy.\3\ 
With this proposed rule change, the Exchange is proposing to amend Rule 
720 to

[[Page 5526]]

address complex orders that have at least one leg that trades at an 
erroneous price. Rule 720 is the Exchange's rule that governs obvious 
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 on the Exchange.
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    \3\ See ISE Rule 722(a)(1).
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    Rule 720 provides a framework for reviewing the price of a 
transaction to determine whether that price was an ``obvious error'' 
\4\ pursuant to objective standards. When a Member believes it received 
one or more executions at an erroneous price, that Member may notify 
designated members of the Exchange's market control center (``Market 
Control'') within the prescribed timeframe so Market Control can 
determine whether the Member participated in a transaction that was the 
result of an obvious or catastrophic error.\5\ Such an 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. Market Control use one of two 
criteria when determining the theoretical price of an options 
execution, which is enumerated in ISE Rule 720(a)(3). The theoretical 
price is then compared to an obvious/catastrophic error chart within 
Rule 720(a). If the transaction price meets this threshold, the 
transaction may be adjusted or nullified.
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    \4\ This proposed rule change also covers catastrophic errors.
    \5\ See, ISE Rules 720(b)(1) and 720(d)(1).
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    This proposed rule change would permit all legs of a complex order 
execution to be nullified when one leg can be nullified under Rule 720, 
only if the execution was a complex order versus a complex order.\6\ 
This occurs when a complex order executes against another complex 
order. For example, assume a customer trades a call spread at a net 
price of $0.50 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 720, 
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 proposed rule change, therefore, provides an important benefit to 
both parties of a complex order, i.e., nullification of all the 
components of a complex order that traded with another complex order, 
because neither party intended to end up with just one component of a 
complex order. With this proposed rule change, a complex order 
execution where part or all of a complex order traded at an erroneous 
price would be nullified, not adjusted. The Exchange believes that if 
any one leg of a complex order is adjusted to a price other than its 
stated price, the trade no longer serves its purpose because complex 
orders are intended to serve a particular trading strategy but only if 
the order is executed at its stated price.
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    \6\ See, proposed ISE Rule 720, Supplementary Material .06.
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    This proposal does not address complex orders that do not trade 
against other complex orders. This proposal is intended 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 this 
proposed rule change.
    The Exchange believes that the proposed rule change is reasonable 
and objective, and would serve to enhance the application of the 
Exchange's Obvious and Catastrophic Error rule by extending it to 
erroneous executions in complex orders. The purpose of this proposed 
rule change is to align the Exchange's rule with rules currently in 
place at other exchanges that address erroneous executions in complex 
orders.\7\ The proposed rule change will provide members with similar 
opportunities for trade nullification that are available on PHLX which 
also has a rule in place to address obvious and catastrophic errors 
involving executions in complex orders.
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    \7\ See, for example, NASDAQ OMX PHLX LLC (``PHLX'') Rule 
1092(c)(v).
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2. Basis
    The Exchange believes that this proposed rule change is consistent 
with Section 6(b) of the Securities Exchange Act of 1934 (``Exchange 
Act'') \8\ in general, and furthers the objectives of Section 6(b)(5) 
of the Exchange Act \9\ in particular, in that it is designed to 
promote just and equitable principles of trade, and to remove 
impediments to and perfect the mechanism for a free and open market and 
a national market system, and in general, to protect investors and the 
public interest.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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    The Exchange understands that, in approving proposals related to 
adjusting and nullifying option trades involving obvious and 
catastrophic errors, the Commission has focused on the need for 
specificity and objectivity with respect to exchange determinations and 
processes for reviewing such determinations.\10\ In this regard, the 
Exchange believes that the proposed rule change provides specific and 
objective procedures for determining whether a trade should be 
nullified. The Exchange believes the proposed rule change will improve 
the obvious error process for complex orders that trade with another 
complex order. 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 complex orders on the 
Exchange because neither party to a complex order expects or intends to 
end up with just a piece of a complex order.
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    \10\ See Securities Exchange Act Release No. 54228 (July 27, 
2006), 71 FR 44066 (August 3, 2006) (SR-ISE-2006-14).
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    The Exchange also believes that the proposed rule change would 
benefit investors and market participants that are members of multiple 
exchanges by more closely aligning the Exchange's rules with respect to 
obvious and catastrophic errors involving executions in complex orders 
with those of other exchanges. In this respect, the proposed rule 
change helps foster certainty for market participants trading on 
multiple exchanges. Accordingly, the Exchange believes that the 
increased specificity resulting from the proposed rule change, combined 
with the continued objective nature of the Exchange's process for 
rendering and reviewing trade nullification determinations, is 
consistent with prior guidance from the Commission, is consistent with 
the Exchange Act and is consistent with the maintenance of a fair and 
orderly market and the protection of investors and the public interest.

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, but rather this proposal will 
promote competition as it is designed to improve the treatment of 
complex orders where part or all of a complex order is traded at an 
erroneous price.

[[Page 5527]]

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

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

    Because the foregoing proposed rule change does not significantly 
affect the protection of investors or the public interest, does not 
impose any significant burden on competition, and, by its terms, does 
not 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) \11\ of the Act and Rule 19b-
4(f)(6) \12\ thereunder. The Exchange provided the Commission with 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at least 
five business days prior to the date of filing the proposed rule 
change.
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6).
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    The Exchange has asked the Commission to waive the 30-day operative 
delay so that the proposal may become operative immediately upon 
filing. The Commission believes that waiver of the operative delay is 
consistent with the protection of investors and the public interest 
because this rule will offer Exchange members the same potential for 
relief that is available at other options exchanges for certain obvious 
and catastrophic errors involving complex orders. Therefore, the 
Commission designates the proposal operative upon filing.\13\
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    \13\ 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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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend 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.

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 email to rule-comments@sec.gov. Please include 
File Number SR-ISE-2013-04 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-ISE-2013-04. This file 
number should be included on the subject line if email 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 10:00 a.m. and 
3:00 p.m. Copies of such filing also will be available for inspection 
and copying at the principal offices 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-ISE-2013-04, and should be 
submitted on or before February 15, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-01487 Filed 1-24-13; 8:45 am]
BILLING CODE 8011-01-P


