
[Federal Register Volume 78, Number 46 (Friday, March 8, 2013)]
[Notices]
[Pages 15067-15073]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-05419]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69033; File No. SR-NYSEMKT-2013-10]


Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing of 
Proposed Rule Change, as Modified by Amendment No. 1, Adopting Exchange 
Rule 953.1NY To Provide for How the Exchange Proposes To Treat Orders, 
Market-Making Quoting Obligations, and Errors in Response to the 
Regulation NMS Plan To Address Extraordinary Market Volatility; and 
Amending Exchange Rule 953NY To Codify That the Exchange Shall Halt 
Trading in All Options Overlying NMS Stocks When the Equities Markets 
Initiate a Market-Wide Trading Halt Due to Extraordinary Market 
Volatility

March 4, 2013.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on February 26, 2013, NYSE MKT LLC (the ``Exchange'' or 
``NYSE MKT'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the self-regulatory 
organization. On March 1, 2013, the Exchange submitted Amendment No. 1 
to the proposed rule change.\4\ 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\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
    \4\ See email from Brian O'Neill, Chief Counsel, NYSE 
Regulation, to Andrew Madar, Assistant Director, Division of Trading 
and Markets, dated March 1, 2013 (``Amendment No. 1'').
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to adopt (i) Exchange Rule 953.1NY to provide 
for how the Exchange proposes to treat orders, market-making quoting 
obligations, and errors in response to the Regulation NMS Plan to 
Address Extraordinary Market Volatility; and (ii) to amend Exchange 
Rule 953NY to codify that the Exchange shall halt trading in all 
options overlying NMS stocks when the equities markets initiate a 
market-wide trading halt due to extraordinary market volatility. The 
text of the proposed rule change is available on the Exchange's Web 
site at www.nyse.com, at the principal office of the Exchange, on the 
Commission's Web site at www.sec.gov, and at the Commission's Public 
Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the 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 those 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 parts 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 proposes (i) to adopt Exchange Rule 953.1NY to provide 
for how the Exchange proposes to treat orders, market-making quoting 
obligations, and errors in response to the Regulation NMS Plan to 
Address Extraordinary Market Volatility (the ``Plan''), which is 
applicable to all NMS stocks, as defined in Regulation NMS Rule 
600(b)(47); and (ii) to amend Exchange Rule 953NY to codify that the 
Exchange shall halt trading in all options when the equities markets 
initiate a market-wide trading halt due to extraordinary market 
volatility. The Exchange proposes to adopt new Rule 953.1NY for a pilot 
period that coincides with the pilot period for the Plan, which is 
currently scheduled as a one-year pilot to begin on February 4, 2013 
[sic].
Background
    Since May 6, 2010, when the markets experienced excessive 
volatility in an abbreviated time period, i.e., the ``flash crash,'' 
the equities exchanges and FINRA have implemented market-wide measures 
designed to restore investor confidence by reducing the potential for 
excessive market volatility. The measures adopted include pilot plans 
for stock-by-stock trading pauses,\5\ related changes to the equities 
market clearly erroneous execution rules,\6\ and more stringent 
equities market maker quoting requirements.\7\ On May 31, 2012, the 
Commission approved the Plan, as amended, on a one-year pilot basis.\8\ 
In addition, the Commission approved changes to the equities market-
wide circuit breaker rules on a pilot basis to coincide with the pilot 
period for the Plan.\9\
---------------------------------------------------------------------------

    \5\ See, e.g., NYSE Rule 80C, Exchange Rule 80C.
    \6\ See, e.g., NYSE Rule 128, Exchange Rule 128.
    \7\ See, e.g., NYSE Rule 104(a)(1)(B), Exchange Rule 
104(a)(1)(B).
    \8\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631) (Order Approving, 
on a Pilot Basis, the Plan).
    \9\ See Securities Exchange Act Release No. 67090 (May 31, 
2012), 77 FR 33531 (June 6, 2012) (SR-BATS-2011-038; SR-BYX-2011-
025; SR-BX-2011-068; SR-CBOE-2011-087; SR-C2-2011-024; SR-CHX-2011-
30; SR-EDGA-2011-31; SR-EDGX-2011-30; SR-FINRA-2011-054; SR-ISE-
2011-61; SR-NASDAQ-2011-131; SR-NSX-2011-11; SR-NYSE-2011-48; SR-
NYSEAmex-2011-73; SR-NYSEArca-2011-68; SR-Phlx-2011-129).
---------------------------------------------------------------------------

    The Plan is designed to prevent trades in individual NMS stocks 
from occurring outside of specified Price Bands.\10\ As described more 
fully below, the requirements of the Plan are coupled with Trading 
Pauses to accommodate more fundamental price moves (as opposed to 
erroneous trades or momentary gaps in liquidity). All trading centers 
in NMS stocks, including both those operated by Participants and those 
operated by members of Participants, are required to establish, 
maintain, and enforce written policies and procedures that are

[[Page 15068]]

reasonably designed to comply with the requirements specified in the 
Plan.\11\
---------------------------------------------------------------------------

    \10\ Unless otherwise specified, capitalized terms used in this 
rule filing are based on the defined terms of the Plan.
    \11\ The Exchange is a participant in the Plan through its 
wholly-owned subsidiary, NYSE MKT LLC, which operates an equities 
market.
---------------------------------------------------------------------------

    As set forth in more detail in the Plan, Price Bands consisting of 
a Lower Price Band and an Upper Price Band for each NMS Stock are 
calculated by the Processors.\12\ When the National Best Bid (Offer) is 
below (above) the Lower (Upper) Price Band, the Processors shall 
disseminate such National Best Bid (Offer) with an appropriate flag 
identifying it as unexecutable. When the National Best Bid (Offer) is 
equal to the Upper (Lower) Price Band, the Processors shall distribute 
such National Best Bid (Offer) with an appropriate flag identifying it 
as a Limit State Quotation.\13\ All trading centers in NMS stocks must 
maintain written policies and procedures that are reasonably designed 
to prevent the display of offers below the Lower Price Band and bids 
above the Upper Price Band for NMS stocks. Notwithstanding this 
requirement, the Processor shall display an offer below the Lower Price 
Band or a bid above the Upper Price Band, but with a flag that it is 
non-executable. Such bids or offers shall not be included in the 
National Best Bid or National Best Offer calculations.\14\
---------------------------------------------------------------------------

    \12\ See Section V(A) of the Plan.
    \13\ See Section VI(A) of the Plan.
    \14\ See Section VI(A)(3) of the Plan.
---------------------------------------------------------------------------

    Trading in an NMS stock immediately enters a Limit State if the 
National Best Offer (Bid) equals but does not cross the Lower (Upper) 
Price Band.\15\ Trading for an NMS stock exits a Limit State if, within 
15 seconds of entering the Limit State, all Limit State Quotations were 
executed or canceled in their entirety. If the market does not exit a 
Limit State within 15 seconds, then the Primary Listing Exchange would 
declare a five-minute trading pause pursuant to Section VII of the LULD 
Plan, which would be applicable to all markets trading the 
security.\16\ In addition, the Plan defines a Straddle State as when 
the National Best Bid (Offer) is below (above) the Lower (Upper) Price 
Band and the NMS stock is not in a Limit State. For example, assume the 
Lower Price Band for an NMS Stock is $9.50 and the Upper Price Band is 
$10.50, such NMS stock would be in a Straddle State if the National 
Best Bid were below $9.50, and therefore non-executable, and the 
National Best Offer were above $9.50 (including a National Best Offer 
that could be above $10.50). If an NMS stock is in a Straddle State and 
trading in that stock deviates from normal trading characteristics, the 
Primary Listing Exchange may declare a trading pause for that NMS stock 
if such Trading Pause would support the Plan's goal to address 
extraordinary market volatility.
---------------------------------------------------------------------------

    \15\ See Section VI(B)(1) of the Plan.
    \16\ The primary listing market would declare a Trading Pause in 
an NMS stock; upon notification by the primary listing market, the 
Processor would disseminate this information to the public. No 
trades in that NMS stock could occur during the trading pause, but 
all bids and offers may be displayed. See Section VII(A) of the 
Plan.
---------------------------------------------------------------------------

Proposed Rule 953.1NY
    The Exchange proposes to adopt new Exchange Rule 953.1NY to provide 
for how the Exchange shall treat orders and quotes in options overlying 
NMS stocks when the Plan is in effect.
    First, the Exchange proposes rules regarding the treatment of 
certain orders or quotes if the underlying NMS stock is in a Limit 
State and Straddle State. Whenever an NMS stock is in a Limit State or 
Straddle State, trading continues, however, there will not be a 
reliable price for a security to serve as a benchmark for the price of 
the option. For example, if the underlying NMS stock is in a Limit 
State, while trading in that stock continues, by being in a Limit 
State, there will be either cancellations or executions at that price, 
and if the Limit State is not resolved in 15 seconds, the NMS Stock 
will enter a Trading Pause. If an NMS stock is in a Straddle State, 
that means that there is either a National Best Bid or National Best 
Offer that is non-executable, which could result in limited price 
discovery in the underlying NMS stock. In addition to the lack of a 
reliable underlying reference price, the Exchange is concerned about 
the width of the markets and quality of the execution for market 
participants during Limit or Straddle States. While the Exchange 
recognizes the importance of continued trading in options overlying NMS 
stocks during Limit States and Straddle States, the Exchange believes 
that certain types of orders increase the risk of errors and poor 
executions and therefore should be not allowed during these times when 
there may not be a reliable underlying reference price, there may be a 
wide bid/ask quotation differential, and lower trading liquidity in the 
options markets. Specifically, the Exchange proposes that if the 
underlying NMS stock is in a Limit State or Straddle State, the 
Exchange shall reject all incoming Market Orders and will not elect 
Stop Orders.\17\ The Exchange believes that permitting these order 
types to execute when the underlying NMS stock is in a Limit State or 
Straddle State would add to the volatility in the options markets 
during times of extraordinary market volatility and could have the 
potential to lead to unwanted executions. The Exchange believes that 
adding certainty to the treatment of Market Orders and Stop Orders when 
the underlying NMS stock is in these situations will encourage market 
participants to continue to provide liquidity to the Exchange and thus 
promote a fair and orderly market.
---------------------------------------------------------------------------

    \17\ See Rule 900.3NY(d)(1). Stop Orders when elected create a 
Market Order to buy or sell the option. In contrast, the Exchange is 
not proposing to prohibit the election of Stop Limit Orders. Stop 
Limit Orders when elected create a Limit Order to buy or sell the 
option at a specific price. See 900.3NY(d)(2). The Exchange believes 
that Stop Limit Orders do not raise the same risks during periods of 
extraordinary volatility, because once elected the associated limit 
orders would not race through the order book in the manner that an 
elected Market Order would.
---------------------------------------------------------------------------

    Second, the Exchange proposes to adopt subsection (b) to provide 
that when evaluating whether a Specialist has met its market-making 
quoting requirement pursuant to Rule 925.1NY(b) or a Market Maker has 
met its market-making quoting requirement pursuant to Rule 925.1NY(c) 
in options overlying NMS stocks, the Exchange shall consider as a 
mitigating circumstance the frequency and duration of occurrences when 
an underlying NMS stock is in a Limit State or a Straddle State. This 
is necessary given the direct relationship between an options price and 
the price of the underlying security. During a Limit or Straddle State, 
the bid price, offer price or both of the underlying security will be 
unexecutable [sic]. With the bid and or offer flagged unexecutable, the 
ability to hedge the purchase or sale of an option will be jeopardized 
and in fact it may not be possible to purchase or sell shares of the 
underlying security at any price to offset the risk created by either 
buying or selling calls and/or put options during a Limit State or a 
Straddle State. The Exchange expects that its Market Makers will as 
need to modify their quoting behavior a result. For the reasons 
described below the Exchange feels that the proposed change to consider 
as a mitigating circumstance the frequency and duration of periods 
during which an underlying NMS stock is in a Limit State or a Straddle 
State is the appropriate approach until such a time as the Exchange has 
more experience with the impact of the Plan on the options marketplace, 
particularly the impact on Market Makers ability to provide liquidity 
in an option when unknown (and possibly very limited) liquidity exists 
in the underlying security.

[[Page 15069]]

    The Exchange has settled on this approach after analyzing in detail 
the alternatives. An undesirable alternative for the Exchange would be 
to propose to relax the quoting obligations. The relaxed quoting 
obligations could apply to the full trading day or just during the 
periods of extraordinary market volatility in the underlying NMS stock 
during a Straddle State or Limit State. The Exchange could, for 
example, have proposed to adopt the same market maker quoting 
obligations that apply to market makers on another options market that 
only requires its market makers to provide a two-sided continuous 
quote, without any requirement for a $5 or tighter bid-ask 
differential.\18\ Absent the $5 bid-ask differential requirement, the 
Exchange believes there would be no issue with Market Makers meeting 
their continuous quoting obligations during periods of extraordinary 
market volatility in the underlying stock because Market Markers could 
continuously quote a $.01 bid and a $1000 offer, for example. However, 
the Exchange believes that relaxing the quoting obligations only during 
Straddle States and Limit States would cause significant technical 
problems for Market Makers, Exchange systems, and surveillance 
monitoring. Underlying NMS stocks will likely flicker in and out of a 
Straddle State or Limit State throughout the day. Programming systems 
to adjust the quoting obligations to constant changes in a Straddle 
State or Limit State would likely be technologically difficult and 
economically prohibitive. The only real practical solution would be for 
the Exchange to relax the quoting obligations for the full trading day 
by eliminating the $5 bid-ask differential requirement. The Exchange 
believes that eliminating the $5 bid-ask differential requirement is 
also an undesirable alternative. The Exchange values the role of Market 
Makers in the options market and believes that existing quoting 
requirements should be maintained in order to facilitate transactions, 
preserve market liquidity, and ensure the fair and orderly trading of 
options on the Exchange.
---------------------------------------------------------------------------

    \18\ See BATS Options Rule 22.6(d).
---------------------------------------------------------------------------

    Therefore, in lieu of these alternatives, the Exchange proposes to 
adopt subsection (b) to provide that when evaluating whether a 
Specialist has met its market-making quoting requirement pursuant to 
Rule 925.1NY(b) or a Market Maker has met its market-making quoting 
requirement pursuant to Rule 925.1NY(c) in options overlying NMS 
stocks, the Exchange shall consider as a mitigating circumstance the 
frequency and duration that an underlying NMS stock is in a Limit State 
or a Straddle State. For example, if an ATP Holder fails to meet its 
monthly quoting obligations, and during the review, it is determined 
that the quoting that failed to meet the obligation was for options 
that overlay NMS stocks with a significant number of Straddle States 
and Limit States, then pursuant to proposed Rule 953.1NY(c), that would 
be considered a mitigating circumstance that would entitle the OTP 
Holder to relief. The Exchange will work with FINRA to monitor the 
impact of Straddle States and Limit States on a Specialist or Market 
Marker's ability to meet its market-maker quoting requirements. The 
Exchange notes that it does not believe that it needs to modify the 
existing quoting obligations for Market Markers in Rules 925NY and 
925.1NY to reflect how such quoting requirements may interact with how 
underlying NMS stocks trade during a Straddle State or Limit State. 
Rather, during periods of extraordinary market volatility in the 
underlying NMS stock, the Exchange believes that the existing quoting 
requirements should be maintained in order to facilitate transactions, 
preserve market liquidity, and ensure the fair and orderly trading of 
options on the Exchange. This change is also designed to eliminate the 
technologically difficult and economically prohibitive systems 
programming that would be required if the Exchange eliminated the $5 
bid-ask differential requirement only during Straddle States or Limit 
States.
    Finally, the Exchange proposed to adopt subsection (c) to provide 
that electronic transactions in stock options that occur during a Limit 
State or a Straddle State would not be subject to review under Rule 
975NY(a) for Obvious Errors or Rule 975NY(d) for Catastrophic Errors. 
In addition, subsection (c) will provide that electronic transactions 
in options that overlay an NMS stock that occur during a Limit State or 
a Straddle State may be reviewed on Exchange motion pursuant to 
975NY(b)(3).\19\ For the reasons described below the Exchange feels 
that the proposal to allow review of electronic transactions in options 
that overlay an NMS stock that occur during a Limit State or a Straddle 
State only on Exchange motion is the appropriate approach until such a 
time as the Exchange has more experience with the impact of the Plan on 
the options marketplace. In particular, the Exchange notes that other 
protections will continue to exist to safeguard Customers as discussed 
further below. The Exchange proposes to review the operation of this 
provision during the one year Pilot period for the proposal and analyze 
the impact of Limit and Straddle States accordingly.\20\ In addition, 
the Exchange will provide data analysis during the duration of the 
Pilot to the Commission so that the Commission may analysis the 
operation of the Pilot and evaluate with the Exchange whether the Pilot 
should be continued or be modified.\21\
---------------------------------------------------------------------------

    \19\ Rule 975NY(b)(3) provides that in the interest of 
maintaining a fair and orderly market and for the protection of 
investors, the Exchange's Chief Executive Officer (``CEO'') or 
designee thereof, who is an officer of the Exchange (collectively 
``Exchange officer''), may, on his or her own motion or upon 
request, determine to review any transaction occurring on the 
Exchange that is believed to be erroneous. A transaction reviewed 
pursuant to this provision may be nullified or adjusted only if it 
is determined by the Exchange officer that the transaction is 
erroneous as provided in Rule 975NY(a)(3), (a)(4), (a)(5) or (a)(6). 
A transaction would be adjusted or nullified in accordance with the 
provision under which it is deemed an erroneous transaction. The 
Exchange officer may be assisted by a Trading Official in reviewing 
a transaction. In addition, the Exchange officer shall act pursuant 
to 975NY(b)(3) as soon as possible after receiving notification of 
the transaction, and ordinarily would be expected to act on the same 
day as the transaction occurred. In no event shall the Exchange 
officer act later than 9:30 a.m. (ET) on the next trading day 
following the date of the transaction in question. An ATP Holder 
affected by a determination to nullify or adjust a transaction 
pursuant to this paragraph (3) may appeal such determination in 
accordance with Rule 975NY(c); however, a determination by an 
Exchange officer not to review a transaction, or a determination not 
to nullify or adjust a transaction for which a review was requested 
or conducted, is not appealable. If a transaction is reviewed and a 
determination is rendered pursuant to Rules 975NY(a)(3), (a)(4), 
(a)(5) or (a)(6), no additional relief may be granted under this 
provision.
    \20\ See Amendment No. 1, supra note 4.
    \21\ Id.
---------------------------------------------------------------------------

    The Exchange has settled on this approach after analyzing in detail 
the alternatives. An undesirable alternative for the Exchange would be 
to maintain the current operation of Rule 975NY(a) for Obvious Errors 
or Rule 975NY(d) for Catastrophic Errors during the Limit State or 
Straddle State. Pursuant to Rules 975NY(a), market participants may 
have up to 30 minutes to review a transaction as an Obvious Error. 
Pursuant to 975NY(d), market participants may have up to 8:30 a.m. ET 
on the first trading day following a transaction to review it as a 
Catastrophic Error. The Exchange believes that during periods of 
extraordinary volatility, the review period for transactions under the 
Obvious Error and Catastrophic Error provisions would allow market 
participants a second look at transactions during a Limit State or a 
Straddle State that is potentially unfair to other market participants. 
For example, thirty

[[Page 15070]]

minutes after a transaction that occurs during extraordinary volatility 
that triggers a Limit State or a Straddle State the market could look 
drastically different from a price and liquidity level. The Exchange 
believes that market participants should not be able to benefit from 
the time frame to review their transactions in these situations. This 
change would ensure that limit orders that were filled during a Limit 
or Straddle State would have certainty of execution. As noted above 
with respect to the treatment of Market Orders and Stop Orders when the 
underlying NMS Stock is in a Limit or Straddle State, the Exchange 
believes that adding certainty to the execution of orders in these 
situations will encourage market participants to continue to provide 
liquidity to the Exchange and thus promote a fair and orderly market. 
Barring this change, the provisions of Rule 975NY(a)(2)(B) would likely 
apply in many instances during Limit or Straddle States. This Rule 
provides that, ``if there are not quotes for comparison purposes, or if 
bid/ask differential for the national best bid or offer for the 
effected series just prior to the transaction was at least two times 
the permitted bid/ask differential pursuant to Rule 925NY(b)(4), as 
determined by a designated trading official.'' The Exchange believes 
this provision would give rise to much uncertainty for market 
participants as there is no bright line definition of what 
``theoretical value'' should be for an option when the underlying NMS 
stock has an unexecutable bid or offer or both. Determining 
``theoretical value'' in such a situation would be often times very 
subjective as opposed to an objective determination giving rise to 
additional uncertainty and confusion for investors. For example:
     A $500 security enters a Straddle State resulting in un-
executable bids and offers.
     Consequently the market for the options on that security 
widens to reflect the uncertainty surrounding what price the stock may 
be sold at to hedge the sale of puts or purchase of calls. Prior to 
entering the Straddle State, the 22 day at the money $500 strike put 
options were trading at $24.45-$24.65.\22\ Upon entering the Straddle 
State the market for those options widens to $24.45-$35.00.
---------------------------------------------------------------------------

    \22\ Calculated using a binomial pricing model for American 
style options with an interest rate of .25%, no dividends, and an 
implied volatility of 50.
---------------------------------------------------------------------------

     A limit order to pay $32 for 10 is entered resulting in a 
new market of $32.00-$35.00. 14 seconds after entering the Limit State 
in the underlying security, a limit order to sell 10 contracts at $32 
is received and trades with the posted $32 limit order to buy. 
Immediately after the trade is consummated, the Straddle State in the 
underlying security has not resolved and consequently the underlying 
security is halted. Upon resumption of trading in the underlying 
security, consider two possible scenarios:
     Scenario 1--The market for the security is $450-$452. The 
puts which traded immediately prior to the trading halt are now worth 
at least their intrinsic value of $50 and quite likely are trading with 
some time premium as well. The seller of 10 contracts at $32 
immediately requests an Obvious Error review under the provisions of 
Rule 975NY.
     Scenario 2--The market for the security is now $550-$552. 
The puts which traded immediately prior to the trading halt are now 
worth an estimated $8.\23\ The buyer of 10 contracts at $32 immediately 
requests an Obvious Error review under the provisions of Rule 965NY 
[sic].
---------------------------------------------------------------------------

    \23\ See supra note 19.
---------------------------------------------------------------------------

    Under both scenarios the bid/ask spread in the option was $2 at the 
time of the trade and as such it now falls to a designated trading 
official to determine what the ``theoretical value'' of the option is. 
Absent the ability to ascertain prices at which the stock could have 
been bought or sold at the time the option traded, the designated 
official would be at best guessing what the ``theoretical value'' 
should have been. Such uncertainty in how the transaction will be 
resolved will only discourage participants from entering executable 
interest during Limit and Straddle States. The impossibility of 
ascribing ``theoretical value'' to an option, whose price is directly 
affected by the ability to buy and sell shares of the underlying 
security, gives rise to the Exchange need to make clear that trades 
during Limit and Straddle states will stand irrespective of subsequent 
price moves in the underlying security. Absent this bright line 
guidance, the Exchange expects the entry of executable interest in the 
options market to be severely curtailed as securities approach and 
enter Limit and Straddle States, decreasing the opportunity to foster 
price discovery and transparency at a time when it is most needed. In 
contrast, if participants know in advance that trades they effect with 
quotes and/or orders having limit prices will stand irrespective of 
subsequent moves in the underlying security, they will be much more 
likely to submit such limit prices.
    Another undesirable alternative for the Exchange would be to 
propose to always use the prevailing NBBO as the metric to decide 
whether an error has occurred, irrespective of how wide the NBBO was at 
the time of the execution. This approach alleviates the burden on the 
Exchange of having to ascribe a Theoretical Price to an option when the 
stock has an un-executable bid, offer or both but it still presents 
significant problems. For example, in a Limit or Straddle State it is 
likely that there will be less depth of book--both on an intra as well 
as an inter-market basis. This gives rise to the potential for gaming 
of the Obvious Error Rule which mandates that Market Maker to Market 
Maker trades are always adjusted. For example, consider this scenario:

----------------------------------------------------------------------------------------------------------------
                            Exchange                               Bid size    Bid price   Ask price   Ask size
----------------------------------------------------------------------------------------------------------------
NYSE Arca.......................................................          50          $5          $7           1
NYSE Amex.......................................................           5           6          15         100
----------------------------------------------------------------------------------------------------------------

    An NYSE Amex Market Maker is offering 100 contracts at $15. Another 
NYSE Amex Market Maker enters an ISO order to buy 100 contracts at $15. 
Immediately after the execution the same NYSE Amex Market Maker 
requests a review under Rule 975NY. Simply using the NBBO, in this case 
$7, would mean that as required under Rule 975NY, the Exchange would 
rule to adjust that trade to $7.30, essentially forcing the NYSE Amex 
Options Market Maker who was willing to provide liquidity at $15 to 
instead provide liquidity at the much worse price of $7.30. Such an 
outcome would undoubtedly result in fewer Market Makers willing to post 
any liquidity for

[[Page 15071]]

fear of having the same thing happen to them. The Exchange notes that, 
if instead of a Market Maker offering 100 contracts at $15, it was a 
Customer with a resting order in the Consolidated Book the outcome of a 
review under Rule 975NY would have been to bust the trade. The time 
permitted to request a review, conduct the review and issue 
notification to the affected parties can be substantial, particularly 
in light of a Limit or Straddle State where the underlying security 
price is likely to be moving considerably. So we have a Customer who 
having sold options at $15 which (for example) they bought earlier for 
$10 finds themselves without a profit but instead with an open 
position. Obviously should the stock move adversely during the time 
taken to review the trade it is even possible for the option to be 
worth less than where the Customer who was offering at $15 purchased 
it. The Exchange strongly believes that certainty of trade during 
periods of market volatility is vital in order to operate a fair and 
orderly market.
    Therefore, in lieu of these alternatives, the Exchange proposes to 
provide that the electronic transactions in stock options that occur 
during a Limit State or a Straddle State would not be subject to review 
under Rule 975NY(a) for Obvious Errors or Rule 975NY(d) for 
Catastrophic Errors. The Exchange would still review transactions in 
the interest of maintaining a fair and orderly market and for the 
protection of investors, on its own motion, determine to review any 
transaction occurring on the Exchange that is believed to be erroneous 
that occurs during a Limit State or a Straddle State in accordance with 
Rule 975NY(b)(3). The Exchange believes that this safeguard will 
provide the flexibility for the Exchange to act when necessary and 
appropriate to nullify or adjust a transaction, while also providing 
market participants with certainty that trades they effect with quotes 
and/or orders having limit prices will stand irrespective of subsequent 
moves in the underlying security. By limiting the erroneous trade 
review to only via Exchange motion, the Exchange believes that the 
proposal mitigates two of the undesirable aspects of the alternatives 
described above--(i) the moral hazard associated with granting a second 
look to trades that went against the market participant after market 
conditions have changed and (ii) gaming of the Obvious Error Rule to 
adjust Market Makers--while also limiting the discretion of determining 
Theoretical Value to only those situations that the Exchange determines 
is necessary in the interest of maintaining a fair and orderly market 
and for the protection of investors. The right to review on Exchange 
motion electronic transactions that occur during a Limit State or 
Straddle State under this provision would also allow the Exchange to 
account for unforeseen circumstances that result in Obvious Errors such 
as technological or systems malfunctions of which a nullification or 
adjustment may be necessary in order to preserve the interest of 
maintaining a fair and orderly market and for the protection of 
investors.
    The Exchange notes that there are additional protections in place 
outside of the Obvious Error Rule, specifically pre-trade protections. 
First, SEC Rule 15c3-5 requires that, ``financial risk management 
controls and supervisory procedures must be reasonably designed to 
prevent the entry of orders that exceed appropriate pre-set credit or 
capital thresholds, or that appear to be erroneous.'' \24\ Secondly, 
the Exchange has price checks applicable to limit orders that rejects 
limit orders that are priced sufficiently far through the NBBO that it 
seems likely an error occurred. The requirements placed upon broker 
dealers to adopt controls to prevent the entry of orders that appear to 
be erroneous, coupled with Exchange functionality that filters out 
orders that appear to be erroneous serve to sharply reduce the 
incidence of errors arising from situations, for example, where 
participants mistakenly enter an order to pay $20 for an option that is 
offered at $2.
---------------------------------------------------------------------------

    \24\ See Securities Exchange Act Release No. 63241, 75 FR 69791 
(November 15, 2010) (S7-03-10).
---------------------------------------------------------------------------

Proposed Amendment to Rule 953NY
    The Exchange proposes to amend Rule 953NY so that the Exchange, as 
an options market, can better respond to the manner by which the 
equities markets declare a market-wide trading halt, also known as a 
market-wide circuit breaker.\25\ As noted above, the Commission has 
approved changes to the equities exchanges and FINRA rules regarding 
market-wide trading halt rules, which are currently scheduled to go 
into effect on a one-year pilot basis beginning February 4, 2013 [sic]. 
The proposed Rule 953NY is similar to a recently approved rule adopted 
by CBOE.\26\ However, unlike the CBOE rule, the Exchange does not need 
to restate the equities rule on halting trading in stocks in the 
Exchange's Rule set for options trading, because NYSE MKT Rules for 
equities trading already cover market-wide trading halts in stocks.\27\ 
In addition, the Exchange is proposing to add Commentary .05 to provide 
that reopening of trading following a trading halt under this Rule 
shall be conducted pursuant to procedures adopted by the Exchange and 
communicated by notice to its ATP Holders and ATP Firms. This 
Commentary is nearly identical to that found in CBOE Rule 6.3B and 
Commentary .03 to NYSE Arca Options Rule 7.5.\28\
---------------------------------------------------------------------------

    \25\ Market-wide circuit breakers in the equities market are 
different than trading halt during a Trading Pause in the underlying 
pursuant to the LULD Plan. Market-wide circuit breakers for equities 
are currently covered by NYSE MKT Rule 80B--Equities. See NYSE MKT 
Rule 80B--Equities. The Exchange's Rule regarding trading pauses 
(also known as ``single stock circuit breakers'') is found in Rule 
953NY(b) for options and NYSE MKT Rule 80C(b)--Equities for 
equities.
    \26\ See CBOE Rule 6.3B.
    \27\ See NYSE MKT Rule 80B--Equities.
    \28\ See CBOE Rule 6.3B and NYSE Arca Options Rule 7.5.
---------------------------------------------------------------------------

    The proposed rule change provides that whenever the equities 
markets halt trading in all NMS stocks due to extraordinary market 
volatility, the Exchange will similarly halt trading in all options. 
The Exchange believes that the proposed rule change can be adopted on a 
permanent basis notwithstanding that the equities market version of the 
market-wide circuit breakers has been adopted on a pilot basis. In 
particular, the Exchange believes that the proposed rule provides the 
Exchange with flexibility to halt trading in options whenever the 
equities markets halt trading in all stocks, regardless of what 
triggers that the equities markets may use for halting trading in all 
stocks. Accordingly, if the equities market pilot rules were to expire 
and revert back to the pre-February 4, 2013 [sic] version of market-
wide trading halts, or if the equities markets again amend the triggers 
for their market-wide circuit breaker rule, the proposed Exchange rule 
would have sufficient flexibility to work with the revised equities 
rule without requiring an additional rule change by the Exchange. The 
Exchange also notes that in addition to amended Rule 953NY, that the 
remaining provisions in existing Rule 953NY regarding Trading Halts and 
Suspensions remain unchanged and provides a means to halt or suspend 
trading in options contracts whenever the Exchange deems such action 
appropriate in the interests of a fair and orderly market and to 
protect investors.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section

[[Page 15072]]

6(b) of the Act \29\ in general, and furthers the objectives of Section 
6(b)(5),\30\ in particular, in that it is designed to promote just and 
equitable principles of trade, remove impediments to and perfect the 
mechanisms of a free and open market and a national market system and, 
in general, to protect investors and the public interest. Specifically, 
this rule proposal supports the objectives of perfecting the mechanism 
of a free and open market and the national market system because it 
promotes uniformity across markets concerning when and how to halt 
trading in all stock options as a result of extraordinary market 
volatility.
---------------------------------------------------------------------------

    \29\ 15 U.S.C. 78f(b).
    \30\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The proposal to add Rule 953.1NY will ensure that trading in 
options that overlay NMS stocks is appropriately modified to reflect 
market conditions that occur during a Limit State or a Straddle States 
in a manner that promotes just and equitable principles of trade and 
removes impediments to, and perfects the mechanism of, a free and open 
market and a national market system. Specifically, the proposal will 
help allow market participants to continue to trade stock options 
during times of extraordinary market conditions without the added risk 
of certain orders that may increase volatility in the options markets 
during times of extraordinary market volatility and may potentially 
lead to errors and poor executions due to the lack of reliable 
reference prices for the options and the width of the markets. Thus, 
reducing these risks should help encourage market participants to 
continue to provide liquidity during extraordinary market volatility.
    The proposal to consider the frequency and duration of Straddle 
States and/or Limit States in the underlying NMS stock as mitigating 
circumstance in determining whether the Market Maker has met their 
quoting obligations will help ensure Market Markers continue to provide 
their necessary role in helping to facilitate transactions, to preserve 
market liquidity, and to help ensure the fair and orderly trading of 
stock options on the Exchange during periods of extraordinary market 
volatility while also providing reasonable relief when necessary.
    In addition, the proposal to not allow electronic transactions in 
stock options that occur during a Limit State or a Straddle State to be 
subject to review under Rule 975NY(a) for Obvious Errors or Rule 
975NY(d) for Catastrophic Errors is designed to promote just and 
equitable principles of trade, remove impediments to and perfect the 
mechanisms of a free and open market and a national market system and, 
in general, to protect investors and the public interest, by ensuring 
that Exchange officials do not have discretion to cancel trades. This 
change would ensure that limit orders that are filled during a Limit or 
Straddle State would have certainty of execution in a manner that 
promotes just and equitable principles of trade and removes impediments 
to, and perfects the mechanism of, a free and open market and a 
national market system. The proposal to allow electronic transactions 
in options that occur during a Limit State or a Straddle State may be 
reviewed on Exchange motion pursuant to 975NY(b)(3) is designed to 
promote just and equitable principles of trade, remove impediments to 
and perfect the mechanisms of a free and open market and a national 
market system and, in general, to protect investors and the public 
interest, by providing the flexibility for the Exchange to still review 
transactions for Obvious Error treatment when in the interest of 
maintaining a fair and orderly market and for the protection of 
investors.
    Finally, the proposal to amend Rule 953NY will ensure that the 
Exchange halts trading in all options whenever the equities markets 
initiate a market-wide trading halt circuit breaker in response to 
extraordinary market conditions in a manner that promotes just and 
equitable principles of trade and removes impediments to, and perfects 
the mechanism of, a free and open market and a national market system 
because the proposed rule change will assure that the Exchange will 
halt options trading regardless of the triggers that the equities 
markets use to initiate a market-wide halt in trading.

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 that is not necessary or appropriate 
in furtherance of the purposes of the Act. The proposed changes are 
being made to provide for how the Exchange shall treat orders and 
quotes in options overlying NMS stocks when the Plan is in effect and 
will not impose any burden on competition while providing certainty of 
treatment and execution of options orders during periods of 
extraordinary volatility in the underlying NMS stock, and facilitating 
appropriate liquidity during a Limit State or Straddle State.

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

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the 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-NYSEMKT-2013-10 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-NYSEMKT-2013-10. 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

[[Page 15073]]

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 
the filing also will be available for inspection and copying at the 
principal office of the Exchange. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-NYSEMKT-2013-10 and should be submitted on or before 
March 29, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\31\
---------------------------------------------------------------------------

    \31\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-05419 Filed 3-7-13; 8:45 am]
BILLING CODE 8011-01-P


