
[Federal Register Volume 78, Number 49 (Wednesday, March 13, 2013)]
[Notices]
[Pages 15997-15999]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-05735]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69058; File No. SR-NASDAQ-2013-039]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
To Replace the Current Mid-Point Test Applied to the Definition of 
Theoretical Price

March 7, 2013.
    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 February 26, 2013, The NASDAQ Stock Market LLC (``NASDAQ'' 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 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 has filed a proposed rule change for the NASDAQ 
Options Market (``NOM'') to amend Chapter V Regulation of Trading on 
NOM, Section 6, Obvious Errors, to replace the current mid-point test 
applied to the definition of Theoretical Price, as described further 
below.
    The text of the proposed rule change is below. Proposed new 
language is italicized.
* * * * *

Chapter V Regulation of Trading on NOM

* * * * *

Sec. 6 Obvious Errors

    (a) Nasdaq shall either nullify a transaction or adjust the 
execution price of a transaction that meets the standards provided in 
this Section.
    (b) No change.
    (c) Definition of Theoretical Price. For purposes of this Section 
only, the Theoretical Price of an option series is,
    (i) If the series is traded on at least one other options exchange, 
the [mid-point of the] last National Best Bid price with respect to an 
erroneous sell transaction and the last National Best Offer price with 
respect to an erroneous buy transaction [and Offer (``NBBO'')], just 
prior to the transaction; or
    (ii) No change.

[[Page 15998]]

    (d)-(e) No change.
* * * * *

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

    In its filing with the Commission, 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 Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    The purpose of the proposal is to help Participants to better 
manage their risk by modernizing the Exchange's Obvious Errors rule. 
Chapter V, Section 6 governs obvious and catastrophic errors. Obvious 
errors are calculated under the rule by determining a theoretical price 
and determining, based on objective standards, whether the trade should 
be nullified or adjusted. The rule also contains a process for 
requesting an obvious error review. Certain more substantial errors may 
fall under the category of a catastrophic error, for which a longer 
time period is permitted to request a review and for which trades can 
only be adjusted (not nullified). Trades are adjusted pursuant to an 
adjustment table that, in effect, assesses an adjustment penalty. By 
adjusting trades above or below the theoretical price, the Rule 
assesses a ``penalty'' in that the adjustment price is not as favorable 
as the amount the party making the error would have received had it not 
made the error.
    Currently, Chapter V, Section 6 provides that the definition of the 
Theoretical Price of an option is: (i) If the series is traded on at 
least one other options exchange, the mid-point of the National Best 
Bid and Offer (``NBBO''), just prior to the transaction; or (ii) if 
there are no quotes for comparison purposes, as determined by 
MarketWatch as defined in Chapter I.
    The Exchange believes that in certain situations the application of 
the rule when determining to nullify or adjust transactions may lead to 
an unfair result for one of the parties to the transaction, 
particularly where the market for the affected series includes a bid 
price that is relatively small (for example, $0.50) and a substantially 
higher offer (for example $5.00). The result is that a transaction to 
sell that occurs correctly on the bid at $0.50 could be adjusted based 
on the midpoint of the NBBO, which is, in this example, $2.75. In such 
a case, the result is unfair to the bidder at $0.50, whose price would 
be adjusted based on the Theoretical Price of $2.75, and an unjust 
enrichment to the seller, who is entitled to $0.50 based on the bid, 
but who would receive the adjusted price of over $2.00 higher because 
of the rule, and not due to market conditions.
    Accordingly, the proposal would re-define ``Theoretical Price'' to 
mean either the last National Best Bid price with respect to an 
erroneous sell transaction or the last National Best Offer price with 
respect to an erroneous buy transaction, just prior to the trade. The 
purpose of this provision is to establish a Theoretical Price that is 
clearly defined when there are quotations to compare to the erroneous 
transaction price, and to eliminate the scenario above that arises from 
the ``mid-point'' test when the NBBO is particularly wide. The Exchange 
notes that other options exchanges previously employed the mid-point 
test but changed it to the NBBO test.
    When another options exchange's comparable rule was first adopted, 
the Commission stated that it ``* * * considers that in most 
circumstances trades that are executed between parties should be 
honored. On rare occasions, the price of the executed trade indicates 
an `obvious error' may exist, suggesting that it is unrealistic to 
expect that the parties to the trade had come to a meeting of the minds 
regarding the terms of the transaction. In the Commission's view, the 
determination of whether an `obvious error' has occurred, and the 
adjustment or nullification of a transaction because an obvious error 
is considered to exist, should be based on specific and objective 
criteria and subject to specific and objective procedures * * * The 
Commission believes that Phlx's proposed obvious error rule establishes 
specific and objective criteria for determining when a trade is an 
`obvious error.' Moreover, the Commission believes that the Exchange's 
proposal establishes specific and objective procedures governing the 
adjustment or nullification of a trade that resulted from an `obvious 
error.' '' \3\
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    \3\ See Securities Exchange Act Release No. 49785 (May 28, 
2004), 69 FR 32090 (June 8, 2004) (SR-Phlx-2003-68).
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2. Statutory Basis
    NASDAQ believes that its proposal is consistent with Section 6(b) 
of the Act \4\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \5\ 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, and to 
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 helping Exchange members better 
manage the risk associated with potential erroneous trades. 
Specifically, the Exchange believes that the proposal is consistent 
with these principles, because it sets forth an objective process based 
on specific and objective criteria and subject to specific and 
objective procedures. In addition, the Exchange has again weighed 
carefully the need to assure that one market participant is not 
permitted to receive a windfall at the expense of another market 
participant, against the need to assure that market participants are 
not simply being given an opportunity to reconsider poor trading 
decisions. Accordingly, the Exchange has determined that defining the 
Theoretical Price of an option with reference to the NBBO is 
appropriate and consistent with the aforementioned principles.
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    \4\ 15 U.S.C. 78f(b).
    \5\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASDAQ 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. The proposal does not impose an intra-
market burden on competition, because the new definition of Theoretical 
Price will apply to all Options Participants. Nor will the proposal 
impose a burden on competition among the options exchanges, because of 
the vigorous competition for order flow among the options exchanges. 
NOM competes with 10 other options exchanges in a highly competitive 
market, where market participants can easily and readily direct order 
flow to competing venues.

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

    Written comments were neither solicited nor received.

[[Page 15999]]

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 from the date on which it was filed, 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 \6\ and Rule 19b-
4(f)(6)(iii) thereunder.\7\
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    \6\ 15 U.S.C. 78s(b)(3)(A).
    \7\ 17 CFR 240.19b-4(f)(6)(iii). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and the text of 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.
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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-NASDAQ-2013-039 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-NASDAQ-2013-039. 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 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-NASDAQ-2013-039 and should 
be submitted on or before April 3, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-05735 Filed 3-12-13; 8:45 am]
BILLING CODE 8011-01-P


