
[Federal Register Volume 78, Number 54 (Wednesday, March 20, 2013)]
[Notices]
[Pages 17262-17266]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-06392]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69141; File No. SR-Phlx-2013-29]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing of Proposed Rule Change To Address Obvious and Catastrophic 
Options Errors in Response to the Regulation NMS Plan To Address 
Extraordinary Market Volatility

March 15, 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 March 14, 2013, NASDAQ OMX PHLX LLC (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II 
and III below, which Items have been prepared by the self-regulatory 
organization. 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.
---------------------------------------------------------------------------

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

    The Exchange proposes to adopt new Exchange Rule 1047(f)(v) to 
provide for how the Exchange proposes to treat obvious and catastrophic 
options errors in response to the Regulation NMS Plan to Address 
Extraordinary Market Volatility.
    The text of the proposed rule change is below; proposed new 
language is in italics.
* * * * *
Rule 1047. Trading Rotations, Halts and Suspensions
    (a)-(e) No change.
    (f) This paragraph shall be in effect during a pilot period to 
coincide with the pilot period for the Plan to Address Extraordinary 
Market Volatility Pursuant to Rule 608 of Regulation NMS, as it may be 
amended from time to time (``LULD Plan''), except as specified in 
subparagraph (v) below. Capitalized terms used in this paragraph shall 
have the same meaning as provided for in the LULD Plan. During a Limit 
State and Straddle State in the Underlying NMS stock:
    (i)-(iv) No change.
    (v) For a one year period following the adoption of this 
subparagraph (v), electronic trades are not subject to an obvious error 
or catastrophic error review pursuant to Rule 1092(a)(i) or (ii) nor 
are they subject to nullification or adjustment pursuant to Rule 
1092(c)(ii)(E) or (F). Nothing in this provision shall prevent 
electronic trades from review on Exchange motion pursuant to Rule 
1092(e)(i)(B).
    (g) No change.
    * * * Commentary:
    .01-.03 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to adopt Exchange Rule 1047(f)(v) \4\ to 
provide for how the Exchange will treat options obvious and 
catastrophic options 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). The Exchange proposes to adopt new Rule 1047(f)(v) for a 
one year pilot period.\5\
---------------------------------------------------------------------------

    \4\ The provisions of Rule 1047(f)(i)-(iii) and (g) were filed 
and became effective on February 28, 2013, with a 30 day operative 
delay, on a pilot basis. See Securities Exchange Act Release No. 
69118 (March 12, 2013) (SR-Phlx-2013-20). Rule 1047(f)(iv) was filed 
as SR-Phlx-2013-21. See Securities Exchange Act Release No. 69068 
(March 7, 2013).
    \5\ The Exchange will conduct its own analysis concerning the 
elimination of obvious and catastrophic error provisions during 
Limit States and Straddle States and agrees to provide the 
Commission with relevant data to assess the impact of this proposed 
rule change. As part of its analysis, the Exchange will evaluate: 
(1) The options market quality during Limit States and Straddle 
States; (2) assess the character of incoming order flow and 
transactions during Limit States and Straddle States; and (3) review 
any complaints from members and their customers concerning 
executions during Limit States and Straddle States. Additionally, 
the Exchange agrees to provide to the Commission data requested to 
evaluate the impact of the elimination of the obvious and 
catastrophic error provisions, including data relevant to assessing 
the various analyses noted above.
---------------------------------------------------------------------------

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 the Financial Industry Regulatory Authority 
(``FINRA'') have implemented market-wide measures designed to restore 
investor confidence by reducing the potential for excessive market 
volatility. Among the measures adopted include pilot plans for stock-
by-stock trading pauses,\6\ related changes to the equities market 
clearly erroneous execution rules,\7\ and more stringent equities 
market maker quoting requirements.\8\ On May 31, 2012, the Commission 
approved the Plan, as amended, on a one-year pilot basis.\9\ In 
addition, the Commission approved changes to the equities market-wide 
circuit breaker

[[Page 17263]]

rules on a pilot basis to coincide with the pilot period for the 
Plan.\10\
---------------------------------------------------------------------------

    \6\ See e.g., Exchange Rule 3100.
    \7\ See e.g., Exchange Rule 3312.
    \8\ See e.g., NASDAQ Rule 4613.
    \9\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631) (Order Approving 
the Plan on a Pilot Basis).
    \10\ 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.\11\ 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 
reasonably designed to comply with the requirements specified in the 
Plan.
---------------------------------------------------------------------------

    \11\ Unless otherwise specified, capitalized terms used in this 
rule filing are based on the defined terms of the Plan.
---------------------------------------------------------------------------

    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\ 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 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 unexecutable, 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.
---------------------------------------------------------------------------

    \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.
    \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.
---------------------------------------------------------------------------

Proposal
    The Exchange proposes to adopt new subparagraph (f)(v) to provide 
that trades are not subject to an obvious error or catastrophic error 
review pursuant to Rule 1092(a)(i) or (ii) during a Limit State or 
Straddle State. Thus, pursuant to Rule 1092(c)(ii)(F), relating back to 
Rule 1092(a), such trade could not be nullified or adjusted.
    Pursuant to Rule 1092(c)(ii)(E), if the trade resulted in an 
execution price in a series quoted no bid during a Limit State or 
Straddle State, such trade could not be nullified or adjusted.
    Nevertheless, trades will continue to be subject to an obvious 
error or catastrophic error review in a Limit State or Straddle State 
if:
    (A) The trade resulted from a verifiable disruption or malfunction 
of an Exchange execution, dissemination, or communication system that 
caused a quote/order to trade in excess of its disseminated size (e.g. 
a quote/order that is frozen, because of an Exchange system error, and 
repeatedly traded) in which case trades in excess of the disseminated 
size may be nullified;\17\
---------------------------------------------------------------------------

    \17\ See Rule 1092(c)(ii)(A).
---------------------------------------------------------------------------

    (B) The trade resulted from a verifiable disruption or malfunction 
of an Exchange dissemination or communication system that prevented a 
member from updating or canceling a quote/order for which the member is 
responsible where there is Exchange documentation providing that the 
member sought to update or cancel the quote/order;\18\
---------------------------------------------------------------------------

    \18\ See Rule 1092(c)(ii)(B).
---------------------------------------------------------------------------

    (C) The trade resulted from an erroneous print disseminated by the 
underlying market which is later cancelled or corrected by the 
underlying market where such erroneous print resulted in a trade higher 
or lower than the average trade in the underlying security during the 
time period encompassing two minutes 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 time period encompassing 
two minutes before and after the erroneous print. For purposes of this 
Rule, 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);\19\ or
---------------------------------------------------------------------------

    \19\ See Rule 1092(c)(ii)(C).
---------------------------------------------------------------------------

    (D) The trade resulted from an erroneous quote in the Primary 
Market for the underlying security that has a width of at least $1.00 
and that width is at least five times greater than the average quote 
width for such underlying security during the time period encompassing 
two minutes before and after the dissemination of such quote. For the 
purposes of this Rule, the average quote width shall be determined by 
adding the quote widths of sample quotations at regular 15-second 
intervals 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).\20\
---------------------------------------------------------------------------

    \20\ See Rule 1092(c)(ii)(D).
---------------------------------------------------------------------------

    Currently, under Rule 1092(a)(i) and (ii), obvious and catastrophic 
errors are calculated by determining a theoretical price and applying 
such price, based on objective standards, to ascertain whether the 
trade should be nullified or adjusted. While the rule contains a 
notification 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 currently only be adjusted (not

[[Page 17264]]

nullified).\21\ 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.
---------------------------------------------------------------------------

    \21\ But see Securities Exchange Act Release No. 68907 (February 
12, 2013), 78 FR 11705 (February 19, 2013) (SR-Phlx-2013-05).
---------------------------------------------------------------------------

    Pursuant to Rule 1092(a)(i) and (ii), obvious and catastrophic 
errors are determined by comparing the theoretical price of the option, 
calculated by one of the methods in Rule 1092(b), to an adjustment 
table in Rule 1092(a). The Exchange has determined not to permit 
obvious and catastrophic errors reviews under Rule 1092(a) when a trade 
occurred during a Limit State or Straddle State.
    Pursuant to Rule 1092(b), the theoretical price of an option is 
determined in one of three ways: (i) If the series is traded on at 
least one other options exchange, 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, just prior to 
the trade; (ii) if there are no quotes for comparison purposes, or if 
the bid/ask differential of the National Best Bid and Offer (``NBBO'') 
for the affected series, just prior to the erroneous transaction, was 
at least two times the permitted bid/ask differential under Rule 
1014(c)(i)(A)(1)(a), as determined by an Options Exchange Official; or 
(iii) for transactions occurring as part of the Exchange's automated 
opening system, the theoretical price shall be the first quote after 
the transaction(s) in question that does not reflect the erroneous 
transaction(s).
    The Exchange believes that none of these three methods is 
appropriate during a Limit State or Straddle State. Specifically, under 
Rule 1092(b)(i), the theoretical price is determined with respect to 
the NBBO for an option series just prior to the trade. As discussed 
above, during a Limit State or Straddle State, options prices may 
deviate substantially from those available prior to or following the 
State. The Exchange believes this provision would give rise to much 
uncertainty for market participants as there is no bright line 
definition of what the theoretical price should be for an option when 
the underlying NMS stock has an unexecutable bid or offer or both. 
Determining theoretical price 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. Accordingly, the 
Exchange does not believe that the approach employed under Rule 
1092(b)(i), which by definition depends on a reliable NBBO in the 
option, is appropriate during a Limit State or Straddle State. The 
Exchange believes that this is appropriate because while in a Limit 
State or Straddle State, only limit orders will be accepted by the 
Exchange, affirming that the participant is willing to accept an 
execution up to the limit price. Further, because the Exchange system 
will only trade through the theoretical bid or offer if the Exchange or 
the participant (via an ISO order) has accessed all better priced 
interest away in accordance the Options Order Protection and Locked/
Crossed Markets Plan, the Exchange believes potential trade reviews of 
executions that occurred at the participant's limit price and also in 
compliance with aforementioned Plan could result in uncertainty that 
could harm liquidity and also could create an advantage to either side 
of an execution depending on the future movement of the underlying 
stock.
    The Exchange recognizes that the second method (in Rule 
1092(b)(ii)) affords discretion to the Options Exchange Official in 
determining the theoretical price and thereby, ultimately, whether a 
trade is busted or adjusted and to what price. The Exchange has 
determined that it would be difficult to exercise such discretion in 
periods of extraordinary market volatility and in particular when the 
price of the underlying security is unreliable. Moreover, the 
theoretical price would be subjective. Thus, the Exchange has 
determined not to permit an obvious or catastrophic error review if 
there are no quotes for comparison purposes, or if the bid/ask 
differential of the NBBO for the affected series, just prior to the 
erroneous transaction, was at least two times the permitted bid/ask 
differential. The Exchange believes that adding certainty to the 
execution of orders in these situations should encourage market 
participants to continue to provide liquidity to the Exchange and thus 
promote a fair and orderly market.
    The Exchange notes that Rule 1092(b)(iii) applies to trades 
executed during openings. Because the Exchange does not intend to open 
an option during a Limit State or Straddle State, this provision, on 
its face, will not apply.
    For the same reasons, the Exchange is proposing that Rule 
1092(c)(ii)(F) not apply during a Limit State or Straddle State.
    In addition, the Exchange proposes to provide that trades are not 
subject to an obvious error and catastrophic error review if pursuant 
to Rule 1092(c)(ii)(E) the trade resulted from an execution price in a 
series quoted no bid. A zero bid option refers to an option where the 
bid price is $0.00. Series of options quoted zero bid are usually deep 
out-of-the-money series that are perceived as having little if any 
chance of expiring in-the-money. For this reason, relatively few 
transactions occur in these series and those that do are usually the 
result of a momentary pricing error.
    Specifically, under this provision, where the trade resulted in an 
execution price in a series quoted no bid and for 5 seconds prior to 
the execution remained no bid (excluding the quote in question; bids 
and offers of the parties to the subject trade that are in any of the 
series in the same options class shall not be considered) and at least 
one strike price below (for calls) or above (for puts) in the same 
class were quoted no bid at the time of the erroneous execution (in 
which case the trade shall be nullified). The Exchange believes that 
these situations are not appropriate for an error review because they 
are more likely to result in a windfall to one party at the expense of 
another, in a Limit State or Straddle State, because the criteria for 
meeting the no-bid provision are more likely to be met in a Limit State 
or Straddle State, and unlike normal circumstances, may not be a true 
reflection of the value of the series being quoted. For example, in a 
series quoted $1.95-$2.00 on multiple exchanges prior to the Limit 
State or Straddle State, an order to B10@ $2.00 is likely a reasonably 
priced trade because the buyer attempted to pay $2.00 with a limit 
price. However, if that series and the series one strike below are both 
quoted $0.00-$5.00, then both the seller and the buyer at $2.00 would 
have an opportunity to dispute the trade. This would create uncertainty 
to both parties and an advantage to one participant if the underlying 
stock moved significantly in their direction.
Rationale
    When Rule 1092 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

[[Page 17265]]

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.' \22\
---------------------------------------------------------------------------

    \22\ See Securities Exchange Act Release No. 49785 (May 28, 
2004), 69 FR 32090 (June 8, 2004) (SR-Phlx-2003-68).
---------------------------------------------------------------------------

    In 2008, the Exchange amended Rule 1092 to adopt the catastrophic 
error provision. In doing so, the Exchange stated that it had ``* * * 
weighed carefully the need to assure that one market participant is not 
permitted to receive a windfall at the expense of another market 
participant that made an Obvious Error, against the need to assure that 
market participants are not simply being given an opportunity to 
reconsider poor trading decisions. The Exchange states that, while it 
believes that the Obvious Error Rule strikes the correct balance in 
most situations, in some extreme situations, trade participants may not 
be aware of errors that result in very large losses within the time 
periods currently required under the rule. In this type of extreme 
situation, the Exchange believes its members 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 members should 
only be given more time when the execution price is much further away 
from the theoretical price than is required for Obvious Errors so that 
relief is only provided in extreme circumstances.'' \23\
---------------------------------------------------------------------------

    \23\ See Securities Exchange Act Release No. 58002 (June 23, 
2008), 73 FR 36581 (June 27, 2008) (SR-Phlx-2008-42)(Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change 
Relating to Catastrophic Errors).
---------------------------------------------------------------------------

    The Exchange believes that this proposal is consistent with those 
principles because it strikes the aforementioned balance. The Exchange 
is proposing to decline to review certain trades, which is specific and 
objective. Furthermore, the proposal more fairly balances the potential 
windfall to one market participant against the potential 
reconsideration of a trading decision under the guise of an error, and 
thereby results in more certainty during periods of extreme market 
volatility. Trades can nevertheless be considered erroneous under other 
sections of the Rule, because those continue to be an objective method 
of determining whether an error occurred, even during periods of 
extraordinary market volatility. Because the Exchange intends to 
continue to review trades pursuant to Rule 1092(c)(ii)(A)-(D), the 
Exchange believes that this continues to provide some protection to 
market participants.
    The Exchange notes that there are additional protections in place 
outside of the Obvious Errors and Catastrophic Errors 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. Accordingly, the Exchange believes it is 
appropriate to eliminate any potential protection applying the obvious 
or catastrophic error rule might provide during Limit States and 
Straddle States, as its application may produce inequitable results.
---------------------------------------------------------------------------

    \24\ See Securities and Exchange Act Release No. 63241 (November 
3, 2010), 75 FR 69791 (November 15, 2010) (S7-03-10).
---------------------------------------------------------------------------

    The Exchange may 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 electronic 
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 1092(e)(i)(B). 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. 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 or 
catastrophic errors for 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 
understands that this provision is specifically limited to [sic] and 
will administer it in a manner that is consistent with the principles 
of the Act. The Exchange will create and maintain records relating to 
the use of the authority to act on its own motion during a Limit State 
or Straddle State, including when the Exchange received requests to act 
on its motion and determined not to as well as any complaints related 
to the Exchange's use of such authority.
    Various Exchange staff have, over time, spoken to a number of 
member organizations about how to treat obvious and catastrophic errors 
during a Limit State or Straddle State, with no one viewpoint 
particularly emerging; rather, the Exchange staff has heard a variety 
of views, mostly focused on having many trades stand, on fairness and 
fair and orderly markets and on being able to re-address the details 
during the course of the pilot, if needed.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\25\ in general and with Section 
6(b)(5) of the Act,\26\ in particular, which requires that the rules of 
an exchange be designed to prevent fraudulent and manipulative acts and 
practices, promote just and equitable principles of trade, foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, protect investors and the public interest, 
because it should provide certainty about how errors involving options 
orders and trades will be handled during periods of extraordinary 
volatility in the underlying security. The Exchange further believes 
that it is necessary and appropriate in the interest of promoting fair 
and orderly markets to exclude transactions

[[Page 17266]]

executed during a Limit State or Straddle State from certain aspects of 
Rule 1092. The Exchange believes the application of the current rule 
will be impracticable given the lack of a reliable NBBO in the options 
market during Limit States and Straddle States, and that the resulting 
actions (i.e., nullified trades or adjusted prices) may not be 
appropriate given market conditions. This change would ensure that 
limit orders that are filled during a Limit State or Straddle State 
would have certainty of execution in a manner that promotes just and 
equitable principles of trade, removes impediments to, and perfects the 
mechanism of a free and open market and a national market system. 
Moreover, given that options prices during brief Limit States or 
Straddle States may deviate substantially from those available shortly 
following the Limit State or Straddle State, the Exchange believes 
giving market participants time to re-evaluate a transaction would 
create an unreasonable adverse selection opportunity that would 
discourage participants from providing liquidity during Limit States or 
Straddle States. In this respect, the Exchange notes that by rejecting 
market orders and stop orders, and cancelling pending market orders and 
stop orders, only those orders with a limit price will be executed 
during a Limit State or Straddle State. Therefore, on balance, the 
Exchange believes that removing the potential inequity of nullifying or 
adjusting executions occurring during Limit States or Straddle States 
outweighs any potential benefits from applying certain provisions 
during such unusual market conditions. Additionally, as discussed 
above, there are additional pre-trade protections in place both within 
and outside of Rule 1092 that will continue to safeguard customers.
---------------------------------------------------------------------------

    \25\ 15 U.S.C. 78f.
    \26\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, as amended. 
Specifically, the proposal does not impose an intra-market burden on 
competition, because it will apply to all members. Nor will the 
proposal impose a burden on competition among the options exchanges, 
because, in addition to the vigorous competition for order flow among 
the options exchanges, the proposal addresses a regulatory situation 
common to all options exchanges. To the extent that market participants 
disagree with the particular approach taken by the Exchange herein, 
market participants can easily and readily direct order flow to 
competing venues. The Exchange believes this proposal will not impose a 
burden on competition and will help provide certainty during periods of 
extraordinary volatility in an NMS stock.

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.

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 Exchange consents, the Commission shall: (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-Phlx-2013-29 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-Phlx-2013-29. 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 will also 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-Phlx-2013-29 and should be 
submitted on or before April 4, 2013.
---------------------------------------------------------------------------

    \27\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-06392 Filed 3-19-13; 8:45 am]
BILLING CODE 8011-01-P


