
[Federal Register Volume 78, Number 71 (Friday, April 12, 2013)]
[Notices]
[Pages 22011-22015]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-08609]



[[Page 22011]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69339; File No. SR-NYSEMKT-2013-10]


Self-Regulatory Organizations; NYSE MKT LLC; Order Approving, on 
an Accelerated Basis, 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

April 8, 2013.

I. Introduction

    On February 26, 2013, NYSE MKT LLC (the ``Exchange'' or ``NYSE 
MKT'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) \1\ of the Securities 
Exchange Act of 1934 (``Act''),\2\ and Rule 19b-4 thereunder,\3\ a 
proposed rule change 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 
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 proposed rule change 
was published for comment in the Federal Register on March 4, 2013.\4\ 
On April 1, the Exchange submitted Amendment No. 1 to the proposed rule 
change.\5\ The Commission received one comment letter on the 
proposal.\6\ This order approves the proposed rule change on an 
accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
    \4\ See Securities Exchange Act Release No. 69033, 78 FR 15067 
(March 8, 2013).
    \5\ In Amendment No. 1, the Exchange expanded upon its rationale 
for its proposed changes regarding the nullification and adjustment 
of options transactions, agreed to provide the Commission with 
relevant data to assess the impact of the proposal, and clarified 
the length of the pilot period related to such changes. Because the 
changes made in Amendment No. 1 do not materially alter the 
substance of the proposed rule change or raise any novel regulatory 
issues, Amendment No. 1 is not subject to notice and comment.
    \6\ See Letter to Elizabeth M. Murphy, Secretary, Commission, 
from Janet McGinness, Executive Vice President and Corporate 
Secretary, General Counsel, NYSE Markets, dated April 5, 2013 
(``NYSE Letter'').
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II. Background

    On May 6, 2010, the U.S. equity markets experienced a severe 
disruption that, among other things, resulted in the prices of a large 
number of individual securities suddenly declining by significant 
amounts in a very short time period before suddenly reversing to prices 
consistent with their pre-decline levels.\7\ This severe price 
volatility led to a large number of trades being executed at 
temporarily depressed prices, including many that were more than 60% 
away from pre-decline prices. One response to the events of May 6, 
2010, was the development of the single-stock circuit breaker pilot 
program, which was implemented through a series of rule filings by the 
equity exchanges and by FINRA.\8\ The single-stock circuit breaker was 
designed to reduce extraordinary market volatility in NMS stocks by 
imposing a five-minute trading pause when a trade was executed at a 
price outside of a specified percentage threshold.\9\
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    \7\ The events of May 6 are described more fully in a joint 
report by the staffs of the Commodity Futures Trading Commission 
(``CFTC'') and the Commission. See Report of the Staffs of the CFTC 
and SEC to the Joint Advisory Committee on Emerging Regulatory 
Issues, ``Findings Regarding the Market Events of May 6, 2010,'' 
dated September 30, 2010, available at http://www.sec.gov/news/studies/2010/marketevents-report.pdf.
    \8\ For further discussion on the development of the single-
stock circuit breaker pilot program, see Securities Exchange Act 
Release No. 67091 (May 31, 2012), 77 FR 33498 (June 6, 2012) 
(``Limit Up-Limit Down Plan'' or ``Plan'').
    \9\ See Securities Exchange Act Release Nos. 62884 (September 
10, 2010), 75 FR 56618 (September 16, 2010) and Securities Exchange 
Act Release No. 62883 (September 10, 2010), 75 FR 56608 (September 
16, 2010) (SR-FINRA-2010-033) (describing the ``second stage'' of 
the single-stock circuit breaker pilot) and Securities Exchange Act 
Release No. 64735 (June 23, 2011), 76 FR 38243 (June 29, 2011) 
(describing the ``third stage'' of the single-stock circuit breaker 
pilot).
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    To replace the single-stock circuit breaker pilot program, the 
equity exchanges filed a National Market System Plan \10\ pursuant to 
Section 11A of the Act,\11\ and Rule 608 thereunder,\12\ which featured 
a ``limit up-limit down'' mechanism (as amended, the ``Limit Up-Limit 
Down Plan'' or ``Plan'').
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    \10\ NYSE Euronext filed on behalf of New York Stock Exchange 
LLC (``NYSE''), NYSE Amex LLC (``NYSE Amex''), and NYSE Arca, Inc. 
(``NYSE Arca''), and the parties to the proposed National Market 
System Plan, BATS Exchange, Inc., BATS Y-Exchange, Inc., Chicago 
Board Options Exchange, Incorporated (``CBOE''), Chicago Stock 
Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial 
Industry Regulatory Authority, Inc., NASDAQ OMX BX, Inc., NASDAQ OMX 
PHLX LLC, the Nasdaq Stock Market LLC, and National Stock Exchange, 
Inc. (collectively with NYSE, NYSE MKT, and NYSE Arca, the 
``Participants''). On May 14, 2012, NYSE Amex filed a proposed rule 
change on an immediately effective basis to change its name to NYSE 
MKT LLC (``NYSE MKT''). See Securities Exchange Act Release No. 
67037 (May 21, 2012) (SR-NYSEAmex-2012-32).
    \11\ 15 U.S.C. 78k-1.
    \12\ 17 CFR 242.608.
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    The Plan sets forth requirements that are designed to prevent 
trades in individual NMS stocks from occurring outside of the specified 
price bands. The price bands consist of a lower price band and an upper 
price band for each NMS stock. When one side of the market for an 
individual security is outside the applicable price band, i.e., the 
National Best Bid is below the Lower Price Band, or the National Best 
Offer is above the Upper Price band, the Processors \13\ are required 
to disseminate such National Best Bid or National Best Offer \14\ with 
a flag identifying that quote as non-executable. When the other side of 
the market reaches the applicable price band, i.e., the National Best 
Offer reaches the lower price band, or the National Best Bid reaches 
the upper price band, the market for an individual security enters a 
15-second Limit State, and the Processors are required disseminate such 
National Best Offer or National Best Bid with an appropriate flag 
identifying it as a Limit State Quotation. Trading in that stock would 
exit the 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 will declare a five-minute trading pause, 
which is applicable to all markets trading the security.
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    \13\ As used in the Plan, the Processor refers to the single 
plan processor responsible for the consolidation of information for 
an NMS Stock pursuant to Rule 603(b) of Regulation NMS under the 
Exchange Act. See id.
    \14\ ``National Best Bid'' and ``National Best Offer'' has the 
meaning provided in Rule 600(b)(42) of Regulation NMS under the 
Exchange Act. See id.
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    The Primary Listing Exchange may also declare a trading pause when 
the stock is in a Straddle State, i.e., the National Best Bid (Offer) 
is below (above) the Lower (Upper) Price Band and the NMS Stock is not 
in a Limit State. In order to declare a trading pause in this scenario, 
the Primary Listing Exchange must determine that trading in that stock 
deviates from normal trading characteristics such that declaring a 
trading pause would support the Plan's goal to address extraordinary 
market volatility.\15\
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    \15\ As set forth in more detail in the Plan, all trading 
centers would be required to establish, maintain, and enforce 
written policies and procedures reasonably designed to prevent the 
display of offers below the Lower Price Band and bids above the 
Upper Price Band for an NMS Stock. The Processors would be able to 
disseminate an offer below the Lower Price Band or bid above the 
Upper Price Band that nevertheless may be inadvertently submitted 
despite such reasonable policies and procedures, but with an 
appropriate flag identifying it as non-executable; such bid or offer 
would not be included in National Best Bid or National Best Offer 
calculations. In addition, all trading centers would be required to 
develop, maintain, and enforce policies and procedures reasonably 
designed to prevent trades at prices outside the price bands, with 
the exception of single-priced opening, reopening, and closing 
transactions on the Primary Listing Exchange.

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[[Page 22012]]

    On May 31, 2012, the Commission approved the Plan as a one-year 
pilot, which shall be implemented in two phases.\16\ The first phase of 
the Plan shall be implemented beginning April 8, 2013.\17\
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    \16\ See ``Limit Up-Limit Down Plan,'' supra note 8. See also 
Securities Exchange Act Release No. 68953 (February 20, 2013), 78 FR 
13113 (February 26, 2013) (Second Amendment to Limit Up-Limit Down 
Plan by BATS Exchange, Inc., BATS Y-Exchange, Inc., Chicago Board 
Options Exchange, Inc., et al.) and Securities Exchange Act Release 
No. 69062 (March 7, 2013), 78 FR 15757 (March 12, 2013) (Third 
Amendment to Limit Up-Limit Down Plan by BATS Exchange, Inc., BATS 
Y-Exchange, Inc., Chicago Board Options Exchange, Inc., et al.)
    \17\ See ``Second Amendment to Limit Up-Limit Down Plan,'' supra 
note 16.
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III. Description of the Proposal

1. Treatment of Market and Stop Orders

    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 if the underlying NMS stock is in a Limit State and Straddle State. 
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.\18\ According to 
the Exchange, when the underlying enters a Limit or Straddle State, 
there may not be a reliable underlying reference price, there may be a 
wide bid/ask quotation differential in the option, and there may be 
less liquidity in the options markets. For these reasons, the Exchange 
stated that permitting these order types to execute when the underlying 
NMS stock is in a Limit or Straddle State could lead to executions at 
prices that may inferior to the NBBO immediately before the underlying 
entered the Limit or Straddle State, and could add to volatility in the 
options markets during times of extraordinary market volatility.
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    \18\ 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 
represented 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.
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2. Specialist and Market Maker Quoting Obligations

    The Exchange also proposes to modify its rules governing quoting 
obligations for Specialists and Market Makers. Specifically, the 
Exchange will 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. For example, if a Market Maker failed to 
meet its monthly quoting obligations, and during the review, it was 
determined that the quoting that failed to meet the obligation was for 
options on 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 that Market 
Maker to relief.
    The Exchange represented that this change is necessary given the 
direct relationship between the price of an option and the price of the 
underlying security, which may affect the quoting behavior of 
Specialists and Market Makers. For example, when the underlying is in a 
Limit or Straddle State, the ability of a Specialist or Market Maker to 
hedge an options position may be impaired, and they modify their 
quoting behavior accordingly. The Exchange also stated that this aspect 
of its proposal would facilitate transactions and preserve market 
liquidity.

3. Declaration of Trading Halts

    The Exchange also proposes to amend Rule 953NY so that the Exchange 
would halt trading in all options whenever the equities markets halt 
trading in all NMS stocks due to extraordinary market volatility, i.e., 
when a market-wide circuit breaker is triggered.\19\ The Exchange noted 
that this provision, which explicitly provides for a trading halt when 
the equities market is halted due to the market-wide circuit breaker, 
is similar to a rule recently amended by CBOE.\20\ The Exchange also 
represented that the remaining provisions in existing Rule 953NY 
regarding Trading Halts and Suspensions remain unchanged and provide 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.
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    \19\ Market-wide circuit breakers in the equities market are 
different than a 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.
    \20\ See CBOE Rule 6.3B.
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    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. The 
Exchange represented this Commentary is similar to that found in CBOE 
Rule 6.3B, and nearly identical to Commentary .03 to NYSE Arca Options 
Rule 7.5.\21\
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    \21\ See CBOE Rule 6.3B and NYSE Arca Options Rule 7.5.
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4. Obvious Error

    In connection with the implementation of the Plan, the Exchange 
proposes to adopt new Rule 953.1NY(c) to exclude electronic 
transactions in stock options that overlay an NMS stock that occur 
during a Limit State or Straddle State from the provisions of Rule 
975NY(a) for Obvious Errors or Rule 975NY(d) for Catastrophic Errors. 
Additionally, the Exchange proposes to retain the ability to review 
electronic transactions that occur during a Limit State or Straddle 
State by Exchange motion pursuant to Rule 975NY(b)(3).\22\
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    \22\ 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.

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[[Page 22013]]

    Rule 975NY provides a process by which a transaction may be 
nullified or adjusted when the execution price of a transaction 
deviates from the option's theoretical price by a certain amount. 
Generally, the theoretical price of an option is the National Best Bid 
and Offer (``NBBO'') of the option. In certain circumstances, Trading 
Officials have the discretion to determine the theoretical price.\23\
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    \23\ Specifically, under Rules 975NY(a)(2) and 975NY(d)(2), the 
theoretical price is determined in one of two ways: (i) If the 
series is traded on at least one other options exchange, the last 
bid price with respect to an erroneous sell transaction and the last 
offer price with respect to an erroneous buy transaction, just prior 
to the trade, that comprise the NBBO as disseminated by the Options 
Price Reporting Authority; or (ii) as determined by a designated 
Trading Official, if there are not 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 pursuant to Rule 925NY(b)(4).
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    The Exchange believes maintaining the current operation of Rules 
975NY(a)(1) and 975NY(d)(1) during a Limit State or Straddle State 
would be undesirable. According to the Exchange, during periods of 
extraordinary volatility, the review period \24\ for transactions under 
the Obvious Error and Catastrophic Error provisions would allow market 
participants to re-evaluate a transaction that occurred during a Limit 
State or Straddle State at a later time, which is potentially unfair to 
other market participants and would discourage market participants from 
providing liquidity during Limit States or Straddle States. The 
Exchange believes that market participants should not be able to 
benefit from the time frame to review their transactions in these 
situations.
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    \24\ Pursuant to Rule 975NY(b), market participants may have up 
to 20 minutes to notify the Exchange of a transaction that may be an 
Obvious Error. Pursuant to Rule 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.
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    The Exchange also noted that, barring this proposed rule change, 
the provisions of Rules 975NY(a)(2)(B) and 975NY(d)(2)(B) \25\ would 
likely apply in many instances during Limit or Straddle States. 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 value should be for an option when the underlying NMS 
stock has an unexecutable bid or offer or both. The Exchange notes that 
the theoretical price in this context would be subjective. Ultimately, 
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, thus promoting fair and orderly 
markets.
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    \25\ These provisions give the Exchange Trading Official the 
discretion to determine the theoretical price of an option for 
purposes of analyzing whether a transaction qualifies for 
nullification or adjustment under Rule 975NY.
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    In Amendment No. 1, the Exchange also noted that application of 
current Rules 975NY(a) and 975NY(d) would be unreliable during a Limit 
State or Straddle State. The Exchange believes that application of 
Rules 975NY(a) and 975NY(d) to electronic transactions occurring during 
a Limit or Straddle State would be impracticable given the lack of a 
reliable national best bid or offer in the options market during Limit 
States and Straddle States and that the resulting actions may not be 
appropriate given market conditions. 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 Rules 975NY(a) and 975NY(d) during 
such unusual market conditions.
    In response to these concerns, the Exchange proposes to adopt Rule 
953.1NY(c) to provide that electronic transactions are not subject to 
an obvious error or catastrophic error review pursuant to Rules 
975NY(a) and 975NY(d) during a Limit State or Straddle State.
    Proposed Rule 953.1NY(c) will also include a qualification that 
nothing in the proposed rule change will prevent electronic trades from 
being reviewed on Exchange motion pursuant to Rule 975NY(b)(3).\26\ 
According to the Exchange, this safeguard will provide the flexibility 
to act when necessary and appropriate, 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, according to the Exchange, would enable 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.
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    \26\ The Exchange stated that it received informal feedback from 
a number of market participants, including liquidity providers and 
order flow providers, that has generally been supportive of the 
Exchange's proposed rule change.
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    The Exchange also noted that its existing order protections that 
reject limit orders that are priced too far through the NBBO would 
continue to apply during Limit and Straddle States. Additionally, the 
Exchange notes that while in Limit States and Straddle States, only 
limit orders will be accepted, affirming that the participant is 
willing to accept an execution up to the limit price. Further, 
according to the Exchange, 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 
with 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 in compliance with the aforementioned 
Plan could harm liquidity and also create an advantage to either side 
of an execution depending on the future movement of the underlying 
stock.

IV. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and rules and 
regulations thereunder applicable to a national securities 
exchange.\27\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\28\ which, 
among other things, requires a national securities exchange to be so 
organized and have the capacity to be able to carry out the purposes of 
the Act and to enforce compliance by its members and persons associated 
with its members with the provisions of the Act, the rules and 
regulations thereunder, and the rules of the exchange, and 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 regulation, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest.
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    \27\ In approving the proposed rule changes, the Commission has 
considered their impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \28\ 15 U.S.C. 78f(b).
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    With respect to the proposal to reject market orders and to not 
elect Stop Orders when the underlying is in a

[[Page 22014]]

Limit or Straddle State, the Exchange stated that permitting these 
order types to execute during these times could contribute to market 
volatility and could have the potential to lead to poor executions, as 
spreads in the options markets might have widened in response to the 
underlying entering a Limit or Straddle State. The Commission believes 
that rejecting market orders and not electing Stop Orders during these 
times will provide certainty to the treatment of Market Orders and Stop 
Orders during these times. To the extent that the spreads in the 
options market may widen as a result of the underlying entering a Limit 
or Straddle State, this proposal may also prevent market and Stop 
Orders from receiving executions at unintended prices during these 
times.
    With respect to deeming the frequency and duration with which the 
underlying security is in a Limit or Straddle State a mitigating 
circumstance when evaluating the adherence of Specialists and Market 
Makers to their respective quoting obligations, the Commission finds 
that this proposal represents an appropriate response to the potential 
effect on the options markets of the underlying entering a Limit or 
Straddle State. During a limit up-limit down state, there may not be a 
reliable price for the underlying security to serve as a benchmark for 
market makers to price options. In addition, the absence of an 
executable bid or offer for the underlying security will make it more 
difficult for market makers to hedge the purchase or sale of an option. 
Given these significant changes to the normal operating conditions of 
market makers, the Commission finds that the Exchange's proposal in 
these limited circumstances is consistent with the Act.
    The Commission notes, however, that the Plan was approved on a 
pilot basis and its Participants will monitor how it is functioning in 
the equity markets during the pilot period. To this end, the Commission 
expects that, upon implementation of the Plan, the Exchange will 
continue monitoring this amendment to its rules and determine if any 
necessary adjustments are required to ensure that they remain 
consistent with the Act.
    The Commission also believes that the proposal to halt trading in 
the options market when trading in the equities markets has been halted 
as a result of the market-wide circuit breaker being triggered is 
consistent with the Act. This proposal is reasonably designed to ensure 
that the Exchange halts trading in all options whenever the equities 
markets initiate a trading halt as a result of the market-wide circuit 
breaker, thereby minimizing volatility in the options markets. This 
provision is also similar to a corresponding CBOE rule. The provision 
addressing re-opening of trading following such a halt is substantively 
similar to both CBOE Rule 6.3B, and the commentary contained in NYSE 
Arca Rule 7.5.
    The Commission finds that the Exchange's proposal to suspend 
certain aspects of Rule 975NY during a Limit State or Straddle State is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\29\ Specifically, the Commission finds that the proposal is 
consistent with Section 6(b)(5) of the Act,\30\ in that it is 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.
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    \29\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \30\ 15 U.S.C. 78f(b)(5).
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    In Amendment No. 1, the Exchange notes its belief that suspending 
certain aspects of Rule 975NY during a Limit State or Straddle State 
will ensure that limit orders that are filled during a Limit or 
Straddle State will 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 Exchange states that it believes the 
application of the current rule would be impracticable given what it 
perceives will be 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. In addition, given the Exchange's view that 
options prices during Limit States or Straddle States may deviate 
substantially from those available shortly following the Limit State or 
Straddle State, the Exchange believes that providing market 
participants time to re-evaluate a transaction executed during a Limit 
or Straddle State will create an unreasonable adverse selection 
opportunity that will discourage participants from providing liquidity 
during Limit States or Straddle States. Ultimately, 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 during Limit States and Straddle States, thus 
promoting fair and orderly markets.
    The Commission notes, however, that the Exchange has proposed this 
rule change based on its expectations about the quality of the options 
market during Limit States and Straddle States. In Amendment No. 1, the 
Exchange stated, for example, that it believes that application of the 
obvious and catastrophic error rules would be impracticable given the 
potential for lack of a reliable NBBO in the options market during 
Limit States and Straddle States. Given the Exchange's recognition of 
the potential for unreliable NBBOs in the options markets during Limit 
States and Straddle States, the Commission is concerned about the 
extent to which investors may rely to their detriment on the quality of 
quotations and price discovery in the options markets during these 
periods. This concern is heightened by the Exchange's proposal to 
exclude trades that occur during a Limit State or Straddle State from 
the obvious error or catastrophic error review procedures pursuant to 
Rules 975NY(a) or 975NY(d). The Commission urges investors and market 
professionals to exercise caution when considering trading options 
under these circumstances. Broker-dealers also should be mindful of 
their obligations to customers that may or may not be aware of specific 
options market conditions or the underlying stock market conditions 
when placing their orders.
    While the Commission remains concerned about the quality of the 
options market during the Limit and Straddle States, and the potential 
impact on investors of executing in this market without the protections 
of the obvious or catastrophic error rules that are being suspended 
during the Limit and Straddle States, it believes that certain aspects 
of the proposal could help mitigate those concerns.
    First, despite the removal of obvious and catastrophic error 
protection during Limit States and Straddle States, the Exchange states 
that there are additional measures in place designed to protect 
investors. For example, the Exchange states 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. Additionally, the

[[Page 22015]]

Exchange notes the existence of SEC Rule 15c3-5 requiring broker-
dealers to have controls and procedures in place that are reasonably 
designed to prevent the entry of erroneous orders. Finally, with 
respect to limit orders that will be executable during Limit States and 
Straddle States, the Exchange states that it applies price checks to 
limit orders that are priced sufficiently far through the NBBO. 
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.
    The Exchange also believes that the aspect of the proposed rule 
change that will continue to allow the Exchange to review on its own 
motion electronic trades that occur during a Limit State or a Straddle 
State is consistent with the Act because it would provide flexibility 
for the Exchange to act when necessary and appropriate to nullify or 
adjust a transaction and will enable 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. In Amendment No. 1, the Exchange 
represents that it recognizes that this provision is limited and that 
it will administer the provision in a manner that is consistent with 
the principles of the Act. In addition, the Exchange represents that it 
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.
    Finally, the Exchange has proposed that the changes be implemented 
on a one year pilot basis. The Commission believes that it is important 
to implement the proposal as a pilot. The one year pilot period will 
allow the Exchange time to assess the impact of the Plan on the options 
marketplace and allow the Commission to further evaluate the effect of 
the proposal prior to any proposal or determination to make the changes 
permanent. To this end, pursuant to Amendment No. 1, the Exchange has 
committed to: (1) Evaluate 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 has agreed to provide to the Commission with data requested to 
evaluate the impact of the elimination of the obvious error rule, 
including data relevant to assessing the various analyses noted above. 
On April 5, 2013, NYSE Euronext submitted a letter on behalf of the 
Exchange, stating that the Exchange will provide specific data to the 
Commission and the public and certain analysis to the Commission to 
evaluate the impact of Limit States and Straddle States on liquidity 
and market quality in the options markets.\31\ This will allow the 
Commission, the Exchange, and other interested parties to evaluate the 
quality of the options markets during Limit States and Straddle States 
and to assess whether the additional protections noted by the Exchange 
are sufficient safeguards against the submission of erroneous trades, 
and whether the Exchange's proposal appropriately balances the 
protection afforded to an erroneous order sender against the potential 
hazards associated with providing market participants additional time 
to review trades submitted during a Limit State or Straddle State.
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    \31\ In particular, the Exchange represented that, at least two 
months prior to the end of the one year pilot period of proposed 
Rule 953.1NY(c), it would provide to the Commission an evaluation of 
(i) the statistical and economic impact of Straddle States on 
liquidity and market quality in the options market and (ii) whether 
the lack of obvious error rules in effect during the Limit States 
and Straddle States are problematic. In addition, the Exchange 
represented that each month following the adoption of the proposed 
rule change it would provide to the Commission and the public a 
dataset containing certain data elements for each Limit State and 
Straddle State in optionable stocks. The Exchange stated that the 
options included in the dataset will be those that meet the 
following conditions: (i) The options are more than 20% in the money 
(strike price remains greater than 80% of the last stock trade price 
for calls and strike price remains greater than 120% of the last 
stock trade price for puts when the Limit State or Straddle State is 
reached); (ii) the option has at least two trades during the Limit 
State or Straddle State; and (iii) the top ten options (as ranked by 
overall contract volume on that day) meeting the conditions listed 
above. For each of those options affected, each dataset will 
include, among other information: Stock symbol, option symbol, time 
at the start of the Limit State or Straddle State and an indicator 
for whether it is a Limit State or Straddle State. For activity on 
the Exchange in the relevant options, the Exchange has agreed to 
provide executed volume, time-weighted quoted bid-ask spread, time-
weighted average quoted depth at the bid, time-weighted average 
quoted depth at the offer, high execution price, low execution 
price, number of trades for which a request for review for error was 
received during Limit States and Straddle States, an indicator 
variable for whether those options outlined above have a price 
change exceeding 30% during the underlying stock's Limit State or 
Straddle State compared to the last available option price as 
reported by OPRA before the start of the Limit or Straddle state (1 
if observe 30% and 0 otherwise), and another indicator variable for 
whether the option price within five minutes of the underlying stock 
leaving the Limit State or Straddle State (or halt if applicable) is 
30% away from the price before the start of the Limit State or 
Straddle State. See NYSE Letter, supra note 5.
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    In addition, the Commission finds good cause, pursuant to Section 
19(b)(2) of the Act \32\ for approving the proposed rule change on an 
accelerated basis. This proposal is related to the Plan, which will 
become operative on April 8, 2013, and aspects of the proposal, such as 
rejecting market orders and not electing Stop Orders during the Limit 
and Straddle States, are designed to prevent such orders from receiving 
poor executions during those times.\33\ In granting accelerated 
approval, the proposed rule change, and any attendant benefits, will 
take effect upon the Plan's implementation date. Accordingly, the 
Commission finds that good cause exists for approving the proposed rule 
change on an accelerated basis.
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    \32\ 15 U.S.C. 78s(b)(2)
    \33\ See supra note 17.
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\34\ that the proposed rule change (SR-NYSEMKT-2013-10) is approved on 
an accelerated basis.
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    \34\ 15 U.S.C. 78f(b)(2).
    \35\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\35\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-08609 Filed 4-11-13; 8:45 am]
BILLING CODE 8011-01-P


