
[Federal Register Volume 78, Number 85 (Thursday, May 2, 2013)]
[Notices]
[Pages 25777-25779]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-10346]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69467; File No. SR-ISE-2013-15]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Order Granting Approval of a Proposed Rule Change To Amend the 
Obvious and Catastrophic Errors Rule

April 26, 2013.


I. Introduction

    On February 26, 2013, the International Securities Exchange, LLC 
(the ``Exchange'' or the ``ISE'') filed with the Securities and 
Exchange Commission (``Commission''), pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (the ``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend Rule 720, Obvious and 
Catastrophic Errors. The proposed rule change was published for comment 
in the Federal Register on March 14, 2013.\3\ The Commission received 
no comment letters on the proposal. This order approves the proposed 
rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 69085 (March 8, 2013), 
78 FR 16338 (``Notice'').
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II. Description of the Proposed Rule Change

    The Exchange proposes to amend Rule 720 relating to obvious error 
and catastrophic error rules by: (1) Providing that, in the case of 
both obvious and catastrophic errors, the Exchange will nullify trades 
for transactions involving Priority Customers \4\ and adjust trades 
where none of the parties to the trade are Priority Customers; and (2) 
harmonizing the procedure for making obvious and catastrophic error 
determinations.
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    \4\ ISE Rule 100(a)(37A) defines ``Priority Customer'' as a 
person or entity that (i) is not a broker or dealer in securities, 
and (ii) does not place more than 390 orders in listed options per 
day on average during a calendar month for its own beneficial 
account(s).
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Erroneous Transactions Involving Priority Customers

    Under current Rule 720(b)(2), the Exchange nullifies obvious error 
transactions unless all parties to the trade are ISE market makers, in 
which case the Exchange adjusts the price of the transaction. With 
respect to catastrophic errors, the Exchange currently adjusts all 
transactions even if they involve non-market makers.\5\
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    \5\ See ISE Rule 720(d)(3).
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    The Exchange proposes to amend its obvious and catastrophic error 
procedures to allow the Exchange to nullify trades that qualify as 
either an obvious error or a catastrophic error if such trades involved 
a Priority Customer and adjust trades where none of the parties to the 
trade are Priority Customers (i.e., market makers, broker-dealers and 
professional customers). Specifically, the Exchange proposes to amend 
Rule 720(b)(2)(ii) and adopt new Rule 720(c)(2)(B),\6\ which states 
that where at least one party to the obvious or catastrophic error is a 
Priority Customer, the trade will be nullified by

[[Page 25778]]

Market Control \7\ unless both parties agree to an adjustment price for 
the transaction within thirty (30) minutes of being notified by Market 
Control of its determination. The Exchange believes that this proposal 
provides a fair way to address the issue of a trade executing through a 
customer's limit order price while balancing the competing interests of 
certainty that trades stand with the policy concerns about dealing with 
true errors.
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    \6\ This proposed rule change also realigns certain parts of 
Rule 720. The rule on Catastrophic Error Procedure rule was 
previously found in Rule 720(d) and with the proposed realignment, 
this rule now appears as Rule 720(c).
    \7\ Market Control consists of designated personnel in the 
Exchange's market control center. See ISE Rule 720(a)(3)(ii).
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Determination of Erroneous Transactions

    Under Rule 720(b)(2), Market Control determines whether an obvious 
error has occurred and applies the rule to adjust or nullify trades 
with the ability for those parties affected to request that a panel of 
members review decisions made by Market Control. With respect to 
catastrophic errors, Rule 720(d)(2) currently requires that a panel of 
members make the initial determination of whether a catastrophic error 
occurred rather than Market Control.
    The Exchange proposes to amend the catastrophic error procedure to 
provide that Market Control shall make the initial determination of 
whether or not a catastrophic error has occurred. The Exchange's 
proposed procedure would allow parties affected by an action taken by 
Market Control the ability to request that such actions be reviewed by 
a member panel, rather than requiring a member panel to make the 
initial determination in all cases. The Exchange's proposed rule also 
sets forth the steps that Market Control shall take if a determination 
has been made that a catastrophic error has occurred.\8\
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    \8\ See Proposed Rule 720(c)(2).
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    The Exchange also proposes to rearrange parts of Rule 720. 
Specifically, the Exchange proposes to delete Rule 720(c) (Obvious 
Error Panel) and move the substance of that rule to new Rule 720(d), 
which is also renamed Review Panel, and which will now apply to both 
obvious and catastrophic errors. Proposed Rule 720(d) will provide the 
composition of the Review Panel,\9\ the scope of the Review Panel's 
review,\10\ the procedure for requesting review,\11\ and the decisions 
of the Review Panel.\12\
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    \9\ See Proposed Rule 720(d)(1).
    \10\ See Proposed Rule 720(d)(2).
    \11\ See Proposed Rule 720(d)(3).
    \12\ See Proposed Rule 720(d)(4). The Exchange is also proposing 
conforming amendments to Supplementary Material .01, .02, .03 and 
.04 to Rule 720 to reflect the proposed rule changes.
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III. Discussion

    The Commission has carefully considered the proposed rule change 
and finds that the proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\13\ Specifically, the 
Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\14\ in that the proposed change is designed 
to promote just and equitable principles of trade, will serve 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.\15\
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    \13\ In approving the 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).
    \14\ 15 U.S.C. 78f(b)(5).
    \15\ 15 U.S.C. 78o-4(b)(2)(C).
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    In the filing, the Exchange notes its belief that the proposed rule 
change relating to nullifying trades involving Priority Customers and 
adjusting trades where none of the parties are Priority Customers will 
help market participants better manage their risk associated with 
potential erroneous trades. The Exchange notes that the proposed rule 
change is not unfairly discriminatory, even though it offers some 
market participants a choice as to whether a trade is nullified or 
adjusted, while other market participants will continue to have all of 
their obvious and catastrophic errors adjusted. Specifically, the 
Exchange notes that the existing rules differentiate among market 
participants.\16\ The Exchange notes further that options rules often 
treat Priority Customers in a special way,\17\ recognizing that 
Priority Customers are not necessarily immersed in the day-to-day 
trading of the markets, less likely to be watching trading activity in 
a particular option throughout the day, and may have limited funds in 
their trading accounts. The Exchange goes on to note that, while the 
proposed rule change may introduce uncertainty regarding whether a 
trade will be adjusted or nullified, it eliminates price uncertainty, 
as customer orders can be adjusted to a significantly different price 
than their limit order price under the rule prior to this proposed rule 
change. Ultimately, the Exchange believes differentiating among market 
participants by permitting Priority Customers to have a choice as to 
whether to nullify a trade involving an obvious or a catastrophic error 
is not unfairly discriminatory, because it is reasonable and fair to 
provide Priority Customers with additional options to protect 
themselves against the consequences of obvious and catastrophic errors.
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    \16\ The Exchange notes, for example, that the notification 
period to begin the obvious error process is different for Exchange 
market makers and non-market makers and whether a trade is adjusted 
or busted also differs.
    \17\ For example, many options exchanges priority rules treat 
Priority Customer orders differently and some options exchanges only 
accept certain types of orders from Priority Customers. Most options 
exchanges also charge different fees for Priority Customer orders.
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    The Commission notes that in considering the proposed rule change, 
the Exchange has weighed the benefits of certainty to non-broker-dealer 
customers that their limit price will not be violated against the costs 
of increased uncertainty to other market participants such as market 
makers and broker-dealers that their trades may be nullified instead of 
adjusted depending on whether the other party to the transaction is or 
is not a Priority Customer. The proposed rule change takes an approach 
similar to the one taken in the Exchange's existing obvious error rule, 
whereby transactions in which an obvious error occurred with at least 
one party that is not an Exchange market maker are nullified unless 
both parties agree to adjust the price of the transaction within 30 
minutes of being notified of the obvious error.
    Further, the Commission believes that the proposed rule change 
relating to Market Control making the determination of whether a 
catastrophic error has occurred will promote just and equitable 
principles of trade by adding certainty and more consistency to the 
current rule. The Exchange noted that, in its experience, the procedure 
of requiring a member panel to make the initial determination of 
whether or not a catastrophic error has occurred in all cases is 
inefficient and unnecessary. The Exchange stated that its obvious and 
catastrophic error rule and the procedures that carry out the rule have 
consistently been based on specific and objective criteria. The 
Exchange noted that this proposal furthers that principle by adopting 
objective guidelines for the determination of which trades may be 
nullified or adjusted, and for the determination of whether or not a 
trade is deemed to be a catastrophic error. For the reasons noted 
above, the Exchange believes that the proposed rule change is 
consistent with the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\18\ that the

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proposed rule change (SR-ISE-2013-15) be, and hereby is, approved.
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    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-10346 Filed 5-1-13; 8:45 am]
BILLING CODE 8011-01-P


