
[Federal Register Volume 78, Number 101 (Friday, May 24, 2013)]
[Notices]
[Pages 31623-31625]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-12438]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69609; File No. SR-NYSEArca-2013-15]


Self-Regulatory Organizations; NYSE Arca Inc.; Order Granting 
Approval of Proposed Rule Change, Modified by Amendment No. 1, Amending 
Rule 6.87 In Part and Adding a New Section To Address Errors That 
Involve Complex Orders

May 20, 2013.

I. Introduction

    On February 1, 2013, NYSE Arca, Inc. (``NYSE Arca'' or the 
``Exchange'') filed with the Securities and Exchange

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Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend the Exchange's Obvious 
Error Rule in part and add a new section to address errors that involve 
Complex Orders. The proposed rule change was published for comment in 
the Federal Register on February 21, 2013.\3\ The Commission received 
no comment letters on the proposal. On April 23, 2013, the Exchange 
filed Amendment No. 1 to the proposed rule change.\4\ This order 
approves the proposed rule change, as modified by Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 68927 (February 14, 
2013), 78 FR 12117 (``Notice'').
    \4\ In Amendment No. 1, NYSE Arca deleted an erroneous reference 
to ``Professional Customers'' in the proposal because the Exchange's 
rules do not include ``Professional Customer'' as a defined 
category. The Commission believes the amendment is technical in 
nature and not subject to notice and comment.
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II. Description of Proposal

    The Exchange proposes several changes to its Obvious Error Rule, 
Rule 6.87. First, the Exchange is proposing to change the portion of 
the rule that addresses errors in series with zero or no bid. 
Specifically, the Exchange proposes replacing reference to ``series 
quoted no bid on the Exchange'' with ``series where the NBBO bid is 
zero.'' The Exchange believes that this change ensures consistency with 
other relevant parts of the rule.
    Second, the Exchange proposes to increase the amount of time in 
which Market Makers are required to notify the Exchange in order to 
have transactions reviewed under Rule 6.87. Under the proposal, the 
time would increase from five minutes to ten minutes. The Exchange 
represents that this additional time accommodates the potential need 
for Market Makers to call multiple exchanges to have transactions 
reviewed.
    Third, the Exchange proposes to extend the time OTP Holders acting 
as agent for Customer orders have to notify the Exchange of a potential 
error from twenty minutes to thirty minutes.\5\ The Exchange states 
that because Customers are far removed from the execution of the trade, 
it believes that it is appropriate to give Customers more time for 
their requests for review to pass from their broker-dealer to the 
Exchange. In contrast, the Exchange notes that other market 
participants, such as firms and non-member Market Makers tend to route 
their own order flow directly to the Exchange and are not as far 
removed from the actual execution. The Exchange further explains that 
it is fairly common for broker-dealers that receive a Customer order to 
route that order to another broker-dealer that uses a router that 
evaluates best execution factors to determine where to ultimate route 
the order. In these situations, if a Customer chooses to request an 
Obvious Error review, Customers may need more than 20 minutes for their 
requests for review to reach the Exchange. The Exchange acknowledges 
that extending the notification period can increase the uncertainty of 
the standing of the trade, however, it believes that such uncertainty 
will be limited to trades that are so outside the bounds of normal 
trading that they might qualify for Obvious Error treatment.
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    \5\ The Commission notes that NYSE Arca Rule 6.87, Commentary 
.06 states that ``for the purposes of Rule 6.87, the term Customer, 
as defined in Rule 6.1(b)(29) or Rule 6.1A(a)(4), shall not include 
a broker or dealer.''
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    Finally, the Exchange is proposing to add a new section to Rule 
6.87 to address Complex Orders in the Obvious Error context, as its 
current rule is silent on how such Complex Orders are handled. 
According to the Exchange, Complex Orders are often used by market 
participants to enter positions known as spreads that entail limited 
risk relative to an outright naked sale of a put or call. The Exchange 
believes that the best approach for dealing with Complex Orders in the 
Obvious Error context is to preserve the spread whenever possible to 
mitigate the risk of such trades. Therefore, in the situation where a 
Complex Order trades with another Complex Order in the Complex Order 
Book, and one of the legs qualifies for Obvious Error treatment under 
Rule 6.87, then all legs of the Complex Order will be busted unless 
both parties mutually agree to an adjustment price.
    The Exchange also believes that it is appropriate not to permit 
Obvious Error treatment in situations where the only error in the trade 
occurred in a no-bid series. Therefore, in situations where a Complex 
Order trades with another Complex Order in the Complex Order Book where 
one leg qualifies for the no-bid provision of Rule 6.87, the trade will 
stand as executed, unless both parties to the trade mutually agree 
otherwise. The Exchange believes that this provision will prevent 
manipulation and a potential increase in nullified trades, particularly 
because it prevents parties from being able to enter a spread price 
slightly away from the market, thus increasing the chance that one of 
the legs will qualify for no-bid treatment, and providing the party 
entering the order with a window of time to evaluate the market and 
decide if it would be to its benefit to nullify the trade.
    Finally, the Exchange is codifying its current practice for 
handling situations in which a Complex Order trades with individual 
orders or quotes in the Consolidated Book. Pursuant to the proposed 
Rule, each executed leg will be reviewed separately under Rule 6.87. 
The Exchange notes that while it prefers to avoid the partial execution 
of a Complex Order, pursuant to this provision, it is possible that 
after a Complex Order trade, only one leg qualifies for Obvious Error 
treatment, resulting in the residual position of a single leg. The 
Exchange explains that is will not seek to nullify a valid execution in 
the Consolidated Order Book of an OTP Holder who unknowingly interacted 
with a leg of a Complex Order.

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act \6\ 
and the rules and regulations thereunder applicable to a national 
securities exchange.\7\ In particular, the Commission finds that the 
proposed rule change, as amended, is consistent with Section 6(b)(5) of 
the Act,\8\ which requires, among other things, that the Exchange's 
rules be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities, 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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    \6\ 15 U.S.C. 78f.
    \7\ 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).
    \8\ 15 U.S.C. 78f(b)(5).
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    The Exchange is replacing reference to ``series quoted no bid on 
the Exchange'' with ``series where the NBBO bid is zero'' because it 
believes that the NBBO provides greater accuracy in determining the 
value of an option because it takes into account interest from 
participants across all markets, not just those active on the Exchange. 
The Exchange also believes that this change will promote just and 
equitable principles of trade by adding more certainty and consistency 
to the Exchange's Obvious Error rule. This consistency, according to 
the Exchange,

[[Page 31625]]

is important to help avoid investor confusion.
    The Exchange believes that the change to increase the time limit 
for Market Makers to request review of transactions protects investors 
and the public interest because it will ensure they are comfortable 
meeting the deadline, thereby allowing Market Makers to continue to 
aggressively provide liquidity in a transparent and nondiscriminatory 
manner to all participants. Further, the Exchange notes that increasing 
the time limit for OTP Holders acting as agent for Customers to request 
review of transactions should give Customers sufficient time to request 
a review for trades, which is also consistent with investor protection 
and furthering the public interest as it allows those market 
participants furthest removed from the point of execution time to 
evaluate each trade and have adequate time to notify the Exchange of a 
potential error.
    The Exchange believes that the proposed rule changes that address 
the handling of Complex Orders under the Obvious Error rule are 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, and, in general, to 
protect investors and the public interest. The Exchange notes that 
detailing the treatment of Complex Orders involved in Obvious Errors 
provides investors with greater certainty. The Exchange also believes 
that the best approach for dealing with Complex Orders in the context 
of the Obvious Error rule is to preserve the spread whenever possible. 
Second, the Exchange believes that preventing market participants from 
busting trades solely the result of a leg(s) of a Complex Order 
executing in a no-bid series furthers the protection of investors and 
the public interest by preventing potential abuse. Finally, the 
Exchange believes that the proposed rule change provides objective 
guidelines for the determination of whether an obvious price error has 
occurred, as it notes that the determination of whether an ``Obvious 
Error'' has occurred should be based on specific and objective criteria 
and subjective to specific and objective procedures.
    The Commission notes that, in approving past proposals relating to 
Obvious Errors, it has emphasized the importance of specific and 
objective criteria to determine how and when to nullify or adjust 
trades involving Obvious Errors.\9\ The Commission believes the changes 
that comprise this current proposal further this objective. For the 
reasons noted above, the Commission finds that the proposed rule change 
is consistent with Section 6(b)(5) of the Act,\10\ which requires, 
among other things, that the Exchange's rules be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in facilitating transactions in securities, 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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    \9\ See, e.g., Securities Exchange Release Nos. 54228 (July 27, 
2006), 71 FR 44066 (August 3, 2006) (SR-CBOE-2006-14) and 58778 
(October 14, 2008), 73 FR 62577 (October 21, 2008) (SR-CBOE-2008-90) 
(both approving revisions to CBOE's Obvious Error Rules).
    \10\ 15 U.S.C. 78f(b)(5).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-NYSEArca-2013-15), as 
modified by Amendment No. 1, is hereby approved.
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    \11\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-12438 Filed 5-23-13; 8:45 am]
BILLING CODE 8011-01-P


