
[Federal Register Volume 80, Number 38 (Thursday, February 26, 2015)]
[Notices]
[Pages 10551-10553]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-03959]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74336; File No. SR-NASDAQ-2015-016]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend Chapter V, Regulation of Trading on NOM, To Extend the Pilot 
Program Under Section 3(d)(iv)

February 20, 2015.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that, on February 19, 2015, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the Exchange. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend Chapter V, Regulation of Trading on 
NOM, to extend the pilot program under Section 3(d)(iv), which provides 
for how the Exchange treats obvious and catastrophic options errors in 
response to the Plan to Address Extraordinary Market Volatility 
Pursuant to Rule 608 of Regulation NMS under the Act (the ``Limit Up-
Limit Down Plan'' or the ``Plan'').\3\ The Exchange proposes to extend 
the pilot period until October 23, 2015.
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    \3\ Securities Exchange Act Release No. 69341 (April 8, 2013), 
78 FR 21996 (April 12, 2013) (SR-NASDAQ-2013-048).
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    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaq.cchwallstreet.com, at the principal office of 
the Exchange, and at the Commission's Public Reference Room.

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    In April 2013, the Commission approved a proposal, on a one year 
pilot basis, to adopt Chapter V, Section 3(d)(iv) to provide for how 
the Exchange will treat obvious and catastrophic options errors in 
response to the Plan, which is applicable to all NMS stocks, as defined 
in Regulation NMS Rule 600(b)(47).\4\ The Plan is designed to prevent 
trades in individual NMS stocks from occurring outside of specified 
Price Bands.\5\ 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).
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    \4\ The Plan was extended until February 20, 2015. The Plan was 
initially approved for a one-year pilot period, which began on April 
8, 2013. Securities Exchange Act Release No. 71649 (March 5, 2014), 
79 FR 13696 (March 11, 2014).
    \5\ Unless otherwise specified, capitalized terms used in this 
rule filing are based on the defined terms of the Plan.
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    The Exchange extended the operation of Chapter V, Section 3(d)(iv), 
which provides that trades are not subject to an obvious error or 
catastrophic error review pursuant to Chapter V, Sections 6(b) or 6(f) 
during a Limit State or

[[Page 10552]]

Straddle State in 2014.\6\ The Exchange now proposes to extend the 
pilot program for an additional pilot period ending October 23, 2015. 
The Exchange believes conducting an obvious error or catastrophic error 
review is impracticable given the lack of a reliable National Best Bid/
Offer (``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. Under 
the pilot, limit orders that are filled during a Limit State or 
Straddle State 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. 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. 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 those provisions during such unusual market conditions.
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    \6\ Securities Exchange Act Release No. 71902 (April 8, 2014), 
79 FR 20946 (April 14, 2014) (SR-NASDAQ-2014-033).
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    The Exchange believes the benefits to market participants from the 
pilot program should continue on a pilot basis to coincide with the 
operation of the Limit Up-Limit Down Plan. The Exchange believes that 
continuing the pilot will protect against any unanticipated 
consequences and permit the industry to gain further experience 
operating the Plan.
    The Exchange will conduct an 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: (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 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. By May 29, 2015, the Exchange shall 
provide to the Commission and the public assessments relating to the 
impact of the operation of the obvious error rules during Limit and 
Straddle States as follows: \7\
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    \7\ The Exchange submitted a pilot report on September 30, 2014.
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    1. Evaluate the statistical and economic impact of Limit and 
Straddle States on liquidity and market quality in the options markets.
    2. Assess whether the lack of obvious error rules in effect during 
the Straddle and Limit States are problematic.
    Each month the Exchange shall provide to the Commission and the 
public a dataset containing the data for each Straddle and Limit State 
in optionable stocks that had at least one trade on the Exchange during 
a Straddle or Limit State. For each of those options affected, each 
data record should contain the following information:
     Stock symbol, option symbol, time at the start of the 
Straddle or Limit State, an indicator for whether it is a Straddle or 
Limit State,
     For activity on the Exchange:
     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 Straddle and Limit States,
     an indicator variable for whether those options outlined 
above have a price change exceeding 30% during the underlying stock's 
Limit 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). Another indicator variable for whether 
the option price within five minutes of the underlying stock leaving 
the Limit or Straddle State (or halt if applicable) is 30% away from 
the price before the start of the Limit or Straddle State.\8\
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    \8\ The Exchange agreed to provide similar data in the original 
proposal. See Securities Exchange Act Release No. 69341 (April 8, 
2013), 78 FR 21996 (April 12, 2013) (SR-NASDAQ-2013-048) at notes 4 
and 11. However, that data included two additional filters 
pertaining to the top 10 options and an in-the-money amount, which 
no longer apply. The Exchange provided historical data in the new 
form pursuant to this proposed rule change, going back to the 
beginning of the original pilot period.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\9\ in general, and with Section 
6(b)(5) of the Act,\10\ in particular, which requires that the rules of 
an exchange be designed to promote just and equitable principles of 
trade, remove impediments to and perfect the mechanism of a free and 
open market and a national market system, and protect investors and the 
public interest, because it should continue to provide certainty about 
how errors involving options orders and trades will be handled during 
periods of extraordinary volatility in the underlying security. The 
Exchange believes that it continues to be necessary and appropriate in 
the interest of promoting fair and orderly markets to exclude 
transactions executed during a Limit State or Straddle State from 
certain aspects of Chapter V, Section 6.
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    \9\ 15 U.S.C. 78f.
    \10\ 15 U.S.C. 78f(b)(5).
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    Although the Limit Up-Limit Down Plan is operational, the Exchange 
believes that maintaining the pilot will help the industry gain further 
experience operating the Plan as well as the pilot provisions.
    Based on the foregoing, the Exchange believes the benefits to 
market participants should continue on a pilot basis to coincide with 
the operation of the Limit Up-Limit Down Plan.

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.

[[Page 10553]]

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

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the proposed rule change does not (i) significantly affect 
the protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative for 30 
days from the date on which it was filed, or such shorter time as the 
Commission may designate if consistent with the protection of investors 
and the public interest, the proposed rule change has become effective 
pursuant to Section 19(b)(3)(A) of the Act \11\ and Rule 19b-
4(f)(6)(iii) thereunder.\12\
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6)(iii). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and the text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission.
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    The Exchange has asked the Commission to waive the 30-day operative 
delay so that the proposal may become operative immediately upon 
filing. The Commission believes that waiving the 30-day operative delay 
is consistent with the protection of investors and the public interest, 
as it will allow the obvious error pilot program to continue 
uninterrupted while the industry gains further experience operating 
under the Plan, and avoid any investor confusion that could result from 
a temporary interruption in the pilot program. For this reason, the 
Commission designates the proposed rule change to be operative upon 
filing.\13\
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    \13\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or 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-NASDAQ-2015-016 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2015-016. 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 such filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NASDAQ-2015-016, and should 
be submitted on or before March 19, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015-03959 Filed 2-25-15; 8:45 am]
BILLING CODE 8011-01-P


