
[Federal Register Volume 82, Number 132 (Wednesday, July 12, 2017)]
[Notices]
[Pages 32216-32218]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-14556]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81084; File No. SR-BatsBZX-2017-35]


Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Order 
Granting Approval of a Proposed Rule Change To Amend Rule 20.6, 
Nullification and Adjustment of Options Transactions Including Obvious 
Errors, and Rule 20.3, Trading Halts

July 6, 2017.

I. Introduction

    On May 5, 2017, Bats BZX Exchange, Inc. (the ``Exchange'' or 
``BZX'') 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 Exchange Rule 20.6 (``Rule 20.6''), 
relating to the adjustment and nullification of transactions that occur 
on the Exchange's equity options platform, and Exchange Rule 20.3 
(``Rule 20.3''), relating to trading halts. The proposed rule change 
was published for comment in the Federal Register on May 23, 2017.\3\ 
The Commission received no comments regarding 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\ See Securities Exchange Act Release No. 80709 (May 17, 
2017), 82 FR 23684 (``Notice'').
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II. Description of the Proposed Rule Change

    The Exchange proposes to amend Rule 20.6, entitled ``Nullification 
and Adjustment of Options Transactions including Obvious Errors,'' to: 
(i) Adopt procedures to determine Theoretical Price in the event a 
reliable national best bid or offer (``NBBO'') is not available; and 
(ii) expand the category of invalid quotes. The Exchange also proposes 
to amend Rule 20.3, entitled ``Trading Halts,'' to require the Exchange 
to nullify any transaction that occurs during a regulatory halt on the 
primary listing market for the underlying security.

A. Background

    The Exchange and other options exchanges previously adopted new, 
harmonized rules related to the adjustment and nullification of 
erroneous options transactions.\4\ The Exchange believes that the 
changes the options exchanges implemented with the new, harmonized 
rules have led to increased transparency and finality with respect to 
the adjustment and nullification of erroneous options transactions.\5\ 
However, as part of the initial initiative, the Exchange and other 
options exchanges deferred a few specific matters for further 
discussion, including the calculation of Theoretical Price in the event 
a reliable NBBO is not available and the handling of erroneous complex 
orders and stock-option orders.\6\ The calculation of Theoretical Price 
is used in determining whether an options transaction is potentially 
erroneous and subject to a nullification or adjustment under Rule 20.6.
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    \4\ See Securities Exchange Act Release No. 74556 (March 20, 
2015), 80 FR 16031 (March 26, 2015) (order approving SR-BATS-2014-
067); see also Securities and Exchange Act Release No. 73884 
(December 18, 2014), 79 FR 77557 (December 24, 2014) (notice of 
filing of SR-BATS-2014-067).
    \5\ See Notice, supra note 3, at 23684.
    \6\ Since adopting the initial harmonized rule, the exchanges 
that offer complex orders and/or stock-option orders have addressed 
the handling of erroneous options transactions that result from the 
execution of complex orders and stock-option orders. See, e.g., 
Securities Exchange Act Release No. 80040 (February 14, 2017), 82 FR 
11248 (February 21, 2017) (SR-CBOE-2016-088) (granting approval of a 
proposal related to the nullification and adjustment of erroneous 
complex order and stock-option order transactions).
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B. Calculation of Theoretical Price Using a Third Party Provider

    Pursuant to Rule 20.6, when reviewing a transaction as potentially 
erroneous, the Exchange needs to first determine the ``Theoretical 
Price'' of the option, i.e., the Exchange's estimate of the correct 
market price for the option. If the applicable option series is traded 
on at least one other options exchange, then the Theoretical Price of 
an option series is generally the last national best bid (``NBB'') just 
prior to the trade in question with respect to an erroneous sell 
transaction or the last national best offer (``NBO'') just prior to the 
trade in question with respect to an erroneous buy transaction. 
However, there may be situations where the NBB or NBO is not available 
or may not be reliable. Specifically, under sub-paragraphs (b)(1)-(3) 
of Rule 20.6, these situations occur when there are no quotes or no 
valid quotes for comparison purposes, when the NBBO is determined to be 
too wide to be reliable, and at the open of each trading day. In each 
of these circumstances, because the NBB or NBO is not available or is 
deemed to be unreliable, the Exchange determines Theoretical Price.\7\ 
The Exchange notes that the process for determining Theoretical Price 
in such situations could be subjective and lead to disparate results 
for a transaction that spans multiple options exchanges.\8\
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    \7\ The Exchange states that when determining Theoretical Price 
under the current Rule, Exchange personnel generally consult and 
refer to data such as the prices of related series (especially the 
closest strikes in the option in question), the price of the 
underlying security, volatility characteristics of the option, and 
historical pricing of the option and/or similar options. See Notice, 
supra note 3, at 23685.
    \8\ See id.
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    Accordingly, the Exchange proposes to adopt Interpretation and 
Policy .03 to Rule 20.6 to specify how the Exchange would determine 
Theoretical Price when required by sub-paragraphs (b)(1)-(3) of Rule 
20.6.\9\ In particular, the Exchange worked with other options 
exchanges to identify and select a reliable third party vendor (``TP 
Provider'') that would provide Theoretical Price to the Exchange 
whenever one or more transactions is under review pursuant to Rule 20.6 
and the NBBO is unavailable or deemed unreliable pursuant to Rule 
20.6(b).\10\ The Exchange and other options exchanges selected CBOE 
Livevol, LLC (``Livevol'') as the TP Provider.\11\ According to the 
Exchange, Livevol will develop a new tool in connection with this 
proposal based on its existing technology and services that would 
supply Theoretical Price to the Exchange and other options exchanges 
upon request.\12\ Accordingly, pursuant to proposed Interpretation and 
Policy .03 of Rule 20.6, when the Exchange must determine Theoretical 
Price pursuant to sub-paragraphs (b)(1)-(3) of

[[Page 32217]]

Rule 20.6, the Exchange would request Theoretical Price from the same 
TP Provider as other options exchanges that have adopted the new 
harmonized provision in their rules.\13\
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    \9\ The Exchange has further proposed to modify paragraph (b) to 
Rule 20.6 to state that the Exchange will rely on paragraph (b) and 
Interpretation and Policy .03 when determining Theoretical Price.
    \10\ See Notice, supra note 3, at 23685.
    \11\ See id. The Exchange proposes to codify the selection of 
Livevol in proposed paragraph (d) to Interpretation and Policy .03 
of Rule 20.6. See id.
    \12\ See id. The Exchange states that the Theoretical Price tool 
would leverage current market data and surrounding strikes to assist 
in a relative value pricing approach to generating a Theoretical 
Price. See id. When relative value methods are incapable of 
generating a valid Theoretical Price, the Theoretical Price tool 
will utilize historical trade and quote data to calculate 
Theoretical Price. See id.
    \13\ See id.
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    In addition, the Exchange proposes that if an Official \14\ of the 
Exchange believes that the Theoretical Price provided by the TP 
Provider is fundamentally incorrect and cannot be used consistent with 
the maintenance of a fair and orderly market, the Official shall 
contact the TP Provider to notify the TP Provider of the reason the 
Official believes such Theoretical Price is inaccurate and to request a 
review and correction of the calculated Theoretical Price.\15\ The 
Exchange notes that it does not anticipate needing to rely on this 
provision frequently, if at all, but believes the provision would allow 
the Exchange to prepare for all potential circumstances.\16\ The 
Exchange has also proposed to promptly provide electronic notice to 
other options exchanges if the TP Provider has been contacted to review 
and correct the calculated Theoretical Price at issue and to include a 
brief explanation of the reason for the request.\17\
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    \14\ For purposes of Rule 20.6, an Official is an Officer of the 
Exchange or such other employee designee of the Exchange that is 
trained in the application of Rule 20.6.
    \15\ See proposed paragraph (b) to Interpretation and Policy .03 
of Rule 20.6. If the TP Provider reviews the Theoretical Price, but 
disagrees that there has been any error, then the Exchange would be 
bound to use the Theoretical Price provided by the TP Provider. See 
Notice, supra note 3, at 23686 n.10.
    \16\ See Notice, supra note 3, at 23686.
    \17\ See proposed paragraph (b) to Interpretation and Policy .03 
of Rule 20.6. According to the Exchange, it expects that all other 
options exchanges, once in receipt of this notification, would await 
the determination of the TP Provider and would use the corrected 
price as soon as it becomes available. See Notice, supra note 3, at 
23686. The Exchange further notes that it expects the TP Provider to 
cooperate with, but to be independent of, the Exchange and other 
options exchanges. See id.
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    The Exchange also proposes that if the TP Provider experiences a 
systems issue that renders its services unavailable to accurately 
calculate Theoretical Price and such issue cannot be corrected in a 
timely manner, an Official of the Exchange may determine the 
Theoretical Price.\18\ The Exchange expects that it would await the TP 
Provider's services becoming available again if the Exchange was able 
to obtain information regarding the issue and the TP Provider had a 
reasonable expectation of being able to resume normal operations within 
the next several hours based on communications with the TP 
Provider.\19\ The Exchange also notes that if a wide-scale event 
occurred, even if such event did not qualify as a ``Significant Market 
Event'' pursuant to Rule 20.6(e), and the TP Provider was unavailable 
or otherwise experiencing difficulty, the Exchange believes that it and 
other options exchanges would seek to coordinate to the extent 
possible.\20\ In particular, the Exchange and other options exchanges 
have a process, administered by the Options Clearing Corporation, to 
invoke a discussion amongst all options exchanges in the event of any 
widespread or significant market events.\21\ The Exchange believes that 
this process could be used in the event necessary if there were an 
issue with the TP Provider.\22\
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    \18\ See proposed paragraph (c) to Interpretation and Policy .03 
of Rule 20.6. The Exchange states that it does not anticipate 
needing to rely on this provision frequently, if at all, but 
believes the provision would allow the Exchange to prepare for all 
potential circumstances. See Notice, supra note 3, at 23686.
    \19\ See Notice, supra note 3, at 23686. The Exchange states 
that Livevol has business continuity and disaster recovery 
procedures that would help to ensure that the Theoretical Price tool 
remains available or, in the event of an outage, that service is 
restored in a timely manner. See id.
    \20\ See id.
    \21\ See id.
    \22\ See id.
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    The Exchange also proposes to adopt language in paragraph (d) of 
Interpretation and Policy .03 to Rule 20.6 to state that neither the 
Exchange, the TP Provider, nor any affiliate of the TP Provider, makes 
any warranty, express or implied, as to the results to be obtained by 
any person or entity from the use of the TP Provider pursuant to 
Interpretation and Policy .03 to Rule 20.6. The proposed rule would 
further state that the TP Provider does not guarantee the accuracy or 
completeness of the calculated Theoretical Price and that the TP 
Provider disclaims all warranties of merchantability or fitness for a 
particular purpose or use with respect to such Theoretical Price. 
Finally, proposed paragraph (d) of Interpretation and Policy .03 to 
Rule 20.6 would state that neither the Exchange nor the TP Provider 
shall have any liability for any damages, claims, losses (including any 
indirect or consequential losses), expenses, or delays, whether direct 
or indirect, foreseen or unforeseen, suffered by any person arising out 
of any circumstance or occurrence relating to the use of such 
Theoretical Price or arising out of any errors or delays in calculating 
such Theoretical Price.\23\
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    \23\ The Exchange states that proposed paragraph (d) of 
Interpretation and Policy .03 to Rule 20.6 is modeled after existing 
language in Exchange Rules regarding ``reporting authorities'' that 
calculate indices. See id. at 23687. See also, e.g., BZX Rule 29.13, 
which relates to index options potentially listed and traded on the 
Exchange and disclaims liability for a reporting authority and their 
affiliates.
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C. No Valid Quotes--Market Participant Quoting on Multiple Exchanges

    As described above, one of the times where the NBB or NBO is deemed 
to be unreliable for purposes of calculating the Theoretical Price is 
when there are no quotes or no valid quotes for the affected series. In 
addition to when there are no quotes, the Exchange does not consider 
the following to be valid quotes: (i) All quotes in the applicable 
option series published at a time where the last NBB is higher than the 
last NBO in such series; (ii) quotes published by the Exchange that 
were submitted by either party to the transaction in question; and 
(iii) quotes published by another options exchange against which the 
Exchange has declared self-help.\24\
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    \24\ See Rule 20.6(b).
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    The Exchange proposes to add an additional category of invalid 
quotes in order to avoid a situation where a market participant has 
established the market at an erroneous price on multiple exchanges.\25\ 
In particular, the Exchange proposes to also consider as invalid the 
quotes in a series published by another options exchange if either 
party to the transaction in question submitted the quotes in the series 
representing such options exchange's best bid or offer.\26\ The 
Exchange, however, has proposed to only consider quotes invalid on 
other options exchanges in up to twenty-five total options series 
(i.e., whether such series all relate to the same underlying security 
or multiple underlying securities), which the Exchange states would 
allow it to apply the proposed rule in a timely and organized 
fashion.\27\ The Exchange believes its proposal to limit the proposed 
rule to twenty-five total options series is necessary because the 
application of the proposal will take considerable coordination with 
other options exchanges to confirm that the quotations in question on 
an away options exchange were indeed submitted by a party to a 
transaction on the Exchange.\28\ The Exchange also proposes to require 
the party that believes it established the best bid or offer on one or 
more other options exchanges to identify to the Exchange, in up to 
twenty-five total options series, the quotes which were submitted by 
such party and published by the other

[[Page 32218]]

options exchanges.\29\ In turn, the Exchange would verify with such 
other options exchanges that such quotations were indeed submitted by 
such party.\30\
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    \25\ See Notice, supra note 3, at 23687.
    \26\ See proposed Rule 20.6(b)(2)(C). The Exchange also proposes 
to renumber current Rule 20.6(b)(2)(C) as Rule 20.6(b)(2)(D).
    \27\ See Notice, supra note 3, at 23687.
    \28\ See id.
    \29\ See id. at 23688.
    \30\ See id.
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D. Trading Halts

    Rule 20.3 describes the Exchange's authority to declare trading 
halts in one or more options traded on the Exchange. Currently, Rule 
20.3 states that the Exchange shall nullify any transaction that occurs 
during a trading halt in the affected option on the Exchange or, with 
respect to equity options, during a trading halt on the primary listing 
market for the underlying security. The Exchange proposes to nullify 
any equity options transaction that occurs during a regulatory halt as 
declared by the primary listing market for the underlying security.\31\ 
The Exchange believes this change is necessary to distinguish a 
declared regulatory halt, where the underlying security should not be 
actively trading on any venue, from an operational issue on the primary 
listing exchange where the security continues to safely trade on other 
trading venues.\32\
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    \31\ See proposed paragraph (b) of Interpretation and Policy .01 
to Rule 20.3.
    \32\ See Notice, supra note 3, at 23688.
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E. Implementation Date

    In order to ensure that other options exchanges are able to adopt 
rules consistent with this proposal and to coordinate the effectiveness 
of such harmonized rules, the Exchange proposes to delay the 
effectiveness of this proposal to a date within ninety days following 
this approval.\33\
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    \33\ See id. The Exchange will announce the operative date in a 
Regulatory Circular made available to its Members. See id.
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III. Discussion and Commission Findings

    The Commission 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.\34\ In 
particular, the Commission finds that the proposed rule change is 
consistent with the requirements of Section 6(b) of the Act \35\ and 
with Section 6(b)(5) of the Act,\36\ 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 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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    \34\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \35\ 15 U.S.C. 78f(b).
    \36\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposal to amend Rule 20.6 will 
help assure greater objectivity, transparency, and clarity with respect 
to the adjustment and nullification of erroneous options transactions. 
The Commission notes that the proposal is designed to achieve more 
consistent results for participants across U.S. options exchanges than 
under the initial harmonized rules, while maintaining a fair and 
orderly market, protecting investors, and protecting the public 
interest. In particular, the proposal is designed to increase the 
consistency and transparency in the handling of erroneous options 
transactions in situations where the NBBO is unavailable or deemed 
unreliable pursuant to Rule 20.6(b).
    The Commission also believes that the Exchange's proposed change to 
its no valid quotes provision, as described in greater detail above, is 
consistent with the Act and would further the goal of providing 
increased transparency and uniformity in the handling of erroneous 
options transactions in a timely and organized fashion. Finally, the 
Commission believes that the Exchange's proposed change to Rule 20.3 
would provide increased transparency to its trading halt rule.
    Based on the foregoing, the Commission believes that the proposed 
rule change is consistent with Section 6(b)(5) of the Act \37\ in that 
proposed Rules 20.3 and 20.6 will foster cooperation and coordination 
with persons engaged in regulating and facilitating transactions.
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    \37\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that the proposed rule change will become 
operative within ninety days following its approval, on a date to be 
announced in a Regulatory Circular made available by the Exchange to 
its Members. This delayed implementation is to ensure that other 
options exchanges will have sufficient time to adopt rules consistent 
with this proposal and to coordinate the date of implementation of such 
harmonized rules.\38\
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    \38\ See Notice, supra note 3, at 23688.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\39\ that the proposed rule change (SR-BatsBZX-2017-35) be, and 
hereby is, approved.
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    \39\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\40\
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    \40\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-14556 Filed 7-11-17; 8:45 am]
BILLING CODE 8011-01-P


