[Federal Register Volume 86, Number 244 (Thursday, December 23, 2021)]
[Notices]
[Pages 73009-73011]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-27821]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93818; File No. SR-NYSEArca-2021-91]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Approving a 
Proposed Rule Change To Amend Rule 6.87-O

December 17, 2021.

I. Introduction

    On October 20, 2021, NYSE Arca, Inc. (``NYSE Arca'' or the 
``Exchange'') filed with the Securities and Exchange 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 Rule 6.87-O (``Nullification and 
Adjustment of Options Transactions including Obvious Errors''). The 
proposed rule change was published for comment in the Federal Register 
on November 4, 2021.\3\ This order approves the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 93472 (October 29, 
2021), 86 FR 60926 (``Notice''). Comments received on the proposal 
are available on the Commission's website at: https://www.sec.gov/comments/sr-nysearca-2021-91/srnysearca202191.htm.
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

A. Background

    Pursuant to Rule 6.87-O, when reviewing an options transaction as 
potentially erroneous, the Exchange needs to 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.\4\ However, there may be situations where the NBB or NBO 
is not available or may not be reliable. Specifically, under Rule 6.87-
O(b)(1)-(3), 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.\5\
---------------------------------------------------------------------------

    \4\ See Rule 6.87-O(b).
    \5\ This includes at times the use of a singular third-party 
vendor, known as a TP Provider (currently CBOE Livevol, LLC). See 
Notice, supra note 3, at 60926.
---------------------------------------------------------------------------

    Under Rule 6.87-O(c), the Exchange determines whether an obvious 
error has occurred by comparing the execution price of the transaction 
with the Theoretical Price.\6\ If the execution price is determined to 
be higher or lower than the Theoretical Price by a minimum amount, as 
described in Rule 6.87-O(c)(1), the Exchange will either adjust or bust 
the transaction as provided for by Rule 6.87-O(b)(4).
---------------------------------------------------------------------------

    \6\ See Rule 6.87-O(c)(1).
---------------------------------------------------------------------------

    Following discussions with other exchanges and a cross-section of 
industry participants and in coordination with the Listed Options 
Market Structure Working Group (``LOMSWG'') (collectively, the 
``Industry Working Group''), the Exchange proposes: (1) To amend Rule 
6.87-O(b)(3) to permit the Exchange to determine the Theoretical Price 
of a customer option transaction in a wide market so long as a narrow 
market exists at any point during the 10-second period after an opening 
or re-opening; and (2) to amend Rule 6.87-O(c)(4)(B) to adjust, rather 
than nullify, customer transactions in obvious error situations, 
provided the adjustment does not violate the limit price. According to 
the Exchange, other options exchanges will also submit substantively 
identical proposals to the Commission following approval of this 
proposal.\7\
---------------------------------------------------------------------------

    \7\ See Notice, supra note 3, at 60926.
---------------------------------------------------------------------------

B. Rule 6.87-O(b)(3)

    Pursuant to Rule 6.87-O(b)(3), the Exchange will determine the 
Theoretical Price if the NBBO for the subject series is wide 
immediately before execution and a narrow market (as set forth in the 
rule) existed during the ten seconds prior to the transaction. Rule 
6.87-O(b)(3) further specifies that, should there be no narrow quotes 
during the ten seconds prior to the transaction, the Theoretical Price 
for the affected series will be the NBBO that existed at the time of 
execution (regardless of its width).\8\ The Exchange observes, however, 
that in the first seconds of trading, there is no 10-second period 
``prior to the transaction.'' \9\ According to the Exchange, the 
Industry Working Group has further observed that prices in certain 
series can be disjointed at the start of trading.\10\ Accordingly, the

[[Page 73010]]

Exchange proposes to amend Rule 6.87-O(b)(3) to address trading in 
certain circumstances immediately after the opening before liquidity 
has had a chance to enter the market by allowing the Exchange to 
determine the Theoretical Price in a wide market so long as a narrow 
market exists at any point during the 10-second period after an opening 
or re-opening.
---------------------------------------------------------------------------

    \8\ See also id. at 60927.
    \9\ See id.
    \10\ See id.
---------------------------------------------------------------------------

    The proposed rule change would also better harmonize section (b)(3) 
with section (b)(1) of the Rule. Under section (b)(1), the Exchange is 
permitted to determine the Theoretical Price for transactions occurring 
as part of the opening auction process (as defined in Rule 6.64-O) if 
there is no NBB or NBO for the affected series just prior to the 
erroneous transaction. In contrast, under the current version of 
section (b)(3), the Exchange would not be able to determine the 
Theoretical Price for the trade occurring during core trading. Thus, if 
an erroneous trade occurs on the Exchange during the 10-second period 
immediately following an opening or reopening, and an erroneous trade 
occurs on another exchange as a part of its opening auction during the 
first 10 seconds of trading, the trade on the other exchange could be 
submitted for review under (b)(1) and only that exchange would be able 
to determine the Theoretical Price. Under the current version of 
section (b)(3), the Exchange would not be able to determine the 
Theoretical Price because the erroneous transaction occurred during the 
first 10 seconds of core trading and not as a part of the opening 
process. Under the proposed rule change, however, both trades would be 
entitled to the same review regarding the same Theoretical Price based 
upon the same time.\11\
---------------------------------------------------------------------------

    \11\ See Notice, supra note 3, at 60928.
---------------------------------------------------------------------------

    Pursuant to the proposed rule change, the Exchange would determine 
the Theoretical Price if the bid/ask differential of the NBB and NBO 
for the affected series just prior to the Customer's erroneous 
transaction was equal to or greater than the minimum amount set forth 
in proposed Rule 6.87-O(b)(3)(A) \12\ and there was a bid/ask 
differential less than the minimum amount during the 10 seconds prior 
to the transaction.\13\ If there was no bid/ask differential less than 
the minimum amount during the 10 seconds prior to the transaction, then 
the Exchange would determine the Theoretical Price if the bid/ask 
differential of the NBB and NBO for the affected series just prior to 
the Customer's erroneous transaction was equal to or greater than the 
minimum amount set forth in proposed Rule 6.87-O(b)(3)(A) and there was 
a bid/ask differential less than the minimum amount anytime during the 
10 seconds after an opening or re-opening.\14\ If there was no bid/ask 
differential less than the minimum amount during the 10 seconds 
following an opening or re-opening, then the Theoretical Price of an 
option series would be the last NBB or NBO just prior to the customer 
transaction in question, as set forth in Rule 6.87-O(b).\15\ Customer 
transactions occurring more than 10 seconds after an opening or re-
opening would continue to be subject to proposed Rule 6.87-
O(b)(3)(A).\16\
---------------------------------------------------------------------------

    \12\ The Exchange proposes to move the existing text of Rule 
6.87-O(b)(3) into a new subparagraph (A).
    \13\ See proposed Rule 6.87-O(b)(3)(B)(i).
    \14\ See proposed Rule 6.87-O(b)(3)(B)(ii).
    \15\ See proposed Rule 6.87-O(b)(3)(B)(iii).
    \16\ See supra note 12. See also Notice, supra note 3, for 
additional description and examples of the proposed rule change.
---------------------------------------------------------------------------

C. Rule 6.87-O(c)(4)(B)

    Current Rule 6.87-O(c)(4) provides that obvious error transactions 
involving non-customers would be adjusted, while transactions involving 
customers are nullified, unless a certain specified condition 
applies.\17\ Under this proposed rule change, Rule 6.87-O(c)(4)(B) 
would be amended to provide that even obvious error transactions 
involving a customer will be adjusted, instead of nullified, as long as 
the adjustment does not violate the customer's limit price. 
Specifically, pursuant to proposed Rule 6.87-O(c)(4)(B), where at least 
one party to an erroneous transaction is a customer, the execution 
price of the transaction would be adjusted pursuant to the adjustment 
criteria in Rule 6.87-O(c)(4)(A), which provides for the adjustment of 
prices a specified amount away from the Theoretical Price. Any customer 
obvious error exceeding 50 contracts would be subject to the size 
adjustment modifier defined in Rule 6.87-O(a)(4).\18\ However, if such 
adjustment(s) would result in an execution price higher (for buy 
transactions) or lower (for sell transactions) than the customer's 
limit price, the trade would be nullified.\19\
---------------------------------------------------------------------------

    \17\ Specifically, current Rule 6.87-O(c)(4)(C) provides that if 
an OTP Holder has 200 or more customer transactions under review 
concurrently and the orders resulting in such transactions were 
submitted during the course of two minutes or less, where at least 
one party to the obvious error is a non-customer, then the Exchange 
will apply the non-customer adjustment criteria found in Rule 6.87-
O(c)(4)(A).
    \18\ See proposed Rule 6.87-O(c)(4)(B).
    \19\ See id.
---------------------------------------------------------------------------

D. Implementation Date

    The Exchange represents that it will announce the effective date of 
the proposed rule change in a Trader Update distributed to all OTP 
Holders and OTP Firms, which will be no sooner than six months from the 
approval of this proposal.\20\
---------------------------------------------------------------------------

    \20\ See Notice, supra note 3, at 60928.
---------------------------------------------------------------------------

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.\21\ In 
particular, the Commission finds that the proposed rule change is 
consistent with the requirements of Section 6(b) of the Act \22\ and 
with Section 6(b)(5) of the Act,\23\ 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. Further, the 
Commission believes that proposed modifications to Rule 6.87-O will 
foster cooperation and coordination with persons engaged in regulating 
and facilitating transactions.
---------------------------------------------------------------------------

    \21\ 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).
    \22\ 15 U.S.C. 78f(b).
    \23\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    One commenter, a LOMSWG member, expressed broad support for the 
proposal, stating that the proposal is designed to protect retail 
customers.\24\ Specifically, the commenter argues that the proposed 
change to Rule 6.87-O(b)(3) would provide a more uniform treatment of 
customer erroneous transactions occurring during the 10-second period 
immediately following an opening or re-opening.\25\ The commenter also 
argues that the proposed change to Rule 6.87-O(c)(4)(B) would provide 
for uniform treatment of customer and non-customer erroneous 
transactions, stating that the proposal reflects changes in the 
dynamics of options market customers by extending hedging protections 
previously available to non-customers.\26\
---------------------------------------------------------------------------

    \24\ See Letter from Ellen Greene, Managing Director, Equities & 
Options Market Structure, Securities Industry and Financial Markets 
Association, to Vanessa Countryman, Secretary, Commission, dated 
November 23, 2021, at 2 (``SIFMA Letter'').
    \25\ See id. See also text accompanying note 11.
    \26\ See SIFMA Letter, supra note 25, at 2.
---------------------------------------------------------------------------

    The Commission believes that the proposal to amend Rule 6.87-
O(b)(3)(B)

[[Page 73011]]

is designed to achieve more consistent results for participants across 
U.S. options exchanges than under the current harmonized rules, while 
maintaining a fair and orderly market, protecting investors, and 
protecting the public interest. Specifically, the proposed change to 
Rule 6.87-O(b)(3) is designed to increase the consistency and 
transparency in the handling of erroneous options transactions in 
situations immediately after an opening or re-opening where there is no 
10-second period prior to the transaction by allowing for the 
calculation of a Theoretical Price during the 10-second period 
immediately following an opening and reopening.\27\
---------------------------------------------------------------------------

    \27\ See Notice, supra note 3, at 60928.
---------------------------------------------------------------------------

    The Commission also believes that the Exchange's proposed change to 
Rule 6.87-O(c)(4) is consistent with the Act and would further the goal 
of providing increased transparency and uniformity in the handling of 
erroneous options transactions involving customers and non-customers. 
As the Exchange observes, the proposed rule change would better 
harmonize the treatment of non-customer transactions and customer 
transactions under the Rule and provide greater certainty of execution 
for all participants to options transactions, while still respecting a 
customer's limit price.\28\
---------------------------------------------------------------------------

    \28\ See id. at 60928-29.
---------------------------------------------------------------------------

    The proposed rule change will become operative no sooner than six 
months following its approval, on a date to be announced in a Trader 
Update made available by the Exchange to its OTP Holders and OTP Firms. 
This delayed implementation is designed to allow other options 
exchanges time to adopt rules consistent with this proposal and for all 
options exchanges to coordinate the date of implementation of such 
harmonized rules.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\29\ that the proposed rule change (SR-NYSEArca-2021-91) be, and 
hereby is, approved.
---------------------------------------------------------------------------

    \29\ 15 U.S.C. 78s(b)(2).
    \30\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-27821 Filed 12-22-21; 8:45 am]
BILLING CODE 8011-01-P


