[Federal Register Volume 87, Number 136 (Monday, July 18, 2022)]
[Notices]
[Pages 42760-42767]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-15219]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95259; File No. SR-CboeBZX-2022-037]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Amend BZX Rule 11.17, Clearly 
Erroneous Executions

July 12, 2022.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on July 11, 2022, Cboe BZX Exchange, Inc. (the ``Exchange'' or 
``BZX'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to

[[Page 42761]]

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 Substance 
of the Proposed Rule Change

    Cboe BZX Exchange, Inc. (``BZX'' or the ``Exchange'') is filing 
with the Securities and Exchange Commission (the ``Commission'') a 
proposed rule change to amend BZX Rule 11.17, Clearly Erroneous 
Executions. The text of the proposed rule change is provided in Exhibit 
5.
    The text of the proposed rule change is also available on the 
Exchange's website (http://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), at the Exchange's Office of the Secretary, 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
    The purpose of the proposed rule change is to amend BZX Rule 11.17, 
Clearly Erroneous Executions. Specifically, the Exchange proposes to: 
(1) make the current clearly erroneous pilot program permanent; and (2) 
limit the circumstances where clearly erroneous review would continue 
to be available during Regular Trading Hours,\3\ when the LULD Plan to 
Address Extraordinary Market Volatility (the ``LULD Plan'') \4\ already 
provides similar protections for trades occurring at prices that may be 
deemed erroneous. The Exchange believes that these changes are 
appropriate as the LULD Plan has been approved by the Commission on a 
permanent basis,\5\ and in light of amendments to the LULD Plan, 
including changes to the applicable Price Bands \6\ around the open and 
close of trading.
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    \3\ The term ``Regular Trading Hours'' means the time between 
9:30 a.m. and 4:00 p.m. Eastern Time. See BZX Rule 1.5(w).
    \4\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012).
    \5\ See Securities Exchange Act Release No. 84843 (December 18, 
2018), 83 FR 66464 (December 26, 2018) (``Notice''); 85623 (April 
11, 2019), 84 FR 16086 (April 17, 2019) (File No. 4-631) 
(``Amendment Eighteen'').
    \6\ ``Price Bands'' refers to the term provided in Section V of 
the LULD Plan.
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Proposal To Make the Clearly Erroneous Pilot Permanent
    On September 10, 2010, the Commission approved, on a pilot basis, 
changes to BZX Rule 11.17 that, among other things: (i) provided for 
uniform treatment of clearly erroneous execution reviews in multi-stock 
events involving twenty or more securities; and (ii) reduced the 
ability of the Exchange to deviate from the objective standards set 
forth in the rule.\7\ In 2013, the Exchange adopted a provision 
designed to address the operation of the LULD Plan.\8\ Finally, in 
2014, the Exchange adopted two additional provisions providing that: 
(i) a series of transactions in a particular security on one or more 
trading days may be viewed as one event if all such transactions were 
effected based on the same fundamentally incorrect or grossly 
misinterpreted issuance information resulting in a severe valuation 
error for all such transactions; and (ii) in the event of any 
disruption or malfunction in the operation of the electronic 
communications and trading facilities of an Exchange, another SRO, or 
responsible single plan processor in connection with the transmittal or 
receipt of a trading halt, an Officer, acting on his or her own motion, 
shall nullify any transaction that occurs after a trading halt has been 
declared by the primary listing market for a security and before such 
trading halt has officially ended according to the primary listing 
market.\9\ These changes are currently scheduled to operate for a pilot 
period that would end at the close of business on July 20, 2022.\10\
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    \7\ See Securities Exchange Act Release No. 62886 (Sept. 10, 
2010), 75 FR 56613 (Sept. 16, 2010) (SR-BATS-2010-016).
    \8\ See Securities Exchange Act Release No. 68797 (Jan. 31, 
2013), 78 FR 8635 (Feb. 6, 2013) (SR-BATS-2013-008).
    \9\ See Securities Exchange Act Release No. 72434 (June 19, 
2014), 79 FR 36110 (June 25, 2014) (SR-BATS-2014-014).
    \10\ See Securities Exchange Act Release No. 94749 (April 19, 
2022), 87 FR 24352 (April 25, 2022) (SR-CboeBZX-2022-028).
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    When it originally approved the clearly erroneous pilot, the 
Commission explained that the changes were ``being implemented on a 
pilot basis so that the Commission and the Exchanges can monitor the 
effects of the pilot on the markets and investors, and consider 
appropriate adjustments, as necessary.'' \11\ In the 12 years since 
that time, the Exchange and other national securities exchanges have 
gained considerable experience in the operation of the rule, as amended 
on a pilot basis. Based on that experience, the Exchange believes that 
the program should be allowed to continue on a permanent basis so that 
equities market participants and investors can benefit from the 
increased certainty provided by the amended rule.
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    \11\ See Securities Exchange Act Release No. 62886 (September 
10, 2010), 75 FR 56613 (September 16, 2010) (SR-BATS-2010-016).
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    The clearly erroneous pilot was implemented following a severe 
disruption in the U.S. equities markets on May 6, 2010 (``Flash 
Crash'') to ``provide greater transparency and certainty to the process 
of breaking trades.'' \12\ Largely, the pilot reduced the discretion of 
the Exchange, other national securities exchanges, and Financial 
Industry Regulatory Authority (``FINRA'') to deviate from the objective 
standards in their respective rules when dealing with potentially 
erroneous transactions. The pilot has thus helped afford greater 
certainty to Members and investors about when trades will be deemed 
erroneous pursuant to self-regulatory organization (``SRO'') rules and 
has provided a more transparent process for conducting such reviews. 
The Exchange proposes to make the current pilot permanent so that 
market participants can continue to benefit from the increased 
certainty afforded by the current rule.
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    \12\ Id.
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Amendments to the Clearly Erroneous Rules
    When the Participants to the LULD Plan filed to introduce the Limit 
Up-Limit Down (``LULD'') mechanism, itself a response to the Flash 
Crash, a handful of commenters noted the potential discordance between 
the clearly erroneous rules and the Price Bands used to limit the price 
at which trades would be permitted to be executed pursuant to the LULD 
Plan. For example, two commenters requested that the clearly erroneous 
rules be amended so the presumption would be that trades executed 
within the Price Bands would not be not subject to review.\13\ While 
the Participants acknowledged that the potential to prevent clearly 
erroneous executions would be a ``key benefit'' of the LULD Plan, the 
Participants decided not to amend the clearly erroneous rules at

[[Page 42762]]

that time.\14\ In the years since, industry feedback has continued to 
reflect a desire to eliminate the discordance between the LULD 
mechanism and the clearly erroneous rules so that market participants 
would have more certainty that trades executed with the Price Bands 
would stand. For example, the Equity Market Structure Advisory 
Committee (``EMSAC'') Market Quality Subcommittee included in its April 
19, 2016 status report a preliminary recommendation that clearly 
erroneous rules be amended to conform to the Price Bands--i.e., ``any 
trade that takes place within the band would stand and not be broken 
and trades outside the LU/LD bands would be eligible for the 
consideration of the Clearly Erroneous rules.'' \15\
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    \13\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631) (n. 33505).
    \14\ Id.
    \15\ See EMSAC Market Quality Subcommittee, Recommendations for 
Rulemaking on Issues of Market Quality (November 29, 2016), 
available at https://www.sec.gov//emsac/recommendations-rulemaking-market-quality.pdf.
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    The Exchange believes that it is important for there to be some 
mechanism to ensure that investors' orders are either not executed at 
clearly erroneous prices or are subsequently busted as needed to 
maintain a fair and orderly market. At the same time, the Exchange 
believes that the LULD Plan, as amended, would provide sufficient 
protection for trades executed during Regular Trading Hours. Indeed, 
the LULD mechanism could be considered to offer superior protection as 
it prevents potentially erroneous trades from being executed in the 
first instance. After gaining experience with the LULD Plan, the 
Exchange now believes that it is appropriate to largely eliminate 
clearly erroneous review during Regular Trading Hours when Price Bands 
are in effect. Thus, as proposed, trades executed within the Price 
Bands would stand, barring one of a handful of identified scenarios 
where such review may still be necessary for the protection of 
investors. The Exchange believes that this change would be beneficial 
for the U.S. equities markets as it would ensure that trades executed 
within the Price Bands are subject to clearly erroneous review in only 
rare circumstances, resulting in greater certainty for Members and 
investors.
    The current LULD mechanism for addressing extraordinary market 
volatility is available solely during Regular Trading Hours. Thus, 
trades during the Exchange's Early Trading,\16\ Pre-Opening,\17\ or 
After Hours Sessions \18\ would not benefit from this protection and 
could ultimately be executed at prices that may be considered 
erroneous. For this reason, the Exchange proposes that transactions 
executed during the Early Trading, Pre-Opening, or After Hours Sessions 
would continue to be reviewable as clearly erroneous. Continued 
availability of the clearly erroneous rule during pre- and post-market 
trading sessions would therefore ensure that investors have appropriate 
recourse when erroneous trades are executed outside of the hours where 
similar protection can be provided by the LULD Plan. Further, the 
proposal is designed to eliminate the potential discordance between 
clearly erroneous review and LULD Price Bands, which does not exist 
outside of Regular Trading Hours because the LULD Plan is not in 
effect. Thus, the Exchange believes that it is appropriate to continue 
to allow transactions to be eligible for clearly erroneous review if 
executed outside of Regular Trading Hours.
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    \16\ The term ``Early Trading Session'' means the time between 
7:00 a.m. and 8:00 a.m. Eastern Time. See BZX Rule 1.5(ee).
    \17\ The term ``Pre-Opening Session'' means the time between 
8:00 a.m. and 9:30 a.m. Eastern Time. See BZX Rule 1.5(r).
    \18\ The term ``After Hours Trading Session'' means the time 
between 4:00 p.m. and 8:00 p.m. Eastern Time. See BZX Rule 1.5(c).
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    On the other hand, there would be much more limited potential to 
request that a transaction be reviewed as potentially erroneous during 
Regular Trading Hours. With the introduction of the LULD mechanism in 
2013, clearly erroneous trades are largely prevented by the requirement 
that trades be executed within the Price Bands. In addition, in 2019, 
Amendment Eighteen to the LULD Plan eliminated double-wide Price Bands: 
(1) at the Open, and (2) at the Close for Tier 2 NMS Stocks 2 with a 
Reference Price above $3.00.\19\ Due to these changes, the Exchange 
believes that the Price Bands would provide sufficient protection to 
investor orders such that clearly erroneous review would no longer be 
necessary during Regular Trading Hours. As the Participants to the LULD 
Plan explained in Amendment Eighteen: ``Broadly, the Limit Up-Limit 
Down mechanism prevents trades from happening at prices where one party 
to the trade would be considered `aggrieved,' and thus could be viewed 
as an appropriate mechanism to supplant clearly erroneous rules.'' 
While the Participants also expressed concern that the Price Bands 
might be too wide to afford meaningful protection around the open and 
close of trading, amendments to the LULD Plan adopted in Amendment 
Eighteen narrowed Price Bands at these times in a manner that the 
Exchange believes is sufficient to ensure that investors' orders would 
be appropriately protected in the absence of clearly erroneous review. 
The Exchange therefore believes that it is appropriate to rely on the 
LULD mechanism as the primary means of preventing clearly erroneous 
trades during Regular Trading Hours.
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    \19\ See Amendment Eighteen, supra note 5.
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    At the same time, the Exchange is cognizant that there may be 
limited circumstances where clearly erroneous review may continue to be 
appropriate, even during Regular Trading Hours. Thus, the Exchange 
proposes to amend its clearly erroneous rules to enumerate the specific 
circumstances where such review would remain available during the 
course of Regular Trading Hours, as follows. All transactions that fall 
outside of these specific enumerated exceptions would be ineligible for 
clearly erroneous review.
    First, pursuant to proposed paragraph (c)(1)(A), a transaction 
executed during Regular Trading Hours would continue to be eligible for 
clearly erroneous review if the transaction is not subject to the LULD 
Plan. In such case, the Numerical Guidelines set forth in paragraph 
(c)(2) of Rule 11.17 will be applicable to such NMS Stock. While the 
majority of securities traded on the Exchange would be subject to the 
LULD Plan, certain equity securities, such as rights and warrants, are 
explicitly excluded from the provisions of the LULD Plan and would 
therefore be eligible for clearly erroneous review instead.\20\ 
Similarly, there are instances, such as the opening auction on the 
primary listing market,\21\ where transactions are not ordinarily 
subject to the LULD Plan, or circumstances where a transaction that 
ordinarily would have been subject to the LULD Plan is not--due, for 
example, to some issue with processing the Price Bands. These 
transactions would continue to be eligible for clearly erroneous 
review, effectively ensuring that such review remains available as a 
backstop when the LULD Plan would not prevent executions from occurring 
at erroneous prices in the first instance.
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    \20\ See Appendix A of the LULD Plan.
    \21\ The initial Reference Price used to calculate Price Bands 
is typically set by the Opening Price on the primary listing market. 
See Section V(B) of the LULD Plan.
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    Second, investors would also continue to be able to request review 
of transactions that resulted from certain systems issues pursuant to 
proposed paragraph (c)(1)(B). This limited exception would help to 
ensure that

[[Page 42763]]

trades that should not have been executed would continue to be subject 
to clearly erroneous review. Specifically, as proposed, transactions 
executed during Regular Trading Hours would be eligible for clearly 
erroneous review pursuant to proposed paragraph (c)(1)(B) if the 
transaction is the result of an Exchange technology or systems issue 
that results in the transaction occurring outside of the applicable 
LULD Price Bands pursuant to BZX Rule 11.17(g). A transaction subject 
to review pursuant to this paragraph shall be found to be clearly 
erroneous if the price of the transaction to buy (sell) that is the 
subject of the complaint is greater than (less than) the Reference 
Price, described in paragraph (d) of this Rule, by an amount that 
equals or exceeds the applicable Percentage Parameter defined in 
Appendix A to the LULD Plan (``Percentage Parameters'').
    Third, the Exchange proposes to narrowly allow for the review of 
transactions during Regular Trading Hours when the Reference Price, 
described in proposed paragraph (d), is determined to be erroneous by 
an Officer of the Exchange. Specifically, a transaction executed during 
Regular Trading Hours would be eligible for clearly erroneous review 
pursuant to proposed paragraph (c)(1)(C) if the transaction involved, 
in the case of (1) a corporate action or new issue or (2) a security 
that enters a Trading Pause pursuant to the LULD Plan and resumes 
trading without an auction,\22\ a Reference Price that is determined to 
be erroneous by an Officer of the Exchange because it clearly deviated 
from the theoretical value of the security. In such circumstances, the 
Exchange may use a different Reference Price pursuant to proposed 
paragraph (d)(2) of this Rule. A transaction subject to review pursuant 
to this paragraph shall be found to be clearly erroneous if the price 
of the transaction to buy (sell) that is the subject of the complaint 
is greater than (less than) the new Reference Price, described in 
paragraph (d)(2) below, by an amount that equals or exceeds the 
applicable Numerical Guidelines or Percentage Parameters, as applicable 
depending on whether the security is subject to the LULD Plan. 
Specifically, the Percentage Parameters would apply to all transactions 
except those in an NMS Stock that is not subject to the LULD Plan, as 
described in paragraph (c)(1)(A).
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    \22\ The Exchange notes that the ``resumption of trading without 
an auction'' provision of the proposed rule text applies only to 
securities that enter a Trading Pause pursuant to LULD and does not 
apply to a corporate action or new issue.
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    In the context of a corporate action or a new issue, there may be 
instances where the security's Reference Price is later determined by 
the Exchange to be erroneous (e.g., because of a bad first trade for a 
new issue), and subsequent LULD Price Bands are calculated from that 
incorrect Reference Price. In determining whether the Reference Price 
is erroneous in such instances, the Exchange would generally look to 
see if such Reference Price clearly deviated from the theoretical value 
of the security. In such cases, the Exchange would consider a number of 
factors to determine a new Reference Price that is based on the 
theoretical value of the security, including but not limited to, the 
offering price of the new issue, the ratio of the stock split applied 
to the prior day's closing price, the theoretical price derived from 
the numerical terms of the corporate action transaction such as the 
exchange ratio and spin-off terms, and the prior day's closing price on 
the OTC market for an OTC up-listing.\23\ In the foregoing instances, 
the theoretical value of the security would be used as the new 
Reference Price when applying the Percentage Parameters under the LULD 
Plan (or Numerical Guidelines if the transaction is in an NMS Stock 
that is not subject to the LULD Plan) to determine whether executions 
would be cancelled as clearly erroneous.
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    \23\ Using transaction data reported to the FINRA OTC Reporting 
Facility, FINRA disseminates via the Trade Data Dissemination 
Service a final closing report for OTC equity securities for each 
business day that includes, among other things, each security's 
closing last sale price.
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    The following illustrate the proposed application of the rule in 
the context of a corporate action or new issue:
Example 1
1. ABCD is subject to a corporate action, 1 for 10 reverse split, and 
the previous day close was $5, but the new theoretical price based on 
the terms of the corporate action is $50
2. The security opens at $5, with LULD bands at $4.50 x $5.50
3. The bands will be calculated correctly but the security is trading 
at an erroneous price based on the valuation of the remaining 
outstanding shares
4. The theoretical price of $50 would be used as the new Reference 
Price when applying LULD bands to determine if executions would be 
cancelled as clearly erroneous
Example 2
1. ABCD is subject to a corporate action, the company is doing a spin 
off where a new issue will be listed, BCDE. ABCD trades at $50, and the 
spinoff company is worth \1/5\ of ABCD
2. BCDE opens at $50 in the belief it is the same company as ABCD
3. The theoretical values of the two companies are ABCD $40 and BCDE 
$10
4. BCDE would be deemed to have had an incorrect Reference Price and 
the theoretical value of $10 would be used as the new Reference Price 
when applying the LULD Bands to determine if executions would be 
cancelled as clearly erroneous
Example 3
1. ABCD is an uplift from the OTC market, the prior days close on the 
OTC market was $20
2. ABCD opens trading on the new listing exchange at $0.20 due to an 
erroneous order entry
3. The new Reference Price to determine clearly erroneous executions 
would be $20, the theoretical value of the stock from where it was last 
traded

    In the context of the rare situation in which a security that 
enters a LULD Trading Pause and resumes trading without an auction 
(i.e., reopens with quotations), the LULD Plan requires that the new 
Reference Price in this instance be established by using the mid-point 
of the best bid and offer (``BBO'') on the primary listing exchange at 
the reopening time.\24\ This can result in a Reference Price and 
subsequent LULD Price Band calculation that is significantly away from 
the security's last traded or more relevant price, especially in less 
liquid names. In such rare instances, the Exchange is proposing to use 
a different Reference Price that is based on the prior LULD Band that 
triggered the Trading Pause, rather than the midpoint of the BBO.
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    \24\ See LULD Plan, Section I(U) and V(C)(1).
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    The following example illustrates the proposed application of the 
rule in the context of a security that reopens without an auction:
Example 4
1. ABCD stock is trading at $20, with LULD Bands at $18 x $22
2. An incoming buy order causes the stock to enter a Limit State 
Trading Pause and then a Trading Pause at $22
3. During the Trading Pause, the buy order causing the Trading Pause is 
cancelled
4. At the end of the 5-minute halt, there is no crossed interest for an 
auction to occur, thus trading would resume on a quote
5. Upon resumption, a quote that was available prior to the Trading 
Pause (e.g. a quote was resting on the book

[[Page 42764]]

prior to the Trading Pause), is widely set at $10 x $90
6. The Reference Price upon resumption is $50 (mid-point of BBO)
7. The SIP will use this Reference Price and publish LULD Bands of $45 
x $55 (i.e., far away from BBO prior to the halt)
8. The bands will be calculated correctly, but the $50 Reference Price 
is subsequently determined to be incorrect as the price clearly 
deviated from where it previously traded prior to the Trading Pause
9. The new Reference Price would be $22 (i.e., the last effective Price 
Band that was in a limit state before the Trading Pause), and the LULD 
Bands would be applied to determine if the executions should be 
cancelled as clearly erroneous

    In all of the foregoing situations, investors would be left with no 
remedy to request clearly erroneous review without the proposed 
carveouts in paragraph (c)(1)(C) because the trades occurred within the 
LULD Price Bands (albeit LULD Price Bands that were calculated from an 
erroneous Reference Price). The Exchange believes that removing the 
current ability for the Exchange to review in these narrow 
circumstances would lessen investor protections.
Numerical Guidelines
    Today, paragraph (c)(1) defines the Numerical Guidelines that are 
used to determine if a transaction is deemed clearly erroneous during 
Regular Trading Hours, or during the Early Trading, Pre-Opening and 
After Hours Sessions. With respect to Regular Trading Hours, trades are 
generally deemed clearly erroneous if the execution price differs from 
the Reference Price (i.e., last sale) by 10% if the Reference Price is 
greater than $0.00 up to and including $25.00; 5% if the Reference 
Price is greater than $25.00 up to and including $50.00; and 3% if the 
Reference Price is greater than $50.00. Wider parameters are also used 
for reviews for Multi-Stock Events, as described in paragraph (c)(2). 
With respect to transactions in Leveraged ETF/ETN securities executed 
during Regular Trading Hours, Early Trading, Pre-Opening and After-
Hours Trading Session, trades are deemed clearly erroneous if the 
execution price exceeds the Regular Trading Hours Numerical Guidelines 
multiplied by the leverage multiplier.
    Given the changes described in this proposed rule change, the 
Exchange proposes to amend the way that the Numerical Guidelines are 
calculated during Regular Trading Hours in the handful of instances 
where clearly erroneous review would continue to be available. 
Specifically, the Exchange would base these Numerical Guidelines, as 
applied to the circumstances described in paragraph (c)(1)(A), on the 
Percentage Parameters used to calculate Price Bands, as set forth in 
Appendix A to the LULD Plan. Without this change, a transaction that 
would otherwise stand if Price Bands were properly applied to the 
transaction may end up being subject to review and deemed clearly 
erroneous solely due to the fact that the Price Bands were not 
available due to a systems or other issue. The Exchange believes that 
it makes more sense to instead base the Price Bands on the same 
parameters as would otherwise determine whether the trade would have 
been allowed to execute within the Price Bands. The Exchange also 
proposes to modify the Numerical Guidelines applicable to leveraged 
ETF/ETN securities during Regular Trading Hours. As noted above, the 
Numerical Guidelines will only be applicable to transactions eligible 
for review pursuant paragraph (c)(1)(A) (i.e., to NMS Stocks that are 
not subject to the LULD Plan). As leveraged ETF/ETN securities are 
subject to LULD and thus the Percentage Parameters will be applicable 
during Regular Trading Hours, the Exchange proposes to eliminate the 
Numerical Guidelines for leveraged ETF/ETN securities traded during 
Regular Trading Hours. However, as no Price Bands are available outside 
of Regular Trading Hours, the Exchange proposes to keep the existing 
Numerical Guidelines in place for transactions in leveraged ETF/ETN 
securities that occur during Early Trading, Pre-Opening and After-Hours 
Trading.
    The Exchange also proposes to move existing paragraphs (c)(2), 
(c)(3), and (d) to proposed paragraph (c)(2)(B), (c)(2)(C), and 
(C)(2)(D), respectively, as Multi-Stock Events, Additional Factors, and 
Outlier Transactions will only be subject to review if those NMS Stocks 
are not subject to the LULD Plan or occur during the Early Trading, 
Pre-Opening and After Hours Sessions. Proposed paragraph (c)(2)(B) is 
substantially similar to existing paragraph (c)(2) except for a change 
in rule reference to paragraph (c)(1) has been updated to paragraph 
(c)(1)(A). Further, given the proposal to move existing paragraph 
(c)(2) to paragraph (c)(2)(B), the Exchange also proposes to amend 
applicable rule references throughout paragraph (c)(2)(A). Finally, the 
Exchange proposes to update applicable rule references in paragraph 
(c)(2)(D) based on the above-described structural changes to the Rule.
Reference Price
    As proposed, the Reference Price used would continue to be based on 
last sale and would be memorialized in proposed paragraph (d). 
Continuing to use the last sale as the Reference Price is necessary for 
operational efficiency as it may not be possible to perform a timely 
clearly erroneous review if doing so required computing the arithmetic 
mean price of eligible reported transactions over the past five 
minutes, as contemplated by the LULD Plan. While this means that there 
would still be some differences between the Price Bands and the clearly 
erroneous parameters, the Exchange believes that this difference is 
reasonable in light of the need to ensure timely review if clearly 
erroneous rules are invoked. The Exchange also proposes to allow for an 
alternate Reference Price to be used as prescribed in proposed 
paragraphs (d)(1), (2), and (3). Specifically, the Reference Price may 
be a value other than the consolidated last sale immediately prior to 
the execution(s) under review (1) in the case of Multi-Stock Events 
involving twenty or more securities, as described in paragraph 
(c)(2)(B) above, (2) in the case of an erroneous Reference Price, as 
described in paragraph (c)(1)(C) above,\25\ or (3) in other 
circumstances, such as, for example, relevant news impacting a security 
or securities, periods of extreme market volatility, sustained 
illiquidity, or widespread system issues, where use of a different 
Reference Price is necessary for the maintenance of a fair and orderly 
market and the protection of investors and the public interest, 
provided that such circumstances occurred during Early Trading, Pre-
Opening or After-Hours Session or are eligible for review pursuant to 
paragraph (c)(1)(A).
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    \25\ As discussed above, in the case of (c)(1)(C)(1), the 
Exchange would consider a number of factors to determine a new 
Reference Price that is based on the theoretical value of the 
security, including but not limited to, the offering price of the 
new issue, the ratio of the stock split applied to the prior day's 
closing price, the theoretical price derived from the numerical 
terms of the corporate action transaction such as the exchange ratio 
and spin-off terms, and the prior day's closing price on the OTC 
market for an OTC up-listing. In the case of (c)(1)(C)(2), the 
Reference Price will be the last effective Price Band that was in a 
limit state before the Trading Pause.
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Appeals
    As described more fully below, the Exchange proposes to eliminate 
paragraph (f), System Disruption or Malfunction. Accordingly, the 
Exchange proposes to remove from paragraph (e)(2), Appeals, each 
reference to

[[Page 42765]]

paragraph (f), and include language referencing proposed paragraph (g), 
Transactions Occurring Outside of the LULD Bands.
System Disruption or Malfunction
    To conform with the structural changes descried above, the Exchange 
proposes to remove paragraph 11.17(f), System Disruption or 
Malfunction, combine paragraph (c)(1)(C) with paragraph (c)(1)(B), and 
remove the reference to a trading halt in paragraph (c)(1)(C) to make 
clear that Trading Halts are subject to proposed paragraph (j). 
Specifically, as described in proposed paragraph (c)(1)(B) above, 
transactions occurring during Regular Trading Hours that are executed 
outside of the LULD Price Bands due to an Exchange technology or system 
issue, may be subject to clearly erroneous review pursuant to proposed 
paragraphs 11.17(g). Proposed paragraph 11.17 (c)(1)(B) further 
provides that a transaction subject to review pursuant to this 
paragraph shall be found to be clearly erroneous if the price of the 
transaction to buy (sell) that is the subject of the complaint is 
greater than (less than) the Reference Price, described in paragraph 
(d), by an amount that equals or exceeds the applicable Percentage 
Parameter defined in Appendix A to the LULD Plan.
Trade Nullification for UTP Securities That Are the Subject of Initial 
Public Offerings
    Current paragraph (h) of BZX Rule 11.17 provides different 
procedures for conducting clearly erroneous review in initial public 
offering (``IPO'') securities that are traded pursuant to unlisted 
trading privileges (``UTP'') after the initial opening of such IPO 
securities on the listing market. Specifically, this paragraph provides 
that a clearly erroneous error may be deemed to have occurred in the 
opening transaction of the subject security if the execution price of 
the opening transaction on the Exchange is the lesser of $1.00 or 10% 
away from the opening price on the listing exchange or association. The 
Exchange no longer believes that this provision is necessary as opening 
transactions on the Exchange following an IPO are subject to Price 
Bands pursuant to the LULD Plan. The Exchange therefore proposes to 
eliminate this provision in connection with the broader changes to 
clearly erroneous review during Regular Trading Hours.
Securities Subject To Limit Up-Limit Down Plan
    The Exchange proposes to renumber paragraph (i) to paragraph (h) 
based on the proposal to eliminate existing paragraph (h), and to 
rename the paragraph to provide for transactions occurring outside of 
LULD Price Bands. Given that proposed paragraph (c)(1) defines the LULD 
Plan, the Exchange also proposes to eliminate redundant language from 
proposed paragraph (h). Finally, the Exchange also proposes to update 
references to the LULD Plan and Price Bands so that they are uniform 
throughout the Rule and to update rule references throughout the 
paragraph to conform to the structural changes to the Rule described 
above.
Multi-Day Event and Trading Halts
    The Exchange proposes to renumber paragraphs (j) and (k) to 
paragraphs (h) and (i), respectively, based on the proposal to 
eliminate existing paragraph (h). Additionally, the Exchange proposes 
to modify the text of both paragraphs to reference the Percentage 
Parameters as well as the Numerical Guidelines. Specifically, the 
existing text of proposed paragraphs (h) and (i) provides that any 
action taken in connection with this paragraph will be taken without 
regard to the Numerical Guidelines set forth in this Rule. The Exchange 
proposes to amend the rule text to provide that any action taken in 
connection with this paragraph will be taken without regard to the 
Percentage Parameters or Numerical Guidelines set forth in this Rule, 
with the Percentage Parameters being applicable to an NMS Stock subject 
to the LULD Plan and the Numerical Guidelines being applicable to an 
NMS Stock not subject to the LULD Plan.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the requirements of Section 6(b) of the Act,\26\ in general, and 
Section 6(b)(5) of the Act,\27\ in particular, in that it is designed 
to remove impediments to and perfect the mechanism of a free and open 
market and a national market system, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest and not to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \26\ 15 U.S.C. 78f(b).
    \27\ 15 U.S.C. 78f(b)(5).
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    As explained in the purpose section of this proposed rule change, 
the current pilot was implemented following the Flash Crash to bring 
greater transparency to the process for conducting clearly erroneous 
reviews, and to help assure that the review process is based on clear, 
objective, and consistent rules across the U.S. equities markets. The 
Exchange believes that the amended clearly erroneous rules have been 
successful in that regard and have thus furthered fair and orderly 
markets. Specifically, the Exchange believes that the pilot has 
successfully ensured that such reviews are conducted based on objective 
and consistent standards across SROs and has therefore afforded greater 
certainty to Members and investors. The Exchange therefore believes 
that making the current pilot a permanent program is appropriate so 
that equities market participants can continue to reap the benefits of 
a clear, objective, and transparent process for conducting clearly 
erroneous reviews. In addition, the Exchange understands that the other 
U.S. equities exchanges and FINRA will also file largely identical 
proposals to make their respective clearly erroneous pilots permanent. 
The Exchange therefore believes that the proposed rule change would 
promote transparency and uniformity across markets concerning review of 
transactions as clearly erroneous and would also help assure consistent 
results in handling erroneous trades across the U.S. equities markets, 
thus furthering fair and orderly markets, the protection of investors, 
and the public interest.
    Similarly, the Exchange believes that it is consistent with just 
and equitable principles of trade to limit the availability of clearly 
erroneous review during Regular Trading Hours. The Plan was approved by 
the Commission to operate on a permanent rather than pilot basis. As a 
number of market participants have noted, the LULD Plan provides 
protections that ensure that investors' orders are not executed at 
prices that may be considered clearly erroneous. Further, amendments to 
the LULD Plan approved in Amendment Eighteen serve to ensure that the 
Price Bands established by the LULD Plan are ``appropriately tailored 
to prevent trades that are so far from current market prices that they 
would be viewed as having been executed in error.'' \28\ Thus, the 
Exchange believes that clearly erroneous review should only be 
necessary in very limited circumstances during Regular Trading Hours. 
Specifically, such review would only be necessary in instances where a 
transaction was not subject to the LULD Plan, or was the result of some 
form of systems issue, as detailed in the purpose

[[Page 42766]]

section of this proposed rule change. Additionally, in narrow 
circumstances where the transaction was subject to the LULD Plan, a 
clearly erroneous review would be available in the case of (1) a 
corporate action or new issue or (2) a security that enters a Trading 
Pause pursuant to LULD and resumes trading without an auction, where 
the Reference Price is determined to be erroneous by an Officer of the 
Exchange because it clearly deviated from the theoretical value of the 
security. Thus, eliminating clearly erroneous review in all other 
instances will serve to increase certainty for Members and investors 
that trades executed during Regular Trading Hours would typically stand 
and would not be subject to review.
---------------------------------------------------------------------------

    \28\ See Amendment Eighteen, supra note 5.
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    Given the fact that clearly erroneous review would largely be 
limited to transactions that were not subject to the LULD Plan, the 
Exchange also believes that it is necessary to change the parameters 
used to determine whether a trade is clearly erroneous. Specifically, 
due to the different parameters currently used for clearly erroneous 
review and for determining Price Bands, it is possible that a trade 
that would have been permitted to execute within the Price Bands would 
later be deemed clearly erroneous, if, for example, a systems issue 
prevented the dissemination of the Price Bands. The Exchange believes 
that this result is contrary to the principle that trades within the 
Price Bands should stand, and has the potential to cause investor 
confusion if trades that are properly executed within the applicable 
parameters described in the LULD Plan are later deemed erroneous. By 
using consistent parameters for clearly erroneous reviews conducted 
during Regular Trading Hours and the calculation of the Price Bands, 
the Exchange believes that this change would also serve to promote 
greater certainty with regards to when trades may be deemed erroneous.
    The Exchange believes that it is consistent with the protection of 
investors and the public interest to remove the current provision of 
the clearly erroneous rule dealing with UTP securities that are the 
subject of IPOs. This provision applies specifically to opening 
transactions on a non-listing market following an IPO on the listing 
market. As such, review under this paragraph is limited to trades 
conducted during Regular Trading Hours. As previously addressed, trades 
executed during Regular Trading Hours would generally not be subject to 
clearly erroneous review but would instead be protected by the Price 
Bands. The Exchange therefore no longer believes that this paragraph is 
necessary, as all trades subject to this provision today would either 
be subject to the LULD Plan, or, in the event of some systems or other 
issue, would be subject to the provisions that apply to transactions 
that are not adequately protected by the LULD Plan.
    Finally, the proposed rule changes make organizational updates to 
the Exchange's Clearly Erroneous Execution Rule as well as minor 
updates and corrections to the Rule to improve readability and clarity.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change would 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The proposal would ensure 
the continued, uninterrupted operation of harmonized clearly erroneous 
execution rules across the U.S. equities markets while also amending 
those rules to provide greater certainty to Members and investors that 
trades will stand if executed during Regular Trading Hours where the 
LULD Plan provides adequate protection against trading at erroneous 
prices. The Exchange understands that the other national securities 
exchanges and FINRA will also file similar proposals, the substance of 
which are identical to this proposal. Thus, the proposed rule change 
will help to ensure consistency across SROs without implicating any 
competitive issues.

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

    No comments were solicited or received on the proposed rule change.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    A. by order approve or disapprove such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be 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 [email protected]. Please include 
File Number SR-CboeBZX-2022-037 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-CboeBZX-2022-037. 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 website (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 website 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 the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions.
    You should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-CboeBZX-2022-
037 and should be submitted on or before August 8, 2022.


[[Page 42767]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-15219 Filed 7-15-22; 8:45 am]
BILLING CODE 8011-01-P


