Electronic Communication for Docket EPA-HQ-OPP-2013-0411.

From: Smith, Charles
Sent: Thursday, February 20, 2014 2:49 PM
To: Madden, Barbara; Kumar, Rita; Laws, Meredith
Cc: Perron, Monique; Tyler, Jennifer-R
Subject: Spirodiclofen

RD,

This email is to inform you of the progress regarding the spirodiclofen immunotoxicity and inhalation toxicity study requirements as referenced in the 2011 spirodiclofen risk assessment (J. Tyler; D386201; 11/11/11).

Since the completion of that assessment, HED has reviewed the immunotoxicity study (MRID 49072601) submitted by the registrants.  This study was classified as acceptable/guideline and satisfies the guideline requirement for an immunotoxicity study in rodents (M. Perron; TXR 0056898; 2/19/14).  No treatment related systemic or immunotoxicity related effects were seen at the highest dose tested (1,216 mg/kg/day).  As a result, the immunotoxicity study does not materially impact the results of the 2011 risk assessment.

On February 20, 2014 the Hazard and Science Policy Council (HASPOC) met to discuss the need for an inhalation study in rats to support the registered and future proposed uses of spirodiclofen.  The HASPOC, based on a WOE approach, concludes that a subchronic inhalation toxicity study is not required for spirodiclofen at this time.  This approach considered all of the available hazard and exposure information for spirodiclofen, including: (1) all relevant hazard and exposure information, including its low acute inhalation toxicity; (2) the lowest short- and intermediate-term MOEs calculated using an oral POD are 6,200 and 1,000, respectively; and (3) its physical/chemical properties, including its low volatility.

Since both of the toxicity data requirements discussed in the 2011 risk assessment have been fulfilled, there are no longer any outstanding toxicity data requirements for spirodiclofen.

Thanks.

Charles (Billy) Smith
Branch Chief, Risk Assessment Branch 1
Health Effects Division/Office of Pesticide Programs
Environmental Protection Agency
703-305-0291


[Federal Register Volume 78, Number 46 (Friday, March 8, 2013)]
[Notices]
[Pages 15080-15086]
[FR Doc No: 2013-05418]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69032; File No. SR-NYSEArca-2013-10]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change, as Modified by Amendment No. 1, Adopting New
Exchange Rule 6.65A To Provide for How the Exchange Proposes to Treat
Orders, Market-Making Quoting Obligations, and Errors in Response to
the Regulation NMS Plan To Address Extraordinary Market Volatility; and
Amending Exchange Rule 6.65 To Codify That the Exchange Shall Halt
Trading in All Options Overlying NMS Stocks When the Equities Markets
Initiate a Market-Wide Trading Halt Due to Extraordinary Market
Volatility

March 4, 2013.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on February 26, 2013, NYSE Arca, Inc. (the ``Exchange'' or
``NYSE Arca'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I and II
below, which Items have been prepared by the self-regulatory
organization. On March 1, 2013, the Exchange submitted Amendment No. 1
to the proposed rule change.\4\ The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
    \4\ See email from Brian O'Neill, Chief Counsel, NYSE
Regulation, to Andrew Madar, Assistant Director, Division of Trading
and Markets, dated March 1, 2013 (``Amendment No. 1'').
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The Exchange proposes (i) to adopt new Exchange Rule 6.65A to
provide for how the Exchange proposes to treat orders, market-making
quoting obligations, and errors in response to the Regulation NMS Plan
to Address Extraordinary Market Volatility; and (ii) to amend Exchange
Rule 6.65 to codify that the Exchange shall halt trading in all options
overlying NMS stocks when the equities markets initiate a market-wide
trading halt due to extraordinary market volatility. The text of the
proposed rule change is available on the Exchange's Web site at
www.nyse.com, at the principal office of the Exchange, on the
Commission's Web site at www.sec.gov, 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 self-regulatory organization
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 those 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 parts of such statements.

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

1. Purpose
    The Exchange proposes (i) to adopt Exchange Rule 6.65A to provide
for how the Exchange proposes to treat orders, market-making quoting
obligations, and errors in response to the Regulation NMS Plan to
Address Extraordinary Market Volatility (the ``Plan''), which is
applicable to all NMS stocks, as defined in Regulation NMS Rule
600(b)(47); and (ii) to amend Exchange Rule 6.65 to codify that the
Exchange shall halt trading in all options when the equities markets
initiate a market-wide trading halt due to extraordinary market
volatility. The Exchange proposes to adopt new Rule 6.65A for a pilot
period that coincides with the pilot period for the Plan, which is
currently scheduled as a one-year pilot to begin on February 4, 2013
[sic].
Background
    Since May 6, 2010, when the markets experienced excessive
volatility in an abbreviated time period, i.e., the ``flash crash,''
the equities exchanges and FINRA have implemented market-wide measures
designed to restore investor confidence by reducing the potential for
excessive market volatility. The measures adopted include pilot plans
for stock-by-stock trading pauses,\5\ related changes to the equities
market clearly erroneous execution rules,\6\ and more stringent
equities market maker quoting requirements.\7\ On May 31, 2012, the
Commission approved the Plan, as amended, on a one-year pilot basis.\8\
In addition, the Commission approved changes to the equities market-
wide circuit breaker rules on a pilot basis to coincide with the pilot
period for the Plan.\9\
---------------------------------------------------------------------------

    \5\ See, e.g., NYSE Rule 80C, NYSE Arca Equities Rule 7.11.
    \6\ See, e.g., NYSE Rule 128, NYSE Arca Equities Rule 7.10.
    \7\ See, e.g., NYSE Rule 104(a)(1)(B), NYSE Arca Equities Rule
7.23(a)(1).
    \8\ See Securities Exchange Act Release No. 67091 (May 31,
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631) (Order Approving,
on a Pilot Basis, the Plan).
    \9\ See Securities Exchange Act Release No. 67090 (May 31,
2012), 77 FR 33531 (June 6, 2012) (SR-BATS-2011-038; SR-BYX-2011-
025; SR-BX-2011-068; SR-CBOE-2011-087; SR-C2-2011-024; SR-CHX-2011-
30; SR-EDGA-2011-31; SR-EDGX-2011-30; SR-FINRA-2011-054; SR-ISE-
2011-61; SR-NASDAQ-2011-131; SR-NSX-2011-11; SR-NYSE-2011-48; SR-
NYSEAmex-2011-73; SR-NYSEArca-2011-68; SR-Phlx-2011-129).
---------------------------------------------------------------------------

    The Plan is designed to prevent trades in individual NMS stocks
from occurring outside of specified Price Bands.\10\ As described more
fully below, 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). All trading centers
in NMS stocks, including both those operated by Participants and those
operated by members of Participants, are required to establish,
maintain, and enforce written policies and procedures that are
reasonably designed to comply with the requirements specified in the
Plan.\11\
---------------------------------------------------------------------------

    \10\ Unless otherwise specified, capitalized terms used in this
rule filing are based on the defined terms of the Plan.
    \11\ The Exchange is a participant in the Plan through its
wholly-owned subsidiary, NYSE Arca Equities, Inc., which operates an
equities market.
---------------------------------------------------------------------------

    As set forth in more detail in the Plan, Price Bands consisting of
a Lower Price Band and an Upper Price Band for each NMS Stock are
calculated by the Processors.\12\ When the National Best Bid (Offer) is
below (above) the Lower (Upper) Price Band, the Processors shall
disseminate such National Best Bid (Offer) with an appropriate flag
identifying it as unexecutable. When the National Best Bid (Offer) is
equal to the Upper (Lower) Price Band, the Processors shall distribute
such National Best Bid (Offer) with an appropriate flag identifying it
as a Limit State Quotation.\13\ All trading centers in NMS stocks must
maintain written policies and procedures that are reasonably designed
to prevent the display of offers below the Lower Price Band and bids
above the Upper Price Band for NMS stocks. Notwithstanding this
requirement, the Processor shall display an offer below the Lower Price
Band or a bid above the Upper Price Band, but with a flag that it is
non-executable. Such bids or offers shall not

be included in the National Best Bid or National Best Offer
calculations.\14\
---------------------------------------------------------------------------

    \12\ See Section V(A) of the Plan.
    \13\ See Section VI(A) of the Plan.
    \14\ See Section VI(A)(3) of the Plan.
---------------------------------------------------------------------------

    Trading in an NMS stock immediately enters a Limit State if the
National Best Offer (Bid) equals but does not cross the Lower (Upper)
Price Band.\15\ Trading for an NMS stock exits a Limit State if, within
15 seconds of entering the Limit State, all Limit State Quotations were
executed or canceled in their entirety. If the market does not exit a
Limit State within 15 seconds, then the Primary Listing Exchange would
declare a five-minute trading pause pursuant to Section VII of the LULD
Plan, which would be applicable to all markets trading the
security.\16\ In addition, the Plan defines a Straddle State as when
the National Best Bid (Offer) is below (above) the Lower (Upper) Price
Band and the NMS stock is not in a Limit State. For example, assume the
Lower Price Band for an NMS Stock is $9.50 and the Upper Price Band is
$10.50, such NMS stock would be in a Straddle State if the National
Best Bid were below $9.50, and therefore non-executable, and the
National Best Offer were above $9.50 (including a National Best Offer
that could be above $10.50). If an NMS stock is in a Straddle State and
trading in that stock deviates from normal trading characteristics, the
Primary Listing Exchange may declare a trading pause for that NMS stock
if such Trading Pause would support the Plan's goal to address
extraordinary market volatility.
---------------------------------------------------------------------------

    \15\ See Section VI(B)(1) of the Plan.
    \16\ The primary listing market would declare a Trading Pause in
an NMS stock; upon notification by the primary listing market, the
Processor would disseminate this information to the public. No
trades in that NMS stock could occur during the trading pause, but
all bids and offers may be displayed. See Section VII(A) of the
Plan.
---------------------------------------------------------------------------

Proposed New Rule 6.65A
    The Exchange proposes to adopt new Exchange Rule 6.65A to provide
for how the Exchange shall treat orders and quotes in options overlying
NMS stocks when the Plan is in effect.
    First, the Exchange proposes rules regarding the treatment of
certain orders or quotes if the underlying NMS stock is in a Limit
State and Straddle State. Whenever an NMS stock is in a Limit State or
Straddle State, trading continues, however, there will not be a
reliable price for a security to serve as a benchmark for the price of
the option. For example, if the underlying NMS stock is in a Limit
State, while trading in that stock continues, by being in a Limit
State, there will be either cancellations or executions at that price,
and if the Limit State is not resolved in 15 seconds, the NMS Stock
will enter a Trading Pause. If an NMS stock is in a Straddle State,
that means that there is either a National Best Bid or National Best
Offer that is non-executable, which could result in limited price
discovery in the underlying NMS stock. In addition to the lack of a
reliable underlying reference price, the Exchange is concerned about
the width of the markets and quality of the execution for market
participants during Limit or Straddle States. While the Exchange
recognizes the importance of continued trading in options overlying NMS
stocks during Limit States and Straddle States, the Exchange believes
that certain types of orders increase the risk of errors and poor
executions and therefore should be not allowed during these times when
there may not be a reliable underlying reference price, there may be a
wide bid/ask quotation differential, and lower trading liquidity in the
options markets. Specifically, the Exchange proposes that if the
underlying NMS stock is in a Limit State or Straddle State, the
Exchange shall reject all incoming Market Orders and will not elect
Stop Orders.\17\ The Exchange believes that permitting these order
types to execute when the underlying NMS stock is in a Limit State or
Straddle State would add to the volatility in the options markets
during times of extraordinary market volatility and could have the
potential to lead to unwanted executions. The Exchange believes that
adding certainty to the treatment of Market Orders and Stop Orders when
the underlying NMS stock is in these situations will encourage market
participants to continue to provide liquidity to the Exchange and thus
promote a fair and orderly market.
---------------------------------------------------------------------------

    \17\ See Rule 6.62(d)(1). Stop Orders when elected create a
Market Order to buy or sell the option. In contrast, the Exchange is
not proposing to prohibit the election of Stop Limit Orders. Stop
Limit Orders when elected create a Limit Order to buy or sell the
option at a specific price. See Rule 6.62(d)(2). The Exchange
believes that Stop Limit Orders do not raise the same risks during
periods of extraordinary volatility, because once elected the
associated limit orders would not race through the order book in the
manner that an elected Market Order would.
---------------------------------------------------------------------------

    Second, the Exchange proposes to adopt subsection (b) to provide
that when evaluating whether a Lead Market Maker has met its market-
making quoting requirement pursuant to Rule 6.37B(b) or a Market Maker
has met its market-making quoting requirement pursuant to Rule 6.37B(c)
in options overlying NMS stocks, the Exchange shall consider as a
mitigating circumstance the frequency and duration of occurrences when
an underlying NMS stock is in a Limit State or a Straddle State. This
is necessary given the direct relationship between an options price and
the price of the underlying security. During a Limit or Straddle State,
the bid price, offer price or both of the underlying security will be
unexecutable [sic]. With the bid and or offer flagged unexecutable, the
ability to hedge the purchase or sale of an option will be jeopardized
and in fact it may not be possible to purchase or sell shares of the
underlying security at any price to offset the risk created by either
buying or selling calls and/or put options during a Limit State or a
Straddle State. The Exchange expects that its Market Makers will need
to modify their quoting behavior as a result. For the reasons described
below the Exchange feels that the proposed change to consider as a
mitigating circumstance the frequency and duration of periods during
which an underlying NMS stock is in a Limit State or a Straddle State
is the appropriate approach until such a time as the Exchange has more
experience with the impact of the Plan on the options marketplace,
particularly the impact on Market Makers' ability to provide liquidity
in an option when unknown (and possibility very limited) liquidity
exists in the underlying security.
    The Exchange has settled on this approach after analyzing in detail
the alternatives. An undesirable alternative for the Exchange would be
to propose to relax the quoting obligations. The relaxed quoting
obligations could apply to the full trading day or just during the
periods of extraordinary market volatility in the underlying NMS stock
during a Straddle State or Limit State. The Exchange could, for
example, have proposed to adopt the same market maker quoting
obligations that apply to market makers another options market that
only required its market makers to provide a two-sided continuous
quote, without any $5 or tighter bid-ask differential.\18\ Absent the
$5 bid-ask differential requirement, the Exchange believes there would
be no issue with Market Makers meeting their continuous quoting
obligations during periods of extraordinary market volatility in the
underlying stock because Market Markers could continuously quote a $.01
bid and a $1000 offer, for example. However, the Exchange believes that
relaxing the quoting obligations only during Straddle States and Limit
States would cause significant technical problems for Market Makers,
Exchange systems, and surveillance monitoring. Underlying NMS stocks
will likely flicker in and out of a Straddle State or

Limit State throughout the day. Programming systems to adjust the
quoting obligations to constant changes in a Straddle State or Limit
State would likely be technologically difficult and economically
prohibitive. The only real practical solution would be for the Exchange
to relax the quoting obligations for the full trading day by
eliminating the $5 bid-ask differential requirement. The Exchange
believes that eliminating the $5 bid-ask differential requirement is
also an undesirable alternative. The Exchange values the role of Market
Makers in the options market and believes that existing quoting
requirements should be maintained in order to facilitate transactions,
preserve market liquidity, and ensure the fair and orderly trading of
options on the Exchange.
---------------------------------------------------------------------------

    \18\ See BATS Options Rule 22.6(d).
---------------------------------------------------------------------------

    Therefore, in lieu of these alternatives, the Exchange proposes to
adopt subsection (b) to provide that when evaluating whether a
Specialist has met its market-making quoting requirement pursuant to
Rule 925.1NY(b) [sic] or a Market Maker has met its market-making
quoting requirement pursuant to Rule 925.1NY(c) [sic] in options
overlying NMS stocks, the Exchange shall consider as a mitigating
circumstance the frequency and duration that an underlying NMS stock is
in a Limit State or a Straddle State. For example, if an OTP Holder
fails to meet its monthly quoting obligations, and during the review,
it is determined that the quoting that failed to meet the obligation
was for options that overlay NMS stocks with a significant number of
Straddle States and Limit States, then pursuant to proposed Rule
6.65A(c), that would be considered a mitigating circumstance that would
entitle the OTP Holder to relief. The Exchange will work with FINRA to
monitor the impact of Straddle States and Limit States on a Lead Market
Maker or Market Marker's ability to meet its market-maker quoting
requirements. The Exchange notes that it does not believe that it needs
to modify the existing quoting obligations for Market Markers in Rules
6.37, 6.37A, and Rule 6.37B to reflect how such quoting requirements
may interact with how underlying NMS stocks trade during a Straddle
State or Limit State. Rather, during periods of extraordinary market
volatility in the underlying NMS stock, the Exchange believes that the
existing quoting requirements should be maintained in order to
facilitate transactions, preserve market liquidity, and ensure the fair
and orderly trading of options on the Exchange. This change is also
designed to eliminate the technologically difficult and economically
prohibitive systems programming that would be required if the Exchange
eliminated the $5 bid-ask differential requirement only during Straddle
States or Limit States.
    Finally, the Exchange proposed to adopt subsection (c) to provide
that electronic transactions in stock options that occur during a Limit
State or a Straddle State would not be subject to review under Rule
6.87(a) for Obvious Errors or Rule 6.87(d) for Catastrophic Errors. In
addition, subsection (c) will provide that electronic transactions in
options that overlay an NMS stock that occur during a Limit State or a
Straddle State may be reviewed on Exchange motion pursuant to
6.87(b)(3).\19\ For the reasons described below the Exchange feels that
the proposal to allow review of electronic transactions in options that
overlay an NMS stock that occur during a Limit State or a Straddle
State only on Exchange motion is the appropriate approach until such a
time as the Exchange has more experience with the impact of the Plan on
the options marketplace. In particular, the Exchange notes that other
protections will continue to exist to safeguard Customers as discussed
further below. The Exchange proposes to review the operation of this
provision during the one year Pilot period for the proposal and analyze
the impact of Limit and Straddle States accordingly.\20\ In addition,
the Exchange will provide data analysis during the duration of the
Pilot to the Commission so that the Commission may analysis the
operation of the Pilot and evaluate with the Exchange whether the Pilot
should be continued or be modified.\21\
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    \19\ Rule 6.87(b)(3) provides that in the interest of
maintaining a fair and orderly market and for the protection of
investors, the Chief Executive Officer of NYSE Arca, Inc. (``CEO'')
or designee thereof, who is an officer of the Exchange (collectively
``Exchange officer''), may, on his or her own motion or upon
request, determine to review any transaction occurring on the
Exchange that is believed to be erroneous. A transaction reviewed
pursuant to this provision may be nullified or adjusted only if it
is determined by the Exchange officer that the transaction is
erroneous as provided in Rules 6.87(a)(3), (a)(4), (a)(5) or (a)(6).
A transaction would be adjusted or nullified in accordance with the
provision under which it is deemed an erroneous transaction. The
Exchange officer may be assisted by a Trading Official in reviewing
a transaction. In addition, the Exchange officer shall act pursuant
to Rule 6.87(b)(3) as soon as possible after receiving notification
of the transaction, and ordinarily would be expected to act on the
same day as the transaction occurred. In no event shall the Exchange
officer act later than 9:30 a.m. (ET) on the next trading day
following the date of the transaction in question. An ATP [sic]
Holder affected by a determination to nullify or adjust a
transaction pursuant to this paragraph (3) may appeal such
determination in accordance with Rule 6.87(c); however, a
determination by an Exchange officer not to review a transaction, or
a determination not to nullify or adjust a transaction for which a
review was requested or conducted, is not appealable. If a
transaction is reviewed and a determination is rendered pursuant to
Rules 6.87(a)(3), (a)(4), (a)(5) or (a)(6), no additional relief may
be granted under this provision.
    \20\ See Amendment No. 1, supra note 4.
    \21\ Id.
---------------------------------------------------------------------------

    The Exchange has settled on this approach after analyzing in detail
the alternatives. An undesirable alternative for the Exchange would be
to maintain the current operation of Rule 6.87(a) for Obvious Errors or
6.87(d) for Catastrophic Errors during the Limit State or Straddle
State. Pursuant to Rules 6.87(a), market participants may have up to 30
minutes to review a transaction as an Obvious Error. Pursuant to
6.87(d), market participants may have up to 8:30 a.m. e.t. on the first
trading day following a transaction to review it as a Catastrophic
Error. The Exchange believes that during periods of extraordinary
volatility, the review period for transactions under the Obvious Error
and Catastrophic Error provisions would allow market participants a
second look at transactions during a Limit State or a Straddle State
that is potentially unfair to other market participants. For example,
thirty minutes after a transaction that occurs during extraordinary
volatility that triggers a Limit State or a Straddle State the market
could look drastically different from a price and liquidity level. The
Exchange believes that market participants should not be able to
benefit from the time frame to review their transactions in these
situations. This change would ensure that limit orders that were filled
during a Limit or Straddle State would have certainty of execution. As
noted above with respect to the treatment of Market Orders and Stop
Orders when the underlying NMS Stock is in a Limit or Straddle State,
the Exchange believes that adding certainty to the execution of orders
in these situations will encourage market participants to continue to
provide liquidity to the Exchange and thus promote a fair and orderly
market. Barring this change, the provisions of Rule 6.87(a)(2)(B) would
likely apply in many instances during Limit or Straddle States. This
Rule provides that, ``if there are not quotes for comparison purposes,
or if bid/ask differential for the national best bid or offer for the
effected series just prior to the transaction was at least two times
the permitted bid/ask differential pursuant to Rule 6.37(b)(1)(A-E), as
determined by a designated trading official.'' The Exchange believes
this provision would give rise to much uncertainty for market

participants as there is no bright line definition of what
``theoretical value'' should be for an option when the underlying NMS
stock has an unexecutable bid or offer or both. Determining
``theoretical value'' in such a situation would be often times very
subjective as opposed to an objective determination giving rise to
additional uncertainty and confusion for investors. For example:
     A $500 security enters a Straddle State resulting in un-
executable bids and offers.
     Consequently the market for the options on that security
widens to reflect the uncertainty surrounding what price the stock may
be sold at to hedge the sale of puts or purchase of calls. Prior to
entering the Straddle State, the 22 day at the money $500 strike put
options were trading at $24.45-$24.65.\22\ Upon entering the Straddle
State the market for those options widens to $24.45-$35.00.
---------------------------------------------------------------------------

    \22\ Calculated using a binomial pricing model for American
style options with an interest rate of .25%, no dividends, and an
implied volatility of 50.
---------------------------------------------------------------------------

     A limit order to pay $32 for 10 is entered resulting in a
new market of $32.00-$35.00. 14 seconds after entering the Limit State
in the underlying security, a limit order to sell 10 contracts at $32
is received and trades with the posted $32 limit order to buy.
Immediately after the trade is consummated, the Straddle State in the
underlying security has not resolved and consequently the underlying
security is halted. Upon resumption of trading in the underlying
security, consider two possible scenarios:
     Scenario 1--The market for the security is $450-$452. The
puts which traded immediately prior to the trading halt are now worth
at least their intrinsic value of $50 and quite likely are trading with
some time premium as well. The seller of 10 contracts at $32
immediately requests an Obvious Error review under the provisions of
Rule 975NY [sic].
     Scenario 2--The market for the security is now $550-$552.
The puts which traded immediately prior to the trading halt are now
worth an estimated $8.\23\ The buyer of 10 contracts at $32 immediately
requests an Obvious Error review under the provisions of Rule 965NY
[sic].
---------------------------------------------------------------------------

    \23\ See supra note 19.
---------------------------------------------------------------------------

    Under both scenarios the bid/ask spread in the option was $2 at the
time of the trade and as such it now falls to a designated trading
official to determine what the ``theoretical value'' of the option is.
Absent the ability to ascertain prices at which the stock could have
been bought or sold at the time the option traded, the designated
official would be at best guessing what the ``theoretical value''
should have been. Such uncertainty in how the transaction will be
resolved will only discourage participants from entering executable
interest during Limit and Straddle States. The impossibility of
ascribing ``theoretical value'' to an option, whose price is directly
affected by the ability to buy and sell shares of the underlying
security, gives rise to the Exchange need to make clear that trades
during Limit and Straddle states will stand irrespective of subsequent
price moves in the underlying security. Absent this bright line
guidance, the Exchange expects the entry of executable interest in the
options market to be severely curtailed as securities approach and
enter Limit and Straddle States, decreasing the opportunity to foster
price discovery and transparency at a time when it is most needed. In
contrast, if participants know in advance that trades they effect with
quotes and/or orders having limit prices will stand irrespective of
subsequent moves in the underlying security, they will be much more
likely to submit such limit prices.
    Another undesirable alternative for the Exchange would be to
propose to always use the prevailing NBBO as the metric to decide
whether an error has occurred, irrespective of how wide the NBBO was at
the time of the execution. This approach alleviates the burden on the
Exchange of having to ascribe a Theoretical Price to an option when the
stock has an un-executable bid, offer or both but it still presents
significant problems. For example, in a Limit or Straddle State it is
likely that there will be less depth of book--both on an intra as well
as an inter-market basis. This gives rise to the potential for gaming
of the Obvious Error Rule which mandates that Market Maker to Market
Maker trades are always adjusted. For example, consider this scenario:

----------------------------------------------------------------------------------------------------------------
                            Exchange                               Bid size    Bid price   Ask price   Ask size
----------------------------------------------------------------------------------------------------------------
NYSE Arca.......................................................          50          $5          $7           1
NYSE Amex.......................................................           5           6          15         100
----------------------------------------------------------------------------------------------------------------

    An NYSE Amex Market Maker is offering 100 contracts at $15. Another
NYSE Amex Market Maker enters an ISO order to buy 100 contracts at $15.
Immediately after the execution the same NYSE Amex Options Market Maker
requests a review under Rule 6.87. Simply using the NBBO, in this case
$7, would mean that as required under Rule 6.87, the Exchange would
rule to adjust that trade to $7.30, essentially forcing the NYSE Amex
Market Maker who was willing to provide liquidity at $15 to instead
provide liquidity at the much worse price of $7.30. Such an outcome
would undoubtedly result in fewer Market Makers willing to post any
liquidity for fear of having the same thing happen to them. The
Exchange notes that, if instead of a Market Maker offering 100
contracts at $15, it was a Customer with a resting order in the
Consolidated Book the outcome of a review under Rule 6.87 would have
been to bust the trade. The time permitted to request a review, conduct
the review and issue notification to the affected parties can be
substantial, particularly in light of a Limit or Straddle State where
the underlying security price is likely to be moving considerably. So
we have a Customer who having sold options at $15 which (for example)
they bought earlier for $10 finds themselves without a profit but
instead with an open position. Obviously should the stock move
adversely during the time taken to review the trade it is even possible
for the option to be worth less than where the Customer who was
offering at $15 purchased it. The Exchange strongly believes that
certainty of trade during periods of market volatility is vital in
order to operate a fair and orderly market.
    Therefore, in lieu of these alternatives, the Exchange proposes to
provide that the electronic transactions in stock options that occur
during a Limit State or a Straddle State would not be subject to review
under Rule 6.87(a) for Obvious Errors or Rule 6.87(d) for Catastrophic
Errors. The Exchange would still review transactions in the interest of
maintaining a fair and orderly market

and for the protection of investors, on its own motion, determine to
review any transaction occurring on the Exchange that is believed to be
erroneous that occurs during a Limit State or a Straddle State in
accordance with Rule 6.87(b)(3). The Exchange believes that this
safeguard will provide the flexibility for the Exchange to act when
necessary and appropriate to nullify or adjust a transaction, while
also providing market participants with certainty that trades they
effect with quotes and/or orders having limit prices will stand
irrespective of subsequent moves in the underlying security. By
limiting the erroneous trade review to only via Exchange motion, the
Exchange believes that the proposal mitigates two of the undesirable
aspects of the alternatives described above--(i) the moral hazard
associated with granting a second look to trades that went against the
market participant after market conditions have changed and (ii) gaming
of the Obvious Error Rule to adjust Market Makers--while also limiting
the discretion of determining Theoretical Value to only those
situations that the Exchange determines is necessary in the interest of
maintaining a fair and orderly market and for the protection of
investors. The right to review on Exchange motion electronic
transactions that occur during a Limit State or Straddle State under
this provision would also allow the Exchange to account for unforeseen
circumstances that result in Obvious Errors such as technological or
systems malfunctions of which a nullification or adjustment may be
necessary in order to preserve the interest of maintaining a fair and
orderly market and for the protection of investors.
    The Exchange notes that there are additional protections in place
outside of the Obvious Error Rule, specifically pre-trade protections.
First, SEC Rule 15c3-5 requires that, ``financial risk management
controls and supervisory procedures must be reasonably designed to
prevent the entry of orders that exceed appropriate pre-set credit or
capital thresholds, or that appear to be erroneous.'' \24\ Secondly,
the Exchange has price checks applicable to limit orders that rejects
limit orders that are priced sufficiently far through the NBBO that it
seems likely an error occurred. The requirements placed upon broker
dealers to adopt controls to prevent the entry of orders that appear to
be erroneous, coupled with Exchange functionality that filters out
orders that appear to be erroneous serve to sharply reduce the
incidence of errors arising from situations, for example, where a
participant mistakenly enters an order to pay $20 for an option that is
offered at $2.
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    \24\ See Securities Exchange Act Release No. 63241, 75 FR 69791
(November 15, 2010) (S7-03-10).
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Proposed Amendment to Rule 6.65
    The Exchange proposes to amend Rule 6.65 so that the Exchange, as
an options market, can better respond to the manner by which the
equities markets declare a market-wide trading halt, also known as a
market-wide circuit breaker,\25\ and to delete current Rule 7.5.
Currently, Rule 7.5 simply restates the equities rule regarding market-
wide trading halts, including references to halting trading in
``stocks,'' without reference to halting trading in options. In its
current form,\26\ Rule 7.5 provides for Level 1, 2, and 3 declines and
specified trading halts following such declines. The values of Levels
1, 2 and 3 are calculated at the beginning of each calendar quarter,
using 10%, 20% and 30%, respectively, of the average closing value of
the DJIA for the month prior to the beginning of the quarter. Each
percentage calculation is rounded to the nearest fifty points to create
the Levels' trigger points. The NYSE distributes new trigger levels
quarterly to the media and via an NYSE Information Memo, and the new
trigger levels are also available on the NYSE Web site.\27\ The values
then remain in effect until the next quarterly calculation,
notwithstanding whether the DJIA has moved and a Level 1, 2, or 3
decline is no longer equal to an actual 10%, 20%, or 30% decline in the
most recent closing value of the DJIA. Once a market-wide circuit
breaker is in effect, trading in all securities on the Exchange,
including stock options on NYSE Arca Options and stocks on NYSE Arca
Equities, halt for the specified times in the Rule.
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    \25\ Market-wide circuit breakers in the equities market are
different than trading halt during a Trading Pause in the underlying
pursuant to the LULD Plan. Market-wide circuit breakers for equities
are currently covered by NYSE Arca Equities Rule 7.12. See NYSE Arca
Equities Rule 7.12. The Exchange's Rule regarding trading pauses
(also known as ``single stock circuit breakers'') is found in Rule
6.65(b) for options and NYSE Arca Equities Rule 7.11(b) for
equities.
    \26\ The methodology for calculating market-wide trading halts
was last amended in 1998, when declines based on specified point
drops in the DJIA were replaced with the current methodology of
using a percentage decline that is recalculated quarterly. See
Securities Exchange Act Release No. 39846 (April 9, 1998), 63 FR
18477 (April 15, 1998) (SR-NYSE-98-06, SR-Amex-98-09, SR-BSE-98-06,
SR-CHX-98-08, SR-NASD-98-27, and SR-Phlx-98-15).
    \27\ See, e.g., NYSE Regulation Information Memos 11-19 (June
30, 2011) and 11-10 (March 31, 2011).
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    As noted above, the Commission has approved changes to the equities
exchanges and FINRA rules regarding market-wide trading halt rules,
which are currently scheduled to go into effect on a one-year pilot
basis beginning February 4, 2013 [sic]. The Exchange proposes to amend
Rule 7.5 to reflect the changes approved for the equities markets by
deleting the text that restates the former equities rule on halting
trading in stocks and replace it with a new provision in Rule 6.65 that
provides more generally that if the equities markets initiate a market-
wide trading halt in response to extraordinary market volatility, the
Exchange would likewise halt trading in all options. The proposed rule
change is similar to a recently approved rule adopted by CBOE.\28\
However, unlike the CBOE rule, the Exchange does not need to restate
the equities rule on halting trading in stocks in the Exchange's Rule
set for options trading, because NYSE Arca Equities Rules already cover
market-wide trading halts in stocks.\29\ In addition, the Exchange is
proposing to add Commentary .05 to provide that reopening of trading
following a trading halt under this Rule shall be conducted pursuant to
procedures adopted by the Exchange and communicated by notice to its
OTP Holders and OTP Firms. This Commentary is nearly identical to that
found in CBOE Rule 6.3B and current Commentary .03 to Exchange Rule 7.5
that is being deleted.\30\
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    \28\ See CBOE Rule 6.3B.
    \29\ See NYSE Arca Equities Rule 7.12.
    \30\ See CBOE Rule 6.3B.
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    The proposed rule change provides that whenever the equities
markets halt trading in all NMS stocks due to extraordinary market
volatility, the Exchange will similarly halt trading in all options.
The Exchange believes that the proposed rule change can be adopted on a
permanent basis notwithstanding that the equities market version of the
market-wide circuit breakers has been adopted on a pilot basis. In
particular, the Exchange believes that the proposed rule provides the
Exchange with flexibility to halt trading in options whenever the
equities markets halt trading in all stocks, regardless of what
triggers that the equities markets may use for halting trading in all
stocks. Accordingly, if the equities market pilot rules were to expire
and revert back to the pre-February 4, 2013 [sic] version of market-
wide trading halts, or if the equities markets again amend the triggers
for their market-wide circuit breaker rule, the proposed Exchange rule
would have sufficient flexibility to work with the revised equities
rule without requiring an additional rule change by the Exchange. The
Exchange also notes that

in addition to amended Rule 6.65, that the remaining provisions in
existing Rule 6.65 regarding Trading Halts and Suspensions remain
unchanged and provides a means to halt or suspend trading in options
contracts whenever the Exchange deems such action appropriate in the
interests of a fair and orderly market and to protect investors.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with
Section 6(b) of the Act \31\ in general, and furthers the objectives of
Section 6(b)(5),\32\ in particular, in that it is designed to promote
just and equitable principles of trade, remove impediments to and
perfect the mechanisms of a free and open market and a national market
system and, in general, to protect investors and the public interest.
Specifically, this rule proposal supports the objectives of perfecting
the mechanism of a free and open market and the national market system
because it promotes uniformity across markets concerning when and how
to halt trading in all stock options as a result of extraordinary
market volatility.
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    \31\ 15 U.S.C. 78f(b).
    \32\ 15 U.S.C. 78f(b)(5).
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    The proposal to add Rule 6.65A will ensure that trading in options
that overlay NMS stocks is appropriately modified to reflect market
conditions that occur during a Limit State or a Straddle State 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. Specifically, the proposal will help
allow market participants to continue to trade stock options during
times of extraordinary market conditions without the added risk of
certain orders that may increase volatility in the options markets
during times of extraordinary market volatility and may potentially
lead to errors and poor executions due to the lack of reliable
reference prices for the options and the width of the markets. Thus,
reducing these risks should help encourage market participants to
continue to provide liquidity during extraordinary market volatility.
    The proposal to consider the frequency and duration of Straddle
States and/or Limit States in the underlying NMS stock as mitigating
circumstance in determining whether the Market Maker has met their
quoting obligations will help ensure Market Makers continue to provide
their necessary role in helping to facilitate transactions, to preserve
market liquidity, and to help ensure the fair and orderly trading of
stock options on the Exchange during periods of extraordinary market
volatility while also providing reasonable relief when necessary.
    In addition, the proposal to not allow electronic transactions in
stock options that occur during a Limit State or a Straddle State to be
subject to review under Rule 6.87(a) for Obvious Errors or Rule 6.87(d)
for Catastrophic Errors is designed to promote just and equitable
principles of trade, remove impediments to and perfect the mechanisms
of a free and open market and a national market system and, in general,
to protect investors and the public interest, by ensuring that Exchange
officials do not have discretion to cancel trades. This change would
ensure that limit orders that are filled during a Limit or Straddle
State would 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. The proposal to allow electronic transactions in options that
occur during a Limit State or a Straddle State may be reviewed on
Exchange motion pursuant to 6.87(b)(3) is designed to promote just and
equitable principles of trade, remove impediments to and perfect the
mechanisms of a free and open market and a national market system and,
in general, to protect investors and the public interest, by providing
the flexibility for the Exchange to still review transactions for
Obvious Error treatment when in the interest of maintaining a fair and
orderly market and for the protection of investors.
    Finally, the proposal to amend Rule 6.65 and delete current Rule
7.5 will ensure that the Exchange halts trading in all options whenever
the equities markets initiate a market-wide trading halt circuit
breaker in response to extraordinary market conditions 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 because the proposed rule change will assure
that the Exchange will halt options trading regardless of the triggers
that the equities markets use to initiate a market-wide halt in
trading.

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

    The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The proposed changes are
being made to provide for how the Exchange shall treat orders and
quotes in options overlying NMS stocks when the Plan is in effect and
will not impose any burden on competition while providing certainty of
treatment and execution of options orders during periods of
extraordinary volatility in the underlying NMS stock, and facilitating
appropriate liquidity during a Limit State or Straddle State.

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

    No written comments were solicited or received with respect to 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 (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization 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_ADDRESS>Please include
File Number SR-NYSEArca-2013-10 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSEArca-2013-10. 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
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; 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-NYSEArca-2013-10 and should be submitted on or before
March 29, 2013.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\33\
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    \33\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-05418 Filed 3-7-13; 8:45 am]
BILLING CODE 8011-01-P