[Federal Register Volume 78, Number 181 (Wednesday, September 18, 2013)]
[Notices]
[Pages 57431-57444]
[FR Doc No: 2013-22648]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70381; File No. SR-CHX-2013-16]

Self-Regulatory Organizations; Chicago Stock Exchange, Inc.;
Notice of Filing of Proposed Rule Change To Adopt Standards for the
Cancellation or Adjustment of Bona Fide Error Trades, the Submission of
Error Correction Transactions, and the Cancellation or Adjustment of
Stock Leg Trades of Stock-Option or Stock-Future Orders

September 12, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\, and Rule 19b-4 \2\ thereunder, notice is hereby given
that on September 4, 2013 the Chicago Stock Exchange, Inc. (``CHX'' or
the ``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') the proposed rule change as described in
Items I, II and III below, which Items have been prepared by the
Exchange. CHX has filed this proposal pursuant to Section 19(b)(2) of
the Act.\3\ The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(2).
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change

    CHX proposes to amend Article 20, Rule 9 to outline and clarify the
Exchange's current requirements for the cancellation of trades based on
Bona Fide Error and to establish new requirements for the adjustment of
trades based on Bona Fide Error; to adopt Article 20, Rule 9A to detail
the Exchange's current requirements for Error Correction Transactions;
and to

adopt Article 20, Rule 11 to amend the Exchange's current requirements
for the cancellation of the stock leg trade of a Stock-Option order, to
establish new requirements for the adjustment of the stock leg trade of
a Stock-Option order, and to allow the stock leg trade of Stock-Future
orders to be cancelled or adjusted pursuant to proposed Rule 11.
    The text of this proposed rule change is available on the
Exchange's Web site at (www.chx.com) and in 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 CHX included statements
concerning the purpose of and basis for the proposed rule changes 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 CHX 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 Exchange proposes to amend Article 20, Rule 9 to outline and
clarify the Exchange's current requirements for the cancellation of
trades based on Bona Fide Error and to establish new requirements for
the adjustment of trades based on Bona Fide Error; to adopt Article 20,
Rule 9A to detail the Exchange's current requirements for Error
Correction Transactions; and to adopt Article 20, Rule 11 to amend the
Exchange's current requirements for the cancellation of the stock leg
trade of a Stock-Option order, to establish new requirements for the
adjustment of the stock leg trade of a Stock-Option order, and to allow
the stock leg trade of Stock-Future orders to be cancelled or adjusted
pursuant to proposed Rule 11.

Proposed Article 20, Rule 9 ``Cancellation or Adjustment of Bona Fide
Error Trades''

    Current Article 20, Rule 9 outlines two bases for the cancellation
of trades at the request of all parties to the trade. Specifically,
current Article 20, Rule 9(a) provides that transactions made in
``demonstrable error'' \4\ and cancelled by both parties may be
unwound, subject to the approval of the Exchange. Although the Exchange
has provided specific guidance to its Participants in the form of CHX
Information Memorandums with respect to demonstrable error, the CHX
rules are silent as to the specific requirements or processes involved
in the demonstrable error trade cancellation process.\5\ In sum, the
Exchange currently requires ``concrete, documented evidence that the
initial trade was transacted in error or includes an erroneous term
that requires the cancellation of the initial report.'' \6\
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    \4\ Although not currently in the CHX rules, the Exchange
defines ``demonstrable error'' as a ``Bona Fide Error'' exactly as
defined under the ``Order Exempting Certain Error Correction
Transactions From Rule 611 of Regulation NMS Under the Securities
Exchange Act of 1934.'' See Securities Exchange Act Release No.
55884 (June 8, 2007), 72 FR 32926 (June 14, 2007). As discussed
below, the Exchange proposes to adopt this definition as proposed
Article 1, Rule 1(hh).
    \5\ Among other things, these CHX Information Memorandums have
provided evidentiary standards and parameters for trade
cancellations based on demonstrable errors.
    For instance, CHX Information Memorandum (MR-11-8) states the
following, in pertinent part (italics added):
    Cancellation of Transactions (CHX Article 20, Rule 9)
    ``Additionally, the Department wishes to highlight the CHX rule
requirement that trades can only be cancelled or busted based on
mutual agreement of all parties involved if the initial trade was
done in demonstrable error. The same factors used in making a [Bona
Fide Error] determination apply with equal force to proposed
cancellations under Article 20, Rule 9. Proper documentary proof
will be required at the time of such requests in this case as well.
While we cannot say in advance what may be considered adequate proof
of demonstrable error, the basic standard will be concrete,
documented evidence that the initial trade was transacted in error
or includes an erroneous term that requires the cancellation of the
initial report. Examples might include transcribed evidence of the
correct trade terms versus what was entered in error (i.e., a price
of $15.42 vs $51.42) or recorded evidence of a misconveyance of
terms (i.e., print stock ABC vs BAC). Requests will be reviewed on a
case-by-case basis prior to being transacted by CHX Operations
staff.
    Finally, we note that trades may only be cancelled pursuant to
CHX Article 20, Rule 9. The Exchange does not have the authority to
modify or adjust the individual terms of previously reported
transactions.''
    \6\ Id.
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    Moreover, current Article 20, Rule 9(b) outlines rules for the
cancellation of the stock leg trade of a Stock-Option order.
Specifically, current Article 20, Rule 9(b) provides that a trade
representing the stock leg of a stock-option order may be cancelled at
the request of all parties to the trade if, inter alia, market
conditions in any of the non-Exchange markets prevent the options leg
from executing at the price agreed upon by the parties or the options
leg was cancelled by the exchange on which it was executed.
    Although, both current Article 20, Rule 9(a) and Rule 9(b) require
all the parties to the trade to consent to the cancellation of the
trade, the reasons for each cancellation are substantively different.
Given this difference, the Exchange proposes to separate current
Article 20, Rule 9 into two different rules. The Exchange proposes to
detail, inter alia, the requirements for the cancellation of trades
based on demonstrable error under proposed Rule 9 and to detail, inter
alia, the requirements for the cancellation of the stock leg of a
stock-option order under proposed Rule 11.\7\
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    \7\ As discussed in great detail below, the Exchange proposes to
clarify and expand the scope of current Article 20, Rules 9(a) and
9(b).
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    In sum, proposed Rule 9 (``Cancellation or Adjustment of Bona Fide
Error Trades'') retains the substance of current Article 20, Rule 9(a),
with some amendments. Under proposed Rule 9, the Exchange proposes (1)
to explicitly outline and expand the current requirements for
cancellations of trades based on Bona Fide Error \8\ and (2) to allow
for adjustments of trades based on Bona Fide Error, provided that
certain additional requirements are met.\9\
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    \8\ See supra note 4.
    \9\ The Exchange notes that proposed Article 20, Rule 9 does not
extinguish Participants' market access obligations pursuant to Rule
15c3-5 under the Act. See 17 CFR 240.15c3-5.
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    Specifically, proposed Rule 9(a) states that a trade executed on
the Exchange in ``Bona Fide Error,'' as defined under proposed Article
1, Rule 1(hh), may be cancelled or adjusted pursuant to this Rule,
subject to the approval of the Exchange. The Exchange notes that
proposed Rule 9 only applies to Bona Fide Error trades that were
executed on the Exchange and, as such, orders that are routed to other
market centers and executed at such away market centers are not within
the purview of proposed Rule 9.\10\ Moreover, the Exchange proposes to
define ``Bona Fide Error'' exactly as defined in the Commission's
release granting exemptive relief for Error Correction
Transactions.\11\ Thus, proposed Article 1, Rule 1(hh) defines ``Bona
Fide Error'' as:
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    \10\ Although the Exchange anticipates implementing it in the
near future, the Exchange does not currently offer order routing.
    \11\ See supra note 4.
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    (1) the inaccurate conveyance or execution of any term of an order,
including, but not limited to, price, number of shares or other unit of
trading; identification of the security; identification of the account
for which securities are purchased or sold; lost or otherwise misplaced
order tickets; or the execution of an order on the wrong side of a
market;
    (2) the unauthorized or unintended purchase, sale, or allocation of

securities, or the failure to follow specific client instructions;
    (3) the incorrect entry of data into relevant systems, including
reliance on incorrect cash positions, withdrawals, or securities
positions reflected in an account; or
    (4) a delay, outage, or failure of a communication system used to
transmit market data prices or to facilitate the delivery or execution
of an order.
    The Exchange notes that it currently permits trade cancellations
based on Bona Fide Errors of the Participant submitting the order to
the Matching System (``executing broker Participant'') or of the
customer of the executing broker Participant, so long as the Bona Fide
Error can be reasonably identified and supported by the executing
broker Participant and verified by the Exchange. Thus, the Exchange
proposes to clarify this limitation as proposed paragraph .01 of the
Interpretations and Policies of proposed Rule 9. Specifically, proposed
paragraph .01 provides that proposed Rule 9 shall only apply to Bona
Fide Errors committed by the Participant that submitted the order to
the Matching System or the customer of the Participant that submitted
the order to the Matching System.
    Proposed Rule 9(b) outlines the specific requirements that must be
met by the executing broker Participant before the Exchange can
consider a request to cancel or adjust an erroneous trade.\12\
Specifically, proposed paragraph (b) states that the Exchange may
approve a request for a trade cancellation or adjustment pursuant to
this Rule and take the corrective action(s) necessary to effectuate
such a cancellation or adjustment, provided that the items listed
thereunder are submitted to the Exchange, in a form prescribed by the
Exchange,\13\ by the Participant that submitted the erroneous trade.
Moreover, the proposed paragraph continues by stating that all of the
requirements of the proposed paragraph must be complied with, to the
satisfaction of the Exchange, before a trade cancellation or adjustment
pursuant to this proposed Rule may be approved or any corrective action
may be taken. In addition, the Exchange shall have sole discretion in
determining whether the requirements of this Rule have been satisfied.
Thereunder, the specific requirements are listed as proposed paragraphs
(b)(1)-(3), which states as follows:
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    \12\ Although the Exchange currently requires, inter alia,
documentary proof of a Bona Fide Error prior to the Exchange
considering a trade cancellation, there are no such requirements
stated in the current CHX rules. See supra note 5.
    \13\ Prior to proposed Rule 9, Rule 9A, and Rule 11 becoming
operative, the Exchange will provide all Participants with specific
instructions, through a CHX Information Memo or the like, which will
detail the ``form prescribed by the Exchange'' contemplated by
proposed paragraph (b).
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    (1) Timely written request. The Participant that submitted the
erroneous trade shall submit a written request for cancellation or
adjustment, including all information and supporting documentation
required by this Rule, including a Trade Error Report, no later than
4:30 p.m. CST on T+1. The Exchange will retain a copy of the written
request, information and supporting documentation. In extraordinary
circumstances, a cancellation or adjustment may be requested and
effected after T+1, with the approval of an officer of the Exchange;
    (2) Bona Fide Error. The Participant that submitted the erroneous
trade shall identify the error that is a ``Bona Fide Error,'' as
defined under Article 1, Rule 1(hh), and the source of the Bona Fide
Error. The Participant shall also provide supporting documentation
showing the objective facts and circumstances concerning the Bona Fide
Error, such as the original terms of the order or a record of the
misconveyance of terms; and
    (3) All parties consent. The Exchange shall verify that the
cancellation or adjustment is requested by all parties involved in the
Bona Fide Error trade (or by an authorized agent of those parties). The
Participant that submitted the erroneous trade shall provide supporting
documentation evidencing this consent.
    With respect to proposed paragraph (b)(1), although not currently
stated in the CHX rules, the T+1 time requirement is the current time
limit required by the Exchange for cancellation of trades based on
demonstrable error. Based on its experience, the Exchange submits that
the T+1 time requirement (i.e., day of erroneous trade + one full
trading day) is reasonable. The flexibility of the T+1 requirement is
particularly necessary where the Bona Fide Error was not committed by
the executing broker Participant, but by the customer of the executing
broker Participant that relayed inaccurate order terms to the executing
broker Participant. In such a case, the executing broker Participant
would not have known, at the time the erroneous trade was executed,
that the terms of the trade were erroneous. Thus, there would
inevitably be some delay before the Bona Fide Error was discovered and
the source of the error identified. Moreover, certain Bona Fide Errors
may not be discovered until clearing submissions have been made. In
such an instance, the T+1 requirement would be essential for Bona Fide
Errors to surface. Furthermore, in recognizing that extraordinary
circumstances may prevent compliance with the T+1 requirement, the
Exchange submits that requiring approval of an officer of the Exchange
to waive the T+1 requirement will allow the Exchange to verify that
such extraordinary circumstances exist on a case-by-case basis and will
consequently safeguard against the abuse of this exception.\14\
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    \14\ The Exchange anticipates that the list of eligible officers
would include the Chief Operating Officer, Chief Regulatory Officer,
General Counsel, and Vice President of Market Regulation.
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    With respect to proposed paragraph (b)(2), the Exchange notes that
the supporting documentation showing the objective facts and
circumstances concerning the Bona Fide Error may differ, depending on
the source and nature of the Bona Fide Error. Although it is difficult,
if not impossible, to establish a general rule as to what would
constitute sufficient documentation,\15\ copies of verifiable
communications (e.g., email, instant message, recorded phone lines,
internal order ticket) will usually be required by the Exchange when
considering a request to cancel or adjust a trade made in Bona Fide
Error.
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    \15\ See supra note 5.
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    With respect to proposed paragraph (b)(3), the Exchange notes that
this requirement is designed to balance the need to adequately
ascertain the intent of all parties to an erroneous trade and to
address the practical difficulty of an executing broker Participant
attempting to directly verify the consent of such parties where the
executing broker Participant received an order from an authorized agent
of the parties to the trade and not from the parties directly. Under
these circumstances, the Exchange submits that it is reasonable that
the consent to cancel or adjust an erroneous trade may be given by the
authorized agent(s) of those parties. With that said, the Exchange
notes that under no circumstances shall the Exchange consider a request
to cancel or adjust a Bona Fide Error trade without documentation
verifying the intent of the parties to the erroneous trade to cancel or
adjust the trade.
    If the executing broker Participant satisfies all of the
requirements of proposed paragraph (b) to the satisfaction of the
Exchange, a request to cancel a trade made in Bona Fide Error would be
approved. However, if the executing broker Participant were to request
a trade adjustment, the Exchange would take additional steps to

validate the proposed adjustment, pursuant to proposed paragraph (c).
    Proposed paragraph (c) provides that a trade adjustment shall only
be made to the extent necessary to correct the Bona Fide Error (i.e.,
to reflect the original terms of the order). The proposed paragraph
continues by stating that prior to approving an adjustment, the
Exchange shall validate that the proposed adjusted trade could have
been executed in the Matching System at the time the trade was
initially executed, in compliance with all applicable CHX and SEC
rules. For instance, the validation process would require the Exchange
to ensure that the proposed adjusted trade would not have improperly
traded-through or ahead of interest resting on the Matching System
(``CHX Book'') or a Protected Quotation of an external market in
violation of Rule 611 of Regulation NMS.
    Proposed paragraph (c) illustrates the benefit of a trade
adjustment over a trade cancellation and the submission of an Error
Correction Transaction.\16\ Assuming that a corrective trade would
qualify as an Error Correction Transaction and be exempt from the
trade-through prohibition of Rule 611 of Regulation NMS, such a
corrective trade would still be subject to the state of the CHX Book as
of the time the corrective trade was submitted. However, a validated
trade adjustment would allow the executing broker Participant to
preserve the timestamp of the original trade. Allowing the executing
broker Participant to choose a trade cancellation or adjustment would
allow for greater flexibility in determining the best course of action
to rectify Bona Fide Errors.
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    \16\ See supra note 4.
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    Proposed paragraph (d) clarifies that if the Exchange approves a
request for a trade cancellation or adjustment, any corrective
action(s) necessary to effectuate the cancellation or adjustment,
including corrective entries into the Exchange's records and/or
corrective clearing submissions to a Qualified Clearing Agency, shall
be taken solely by the Exchange operations personnel. This provision
serves as a contrast to proposed paragraph (b), which places the
responsibility for satisfying the T+1 requirement upon the executing
broker Participant that submitted the erroneous trade.
    The following Examples 1-3 illustrate how proposed Rule 9 would be
applied under different scenarios.
    Example 1. Assume that Broker A receives an order to buy 100,000
shares of security XYZ at $100.10/share. Assume that the Broker A
wishes to match that order with a contra-side order that was placed
with Broker A earlier that day. Assume that Broker A accurately conveys
the terms of the cross order to Broker B, which is an executing broker
Participant. However, assume that Broker B commits a good faith input
error as to the price of the order and thus, an erroneous trade of
100,000 shares of security XYZ at $100.01 is executed on the
Exchange.\17\
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    \17\ Assuming that the reference price for security XYZ is
approximately $100.10 per share, the erroneous trade would not
qualify for cancellation as a Clearly Erroneous Transaction because
the erroneous price of $100.01 does not meet the 3% threshold. See
CHX Article 20, Rule 10(c).
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    The price input error by Broker B would constitute a Bona Fide
Error, pursuant to proposed Article 1, Rule 1(hh)(1) or (3), where the
execution of the cross at the incorrect price is an ``inaccurate
conveyance or execution of any term of an order, including, but not
limited to, price'' and may also be the result of ``the incorrect entry
of data into relevant systems.''
    Moreover, if the parties to the erroneous trade wished to cancel
the trade, Broker B would have to comply with the requirements of
proposed Article 20, Rule 9(b) no later than 4:30 p.m. CST on T+1 or
after T+1 with the approval of an officer of the Exchange.
Specifically, pursuant to proposed paragraph (b)(1), Broker B must
submit a Trade Error Report and a brief written request to cancel the
erroneous trade. Also, pursuant to proposed paragraph (b)(2), Broker B
must provide a brief explanation of the input error and produce
documentation reflecting the original terms of the order. The
documentation requirement could be satisfied, among other ways, by
producing the internal order ticket from Broker A showing the price of
$100.10 or a copy of a communication from Broker A to Broker B
indicating the correct price and a timestamp prior to the CHX timestamp
of the erroneous trade. In addition, pursuant to proposed paragraph
(b)(3), Broker B would have to produce documentation evidencing consent
to cancel the erroneous trade by the parties to the trade or, since
Broker B did not interface directly with the parties to the erroneous
trade, consent to cancel by Broker A, as authorized agent(s) of the
parties to the trade.
    Example 2. Assume the same as Example 1, except that the order
price input error (i.e., $100.01, instead of $100.10) was committed by
Broker A as an authorized agent of the parties to the erroneous trade
and not by Broker B. Assume, therefore, that Broker B received the
order with the incorrect price and, in turn, submitted the cross order
to the Matching System resulting in an erroneous trade.
    In this Example, the Bona Fide Error could be subject to proposed
Rule 9 because proposed paragraph .02 contemplates Bona Fide Errors
committed by the ``customer of the Participant that submitted the
erroneous trade.'' However, in requesting the trade cancellation,
Broker B would be required to provide all of the information as
required by proposed paragraph (b) in a manner similar to Example 1,
except that in addition to identifying the price misconveyance and the
source of the error as being Broker A, Broker B would have to produce
documentation of the original terms of the order as relayed to Broker A
from each of the parties to the erroneous trade. As a general rule, the
documentation showing the correct order terms should be verifiable to
an objective source. That is, if the Bona Fide Error was committed by
the executing broker Participant, the documentation showing the correct
terms should be from the Participant's customer. If the Bona Fide Error
was committed by the customer of the Participant, then an internal
order ticket or similar documentation showing the correct terms as
related to the customer of the Participant, would suffice.
    Example 3. Assume the same as Example 2, except that the parties to
the erroneous trade wished to adjust the trade to comport it with the
original terms of the order (i.e., correct price of $100.10). Assume
further that, at the time of the erroneous trade, the National Best Bid
and Offer (``NBBO'') for security XYZ was $100.01 x $100.11 and the CHX
Best Bid and Offer (``CHX BBO'') for security XYZ was at the NBBO.
Assume also that the CHX best bid at $100.01 was for 100 shares and
there are no undisplayed interests at or within the CHX BBO. In this
case, like in Example 2, the executing broker Participant would have to
satisfy the requirements of proposed paragraph (b).
    In addition, pursuant to proposed paragraph (c), the Exchange would
take the additional step of validating that the adjusted trade could
have been executed in the Matching System at the time the erroneous
trade was initially executed, in compliance with all applicable CHX and
SEC rules. Thus, based on the aforementioned snapshot of the NBBO and
the CHX BBO at the time of the erroneous trade, an adjustment of the
price of the erroneous trade from $100.01 to the correct price of
$100.10 would have complied with SEC and CHX rules, as of the time of
the erroneous trade. Specifically, the adjusted trade would have
complied

with Rule 611 of Regulation NMS in that it would not have constituted a
trade-through of a Protected Quotation of an external market as the
adjusted price of $100.10 would have been within the NBBO of $100.01 x
$100.11 at the time of the erroneous trade. Moreover, the adjusted
trade would have complied with Article 20, Rule 8 in that the adjusted
trade would not have improperly traded-through or ahead of interest
resting on the CHX Book as the adjusted price of $100.10 would have
been within the CHX BBO of $100.01 x $100.11.\18\
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    \18\ Current Article 20, Rule 8(d)(1) states that ``except for
certain orders which shall be executed as described in Rule 8(e),
below, an incoming order shall be matched against one or more orders
in the Matching System, in the order of their ranking, at the price
of each resting order, for the full amount of shares available at
that price, or for the size of the incoming order, if smaller.''
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    As discussed above, Example 3 illustrates the primary benefit of a
trade adjustment over a trade cancellation then corrective trade, which
is to preserve the original timestamp of the trade. This is important
because the NBBO and the CHX Book may have changed to the extent that a
trade with the correct terms may no longer be executable. Even if the
corrective trade qualifies as an Error Correction Transaction \19\ and
is thereby able to trade-through the NBBO, if a subsequent order were
to have posted to the CHX Book after the erroneous trade executed at a
price that was the same as or better than the corrective trade, the
corrective trade would nevertheless be blocked by the CHX Book.\20\
Trade adjustments avoid this problem by allowing the original trade to
stand with adjustments to the trade to comport it to the original terms
of the order, so long as the adjusted trade could be validated pursuant
to proposed paragraph (c). Thus, the prevailing market and the state of
the CHX Book as of the time of the adjustment become irrelevant.
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    \19\ See Securities Exchange Act Release No. 55884 (June 8,
2007), 72 FR 32926 (June 14, 2007) (Order Exempting Certain Error
Correction Transactions From Rule 611 of Regulation NMS Under the
Securities Exchange Act of 1934).
    \20\ For instance, where the order posted to the CHX Book after
the erroneous trade and the corrective trade are priced the same, a
corrective trade that qualifies for special handling as Cross With
Size would execute ahead of such resting orders at the same price.
See Article 20, Rule 2(g)(1).
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    The Exchange submits that allowing such adjustments of Bona Fide
Error trades would not harm other market participants because the
result of an adjusted trade is identical to the original trade having
been executed correctly. Indeed, trade adjustments ensure that parties
to a trade are not penalized for Bona Fide Errors committed by
authorized agent(s) or the executing broker Participant that submitted
the erroneous trade. Furthermore, the Exchange submits that Bona Fide
Error trade adjustments would be beneficial to the market as a whole in
that it would prevent the excessive reporting of trades to the
Consolidated Tape.\21\ When an erroneous trade is submitted, cancelled,
then a corrective trade is submitted, the Consolidated Tape would
reflect two order executions, thereby skewing the activity in that NMS
stock. In contrast, a trade adjustment to the erroneous trade would
result in only the original trade being reported. In addition, the
Exchange notes that a trade adjustment would not harm other market
participants because a trade adjustment is tantamount to the original
trade having been made without Bona Fide Errors. That is, if the trade
were adjusted to the correct terms, other market participants would be
in the same position as if the trade had originally executed at the
correct terms.
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    \21\ The Exchange does not submit that ``excessive'' reporting
to the tape would reflect inaccurate information. Rather, the
Exchange believes that if trades were allowed to be adjusted under
the circumstances proposed by this proposed rule filing, the tape
could more efficiently represent market activity (e.g., reporting
the initial trade and an adjustment to that trade, as opposed to
reporting the initial trade, plus a cancellation of that trade, and
a replacement trade).
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    Finally, proposed paragraph (e) mirrors current Article 20, Rule
9(b)(5) which provides that failure to comply with the provisions of
this Rule shall be considered conduct inconsistent with just and
equitable principles of trade and a violation of Article 9, Rule 2.\22\
As the Exchange intends for the functionality provided by proposed Rule
9 to be utilized sparingly, the Exchange will continue its current
market surveillance procedures to reasonably ensure that both Bona Fide
Error trade cancellations and adjustments are properly utilized from
both a basis and frequency perspective.
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    \22\ CHX Article 9, Rule 2 (Just and Equitable Trade Principles)
states as follows:
     No Participant, Participant Firm or partner, officer, director
or registered employee of a Participant Firm shall engage in conduct
or proceeding inconsistent with just and equitable principles of
trade. The willful violation of any provision of the Exchange Act or
any rule or regulation thereunder shall be considered conduct or
proceeding inconsistent with just and equitable principles of trade.
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Proposed Article 20, Rule 9A ``Error Correction Transactions''

    Proposed Rule 9A adopts requirements for Error Correction
Transactions (``ECT''), which are currently accepted by the Exchange,
but the requirements of which are not detailed in the CHX rules.\23\
The proposed language virtually mirrors key portions of the ``Order
Exempting Certain Error Correction Transactions From Rule 611 of
Regulation NMS Under the Securities Exchange Act of 1934'' (``ECT
order'').\24\
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    \23\ The Exchange currently accepts ECTs, provided that, inter
alia, the ECT is marked by a special Bone Fide Error trade indicator
and the Participant submits a Trade Error Report to the Exchange.
    \24\ See supra note 19.
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    Specifically, proposed paragraph (a) provides that a Participant
may submit an ECT to remedy the execution of customer orders that have
been placed in error, provided that the following requirements are
satisfied:
    (1) The erroneous transaction was the result of a ``Bona Fide
Error,'' as defined under proposed Article 1, Rule 1(hh);
    (2) The Bona Fide Error is evidenced by objective facts and
circumstances and the Participant maintains documentation of such facts
and circumstances;
    (3) The Participant recorded the ECT in its error account;
    (4) The Participant established, maintained, and enforced written
policies and procedures that were reasonably designed to address the
occurrence of errors and, in the event of an error, the use and terms
of an ECT to correct the error in compliance with this Rule; and
    (5) The Participant regularly surveiled to ascertain the
effectiveness of its policies and procedures to address errors and
transactions to correct errors and took prompt action to remedy
deficiencies in such policies and procedures.
    Proposed paragraph (b) states that an ECT may execute without the
restrictions of the trade-through prohibition of Rule 611, provided
that the ECT is marked with a special Bona Fide Error trade
indicator.\25\ Proposed paragraph (b) further states that this
exemption applies only to the ECT itself and does not, for example,
apply to any subsequent trades made by a Participant to eliminate a
proprietary position connected with the ECT. Aside from the language
requiring that ECTs be marked with a special trade indicator, the
proposed language virtually mirrors language from the ECT order.
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    \25\ See supra note 23.
---------------------------------------------------------------------------

    Similar to proposed Article 20, Rule 9(e), proposed paragraph (c)
provides that failure to comply with the provisions of this Rule shall
be considered conduct inconsistent with

just and equitable principles of trade and a violation of Article 9,
Rule 2.\26\
---------------------------------------------------------------------------

    \26\ See supra note 22.
---------------------------------------------------------------------------

    Within the context of the proposed CHX trade cancellation and
adjustment matrix, proposed Rule 9A addresses a few specific
situations. First, ECTs are typically used to submit corrective trades
after a trade based on Bona Fide Error had been cancelled or to submit
a trade where the original order was never submitted (i.e., a ``missed
market'' situation).\27\ ECTs can also provide a corrective remedy
where there is a Bona Fide Error trade, as defined under proposed
Article 1, Rule 1(hh), but a trade cancellation or adjustment pursuant
to proposed Rule 9 is not possible, due to the fact that there is not
unanimous consent of all parties to the trade to cancel or adjust
(e.g., Bona Fide Error was committed by the executing broker
Participant with respect to a single-sided order). In such a case, the
erroneous trade would be taken into the error account of the executing
broker Participant, as opposed to being cancelled. However, if the
erroneous trade were cancelled as a Clearly Erroneous Transaction \28\
without the unanimous consent of all parties to the trade, an ECT could
be affected without the executing broker Participant having to take the
erroneous trade into its error account. Thus, proposed Rule 9A, read
together with current Article 20, Rule 9 and Rule 10, contemplates a
wide array of remedies to correct Bona Fide or Obvious Errors.
---------------------------------------------------------------------------

    \27\ The Exchange notes that ``absent a bona fide error as
defined above, the exemption does not apply to a broker-dealer's
mere failure to execute a not-held order in accordance with a
customer's expectations.'' Securities Exchange Act Release No. 55884
(June 8, 2007), 72 FR 32926, 32927 (June 14, 2007), note 14.
    \28\ See CHX Article 20, Rule 10.
---------------------------------------------------------------------------

Proposed Article 20, Rule 11 ``Cancellation or Adjustment of Stock Leg
Trades''

    The Exchange proposes to adopt Article 20, Rule 11 (``Cancellation
or Adjustment of Stock Leg Trades'') to expand and clarify current
Article 20, Rule 9(b), which outlines the requirements for the
cancellation of the stock leg of Stock-Option orders. In addition to
adopting much of current Article 20, Rule 9(b), proposed Rule 11
expands the circumstances under which stock leg trades may be
cancelled, adopts new requirements to allow for the adjustment of stock
leg trades and includes Stock-Future orders within the purview of the
proposed Rule.
    Proposed Rule 11(a) adopts current Article 20, Rule 9(b)(6) and
provides a general overview of the scope of the proposed Rule.
Specifically, it states that unless otherwise expressly prohibited by
the Exchange's rules, a trade representing the stock leg of a Stock-
Option combination order, as defined under proposed Article 1, Rule
1(ii) or a Stock Future combination order, as defined under Article 1,
Rule 1(jj), may be subject to cancellation or adjustment by the
Exchange pursuant to proposed Rule 11, if the stock leg trade was
marked by a special trade indicator when it was originally submitted to
the Matching System.\29\ The proposed paragraph further clarifies that
if the stock leg trade was not originally marked by a special trade
indicator, the trade shall not be eligible for cancellation or
adjustment, notwithstanding compliance with the other requirements of
this Rule.
---------------------------------------------------------------------------

    \29\ Current Article 20, Rule 9(b)(6) requires ``any
transactions cancelled pursuant to the provisions of this section
must be identified by a special trade indicator.''
     The purpose of the special trade indicator is to mark a stock
leg trade as being part of a Stock-Option order and consequently
notifies the market after execution that the trade may be cancelled,
as the trade is contingent upon the execution of non-stock legs that
comprise the total Stock-Option combination order.
---------------------------------------------------------------------------

    Proposed Article 1, Rule 1(ii) provides a definition for ``Stock-
Option'' combination orders. Specifically, the proposed definition of
``Stock-Option'' order simplifies current Article 20, Rule 9(b)(2) \30\
and provides that ``Stock-Option'' is a combination order where at
least one component is a cross order for a stated number of units of an
underlying or related security coupled with the purchase or sale of
options contract(s) on the opposite side of the market representing at
least the same number of units as the underlying or related security
portion of the order. The Exchange submits that this simplified
definition encompasses the hedging scenarios described in current
Article 20, Rule 9(b)(2)(i) and (ii), as illustrated in the examples
below.
---------------------------------------------------------------------------

    \30\ Current Article 20, Rule 9(b)(2) states as follows:
     For purposes of this Rule, a 'stock-option order' is an order
to buy or sell a stated number of units of an underlying or a
related security coupled with either (i) the purchase or sale of
option contract(s) on the opposite side of the market representing
either the same number of units of the underlying or related
security or the number of units of the underlying security necessary
to create a delta-neutral or delta-hedged position or (ii) the
purchase or sale of an equal number of put and call option
contracts, each having the same exercise price, expiration date and
each representing the same number of units of stock as, and on the
opposite side of the market from, the underlying or related security
portion of the order.
---------------------------------------------------------------------------

    The Exchange notes that all cross orders marked as Qualified
Contingent Trades (``QCTs'') \31\ received by the Matching System would
qualify as a Stock-Option or Stock-Future order and thus be eligible
for cancellation or adjustment pursuant to proposed Rule 11.\32\
However, it is important to note that not every Stock-Option or Stock-
Future order would qualify as a QCT because the definition of Stock-
Option/Stock-Future does not require the contemporaneous or near
contemporaneous execution of the different components. Therefore,
maintaining the distinction between QCT and Stock-Option/Stock-Future
orders is important, in light of the fact that a stock leg trade that
qualifies as QCT is exempt from Rule 611(a) of Regulation NMS, whereas
a stock leg trade that is part of a Stock-Option or Stock-Future
combination order may be cancelled or adjusted pursuant to proposed
Rule 11.
---------------------------------------------------------------------------

    \31\ See Securities Exchange Act Release No. 54389 (August 31,
2006), 71 FR 52829 (September 7, 2006) (``Order Granting an
Exemption for Qualified Contingent Trades From Rule 611(a) of
Regulation NMS Under the Securities Exchange Act of 1934''); see
also Securities Exchange Act Release No. 57620 (April 4, 2008), 73
FR 19271 (April 4, 2008) (``Order Modifying the Exemption for
Qualified Contingent Trades From Rule 611(a) of Regulation NMS Under
the Securities Exchange Act of 1934''); see also Article 1, Rule
2(b)(2)(E).
    \32\ The QCT requirement that ``the Exempted NMS Stock
Transaction is fully hedged (without regard to any prior existing
position) as a result of the other component of the contingent
trade'' is similar to the proposed requirement for Stock-Option/
Stock-Future orders that the stock leg trade be couple with
``options contract(s) on the opposite side of the market
representing at least the same number of units as the underlying or
related security portion of the order.'' See CHX Article 1, Rule
2(b)(2)(E).
---------------------------------------------------------------------------

    The following Examples 1-3 illustrate which combination orders
would comport with the proposed definition of ``Stock-Option'' orders.
    Example 1. Assume that a combination order is presented as follows
and the contra-parties to the stock and options legs are the same:

Buy 1,000,000 shares of XYZ
Sell 10,000 XYZ Jan 50 call options
In this Example, the stock position on the long side of the market is
hedged on a share-by-share basis by the options position on the short
side of the market, because the stock position represents the same
number of units as the options position (i.e., 1,000,000 shares of XYZ
on the long side against 10,000 XYZ call options representing 1,000,000
shares of XYZ on the short side). Thus, this combination order is a
``Stock-Option'' order as defined under proposed Article 1, Rule 1(ii),
because the short side call options represent ``at least the same
number of units as the underlying or related security portion of the
order.''

    Example 2. Assume that a combination order is presented as follows
and the contra-parties to the stock and options legs are the same:

Buy 470,000 shares of XYZ
Sell 10,000 XYZ Jan 50 call options
Assume further that the call options have a delta value of 0.47. In
this Example, the stock position on the long side of the market is
hedged on a share-by-share basis by the options position on the short
side of the market, because the stock position represents fewer units
than the options position (i.e., 470,000 shares of XYZ on the long side
against 10,000 XYZ call options representing 1,000,000 shares of XYZ on
the short side). Thus, this combination order is a ``Stock-Option''
order as defined under proposed Article 1, Rule 1(ii), because the
short side call options represent ``at least the same number of units
as the underlying or related security portion of the order.'' Moreover,
this Example illustrates that a delta-neutral hedge will fall within
the proposed definition. That is, since a delta value can never exceed
1, a delta-neutral hedge will never result in a stock position being
less than hedged on a share-by-share basis by the options position.
    Example 3. Assume that a combination order is presented as follows
and the contra-parties to the stock and options legs are the same:

Buy 2,000,000 shares of XYZ
Sell 10,000 XYZ Jan 50 call options
In this Example, the stock position on the long side of the market is
not hedged on a share-by-share basis by the options position on the
short side of the market, because the stock position represents a
greater number of units than the options position (i.e., 2,000,000
shares of XYZ on the long side against 10,000 XYZ call options
representing 1,000,000 shares of XYZ on the short side). Thus, this
combination order is not a ``Stock-Option'' order as defined under
proposed Article 1, Rule 1(ii), because the short side call options do
not represent ``at least the same number of units as the underlying or
related security portion of the order.''
    In sum, Examples 1-3 illustrate that if the long (short) stock
position is hedged on at least a share-by-share basis by the short
(long) options position(s), the combination order will meet the
proposed definition of ``Stock-Option.'' Moreover, the following
Examples 4-7 illustrate situations where there are more than one
options positions, such as the scenario described under current Article
20, Rule 9(b)(2)(ii) and how such multiple options positions would fit
under the proposed definition of ``Stock-Option'' order.
    Example 4. Assume that a combination order is presented as follows
and the contra-parties to the stock and options legs are the same:

Buy 1,000,000 shares of XYZ
Sell 10,000 XYZ Jan 50 call options
Buy 10,000 XYZ Jan 50 put options
This is an example of the type of order contemplated by current Article
20, Rule 9(b)(2)(ii). That is, the positions in this Example 4
represent the purchase or sale of an equal number of put and call
option contracts (i.e., 10,000 contracts each), each having the same
exercise price (i.e., $50.00), expiration date (i.e., January) and each
representing the same number of units of stock as, and on the opposite
side of the market from, the underlying or related security portion of
the order (i.e., each option represents 1,000,000 shares on the short
side of the market opposite of the 1,000,000 shares on the long side
market).
    This order fits within the proposed definition of ``Stock-Option''
because each one of the options legs are on the opposite side of the
market from the stock leg and each represent ``at least the same number
of units as the underlying or related security portion of the order.''
    Example 5. Assume that a combination order is presented as follows
and the contra-parties to the stock and options legs are the same:

Buy 1,000,000 shares of XYZ
Sell 6,000 XYZ Jan 50 call options
Buy 4,000 XYZ Jan 50 put options
This order also fits within the proposed definition of ``Stock-Option''
because the stock position on the long side of the market is hedged on
a share-by-share basis by the sum of the two options position on the
short side of the market, because the stock position represents the
same number of units as the options position (i.e., buy 1,000,000
shares of XYZ on the long side against sell 6,000 XYZ call options and
buy 4,000 XYZ put options, together representing 1,000,000 shares of
XYZ on the short side). Thus, this combination order is a ``Stock-
Option'' order as defined under proposed Article 1, Rule 1(ii), because
the short side call and put options together represent ``at least the
same number of units as the underlying or related security portion of
the order.''
    Another way to visualize this trade is to break up the order into
two separate Stock-Option orders:

------------------------------------------------------------------------
                                             Stock-Option Order 1                     i>2
------------------------------------------------------------------------
Buy 600,000 shares of XYZ.................  Buy 400,000 shares of XYZ.
Sell 6,000 XYZ Jan 50 call options........  Buy 4,000 XYZ Jan 50 put
                                             options.
------------------------------------------------------------------------

Each one of the stock leg components are hedged on a share-by-share
basis by options contracts on the opposite side of the market
representing exactly the same number of shares as the stock leg.
    Example 6. Assume that a combination order is presented as follows
and the contra-parties to the stock and options legs are the same:

Buy 1,000,000 shares of XYZ
Sell 5,000 XYZ Jan 50 call options
Sell 5,000 XYZ Jan 50 put options
In this Example, the stock position and the XYZ Jan 50 put options are
on the long side of the market, while the XYZ Jan 50 call is on the
short side of the market. Since the proposed definition of ``Stock-
Option'' is only concerned about the stock position being hedged by
options on the opposite side of the market, and not additional options
positions on the same side of the market as the stock position, any
options positions on the same side of the market as the stock position
would be ignored. After excluding the XYZ Jan 50 put options from the
analysis, we are left with a stock position on the long side that is
not hedged on a share-by-share basis by the options position on the
short side, because the stock position represents a greater number of
units than the options position (i.e., buy 1,000,000 shares of XYZ on
the long side against sell 5,000 XYZ call options representing 500,000
shares of XYZ on the short side). Thus, this combination order is not a
``Stock-Option'' order as defined under proposed Article 1, Rule 1(ii),
because the short side call options do not represent ``at least the
same number of units as the underlying or related security portion of
the order.''
    Example 7. Assume the same as Example 6, except that the call
options on the short side of the market were for 20,000 contracts
representing 2,000,000 shares of XYZ. As in Example 6, the put options
on the long side of the market would be ignored. We are then left with
a stock position on the long side that is smaller than the call options
position on the short side (i.e., buy 1,000,000 shares of XYZ on the
long side against 20,000 XYZ call options representing 2,000,000 shares
of XYZ on the short side). Thus, this combination order is a ``Stock-
Option'' order as defined under proposed Article 1, Rule 1(ii), because
the short side call options represent ``at least the same number of
units as the underlying or related security portion of the order.''

    With respect to the proposed definition of ``Stock-Future'' order,
proposed Article 1, Rule 1(jj) provides that it is a combination order
where at least one component is a cross order for a stated number of
units of an underlying or a related security coupled with the purchase
or sale of futures contract(s) on the opposite side of the market
representing at least the same number of units of the underlying or
related security portion of the order.\33\ Similar to the proposed
definition for ``Stock-Option'' orders, this definition establishes a
bright-line requirement for the size of the futures transaction, so as
to prevent misuse of this proposed Rule (i.e., the use of de minimis
amount of future contracts to allow a stock order to be subject to
cancellation or adjustment). Given that Stock-Future orders can also be
QCTs, the Exchange submits that making the definitions of ``Stock-
Option'' and ``Stock-Future'' orders nearly identical is appropriate.
---------------------------------------------------------------------------

    \33\ For example, a trade on the CHX in the SPDR S&P 500 ETF
Trust (symbol SPY) may be related to a transaction in an S&P 500
futures contract.
---------------------------------------------------------------------------

Cancellation of Stock Leg Trades

    Proposed Rule 11(b) outlines the requirements for the requests to
cancel a stock leg trade. Specifically, paragraph (b)(1) incorporates
and expands the first half of current Article 20, Rule 9(b)(1),\34\ and
provides that the Exchange may approve a request to cancel a stock leg
trade that was originally marked by a special trade indicator and take
the corrective action(s) necessary to effectuate such a cancellation,
provided that the following items are submitted to the Exchange, in a
form prescribed by the Exchange, by the Participant that submitted the
stock leg trade. It further provides that the requirements of this
paragraph (b) must be complied with to the satisfaction of the
Exchange, before a stock leg trade cancellation pursuant to this Rule
may be approved or any corrective action may be taken. In addition, the
Exchange shall have sole discretion in determining whether the
requirements of this Rule have been satisfied. Thereunder, proposed
subparagraphs (A)-(C) require the following:
---------------------------------------------------------------------------

    \34\ Current CHX Article 20, Rule 9(b)(1) states as follows:
     Unless otherwise expressly permitted by the Exchange's rules, a
trade representing the execution of the stock leg of a stock-option
order may be cancelled at the request of all Participants that are
parties to that trade if (i) market conditions in any of the non-
Exchange market(s) prevent the execution of the option leg(s) at the
price agreed upon by the parties to the options leg, or (ii) the
options leg(s) is cancelled by the exchange on which it was
executed.
---------------------------------------------------------------------------

    (A) Timely written request. The Participant that submitted the
stock leg trade shall submit a written request for cancellation,
including all information and supporting documentation required by this
Rule, no later than 4:30 p.m. CST on T+1. The Exchange will retain a
copy of the written request, information, and supporting documentation.
In extraordinary circumstances, a cancellation may be requested and
effected after T+1, with the approval of an officer of the Exchange;
    (B) Qualified Cancellation Basis. The Participant that submitted
the stock leg trade shall identify the Qualified Cancellation Basis, as
defined under proposed paragraph (b)(2). The Participant shall also
provide and maintain supporting documentation showing the objective
facts and circumstances supporting the Qualified Cancellation Basis;
and
    (C) All parties consent. The Exchange shall verify that the
cancellation is requested by all parties involved in the stock leg
trade (or by an authorized agent of those parties). The Participant
that submitted the stock leg trade shall provide supporting
documentation evidencing this consent.
    Similar to proposed Rule 9(b)(1), proposed subparagraph (A) sets a
time limit for requests to cancel a stock leg trade of a Stock-Option/
Stock-Future order. The time requirement is short enough to encourage
quick resolution, while being long enough to accommodate unforeseen
circumstances. Thus, similar to proposed Rule 9(b)(1), the Exchange
will not consider any request to cancel a stock leg trade, much less
take any corrective action to effectuate such a cancellation, until all
of the requirements of proposed Rule 11 are satisfied.
    Similar to proposed Rule 9(b)(2), proposed subparagraph (B)
requires the Participant that submitted the stock leg trade to identify
the specific reason for the requested cancellation, which in the
context of Stock-Option/Stock-Future combination orders would at least
be one of the ``Qualified Cancellation Basis,'' as discussed in detail
below. Moreover, like proposed Rule 9(b)(2), the Participant that
submitted the stock leg trade is responsible for providing all
documentation that supports the Qualified Cancellation Basis. For
instance, if the reason for the stock leg trade cancellation is that
the non-stock leg executed at a price other than what was originally
agreed, the Participant that submitted the stock leg trade would have
to produce documentation reflecting the original non-stock leg terms
and a copy of the original order ticket that reflects the non-stock leg
trade as actually executed.
    Similar to proposed Rule 9(b)(3), proposed subparagraph (C)
requires the Exchange to verify that the request to cancel the stock
leg trade is consented to by the parties to the stock leg trade or by
an authorized agent(s) of the parties. However, the Participant that
submitted the stock leg trade must provide the supporting documentation
evidencing this consent to cancel (e.g., email or instant message) from
either the parties to the trade or by an authorized agent of the
parties.
    As referred to in proposed Rule 11(b)(1)(B) above, proposed Rule
11(b)(2) lists the ``Qualified Cancellation Basis'' as follows:
    (A) A non-stock leg executed at a price/quantity or was adjusted to
a price/quantity other than the price/quantity originally agreed upon
by all of the parties to the Stock-Option or Stock-Future order;
    (B) A non-stock leg could not be executed; or
    (C) A non-stock leg was cancelled by the exchange on which it was
executed.
    While proposed subparagraph (C) substantively mirrors current
Article 20, Rule 9(b)(1)(ii), proposed subparagraphs (A) and (B)
expands the permissible circumstances where a stock leg trade may be
cancelled.
    Proposed subparagraph (A) is based on current Article 20, Rule
9(b)(1)(i), but expands its scope. Specifically, proposed subparagraph
(A) eliminates the overly narrow reference to ``market conditions'' and
includes execution of the non-stock leg at a size other than what was
originally agreed as a basis to cancellation of the stock leg. That is,
in addition to situations where market conditions prevent the execution
of the non-stock leg at the originally agreed price (e.g., NBBO
changes), the proposed subparagraph (A) contemplates situations where
the parties voluntarily adjust the terms of non-stock leg trade or
modify the terms of the non-stock leg order prior to execution, with
the intention of modifying the original stock leg terms. If all of the
components are executed at the modified terms, there would be no need
to cancel trades. However, given the latency inherent in the Stock-
Option/Stock-Future order handling and execution process,\35\ it is
frequently the

case that modification instructions fail to reach the Participant that
submitted the stock leg trade on the Exchange, prior to the stock leg
executing at the original terms.
---------------------------------------------------------------------------

    \35\ When parties to a Stock-Option/Stock-Future order agree to
the terms, the individual components are virtually never executed
simultaneously, due to the fact that derivative legs and stock legs
are executed on different venues. Thus, the order packaging process
frequently involves numerous brokers relaying order instructions for
component orders that are to be executed at different venues. In the
situation where a Stock-Option order originates on the floor of an
options exchange or a Stock-Future order originates on the floor of
a futures exchange, the relaying of stock leg order information will
likely go from the floor brokers to an inter-dealer broker, who in
turn will relay the information to an executing broker Participant.
In such a case, there will be an inherent latency in communication
in the process.
---------------------------------------------------------------------------

    For instance, a voluntary modification of the terms of a Stock-
Option order may arise if one or more parties to the order withdrew
from the order prior to execution of any components. In such an
instance, the remaining parties would have to either cancel the entire
Stock-Option order or attempt to modify the terms of the order to
compensate for the lost parties. If the parties chose to attempt to
modify the terms of the Stock-Option order, there may be a situation
where the non-stock leg would execute at the modified terms, but the
stock leg trade would execute at the original terms, before the
modified stock leg terms were received by the Participant that
submitted the stock leg trade. Thus, the stock leg trade would likely
be inadequately hedged \36\ by the options position. In the worst case
scenario, the stock leg may have traded-through a Protected Quotation
without being ``fully hedged,'' as required by the QCT exemption.\37\
In such a case, the parties may wish to either adjust the stock leg
trade, pursuant to proposed Article 20, Rule 11(c), as discussed in
detail below, or simply cancel the original stock leg trade and replace
the trade with a stock leg trade that is adequately hedged by the
modified non-stock leg trade.\38\ Thus, by expanding current Article
20, Rule 9(b)(1)(i) to include all situations where a non-stock leg
executed at a price/quantity other than what was originally agreed, the
communication latency issues can be effectively mitigated and market
participants can be protected from being penalized for engaging in bona
fide market activity.
---------------------------------------------------------------------------

    \36\ An ``inadequate'' hedge means a hedge ratio that deviates
from what has been agreed by the parties to the Stock-Option/Stock-
Future order or a hedge that is not a ``fully hedged'' position, as
required and defined by the QCT exemption. See supra note 31.
    \37\ See supra note 31.
    \38\ The parties may decide that it would be more desirable to
cancel the stock leg trade, given the additional requirements that
must be met for a trade adjustment to be approved pursuant to
proposed Article 20, Rule 11(c), especially if the replacement stock
leg trade would not trade-through a Protected Quotation of an
external market.
---------------------------------------------------------------------------

    Proposed subparagraph (B) adopts a new Qualified Cancellation Basis
where a stock leg trade may be cancelled if the non-stock leg was never
executed. There are numerous reasons why a non-stock leg trade may not
be executed. For instance, market conditions may block the execution of
an options leg at the originally agreed price, and instead of executing
at a price other than what was originally agreed, the parties may
simply cancel the non-stock leg order. Also, one or more parties to a
Stock-Option/Stock-Future order may decide not to participate in the
Stock-Option order prior to any of the component orders being executed.
In this case, instead of trying to modify the terms of the Stock-Option
order to compensate for the lost parties, as discussed above, the
remaining parties may decide that it would be best to cancel the entire
order. If the parties decide to cancel the Stock-Option order, the
cancel messages may reach the respective executing brokers in time,
thus obviating the need to cancel trades. However, due to the inherent
communication latency,\39\ it is frequently the case that the non-stock
leg order is cancelled prior to execution, but the cancel message does
not reach the Exchange prior to the stock leg being executed. In such a
situation, it would be patently unfair to require the parties to the
Stock-Option/Stock-Future order to maintain a stock position that is no
longer hedged by a non-stock position, especially if the stock leg
relied on the QCT exemption to trade-through a Protected Quotation of
an external market.
---------------------------------------------------------------------------

    \39\ See supra note 35.
---------------------------------------------------------------------------

    Moreover, the Exchange submits that any potential abuse of proposed
subparagraph (B) is reasonably eliminated by the requirement that all
parties to the Stock-Option order consent to the stock leg trade
cancellation. Thus, since no one contra-party may act unilaterally to
cancel a trade, this would prevent any one contra-party from cancelling
a stock leg trade where stock prices or options prices moved in favor
of that party. It logically flows that if prices move in favor of one
party, the prices have moved to disadvantage of the contra-party. Under
such circumstances, the contra-party would never agree to a stock leg
trade cancellation.
    The Exchange submits that the proposed Qualified Cancellation
Bases, when considered as a whole, adequately address the latency
issues that affect the Stock-Option/Stock-Future order packaging
process. By expanding the permissible bases for cancelling stock leg
trades, the problems arising from these latency issues can be resolved
by allowing market participants to step away from unwanted stock
positions when certain contingencies are not realized.

Adjustments of Stock Leg Trades

    The Exchange submits that when a non-stock leg executes at
different terms than originally agreed or is adjusted by the exchange,
it may be more appropriate to permit the adjustment of the stock leg
trade to maintain the original aggregate cash flow \40\ or original
hedge ratio of the Stock-Option or Stock-Future order that was agreed
upon by all of the parties, as opposed to cancelling the stock leg
trade and requiring the parties to attempt to execute the entire
package again. So long as the adjustment is consistent with original
intent of the parties that can be reasonably ascertained, the Exchange
submits that allowing adjustments can prove to be a valuable tool in
promoting order flow to the Exchange and preventing the excessive
reporting of activity to the tape.\41\
---------------------------------------------------------------------------

    \40\ The ``original aggregate cash flow'' of a Stock-Option or
Stock Future order is the absolute value of the difference between
the cash flow of the proposed stock leg trade and the proposed non-
stock leg trade had the Stock-Option or Stock-Future order been
executed as originally intended. See infra Example 8.
    \41\ See supra note 21.
---------------------------------------------------------------------------

    Proposed paragraph (c) adopts new requirements to allow for the
adjustment of a stock leg trade that is a component of a Stock-Option/
Stock-Future order under specified circumstances. The format of
proposed paragraph (c) is modeled on proposed paragraph (b), with
additional substance to address the added complexity of adjusting
trades. Similar to proposed paragraph (b)(1), proposed paragraph (c)(1)
provides that the Exchange may approve a request to adjust a stock leg
trade that was originally marked by a special trade indicator and take
the corrective action(s) necessary to effectuate such an adjustment,
provided that the following items are submitted to the Exchange, in a
form prescribed by the Exchange, by the Participant that submitted the
stock leg trade. It further states that the requirements of this
proposed paragraph (c) must be complied with, to the satisfaction of
the Exchange, before a stock leg trade adjustment pursuant to this Rule
may be approved or any corrective action may be taken. Thereunder,
proposed subparagraphs (A)-(D) require the following:
    (A) Timely written request. The Participant that submitted the
stock leg trade shall submit a written request for adjustment,
including all information and supporting documentation required by this
Rule, no later than 4:30 p.m. CST

on T+1. The Exchange will retain a copy of the written request,
information, and supporting documentation. In extraordinary
circumstances, an adjustment may be requested and effected after T+1,
with the approval of an officer of the Exchange;
    (B) Qualified Adjustment Basis. The Participant that submitted the
stock leg trade shall identify the Qualified Adjustment Basis, as
defined under proposed paragraph (c)(2). The Participant shall also
provide and maintain supporting documentation showing the objective
facts and circumstances supporting the Qualified Adjustment Basis;
    (C) All parties consent. The Exchange shall verify that the
adjustment is requested by all parties involved in the stock leg trade
(or by an authorized agent of those parties). The Participant that
submitted the stock leg trade shall provide supporting documentation
evidencing this consent; and
    (D) Additional Documentation. The Participant that submitted the
stock leg trade shall submit a proposed Adjusted Stock Price or
Adjusted Stock Quantity, as detailed under proposed paragraph (c)(3).
    Similar to proposed paragraph (b)(1)(A)-(C), proposed subparagraphs
(c)(1)(A)-(C) establishes time, basis, consent, and documentation
requirements for proposed stock leg trade adjustments. Proposed
subparagraph (D) establishes an additional documentation requirement
for proposed stock leg trade adjustments that requires the Participant
that submitted the stock leg trade to provide certain information and
calculations to show that the proposed adjustment are necessary and
appropriate (i.e., Adjusted Stock Price for price adjustments and
Adjusted Stock Quantity for quantity adjustments) and comport with the
requirements of proposed paragraph (c)(3).
    As referred to in proposed Rule 11(c)(1)(B) above, proposed
paragraph (c)(2) provides that a ``Qualified Adjustment Basis'' exists
if a non-stock leg executed at a price/quantity or was adjusted to a
price/quantity other than the price/quantity originally agreed upon by
all of the parties to the Stock-Option or Stock-Future order. Proposed
paragraph (c)(2) is identical to proposed paragraph (b)(2)(A). If the
non-stock leg were to execute or be adjusted to price/quantity other
than what was originally agreed, the parties to the stock leg trade
would have the choice of either cancelling the stock leg trade or
adjusting the stock leg trade to match the original aggregate cash flow
or the original hedge ratio of the Stock-Option or Stock-Future order.
Adjustments under such circumstances would obviate the need to cancel
component trades that have been properly executed and would be a more
efficient use of market resources. Moreover, adjustments would also
have the additional benefit of avoiding excessive reporting to the
tape.\42\
---------------------------------------------------------------------------

    \42\ Id.
---------------------------------------------------------------------------

    In order to reasonably ensure that adjustments to the stock leg
trade are made consistently and comport to the original intent of the
parties, a detailed methodology for determining and verifying exact
adjusted terms is essential. To this end, proposed paragraph (c)(3)
provides that the Participant that submitted the stock leg trade may
request only one of the following adjustments per Stock-Option or
Stock-Future order. Moreover, pursuant to proposed paragraph (c)(1)(D),
the Participant shall provide the applicable information and
calculations to the Exchange in a form prescribed by the Exchange.
    Proposed subparagraph (A) details the necessary calculations for
Adjusted Stock Price, where a non-stock leg executed at a price or was
adjusted to a price other than the price originally agreed upon by all
of the parties to the Stock-Option or Stock-Future order and the
parties wish to maintain the original aggregate cash flow of the Stock-
Option or Stock-Future order. Thereunder, subparagraphs (A)(i)-(iv)
require the Participant that submitted the stock leg trade to submit:
    (i) the aggregate cash flow of the Stock-Option or Stock-Future
order based on trade prices had it been fully executed at the original
terms agreed upon by all of the parties to the Stock-Option or Stock-
Future order, prior to any component trade having been executed;
    (ii) the actual aggregate cash flow of the executed non-stock
leg(s);
    (iii) the Comparable Stock Price (``CSP'') for the stock leg which
would result in exactly the same aggregate cash flow as indicated under
subparagraph (i);
    (iv) the proposed Adjusted Stock Price (``ASP'') that comports with
the following formula:

(CSP-$0.015) <= ASP <= (CSP + $0.015)
The following Examples 8 and 9 illustrate how the requirements of
proposed subparagraph (A) could be met.

    Example 8. Assume that the current market value for XYZ Jan 50 call
options is $4.50/share, the call options have a delta of 0.47, and the
current market value for security XYZ is $50.00. Assume that Floor
Broker A and Floor Broker B agree to a Buy-Write Stock-Option
combination order and wish to employ a delta-neutral hedge (i.e., hedge
ratio of 0.47) against the options positions. Specifically, the parties
agree that Floor Broker A will buy 10,000 XYZ Jan 50 calls from Floor
Broker B for $4.50 per share and Floor Broker A will sell to Floor
Broker B 470,000 shares of XYZ at $50.00/share. Assume that the parties
are on the floor of an options exchange and forward the terms of the
stock leg order to an inter-dealer broker, who then forwards the order
to an executing broker Participant on the Exchange.
    Assume that within a few seconds of the stock order being relayed
to the interdealer broker, market conditions prevent the execution of
the options leg at $4.50/share (e.g., the NBBO for options contract
changed from $4.45 x $4.55 to $4.35 x $4.40).\43\ Due to time and
customer considerations, the parties agree to execute the options leg
at the NBO of $4.40/share. At nearly the same time, the parties relay
the new stock leg terms to the interdealer broker for transmission to
the executing broker Participant. However, before the message reaches
the Exchange Participant, the stock leg trade was already executed on
the Exchange at the original terms of 470,000 shares of XYZ at $50.00/
share.
---------------------------------------------------------------------------

    \43\ The Exchange notes that although market conditions
preventing the execution of the non-stock leg at a price other than
what was originally agreed is one example of a Qualified Adjustment
Basis, proposed Rule 11(c)(2) contemplates any situation where the
non-stock leg executed at a price other than what was originally
agreed, provided that the other requirements of proposed Rule 11 are
met.
---------------------------------------------------------------------------

    The Participant that submitted the stock leg trade (i.e., the
executing broker Participant) now wishes to adjust only the price of
the stock leg trade to ensure that the aggregate cash flow remains the
same as originally agreed.\44\ In addition to meeting the requirements
of proposed paragraph (c)(1) and (c)(2), the Participant would have to
submit the following documentation and calculations:
---------------------------------------------------------------------------

    \44\ If the executing broker Participant wished to adjust the
quantity of the stock leg trade to maintain a delta-neutral hedge
based on the new delta at $4.40 per share, the executing broker
Participant would have satisfy the requirements of proposed
subparagraph (C), which is discussed in detail below.
---------------------------------------------------------------------------

    Pursuant to proposed subparagraph (A)(i), the Participant would
have to provide documentation to the Exchange that shows the aggregate
cash flow for the Stock-Option order as originally agreed.
Specifically, the Participant would have to show that the cash flow

for the options leg had it executed at the original terms to be
$4,500,000 (i.e., where 10,000 contracts = 1,000,000 underlying shares;
1,000,000 shares x $4.50/share = $4,500,000 premium to be paid by Floor
Broker A to Floor Broker B) and the cash flow for the stock leg trade
had it executed at the original terms to be $23,500,000 (i.e., 470,000
shares x $50.00 per share = $23,500,000 paid by Floor Broker B to Floor
Broker A). Thus, the total aggregate cash flow of the Stock-Option
order had it executed at the original terms would have been $19,000,000
(i.e., the absolute value of the difference between the cash flows for
the options leg and the stock leg had they executed at the original
terms);
    Pursuant to proposed subparagraph (A)(ii), the Participant would
have to provide documentation to the Exchange that states that the
actual aggregate cash flow for the options leg as actually executed to
have been $4,400,000 (i.e., 10,000 contracts = 1,000,000 underlying
shares; 1,000,000 shares x $4.40/share = $4,400,000 to be paid by Floor
Broker A to Floor Broker B); and
    Pursuant to proposed subparagraph (A)(iii), the Participant would
have to submit a Comparable Stock Price (``CSP'') that would result in
exactly the same aggregate cash flow as calculated pursuant to proposed
subparagraph (A)(i) of $19,000,000. Thus, the proposed CSP would be
calculated pursuant to the following formula:
[GRAPHIC] [TIFF OMITTED] TN18SE13.000

Pursuant to this formula, the CSP is $49.787234 (i.e., $19,000,000-
$4,400,000)/470,000 shares).

    Moreover, the following Example 9 illustrates how proposed
subparagraph (A)(iv) would be applied.
    Example 9. Assume the same as Example 8, except that Floor Broker A
maintains that the Adjusted Stock Price (``ASP'') should be $49.79 by
rounding up to the nearest cent and Floor Broker B maintains that the
ASP should be $49.78 by rounding down to the nearest cent.\45\
---------------------------------------------------------------------------

    \45\ Given that Floor Broker A is selling the underlying stock
and Floor Broker B is buying the underlying stock, it stands to
reason that Floor Broker A would prefer to round the CSP to a higher
figure and Floor Broker B would prefer to round the CSP to a lower
figure.
---------------------------------------------------------------------------

    Proposed subparagraph (A)(iv) provides latitude in determining the
actual ASP, by allowing the parties to reconcile rounding
discrepancies. Thus, pursuant to proposed subparagraph (A)(iv), the
permissible range for an ASP would be plus or minus $0.015 from
$49.787234, which is $49.772234-$49.802234. Given this permissible
range, an equitable remedy for the discrepancy would be for Floor
Broker A and Floor Broker B to split the difference in CSPs and meet
halfway at $49.785. Since the ASP of $49.785 is within the range of the
parameters based on a CSP of $49.78 and $49.79, the agreed ASP of
$49.785 may be accepted by the Exchange, so long as the other
requirements of proposed Rule 11 are satisfied.\46\
---------------------------------------------------------------------------

    \46\ Although proposed subparagraph (A)(iv) allows for the ASP
to be within a permissible range, the actual determination of the
ASP is not at random. As shown in Example 9, the ASP that is
submitted to the Exchange is not a random number within the
permissible range, but rather, the arithmetic mean of two
legitimate, yet different values.
---------------------------------------------------------------------------

    Proposed subparagraph (B) details the necessary calculations for
Adjusted Stock Quantity, where a non-stock leg executed at a quantity
or was adjusted to a quantity other than the quantity originally agreed
upon by all of the parties to the Stock-Option or Stock-Future order.
Thereunder, proposed subparagraphs (B)(i)-(iii) require the Participant
that submitted the stock leg trade to submit:
    (i) the original hedge ratio agreed upon by all the parties to the
Stock-Option or Stock-Future order, prior to any component trade having
been executed;
    (ii) the proposed Expected Stock Quantity (``ESQ'') that maintains
the original hedge ratio; and
    (iii) the proposed Adjusted Stock Quantity (``ASQ'') that comports
with the following formula:

98.5% ESQ <= ASQ <= 101.5% ESQ

The following Example 10 illustrates how the requirements of proposed
subparagraph (B) could be met.
    Example 10. Assume that the current market value for XYZ Jan 50
call options is $4.50/share, the call options have a delta value of
0.47, and the current market value for security XYZ is $50.00. Assume
that Floor Broker C, Floor Broker D, and Floor Broker E agree to a Buy-
Write Stock-Option combination order and wish to employ a delta-neutral
hedge (i.e., hedge ratio of 0.47) against the options position.
Specifically, the parties agree that Floor Brokers C and D will buy
10,000 XYZ Jan 50 calls from Floor Broker E for $4.50/share, where
Floor Broker C will buy 7,000 contracts and Floor Broker D will buy
3,000 contracts, and Floor Brokers C and D will sell to Floor Brokers E
470,000 shares of XYZ at $50.00/share, where 329,000 shares are sold by
Floor Broker C and 141,000 shares are sold by Floor Broker D. Assume
that the parties are on the floor of an options exchange and forward
the terms of the stock leg order to an interdealer broker, who then
forwards the order to a executing broker Participant for execution on
the Exchange.
    However, assume further that immediately after the parties relayed
the terms of the original stock leg trade to the interdealer broker,
Floor Broker D pulls out of the Stock-Option order because his customer
cancels his order. Notwithstanding, Floor Brokers C and E wish to go
forward with the transaction and agree to trade 7,000 contracts of XYZ
Jan 50 call options at $4.50/share and hedge with a trade of 329,000
shares of XYZ at $50.00. Assume then that options leg executes at 7,000
contracts and before the adjusted terms to the stock leg quantity
reaches the executing broker Participant, the stock leg executes at the
original terms of 470,000 shares of XYX at $50.00 per share.
    The Participant that submitted the stock leg trade (i.e., the
executing broker Participant) now wishes to adjust only the quantity of
the stock leg trade to ensure that the hedge ratio remains the same as
originally agreed. In addition to meeting the requirements of proposed
paragraph (c)(1) and (c)(2), the Participant would have to submit the
following documentation and calculations:
    Pursuant to proposed subparagraph (B)(i), the Participant that
submitted the stock leg trade would have to provide documentation that
clearly shows the original hedge ratio agreed upon by all the parties
to the Stock-Option order. In this case, the original hedge ratio was
0.47;
    Pursuant to proposed subparagraph (B)(ii), the Participant would
have to provide an ESQ that maintains the original hedge ratio. Since
the parties originally agreed to execute a delta-neutral hedge, the ESQ
would be 329,000 shares (i.e., 7,000 contracts x 100 shares per
contract = 700,000 shares

equivalent x 0.47 hedge ratio = ESQ of 329,000 shares); and
    Pursuant to proposed paragraph (B)(iii), the Participant would have
to submit an ASQ that is within the range 98.5% of the ESQ and 101.5%
of the ESQ of 329,000. In this Example, the parties to the trade would
likely agree that the CSQ should be the ASQ, since the adjustment to
the quantity of a stock leg trade resulted in an exact Round Lot
value.\47\ Thus, the parties would likely agree to an ASQ of 329,000,
which falls within the permissible range. Thus, the Exchange may accept
the proposed quantity adjustment, so long as the other requirements of
proposed Rule 11 are satisfied.
---------------------------------------------------------------------------

    \47\ If the ESQ were of a Mixed Lot quantity, the parties to the
trade may wish to avoid a Mixed Lot stock trade, as such a trade can
ultimately result in Odd Lot remainders. Thus, under those
circumstances, the parties may agree to round the stock transaction
down to the nearest Round Lot. It is important to note that the
parties could not round up because that would result in the stock
leg trade from not being adequately hedged by options contracts that
represent at least the same number of shares as the stock leg, as
required by the proposed definition of ``Stock-Option'' orders.
---------------------------------------------------------------------------

    Proposed subparagraph (C) details the necessary calculations for
Adjusted Stock Quantity for a Stock-Option order only, where an options
leg trade executed at a price or was adjusted to a price other than the
price originally agreed upon by all of the parties to the Stock-Option
order and the parties wish to maintain the original delta-based hedge
ratio. Thereunder, proposed subparagraphs (C)(i)-(iii) require the
Participant that submitted the stock leg trade to submit:
    (i) the delta used to calculate the size of the original stock leg
trade (``[Delta]1'');
    (ii) the proposed delta associated with the ASP (``[Delta]2'');
    (iii) the proposed ESQ based on the following formula:

ESQ = (Original Stock Leg Quantity x [Delta]2)/[Delta]1

    (iv) the proposed ASQ that comports with the following formula:

98.5% ESQ <= ASQ <= 101.5% ESQ

This adjustment calculation contemplates situations where a change in
the delta value of the options leg would necessitate an adjustment to
the quantity of the stock leg trade to maintain the delta-based hedge.
If the original hedge ratio was delta-based, this calculation would
permit an adjustment to the stock leg trade to maintain the original
delta-based hedge ratio.\48\ The following Examples 11 and 12
illustrate how the requirements of proposed subparagraph (C) could be
met.
---------------------------------------------------------------------------

    \48\ The Exchange notes that it will only permit the parties to
a Stock-Option trade to adjust either the quantity or price of the
stock leg trade, pursuant to proposed paragraph (c)(3), based on the
options leg executing at or being adjusted to a price other than the
price originally agreed upon by all of the parties to the Stock-
Option trade.
---------------------------------------------------------------------------

    Example 11. Assume the same as Example 8, except that the
Participant that submitted the stock leg trade wished to adjust the
quantity of the stock leg trade to maintain the original delta-neutral
hedge, as opposed to adjusting the price of the stock leg trade to
maintain the original aggregate cash flow. Assume that when the options
leg executed at $4.40 per share, the corresponding delta value dropped
from 0.47 to 0.45.\49\ In order to adjust the quantity of the stock leg
trade to comport with the correct delta to maintain a delta-neutral
hedge, the Participant would have to submit the following information
to the Exchange:
---------------------------------------------------------------------------

    \49\ Depending on how values are rounded, the delta of an option
may be more than two digits.
---------------------------------------------------------------------------

    Pursuant to proposed subparagraph (C)(i), the Participant would
have to provide documentation evincing the delta value of the options
contract at $4.50/share was 0.47;
    Pursuant to proposed subparagraph (C)(ii), the Participant would
have to provide documentation evincing the delta value of the options
contract at $4.40/share to be approximately 0.45; \50\
---------------------------------------------------------------------------

    \50\ Id.
---------------------------------------------------------------------------

    Pursuant to proposed subparagraph (C)(iii), the Participant would
have to provide an ESQ that is the quotient of the product of the
original stock leg quantity and the new delta and the original delta.
In this case, the calculation would be (470,000 original shares x 0.45
new hedge ratio)/0.47 original hedge ratio = CSQ of 450,000 shares; and
    Pursuant to proposed paragraph (C)(iv), the Participant would have
to submit an ASQ that is within the range 98.5% of the CSQ and 101.5%
of the ESQ, which in this Example would be 443,250 to 456,750. As noted
above, the proposed adjusted delta is approximately 0.45.\51\ It is
possible that the parties may utilize slightly different delta values,
depending on the reasonable option pricing model employed and the
rounding methodology used.\52\ If the respective delta values differ,
then the CSQ would certainly be different. Thus, allowing the parties a
de minimis range to reconcile such model and rounding inconsistencies
would facilitate an agreement as to the ASQ. However, if the parties
agree that the adjusted delta value should be exactly 0.45, then the
CSQ would equal the ASQ at 450,000 shares.
---------------------------------------------------------------------------

    \51\ Id.
    \52\ Unlike the ASP calculation where the original and adjusted
prices are known based on the objective pricing information
immediately discernible by the Exchange, when a price adjustment is
made, the corresponding delta adjustment cannot be immediately
discerned by the Exchange. Therefore, the Exchange submits that
adopting a rule-based range of acceptable delta values is the most
reasonable approach.
---------------------------------------------------------------------------

    Example 12. Assume the same as Example 8, except that parties to
the Stock-Option trade wished to employ a delta-based hedge ratio where
the stock leg trade represented 10% more stock than required for a
delta-neutral hedge. Thus, the parties agreed that Floor Broker A would
buy 10,000 XYZ Jan 50 calls from Floor Broker B for $4.50 per share and
Floor Broker A would sell to Floor Broker B 517,000 shares of XYZ at
$50.00/share, which is 10% more shares of XYZ than needed to effect a
delta-neutral hedge where the delta value is 0.47. However, assume that
market conditions in the options market resulted in the options leg
executing at $4.40 per share with a corresponding delta value of 0.45.
In order to adjust the quantity of the stock leg trade to maintain the
original delta-based hedge ratio, the Participant that submitted the
stock leg trade would have to submit the following information to the
Exchange:
    Pursuant to proposed subparagraph (C)(i), the Participant would
have to provide documentation evincing the delta value of the options
contract at $4.50/share was 0.47;
    Pursuant to proposed subparagraph (C)(ii), the Participant would
have to provide documentation evincing the delta value of the options
contract at $4.40/share to be approximately 0.45;
    Pursuant to proposed subparagraph (C)(iii), the Participant would
have to provide an ESQ that is the quotient of the product of the
original stock leg quantity and the new delta and the original delta.
In this case, the calculation would be (517,000 original shares x 0.45
new hedge ratio)/0.47 original hedge ratio = CSQ of 495,000 shares. As
originally intended, 495,000 shares represents 10% more shares than
required to create a delta-neutral hedge; and
    Pursuant to proposed paragraph (C)(iv), the Participant would have
to submit an ASQ that is within the range 98.5% of the CSQ and 101.5%
of the ESQ, which in this Example would be 487,575 to 502,425. As
discussed in Example 11, above, this de minimis range is necessary to
address the possibility that the parties may utilize slightly different
delta values, depending on the reasonable option pricing model employed
and the rounding methodology used. However, if the parties agree that
the adjusted

delta value should be exactly 0.45, then the CSQ would equal the ASQ at
495,000 shares.
    Once the ASQ or ASP has been presented to the Exchange pursuant to
proposed paragraph (c)(3), pursuant to proposed paragraph (c)(4), the
Exchange would ascertain that the proposed adjusted stock leg trade
could have been executed in the Matching System at the time the trade
was initially executed, in compliance with all applicable CHX and SEC
rules. The proposed paragraph further provides that, if the trade
adjustment is approved, the adjustment shall be accepted, recorded, and
submitted to a Qualified Clearly Agency, without regard to orders
residing in the Matching System at the time the adjustment is made.
Proposed paragraph (c)(4) mirrors proposed Rule 9(c), which deals with
the validation of adjustments for trades based on Bona Fide Error.
    Specifically, proposed paragraph (d)(4) is designed to reasonably
ensure that a proposed adjusted trade would not have, inter alia,
traded-through the CHX Book or a Protected Quotation of an external
market in violation of Rule 611(a) of Regulation NMS. This validation
illustrates the potential benefits of a stock leg trade adjustment,
which is to preserve the timestamp of the original stock leg trade.
Specifically, a trade adjustment would prevent the need to cancel the
trade and resubmit a corrective trade and thereby prevent the
possibility that the CHX Book would block the new stock leg trade from
being executed, due to a better priced order, which was submitted after
the trade cancellation, now resting on the CHX Book. Similarly, with
respect to the NBBO, a trade adjustment would prevent the possibility
that the NBBO would end up blocking the new stock leg trade from being
executed.
    Moreover, as discussed above, since many Stock-Option orders are
submitted as QCTs, the timing of the execution of the different
components is of paramount importance.\53\ Therefore, the cancellation
of a stock leg trade that is out-of-hedge and resubmission of a new
corrective trade would rarely, if ever, meet QCT time requirement and
would consequently require all components of the Stock-Option order to
be cancelled and re-attempted. That is, a resubmitted stock leg trade
could not be marked QCT, unless all of the components, including a good
non-stock leg trade, were cancelled and re-executed. Therefore, trade
adjustments have the added benefit of allowing market participants the
ability to execute multi-component orders more efficiently.
---------------------------------------------------------------------------

    \53\ See supra note 31.
---------------------------------------------------------------------------

    Proposed paragraph (e) mirrors proposed Rule 9(d) and provides that
if the Exchange approves a request for a stock leg trade cancellation
or adjustment, any corrective action(s) necessary to effectuate the
cancellation or adjustment, including, but not limited to, corrective
entries into the Exchange's records and/or corrective clearing
submissions to a Qualified Clearing Agency, shall be taken by Exchange
operations personnel only. The purpose of this language is to clarify
that the Participant's only role in the proposed trade adjustment or
cancellation is to provide to the Exchange the required information and
documentation as detailed under proposed Rule 11. Finally, proposed
paragraph (f) mirrors proposed Rule 9(e) and provides that failure to
comply with the provisions of this Rule shall be considered conduct
inconsistent with just and equitable principles of trade and a
violation of Article 9, Rule 2.

Implementation of Proposed Rules

    Prior to implementing proposed Article 20, Rules 9, 9A, and 11, the
Exchange will ensure that policies and procedures are in place to allow
Exchange operations personnel to effectively monitor and surveil the
use of the proposed cancellations, adjustments, and submission of ECTs.
The Exchange notes that detailed policies and procedures are already in
place and are being followed by Exchange operations personnel for all
proposed Rules that merely clarify and detail existing functionality
offered by the Exchange. To the extent that the proposed Rules allow
for new functionality, existing policies and procedures will be
expanded and refined to cover such new functionality.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act in general,\54\ and furthers the
objectives of Section 6(b)(5) in particular,\55\ in that it is designed
to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in facilitating
transaction in securities, to remove impediments and perfect the
mechanisms of a free and open market, and, in general, to protect
investors and the public interest.
---------------------------------------------------------------------------

    \54\ 15 U.S.C. 78f(b).
    \55\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Specifically, the proposed rules to permit the adjustment of Bona
Fide Error trades furthers the objectives of the Act by allowing
persons engaged in facilitating transactions in securities to remedy
Bona Fide Errors without having to cancel the erroneous trade. This
will, in turn, perfect the mechanisms of a free and open market by
promoting efficient execution of trades and prevent the excessive
reporting of activity to the Consolidated Tape.\56\
---------------------------------------------------------------------------

    \56\ See supra note 21.
---------------------------------------------------------------------------

    Moreover, the proposed rule change to expand situations where a
Stock-Option or Stock-Future stock leg trade may be cancelled and to
permit the adjustment of stock leg trades furthers the objectives of
the Act by providing Participants the ability to better adapt to
changes in the equities and derivatives markets. Specifically, the
proposed rule change will allow Participants to adapt to changes to the
options or futures leg and therefore facilitate the execution of Stock-
Option or Stock-Future combination orders in ratios as originally
agreed by the parties to the order.
    In addition, the proposed rule change to permit the adjustment of
the stock leg trade furthers the objectives of the Act by protecting
investors and the public interest. From a cost standpoint, by allowing
an adjustment to a stock leg trade, as opposed to outright cancellation
and resubmission of a new order, Participants should realize cost-
savings via reduced order cancellation fees.\57\ The reduced fees will
in turn protect investors by making the marketplace more accessible.
Also, since the adjustment of a trade pursuant to the proposed rule
changes eliminates the need for the parties to execute and report a
replacement trade, the proposed rule should bolster the integrity and
accuracy of the publicly disseminated trade reporting information, by
removing duplicative trade reports. In addition, since the adjustment
would only impact the parties to the options or futures transaction,
the proposed amendments would not impact other Participants that submit
orders on the Exchange. Finally, permitting the adjustment of the stock
leg when the non-stock leg trade has been adjusted should reduce the
credit risk to the parties involved in the transaction, by allowing
such parties to adjust the stock leg to properly hedge the
corresponding options or futures position and, therefore, prevent
unwanted and/or unsustainable stock positions.
---------------------------------------------------------------------------

    \57\ Section E.8 of the Exchange's Fee Schedule details a
formula-based Order Cancellation Fee, which assess a daily
cancellation fee per Account Symbol, if the order cancellation ratio
exceeds a designated threshold.

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

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 will
incentivize market participants to utilize the services offered by the
Exchange by affording customers better opportunities to execute complex
combination orders. By doing so, the Exchange is promoting competition
among the trading centers, which will promote the public interest.

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

    No written comments were either solicited or received.

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

    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 the 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- CHX-2013-16 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-CHX-2013-16. 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 on
official business days between the hours of 10:00 a.m. and 3:00 p.m.
Copies of such filing also will be available for inspection and copying
at the principal offices of CHX. 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-CHX-2013-16, and should be submitted on or before
October 9, 2013.
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    \58\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\58\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-22648 Filed 9-17-13; 8:45 am]
BILLING CODE 8011-01-P