[Federal Register Volume 80, Number 93 (Thursday, May 14, 2015)]
[Notices]
[Pages 27717-27733]
[FR Doc No: 2015-11591]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74911; File No. SR-BOX-2015-18]

Self-Regulatory Organizations; BOX Options Exchange LLC; Notice
of Filing and Immediate Effectiveness of a Proposed Rule Change To
Replace BOX Rule 7170 (Obvious and Catastrophic Errors) With New Rule
7170 (Nullification and Adjustment of Options Transactions Including
Obvious Errors)

May 8, 2015.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on May 5, 2015, BOX Options Exchange LLC (the ``Exchange'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by the self-regulatory organization. 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.
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change

    The Exchange proposes to replace current BOX Rule 7170 (``Current
Rule''), entitled ``Obvious and Catastrophic Errors,'' with new Rule
7170 (``Proposed Rule''), entitled ``Nullification and Adjustment of
Options Transactions including Obvious Errors.'' The text of the
proposed rule change is available from the principal office of the
Exchange, at the Commission's Public Reference Room and also on the
Exchange's Internet Web site at http://boxexchange.com.

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

    In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
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 replace current BOX Rule 7170 (``Current
Rule''), entitled ``Obvious and Catastrophic Errors,'' with new Rule
7170 (``Proposed Rule''), entitled ``Nullification and Adjustment of
Options Transactions including Obvious Errors.'' This is a competitive
filing that is based on a proposal submitted by BATS Exchange, Inc.
(``BATS'') \3\
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    \3\ See File No. SR-BATS-2014-067.
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Background
    For several months the Exchange has been working with other options
exchanges to identify ways to improve the process related to the
adjustment and nullification of erroneous options transactions. The
goal of the process that the options exchanges have undertaken is to
adopt harmonized rules related to the adjustment and nullification of
erroneous options transactions as well as a specific provision related
to coordination in connection with large-scale events involving
erroneous options transactions. As described below, the Exchange
believes that the changes the options exchanges and the Exchange have
agreed to propose will provide transparency and finality with respect
to the adjustment and nullification of erroneous options transactions.
Particularly, the proposed changes seek to achieve consistent results
for participants across U.S. options exchanges while maintaining a fair
and orderly market, protecting investors and protecting the public
interest.
    The Proposed Rule is the culmination of this coordinated effort and
reflects discussions by the options exchanges to universally adopt: (1)
Certain provisions already in place on one or more options exchanges;
and (2) new provisions that the options exchanges collectively believe
will improve the handling of erroneous options transactions. Thus,
although the Proposed Rule is in many ways similar to and based on the
Exchange's Current Rule, the Exchange is adopting various provisions to
conform with existing rules of one or more options exchanges and also
to adopt rules that are not currently in place on any options exchange.
As noted above, in order to adopt a rule that is similar in most
material respects to the rules adopted by other options exchanges, the
Exchange proposes to delete the Current Rule in its entirety and to
replace it with the Proposed Rule.
    The Exchange notes that it has proposed additional objective
standards in the Proposed Rule as compared to the Current Rule. The
Exchange also notes that the Proposed Rule will ensure that the
Exchange will have the same standards as all other options exchanges.
However, there are still areas under the Proposed Rule where subjective
determinations need to be made by Exchange personnel with respect to
the calculation of Theoretical Price. The Exchange notes that the
Exchange and all other options exchanges have been working to further
improve the review of potentially erroneous transactions as well as
their subsequent adjustment by creating an objective and universal way
to determine Theoretical Price in the event a reliable NBBO is not
available. For instance, the Exchange and all other options exchanges
may utilize an independent third party to calculate and disseminate or
make available Theoretical Price. However, this initiative requires
additional exchange and industry discussion as well as additional time
for development and implementation. The Exchange will continue to work
with other options exchanges and the options industry towards the goal
of additional objectivity and uniformity with respect to the
calculation of Theoretical Price.
    As additional background, the Exchange believes that the Proposed
Rule supports an approach consistent with long-standing principles in
the options industry under which the general policy is to adjust rather
than nullify transactions. The Exchange acknowledges that adjustment of
transactions is contrary to the operation of analogous rules applicable
to the equities markets, where erroneous transactions are typically
nullified rather than adjusted and where there is no distinction
between the types of market participants involved in a transaction. For
the reasons set forth below, the Exchange believes that the
distinctions in market structure between equities and options markets
continue to support these distinctions between the rules for handling
obvious errors in the equities and options markets. The Exchange also
believes that the Proposed Rule properly balances several competing
concerns based on the structure of the options markets.
    Various general structural differences between the options and
equities markets point toward the need for a different balancing of
risks for options market participants and are reflected in the Proposed
Rule. Option pricing is

formulaic and is tied to the price of the underlying stock, the
volatility of the underlying security and other factors. Because
options market participants can generally create new open interest in
response to trading demand, as new open interest is created, correlated
trades in the underlying or related series are generally also executed
to hedge a market participant's risk. This pairing of open interest
with hedging interest differentiates the options market specifically
(and the derivatives markets broadly) from the cash equities markets.
In turn, the Exchange believes that the hedging transactions engaged in
by market participants necessitates protection of transactions through
adjustments rather than nullifications when possible and otherwise
appropriate.
    The options markets are also quote driven markets dependent on
liquidity providers to an even greater extent than equities markets. In
contrast to the approximately 7,000 different securities traded in the
U.S. equities markets each day, there are more than 500,000 unique,
regularly quoted option series. Given this breadth in options series
the options markets are more dependent on liquidity providers than
equities markets; such liquidity is provided most commonly by
registered market makers but also by other professional traders. With
the number of instruments in which registered market makers must quote
and the risk attendant with quoting so many products simultaneously,
the Exchange believes that those liquidity providers should be afforded
a greater level of protection. In particular, the Exchange believes
that liquidity providers should be allowed protection of their trades
given the fact that they typically engage in hedging activity to
protect them from significant financial risk to encourage continued
liquidity provision and maintenance of the quote-driven options
markets.
    In addition to the factors described above, there are other
fundamental differences between options and equities markets which lend
themselves to different treatment of different classes of participants
that are reflected in the Proposed Rule. For example, there is no trade
reporting facility in the options markets. Thus, all transactions must
occur on an options exchange. This leads to significantly greater
retail customer participation directly on exchanges than in the
equities markets, where a significant amount of retail customer
participation never reaches the Exchange but is instead executed in
off-exchange venues such as alternative trading systems, broker-dealer
market making desks and internalizers. In turn, because of such direct
retail customer participation, the exchanges have taken steps to afford
those retail customers--generally Priority Customers--more favorable
treatment in some circumstances.
Definitions
    The Exchange proposes to adopt various definitions that will be
used in the Proposed Rule, as described below.
    First, the Exchange proposes to adopt a definition of ``Customer,''
to make clear that this term would not include any broker-dealer or
Professional Customer.\4\ Although other portions of the Exchange's
rules address the capacity of market participants, including customers,
the proposed definition is consistent with such rules and the Exchange
believes it is important for all options exchanges to have the same
definition of Customer in the context of nullifying and adjusting
trades in order to have harmonized rules. As set forth in detail below,
orders on behalf of a Customer are in many cases treated differently
than non-Customer orders in light of the fact that Customers are not
necessarily immersed in the day-to-day trading of the markets, are less
likely to be watching trading activity in a particular option
throughout the day, and may have limited funds in their trading
accounts.
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    \4\ A ``Professional'' is any person or entity that (A) is not a
broker or dealer in securities; and (B) places more than 390 orders
in listed options per day on average during a calendar month for its
own beneficial account(s). See Rule 100(a)(50).
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    Second, the Exchange proposes to adopt definitions for both an
``erroneous sell transaction'' and an ``erroneous buy transaction''
that are identical to the definitions in the Current Rule. As proposed,
an erroneous sell transaction is one in which the price received by the
person selling the option is erroneously low, and an erroneous buy
transaction is one in which the price paid by the person purchasing the
option is erroneously high. This provision helps to reduce the
possibility that a party can intentionally submit an order hoping for
the market to move in their favor while knowing that the transaction
will be nullified or adjusted if the market does not. For instance,
when a market participant who is buying options in a particular series
sees an aggressively priced sell order posted on the Exchange, and the
buyer believes that the price of the options is such that it might
qualify for obvious error, the option buyer can trade with the
aggressively priced order, then wait to see which direction the market
moves. If the market moves in their direction, the buyer keeps the
trade and if it moves against them, the buyer calls the Exchange hoping
to get the trade adjusted or busted.
    Third, the Exchange proposes to adopt a definition of ``Official,''
which would mean an Officer of the Exchange or such other employee
designee of the Exchange that is trained in the application of the
Proposed Rule. While the Exchange uses the term MRC (``Market
Regulation Center'') to identify these individuals in its Current Rule,
the Exchange believes that it is important for all options exchanges to
have the identical definitions in their Obvious and Catastrophic Rules
where possible.
    Fourth, the Exchange proposes to adopt a new term, a ``Size
Adjustment Modifier,'' which would apply to individual transactions and
would modify the applicable adjustment for orders under certain
circumstances, as discussed in further detail below. As proposed, the
Size Adjustment Modifier will be applied to individual transactions as
follows:

------------------------------------------------------------------------
     Number of contracts per execution        Adjustment--TP plus/minus
------------------------------------------------------------------------
1-50......................................  N/A.
51-250....................................  2 times adjustment amount.
251-1000..................................  2.5 times adjustment amount.
1001 or more..............................  3 times adjustment amount.
------------------------------------------------------------------------

    The Size Adjustment Modifier attempts to account for the additional
risk that the parties to the trade undertake for transactions that are
larger in scope. The Exchange believes that the Size Adjustment
Modifier creates additional incentives to prevent more impactful
Obvious Errors and it lessens the impact on the contra-party to an
adjusted trade. The Exchange notes that these contra-parties may have
preferred to only trade the size involved in the transaction at the
price at which such trade occurred, and in trading larger size has
committed a greater level of capital and bears a larger hedge risk.
    When setting the proposed size adjustment modifier thresholds the
Exchange has tried to correlate the size breakpoints with typical small
and larger ``block'' execution sizes of underlying stock. For instance,
SEC Rule 10b-18(a)(5)(ii) defines a ``block'' as a quantity of stock
that is at least 5,000 shares and a purchase price of at least $50,000,
among others.\5\ Similarly, NYSE Rule 72 defines a ``block'' as an
order to buy or sell ``at least 10,000 shares or a quantity of stock
having a market value of $200,000 or more,

whichever is less.'' Thus, executions of 51 to 100 option contracts,
which are generally equivalent to executions of 5,100 and 10,000 shares
of underlying stock, respectively, are proposed to be subject to the
lowest size adjustment modifier. An execution of over 1,000 contracts
is roughly equivalent to a block transaction of more than 100,000
shares of underlying stock, and is proposed to be subject to the
highest size adjustment modifier. The Exchange has correlated the
proposed size adjustment modifier thresholds to smaller and larger
scale blocks because the Exchange believes that the execution cost
associated with transacting in block sizes scales according to the size
of the block. In other words, in the same way that executing a 100,000
share stock order will have a proportionately larger market impact and
will have a higher overall execution cost than executing a 500, 1,000
or 5,000 share order in the same stock, all other market factors being
equal, executing a 1,000 option contract order will have a larger
market impact and higher overall execution cost than executing a 5, 10
or 50 contract option order.
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    \5\ See 17 CFR 240.10b-18(a)(5)(ii).
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Calculation of Theoretical Price
Theoretical Price in Normal Circumstances
    Under both the Current Rule and the Proposed Rule, when reviewing a
transaction as potentially erroneous, the Exchange needs to first
determine the ``Theoretical Price'' of the option, i.e., the Exchange's
estimate of the correct market price for the option. Pursuant to the
Proposed Rule, if the applicable option series is traded on at least
one other options exchange, then the Theoretical Price of an option
series is the last national best bid (``NBB'') just prior to the trade
in question with respect to an erroneous sell transaction or the last
national best offer (``NBO'') just prior to the trade in question with
respect to an erroneous buy transaction unless one of the exceptions
described below exists. Thus, the Exchange proposes that whenever the
Exchange has a reliable NBB or NBO, as applicable, just prior to the
transaction, then the Exchange will use this NBB or NBO as the
Theoretical Price.
    The Exchange also proposes to specify in the Proposed Rule that
when a single order received by the Exchange is executed at multiple
price levels, the last NBB and last NBO just prior to the trade in
question would be the last NBB and last NBO just prior to the
Exchange's receipt of the order.
    The Exchange also proposes to set forth in the Proposed Rule
various provisions governing specific situations where the NBB or NBO
is not available or may not be reliable. Specifically, the Exchange is
proposing additional detail specifying situations in which there are no
quotes or no valid quotes (as defined below), when the national best
bid or offer (``NBBO'') is determined to be too wide to be reliable,
and at the open of trading on each trading day.
No Valid Quotes
    As is true under the Current Rule, pursuant to the Proposed Rule
the Exchange will determine the Theoretical Price if there are no
quotes or no valid quotes for comparison purposes. As proposed, quotes
that are not valid are all quotes in the applicable option series
published at a time where the last NBB is higher than the last NBO in
such series (a ``crossed market''), quotes published by the Exchange
that were submitted by either party to the transaction in question, and
quotes published by another options exchange against which the Exchange
has declared self-help. Thus, in addition to scenarios where there are
literally no quotes to be used as Theoretical Price, the Exchange will
exclude quotes in certain circumstances if such quotes are not deemed
valid. The Proposed Rule is consistent with the Exchange's application
of the Current Rule but the descriptions of the various scenarios where
the Exchange considers quotes to be invalid represent additional detail
that is not included in the Current Rule.
    The Exchange notes that Exchange personnel currently are required
to determine Theoretical Price in certain circumstances. While the
Exchange continues to pursue alternative solutions that might further
enhance the objectivity and consistency of determining Theoretical
Price, the Exchange believes that the discretion currently afforded to
the Exchange Officials is appropriate in the absence of a reliable NBBO
that can be used to set the Theoretical Price. Under the Current Rule,
Exchange personnel will generally consult and refer to data such as the
prices of related series, especially the closest strikes in the option
in question. Exchange personnel may also take into account the price of
the underlying security and the volatility characteristics of the
option as well as historical pricing of the option and/or similar
options.
Wide Quotes
    Similarly, pursuant to the Proposed Rule the Exchange will
determine the Theoretical Price if the bid/ask differential of the NBB
and NBO for the affected series just prior to the erroneous transaction
was equal to or greater than the Minimum Amount set forth below and
there was a bid/ask differential less than the Minimum Amount during
the 10 seconds prior to the transaction. If there was no bid/ask
differential less than the Minimum Amount during the 10 seconds prior
to the transaction then the Theoretical Price of an option series is
the last NBB or NBO just prior to the transaction in question. The
Exchange proposes to use the following chart to determine whether a
quote is too wide to be reliable:

------------------------------------------------------------------------
              Bid price at time of trade                 Minimum amount
------------------------------------------------------------------------
Below $2.00..........................................              $0.75
$2.00 to $5.00.......................................               1.25
Above $5.00 to $10.00................................               1.50
Above $10.00 to $20.00...............................               2.50
Above $20.00 to $50.00...............................               3.00
Above $50.00 to $100.00..............................               4.50
Above $100.00........................................               6.00
------------------------------------------------------------------------

The Exchange notes that the values set forth above generally represent
a multiple of 3 times the bid/ask differential requirements of other
options exchanges, with certain rounding applied (e.g., $1.25 as
proposed rather than $1.20).\6\ The Exchange believes that basing the
Wide Quote table on a multiple of the permissible bid/ask differential
rule provides a reasonable baseline for quotations that are indeed so
wide that they cannot be considered reliable for purposes of
determining Theoretical Price unless they have been consistently wide.
As described above, while the Exchange will determine Theoretical Price
when the bid/ask differential equals or exceeds the amount set forth in
the chart above and within the previous 10 seconds there was a bid/ask
differential smaller than such amount, if a quote has been persistently
wide for at least 10 seconds the Exchange will use such quote for
purposes of Theoretical Price. The Exchange believes that there should
be a greater level of protection afforded to market participants that
enter the market when there are liquidity gaps and price fluctuations.
The Exchange does not believe that a similar level of protection is
warranted when market participants choose to enter a market that is
wide and has been consistently wide for some time. The Exchange notes
that it has previously determined that, given the largely electronic
nature of today's markets, as little as one second (or less) is a long
enough time for market participants to receive, process and account for
and respond to new market

information.\7\ While introducing this new provision the Exchange
believes it is being appropriately cautious by selecting a time frame
that is an order of magnitude above and beyond what the Exchange has
previously determined is sufficient for information dissemination. The
table above bases the wide quote provision off of bid price in order to
provide a relatively straightforward beginning point for the analysis.
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    \6\ See, e.g., NYSE Arca Options Rule 6.37(b)(1).
    \7\ See, e.g., Exchange Rule 7150, which provides that the
duration of the PIP shall be one hundred milliseconds; see also
Securities Exchange Act Release No. 66306 (February 2, 2012), 77 FR
6608 (February 8, 2012) (SR-BX-2011-084) (order granting approval of
proposed rule change to reduce the duration of the PIP from one
second to one hundred milliseconds).
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    As an example, assume an option is quoted $3.00 by $6.00 with 50
contracts posted on each side of the market for an extended period of
time. If a market participant were to enter a market order to buy 20
contracts the Exchange believes that the buyer should have a reasonable
expectation of paying $6.00 for the contracts which they are buying.
This should be the case even if immediately after the purchase of those
options, the market conditions change and the same option is then
quoted at $3.75 by $4.25. Although the quote was wide according to the
table above at the time immediately prior to and the time of the
execution of the market order, it was also well established and well
known. The Exchange believes that an execution at the then prevailing
market price should not in and of itself constitute an erroneous trade.
Transactions at the Open
    Under the Proposed Rule, for a transaction occurring as part of the
Opening Process \8\ the Exchange will determine the Theoretical Price
where there is no NBB or NBO for the affected series just prior to the
erroneous transaction or if the bid/ask differential of the NBBO just
prior to the erroneous transaction is equal to or greater than the
Minimum Amount set forth in the chart proposed for the wide quote
provision described above. The Exchange believes that this discretion
is necessary because it is consistent with other scenarios in which the
Exchange will determine the Theoretical Price if there are no quotes or
no valid quotes for comparison purposes, including the wide quote
provision proposed by the Exchange as described above. If, however,
there are valid quotes and the bid/ask differential of the NBBO is less
than the Minimum Amount set forth in the chart proposed for the wide
quote provision described above, then the Exchange will use the NBB or
NBO just prior to the transaction as it would in any other normal
review scenario.
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    \8\ See Exchange Rule 7070 for a description of the Exchange's
Opening Process.
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    As an example of an erroneous transaction for which the NBBO is
wide at the open, assume the NBBO at the time of the opening
transaction is $1.00 x $5.00 and the opening transaction takes place at
$1.25. The Exchange would be responsible for determining the
Theoretical Price because the NBBO was wider than the applicable
minimum amount set forth in the wide quote provision as described
above. The Exchange believes that it is necessary to determine
theoretical price at the open in the event of a wide quote at the open
for the same reason that the Exchange has proposed to determine
theoretical price during the remainder of the trading day pursuant to
the proposed wide quote provision, namely that a wide quote cannot be
reliably used to determine Theoretical Price because the Exchange does
not know which of the two quotes, the NBB or the NBO, is closer to the
real value of the option.
Obvious Errors
    The Exchange proposes to adopt numerical thresholds that would
qualify transactions as ``Obvious Errors.'' These thresholds are
similar to those in place under the Current Rule. As proposed, a
transaction will qualify as an Obvious Error if the Exchange receives a
properly submitted filing and the execution price of a transaction is
higher or lower than the Theoretical Price for the series by an amount
equal to at least the amount shown below:

------------------------------------------------------------------------
                                                               Minimum
                     Theoretical price                          amount
------------------------------------------------------------------------
Below $2.00................................................        $0.25
$2.00 to $5.00.............................................         0.40
Above $5.00 to $10.00......................................         0.50
Above $10.00 to $20.00.....................................         0.80
Above $20.00 to $50.00.....................................         1.00
Above $50.00 to $100.00....................................         1.50
Above $100.00..............................................         2.00
------------------------------------------------------------------------

Applying the Theoretical Price, as described above, to determine the
applicable threshold and comparing the Theoretical Price to the actual
execution price provides the Exchange with an objective methodology to
determine whether an Obvious Error occurred. The Exchange believes that
the proposed amounts are reasonable as they are generally consistent
with the standards of the Current Rule and reflect a significant
disparity from Theoretical Price. The Exchange notes that the Minimum
Amounts in the Proposed Rule and as set forth above are identical to
the Current Rule except for the last two categories, for options where
the Theoretical Price is above $50.00 to $100.00 and above $100.00. The
Exchange believes that this additional granularity is reasonable
because given the proliferation of additional strikes that have been
created in the past several years there are many more high-priced
options that are trading with open interest for extended periods. The
Exchange believes that it is appropriate to account for these high-
priced options with additional Minimum Amount levels for options with
Theoretical Prices above $50.00.
    Under the Proposed Rule, a party that believes that it participated
in a transaction that was the result of an Obvious Error must notify
the MOC \9\ in the manner specified from time to time by the Exchange
in a circular distributed to Participants. The Exchange currently
requires notification via telephone but believes that maintaining
flexibility in the Rule is important to allow for changes to the
process.
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    \9\ The term ``Market Operations Center'' or ``MOC'' means the
BOX Market Operations Center, which provides market support for
Options Participants during the trading day. See Rule 100(a)(31).
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    The Exchange also proposes to adopt notification timeframes that
must be met in order for a transaction to qualify as an Obvious Error.
Specifically, as proposed a filing must be received by the Exchange
within thirty (30) minutes of the execution with respect to an
execution of a Customer order and within fifteen (15) minutes of the
execution for any other participant. The Exchange also proposes to
provide additional time for trades that are routed through other
options exchanges to the Exchange. Under the Proposed Rule, any other
options exchange will have a total of forty-five (45) minutes for
Customer orders and thirty (30) minutes for non-Customer orders,
measured from the time of execution on the Exchange, to file with the
Exchange for review of transactions routed to the Exchange from that
options exchange and executed on the Exchange (``linkage trades'').
This includes filings on behalf of another options exchange filed by a
third-party routing broker if such third-party broker identifies the
affected transactions as linkage trades. In order to facilitate timely
reviews of linkage trades the Exchange will accept filings from either
the other options exchange or, if applicable, the third-party routing
broker that routed the applicable order(s). The additional fifteen (15)
minutes provided with respect to linkage trades shall only apply to the
extent the options exchange that originally received and routed the
order

to the Exchange itself received a timely filing from the entering
participant (i.e., within 30 minutes if a Customer order or 15 minutes
if a non-Customer order). The Exchange believes that additional time
for filings related to Customer orders is appropriate in light of the
fact that Customers are not necessarily immersed in the day-to-day
trading of the markets and are less likely to be watching trading
activity in a particular option throughout the day. The Exchange
believes that the additional time afforded to linkage trades is
appropriate given the interconnected nature of the markets today and
the practical difficulty that an end user may face in getting requests
for review filed in a timely fashion when the transaction originated at
a different exchange than where the error took place. Without this
additional time the Exchange believes it would be common for a market
participant to satisfy the filing deadline at the original exchange to
which an order was routed but that requests for review of executions
from orders routed to other options exchanges would not qualify for
review as potential Obvious Errors by the time filings were received by
such other options exchanges, in turn leading to potentially disparate
results under the applicable rules of options exchanges to which the
orders were routed.
    Pursuant to the Proposed Rule, an Official may review a transaction
believed to be erroneous on his/her own motion in the interest of
maintaining a fair and orderly market and for the protection of
investors. This proposed provision is designed to give an Official the
ability to provide parties relief in those situations where they have
failed to report an apparent error within the established notification
period. A transaction reviewed pursuant to the proposed provision may
be nullified or adjusted only if it is determined by the Official that
the transaction is erroneous in accordance with the provisions of the
Proposed Rule, provided that the time deadlines for filing a request
for review described above shall not apply. The Proposed Rule would
require the Official to act as soon as possible after becoming aware of
the transaction; action by the Official would ordinarily be expected on
the same day that the transaction occurred. However, because a
transaction under review may have occurred near the close of trading or
due to unusual circumstances, the Proposed Rule provides that the
Official shall act no later than 8:30 a.m. Eastern Time on the next
trading day following the date of the transaction in question.
    The Exchange also proposes to state that a party affected by a
determination to nullify or adjust a transaction after an Official's
review on his or her own motion may appeal such determination in
accordance with paragraph (l), which is described below. The Proposed
Rule would make clear that a determination by the Official not to
review a transaction or determination not to nullify or adjust a
transaction for which a review was conducted on an Official's own
motion is not appealable and further that if a transaction is reviewed
and a determination is rendered pursuant to another provision of the
Proposed Rule, no additional relief may be granted by the Exchange.
    If it is determined that an Obvious Error has occurred based on the
objective numeric criteria and time deadlines described above, the
Exchange will adjust or nullify the transaction as described below and
promptly notify both parties to the trade electronically or via
telephone. The Exchange proposes different adjustment and nullification
criteria for Customers and non-Customers.
    As proposed, where neither party to the transaction is a Customer,
the execution price of the transaction will be adjusted by the Official
pursuant to the table below.

------------------------------------------------------------------------
                                     Buy transaction    Sell transaction
      Theoretical price (TP)         adjustment-- TP    adjustment-- TP
                                           plus              minus
------------------------------------------------------------------------
Below $3.00.......................              $0.15              $0.15
At or above $3.00.................              $0.30              $0.30
------------------------------------------------------------------------

The Exchange believes that it is appropriate to adjust to prices a
specified amount away from Theoretical Price rather than to adjust to
Theoretical Price because even though the Exchange has determined a
given trade to be erroneous in nature, the parties in question should
have had some expectation of execution at the price or prices
submitted. Also, it is common that by the time it is determined that an
obvious error has occurred additional hedging and trading activity has
already occurred based on the executions that previously happened. The
Exchange is concerned that an adjustment to Theoretical Price in all
cases would not appropriately incentivize market participants to
maintain appropriate controls to avoid potential errors.
    Further, as proposed any non-Customer Obvious Error exceeding 50
contracts will be subject to the Size Adjustment Modifier described
above. The Exchange believes that it is appropriate to apply the Size
Adjustment Modifier to non-Customer orders because the hedging cost
associated with trading larger sized options orders and the market
impact of larger blocks of underlying can be significant.
    As an example of the application of the Size Adjustment Modifier,
assume Exchange A has a quoted bid to buy 50 contracts at $2.50,
Exchange B has a quoted bid to buy 100 contracts at $2.05 and there is
no other options exchange quoting a bid priced higher than $2.00.
Assume that the NBBO is $2.50 by $3.00. Finally, assume that all orders
quoted and submitted to Exchange B in connection with this example are
non-Customer orders.
     Assume Exchange A's quoted bid at $2.50 is either executed
or cancelled.
     Assume Exchange B immediately thereafter receives an
incoming market order to sell 100 contracts.
     The incoming order would be executed against Exchange B's
resting bid at $2.05 for 100 contracts.
     Because the 100 contract execution of the incoming sell
order was priced at $2.05, which is $0.45 below the Theoretical Price
of $2.50, the 100 contract execution would qualify for adjustment as an
Obvious Error.
     The normal adjustment process would adjust the execution
of the 100 contracts to $2.35 per contract, which is the Theoretical
Price minus $0.15.
     However, because the execution would qualify for the Size
Adjustment Modifier of 2 times the adjustment price, the adjusted
transaction would instead be to $2.20 per contract, which is the
Theoretical Price minus $0.30.
    By reference to the example above, the Exchange reiterates that it
believes that a Size Adjustment Modifier is appropriate, as the buyer
in this example was originally willing to buy 100 contracts at $2.05
and ended up paying $2.20 per contract for such execution. Without the
Size Adjustment Modifier the buyer would have paid $2.35 per contract.
Such buyer may be

advantaged by the trade if the Theoretical Price is indeed closer to
$2.50 per contract, however the buyer may not have wanted to buy so
many contracts at a higher price and does incur increasing cost and
risk due to the additional size of their quote. Thus, the proposed rule
is attempting to strike a balance between various competing objectives,
including recognition of cost and risk incurred in quoting larger size
and incentivizing market participants to maintain appropriate controls
to avoid errors.
    In contrast to non-Customer orders, where trades will be adjusted
if they qualify as Obvious Errors, pursuant the Proposed Rule a trade
that qualifies as an Obvious Error will be nullified where at least one
party to the Obvious Error is a Customer. The Exchange also proposes,
however, that if any Participant submits requests to the Exchange for
review of transactions pursuant to the Proposed Rule, and in aggregate
that Participant has 200 or more Customer transactions under review
concurrently and the orders resulting in such transactions were
submitted during the course of 2 minutes or less, where at least one
party to the Obvious Error is a non-Customer, the Exchange will apply
the non-Customer adjustment criteria described above to such
transactions. The Exchange based its proposal of 200 transactions on
the fact that the proposed level is reasonable as it is representative
of an extremely large number of orders submitted to the Exchange that
are, in turn, possibly erroneous. Similarly, the Exchange based its
proposal of orders received in 2 minutes or less on the fact that this
is a very short amount of time under which one Participant could
generate multiple erroneous transactions. In order for a Participant to
have more than 200 transactions under review concurrently when the
orders triggering such transactions were received in 2 minutes or less,
the market participant will have far exceeded the normal behavior of
customers deserving protected status.\10\ While the Exchange continues
to believe that it is appropriate to nullify transactions in such a
circumstance if both participants to a transaction are Customers, the
Exchange does not believe it is appropriate to place the overall risk
of a significant number of trade breaks on non-Customers that in the
normal course of business may have engaged in additional hedging
activity or trading activity based on such transactions. Thus, the
Exchange believes it is necessary and appropriate to protect non-
Customers in such a circumstance by applying the non-Customer
adjustment criteria, and thus adjusting transactions as set forth
above, in the event a Participant has more than 200 transactions under
review concurrently.
---------------------------------------------------------------------------

    \10\ The Exchange notes that in the third quarter of this year
across all options exchanges the average number of valid Customer
orders received and executed was less than 38 valid orders every two
minutes. The number of obvious errors resulting from valid orders
is, of course, a very small fraction of such orders.
---------------------------------------------------------------------------

Catastrophic Errors
    Consistent with the Current Rule, the Exchange proposes to adopt
separate numerical thresholds for review of transactions for which the
Exchange does not receive a filing requesting review within the Obvious
Error timeframes set forth above. Based on this review these
transactions may qualify as ``Catastrophic Errors.'' As proposed, a
Catastrophic Error will be deemed to have occurred when the execution
price of a transaction is higher or lower than the Theoretical Price
for the series by an amount equal to at least the amount shown below:

------------------------------------------------------------------------
                                                               Minimum
                     Theoretical price                          amount
------------------------------------------------------------------------
Below $2.00................................................        $0.50
$2.00 to $5.00.............................................        $1.00
Above $5.00 to $10.00......................................        $1.50
Above $10.00 to $20.00.....................................        $2.00
Above $20.00 to $50.00.....................................        $2.50
Above $50.00 to $100.00....................................        $3.00
Above $100.00..............................................        $4.00
------------------------------------------------------------------------

Based on industry feedback on the Catastrophic Error thresholds set
forth under the Current Rule, the thresholds proposed as set forth
above are more granular and lower (i.e., more likely to qualify) than
the thresholds under the Current Rule. As noted above, under the
Proposed Rule as well as the Current Rule, parties have additional time
to submit transactions for review as Catastrophic Errors. As proposed,
notification requesting review must be received by the MOC by 8:30 a.m.
Eastern Time on the first trading day following the execution. For
transactions in an expiring options series that take place on an
expiration day, a party must notify the MOC within 45 minutes after the
close of trading that same day. As is true for requests for review
under the Obvious Error provision of the Proposed Rule, a party
requesting review of a transaction as a Catastrophic Error must notify
the MOC in the manner specified from time to time by the Exchange in a
circular distributed to Participants. By definition, any execution that
qualifies as a Catastrophic Error is also an Obvious Error. However,
the Exchange believes it is appropriate to maintain these two types of
errors because the Catastrophic Error provisions provide market
participants with a longer notification period under which they may
file a request for review with the Exchange of a potential Catastrophic
Error than a potential Obvious Error. This provides an additional level
of protection for transactions that are severely erroneous even in the
event a participant does not submit a request for review in a timely
fashion.
    The Proposed Rule would specify the action to be taken by the
Exchange if it is determined that a Catastrophic Error has occurred, as
described below, and would require the Exchange to promptly notify both
parties to the trade electronically or via telephone. In the event of a
Catastrophic Error, the execution price of the transaction will be
adjusted by the Official pursuant to the table below.

------------------------------------------------------------------------
                                     Buy transaction    Sell transaction
      Theoretical price (TP)         adjustment-- TP    adjustment-- TP
                                           plus              minus
------------------------------------------------------------------------
Below $2.00.......................              $0.50              $0.50
$2.00 to $5.00....................              $1.00              $1.00
Above $5.00 to $10.00.............              $1.50              $1.50
Above $10.00 to $20.00............              $2.00              $2.00
Above $20.00 to $50.00............              $2.50              $2.50
Above $50.00 to $100.00...........              $3.00              $3.00
Above $100.00.....................              $4.00              $4.00
------------------------------------------------------------------------

Although Customer orders would be adjusted in the same manner as non-
Customer orders, any Customer order that qualifies as a Catastrophic
Error will be nullified if the adjustment would result in an execution
price higher (for buy transactions) or lower (for sell transactions)
than the Customer's limit price. Based on industry feedback, the levels
proposed above with respect to adjustment amounts are the same levels
as the thresholds at which a transaction may be deemed a Catastrophic
Error pursuant to the chart set forth above.
    As is true for Obvious Errors as described above, the Exchange
believes that it is appropriate to adjust to prices a specified amount
away from Theoretical Price rather than to adjust to Theoretical Price
because even though the Exchange has determined a given trade to be
erroneous in nature, the parties in question should have had some
expectation of execution at the price or prices submitted. Also, it is
common that by the time it is determined that a Catastrophic Error has
occurred additional hedging and trading activity has already occurred
based on the executions that previously happened. The Exchange is
concerned that an adjustment to Theoretical Price in all cases would
not appropriately incentivize market participants to maintain
appropriate controls to avoid potential errors. Further, the Exchange
believes it is appropriate to maintain a higher adjustment level for
Catastrophic Errors than Obvious Errors given the significant
additional time that can potentially pass before an adjustment is
requested and applied and the amount of hedging and trading activity
that can occur based on the executions at issue during such time. For
the same reasons, other than honoring the limit prices established for
Customer orders, the Exchange has proposed to treat all market
participants the same in the context of the Catastrophic Error
provision. Specifically, the Exchange believes that treating market
participants the same in this context will provide additional certainty
to market participants with respect to their potential exposure and
hedging activities, including comfort that even if a transaction is
later adjusted (i.e., past the standard time limit for filing under the
Obvious Error provision), such transaction will not be fully nullified.
However, as noted above, under the Proposed Rule where at least one
party to the transaction is a Customer, the trade will be nullified if
the adjustment would result in an execution price higher (for buy
transactions) or lower (for sell transactions) than the Customer's
limit price. The Exchange has retained the protection of a Customer's
limit price in order to avoid a situation where the adjustment could be
to a price that the Customer could not afford, which is less likely to
be an issue for a market professional.
Significant Market Events
    In order to improve consistency for market participants in the case
of a widespread market event and in light of the interconnected nature
of the options exchanges, the Exchange proposes to adopt a new
provision that calls for coordination between the options exchanges in
certain circumstances and provides limited flexibility in the
application of other provisions of the Proposed Rule in order to
promptly respond to a widespread market event.\11\ The Exchange
proposes to describe such an event as a Significant Market Event, and
to set forth certain objective criteria that will determine whether
such an event has occurred. The Exchange developed these objective
criteria in consultation with the other options exchanges by reference
to historical patterns and events with a goal of setting thresholds
that very rarely will be triggered so as to limit the application of
the provision to truly significant market events. As proposed, a
Significant Market Event will be deemed to have occurred when proposed
criterion (A) below is met or the sum of all applicable event
statistics, where each is expressed as a percentage of the relevant
threshold in criteria (A) through (D) below, is greater than or equal
to 150% and 75% or more of at least one category is reached, provided
that no single category can contribute more than 100% to the sum. All
criteria set forth below will be measured in aggregate across all
exchanges.
---------------------------------------------------------------------------

    \11\ Although the Exchange has proposed a specific provision
related to coordination amongst options exchanges in the context of
a widespread event, the Exchange does not believe that the
Significant Market Event provision or any other provision of the
proposed rule alters the Exchange's ability to coordinate with other
options exchanges in the normal course of business with respect to
market events or activity. The Exchange does already coordinate with
other options exchanges to the extent possible if such coordination
is necessary to maintain a fair and orderly market and/or to fulfill
the Exchange's duties as a self-regulatory organization.
---------------------------------------------------------------------------

    The proposed criteria for determining a Significant Market Event
are as follows:
    (A) Transactions that are potentially erroneous would result in a
total Worst-Case Adjustment Penalty of $30,000,000, where the Worst-
Case Adjustment Penalty is computed as the sum, across all potentially
erroneous trades, of: (i) $0.30 (i.e., the largest Transaction
Adjustment value listed in sub-paragraph (e)(3)(A) below); times; (ii)
the contract multiplier for each traded contract; times (iii) the
number of contracts for each trade; times (iv) the appropriate Size
Adjustment Modifier for each trade, if any, as defined in sub-paragraph
(e)(3)(A) below;
    (B) Transactions involving 500,000 options contracts are
potentially erroneous;
    (C) Transactions with a notional value (i.e., number of contracts
traded multiplied by the option premium multiplied by the contract
multiplier) of $100,000,000 are potentially erroneous;
    (D) 10,000 transactions are potentially erroneous.
    As described above, the Exchange proposes to adopt a the Worst Case
Adjustment Penalty, proposed as criterion (A), which is the only
criterion that can on its own result in an event being designated as a
significant market event. The Worst Case Adjustment Penalty is intended
to develop an objective criterion that can be quickly determined by the
Exchange in consultation with other options exchanges that approximates
the total overall exposure to market participants on the negatively
impacted side of each transaction that occurs during an event. If the
Worst Case Adjustment criterion is equal to or exceeds $30,000,000,
then an event is a Significant Market Event. As an example of the Worst
Case Adjustment Penalty, assume that a single potentially erroneous
transaction in an event is as follows: sale of 100 contracts of a
standard option (i.e., an option with a 100 share multiplier). The
highest potential adjustment penalty for this single transaction would
be $6,000, which would be calculated as $0.30 times 100 (contract
multiplier) times 100 (number of contracts) times 2 (applicable Size
Adjustment Modifier). The Exchange would calculate the highest
potential adjustment penalty for each of the potentially erroneous
transactions in the event and the Worst Case Adjustment Penalty would
be the sum of such penalties on the Exchange and all other options
exchanges with affected transactions.
    As described above, under the Proposed Rule if the Worst Case
Adjustment Penalty does not equal or exceed $30,000,000, then a
Significant Market Event has occurred if the sum of all applicable
event statistics (expressed as a percentage of the relevant
thresholds), is greater than or equal to 150% and 75% or more of at
least one category is reached. The Proposed Rule further provides that
no single category

can contribute more than 100% to the sum. As an example of the
application of this provision, assume that in a given event across all
options exchanges that: (A) the Worst Case Adjustment Penalty is
$12,000,000 (40% of $30,000,000), (B) 300,000 options contracts are
potentially erroneous (60% of 500,000), (C) the notional value of
potentially erroneous transactions is $30,000,000 (30% of
$100,000,000), and (D) 12,000 transactions are potentially erroneous
(120% of 10,000). This event would qualify as a Significant Market
Event because the sum of all applicable event statistics would be 230%,
far exceeding the 150% threshold. The 230% sum is reached by adding
40%, 60%, 30% and last, 100% (i.e., rounded down from 120%) for the
number of transactions. The Exchange notes that no single category can
contribute more than 100% to the sum and any category contributing more
than 100% will be rounded down to 100%.
    As an alternative example, assume a large-scale event occurs
involving low-priced options with a small number of contracts in each
execution. Assume in this event across all options exchanges that: (A)
the Worst Case Adjustment Penalty is $600,000 (2% of $30,000,000), (B)
20,000 options contracts are potentially erroneous (4% of 500,000), (C)
the notional value of potentially erroneous transactions is $20,000,000
(20% of $100,000,000), and (D) 20,000 transactions are potentially
erroneous (200% of 10,000, but rounded down to 100%). This event would
not qualify as a Significant Market Event because the sum of all
applicable event statistics would be 126%, below the 150% threshold.
The Exchange reiterates that as proposed, even when a single category
other than criterion (A) is fully met, that does not necessarily
qualify an event as a Significant Market Event.
    The Exchange believes that the breadth and scope of the obvious
error rules are appropriate and sufficient for handling of typical and
common obvious errors. Coordination between and among the exchanges
should generally not be necessary even when a Participant has an error
that results in executions on more than one exchange. In setting the
thresholds above the Exchange believes that the requirements will be
met only when truly widespread and significant errors happen and the
benefits of coordination and information sharing far outweigh the costs
of the logistics of additional intra-exchange coordination. The
Exchange notes that in addition to its belief that the proposed
thresholds are sufficiently high, the Exchange has proposed the
requirement that either criterion (A) is met or the sum of applicable
event statistics for proposed (A) through (D) equals or exceeds 150% in
order to ensure that an event is sufficiently large but also to avoid
situations where an event is extremely large but just misses potential
qualifying thresholds. For instance, the proposal is designed to help
avoid a situation where the Worst Case Adjustment Penalty is
$15,000,000, so the event does not qualify based on criterion (A)
alone, but there are transactions in 490,000 options contracts that are
potentially erroneous (missing criterion (B) by 10,000 contracts),
there transactions with a notional value of $99,000,000 (missing
criterion (C) by $1,000,000), and there are 9,000 potentially erroneous
transactions overall (missing criterion (D) by 1,000 transactions). The
Exchange believes that the proposed formula, while slightly more
complicated than simply requiring a certain threshold to be met in each
category, may help to avoid inapplicability of the proposed provisions
in the context of an event that would be deemed significant by most
subjective measures but that barely misses each of the objective
criteria proposed by the Exchange.
    To ensure consistent application across options exchanges, in the
event of a suspected Significant Market Event, the Exchange shall
initiate a coordinated review of potentially erroneous transactions
with all other affected options exchanges to determine the full scope
of the event. Under the Proposed Rule, the Exchange will promptly
coordinate with the other options exchanges to determine the
appropriate review period as well as select one or more specific points
in time prior to the transactions in question and use one or more
specific points in time to determine Theoretical Price. Other than the
selected points in time, if applicable, the Exchange will determine
Theoretical Price as described above. For example, around the start of
a SME that is triggered by a large and aggressively priced buy order,
three exchanges have multiple orders on the offer side of the market:
Exchange A has offers priced at $2.20, $2.25, $2.30 and several other
price levels to $3.00, Exchange B has offers at $2.45, $2.30 and
several other price levels to $3.00, Exchange C has offers at price
levels between $2.50 and $3.00. Assume an event occurs starting at
10:05:25 a.m. ET and in this particular series the executions begin on
Exchange A and subsequently begin to occur on Exchanges B and C.
Without coordination and information sharing between the exchanges,
Exchange B and Exchange C cannot know with certainty that whether or
not the execution at Exchange A that happened at $2.20 immediately
prior to their executions at $2.45 and $2.50 is part of the same
erroneous event or not. With proper coordination, the exchanges can
determine that in this series, the proper point in time from which the
event should be analyzed is 10:05:25 a.m. ET, and thus, the NBO of
$2.20 should be used as the Theoretical Price for purposes of all buy
transactions in such options series that occurred during the event.
    If it is determined that a Significant Market Event has occurred
then, using the parameters agreed with respect to the times from which
Theoretical Price will be calculated, if applicable, the Official will
determine whether any or all transactions under review qualify as
Obvious Errors. The Proposed Rule would require the Exchange to use the
criteria in Proposed Rule 7170(c), as described above, to determine
whether an Obvious Error has occurred for each transaction that was
part of the Significant Market Event. Upon taking any final action, the
Exchange would be required to promptly notify both parties to the trade
electronically or via telephone.
    The execution price of each affected transaction will be adjusted
by an Official to the price provided below, unless both parties agree
to adjust the transaction to a different price or agree to bust the
trade.

------------------------------------------------------------------------
                                     Buy transaction    Sell transaction
      Theoretical price (TP)         adjustment-- TP    adjustment-- TP
                                           plus              minus
------------------------------------------------------------------------
Below $3.00.......................              $0.15              $0.15
At or above $3.00.................               0.30               0.30
------------------------------------------------------------------------

Thus, the proposed adjustment criteria for Significant Market Events
are identical to the proposed adjustment levels for Obvious Errors
generally. In addition, in the context of a Significant Market Event,
any error exceeding 50 contracts will be subject to the Size Adjustment
Modifier described above. Also, the adjustment criteria would apply
equally to all market participants (i.e., Customers and non-Customers)
in a Significant Market Event. However, as is true for the proposal
with respect to Catastrophic Errors, under the Proposed Rule where at
least one party to the transaction is a Customer, the trade will be
nullified if the adjustment would result in an execution price higher
(for buy transactions) or lower (for sell transactions) than the
Customer's limit price. The Exchange has retained the protection of a
Customer's limit price in order to avoid a situation where the
adjustment could be to a price that the Customer could not afford,
which is less likely to be an issue for a market professional. The
Exchange has otherwise proposed to treat all market participants the
same in the context of a Significant Market Event to provide additional
certainty to market participants with respect to their potential
exposure as soon as an event has occurred.
    Another significant distinction between the proposed Obvious Error
provision and the proposed Significant Market Event provision is that
if the Exchange, in consultation with other options exchanges,
determines that timely adjustment is not feasible due to the
extraordinary nature of the situation, then the Exchange will nullify
some or all transactions arising out of the Significant Market Event
during the review period selected by the Exchange and other options
exchanges. To the extent the Exchange, in consultation with other
options exchanges, determines to nullify less than all transactions
arising out of the Significant Market Event, those transactions subject
to nullification will be selected based upon objective criteria with a
view toward maintaining a fair and orderly market and the protection of
investors and the public interest. For example, assume a Significant
Market Event causes 25,000 potentially erroneous transactions and
impacts 51 options classes. Of the 25,000 transactions, 24,000 of them
are concentrated in a single options class. The exchanges may decide
the most appropriate solution because it will provide the most
certainty to participants and allow for the prompt resumption of
regular trading is to bust all trades in the most heavily affected
class between two specific points in time, while the other 1,000 trades
across the other 50 classes are reviewed and adjusted as appropriate. A
similar situation might arise directionally where a Customer submits
both erroneous buy and sell orders and the number of errors that
happened that were erroneously low priced (i.e., erroneous sell orders)
were 50,000 in number but the number of errors that were erroneously
high (i.e., erroneous buy orders) were only 500 in number. The most
effective and efficient approach that provides the most certainty to
the marketplace in a reasonable amount of time while most closely
following the generally prescribed obvious error rules could be to bust
all of the erroneous sell transactions but to adjust the erroneous buy
transactions.
    With respect to rulings made pursuant to the proposed Significant
Market Event provision the Exchange believes that the number of
affected transactions is such that immediate finality is necessary to
maintain a fair and orderly market and to protect investors and the
public interest. Accordingly, rulings by the Exchange pursuant to the
Significant Market Event provision would be non-appealable pursuant to
the Proposed Rule.
Additional Provisions
Mutual Agreement
    In addition to the objective criteria described above, the Proposed
Rule also proposes to make clear that the determination as to whether a
trade was executed at an erroneous price may be made by mutual
agreement of the affected parties to a particular transaction. The
Proposed Rule would state that a trade may be nullified or adjusted on
the terms that all parties to a particular transaction agree, provided,
however, that such agreement to nullify or adjust must be conveyed to
the Exchange in a manner prescribed by the Exchange prior to 8:30 a.m.
Eastern Time on the first trading day following the execution.
    The Exchange also proposes to explicitly state that it is
considered conduct inconsistent with just and equitable principles of
trade for any Participant to use the mutual adjustment process to
circumvent any applicable Exchange rule, the Act or any of the rules
and regulations thereunder. Thus, for instance, a Participant is
precluded from seeking to avoid applicable trade-through rules by
executing a transaction and then adjusting such transaction to a price
at which the Exchange would not have allowed it to execute at the time
of the execution because it traded through the quotation of another
options exchange. The Exchange notes that in connection with its
obligations as a self-regulatory organization, the Exchange's
Regulatory Department reviews adjustments to transactions to detect
potential violations of Exchange rules or the Act and the rules and
regulations thereunder.
Trading Halts
    Exchange Rule 7080 describes the Exchange's authority to declare
trading halts in one or more options traded on the Exchange. The
Exchange proposes to make clear in the Proposed Rule that it will
nullify any transaction that occurs during a trading halt in the
affected option on the Exchange pursuant to Rule 7170. If any trades
occur notwithstanding a trading halt then the Exchange believes it
appropriate to nullify such transactions. While the Exchange may halt
options trading for various reasons, such a scenario almost certainly
is due to extraordinary circumstances and is potentially the result of
market-wide coordination to halt options trading or trading generally.
Accordingly, the Exchange does not believe it is appropriate to allow
trades to stand if such trades should not have occurred in the first
place.
    The Exchange proposes to add new Interpretation Material IM-7080-3
to Rule 7080. Currently, Rule 7080 does not give the Exchange explicit
authority to nullify a transaction that occurs: (a) During a trading
halt in the affected option on the Exchange; or (b) with respect to
equity options (including options overlying ETFs), during a regulatory
halt as declared by the primary listing market for the underlying
security. To ensure consistency with the trading halt provision of the
Exchange with that of the other option exchanges, the Exchange proposes
to adopt new Interpretation Material IM-7080-3 to Rule 7080 to give the
Exchange the explicit authority to nullify transactions in the two
situations described above.
Erroneous Print and Quotes in Underlying Security
    Market participants on the Exchange likely base the pricing of
their orders submitted to the Exchange on the price of the underlying
security for the option. Thus, the Exchange believes it is appropriate
to adopt provisions that allow adjustment or nullification of
transactions based on erroneous prints or erroneous quotes in the
underlying security.

    The Exchange proposes to adopt language in the Proposed Rule
stating that a trade resulting from an erroneous print(s) disseminated
by the underlying market that is later nullified by that underlying
market shall be adjusted or busted as set forth in the Obvious Error
provisions of the Proposed Rule, provided a party notifies the MOC in a
timely manner, as further described below. The Exchange proposes to
define a trade resulting from an erroneous print(s) as any options
trade executed during a period of time for which one or more executions
in the underlying security are nullified and for one second thereafter.
The Exchange believes that one second is an appropriate amount of time
in which an options trade would be directly based on executions in the
underlying equity security. The Exchange also proposes to require that
if a party believes that it participated in an erroneous transaction
resulting from an erroneous print(s) pursuant to the proposed erroneous
print provision it must notify the MOC within the timeframes set forth
in the Obvious Error provision described above. The Exchange has also
proposed to state that the allowed notification timeframe commences at
the time of notification by the underlying market(s) of nullification
of transactions in the underlying security. Further, the Exchange
proposes that if multiple underlying markets nullify trades in the
underlying security, the allowed notification timeframe will commence
at the time of the first market's notification.
    As an example of a situation in which a trade results from an
erroneous print disseminated by the underlying market that is later
nullified by the underlying market, assume that a given underlying is
trading in the $49.00-$50.00 price range then has an erroneous print at
$5.00. Given that there is the potential perception that the underlying
has gone through a dramatic price revaluation, numerous options trades
could promptly trigger based off of this new price. However, because
the price that triggered them was not a valid price it would be
appropriate to review said option trades when the underlying print that
triggered them is removed.
    The Exchange also proposes to add a provision stating that a trade
resulting from an erroneous quote(s) in the underlying security shall
be adjusted or busted as set forth in the Obvious Error provisions of
the Proposed Rule, provided a party notifies the MOC in a timely
manner, as further described below. Pursuant to the Proposed Rule, an
erroneous quote occurs when the underlying security has a width of at
least $1.00 and has a width at least five times greater than the
average quote width for such underlying security during the time period
encompassing two minutes before and after the dissemination of such
quote. For purposes of the Proposed Rule, the average quote width will
be determined by adding the quote widths of sample quotations at
regular 15-second intervals during the four-minute time period
referenced above (excluding the quote(s) in question) and dividing by
the number of quotes during such time period (excluding the quote(s) in
question).\12\ Similar to the proposal with respect to erroneous prints
described above, if a party believes that it participated in an
erroneous transaction resulting from an erroneous quote(s) it must
notify the MOC in accordance with the notification provisions of the
Obvious Error provision described above. The Proposed Rule, therefore,
puts the onus on each Participant to notify the Exchange if such
Participant believes that a trade should be reviewed pursuant to either
of the proposed provisions, as the Exchange is not in position to
determine the impact of erroneous prints or quotes on individual
Participant. The Exchange notes that it does not believe that
additional time is necessary with respect to a trade based on an
erroneous quote because a Participant has all information necessary to
detect the error at the time of an option transaction that was
triggered by an erroneous quote, which is in contrast to the proposed
erroneous print provision that includes a dependency on an action by
the market where the underlying security traded.
---------------------------------------------------------------------------

    \12\ The Exchange has proposed the price and time parameters for
quote width and average quote width used to determine whether an
erroneous quote has occurred based on established rules of options
exchanges that currently apply such parameters. See, e.g., CBOE Rule
6.25(a)(5); NYSE Arca Rule 6.87(a)(5). Based on discussions with
these exchanges, the Exchange believes that the parameters are a
reasonable approach to determine whether an erroneous quote has
occurred for purposes of the proposed rule.
---------------------------------------------------------------------------

    As an example of a situation in which a trade results from an
erroneous quote in the underlying security, assume again that a given
underlying is quoting and trading in the $49.00-$50.00 price range then
a liquidity gap occurs, with bidders not representing quotes in the
market place and an offer quoted at $5.00. Quoting may quickly return
to normal, again in the $49.00-$50.00 price range, but due to the
potential perception that the underlying has gone through a dramatic
price revaluation, numerous options trades could trigger based off of
this new quoted price in the interim. Because the price that triggered
such trades was not a valid price it would be appropriate to review
said option trades.
Stop (and Stop-Limit) Order Trades Triggered by Erroneous Trades
    The Exchange notes that certain market participants and their
customers enter stop or stop limit orders that are triggered based on
executions in the marketplace. As proposed, transactions resulting from
the triggering of a stop or stop-limit order by an erroneous trade in
an option contract shall be nullified by the Exchange, provided a party
notifies the MOC in a timely manner as set forth below. The Exchange
believes it is appropriate to nullify executions of stop or stop-limit
orders that were wrongly triggered because such transactions should not
have occurred. If a party believes that it participated in an erroneous
transaction pursuant to the Proposed Rule it must notify the MOC within
the timeframes set forth in the Obvious Error Rule above, with the
allowed notification timeframe commencing at the time of notification
of the nullification of transaction(s) that triggered the stop or stop-
limit order.
Linkage Trades
    The Exchange also proposes to adopt language that clearly provides
the Exchange with authority to take necessary actions when another
options exchange nullifies or adjusts a transaction pursuant to its
respective rules and the transaction resulted from an order that has
passed through the Exchange and been routed on to another options
exchange on behalf of the Exchange. Specifically, if the Exchange
routes an order pursuant to the Options Order Protection and Locked/
Crossed Market Plan \13\ that results in a transaction on another
options exchange (a ``Linkage Trade'') and such options exchange
subsequently nullifies or adjusts the Linkage Trade pursuant to its
rules, the Exchange will perform all actions necessary to complete the
nullification or adjustment of the Linkage Trade. Although the Exchange
is not utilizing its own authority to nullify or adjust a transaction
related to an action taken on a Linkage Trade by another options
exchange, the Exchange does have to assist in the processing of the
adjustment or nullification of the order, such as notification to the
Participant and the OCC of the adjustment or nullification. Thus, the
Exchange believes that the proposed provision adds additional
transparency to the Proposed Rule.
---------------------------------------------------------------------------

    \13\ As defined in Exchange Rule 15000(n).

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

Verifiable Disruptions or Malfunctions of Exchange Systems
    The Exchange proposes to maintain language in its Current Rule a
provision that allows any transaction arising out of a verifiable
disruption or malfunction in the use or operation of any Exchange
automated quotation, dissemination, execution or communication system
to either be nullified or adjusted by an Official. Under the Proposed
Rule, transactions that qualify for price adjustment will be adjusted
to the Theoretical Price, as defined in paragraph (b) of this Rule.
    Further, in the interest of maintaining a fair and orderly market
for the protection of investors, an Official, on its own motion, may
review any transaction occurring on the Exchange that is believed to be
the result of a verifiable disruption or malfunction. The Official,
when exercising its discretion to review transactions pursuant to this
paragraph, shall act as soon as possible after receiving notification
of the transaction, and ordinarily would be expected to act on the same
day as the transaction occurred. In no event shall the Official act
later than 9:30 a.m. (ET) on the next trading day following the date of
the transaction in question.
Appeals
    The Exchange proposes to maintain its current appeals process in
connection with the Proposed Rule. Specifically, if a Participant
affected by a determination made under the Proposed Rule requests
within the time permitted below, the CRO will review decisions made by
the Official, including whether an obvious error occurred and whether
the correct determination was made.
    Under the Proposed Rule a request for review on appeal must be made
in writing via email or other electronic means specified from time to
time by the Exchange in a circular distributed to Participants within
thirty (30) minutes after the party making the appeal is given
notification of the initial determination being appealed. The CRO shall
review the facts and render a decision as soon as practicable, but
generally on the same trading day as the execution(s) under review. On
requests for appeal received after 3:00 p.m. Eastern Time, a decision
will be rendered as soon as practicable, but in no case later than the
trading day following the date of the execution under review.
    The CRO may overturn or modify an action taken by the Official
under this Rule. All determinations by the CRO shall constitute final
action by the Exchange on the matter at issue. The Exchange believes
that this is necessary given the purpose of the appeal is finality.
    Any determination by the Exchange, the Official or CRO shall be
rendered without prejudice as to the rights of the parties to the
transaction to submit their dispute to arbitration.
Limit Up-Limit Down Plan
    The Exchange is proposing to adopt Interpretation Material IM-7070-
1 to the Proposed Rule to provide for how the Exchange will treat
Obvious and Catastrophic Errors in response to the Regulation NMS Plan
to Address Extraordinary Market Volatility Pursuant to Rule 608 of
Regulation NMS under the Act (the ``Limit Up-Limit Down Plan'' or the
``Plan),\14\ which is applicable to all NMS stocks, as defined in
Regulation NMS Rule 600(b)(47).\15\ Under the Proposed Rule, during a
pilot period to coincide with the pilot period for the Plan, including
any extensions to the pilot period for the Plan, an execution will not
be subject to review as an Obvious Error or Catastrophic Error pursuant
to paragraph (c) or (d) of the Proposed Rule if it occurred while the
underlying security was in a ``Limit State'' or ``Straddle State,'' as
defined in the Plan. The Exchange, however, proposes to retain
authority to review transactions on the Exchange's own motion pursuant
to sub-paragraph (c)(3) of the Proposed Rule and to bust or adjust
transactions pursuant to the proposed Significant Market Event
provision, the proposed trading halts provision, the proposed
provisions with respect to erroneous prints and quotes in the
underlying security, or the proposed provision related to stop and stop
limit orders that have been triggered by an erroneous execution. The
Exchange believes that these safeguards will provide the Exchange with
the flexibility to act when necessary and appropriate to nullify or
adjust a transaction, while also providing market participants with
certainty that, under normal circumstances, the trades they affect with
quotes and/or orders having limit prices will stand irrespective of
subsequent moves in the underlying security.
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    \14\ Securities Exchange Act Release No. 67091 (May 31, 2012),
77 FR 33498 (June 6, 2012) (order approving the Plan on a pilot
basis).
    \15\ 17 CFR 242.600(b)(47).
---------------------------------------------------------------------------

    During a Limit or Straddle State, options prices may deviate
substantially from those available immediately prior to or following
such States. Thus, determining a Theoretical Price in such situations
would often be very subjective, creating unnecessary uncertainty and
confusion for investors. Because of this uncertainty, the Exchange is
proposing to amend Rule 7170 to provide that the Exchange will not
review transactions as Obvious Errors or Catastrophic Errors when the
underlying security is in a Limit or Straddle State.
    The Exchange notes that there are additional protections in place
outside of the Obvious and Catastrophic Error Rule that will continue
to safeguard customers. First, the Exchange rejects all un-priced
options orders received by the Exchange (i.e., Market Orders) during a
Limit or Straddle State for the underlying security. Second, SEC Rule
15c3-5 requires that, ``financial risk management controls and
supervisory procedures must be reasonably designed to prevent the entry
of orders that exceed appropriate pre-set credit or capital thresholds,
or that appear to be erroneous.'' \16\ Third, the Exchange has optional
price checks applicable to limit orders that reject limit orders that
are priced sufficiently far through the national best bid or national
best offer (``NBBO'') that it seems likely an error occurred. The
rejection of Market Orders, the requirements placed upon broker dealers
to adopt controls to prevent the entry of orders that appear to be
erroneous, and Exchange functionality that filters out orders that
appear to be erroneous, will all serve to sharply reduce the incidence
of erroneous transactions.
---------------------------------------------------------------------------

    \16\ See Securities and Exchange Act Release No. 63241 (November
3, 2010), 75 FR 69791 (November 15, 2010) (File No. S7-03-10).
---------------------------------------------------------------------------

    The Exchange represents that it will conduct its own analysis
concerning the elimination of the Obvious Error and Catastrophic Error
provisions during Limit and Straddle States and agrees to provide the
Commission with relevant data to assess the impact of this proposed
rule change. As part of its analysis, the Exchange will evaluate (1)
the options market quality during Limit and Straddle States, (2) assess
the character of incoming order flow and transactions during Limit and
Straddle States, and (3) review any complaints from Participants and
their customers concerning executions during Limit and Straddle States.
The Exchange also agrees to provide to the Commission data requested to
evaluate the impact of the inapplicability of the Obvious Error and
Catastrophic Error provisions, including data relevant to assessing the
various analyses noted above.

    In connection with this proposal, the Exchange will provide to the
Commission and the public a dataset containing the data for each
Straddle State and Limit State in NMS Stocks underlying options traded
on the Exchange beginning in the month during which the proposal is
approved, limited to those option classes that have at least one (1)
trade on the Exchange during a Straddle State or Limit State. For each
of those option classes affected, each data record will contain the
following information:
     Stock symbol, option symbol, time at the start of the
Straddle or Limit State, an indicator for whether it is a Straddle or
Limit State.
     For activity on the Exchange:
     executed volume, time-weighted quoted bid-ask spread,
time-weighted average quoted depth at the bid, time-weighted average
quoted depth at the offer;
     high execution price, low execution price;
     number of trades for which a request for review for error
was received during Straddle and Limit States;
     an indicator variable for whether those options outlined
above have a price change exceeding 30% during the underlying stock's
Limit or Straddle State compared to the last available option price as
reported by OPRA before the start of the Limit or Straddle State (1 if
observe 30% and 0 otherwise). Another indicator variable for whether
the option price within five minutes of the underlying stock leaving
the Limit or Straddle state (or halt if applicable) is 30% away from
the price before the start of the Limit or Straddle State.
    In addition, by May 29, 2015, the Exchange shall provide to the
Commission and the public assessments relating to the impact of the
operation of the Obvious Error rules during Limit and Straddle States
as follows: (1) Evaluate the statistical and economic impact of Limit
and Straddle States on liquidity and market quality in the options
markets; and (2) Assess whether the lack of Obvious Error rules in
effect during the Straddle and Limit States are problematic. The timing
of this submission would coordinate with Participants' proposed time
frame to submit to the Commission assessments as required under
Appendix B of the Plan. The Exchange notes that the pilot program is
intended to run concurrent with the pilot period of the Plan, which has
been extended to October 23, 2015. The Exchange proposes to reflect
this date in the Proposed Rule.
No Adjustments to a Worse Price
    Finally, the Exchange proposes to include Interpretation and Policy
.02 to the Proposed Rule, which would make clear that to the extent the
provisions of the proposed Rule would result in the Exchange applying
an adjustment of an erroneous sell transaction to a price lower than
the execution price or an erroneous buy transaction to a price higher
than the execution price, the Exchange will not adjust or nullify the
transaction, but rather, the execution price will stand.
    The Exchange proposes that is proposed rule change become operative
on May 8, 2015 which will coordinate with the other options exchanges
adopting these harmonized rules.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with the
requirements of Section 6(b) of the Securities Exchange Act of 1934
(the ``Act''),\17\ in general, and Section 6(b)(5) of the Act,\18\ in
particular, in that it is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in facilitating transactions in securities, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general to protect investors and the
public interest.
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    As described above, the Exchange and other options exchanges are
seeking to adopt harmonized rules related to the adjustment and
nullification of erroneous options transactions. The Exchange believes
that the Proposed Rule will provide greater transparency and clarity
with respect to the adjustment and nullification of erroneous options
transactions. Particularly, the proposed changes seek to achieve
consistent results for participants across U.S. options exchanges while
maintaining a fair and orderly market, protecting investors and
protecting the public interest. Based on the foregoing, the Exchange
believes that the proposal is consistent with Section 6(b)(5) of the
Act \19\ in that the Proposed Rule will foster cooperation and
coordination with persons engaged in regulating and facilitating
transactions.
---------------------------------------------------------------------------

    \19\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes the various provisions allowing or dictating
adjustment rather than nullification of a trade are necessary given the
benefits of adjusting a trade price rather than nullifying the trade
completely. Because options trades are used to hedge, or are hedged by,
transactions in other markets, including securities and futures, many
Participants, and their customers, would rather adjust prices of
executions rather than nullify the transactions and, thus, lose a hedge
altogether. As such, the Exchange believes it is in the best interest
of investors to allow for price adjustments as well as nullifications.
The Exchange further discusses specific aspects of the Proposed Rule
below.
    The Exchange does not believe that the proposal is unfairly
discriminatory, even though it differentiates in many places between
Customers and non-Customers. The rules of the options exchanges often
affording them preferential treatment. This treatment is appropriate in
light of the fact that Customers are not necessarily immersed in the
day-to-day trading of the markets, are less likely to be watching
trading activity in a particular option throughout the day, and may
have limited funds in their trading accounts. At the same time, the
Exchange reiterates that in the U.S. options markets generally there is
significant retail customer participation that occurs directly on (and
only on) options exchanges such as the Exchange. Accordingly,
differentiating among market participants with respect to the
adjustment and nullification of erroneous options transactions is not
unfairly discriminatory because it is reasonable and fair to provide
Customers with additional protections as compared to non-Customers.
    The Exchange believes that its proposal with respect to the
allowance of mutual agreed upon adjustments or nullifications is
appropriate and consistent with the Act, as such proposal removes
impediments to and perfects the mechanism of a free and open market and
a national market system, allowing participants to mutually agree to
correct an erroneous transactions without the Exchange mandating the
outcome. The Exchange also believes that its proposal with respect to
mutual adjustments is consistent with the Act because it is designed to
prevent fraudulent and manipulative acts and practices by explicitly
stating that it is considered conduct inconsistent with just and
equitable principles of trade for any Participant to use the mutual
adjustment process to circumvent any applicable Exchange rule, the Act
or any of the rules and regulations thereunder.
    The Exchange believes its proposal to provide within the Proposed
Rule

definitions of Customer, erroneous sell transaction and erroneous buy
transaction is consistent with Section 6(b)(5) of the Act because such
terms will provide more certainty to market participants as to the
meaning of the Proposed Rule and reduce the possibility that a party
can intentionally submit an order hoping for the market to move in
their favor in reliance on the Rule as a safety mechanism, thereby
promoting just and fair principles of trade. Similarly, the Exchange
believes that proposed Interpretation Material IM-7070-2 is consistent
with the Act as it would make clear that the Exchange will not adjust
or nullify a transaction, but rather, the execution price will stand
when the applicable adjustment criteria would actually adjust the price
of the transaction to a worse price (i.e., higher for an erroneous buy
or lower for an erroneous sell order).
    As set forth below, the Exchange believes it is consistent with
Section 6(b)(5) of the Act for the Exchange to determine Theoretical
Price when the NBBO cannot reasonably be relied upon because the
alternative could result in transactions that cannot be adjusted or
nullified even when they are otherwise clearly at a price that is
significantly away from the appropriate market for the option.
Similarly, reliance on an NBBO that is not reliable could result in
adjustment to prices that are still significantly away from the
appropriate market for the option.
    The Exchange believes that its proposal with respect to determining
Theoretical Price is consistent with the Act in that it has retained
the standard of the Current Rule, which is to rely on the NBBO to
determine Theoretical Price if such NBBO can reasonably be relied upon.
Because, however, there is not always an NBBO that can or should be
used in order to administer the rule, the Exchange has proposed various
provisions that provide the Exchange with the authority to determine a
Theoretical Price. The Exchange believes that the Proposed Rule is
transparent with respect to the circumstances under which the Exchange
will determine Theoretical Price, and has sought to limit such
circumstances as much as possible. The Exchange notes that Exchange
personnel currently are required to determine Theoretical Price in
certain circumstances. While the Exchange continues to pursue
alternative solutions that might further enhance the objectivity and
consistency of determining Theoretical Price, the Exchange believes
that the discretion currently afforded to Exchange Officials is
appropriate in the absence of a reliable NBBO that can be used to set
the Theoretical Price.
    With respect to the specific proposed provisions for determining
Theoretical Price for transactions that occur as part of the Exchange's
Opening Process and in situations where there is a wide quote, the
Exchange believes both provisions are consistent with the Act because
they provide objective criteria that will determine Theoretical Price
with limited exceptions for situations where the Exchange does not
believe the NBBO is a reasonable benchmark or there is no NBBO. The
Exchange notes in particular with respect to the wide quote provision
that the Proposed Rule will result in the Exchange determining
Theoretical Price less frequently than it would pursuant to wide quote
provisions that have previously been approved. The Exchange believes
that it is appropriate and consistent with the Act to afford
protections to market participants by not relying on the NBBO to
determine Theoretical Price when the quote is extremely wide but had
been, in the prior 10 seconds, at much more reasonable width. The
Exchange also believes it is appropriate and consistent with the Act to
use the NBBO to determine Theoretical Price when the quote has been
wider than the applicable amount for more than 10 seconds, as the
Exchange does not believe it is necessary to apply any other criteria
in such a circumstance. The Exchange believes that market participants
can easily use or adopt safeguards to prevent errors when such market
conditions exist. When entering an order into a market with a
persistently wide quote, the Exchange does not believe that the
entering party should reasonably expect anything other than the quoted
price of an option.
    The Exchange believes that its proposal to adopt clear but
disparate standards with respect to the deadline for submitting a
request for review of Customer and non-Customer transactions is
consistent with the Act, particularly in that it creates a greater
level of protection for Customers. As noted above, the Exchange
believes that this is appropriate and not unfairly discriminatory in
light of the fact that Customers are not necessarily immersed in the
day-to-day trading of the markets and are less likely to be watching
trading activity in a particular option throughout the day. Thus,
Participants representing Customer orders reasonably may need
additional time to submit a request for review. The Exchange also
believes that its proposal to provide additional time for submission of
requests for review of linkage trades is reasonable and consistent with
the protection of investors and the public interest due to the time
that it might take an options exchange or third-party routing broker to
file a request for review with the Exchange if the initial notification
of an error is received by the originating options exchange near the
end of such options exchange's filing deadline. Without this additional
time, there could be disparate results based purely on the existence of
intermediaries and an interconnected market structure.
    In relation to the aspect of the proposal giving Officials the
ability to review transactions for obvious errors on their own motion,
the Exchange notes that an Official can adjust or nullify a transaction
under the authority granted by this provision only if the transaction
meets the specific and objective criteria for an Obvious Error under
the Proposed Rule. As noted above, this is designed to give the
Official the ability to provide parties relief in those situations
where they have failed to report an apparent error within the
established notification period. However, the Exchange will only grant
relief if the transaction meets the requirements for an Obvious Error
as described in the Proposed Rule.
    The Exchange believes that its proposal to adjust non-Customer
transactions and to nullify Customer transactions that qualify as
Obvious Errors is appropriate for reasons consistent with those
described above. In particular, Customers are not necessarily immersed
in the day-to-day trading of the markets, are less likely to be
watching trading activity in a particular option throughout the day,
and may have limited funds in their trading accounts.
    The Exchange acknowledges that the proposal contains some
uncertainty regarding whether a trade will be adjusted or nullified,
depending on whether one of the parties is a Customer, because a party
may not know whether the other party to a transaction was a Customer at
the time of entering into the transaction. However, the Exchange
believes that the proposal nevertheless promotes just and equitable
principles of trade and protects investors as well as the public
interest because it eliminates the possibility that a Customer's order
will be adjusted to a significantly different price. As noted above,
the Exchange believes it is consistent with the Act to afford Customers
greater protections under the Proposed Rule than are afforded to non-
Customers. Thus, the Exchange believes that its proposal is consistent
with the Act in that it protects investors and the public

interest by providing additional protections to those that are less
informed and potentially less able to afford an adjustment of a
transaction that was executed in error. Customers are also less likely
to have engaged in significant hedging or other trading activity based
on earlier transactions, and thus, are less in need of maintaining a
position at an adjusted price than non-Customers.
    If any Participant submits requests to the Exchange for review of
transactions pursuant to the Proposed Rule, and in aggregate that
Participant has 200 or more Customer transactions under review
concurrently and the orders resulting in such transactions were
submitted during the course of 2 minutes or less, the Exchange believes
it is appropriate for the Exchange apply the non-Customer adjustment
criteria described above to such transactions. The Exchange believes
that the proposed aggregation is reasonable as it is representative of
an extremely large number of orders submitted to the Exchange over a
relatively short period of time that are, in turn, possibly erroneous
(and within a time frame significantly less than an entire day), and
thus is most likely to occur because of a systems issue experienced by
a Participant representing Customer orders or a systems issue coupled
with the erroneous marking of orders. The Exchange does not believe it
is possible at a level of 200 Customer orders over a 2 minute period
that are under review at one time that multiple, separate Customers
were responsible for the errors in the ordinary course of trading. In
the event of a large-scale issue caused by a Participant that has
submitted orders over a 2 minute period marked as Customer that
resulted in more than 200 transactions under review, the Exchange does
not believe it is appropriate to nullify all such transactions because
of the negative impact that nullification could have on the market
participants on the contra-side of such transactions, who might have
engaged in hedging and trading activity following such transactions. In
order for a market participant to have more than 200 transactions under
review concurrently when the orders triggering such transactions were
received in 2 minutes or less, the Exchange believes that a market
participant will have far exceeded the normal behavior of customers
deserving protected status. While the Exchange continues to believe
that it is appropriate to nullify transactions in such a circumstance
if both participants to a transaction are Customers, the Exchange does
not believe it is appropriate to place the overall risk of a
significant number of trade breaks on non-Customers that in the normal
course of business may have engaged in additional hedging activity or
trading activity based on such transactions. Thus, the Exchange
believes it is necessary and appropriate to protect non-Customers in
such a circumstance by applying the non-Customer adjustment criteria,
and thus adjusting transactions as set forth above, in the event a
Participant has more than 200 transactions under review concurrently.
In summary, due to the extreme level at which the proposal is set, the
Exchange believes that the proposal is consistent with Section 6(b)(5)
of the Act in that it promotes just and equitable principles of trade
by encouraging market participants to retain appropriate controls over
their systems to avoid submitting a large number of erroneous orders in
a short period of time.
    Similarly, the Exchange believes that the proposed Size Adjustment
Modifier, which would increase the adjustment amount for non-Customer
transactions, is appropriate because it attempts to account for the
additional risk that the parties to the trade undertake for
transactions that are larger in scope. The Exchange believes that the
Size Adjustment Modifier creates additional incentives to prevent more
impactful Obvious Errors and it lessens the impact on the contra-party
to an adjusted trade. The Exchange notes that these contra-parties may
have preferred to only trade the size involved in the transaction at
the price at which such trade occurred, and in trading larger size has
committed a greater level of capital and bears a larger hedge risk.
    The Exchange similarly believes that its Proposed Rule with respect
to Catastrophic Errors is consistent with the Act as it affords
additional time for market participants to file for review of erroneous
transactions that were further away from the Theoretical Price. At the
same time, the Exchange believes that the Proposed Rule is consistent
with the Act in that it generally would adjust transactions, including
Customer transactions, because this will protect against hedge risk,
particularly for transactions that may have occurred several hours
earlier and thus, which all parties to the transaction might presume
are protected from further modification. Similarly, by providing larger
adjustment amounts away from Theoretical Price than are set forth under
the Obvious Error provision, the Catastrophic Error provision also
takes into account the possibility that the party that was advantaged
by the erroneous transaction has already taken actions based on the
assumption that the transaction would stand. The Exchange believes it
is reasonable to specifically protect Customers from adjustments
through their limit prices for the reasons stated above, including that
Customers are less likely to be watching trading throughout the day and
that they may have less capital to afford an adjustment price. The
Exchange believes that the proposal provides a fair process that will
ensure that Customers are not forced to accept a trade that was
executed in violation of their limit order price. In contrast, market
professionals are more likely to have engaged in hedging or other
trading activity based on earlier trading activity, and thus, are more
likely to be willing to accept an adjustment rather than a
nullification to preserve their positions even if such adjustment is to
a price through their limit price.
    The Exchange believes that proposed rule change to adopt the
Significant Market Event provision is consistent with Section 6(b)(5)
of the Act in that it will foster cooperation and coordination with
persons engaged in regulating the options markets. In particular, the
Exchange believes it is important for options exchanges to coordinate
when there is a widespread and significant event, as commonly, multiple
options exchanges are impacted in such an event. Further, while the
Exchange recognizes that the Proposed Rule will not guarantee a
consistent result for all market participants on every market, the
Exchange does believe that it will assist in that outcome. For
instance, if options exchanges are able to agree as to the time from
which Theoretical Price should be determined and the period of time
that should be reviewed, the likely disparity between the Theoretical
Prices used by such exchanges should be very slight and, in turn, with
otherwise consistent rules, the results should be similar. The Exchange
also believes that the Proposed Rule is consistent with the Act in that
it generally would adjust transactions, including Customer
transactions, because this will protect against hedge risk,
particularly for liquidity providers that might have been quoting in
thousands or tens of thousands of different series and might have
affected executions throughout such quoted series. The Exchange
believes that when weighing the competing interests between preferring
a nullification for a Customer transaction and an adjustment for a
transaction of a market professional, while nullification is
appropriate in a typical one-off situation that it is

necessary to protect liquidity providers in a widespread market event
because, presumably, they will be the most affected by such an event
(in contrast to a Customer who, by virtue of their status as such,
likely would not have more than a small number of affected
transactions). The Exchange believes that the protection of liquidity
providers by favoring adjustments in the context of Significant Market
Events can also benefit Customers indirectly by better enabling
liquidity providers, which provides a cumulative benefit to the market.
Also, as stated above with respect to Catastrophic Errors, the Exchange
believes it is reasonable to specifically protect Customers from
adjustments through their limit prices for the reasons stated above,
including that Customers are less likely to be watching trading
throughout the day and that they may have less capital to afford an
adjustment price. The Exchange believes that the proposal provides a
fair process that will ensure that Customers are not forced to accept a
trade that was executed in violation of their limit order price. In
contrast, market professionals are more likely to have engaged in
hedging or other trading activity based on earlier trading activity,
and thus, are more likely to be willing to accept an adjustment rather
than a nullification to preserve their positions even if such
adjustment is to a price through their limit price. In addition, the
Exchange believes it is important to have the ability to nullify some
or all transactions arising out of a Significant Market Event in the
event timely adjustment is not feasible due to the extraordinary nature
of the situation. In particular, although the Exchange has worked to
limit the circumstances in which it has to determine Theoretical Price,
in a widespread event it is possible that hundreds if not thousands of
series would require an Exchange determination of Theoretical Price. In
turn, if there are hundreds or thousands of trades in such series, it
may not be practicable for the Exchange to determine the adjustment
levels for all non-Customer transactions in a timely fashion, and in
turn, it would be in the public interest to instead more promptly
deliver a simple, consistent result of nullification.
    The Exchange believes that proposed rule change related to review,
nullification and/or adjustment of erroneous transactions during a
trading halt (including the proposed modification to Rule 7080), an
erroneous print in the underlying security, an erroneous quote in the
underlying security, or an erroneous transaction in the option with
respect to stop and stop limit orders is likewise consistent with
Section 6(b)(5) of the Act because the proposal provides for the
adjustment or nullification of trades executed at erroneous prices
through no fault on the part of the trading participants. Allowing for
Exchange review in such situations will promote just and fair
principles of trade by protecting investors from harm that is not of
their own making. Specifically with respect to the proposed provisions
governing erroneous prints and quotes in the underlying security, the
Exchange notes that market participants on the Exchange base the value
of their quotes and orders on the price of the underlying security. The
provisions regarding errors in prints and quotes in the underlying
security cover instances where the information market participants use
to price options is erroneous through no fault of their own. In these
instances, market participants have little, if any, chance of pricing
options accurately. Thus, these provisions are designed to provide
relief to market participants harmed by such errors in the prints or
quotes of the underlying security.
    The Exchange believes that the proposed provision related to
Linkage Trades is consistent with the Act because it adds additional
transparency to the Proposed Rule and makes clear that when a Linkage
Trade is adjusted or nullified by another options exchange, the
Exchange will take necessary actions to complete the nullification or
adjustment of the Linkage Trade.
    The Exchange believes that retaining the same appeals process as
the Exchange maintains under the Current Rule is consistent with the
Act because such process provides Participants with due process in
connection with decisions made by Exchange Officials under the Proposed
Rule.
    With regard to the portion of the Exchange's proposal related to
the applicability of the Obvious Error Rule when the underlying
security is in a Limit or Straddle State, the Exchange believes that
the proposed rule change is consistent with Section 6(b)(5) of the Act
because it will provide certainty about how errors involving options
orders and trades will be handled during periods of extraordinary
volatility in the underlying security. Further, the Exchange believes
that it is necessary and appropriate in the interest of promoting fair
and orderly markets to exclude from Rule 7170 those transactions
executed during a Limit or Straddle State. The Exchange believes the
application of the Proposed Rule without the proposed provision would
be impracticable given the lack of reliable NBBO in the options market
during Limit and Straddle States, and that the resulting actions (i.e.,
nullified trades or adjusted prices) may not be appropriate given
market conditions. The Proposed Rule change would ensure that limit
orders that are filled during a Limit State or Straddle State would
have certainty of execution in a manner that promotes just and
equitable principles of trade, removes impediments to, and perfects the
mechanism of a free and open market and a national market system.
Moreover, given the fact that options prices during brief Limit or
Straddle States may deviate substantially from those available shortly
following the Limit or Straddle State, the Exchange believes giving
market participants time to re-evaluate a transaction would create an
unreasonable adverse selection opportunity that would discourage
participants from providing liquidity during Limit or Straddle States.
In this respect, the Exchange notes that only those orders with a limit
price will be executed during a Limit or Straddle State. Therefore, on
balance, the Exchange believes that removing the potential inequity of
nullifying or adjusting executions occurring during Limit or Straddle
States outweighs any potential benefits from applying certain
provisions during such unusual market conditions. Additionally, as
discussed above, there are additional pre-trade protections in place
outside of the Obvious and Catastrophic Error Rule that will continue
to safeguard customers.
    The Exchange notes that under certain limited circumstances the
Proposed Rule will permit the Exchange to review transactions in
options that overlay a security that is in a Limit or Straddle State.
Specifically, an Official will have authority to review a transaction
on his or her own motion in the interest of maintaining a fair and
orderly market and for the protection of investors. Furthermore, the
Exchange will have the authority to adjust or nullify transactions in
the event of a Significant Market Event, a trading halt in the affected
option, an erroneous print or quote in the underlying security, or with
respect to stop and stop limit orders that have been triggered based on
erroneous trades. The Exchange believes that the safeguards described
above will protect market participants and will provide the Exchange
with the flexibility to act when necessary and appropriate to nullify
or adjust a transaction, while also providing market participants with

certainty that, under normal circumstances, the trades they effect with
quotes and/or orders having limit prices will stand irrespective of
subsequent moves in the underlying security. The right to review those
transactions that occur during a Limit or Straddle State would allow
the Exchange to account for unforeseen circumstances that result in
Obvious or Catastrophic Errors for which a nullification or adjustment
may be necessary in the interest of maintaining a fair and orderly
market and for the protection of investors. Similarly, the ability to
nullify or adjust transactions that occur during a Significant Market
Event or trading halt, erroneous print or quote in the underlying
security, or erroneous trade in the option (i.e., stop and stop limit
orders) may also be necessary in the interest of maintaining a fair and
orderly market and for the protection of investors. Furthermore, the
Exchange will administer this provision in a manner that is consistent
with the principles of the Act and will create and maintain records
relating to the use of the authority to act on its own motion during a
Limit or Straddle State or any adjustments or trade breaks based on
other proposed provisions under the Rule.

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 not necessary or appropriate in
furtherance of the purposes of the Act. In this regard and as indicated
above, the Exchange notes that the rule change is being proposed as a
competitive response to a filing submitted by BATS.\20\
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    \20\ See supra, note 3.
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    Importantly, the Exchange believes the proposal will not impose a
burden on intermarket competition but will rather alleviate any burden
on competition because it is the result of a collaborative effort by
all options exchanges to harmonize and improve the process related to
the adjustment and nullification of erroneous options transactions. The
Exchange does not believe that the rules applicable to such process is
an area where options exchanges should compete, but rather, that all
options exchanges should have consistent rules to the extent possible.
Particularly where a market participant trades on several different
exchanges and an erroneous trade may occur on multiple markets nearly
simultaneously, the Exchange believes that a participant should have a
consistent experience with respect to the nullification or adjustment
of transactions. The Exchange understands that all other options
exchanges intend to file proposals that are substantially similar to
this proposal.
    The Exchange does not believe that the proposed rule change imposes
a burden on intramarket competition because the provisions apply to all
market participants equally within each participant category (i.e.,
Customers and non-Customers). With respect to competition between
Customer and non-Customer market participants, the Exchange believes
that the Proposed Rule acknowledges competing concerns and tries to
strike the appropriate balance between such concerns. For instance, as
noted above, the Exchange believes that protection of Customers is
important due to their direct participation in the options markets as
well as the fact that they are not, by definition, market
professionals. At the same time, the Exchange believes due to the
quote-driven nature of the options markets, the importance of liquidity
provision in such markets and the risk that liquidity providers bear
when quoting a large breadth of products that are derivative of
underlying securities, that the protection of liquidity providers and
the practice of adjusting transactions rather than nullifying them is
of critical importance. As described above, the Exchange will apply
specific and objective criteria to determine whether an erroneous
transaction has occurred and, if so, how to adjust or nullify a
transaction.

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

    The Exchange has neither solicited nor received comments on the
proposed rule change.

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

    Because the proposed rule change does not (i) significantly affect
the protection of investors or the public interest; (ii) impose any
significant burden on competition; and (iii) become operative for 30
days from the date on which it was filed, or such shorter time as the
Commission may designate if consistent with the protection of investors
and the public interest, the proposed rule change has become effective
pursuant to Section 19(b)(3)(A) of the Act \21\ and Rule 19b-4(f)(6)
thereunder.\22\
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    \21\ 15 U.S.C. 78s(b)(3)(A).
    \22\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written
notice of its intent to file the proposed rule change, along with a
brief description and the text of the proposed rule change, at least
five business days prior to the date of filing of the proposed rule
change, or such shorter time as designated by the Commission.
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    The Exchange has asked the Commission to waive the 30-day operative
delay so that the proposal may become operative immediately upon
filing. The Commission believes that waiving the 30-day operative delay
is consistent with the protection of investors and the public interest,
as it will enable the Exchange to meet its proposed implementation date
of May 8, 2015, which will help facilitate the implementation of
harmonized rules related to the adjustment and nullification of
erroneous options transactions across the options exchanges. For this
reason, the Commission designates the proposed rule change to be
operative upon filing.\23\
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    \23\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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    At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or 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-BOX-2015-18 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number SR-BOX-2015-18. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549 on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-BOX-2015-18, and should be
submitted on or before June 4, 2015.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-11591 Filed 5-13-15; 8:45 am]
BILLING CODE 8011-01-P