[Federal Register Volume 80, Number 93 (Thursday, May 14, 2015)]
[Notices]
[Pages 27781-27798]
[FR Doc No: 2015-11603]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74918; File No. SR-MIAX-2015-35]

Self-Regulatory Organizations; Miami International Securities
Exchange LLC; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change Relating to the 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 7, 2015, Miami International Securities Exchange LLC
(``MIAX'' or ``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 Exchange.
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 is filing a proposal to replace current Exchange Rule
521 (the ``Current Rule''), entitled ``Obvious and Catastrophic
Errors,'' with new Exchange Rule 521 (the ``Proposed Rule''), entitled
``Nullification and Adjustment of Options Transactions Including
Obvious Errors.'' Rule 521 relates to the adjustment and nullification
of transactions that occur on the Exchange's options trading platform
(the ``System'' \3\ or the ``MIAX System''). The Exchange also proposes
to amend Exchange Rule 504, Trading Halts, and to delete current
Exchange Rule 531, Trade Nullification and Price Adjustment Procedure.
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    \3\ The term ``System'' means the automated trading system used
by the Exchange for the trading of securities. See Exchange Rule
100.
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    The text of the proposed rule change is available on the Exchange's
Web site at http://www.miaxoptions.com/filter/wotitle/rule_filing, at
MIAX's principal office, and at the Commission's Public Reference Room.

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

    In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.

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

1. Purpose
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 instant Proposed Rule Change is the culmination of a
coordinated effort by the options exchanges to address the August 22,
2013, halt of trading in Nasdaq-listed securities (``Nasdaq SIP
Failure''). Following the Nasdaq SIP Failure, the Chair of the
Commission met with the heads of the securities exchanges to discuss
potential initiatives aimed at addressing market resilience.\4\ The
Proposed Rule responds to the Chair's initiative, 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.
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    \4\ See SEC Press Release No. 2013-178 (September 12, 2013),
available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539804861.
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    The Exchange is proposing additional objective standards in the
Proposed

Rule as compared to the Current Rule. 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 and all
other options exchanges have been working to further improve the review
of potentially erroneous transactions and their subsequent adjustment
by creating an objective and universal way to determine Theoretical
Price in the event a reliable National Best Bid/Offer (``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. 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.
    The Exchange believes that the Proposed Rule is 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. The Exchange believes that the
differences in market structure between equities and options markets
continue to support the 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 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. Options market participants can generally create new open
interest in response to trading demand. As new open interest is
created, trades in the underlying security or related option 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. The Exchange believes that hedging
transactions commonly engaged in by options market participants
necessitates protection of transactions through adjustments rather than
nullifications when possible and 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. This breadth in options series renders
the options markets more dependent on liquidity providers than equities
markets; such liquidity is provided most commonly by registered market
makers but also by other professional traders. Due to 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 trades
of option liquidity providers should be protected because such
liquidity providers typically engage in hedging activity to reduce
potential significant financial risk. This should foster and promote
continued liquidity provision and maintenance of the quote-driven
options markets.
    Furthermore, there are other fundamental differences between
options and equities markets that support the different treatment of
specific categories of participants, as 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 more retail customer participation directly on
exchanges than in the equities markets, where a significant amount of
retail customer participation never reaches an exchange and is instead
executed in off-exchange venues such as alternative trading systems,
broker-dealer market making desks and internalized executions. Because
of such direct retail customer participation, the options exchanges
have taken steps to afford those retail customers--generally
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,''
for purposes of the new Rule as a Priority Customer \5\ to make clear
that this term would not include any broker-dealer or non-Priority
Customer. Although other portions of the Exchange's rules address the
various categories 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 \6\ 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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    \5\ The term ``Priority Customer'' means a person or entity that
(i) is not a broker or dealer in securities, and (ii) does not place
more than 390 orders in listed options per day on average during a
calendar month for its own beneficial account(s). See Exchange Rule
100.
    \6\ Hereinafter, references to ``Customer'' mean ``Priority
Customer.'' See id.
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    Second, the Exchange proposes to adopt definitions for both an
``erroneous sell transaction'' and an ``erroneous buy transaction.'' 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.
    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:

------------------------------------------------------------------------
                                               Adjustment: theoretical
    Number of contracts per transaction       price (as defined below)
                                                     plus/pinus
------------------------------------------------------------------------
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.\7\ 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 should be in proportion 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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    \7\ 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 provisions governing
transactions at the open of trading on each trading day; situations in
which there are no quotes or no valid quotes (as defined below); and
when the national best bid or offer (``NBBO'') is determined to be too
wide to be reliable.
Transactions at the Open
    Under the Proposed Rule, for a transaction occurring as part of the
Opening Process (as described in Exchange Rule 503), 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 below. 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
below, then the Exchange will use the NBB or NBO just prior to the
transaction as it would in any other normal review scenario.
    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 bid/ask differential for the NBBO was
wider than the applicable minimum amount set forth in the wide quote
provision as described below. 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.
No Valid Quotes
    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
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).\8\ 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 sufficient time for market participants to receive,
process and account for and respond to new market information.\9\ 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 on the bid price in order to provide a relatively
straightforward beginning point for the analysis.
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    \8\ See, e.g., NYSE Arca Options Rule 6.37(b)(1).
    \9\ See, e.g., Exchange Rules 520(b) and (c), which require
certain orders to be exposed on the MIAX System for at least one
second before they can be executed.
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    As an example, assume an option is quoted $3.00 by $6.00 with a
size of 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 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.
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 obvious or catastrophic error notification
(described below) 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
MIAX Regulatory Control (``MRC'') in the manner specified from time to
time on the Exchange's Web site. The Exchange currently requires
electronic notification through a web-based process but believes that
maintaining flexibility in the Rule is important to allow for changes
to the process.
    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 party that believes that it participated in
a transaction that was the result of an Obvious Error must submit a
notification to MRC (an ``obvious error notification'') 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.
    Specifically, 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 submit an obvious error notification to
MRC for review of transactions routed to the Exchange from that options
exchange and executed on the Exchange pursuant to the Options Order
Protection and Locked/Crossed Market Plan \10\ (such trades are
hereinafter referred to as ``Linkage Trades''). This includes obvious
error notifications on behalf of another options exchange submitted 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 obvious error
notifications from either the other options exchange or, if applicable,
the third-party routing broker that routed the affected 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
obvious error notification from the entering participant (i.e., within
30 minutes if a Customer order or 15 minutes if a non-Customer order).
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    \10\ As defined in Exchange Rule 1400(n).
---------------------------------------------------------------------------

    The Exchange believes that additional time for obvious error
notifications 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 obvious error
notifications 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 submit an obvious or catastrophic error notification within
the established time 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 affected transaction.
    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 an 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 an Official.
    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 to the transaction
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 Member submits an obvious error notification
pursuant to the Proposed Rule, and in the aggregate that Member 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 Member 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.\11\ 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
Member has more than 200 transactions under review concurrently.
---------------------------------------------------------------------------

    \11\ The Exchange notes that in the third quarter of 2014 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 an obvious error notification 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 (a ``catastrophic error notification'')
must be received by MRC 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

submit a catastrophic error notification to MRC 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
MRC in the manner specified from time to time on the Exchange's Web
site. By definition, any execution that qualifies as a Catastrophic
Error is also an Obvious Error. However, the Exchange believes it is
appropriate to account for these two categories of errors because the
Catastrophic Error provisions provide market participants with a longer
time period within which they may submit a catastrophic error
notification to MRC than the time period for an obvious error
notification. This provides an additional level of protection for
transactions that are severely erroneous even in the event a
participant does not submit an obvious error notification 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 affected parties 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 the submission
of an obvious error notification), 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.\12\ 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 exceeded 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.
---------------------------------------------------------------------------

    \12\ Although the Exchange has proposed a specific provision
related to coordination among 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 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 equals 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 member 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 are 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 Significant Market Event 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 if 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, an 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 521(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 upon which 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 Member 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
Member 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
    Current Exchange Rule 521(c)(4) states that trades on the Exchange
will be nullified when: (i) The trade occurred during a trading halt in
the affected option on the Exchange; or (ii) respecting equity options
(including options overlying ETFs), the trade occurred during a trading
halt on the primary market for the underlying security. The Exchange
proposes to include this language in proposed new Interpretations and
Policies .04 to Exchange Rule 504, Trading Halts. Proposed new Rule
521(f) will refer to this provision by stating that the Exchange shall
nullify any transaction that occurs during a trading halt in the
affected option on the Exchange or respecting equity options (including
options overlying ETFs), the trade occurred during a trading halt on
the primary market for the underlying security, pursuant to Exchange
Rule 504. The Exchange believes it appropriate to nullify transactions
that occur during a trading halt. 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.
Erroneous Print and Quotes in the 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 nullified as set forth in the Obvious Error
provisions of the Proposed Rule, provided a party notifies MRC 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 within which the price of 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 it
participated in an erroneous transaction resulting from an erroneous
print(s) pursuant to the proposed erroneous print provision it must
submit an obvious error notification to MRC 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 notification timeframe to be measured 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
security is trading in the $49.00-$50.00 price range and 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 on 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 nullified as set forth in the Obvious Error provisions
of the Proposed Rule, provided a party notifies MRC in a timely manner,
as further described below. Pursuant to the Proposed Rule, an erroneous
quote occurs when the underlying security has a bid/ask differential of
at least $1.00 and has a bid/ask differential at least five times
greater than the average bid/ask differential 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 bid/ask differential will be determined by adding the
bid/ask differentials of sample quotes 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).\13\ 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 MRC in accordance with the
notification provisions of the Obvious Error provision described above.
The Proposed Rule, therefore, puts the onus on each Member to notify
the Exchange if such Member 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 Members. 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 Member 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.
---------------------------------------------------------------------------

    \13\ 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 security 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 security has gone through
a dramatic price revaluation, numerous options trades could trigger
based on 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 the affected option trades.
Stop and Stop Limit Order Trades Elected by Erroneous Trades
    The Exchange notes that certain market participants and their
customers enter stop or stop limit orders that are elected based on
executions in the marketplace. As proposed, transactions resulting from
the election 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 MRC 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 elected 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 MRC 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 elected the stop or stop limit
order.
Order Protection
    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 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 that results in 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 using 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
Member and the Options Clearing Corporation (``OCC'') of the adjustment
or nullification. Thus, the Exchange believes that the proposed
provision adds additional transparency to the Proposed Rule.
Verifiable Disruptions or Malfunctions of Exchange Systems
    The Proposed Rule will include the same language found in the
Current Rule concerning nullification and adjustment of trades that are
the result of a verifiable system disruption or malfunction.
    Specifically, the Proposed Rule will provide that, absent mutual
agreement, parties to a trade may have a trade nullified or its price
adjusted if any such party makes a documented request within the time
specified in Rule 521(c)(2), and either (1) the trade resulted from a
verifiable disruption or malfunction of an Exchange execution,
dissemination, or communication system that caused a quote/order to
trade in excess of its disseminated size (e.g. a quote/order that is
frozen, because of an Exchange System error, and repeatedly traded) in
which case trades in excess of the disseminated size may be nullified;
or (2) the trade resulted from a verifiable disruption or malfunction
of an Exchange dissemination or communication system that prevented a
Member from updating or canceling a quote/order for which the Member is
responsible where there is Exchange documentation providing that the
Member sought to update or cancel the quote/order.
    An Official may act on his/her own motion pursuant to Rule
521(c)(3) to nullify or adjust a trade resulting from a verifiable
disruption or malfunction of an Exchange system.\14\
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    \14\ Proposed Rule 521(c)(3) states that 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. A transaction reviewed pursuant to the
Proposed Rule may be nullified or adjusted only if it is determined
by the Official that the transaction is erroneous in accordance with
the provisions of this Rule, provided that the time deadlines of
sub-paragraph (c)(2) above shall not apply.
---------------------------------------------------------------------------

Appeal
    The Exchange proposes generally to maintain its current process for
the review of Official decisions on appeal under the Proposed Rule with
certain adjustments to accommodate the harmonized rules. Specifically,
if a party affected by a determination made under the Proposed Rule
requests a review of an Official decision (an ``appeal'') within the
time permitted, the Exchange's Chief Regulatory Officer (``CRO'') or
his/her designee will review decisions made under the Proposed Rule. An
appeal must be submitted within thirty minutes after a party receives
official notification of a final determination by an Official under the
Proposed Rule. The CRO or his/her designee 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. Decisions respecting
appeals that are received after 3:00 p.m. Eastern Time will be rendered
as soon as practicable, but in no event later than the trading day
following the date of the execution under review.\15\
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    \15\ This is distinguished from the Current Rule, which states
that if such notification is made after 3:30 p.m. Eastern Time,
either party has until 9:30 a.m. Eastern Time on the next trading
day to request a review.
---------------------------------------------------------------------------

    In the absence of the CRO, a designee of the CRO will be appointed
to act in this capacity. Consistent with the Current Rule, a Member
that submits an appeal seeking the review of an Official ruling shall
be assessed a fee of $250.00 for each Official ruling to be appealed
that is sustained and not overturned or modified by the CRO, and
decisions of the CRO concerning (i) the review of Official rulings
relating to the nullification or adjustment of transactions, and (ii)
initial requests for relief shall be final and may not be appealed to
the Exchange's Board. Any determination by an Officer or by the CRO or
his/her designee 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
    The Exchange is proposing to adopt Interpretation and Policy .01 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
``LULD Plan''),\16\ which is applicable to all NMS stocks, as defined
in Regulation NMS Rule 600(b)(47).\17\ Under the Proposed Rule, during
a pilot period to coincide with the pilot period for the LULD Plan,
including any extensions to the pilot period for the LULD 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 LULD Plan.
---------------------------------------------------------------------------

    \16\ See Securities Exchange Act Release No. 67091 (May 31,
2012), 77 FR 33498 (June 6, 2012) (Order approving the LULD Plan on
a pilot basis). See also, Securities Exchange Act Release No. 74307
(February 19, 2015), 80 FR 10196 (February 25, 2015)(SR-MIAX-2015-
11)(Notice of Filing and Immediate Effectiveness Extending the MIAX
LULD pilot through October 23, 2015).
    \17\ 17 CFR 242.600(b)(47).
---------------------------------------------------------------------------

    Nonetheless, the Exchange proposes to retain authority to review
transactions on an Official's own motion pursuant to sub-paragraph
(c)(3) of the Proposed Rule or a nullification or adjustment 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.
    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 521 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.'' \18\ Third, the Exchange has limit
order price checks that result in the rejection of limit orders that
are priced sufficiently far through the 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.
---------------------------------------------------------------------------

    \18\ 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 Members 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 Limit and Straddle 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 LULD Plan. The Exchange notes that the pilot program
is intended to run concurrently with the pilot period of the LULD Plan,
which has been extended to October 23, 2015.\19\ The Exchange proposes
to reflect this date in the Proposed Rule.
---------------------------------------------------------------------------

    \19\ See Securities Exchange Act Release No. 74110 (January 21,
2015), 80 FR 4321 (January 27, 2015).
---------------------------------------------------------------------------

No Adjustment 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.
Deletion of Current Exchange Rule 531
    The Exchange proposes to delete current Exchange Rule 531, Trade
Nullification and Price Adjustment Procedure, which states that a trade
on the Exchange may be nullified or adjusted if the parties to the
trade agree to the nullification or adjustment. The Proposed Rule
includes a provision stating that a trade may be nullified or adjusted
on the terms that all parties to a particular transaction agree, thus
obviating the need for current Rule 531.\20\ The Exchange proposes to
reserve the rule number.
---------------------------------------------------------------------------

    \20\ In its filing to adopt Rule 531, the Exchange stated that
the rule is only intended to be effective until the joint efforts by
the exchanges to create uniform trade nullification and adjustment
rules are approved and in effect. See Securities Exchange Act
Release No. 73463 (October 29, 2014), 79 FR 65445 (November 4, 2014)
(SR-MIAX-2014-54).

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

Operative Date
    In order to ensure that other options exchanges are able to adopt
rules consistent with this proposal and to coordinate the effectiveness
of such harmonized rules, the Exchange proposes that the Proposed Rule
be made operative on May 8, 2015.
2. Statutory Basis
    MIAX believes that its proposed rule change is consistent with
Section 6(b) of the Act \21\ in general, and furthers the objectives of
Section 6(b)(5) of the Act \22\ 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 mechanisms of a
free and open market and a national market system and, in general, to
protect investors and the public interest.
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78f(b).
    \22\ 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 \23\ in that the Proposed Rule will foster cooperation and
coordination with persons engaged in regulating and facilitating
transactions.
---------------------------------------------------------------------------

    \23\ Id.
---------------------------------------------------------------------------

    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
Members and their customers would rather adjust prices of executions
rather than nullify the transactions and thereby 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,
including the Exchange's existing Obvious Error provision, often treat
Customers differently, 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 MIAX. 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 mutually 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 Member 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, and Official 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 and
Policy .02 of proposed Rule 521 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 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,
Members 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 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. 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 Member submits requests to the Exchange for review of
transactions pursuant to the Proposed Rule, and in aggregate that
Member 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 to 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
an Options Member 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 an Options
Member 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. The Exchange believes that a market
participant with more than 200 transactions under review concurrently
when the orders electing such transactions were received in 2 minutes
or less 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 Member 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 executed at prices 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 because, among other things, Customers are less
likely to be watching trading throughout the day and they may have less
capital with which to meet 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 the 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 because, typically,
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 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 fund 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 it
would be in the public interest to instead more promptly deliver a
simple, consistent result of nullification.
    The Exchange believes that the proposed rule change related to
review, nullification and/or adjustment of erroneous transactions
during a trading halt, 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 equitable 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 process for the
Request for Review of Official decisions that it maintains under the
Current Rule is consistent with the Act because it affords Members with
due process in connection with decisions made by Officials under the
Proposed Rule which the Member may feel warrants review. The Exchange
believes that this process is streamlined and efficient, thus providing
persons who seek review of Obvious and Catastrophic Error decisions
with an expeditious opportunity for reconsideration of such decisions.
The Exchange also believes that the proposed appeals process is
appropriate with respect to financial penalties for appeals that result
in a decision of the Exchange being upheld because it discourages
frivolous appeals, thereby reducing the possibility of overusing
Exchange resources that can instead be focused on other, more
productive activities. The fees with respect to such financial
penalties are the same as under the Current Rule, and are equitable and
not unfairly discriminatory because they will be applied uniformly to
all Options Members and are designed to reduce administrative burden on
the Exchange.
    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 Proposed Rule 521 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 a
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, because options prices may deviate substantially during
brief Limit or Straddle States 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 when stop and stop limit
orders are elected erroneously 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.
    Additionally, the Exchange's proposal to delete current Rule 531 is
consistent with the Act in that it will promote investor protection by
preventing duplication in the Exchange's rules, ensuring clarity
regarding agreements to nullify or adjust trades.
    With regard to the impact of this proposal on system capacity, the
Exchange notes that it has analyzed its capacity and represents that it
and the Options Price Reporting Authority (``OPRA'') have the necessary
systems capacity to handle any potential additional traffic associated
with the proposed rule change. The Exchange believes that its members
will not have a capacity issue as a result of this proposal.

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

    The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
    The 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 assumed by liquidity providers
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

    Written comments were neither solicited nor received.

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 \24\ and Rule 19b-4(f)(6)
thereunder.\25\
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    \24\ 15 U.S.C. 78s(b)(3)(A).
    \25\ 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.\26\
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    \26\ 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