Notice2022-05150
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of a Proposed Rule Change Relating to Amend BZX Rule 11.17, Clearly Erroneous Executions
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
March 11, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 48 (Friday, March 11, 2022)</title>
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[Federal Register Volume 87, Number 48 (Friday, March 11, 2022)]
[Notices]
[Pages 14062-14068]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-05150]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-94374; File No. SR-CboeBZX-2022-017]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing of a Proposed Rule Change Relating to Amend BZX Rule 11.17,
Clearly Erroneous Executions
March 7, 2022.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on March 7, 2022, Cboe BZX Exchange, Inc. (the ``Exchange'' or
``BZX'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe BZX Exchange, Inc. (``BZX'' or the ``Exchange'') is filing
with the Securities and Exchange Commission (the ``Commission'') a
proposed rule change to amend BZX Rule 11.17, Clearly Erroneous
Executions. The text of the proposed rule change is provided in Exhibit
5.
The text of the proposed rule change is also available on the
Exchange's website (<a href="http://markets.cboe.com/us/equities/regulation/rule_filings/bzx/">http://markets.cboe.com/us/equities/regulation/rule_filings/bzx/</a>), at the Exchange's Office of the Secretary, and at
the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule change is to amend BZX Rule 11.17,
Clearly Erroneous Executions. Specifically, the Exchange proposes to:
(1) Make the current clearly erroneous pilot program permanent; and (2)
limit the circumstances where clearly erroneous review would continue
to be available during Regular Trading Hours,\3\ when the LULD Plan to
Address Extraordinary Market Volatility (the ``LULD Plan'') \4\ already
provides similar protections for trades occurring at prices that may be
deemed erroneous. The Exchange believes that these changes are
appropriate as the LULD Plan has been approved by the Commission on a
[[Page 14063]]
permanent basis,\5\ and in light of amendments to the LULD Plan,
including changes to the applicable Price Bands \6\ around the open and
close of trading.
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\3\ The term ``Regular Trading Hours'' means the time between
9:30 a.m. and 4:00 p.m. Eastern Time. See BZX Rule 1.5(w).
\4\ See Securities Exchange Act Release No. 67091 (May 31,
2012), 77 FR 33498 (June 6, 2012).
\5\ See Securities Exchange Act Release No. 84843 (December 18,
2018), 83 FR 66464 (December 26, 2018) (``Notice''); 85623 (April
11, 2019), 84 FR 16086 (April 17, 2019) (File No. 4-631)
(``Amendment Eighteen'').
\6\ ``Price Bands'' refers to the term provided in Section V of
the LULD Plan.
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Proposal To Make the Clearly Erroneous Pilot Permanent
On September 10, 2010, the Commission approved, on a pilot basis,
changes to BZX Rule 11.17 that, among other things: (i) Provided for
uniform treatment of clearly erroneous execution reviews in multi-stock
events involving twenty or more securities; and (ii) reduced the
ability of the Exchange to deviate from the objective standards set
forth in the rule.\7\ In 2013, the Exchange adopted a provision
designed to address the operation of the LULD Plan.\8\ Finally, in
2014, the Exchange adopted two additional provisions providing that:
(i) A series of transactions in a particular security on one or more
trading days may be viewed as one event if all such transactions were
effected based on the same fundamentally incorrect or grossly
misinterpreted issuance information resulting in a severe valuation
error for all such transactions; and (ii) in the event of any
disruption or malfunction in the operation of the electronic
communications and trading facilities of an Exchange, another SRO, or
responsible single plan processor in connection with the transmittal or
receipt of a trading halt, an Officer, acting on his or her own motion,
shall nullify any transaction that occurs after a trading halt has been
declared by the primary listing market for a security and before such
trading halt has officially ended according to the primary listing
market.\9\ These changes are currently scheduled to operate for a pilot
period that would end at the close of business on April 20, 2022.\10\
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\7\ See Securities Exchange Act Release No. 62886 (Sept. 10,
2010), 75 FR 56613 (Sept. 16, 2010) (SR-BATS-2010-016).
\8\ See Securities Exchange Act Release No. 68797 (Jan. 31,
2013), 78 FR 8635 (Feb. 6, 2013) (SR-BATS-2013-008).
\9\ See Securities Exchange Act Release No. 72434 (June 19,
2014), 79 FR 36110 (June 25, 2014) (SR-BATS-2014-014).
\10\ See Securities Exchange Act Release No. 93342 (October 15,
2021), 86 FR 58332 (October 21, 2021) (SR-CboeBZX-2021-070).
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When it originally approved the clearly erroneous pilot, the
Commission explained that the changes were ``being implemented on a
pilot basis so that the Commission and the Exchanges can monitor the
effects of the pilot on the markets and investors, and consider
appropriate adjustments, as necessary.'' \11\ In the 12 years since
that time, the Exchange and other national securities exchanges have
gained considerable experience in the operation of the rule, as amended
on a pilot basis. Based on that experience, the Exchange believes that
the program should be allowed to continue on a permanent basis so that
equities market participants and investors can benefit from the
increased certainty provided by the amended rule.
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\11\ See Securities Exchange Act Release No. 62886 (September
10, 2010), 75 FR 56613 (September 16, 2010) (SR-BATS-2010-016).
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The clearly erroneous pilot was implemented following a severe
disruption in the U.S. equities markets on May 6, 2010 (``Flash
Crash'') to ``provide greater transparency and certainty to the process
of breaking trades.'' \12\ Largely, the pilot reduced the discretion of
the Exchange, other national securities exchanges, and Financial
Industry Regulatory Authority (``FINRA'') to deviate from the objective
standards in their respective rules when dealing with potentially
erroneous transactions. The pilot has thus helped afford greater
certainty to Members and investors about when trades will be deemed
erroneous pursuant to self-regulatory organization (``SRO'') rules, and
has provided a more transparent process for conducting such reviews.
The Exchange proposes to make the current pilot permanent so that
market participants can continue to benefit from the increased
certainty afforded by the current rule.
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\12\ Id.
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Amendments to the Clearly Erroneous Rules
When the Participants to the LULD Plan filed to introduce the Limit
Up-Limit Down (``LULD'') mechanism, itself a response to the Flash
Crash, a handful of commenters noted the potential discordance between
the clearly erroneous rules and the Price Bands used to limit the price
at which trades would be permitted to be executed pursuant to the LULD
Plan. For example, two commenters requested that the clearly erroneous
rules be amended so the presumption would be that trades executed
within the Price Bands would not be not subject to review.\13\ While
the Participants acknowledged that the potential to prevent clearly
erroneous executions would be a ``key benefit'' of the LULD Plan, the
Participants decided not to amend the clearly erroneous rules at that
time.\14\ In the years since, industry feedback has continued to
reflect a desire to eliminate the discordance between the LULD
mechanism and the clearly erroneous rules so that market participants
would have more certainty that trades executed with the Price Bands
would stand. For example, the Equity Market Structure Advisory
Committee (``EMSAC'') Market Quality Subcommittee included in its April
19, 2016 status report a preliminary recommendation that clearly
erroneous rules be amended to conform to the Price Bands--i.e., ``any
trade that takes place within the band would stand and not be broken
and trades outside the LU/LD bands would be eligible for the
consideration of the Clearly Erroneous rules.'' \15\
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\13\ See Securities Exchange Act Release No. 67091 (May 31,
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631) (n. 33505).
\14\ Id.
\15\ See EMSAC Market Quality Subcommittee, Recommendations for
Rulemaking on Issues of Market Quality (November 29, 2016),
available at <a href="https://www.sec.gov/spotlight/emsac/emsac-recommendations-rulemaking-market-quality.pdf">https://www.sec.gov/spotlight/emsac/emsac-recommendations-rulemaking-market-quality.pdf</a>.
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The Exchange believes that it is important for there to be some
mechanism to ensure that investors' orders are either not executed at
clearly erroneous prices, or are subsequently busted as needed to
maintain a fair and orderly market. At the same time, the Exchange
believes that the LULD Plan, as amended, would provide sufficient
protection for trades executed during Regular Trading Hours. Indeed,
the LULD mechanism could be considered to offer superior protection as
it prevents potentially erroneous trades from being executed in the
first instance. After gaining experience with the LULD Plan, the
Exchange now believes that it is appropriate to largely eliminate
clearly erroneous review during Regular Trading Hours when Price Bands
are in effect. Thus, as proposed, trades executed within the Price
Bands would stand, barring one of a handful of identified scenarios
where such review may still be necessary for the protection of
investors. The Exchange believes that this change would be beneficial
for the U.S. equities markets as it would ensure that trades executed
within the Price Bands are subject to clearly erroneous review in only
rare circumstances, resulting in greater certainty for Members and
investors.
The current LULD mechanism for addressing extraordinary market
volatility is available solely during Regular Trading Hours. Thus,
trades
[[Page 14064]]
during the Exchange's Early Trading,\16\ Pre-Opening,\17\ or After
Hours Sessions \18\ would not benefit from this protection, and could
ultimately be executed at prices that may be considered erroneous. For
this reason, the Exchange proposes that transactions executed during
the Early Trading, Pre-Opening, or After Hours Sessions would continue
to be reviewable as clearly erroneous. Continued availability of the
clearly erroneous rule during pre- and post-market trading sessions
would therefore ensure that investors have appropriate recourse when
erroneous trades are executed outside of the hours where similar
protection can be provided by the LULD Plan. Further, the proposal is
designed to eliminate the potential discordance between clearly
erroneous review and LULD Price Bands, which does not exist outside of
Regular Trading Hours because the LULD Plan is not in effect. Thus, the
Exchange believes that it is appropriate to continue to allow
transactions to be eligible for clearly erroneous review if executed
outside of Regular Trading Hours.
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\16\ The term ``Early Trading Session'' means the time between
7:00 a.m. and 8:00 a.m. Eastern Time. See BZX Rule 1.5(ee).
\17\ The term ``Pre-Opening Session'' means the time between
8:00 a.m. and 9:30 a.m. Eastern Time. See BZX Rule 1.5(r).
\18\ The term ``After Hours Trading Session'' means the time
between 4:00 p.m. and 8:00 p.m. Eastern Time. See BZX Rule 1.5(c).
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On the other hand, there would be much more limited potential to
request that a transaction be reviewed as potentially erroneous during
Regular Trading Hours. With the introduction of the LULD mechanism in
2013, clearly erroneous trades are largely prevented by the requirement
that trades be executed within the Price Bands. In addition, in 2019,
Amendment Eighteen to the LULD Plan eliminated double-wide Price Bands:
(1) At the Open, and (2) at the Close for Tier 2 NMS Stocks 2 with a
Reference Price above $3.00.\19\ Due to these changes, the Exchange
believes that the Price Bands would provide sufficient protection to
investor orders such that clearly erroneous review would no longer be
necessary during Regular Trading Hours. As the Participants to the LULD
Plan explained in Amendment Eighteen: ``Broadly, the Limit Up-Limit
Down mechanism prevents trades from happening at prices where one party
to the trade would be considered `aggrieved,' and thus could be viewed
as an appropriate mechanism to supplant clearly erroneous rules.''
While the Participants also expressed concern that the Price Bands
might be too wide to afford meaningful protection around the open and
close of trading, amendments to the LULD Plan adopted in Amendment
Eighteen narrowed Price Bands at these times in a manner that the
Exchange believes is sufficient to ensure that investors' orders would
be appropriately protected in the absence of clearly erroneous review.
The Exchange therefore believes that it is appropriate to rely on the
LULD mechanism as the primary means of preventing clearly erroneous
trades during Regular Trading Hours.
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\19\ See Amendment Eighteen, supra note 5.
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At the same time, the Exchange is cognizant that there may be
limited circumstances where clearly erroneous review may continue to be
appropriate, even during Regular Trading Hours. Thus, the Exchange
proposes to amend its clearly erroneous rules to enumerate the specific
circumstances where such review would remain available during the
course of Regular Trading Hours, as follows. All transactions that fall
outside of these specific enumerated exceptions would be ineligible for
clearly erroneous review.
First, pursuant to proposed paragraph (c)(1)(A), a transaction
executed during Regular Trading Hours would continue to be eligible for
clearly erroneous review if the transaction is not subject to the LULD
Plan. In such case, the Numerical Guidelines set forth in paragraph
(c)(2) of Rule 11.17 will be applicable to such NMS Stock. While the
majority of securities traded on the Exchange would be subject to the
LULD Plan, certain equity securities, such as rights and warrants, are
explicitly excluded from the provisions of the LULD Plan and would
therefore be eligible for clearly erroneous review instead.\20\
Similarly, there are instances, such as the opening auction on the
primary listing market,\21\ where transactions are not ordinarily
subject to the LULD Plan, or circumstances where a transaction that
ordinarily would have been subject to the LULD Plan is not--due, for
example, to some issue with processing the Price Bands. These
transactions would continue to be eligible for clearly erroneous
review, effectively ensuring that such review remains available as a
backstop when the LULD Plan would not prevent executions from occurring
at erroneous prices in the first instance.
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\20\ See Appendix A of the LULD Plan.
\21\ The initial Reference Price used to calculate Price Bands
is typically set by the Opening Price on the primary listing market.
See Section V(B) of the LULD Plan.
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Second, investors would also continue to be able to request review
of transactions that resulted from certain systems issues pursuant to
proposed paragraphs (c)(1)(B) and (c)(1)(C). In each case, these
limited exceptions would help to ensure that trades that should not
have been executed would continue to be subject to clearly erroneous
review. Specifically, as proposed, transactions executed during Regular
Trading Hours would be eligible for clearly erroneous review pursuant
to proposed paragraph (c)(1)(B) if the transaction involves a
disruption or malfunction in the operation of any electronic
communications and trading facilities of the Exchange pursuant to BZX
Rule 11.17(f). A transaction subject to review pursuant to this
paragraph shall be found to be clearly erroneous if the price of the
transaction to buy (sell) that is the subject of the complaint is
greater than (less than) the Reference Price, described in paragraph
(d) below, by an amount that equals or exceeds the applicable
Percentage Parameter defined in Appendix A to the LULD Plan
(``Percentage Parameters''). Similarly, transactions executed during
Regular Trading Hours would remain eligible for clearly erroneous
review pursuant to proposed paragraph (c)(1)(C) if a transaction is the
result of an Exchange technology or systems issue that results in the
transaction occurring outside of the applicable Price Bands pursuant to
BZX Rule 11.17(h) or if the transaction is executed after the primary
listing market for the security declares a regulatory trading halt,
suspension, or pause pursuant to BZX Rule 11.17(j). In such case, the
Percentage Parameters will be applicable to such transactions.\22\
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\22\ Such transactions similarly involve the execution of trades
that should have been prevented but were not properly prevented due
to a disruption or malfunction in the operation of the electronic
communications and trading facilities of the Exchange, another
market center or responsible single plan processor.
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Third, the Exchange proposes to narrowly allow for the review of
transactions during Regular Trading Hours when the Reference Price,
described in proposed paragraph (d), is determined to be erroneous by
an Officer of the Exchange. Specifically, pursuant to proposed
paragraph (c)(1)(D), a transaction that involved, in the case of (1) a
corporate action or new issue or (2) a security that enters a Trading
Pause pursuant to LULD and resumes trading without an auction,\23\ a
Reference Price that is determined to be erroneous by an Officer of the
Exchange,
[[Page 14065]]
the transaction will be reviewable as clearly erroneous. In such
circumstances, the Exchange may use a different Reference Price
pursuant to proposed paragraph (d)(2) of this Rule. A transaction
subject to review pursuant to this paragraph shall be found to be
clearly erroneous if the price of the transaction to buy (sell) that is
the subject of the complaint is greater than (less than) the new
Reference Price, described in paragraph (d)(2), by an amount that
equals or exceeds the applicable Numerical Guidelines or Percentage
Parameters. Specifically, the Percentage Parameters would apply to all
transactions except those in an NMS Stock that is not subject to the
LULD Plan, as described in paragraph (c)(1)(A).
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\23\ The Exchange notes that the ``resumption of trading without
an auction'' provision of the proposed rule text applies only to
securities that enter a Trading Pause pursuant to LULD and does not
apply to a corporate action or new issue.
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In the context of a corporate action or a new issue, there may be
instances where the security's Reference Price is later determined by
the Exchange to be erroneous (e.g., because of a bad first trade for a
new issue), and subsequent LULD Price Bands are calculated from that
incorrect Reference Price. In determining whether the Reference Price
is erroneous in such instances, the Exchange would generally look at
the theoretical price for the security as the correct Reference Price.
For a corporate action, the theoretical price would be derived from a
mathematical formula using the prior day's close and then applying the
ratio for the corporate action. For a new issue, the theoretical price
would likewise be derived from the valuation of the new issue. If the
new issue is an uplift from the OTC markets, the theoretical price
would be the prior day's close on the OTC market. In the foregoing
instances, the theoretical price of the security would be used as the
new Reference Price when applying the Percentage Parameters under the
LULD Plan (or Numerical Guidelines if the transaction is in an NMS
Stock that is not subject to the LULD Plan) to determine whether
executions would be cancelled as clearly erroneous.
The following illustrate the proposed application of the rule in
the context of a corporate action or new issue:
Example 1
1. ABCD is subject to a corporate action, 1 for 10 reverse split, and
the previous day close was $5, but the new theoretical price based on
the terms of the corporate action is $50
2. The security opens at $5, with LULD bands at $4.50 x $5.50
3. The bands will be calculated correctly but the security is trading
at an erroneous price based on the valuation of the remaining
outstanding shares
4. The theoretical price of $50 would be used as the new Reference
Price when applying LULD bands to determine if executions would be
cancelled as clearly erroneous
Example 2
1. ABCD is subject to a corporate action, the company is doing a spin
off where a new issue will be listed, BCDE. ABCD trades at $50, and the
spinoff company is worth \1/5\ of ABCD
2. BCDE opens at $50 in the belief it is the same company as ABCD
3. The theoretical values of the two companies are ABCD $40 and BCDE
$10
4. BCDE would be deemed to have had an incorrect Reference Price and
the theoretical value of $10 would be used as the new Reference Price
when applying the LULD Bands to determine if executions would be
cancelled as clearly erroneous
Example 3
1. ABCD is an uplift from the OTC market, the prior days close on the
OTC market was $20
2. ABCD opens trading on the new listing exchange at $0.20 due to an
erroneous order entry
3. The new Reference Price to determine clearly erroneous executions
would be $20, the theoretical value of the stock from where it was last
traded
In the context of the rare situation in which a security that
enters a LULD Trading Pause and resumes trading without an auction
(i.e., reopens with quotations), the LULD Plan requires that the new
Reference Price in this instance be established by using the mid-point
of the best bid and offer (``BBO'') on the primary listing exchange at
the reopening time.\24\ This can result in a Reference Price and
subsequent LULD Price Band calculation that is significantly away from
the security's last traded or more relevant price, especially in less
liquid names. In such rare instances, the Exchange is proposing to use
a different Reference Price that is based on the prior LULD Band that
triggered the Trading Pause, rather than the midpoint of the BBO.
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\24\ See LULD Plan, Section I(U) and V(C)(1).
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The following example illustrates the proposed application of the
rule in the context of a security that reopens without an auction:
Example 4
1. ABCD stock is trading at $20, with LULD Bands at $18 x $22.
2. An incoming buy order causes the stock to enter a Limit State
pursuant to the LULD Plan and then a Trading Pause at $22.
3. During the Trading Pause, the buy order causing the Trading
Pause is cancelled.
4. At the end of the 5 minute halt, there is no crossed interest
for an auction to occur, thus trading would resume on a quote.
5. Upon resumption, the quote available is widely set at $10 x $90.
6. The Reference Price upon resumption is $50 (mid-point of BBO).
7. The SIP will use this Reference Price and publish LULD Bands of
$45 x $55 (i.e., far away from BBO prior to the halt).
8. The bands will be calculated correctly, but the $50 Reference
Price is subsequently determined to be incorrect as the price clearly
deviated from where it previously traded prior to the Trading Pause.
9. The new Reference Price would be $22 (i.e., the last effective
Price Band that was in a Limit State before the Trading Pause pursuant
to the LULD Plan), and the LULD Bands would be applied to determine if
the executions should be cancelled as clearly erroneous.
In all of the foregoing situations, investors would be left with no
remedy to request clearly erroneous review without the proposed
carveouts in paragraph (c)(1)(D) because the trades occurred within the
LULD Price Bands (albeit LULD Price Bands that were calculated from an
erroneous Reference Price). The Exchange believes that removing the
current ability for the Exchange to review in these narrow
circumstances would lessen investor protections.
Numerical Guidelines
Today, paragraph (c)(1) defines the Numerical Guidelines that are
used to determine if a transaction is deemed clearly erroneous during
Regular Trading Hours, or during the Early Trading, Pre-Opening and
After Hours Sessions. With respect to Regular Trading Hours, trades are
generally deemed clearly erroneous if the execution price differs from
the Reference Price (i.e., last sale) by 10% if the Reference Price is
greater than $0.00 up to and including $25.00; 5% if the Reference
Price is greater than $25.00 up to and including $50.00; and 3% if the
Reference Price is greater than $50.00. Wider parameters are also used
for reviews for Multi-Stock Events, as described in paragraph (c)(2).
With respect to transactions in Leveraged ETF/ETN securities executed
during
[[Page 14066]]
Regular Trading Hours, Early Trading, Pre-Opening and After Hours
Trading Session, trades are deemed clearly erroneous if the execution
price exceeds the Regular Trading Hours Numerical Guidelines multiplied
by the leverage multiplier.
Given the changes described in this proposed rule change, the
Exchange proposes to amend the way that the Numerical Guidelines are
calculated during Regular Trading Hours in the handful of instances
where clearly erroneous review would continue to be available.
Specifically, the Exchange would base these Numerical Guidelines, as
applied to the circumstances described in paragraph (c)(1)(A), on the
Percentage Parameters used to calculate Price Bands, as set forth in
Appendix A to the LULD Plan. Without this change, a transaction that
would otherwise stand if Price Bands were properly applied to the
transaction may end up being subject to review and deemed clearly
erroneous solely due to the fact that the Price Bands were not
available due to a systems or other issue. The Exchange believes that
it makes more sense to instead base the Price Bands on the same
parameters as would otherwise determine whether the trade would have
been allowed to execute within the Price Bands. The Exchange also
proposes to modify the Numerical Guidelines applicable to leveraged
ETF/ETN securities during Regular Trading Hours. As noted above, the
Numerical Guidelines will only be applicable to transactions eligible
for review pursuant paragraph (c)(1)(A) (i.e., to NMS Stocks that are
not subject to the LULD Plan). As leveraged ETF/ETN securities are
subject to LULD and thus the Percentage Parameters will be applicable
during Regular Trading Hours, the Exchange proposes to eliminate the
Numerical Guidelines for leveraged ETF/ETN securities traded during
Regular Trading Hours. However, as no Price Bands are available outside
of Regular Trading Hours, the Exchange proposes to keep the existing
Numerical Guidelines in place for transactions in leveraged ETF/ETN
securities that occur during Early Trading, Pre-Opening and After Hours
Trading.
The Exchange also proposes to move existing paragraphs (c)(2),
(c)(3), and (d) to proposed paragraph (c)(2)(B), (c)(2)(C), and
(C)(2)(D), respectively, as Multi-Stock Events, Additional Factors, and
Outlier Transactions will only be subject to review if those NMS Stocks
are not subject to the LULD Plan or occur during the Early Trading,
Pre-Opening and After Hours Sessions. Proposed paragraph (c)(2)(B) is
substantially similar to existing paragraph (c)(2) except for a change
in rule reference to paragraph (c)(1) has been updated to paragraph
(c)(1)(A). Further, given the proposal to move existing paragraph
(c)(2) to paragraph (c)(2)(B), the Exchange also proposes to amend
applicable rule references throughout paragraph (c)(2)(A). Finally, the
Exchange proposes to update applicable rule references in paragraph
(c)(2)(D) based on the above-described structural changes to the Rule.
Reference Price
As proposed, the Reference Price used would continue to be based on
last sale and would be memorialized in proposed paragraph (d).
Continuing to use the last sale as the Reference Price is necessary for
operational efficiency as it may not be possible to perform a timely
clearly erroneous review if doing so required computing the arithmetic
mean price of eligible reported transactions over the past five
minutes, as contemplated by the LULD Plan. While this means that there
would still be some differences between the Price Bands and the clearly
erroneous parameters, the Exchange believes that this difference is
reasonable in light of the need to ensure timely review if clearly
erroneous rules are invoked. The Exchange also proposes to allow for an
alternate Reference Price to be used as prescribed in proposed
paragraphs (d)(1), (2), and (3). Specifically, the Reference Price may
be a value other than the consolidated last sale immediately prior to
the execution(s) under review (1) in the case of Multi-Stock Events
involving twenty or more securities, as described in paragraph
(c)(2)(B) above, (2) in the case of an erroneous Reference Price, as
described in paragraph (c)(1)(D) above (and in the case of
(c)(1)(D)(2), the price of the prior LULD Band that triggered the
Trading Pause will be used as the new Reference Price), or (3) in other
circumstances, such as, for example, relevant news impacting a security
or securities, periods of extreme market volatility, sustained
illiquidity, or widespread system issues, where use of a different
Reference Price is necessary for the maintenance of a fair and orderly
market and the protection of investors and the public interest.
System Disruption or Malfunction
The Exchange proposes to change to Rule 11.17(f) to conform to the
structural changes to the Rule described above and to reference the
applicability of Percentage Parameters. Specifically, the Exchange
proposes eliminate a reference to paragraph (c)(3) based on the
structural changes described above. Further, existing rule text
provides that in extraordinary circumstances an Officer of the Exchange
or other senior level employee designee may use a lower Numerical
Guideline if necessary to maintain a fair and order market, protect
investors and the public interest. The Exchange proposes to amend this
language to provide that an Officer of the Exchange or other senior
level employee designee may use a lower Percentage Parameter, in the
case of an NMS Stock subject to the LULD Plan, or a Numerical
Guideline, in the case of an NMS Stock not subject to the LULD in such
case.
Trade Nullification for UTP Securities That Are the Subject of Initial
Public Offerings
Current paragraph (h) of BZX Rule 11.17 provides different
procedures for conducting clearly erroneous review in initial public
offering (``IPO'') securities that are traded pursuant to unlisted
trading privileges (``UTP'') after the initial opening of such IPO
securities on the listing market. Specifically, this paragraph provides
that a clearly erroneous error may be deemed to have occurred in the
opening transaction of the subject security if the execution price of
the opening transaction on the Exchange is the lesser of $1.00 or 10%
away from the opening price on the listing exchange or association. The
Exchange no longer believes that this provision is necessary as opening
transactions on the Exchange following an IPO are subject to Price
Bands pursuant to the LULD Plan. The Exchange therefore proposes to
eliminate this provision in connection with the broader changes to
clearly erroneous review during Regular Trading Hours.
Securities Subject to Limit Up-Limit Down Plan
The Exchange proposes to renumber paragraph (i) to paragraph (h)
based on the proposal to eliminate existing paragraph (h), and to
rename the paragraph to provide for transactions occurring outside of
LULD Price Bands. Given that proposed paragraph (c)(1) defines the LULD
Plan, the Exchange also proposes to eliminate redundant language from
proposed paragraph (h). Finally, the Exchange also proposes to update
references to the LULD Plan and Price Bands so that they are uniform
throughout the Rule and to update rule references throughout the
paragraph to conform to the structural changes to the Rule described
above.
Multi-Day Event and Trading Halts
The Exchange proposes to renumber paragraphs (j) and (k) to
paragraphs (i)
[[Page 14067]]
and (j), respectively, based on the proposal to eliminate existing
paragraph (h). Additionally, the Exchange proposes to modify the text
of both paragraphs to reference the Percentage Parameters as well as
the Numerical Guidelines. Specifically, the existing text of proposed
paragraphs (i) and (j) provides that any action taken in connection
with this paragraph will be taken without regard to the Numerical
Guidelines set forth in this Rule. The Exchange proposes to amend the
rule text to provide that any action taken in connection with this
paragraph will be taken without regard to the Percentage Parameters or
Numerical Guidelines set forth in this Rule, with the Percentage
Parameters being applicable to an NMS Stock subject to the LULD Plan
and the Numerical Guidelines being applicable to an NMS Stock not
subject to the LULD Plan.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the requirements of Section 6(b) of the Act,\25\ in general, and
Section 6(b)(5) of the Act,\26\ in particular, in that it is designed
to remove impediments to and perfect the mechanism of a free and open
market and a national market system, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest and not to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\25\ 15 U.S.C. 78f(b).
\26\ 15 U.S.C. 78f(b)(5).
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As explained in the purpose section of this proposed rule change,
the current pilot was implemented following the Flash Crash to bring
greater transparency to the process for conducting clearly erroneous
reviews, and to help assure that the review process is based on clear,
objective, and consistent rules across the U.S. equities markets. The
Exchange believes that the amended clearly erroneous rules have been
successful in that regard, and have thus furthered fair and orderly
markets. Specifically, the Exchange believes that the pilot has
successfully ensured that such reviews are conducted based on objective
and consistent standards across SROs, and has therefore afforded
greater certainty to Members and investors. The Exchange therefore
believes that making the current pilot a permanent program is
appropriate so that equities market participants can continue to reap
the benefits of a clear, objective, and transparent process for
conducting clearly erroneous reviews. In addition, the Exchange
understands that the other U.S. equities exchanges and FINRA will also
file largely identical proposals to make their respective clearly
erroneous pilots permanent. The Exchange therefore believes that the
proposed rule change would promote transparency and uniformity across
markets concerning review of transactions as clearly erroneous, and
would also help assure consistent results in handling erroneous trades
across the U.S. equities markets, thus furthering fair and orderly
markets, the protection of investors, and the public interest.
Similarly, the Exchange believes that it is consistent with just
and equitable principles of trade to limit the availability of clearly
erroneous review during Regular Trading Hours. The Plan was approved by
the Commission to operate on a permanent rather than pilot basis. As a
number of market participants have noted, the LULD Plan provides
protections that ensure that investors' orders are not executed at
prices that may be considered clearly erroneous. Further, amendments to
the LULD Plan approved in Amendment Eighteen serve to ensure that the
Price Bands established by the LULD Plan are ``appropriately tailored
to prevent trades that are so far from current market prices that they
would be viewed as having been executed in error.'' \27\ Thus, the
Exchange believes that clearly erroneous review should only be
necessary in very limited circumstances during Regular Trading Hours.
Specifically, such review would only be necessary in instances where a
transaction was not subject to the LULD Plan, or was the result of some
form of systems issue, as detailed in the purpose section of this
proposed rule change. Additionally, in narrow circumstances where the
transaction was subject to the LULD Plan, a clearly erroneous review
would be available in the case of (1) a corporate action or new issue
or (2) a security that enters a Trading Pause pursuant to LULD and
resumes trading without an auction, where the Reference Price is
determined to be erroneous by an Officer of the Exchange. Thus,
eliminating clearly erroneous review in all other instances will serve
to increase certainty for Members and investors that trades executed
during Regular Trading Hours would typically stand and would not be
subject to review.
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\27\ See Amendment Eighteen, supra note 5.
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Given the fact that clearly erroneous review would largely be
limited to transactions that were not subject to the LULD Plan, the
Exchange also believes that it is necessary to change the parameters
used to determine whether a trade is clearly erroneous. Specifically,
due to the different parameters currently used for clearly erroneous
review and for determining Price Bands, it is possible that a trade
that would have been permitted to execute within the Price Bands would
later be deemed clearly erroneous, if, for example, a systems issue
prevented the dissemination of the Price Bands. The Exchange believes
that this result is contrary to the principle that trades within the
Price Bands should stand, and has the potential to cause investor
confusion if trades that are properly executed within the applicable
parameters described in the LULD Plan are later deemed erroneous. By
using consistent parameters for clearly erroneous reviews conducted
during Regular Trading Hours and the calculation of the Price Bands,
the Exchange believes that this change would also serve to promote
greater certainty with regards to when trades may be deemed erroneous.
The Exchange believes that it is consistent with the protection of
investors and the public interest to remove the current provision of
the clearly erroneous rule dealing with UTP securities that are the
subject of IPOs. This provision applies specifically to opening
transactions on a non-listing market following an IPO on the listing
market. As such, review under this paragraph is limited to trades
conducted during Regular Trading Hours. As previously addressed, trades
executed during Regular Trading Hours would generally not be subject to
clearly erroneous review but would instead be protected by the Price
Bands. The Exchange therefore no longer believes that this paragraph is
necessary, as all trades subject to this provision today would either
be subject to the LULD Plan, or, in the event of some systems or other
issue, would be subject to the provisions that apply to transactions
that are not adequately protected by the LULD Plan.
Finally, the proposed rule changes make organizational updates to
the Exchange's Clearly Erroneous Execution Rule as well as minor
updates and corrections to the Rule to improve readability and clarity.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change would
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The proposal would ensure
the continued, uninterrupted operation of harmonized clearly erroneous
execution rules across
[[Page 14068]]
the U.S. equities markets while also amending those rules to provide
greater certainty to Members and investors that trades will stand if
executed during Regular Trading Hours where the LULD Plan provides
adequate protection against trading at erroneous prices. The Exchange
understands that the other national securities exchanges and FINRA will
also file similar proposals, the substance of which are identical to
this proposal. Thus, the proposed rule change will help to ensure
consistency across SROs without implicating any competitive issues.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No comments were solicited or received on the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#addfd8c1c880cec2c0c0c8c3d9deeddec8ce83cac2db"><span class="__cf_email__" data-cfemail="addfd8c1c880cec2c0c0c8c3d9deeddec8ce83cac2db">[email protected]</span></a>. Please include
File Number SR-CboeBZX-2022-017 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-CboeBZX-2022-017. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-CboeBZX-2022-017 and should be submitted
on or before April 1, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\28\
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\28\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-05150 Filed 3-10-22; 8:45 am]
BILLING CODE 8011-01-P
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