Notice2022-20593
Self-Regulatory Organizations; NYSE American LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Rule 7.10E
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
September 23, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 184 (Friday, September 23, 2022)</title>
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[Federal Register Volume 87, Number 184 (Friday, September 23, 2022)]
[Notices]
[Pages 58168-58175]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-20593]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95823; File No. SR-NYSEAMER-2022-41]
Self-Regulatory Organizations; NYSE American LLC; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Amend
Rule 7.10E
September 19, 2022.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\
[[Page 58169]]
notice is hereby given that on September 16, 2022, NYSE American LLC
(``NYSE American'' or the ``Exchange'') filed with the Securities and
Exchange Commission (the ``Commission'') the proposed rule change as
described in Items I and II below, which Items have been prepared by
the self-regulatory organization. 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\ 15 U.S.C. 78a.
\3\ 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
The Exchange proposes to amend Rule 7.10E (Clearly Erroneous
Executions). The proposed rule change is available on the Exchange's
website at <a href="http://www.nyse.com">www.nyse.com</a>, at the principal office of the Exchange, and
at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule change is to amend Rule 7.10E
(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 the Core Trading Session,\4\ when the LULD Plan
to Address Extraordinary Market Volatility (the ``LULD Plan'') \5\
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 permanent basis,\6\ and in light of amendments to the LULD Plan,
including changes to the applicable Price Bands \7\ around the open and
close of trading.
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\4\ The term ``Core Trading Session'' is defined in Rule
7.34E(a)(2).
\5\ See Securities Exchange Act Release No. 67091 (May 31,
2012), 77 FR 33498 (June 6, 2012).
\6\ 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 18'').
\7\ ``Price Bands'' refers to the term provided in Section V of
the LULD Plan.
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This proposed rule change is substantively identical to the rule
change recently proposed by Cboe BZX, which the Commission approved on
September 1, 2022.\8\
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\8\ See Securities Exchange Act Release No. 95658 (September 1,
2022) (SR-CboeBZX-2022-037).
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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 Rule 7.10E 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.\9\ In 2013, the Exchange adopted a provision
designed to address the operation of the Plan.\10\ 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.\11\ These
changes are currently scheduled to operate for a pilot period that
would end at the close of business on October 20, 2022.\12\
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\9\ See Securities Exchange Act Release No. 62886 (Sept. 10,
2010), 75 FR 56613 (Sept. 16, 2010) (SR-NYSEAmer-2010-60).
\10\ See Securities Exchange Act Release No. 68801 (Feb. 1,
2013), 78 FR 8630 (Feb. 6, 2013) (SR-NYSEMKT-2013-11).
\11\ See Securities Exchange Act Release No. 72434 (June 19,
2014), 79 FR 36110 (June 25, 2014) (SR-NYSEMKT-2014-37).
\12\ See Securities Exchange Act Release No. 95302 (July 18,
2022), 87 FR 43926 (July 22, 2022) (SR-NYSEAMER-2022-32).
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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.'' \13\ 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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\13\ See Securities Exchange Act Release No. 62886 (Sept. 10,
2010), 75 FR 56613 (Sept. 16, 2010) (SR-NYSEAmer-2010-60).
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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.'' \14\ 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 ETP Holders 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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\14\ 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
[[Page 58170]]
amended so the presumption would be that trades executed within the
Price Bands would not be not subject to review.\15\ 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.\16\ 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.'' \17\
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\15\ See Securities Exchange Act Release No. 67091 (May 31,
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631) (n. 33505).
\16\ Id.
\17\ See EMSAC Market Quality Subcommittee, Recommendations for
Rulemaking on Issues of Market Quality (November 29, 2016),
available at <a href="https://www.sec.gov//emsac/recommendations-rulemaking-market-quality.pdf">https://www.sec.gov//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 the Core Trading Session. 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 Core 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 ETP Holders and
investors.
The current LULD mechanism for addressing extraordinary market
volatility is available solely during the Core Trading Session. Thus,
trades during the Exchange's Early Trading Session \18\ and Late
Trading Session \19\ 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 and Late Trading Sessions would continue to be reviewable as
clearly erroneous. Continued availability of the clearly erroneous rule
during the Early and Late 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 the Core Trading Session 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 the Core Trading
Session.
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\18\ The term ``Early Trading Session'' is defined in Rule
7.34E(a)(1).
\19\ The term ``Late Trading Session'' is defined in Rule
7.34E(a)(3).
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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
the Core Trading Session. 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 18 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.\20\ 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 the Core Trading Session. As the
Participants to the LULD Plan explained in Amendment 18: ``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 18 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 the Core Trading Session.
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\20\ See Amendment 18, supra note 6.
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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 the Core Trading Session. 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 the Core Trading Session, 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 the Core Trading Session 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) 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.\21\
Similarly, there are instances, such as the opening auction on the
primary listing market,\22\ 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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\21\ See Appendix A of the LULD Plan.
\22\ 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
[[Page 58171]]
transactions that resulted from certain systems issues pursuant to
proposed paragraph (c)(1)(B). This limited exception 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 the Core Trading Session would be eligible
for clearly erroneous review pursuant to proposed paragraph (c)(1)(B)
if the transaction is the result of an Exchange technology or systems
issue that results in the transaction occurring outside of the
applicable LULD Price Bands pursuant to paragraph (g). 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) of this Rule, by an amount that
equals or exceeds the applicable Percentage Parameter defined in
Appendix A to the LULD Plan (``Percentage Parameters'').
Third, the Exchange proposes to narrowly allow for the review of
transactions during the Core Trading Session when the Reference Price,
described in proposed paragraph (d), is determined to be erroneous by
an Officer of the Exchange. Specifically, a transaction executed during
the Core Trading Session would be eligible for clearly erroneous review
pursuant to proposed paragraph (c)(1)(C) if the transaction involved,
in the case of (1) a corporate action or new issue, or (2) a security
that enters a Trading Pause pursuant to the LULD Plan and resumes
trading without an auction,\23\ a Reference Price that is determined to
be erroneous by an Officer of the Exchange because it clearly deviated
from the theoretical value of the security. 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, as applicable depending
on whether the security is subject to the LULD Plan. 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 to
see if such Reference Price clearly deviated from the theoretical value
of the security. In such cases, the Exchange would consider a number of
factors to determine a new Reference Price that is based on the
theoretical value of the security, including but not limited to, the
offering price of the new issue, the ratio of the stock split applied
to the prior day's closing price, the theoretical price derived from
the numerical terms of the corporate action transaction such as the
exchange ratio and spin-off terms, and the prior day's closing price on
the OTC market for an OTC up-listing.\24\ In the foregoing instances,
the theoretical value 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.
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\24\ Using transaction data reported to the FINRA OTC Reporting
Facility, FINRA disseminates via the Trade Data Dissemination
Service a final closing report for OTC equity securities for each
business day that includes, among other things, each security's
closing last sale price.
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The following examples 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.\25\ 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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\25\ 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
Trading Pause 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, a quote that was available prior to the Trading
Pause (e.g. a quote was resting on the book prior to the Trading
Pause), is widely set at $10 x $90.
[[Page 58172]]
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), 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)(C) 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
Currently, paragraph (c)(1) defines the Numerical Guidelines that
are used to determine if a transaction is deemed clearly erroneous
during the Core Trading Session and during the Early and Late Trading
Sessions. With respect to the Core Trading Session, 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 the Core Trading Session or Early or Late Trading Session,
trades are deemed clearly erroneous if the execution price exceeds the
Core Trading Session Numerical Guidelines multiplied by the leverage
multiplier.
The Exchange proposes to amend the way that the Numerical
Guidelines are calculated during the Core Trading Session 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 the Core Trading Session. 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 the Core Trading Session, the Exchange proposes to
eliminate the Numerical Guidelines for leveraged ETF/ETN securities
traded during the Core Trading Session. However, as no Price Bands are
available outside of the Core Trading Session, the Exchange proposes to
keep the existing Numerical Guidelines in place for transactions in
leveraged ETF/ETN securities that occur during the Early and Late
Trading Sessions.
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 or Late
Trading Session. 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)(C) above,\26\ 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,
provided that such circumstances occurred during Early or Late Trading
Session or are eligible for review pursuant to paragraph (c)(1)(A).
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\26\ As discussed above, in the case of (c)(1)(C)(1), the
Exchange would consider a number of factors to determine a new
Reference Price that is based on the theoretical value of the
security, including but not limited to, the offering price of the
new issue, the ratio of the stock split applied to the prior day's
closing price, the theoretical price derived from the numerical
terms of the corporate action transaction such as the exchange ratio
and spin-off terms, and the prior day's closing price on the OTC
market for an OTC up-listing. In the case of (c)(1)(C)(2), the
Reference Price will be the last effective Price Band that was in a
limit state before the Trading Pause.
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Appeals
As described more fully below, the Exchange proposes to eliminate
paragraph (f), System Disruption or Malfunction. Accordingly, the
Exchange proposes to remove from paragraph (e)(2), Appeals, each
reference to paragraph (f), and include language referencing proposed
paragraph (g), Transactions Occurring Outside of the LULD Bands.
System Disruption or Malfunction
To conform with the structural changes descried above, the Exchange
now proposes to remove paragraph (f), System Disruption or Malfunction,
and
[[Page 58173]]
proposes new paragraph (c)(1)(B). Specifically, as described in
proposed paragraph (c)(1)(B), transactions occurring during the Core
Trading Session that are executed outside of the LULD Price Bands due
to an Exchange technology or system issue may be subject to clearly
erroneous review pursuant to proposed paragraph (g). Proposed paragraph
(c)(1)(B) further provides that 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), by an amount that equals or exceeds the applicable
Percentage Parameter defined in Appendix A to the LULD Plan.
Trade Nullification for UTP Securities That Are the Subject of Initial
Public Offerings
Current paragraph (h) of Rule 7.10 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 believes that this provision is no longer 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 the Core Trading Session.
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 (h) and (i), 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 (h) and (i) 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,\27\ in general, and
Section 6(b)(5) of the Act,\28\ 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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\27\ 15 U.S.C. 78f(b).
\28\ 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 ETP Holders 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 the Core Trading Session. 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 18 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.'' \29\ Thus, the
Exchange believes that clearly erroneous review should only be
necessary in very limited circumstances during the Core Trading
Session. 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 because it
clearly deviated from the theoretical value of the security. Thus,
eliminating clearly erroneous review in all other instances will serve
to increase certainty for ETP Holders and investors that trades
executed during the Core Trading
[[Page 58174]]
Session would typically stand and would not be subject to review.
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\29\ See Amendment 18, supra note 6.
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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 the Core Trading Session 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 the Core Trading Session. As previously addressed,
trades executed during the Core Trading Session 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 the U.S. equities markets while also amending
those rules to provide greater certainty to ETP Holders and investors
that trades will stand if executed during the Core Trading Session
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 and to the Cboe BZX
proposal that the Commission recently approved.\30\ Thus, the proposed
rule change will help to ensure consistency across SROs without
implicating any competitive issues.
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\30\ See supra note 8.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The Exchange has filed the proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \31\ and Rule 19b-4(f)(6) thereunder.\32\
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 prior to
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 and Rule 19b-
4(f)(6)(iii) thereunder.
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\31\ 15 U.S.C. 78s(b)(3)(A)(iii).
\32\ 17 CFR 240.19b-4(f)(6).
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A proposed rule change filed under Rule 19b-4(f)(6) \33\ normally
does not become operative prior to 30 days after the date of the
filing. However, Rule 19b-4(f)(6)(iii) \34\ permits the Commission to
designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay so that the proposed
rule change may become operative on October 1, 2022. The Commission
believes that waiving the 30-day operative delay is consistent with the
protection of investors and the public interest, as it will allow the
Exchange to coordinate its implementation of the revised clearly
erroneous execution rules with the other national securities exchanges
and FINRA, and will help ensure consistency across the SROs.\35\ For
this reason, the Commission hereby waives the 30-day operative delay
and designates the proposed rule change as operative upon filing.\36\
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\33\ 17 CFR 240.19b-4(f)(6).
\34\ 17 CFR 240.19b-4(f)(6)(iii).
\35\ See SR-CboeBZX-2022-37 (July 8, 2022).
\36\ 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 such proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings under
Section 19(b)(2)(B) \37\ of the Act to determine whether the proposed
rule change should be approved or disapproved.
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\37\ 15 U.S.C. 78s(b)(2)(B).
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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#f785829b92da94989a9a92998384b7849294d9909881"><span class="__cf_email__" data-cfemail="7200071e175f111d1f1f171c0601320117115c151d04">[email protected]</span></a>. Please include
File SR-NYSEAMER-2022-41 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-NYSEAMER-2022-41. This
file number should be included on the
[[Page 58175]]
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-
NYSEAMER-2022-41 and should be submitted on or before October 14, 2022.
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\38\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\38\
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-20593 Filed 9-22-22; 8:45 am]
BILLING CODE 8011-01-P
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