Notice2022-20945
Self-Regulatory Organizations; Long-Term Stock Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend LTSE Rule 11.270, 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
September 28, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 187 (Wednesday, September 28, 2022)</title>
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[Federal Register Volume 87, Number 187 (Wednesday, September 28, 2022)]
[Notices]
[Pages 58885-58891]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-20945]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95883; File No. SR-LTSE-2022-05]
Self-Regulatory Organizations; Long-Term Stock Exchange, Inc.;
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change
To Amend LTSE Rule 11.270, Clearly Erroneous Executions
September 22, 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 September 19, 2022, Long-Term Stock Exchange, Inc. (``LTSE'' or
the ``Exchange'') filed with the Securities and Exchange Commission
(the ``Commission'') the proposed rule
[[Page 58886]]
change as described in Items I and II below, which Items have been
prepared by the self-regulatory organization. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend LTSE Rule 11.270, Clearly Erroneous
Executions to limit the circumstances where clearly erroneous review
would continue to be available during the Regular Market Session \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.
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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 LTSE Rule 1.160(kk).
\4\ See Securities Exchange Act Release No. 67091 (May 31,
2012), 77 FR 33498 (June 6, 2012).
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The text of the proposed rule change is enclosed as Exhibit 5 and
is available on the Exchange's website at <a href="http://longtermstockexchange.com">http://longtermstockexchange.com</a>, at the Exchange's principal office and at
the Public Reference Room of the Commission.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of and basis for the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in Sections A, B, and C below, of the
most significant aspects of such statements
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule change is to amend LTSE Rule
11.270, Clearly Erroneous Executions. Specifically, the Exchange
proposes to limit the circumstances where clearly erroneous review
would continue to be available during the Regular Market Session,\5\
when the LULD Plan to Address Extraordinary Market Volatility (the
``LULD Plan'') \6\ 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,\7\ and in light of amendments
to the LULD Plan, including changes to the applicable Price Bands \8\
around the open and close of trading. The Exchange proposes that the
implementation for the proposed rule change be October 1, 2022.
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\5\ The term ``Regular Trading Hours'' means the time between
9:30 a.m. and 4:00 p.m. Eastern Time. See LTSE Rule 1.160(kk).
\6\ See Securities Exchange Act Release No. 67091 (May 31,
2012), 77 FR 33498 (June 6, 2012).
\7\ 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'').
\8\ ``Price Bands'' refers to the term provided in Section V of
the LULD Plan.
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On May 10, 2019, the Commission approved the Exchange's application
for registration as a national securities exchange.\9\ The approval
order noted that the Exchange had adopted rules to reduce the
occurrence of erroneous trades, including LTSE Rule 11.270.\10\ The
Exchange's registration was conditioned on the Exchange joining the
LULD Plan as a participant.\11\ On November 22, 2019, the Exchange
filed an amendment to the LULD Plan with the Commission to add itself
as a participant.\12\ The amendment was immediately effective.\13\
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\9\ See Securities Exchange Act Release No. 34-85828 (May 10,
2019).
\10\ Id. at 30.
\11\ Id. at 47.
\12\ See Securities Act Release No. 34-87598.
\13\ 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.\14\ 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.\15\ 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.'' \16\
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\14\ See Securities Exchange Act Release No. 67091 (May 31,
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631) (n. 33505).
\15\ Id.
\16\ 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 the Regular Market 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 the Regular Market Session
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 during the Exchange's Pre-Market Session or Post-Market Session
\17\ would
[[Page 58887]]
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 Pre-Market or Post-
Market 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 the Regular Market 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 Regular Market
Session.
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\17\ The term ``Pre-Market Session'' means the time between 8:00
a.m. and 9:30 a.m. Eastern Time. See LTSE Rule 1.160(dd). The term
``Post-Market Session'' means the time between 4:00 p.m. and 8:00
p.m. Eastern Time. See LTSE Rule 1.160(ee).
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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 Regular Market 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 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.\18\ 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 Regular Market Session.
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 the Regular Market
Session.
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\18\ 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 the Regular Market 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 Regular Market Session, as follows. All transactions that
fall outside of these specific enumerated exceptions would be
ineligible for clearly erroneous review.
First, proposed paragraph (b)(2) would adopt provisions contained
in the clearly erroneous executions rules of other exchanges pertaining
to routed executions.\19\ These provisions provide that other market
centers will have additional time to file with the Exchange for review
of transactions routed to the Exchange from that market center and
executed on the Exchange.
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\19\ See, e.g., BZX Rule 11.17.
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Second, pursuant to proposed paragraph (c)(1)(A), a transaction
executed during the Regular Market 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) 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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Third, investors would also continue to be able to request review
of 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 Regular Trading Hours 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 LULD Rule 11.270(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'').
Fourth, the Exchange proposes to narrowly allow for the review of
transactions during the Regular Market 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 Regular Market 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,\22\ 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) below, by an amount that
equals or exceeds the applicable Numerical Guidelines or Percentage
Parameters, as applicable
[[Page 58888]]
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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\22\ 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.\23\ 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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\23\ 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 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
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.
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
Today, paragraph (c)(1) defines the Numerical Guidelines that are
used to determine if a transaction is deemed clearly erroneous during
the Regular Market Session, or during the Pre-Market and Post-Market
Session. With respect to the Regular Market 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 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
[[Page 58889]]
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 add 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)(C) above,\25\ 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 the Pre-Market Session
or Post-Market Session or are eligible for review pursuant to paragraph
(c)(1)(A).
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\25\ 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 described above, the
Exchange proposes to remove paragraph 11.270(f), System Disruption or
Malfunction, combine paragraph (c)(1)(C) with paragraph (c)(1)(B), and
remove the reference to a trading halt in paragraph (c)(1)(C) to make
clear that Trading Halts are subject to proposed paragraph (i).
Specifically, as described in proposed paragraph (c)(1)(B) above,
transactions occurring during the Regular Market 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 paragraphs 11.270(g). Proposed paragraph 11.270 (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.
Officer Acting on Own Motion
The Exchange proposes to renumber paragraph (g) to paragraph (f)
based on the proposal to eliminate existing paragraph (f). The Exchange
also proposes to update references throughout the paragraph to conform
to the structural changes to the Rule.
Securities Subject to Limit Up-Limit Down Plan
The Exchange proposes to renumber paragraph (h) to paragraph (g)
based on the proposal to eliminate existing paragraph (f), 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 (i) and (j) to
paragraphs (h) and (i), respectively, based on the proposal to
eliminate existing paragraph (f). 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
[[Page 58890]]
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,\26\ in general, and
Section 6(b)(5) of the Act,\27\ 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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\26\ 15 U.S.C. 78f(b).
\27\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that it is consistent with just and equitable
principles of trade to limit the availability of clearly erroneous
review during the Regular Market 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 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.'' \28\ Thus, the
Exchange believes that clearly erroneous review should only be
necessary in very limited circumstances during the Regular Market
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 Members and investors that trades executed
during the Regular Market Session would typically stand and would not
be subject to review.
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\28\ 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 the Regular Market 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.
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 Members and investors that
trades will stand if executed during the Regular Market 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. 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
The Exchange has filed the proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \29\ and Rule 19b-4(f)(6) thereunder.\30\
Because the foregoing proposed rule change does not: (i) significantly
affect the protection of investors or the public interest; (ii) impose
any significant burden on competition; and (iii) become operative for
30 days from the date on which it was filed, or such shorter time as
the Commission may designate, it has become effective pursuant to
Section 19(b)(3)(A)(iii) of the Act \31\ and subparagraph (f)(6) of
Rule 19b-4 thereunder.\32\
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\29\ 15 U.S.C. 78s(b)(3)(A)(iii).
\30\ 17 CFR 240.19b-4(f)(6).
\31\ 15 U.S.C. 78s(b)(3)(A)(iii).
\32\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change, along
with a brief description and text of the proposed rule change, at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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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
[[Page 58891]]
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 the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<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#f684839a93db95999b9b93988285b6859395d8919980"><span class="__cf_email__" data-cfemail="0b797e676e26686466666e657f784b786e68256c647d">[email protected]</span></a>. Please include
File Number SR-LTSE-2022-05 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-LTSE-2022-05. 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 such filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. 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-LTSE-2022-05 and should be submitted on
or before October 19, 2022.
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\37\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\37\
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-20945 Filed 9-27-22; 8:45 am]
BILLING CODE 8011-01-P
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