Notice2022-20955
Self-Regulatory Organizations: Notice of Filing and Immediate Effectiveness of a Proposed Rule Change by MIAX PEARL, LLC To Amend Exchange Rule 2621, 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
<html>
<head>
<title>Federal Register, Volume 87 Issue 187 (Wednesday, September 28, 2022)</title>
</head>
<body><pre>
[Federal Register Volume 87, Number 187 (Wednesday, September 28, 2022)]
[Notices]
[Pages 58837-58843]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-20955]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95881; File No. SR-PEARL-2022-41]
Self-Regulatory Organizations: Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change by MIAX PEARL, LLC To Amend
Exchange Rule 2621, Clearly Erroneous Executions
September 22, 2022.
Pursuant to the provisions of Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on September 19, 2022 MIAX PEARL, LLC (``MIAX
Pearl'' or the ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'') a proposed rule change as described in
Items I and II below, which Items have been prepared by the Exchange.
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is filing a proposed rule change to amend Exchange
Rule 2621, Clearly Erroneous Executions.
The text of the proposed rule change is available on the Exchange's
website at <a href="http://www.miaxoptions.com/rule-filings/pearl">http://www.miaxoptions.com/rule-filings/pearl</a> at MIAX
PEARL's principal office, and at the Commission's Public Reference
Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule change is to amend Exchange Rule
2621, Clearly Erroneous Executions. Specifically, the Exchange proposes
to
[[Page 58838]]
limit the circumstances where clearly erroneous review would continue
to be available during Regular Trading Hours,\3\ when the LULD Plan to
Address Extraordinary Market Volatility (the ``LULD Plan'') \4\ already
provides similar protections for trades occurring at prices that may be
deemed erroneous. The Exchange believes that these changes are
appropriate as the LULD Plan has been approved by the Commission on a
permanent basis,\5\ and in light of amendments to the LULD Plan,
including changes to the applicable Price Bands \6\ around the open and
close of trading. This proposed rule change is based on a recent rule
change by Cboe BZX Exchange, Inc. (``BZX'') to amend certain provisions
of the clearly erroneous pilot and to operate the clearly erroneous
pilot on a permanent basis that was recently approved by the
Commission.\7\
---------------------------------------------------------------------------
\3\ The term ``Regular Trading Hours'' means the time between
9:30 a.m. and 4:00 p.m. Eastern Time. See Exchange Rule 1900.
\4\ See Securities Exchange Act Release No. 67091 (May 31,
2012), 77 FR 33498 (June 6, 2012).
\5\ See Securities Exchange Act Release No. 84843 (December 18,
2018), 83 FR 66464 (December 26, 2018) (``Notice''); 85623 (April
11, 2019), 84 FR 16086 (April 17, 2019) (File No. 4-631)
(``Amendment Eighteen'').
\6\ ``Price Bands'' refers to the term provided in Section V of
the LULD Plan.
\7\ See Securities Exchange Act Release No. 95658 (September 1,
2022), 87 FR 55060 (September 8, 2022) (SR-CboeBZX-2022-0037)
(``Approval Order''). The Exchange notes that its Rule 2621 is
basically identical to the clearly erroneous pilot rules of BZX with
the following two key differences: (1) Exchange Rule 2621 does not
include a provision stating it is operating on a pilot basis; and
(2) Exchange Rule 2621 does not account for before or after hours
trading because the Exchange currently provides trading during
Regular Trading Hours. The Exchange will amend Exchange Rule 2621 to
address the availability of the review of clearly erroneous
executions as part of any potential proposed rule change to provide
for before or after hours trading.
---------------------------------------------------------------------------
Background
On August 14, 2020, the Commission approved the adoption of
Exchange Rule 2621 that, among other things: (i) provided for uniform
treatment of clearly erroneous execution reviews in multi-stock events
involving twenty or more securities; (ii) reduced the ability of the
Exchange to deviate from the objective standards set forth in the rule;
adopted a provision designed to address the operation of the LULD Plan;
(iii) adopted a provision providing that 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
(iv) adopted a provision that 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.\8\
---------------------------------------------------------------------------
\8\ See Securities Exchange Act Release No. 89563 (August 14,
2020), 85 FR 51510 (August 20, 2020) (SR-PEARL-2020-03).
---------------------------------------------------------------------------
The clearly erroneous rules were first implemented by other equity
exchanges on a pilot basis 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.'' \9\
Largely, the pilot reduced the discretion of the Exchange, other
national securities exchanges, and Financial Industry Regulatory
Authority (``FINRA'') to deviate from the objective standards in their
respective rules when dealing with potentially erroneous transactions.
The pilot has thus helped afford greater certainty to Members and
investors about when trades will be deemed erroneous pursuant to self-
regulatory organization (``SRO'') rules and has provided a more
transparent process for conducting such reviews. The Commission
recently approved a proposal by BZX to make the current pilot permanent
in which BZX asserted that market participants should be able to
continue to benefit from the increased certainty afforded by its
clearly erroneous rule.\10\
---------------------------------------------------------------------------
\9\ See, e.g., Securities Exchange Act Release No. 62886
(September 10, 2010), 75 FR 56613 (September 16, 2010) (SR-BATS-
2010-016).
\10\ See Approval Order, supra note 7. See also Securities
Exchange Act Release No. 95259 (July 12, 2022), 87 FR 42760 (July
18, 2022) (SR-CboeBZX-2022-037) (``Notice'').
---------------------------------------------------------------------------
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.\11\ 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.\12\ 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.'' \13\
---------------------------------------------------------------------------
\11\ See Securities Exchange Act Release No. 67091 (May 31,
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631) (n. 33505).
\12\ Id.
\13\ 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>.
---------------------------------------------------------------------------
The Exchange believes that it is important for there to be some
mechanism to ensure that investors' orders are either not executed at
clearly erroneous prices or are subsequently busted as needed to
maintain a fair and orderly market. At the same time, the Exchange
believes that the LULD Plan, as amended, would provide sufficient
protection for trades executed during Regular Trading Hours. Indeed,
the LULD mechanism could be considered to offer superior protection as
it prevents potentially erroneous trades from being executed in the
first instance. After gaining experience with the LULD Plan, the
Exchange now believes that it is appropriate to largely eliminate
clearly erroneous review during Regular Trading Hours when Price Bands
are in effect. Thus, as proposed, trades executed within the Price
Bands would stand, barring one of a handful of identified scenarios
where such review may still be necessary for the protection of
investors. The Exchange believes that this change would be beneficial
for the U.S. equities markets as it would ensure that trades executed
within the Price Bands are subject to clearly erroneous review in only
rare circumstances, resulting in
[[Page 58839]]
greater certainty for Members and investors.
There would be much more limited potential to request that a
transaction be reviewed as potentially erroneous during Regular Trading
Hours.\14\ 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.\15\ Due to these changes, the Exchange believes that
the Price Bands would provide sufficient protection to investor orders
such that clearly erroneous review would no longer be necessary during
Regular Trading Hours. As the Participants to the LULD Plan explained
in Amendment Eighteen: ``Broadly, the Limit Up-Limit Down mechanism
prevents trades from happening at prices where one party to the trade
would be considered `aggrieved,' and thus could be viewed as an
appropriate mechanism to supplant clearly erroneous rules.'' While the
Participants also expressed concern that the Price Bands might be too
wide to afford meaningful protection around the open and close of
trading, amendments to the LULD Plan adopted in Amendment Eighteen
narrowed Price Bands at these times in a manner that the Exchange
believes is sufficient to ensure that investors' orders would be
appropriately protected in the absence of clearly erroneous review. The
Exchange therefore believes that it is appropriate to rely on the LULD
mechanism as the primary means of preventing clearly erroneous trades
during Regular Trading Hours.
---------------------------------------------------------------------------
\14\ The Exchange currently only provides for trading during
Regular Trading Hours and does not offer a pre- or post-trading
session.
\15\ See Amendment Eighteen, supra note 5.
---------------------------------------------------------------------------
At the same time, the Exchange is cognizant that there may be
limited circumstances where clearly erroneous review may continue to be
appropriate. Thus, the Exchange proposes to amend its clearly erroneous
rules to enumerate the specific circumstances where such review would
remain available, 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
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 2621 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.\16\ Similarly, there are instances,
such as the opening auction on the primary listing market,\17\ 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.
---------------------------------------------------------------------------
\16\ See Appendix A of the LULD Plan.
\17\ 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.
---------------------------------------------------------------------------
Second, 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 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
Exchange Rule 2621(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 when the Reference Price, described in proposed paragraph
(d), is determined to be erroneous by an Officer of the Exchange.
Specifically, a transaction 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,\18\ 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 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).
---------------------------------------------------------------------------
\18\ 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.
---------------------------------------------------------------------------
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.\19\ 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
[[Page 58840]]
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.
---------------------------------------------------------------------------
\19\ 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.
---------------------------------------------------------------------------
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.\20\ 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.
---------------------------------------------------------------------------
\20\ See LULD Plan, Section I(U) and V(C)(1).
---------------------------------------------------------------------------
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 carve
outs 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
Regular Trading Hours. With respect to Regular Trading Hours, trades
are generally deemed clearly erroneous if the execution price differs
from the Reference Price (i.e., last sale) by 10% if the Reference
Price is greater than $0.00 up to and including $25.00; 5% if the
Reference Price is greater than $25.00 up to and including $50.00; and
3% if the Reference Price is greater than $50.00. Wider parameters are
also used for reviews for Multi-Stock Events, as described in paragraph
(c)(2). With respect to transactions in Leveraged ETF/ETN securities
executed during Regular Trading Hours, trades are deemed clearly
erroneous if the execution price exceeds the Regular Trading Hours
Numerical Guidelines multiplied by the leverage multiplier.
Given the changes described in this proposed rule change, the
Exchange proposes to amend the way that the Numerical Guidelines are
calculated during Regular Trading Hours in the handful of instances
where clearly erroneous review would continue to be available.
Specifically, the Exchange would base these Numerical Guidelines, as
applied to the circumstances described in paragraph (c)(1)(A), on the
Percentage Parameters used to calculate Price Bands, as set forth in
Appendix A to the LULD Plan. Without this change, a transaction that
would otherwise stand if Price Bands were properly applied to the
transaction may end up being subject to review and deemed clearly
erroneous solely due to the fact that the Price Bands were not
available due to a systems or other issue. The Exchange believes that
it makes more sense to instead base the Price Bands on the same
parameters as would otherwise determine whether the trade would have
been allowed to execute within the Price Bands. The Exchange also
proposes to modify the Numerical Guidelines applicable to leveraged
ETF/ETN securities during Regular Trading Hours. As noted above, the
Numerical Guidelines will only be applicable to transactions eligible
for review pursuant paragraph (c)(1)(A) (i.e., to NMS Stocks that are
not subject to the LULD Plan). As leveraged ETF/ETN securities are
subject to LULD and thus the Percentage Parameters will be applicable
during Regular Trading Hours, the Exchange proposes to eliminate the
Numerical Guidelines for leveraged ETF/ETN securities traded during
Regular Trading Hours.
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
[[Page 58841]]
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. 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,\21\ 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 are eligible for review pursuant to
paragraph (c)(1)(A).
---------------------------------------------------------------------------
\21\ 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.
---------------------------------------------------------------------------
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
proposes to remove paragraph 2621(f), System Disruption or Malfunction,
and propose new paragraph (c)(1)(B). Specifically, as described in
proposed paragraph (c)(1)(B) above, transactions occurring during
Regular Trading Hours 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 2621(g).
Proposed paragraph 2621(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 BZX Rule 11.17 provides different
procedures for conducting clearly erroneous review in initial public
offering (``IPO'') securities that are traded pursuant to unlisted
trading privileges (``UTP'') after the initial opening of such IPO
securities on the listing market. Specifically, this paragraph provides
that a clearly erroneous error may be deemed to have occurred in the
opening transaction of the subject security if the execution price of
the opening transaction on the Exchange is the lesser of $1.00 or 10%
away from the opening price on the listing exchange or association. The
Exchange no longer believes that this provision is necessary as opening
transactions on the Exchange following an IPO are subject to Price
Bands pursuant to the LULD Plan. The Exchange therefore proposes to
eliminate this provision in connection with the broader changes to
clearly erroneous review during Regular Trading Hours.
Securities Subject To Limit Up-Limit Down Plan
The Exchange proposes to renumber paragraph (i) to paragraph (h)
based on the proposal to eliminate existing paragraph (h), and to
rename the paragraph to provide for transactions occurring outside of
LULD Price Bands. Given that proposed paragraph (c)(1) defines the LULD
Plan, the Exchange also proposes to eliminate redundant language from
proposed paragraph (h). Finally, the Exchange also proposes to update
references to the LULD Plan and Price Bands so that they are uniform
throughout the Rule and to update rule references throughout the
paragraph to conform to the structural changes to the Rule described
above.
Multi-Day Event and Trading Halts
The Exchange proposes to renumber paragraphs (j) and (k) to
paragraphs (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.
Implementation
The proposed rule change would be effective on October 1, 2022.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the requirements of Section 6(b) of the Act,\22\ in general, and
Section 6(b)(5) of the Act,\23\ in particular, in that it is designed
to remove impediments to and perfect the mechanism of a free and
[[Page 58842]]
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.
---------------------------------------------------------------------------
\22\ 15 U.S.C. 78f(b).
\23\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
As explained in the purpose section of this proposed rule change,
the current program 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 program has
successfully ensured that such reviews are conducted based on objective
and consistent standards across SROs and has therefore afforded greater
certainty to Members and investors. The Exchange therefore believes
that equities market participants should continue to reap the benefits
of a clear, objective, and transparent process for conducting clearly
erroneous reviews. In addition, this proposed rule change present no
new or novel issues because it is based on the rules of Cboe BZX
Exchange, Inc. (``BZX'') which were recently approved by the
Commission.\24\ The Exchange also 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.
---------------------------------------------------------------------------
\24\ See supra note 7.
---------------------------------------------------------------------------
Similarly, the Exchange believes that it is consistent with just
and equitable principles of trade to limit the availability of clearly
erroneous review during Regular Trading Hours. The Plan was approved by
the Commission to operate on a permanent rather than pilot basis. As a
number of market participants have noted, the LULD Plan provides
protections that ensure that investors' orders are not executed at
prices that may be considered clearly erroneous. Further, amendments to
the LULD Plan approved in Amendment Eighteen serve to ensure that the
Price Bands established by the LULD Plan are ``appropriately tailored
to prevent trades that are so far from current market prices that they
would be viewed as having been executed in error.'' \25\ Thus, the
Exchange believes that clearly erroneous review should only be
necessary in very limited circumstances during Regular Trading Hours.
Specifically, such review would only be necessary in instances where a
transaction was not subject to the LULD Plan, or was the result of some
form of systems issue, as detailed in the purpose section of this
proposed rule change. Additionally, in narrow circumstances where the
transaction was subject to the LULD Plan, a clearly erroneous review
would be available in the case of (1) a corporate action or new issue
or (2) a security that enters a Trading Pause pursuant to LULD and
resumes trading without an auction, where the Reference Price is
determined to be erroneous by an Officer of the Exchange 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 Regular Trading Hours would typically stand and would not be
subject to review.
---------------------------------------------------------------------------
\25\ See Amendment Eighteen, supra note 5.
---------------------------------------------------------------------------
Given the fact that clearly erroneous review would largely be
limited to transactions that were not subject to the LULD Plan, the
Exchange also believes that it is necessary to change the parameters
used to determine whether a trade is clearly erroneous. Specifically,
due to the different parameters currently used for clearly erroneous
review and for determining Price Bands, it is possible that a trade
that would have been permitted to execute within the Price Bands would
later be deemed clearly erroneous, if, for example, a systems issue
prevented the dissemination of the Price Bands. The Exchange believes
that this result is contrary to the principle that trades within the
Price Bands should stand, and has the potential to cause investor
confusion if trades that are properly executed within the applicable
parameters described in the LULD Plan are later deemed erroneous. By
using consistent parameters for clearly erroneous reviews conducted
during Regular Trading Hours and the calculation of the Price Bands,
the Exchange believes that this change would also serve to promote
greater certainty with regards to when trades may be deemed erroneous.
The Exchange believes that it is consistent with the protection of
investors and the public interest to remove the current provision of
the clearly erroneous rule dealing with UTP securities that are the
subject of IPOs. This provision applies specifically to opening
transactions on a non-listing market following an IPO on the listing
market. As such, review under this paragraph is limited to trades
conducted during Regular Trading Hours. As previously addressed, trades
executed during Regular Trading Hours would generally not be subject to
clearly erroneous review but would instead be protected by the Price
Bands. The Exchange therefore no longer believes that this paragraph is
necessary, as all trades subject to this provision today would either
be subject to the LULD Plan, or, in the event of some systems or other
issue, would be subject to the provisions that apply to transactions
that are not adequately protected by the LULD Plan.
Finally, the proposed rule changes make organizational updates to
the Exchange's Clearly Erroneous Execution Rule as well as minor
updates and corrections to the Rule to improve readability and clarity.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change would
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The proposal would ensure
the continued, uninterrupted operation of harmonized clearly erroneous
execution rules across the U.S. equities markets while also amending
those rules to provide greater certainty to Members and investors that
trades will stand if executed during Regular Trading Hours where the
LULD Plan provides adequate protection against trading at erroneous
prices. This proposed rule change is based on changes to BZX Rule
11.17, which were recently approved by the Commission.\26\ 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.
---------------------------------------------------------------------------
\26\ See supra note 7.
---------------------------------------------------------------------------
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
[[Page 58843]]
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
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 after the date of the filing, or such
shorter time as the Commission may designate, it has become effective
pursuant to 19(b)(3)(A) of the Act \27\ and Rule 19b-4(f)(6) \28\
thereunder.
---------------------------------------------------------------------------
\27\ 15 U.S.C. 78s(b)(3)(A).
\28\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file 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.
---------------------------------------------------------------------------
A proposed rule change filed under Rule 19b-4(f)(6) \29\ normally
does not become operative prior to 30 days after the date of the
filing. However, Rule 19b-4(f)(6)(iii) \30\ 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.\31\ For
this reason, the Commission hereby waives the 30-day operative delay
and designates the proposed rule change as operative upon filing.\32\
---------------------------------------------------------------------------
\29\ 17 CFR 240.19b-4(f)(6).
\30\ 17 CFR 240.19b-4(f)(6)(iii).
\31\ See SR-CboeBZX-2022-37 (July 8, 2022).
\32\ 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).
---------------------------------------------------------------------------
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#186a6d747d357b7775757d766c6b586b7d7b367f776e"><span class="__cf_email__" data-cfemail="750700191058161a1818101b0106350610165b121a03">[email protected]</span></a>. Please include
File Number SR-PEARL-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-PEARL-2022-41. 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-PEARL-2022-41 and should be submitted on
or before October 19, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\33\
---------------------------------------------------------------------------
\33\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-20955 Filed 9-27-22; 8:45 am]
BILLING CODE 8011-01-P
</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>Indexed from Federal Register on September 28, 2022.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.