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Thursday, April 20, 2017

Options Regulatory Alert #2017 - 14
Nullification and Adjustment of Complex Orders and Stock-Option Orders

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  • Regulatory

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On April 17, 2017, recent amendments to NASDAQ PHLX, LLC ("Phlx") Rule 1092 and Nasdaq ISE, LLC ("ISE") Rule 720 became effective. Phlx Rule 1092 and ISE Rule 720 generally describe the application of the nullification and adjustment of options transactions as they relate to complex orders and stock-option orders.

Amendments were made to Phlx Rule 1092 at Commentary .04 and ISE Rule 702 Supplementary Material .05 related to complex orders.

Complex Orders That Execute Against Individual Legs

  • If a complex order executes against individual legs and at least one of the legs qualifies as an Obvious Error under paragraph (c)(1) or a Catastrophic Error under paragraph (d)(1), then the leg(s) that is an Obvious or Catastrophic Error will be adjusted in accordance with paragraphs (c)(4)(A) or (d)(3), respectively, regardless of whether one of the parties is a Customer.


  • However, any Customer order subject to this paragraph (a) will be nullified if the adjustment would result in an execution price higher (for buy transactions) or lower (for sell transactions) than the Customer’s limit price on the complex order or individual leg(s). If any leg of a complex order is nullified, the entire transaction is nullified.

Complex Orders That Execute Against Other Complex Orders

  • If a complex order executes against another complex order and at least one of the legs qualifies as an Obvious Error under paragraph (c)(1) or a Catastrophic Error under paragraph (d)(1), then the leg(s) that is an Obvious or Catastrophic Error will be adjusted or busted in accordance with paragraph (c)(4) or (d)(3), respectively, so long as either:

(i) the width of the National Spread Market for the complex order strategy just prior to the erroneous transaction was equal to or greater than the amount set forth in the wide quote table of paragraph (b)(3) or

(ii) the net execution price of the complex order is higher (lower) than the offer (bid) of the National Spread Market for the complex order strategy just prior to the erroneous transaction by an amount equal to at least the amount shown in the table in paragraph (c)(1).

  • If any leg of a complex order is nullified, the entire transaction is nullified. For purposes of Phlx Rule 1092 and ISE Rule 720, the National Spread Market for a complex order strategy is determined by the National Best Bid/Offer of the individual legs of the strategy.

Stock-Option Orders

  • If the option leg of a stock-option order qualifies as an Obvious Error under paragraph (c)(1) or a Catastrophic Error under paragraph (d)(1), then the option leg that is an Obvious or Catastrophic Error will be adjusted in accordance with paragraph (c)(4)(A) or (d)(3), respectively, regardless of whether one or the parties is a Customer.


  • However, the option leg of any Customer order subject to this paragraph (c) will be nullified if the adjustment would result in an execution price higher (for buy transactions) or lower (for sell transactions) than the Customer’s limit price on the stock-option order, and the Exchange will attempt to nullify the stock leg.


  • Whenever a stock trading venue nullifies the stock leg of a stock-option order or whenever the stock leg cannot be executed, the Exchange will nullify the option leg upon requires of one of the parties to the transaction or in accordance with paragraph (c)(3).



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