By Kaitlyn Kiernan
The 12 U.S. options exchanges are close to issuing a uniform
rule on how to handle erroneous trades, according to exchange
leaders at an industry event in Chicago on Thursday.
"We will come out with harmonized obvious error rules," Jeromee
Johnson, head of BATS Options at BATS Global Markets, said at the
Futures Industry Association's Futures & Options Expo. "There
are still some discrepancies, but we're close," he said.
The exchanges are expected to file a uniform rule with the
Securities and Exchange Commission as early as Nov. 12, according
to a person familiar with the discussions.
The options exchanges came together to develop the rule at the
request of Securities and Exchange Commission Chairman Mary Jo
White. In September, Ms. White told attendees at a three-hour
meeting that exchanges and regulators need to focus on rebuilding
confidence that markets will be able to operate in all kinds of
trading environments. The difference in rules among the exchanges
was just one of many issues the exchanges are working together to
address.
The request for a uniform rule on how exchanges address trades
that are deemed an obvious or "catastrophic" error came after
confusion following a rash of errant trades from Goldman Sachs
Group Inc. (GS) in August. While the stock market has rules
governing faulty trades that extend across all exchanges, in the
options market each of the 12 U.S. exchanges sets its own
rules.
In August, a faulty system at Goldman mistakenly issued waves of
orders to trade stock-options contracts, in some cases at prices
that were far off the prevailing market rate, with many at $1. The
differing rules created uncertainty in the market as trading firms
awaited the trades' fate.
While NYSE Euronext's (NYX) Amex exchange killed most of the
trades it processed, Deutsche Boerse AG's (DBOEF, DBK.XE)
International Securities Exchange decided to adjust most of the
ones it handled. At ISE, all trades are adjusted unless a small
investor was on one side of the trade, or unless both sides agree
to cancel the trade.
The exchanges are close to developing a unified rule more in
line with the ISE rules with a bias toward adjusting trades unless
an individual investor is involved in the trade, said Steven
Crutchfield, head of U.S. options at NYSE, at the FIA event.
In August, Goldman Sachs was liable to suffer losses into the
hundreds of millions of dollars had its errant trades remained
intact. But with most of the transactions trading on NYSE's Amex
exchange, which canceled the majority of the Goldman trades based
on the exchange's "obvious error" rules, the hit to investement
bank from the technology glitch was small.
Write to Kaitlyn Kiernan at kaitlyn.kiernan@wsj.com
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