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 firstname.lastname@example.org
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(END) Dow Jones Newswires
November 07, 2013 17:22 ET (22:22 GMT)Copyright (c) 2013 Dow Jones & Company, Inc.
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