2. Trade Cancellation or Adjustment Policies
The Commission is interested to know whether it would be beneficial for exchanges to develop more uniform and objective trade cancellation or adjustment policies. These policies should apply to cancellation or adjustment of individual trades, as well as to cancellation or adjustment of a large quantity of trades in response to a disruptive market event at the direction of a regulatory body or in accordance with the exchange's own determination that such cancellation or adjustment of a large quantity of trades is necessary. The policies could include (1) Clear principles on when trades will be cancelled or adjusted; (2) a requirement that traders notify the exchange of error trades within a specified number of minutes; and (3) a requirement that the exchange notify market participants of possible adjusted or busted trades immediately. Requiring traders to notify the exchange quickly and requiring the exchange to communicate the situation to market participants immediately helps to ensure that any market participants potentially affected by impending adjustment or cancellation actions are made aware of the additional risk they bear and can take steps to mitigate that risk.
It may be advisable to base cancellation and adjustment policies on pre-defined, objective criteria in order to minimize the time for identification and notification. Such criteria may include the minimum trade size for which cancellation will be considered, the minimum and maximum range in which a trade will be adjusted, the time a market participant has to request the cancellation or adjustment, the specific circumstances under which trades will be adjusted or canceled (e.g., an exchange system error, specific types of human errors) and factors to be taken into account (e.g., market conditions, whether other market participants have relied on the price). Last, the Commission is inquiring as to the advisability of policies to favor trade adjustment over trade cancellation in order to help ensure that market participants are able to keep the positions they have entered into, even if the prices are adjusted. The Commission is interested in receiving comments on whether additional standardization in error trade policies would be beneficial, and whether this prioritization scheme is appropriate. /88/
FOOTNOTE 88 The Commission notes that error trade policies may vary for different exchanges and for different products at each exchange. See id. at 7. END FOOTNOTE
44. Is a measure that would obligate exchanges to make error trade decisions (i.e., decisions to cancel a trade or to adjust its price) within a specified amount of time after an error trade is reported feasible? If so, what amount of time would be sufficient for exchanges, but would be sufficiently limited to help reduce risk for counterparties to error trades?
45. Should exchanges develop detailed, pre-determined criteria regarding when they can adjust or cancel a trade, or should exchanges be able to exercise discretion regarding when they can adjust or cancel a trade? What circumstances make pre-determined criteria more effective or necessary than the ability to exercise discretion, and vice versa?
46. Do error trade policies that favor price adjustment over trade cancellation effectively mitigate risk for market participants that are counterparties to error trades? Are there certain situations where canceling trades would mitigate counterparty risk more effectively? If so, what are they and how could such situations be identified reliably by the exchange in a short period of time?
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