10020 Federal Register / Vol. 77, No. 34 / Tuesday, February 21, 2012 / Notices 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3COA is a process for auctioning eligible complex 

orders for price improvement. See Rule 6.13(c). 

4Currently the rule limits the number of legs to 

four. See existing Rule 6.13(b)(2). 

5See, e.g., International Securities Exchange 

(‘‘ISE’’) Rule 722(a). 

6This provision for a designated broker-dealer is 

similar to a provision in ISE Rule 722.02, except 

that C2’s proposed provision makes it clear the 

broker-dealer(s) that are designated by the Exchange 

to perform this function are not affiliated with C2. 

The Exchange also notes that the stock-option 

processing provisions will include an order 

marking requirement for stock-option orders. In 

particular, the Exchange is proposing to provide 

that, if the stock leg of a stock-option order 

submitted to the COB or COA is a sell order, then 

the stock leg must be marked ‘‘long, ‘‘short,’’ or 

‘‘short exempt’’ in compliance with Regulation 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–66393; File No. SR–C2– 

2012–004] 

Self-Regulatory Organizations; C2 

Options Exchange, Incorporated; 

Notice of Filing of a Proposed Rule 

Change Related to Stock-Option 

Processing 

February 14, 2012. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 (the 

‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice is hereby given that on February 

7, 2012, the C2 Options Exchange, 

Incorporated (the ‘‘Exchange’’ or ‘‘C2’’) 

filed with the Securities and Exchange 

Commission (the ‘‘Commission’’) the 

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. 

I. Self-Regulatory Organization’s 

Statement of the Terms of the Substance 

of the Proposed Rule Change 

The Exchange is proposing to amend 

its electronic complex order rules to 

adopt procedures for processing stockoption orders. The text of the rule 

proposal is available on the Exchange’s 

Web site (http://www.c2exchange.com/ 

Legal/RuleFilings.aspx), at the 

Exchange’s Office of the Secretary and 

at the Commission. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and the 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, the 

self-regulatory organization 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 those 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 parts of such 

statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and the 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

The Exchange proposes to adopt 

procedures for processing stock-option 

orders under Rule 6.13. In particular, 

the Exchange is proposing to amend 

Rule 6.13 to (i) adopt a definition of a 

stock-option order (as well as include a 

definition of a complex order); (ii) 

include procedures for routing the stock 

leg of a stock-option order; (iii) provide 

that there will be no ‘‘legging’’ of stockoptions, except in one limited context; 

(iv) describe the electronic allocation 

algorithm applicable for stock-option 

orders in the complex order book 

(‘‘COB’’) and the complex order RFR 

auction (‘‘COA’’);3 and (v) incorporate 

certain price check parameter and reCOA features (described in more detail 

below) applicable to the electronic 

processing of stock-option orders. 

Definitions 

The first purpose of this proposed 

rule change is to include a definition of 

stock-option order within Rule 6.13. 

The definition would provide that a 

stock-option order is as [sic] an order to 

buy or sell a stated number of units of 

an underlying stock or a security 

convertible into the underlying stock 

(‘‘convertible security’’) coupled with 

the purchase or sale of options 

contract(s) on the opposite side of the 

market representing either (i) the same 

number of units of the underlying stock 

or convertible security, or (ii) the 

number of units of the underlying stock 

necessary to create a delta neutral 

position, but in no case in a ratio greater 

than eight (8) options contracts per unit 

of trading of the underlying stock or 

convertible security established for that 

series by The Options Clearing 

Corporation (referred to in the text as 

the ‘‘Clearing Corporation’’) (or such 

lower ratio as may be determined by the 

Exchange on a class-by-class basis). In 

addition, only those stock-option orders 

with no more than the applicable 

number of legs, as determined by the 

Exchange on a class-by-class basis, will 

be eligible for processing. 

The Exchange is also proposing to 

adopt a definition of a complex order. 

For purposes of the rule, a complex 

order will be defined as any order 

involving the execution of two or more 

different options series in the same 

underlying security, for the same 

account, occurring at or near the same 

time in a ratio that is equal to or greater 

than one-to-three (.333) and less than or 

equal to three-to-one (3.00) (or such 

lower ratio as may be determined by the 

Exchange on a class-by-class basis) and 

for the purpose of executing a particular 

investment strategy. Only those 

complex orders with no more than the 

applicable number of legs,4 as 

determined by the Exchange on a classby-class basis, are eligible for 

processing. 

These definitions would conform 

with definitions used in other 

exchanges’ rules 5 and is modeled after 

the generic definitions approved for use 

for exemptions from Trade Through 

Liability by the Options Linkage 

Authority as described in the ‘‘Plan For 

The Purpose of Creating And Operation 

An Intermarket Options Linkage’’ and as 

provided in Exchange Chapter 6, 

Section E (which cross-references 

Chicago Board Options Exchange 

Incorporated (‘‘CBOE’’) Rule 6.80(4)). 

Designated Broker-Dealer 

The second purpose of this proposed 

rule change is to adopt procedures for 

routing the stock leg of a stock-option 

order. The Exchange proposes to 

provide that the Exchange will 

electronically transmit orders related to 

a stock leg for execution by a brokerdealer designated by the Exchange (a 

‘‘designated broker-dealer’’) on behalf of 

the parties to the trade. The Exchange 

will transmit the underlying stock leg 

order to a designated broker-dealer for 

execution once the Exchange trading 

system determines that a stock-option 

order trade is possible and at what net 

prices. The stock leg component will be 

transmitted to the designated brokerdealer as two paired orders with a 

designated limit price, subject to one 

limited exception pertaining to the stock 

leg of an unmatched market stockoption order (which is described in 

more detail below). The designated 

broker-dealer will act as agent for the 

stock leg of the stock-option orders. The 

designated broker-dealer may determine 

to match the orders on an exchange or 

‘‘over-the-counter.’’ 

To participate in this automated 

process for stock-option orders, an 

Exchange Permit Holder (‘‘PH’’) must 

enter into a customer agreement with 

one or more designated broker-dealers 

that are not affiliated with the 

Exchange.6 In addition, PHs may only 

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Federal Register / Vol. 77, No. 34 / Tuesday, February 21, 2012 / Notices 10021 

SHO, 17 CFR 242.200(g). See proposed Rule 

6.13.06(e). This proposed marking provision is 

modeled after CBOE Rule 6.53C.06(g). 

7 17 CFR 242.611(a). 

8See Securities Exchange Act Release No. 57620 

(April 4, 2008), 73 FR 19271 (April 9, 2008) (‘‘QCT 

Release’’); see also Securities Exchange Act Release 

No. 54389 (August 31, 2006), 71 FR 52829 

(September 7, 2006). 

9As discussed in more detail below, the stock 

component of all stock-option orders will be 

transmitted to a designated routing broker as paired 

stock orders with a specified limit price, with one 

limited exception. The exception pertains to the 

stock leg of an unmatched market stock-option 

order. In the limited circumstances when the 

Exchange transmits the stock component leg of an 

unmatched market stock-option order to the 

designed [sic] routing broker, such a stock 

component leg will be subject to NBBO pricing (and 

therefore not be processed subject to the QCT 

Exemption). 

10The Exchange notes that at least one other 

options exchange that offers electronic complex 

order processing does not ‘‘leg’’ stock-option orders. 

See, e.g., NASDAQ OMX PHLX LLC (‘‘Phlx’’) Rule 

1080.08(f)(iii)(A)(1). 

submit complex orders with a stock 

component if such orders comply with 

the Qualified Contingent Trade 

Exemption (the ‘‘QCT Exemption’’) from 

Rule 611(a) of Regulation NMS.7 PHs 

submitting such complex orders 

represent that such orders comply with 

the QCT Exemption. The Exchange 

intends to address fees related to routing 

the stock portion of stock-option trades 

in a separate rule change filing. 

The Exchange believes that the 

electronic communication of the orders 

by the Exchange to the designated 

broker-dealer is an efficient means for 

processing stock-option orders. The 

designated broker-dealer will be 

responsible for the proper execution, 

trade reporting and submission to 

clearing of the stock trade that is part of 

a stock option order. In this regard, once 

the orders are communicated to the 

broker-dealer for execution, the brokerdealer has complete responsibility for 

determining whether the orders may be 

executed in accordance with all the 

rules applicable to execution of equity 

orders, including compliance with the 

applicable short sale, trade-through and 

trade reporting rules. If the brokerdealer cannot execute the equity orders 

at the designated price, the stock-option 

combination order will not be executed 

on the Exchange. 

With respect to trade throughs in 

particular, the Exchange believes that 

the stock component of a stock-option 

order is eligible for the QCT Exemption 

from Rule 611(a) of Regulation NMS. A 

Qualified Contingent Trade (‘‘QCT’’) is 

a transaction consisting of two or more 

component orders, executed as agent or 

principal, that satisfy the six elements 

in the Commission’s order exempting 

QCTs from the requirements of Rule 

611(a), which requires trading centers to 

establish, maintain, and enforce written 

policies and procedures that are 

reasonably designed to prevent tradethroughs.8 The Exchange believes that 

the stock portion of a complex order 

under this proposal complies with all 

six requirements.9 Moreover, as 

explained below, the Exchange’s system 

will validate compliance with each 

requirement such that any matched 

order received by a designated brokerdealer under this proposal has been 

checked for compliance with the 

exemption to the extent noted below: 

(1) At least one component order is in 

an NMS stock: the stock component 

must be an NMS stock, which is 

validated by the Exchange’s system; 

(2) All components are effected with 

a product or price contingency that 

either has been agreed to by the 

respective counterparties or arranged for 

by a broker-dealer as principal or agent: 

a complex order, by definition, is 

executed at a single net credit/debit 

price and this price contingency applies 

to all the components of the order, such 

that the stock price computed and sent 

to the designated broker-dealer allows 

the stock order to be executed at the 

proper net debit/credit price based on 

the execution price of each of the option 

legs, which is determined by the 

Exchange’s system; 

(3) The execution of one component 

is contingent upon the execution of all 

other components at or near the same 

time: once a stock-option [sic] is 

accepted and validated by the 

Exchange’s system, the entire package is 

processed as a single transaction and 

each of the option leg(s) and stock 

components are simultaneously 

processed; 

(4) The specific relationship between 

the component orders (e.g., the spread 

between the prices of the component 

orders) is determined at the time the 

contingent order is placed: stock-option 

orders, upon entry, must have a size for 

each component and a net debit/credit 

price (or market price), which the 

Exchange’s system validates and 

processes to determine the ratio 

between the components; an order is 

rejected if the net debit/credit price (or 

market price) and size are not provided 

on the order; 

(5) The component orders bear a 

derivative relationship to one another, 

represent different classes of shares of 

the same issuer, or involve the securities 

of participants in mergers or with 

intentions to merge that have been 

announced or since cancelled: under 

this proposal, the stock component must 

be the underlying security respecting 

the option leg(s), which is validated by 

the Exchange’s system; and 

(6) The transaction is fully hedged 

(without regard to any prior existing 

position) as a result of the other 

components of the contingent trade: 

under this proposal, the ratio between 

the options and stock must be a 

conforming ratio (e.g., largest option leg 

to stock cannot exceed a ratio of eightto-one and multiple options legs cannot 

exceed a ratio of three-to-one), which 

the Exchange’s system validates, and 

which under reasonable risk valuation 

methodologies, means that the stock 

position is fully hedged. In addition, if 

all option and stock components are on 

the same side of the market, which the 

Exchange’s system also validates, then 

the order will not be eligible for 

electronic processing pursuant to Rule 

6.13. 

Furthermore, as noted above, 

proposed Rule 6.13.06(a) provides that 

PHs may only submit complex orders 

with a stock component if such orders 

comply with the QCT Exemption. PHs 

submitting such complex orders with a 

stock component represent that such 

orders comply with the QCT Exemption. 

Thus, the Exchange believes that 

complex orders consisting of a stock 

component will comply with the 

exemption and that the Exchange’s 

system will validate such compliance as 

noted above to assist its designed 

routing broker(s) in carrying out its 

responsibilities as agent for these orders. 

The Exchange believes the proposed 

process offers effective and efficient 

automatic execution for both the options 

and stock components of a stock-option 

order and it should promote just and 

equitable principles of trade and remove 

impediments to and perfect the 

mechanism of a free and open market 

and a national market system by 

enhancing the electronic processing of 

the stock-option orders. However, this 

process is not exclusive. The Exchange 

notes that PHs can also utilize other 

exchanges’ systems (several of which 

offer stock-option processing) or avoid 

using stock-option orders. 

Legging 

The third purpose of this proposed 

rule change is to provide that ‘‘legging’’ 

against the individual orders and quotes 

in the Exchange’s electronic book (the 

‘‘Book’’) will not occur for stock-option 

orders, except that that [sic] legging may 

occur in a limited instance described 

below for eligible market orders that 

have been subject to a COA.10 The 

Exchange believes that limiting the 

electronic trading of stock-option orders 

pursuant to Rule 6.13 to executions 

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10022 Federal Register / Vol. 77, No. 34 / Tuesday, February 21, 2012 / Notices 

11That is not to say that the Exchange would not 

determine to permit additional ‘‘legging’’ of stockoption orders under Rule 6.13 in the future. Any 

such change to the electronic processing of stockoption orders under Rule 6.13 would be subject to 

a separate rule change filing. 

12For purposes of this legging functionality, an 

‘‘eligible market order’’ would mean a stock-option 

order that is within designated size and order type 

parameters, determined by the Exchange on a classby-class basis, and for which the national best bid 

or offer (‘‘NBBO’’) is within designated size and 

price parameters, as determined by the Exchange 

for the individual leg. The designated NBBO price 

parameters will be determined based on a minimum 

bid price for sell orders and a maximum offer price 

for buy orders. The Exchange may also determine 

to limit the trading times within regular trading 

hours that the legging functionality will be 

available. See proposed 6.13.06(d). Pursuant to Rule 

6.13.01, any determination by the Exchange on 

these parameters would be announced via 

Regulatory Circular. 

13Pursuant to Rule 6.13.01, any determination by 

the Exchange to route stock-option market orders in 

this manner will be announced via Regulatory 

Circular. 

14See, e.g., C2 Rule 6.36, Order Routing to Other 

Exchanges. 

15The allocation algorithms for the individual 

series legs include price-time, pro-rata, and pricetime with primary public customer and secondary 

trade participation right priority and an optional 

priority overlays [sic] pertaining to market turner 

priority. See Rules 6.12, Order Execution and 

Priority. 

16The COA ‘‘Responses [sic] Time Interval’’ 

means the period of time during which responses 

to the RFR may be entered. The Exchange 

determines the length of the Response Time Interval 

on a class-by-class basis, however, the duration 

shall not exceed three (3) seconds. See Rule 

6.13(c)(3)(B). 

against other stock-option orders in the 

manner proposed will provide for more 

efficient execution and processing of 

stock-option orders and will assist with 

the maintenance of fair and orderly 

markets by helping to mitigate the 

potential risks associated with legging 

stock-option orders, including the risk 

of one leg of the stock-option order 

going unexecuted (and thereby not 

achieving a complete stock-option order 

execution and having a partial position 

that is unhedged).11

The limited exception where legging 

would be permitted would provide that, 

if at the conclusion of a COA a stockoption order that is an eligible market 

order 12 cannot be filled in whole or in 

a permissible ratio, then any remaining 

balance of the option leg(s) would be 

routed to the Exchange’s system for 

processing as a simple market order(s) 

consistent with the Exchange’s order 

execution rules and any remaining 

balance of the stock leg would be routed 

to the designated broker-dealer, who 

will represent the order on behalf of the 

party that submitted the stock-option 

order.13 The Exchange notes that when 

a stock-option order is legged in this 

manner, it is possible for the Exchange 

to route the option leg(s) to another 

options exchange, consistent with its 

rules.14

This alternate legging functionality is 

intended to assist in the automatic 

execution and processing of stockoption orders that are market orders. 

The Exchange believes the order 

eligibility parameters provide the 

Exchange with the flexibility to assist 

with the maintenance of orderly markets 

by helping to mitigate the potential risks 

associated with legging stock option 

orders, e.g., the risk of a order drilling 

through multiple price points on 

another exchange (thereby resulting in 

execution at prices that are away from 

the NBBO and potentially erroneous), 

and/or the risk of one leg of the stockoption order going unexecuted (thereby 

not achieving a complete stock-option 

order execution and having a partial 

position that is unhedged). 

Allocation Algorithms 

The fourth purpose of this proposed 

rule change is to describe the electronic 

allocation algorithm applicable for 

stock-option orders in COB and COA. 

With respect to COB, the Exchange is 

proposing to provide that stock-option 

orders that are marketable against each 

other will automatically execute. In the 

event there are multiple stock-option 

orders at the same price, they will be 

allocated pursuant to the rules of 

trading priority otherwise applicable to 

incoming electronic orders in the 

individual series legs (or such other 

allocation algorithm as the Exchange 

may designate pursuant to Rule 

6.13.05).15

As a condition for a stock-option 

order to execute against another stockoption order in COB, the execution must 

be at a net price where the individual 

options series leg(s) of the stock-option 

order has priority over the individual 

orders and quotes residing in the 

Exchange’s Book (the ‘‘Book Priority 

Condition’’). To satisfy the Book Priority 

Condition, the individual option series 

leg(s) of a stock-option order (i) must 

not trade through the Exchange’s best 

bid (offer) in the individual component 

series, and (ii) must not trade at the 

Exchange’s best bid (offer) in the 

individual component series if one or 

more public customer orders are resting 

at the best bid (offer) in each of the 

component series and the stock-option 

order could otherwise be executed in 

full (or in a permissible ratio). 

With respect to COA, the Exchange is 

proposing to provide that, in the event 

there are multiple stock-option orders at 

the same price, they will trade in the 

following sequence: (i) Public customer 

stock-option orders resting in COB 

before, or that are received during, the 

COA Response Time Interval 16 and 

public customer responses collectively 

have first priority, with multiple orders 

ranked by time priority; (ii) non-public 

customer stock-option orders resting in 

the COB before the COA Response Time 

Interval have second priority, with 

multiple orders subject to the rules of 

trading priority otherwise applicable to 

incoming orders in the individual 

component legs; and (iii) non-public 

customer stock-option orders resting in 

COB that are received during the 

Response Time Interval and non-public 

customer responses collectively have 

third priority, with multiple orders 

subject to the rules of trading priority 

otherwise applicable to incoming orders 

in the individual component legs. 

As with COB, as a condition for a 

stock-option order to execute against 

another stock-option order through 

COA, would be that the execution must 

satisfy the Book Priority Condition 

described above. 

The system also has some features 

that would apply to the extent that a 

stock-option order is or becomes 

marketable. First, to the extent that a 

marketable stock-option order cannot 

automatically execute in full (or in a 

permissible ratio) when it is routed to 

COB or after being subject to COA 

because there are individual orders and 

quotes residing in the Book that have 

priority (but the order resting in COB 

would not trade against them because 

there will be no ‘‘legging’’), any part of 

the order that may be executed would 

be executed automatically and the part 

that cannot automatically execute 

would be cancelled. Second, to the 

extent that a stock-option order resting 

in COB becomes marketable against the 

derived net market (and cannot 

automatically execute because there is 

no ‘‘legging’’), the full order would be 

subject to COA (and the processing 

described above). For purposes of this 

feature, the ‘‘derived net market’’ for a 

given stock-option strategy would be 

calculated using the Exchange’s best bid 

or offer in the individual option series 

leg(s) and the NBBO in the stock leg. 

The Exchange notes this feature would 

only be applicable to resting stockoption orders that become marketable 

against the derived net market. This 

feature would not be applicable to 

resting stock-option [sic] that would 

become marketable with other stockoption orders. Having the system 

automatically initiate a COA once such 

a stock-option order resting in COB 

becomes marketable against the derived 

net market provides an opportunity for 

other market participants to match or 

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Federal Register / Vol. 77, No. 34 / Tuesday, February 21, 2012 / Notices 10023 

17The Exchange notes that, in these 

circumstances when a resting stock-option order 

becomes marketable, COA will automatically 

initiate regardless of whether a PH has requested 

that the stock-option order be COA’d pursuant to 

Rule 6.13.02. In this regard, the Exchange notes 

that, currently, all of its PHs have elected to have 

their COA-eligible orders COA’d. In addition, the 

Exchange notes that other markets have programs 

in place that provide for the automatic auctioning 

of complex orders. See, e.g., Phlx Rule 1080(e)(i)(A) 

which, among other things, provides that a complex 

order live auction (‘‘COLA’’) will initiate if the Phlx 

system receives a complex order that improves the 

Phlx complex order best debit or credit price 

respecting the specific complex order strategy that 

is the subject of the complex order. During a COLA, 

Phlx market participants may bid and offer against 

the COLA-eligible order pursuant to the Phlx Rule. 

18However, if the Exchange has activated the 

market stock-option order ‘‘legging’’ functionality 

and the and the [sic] order is eligible, in lieu of 

routing to PAR or a booth, any remaining balance 

of the option leg will route to the CBOE Hybrid 

Trading System for processing as a simple market 

order and any remaining balance of the stock leg 

will be electronically transmitted by the Exchange 

to a designated broker-dealer, who will represent 

the order on behalf of the party that submitted the 

stock-option order. See note 12, supra, and 

surrounding discussion on Legging. 

19 It should be noted that this is simply a 

parameter for determining whether a stock-option 

order will be subject to automatic execution, or 

routed to PAR, a booth or cancelled. A stock-option 

order that is subject to automatic execution remains 

subject to the applicable priority requirements 

prescribed in Rule 6.13. 

It should also be noted that the Exchange has not 

proposed to prescribe a minimum acceptable tick 

distance for this parameter (e.g., the acceptable tick 

distance may be established at 0). This will provide 

the Exchange with the flexibility to set the price 

check feature so that automatic executions of stockoption orders must be within the derived net 

market, which considers the Exchange’s best bid or 

offer for the options component leg(s) and the 

NBBO for the stock component leg. The Exchange 

believes it is reasonable and appropriate to utilize 

the Exchange best bid and offer in the calculation 

as the option component leg(s) are not permitted to 

trade at a price inferior to the Exchange’s best bid 

and offer. The Exchange also believes it is 

reasonable and appropriate to consider the NBBO 

for the stock component leg in the calculation as the 

NBBO should serve as a reasonable proxy for what 

may be considered a reasonable price for the 

automatic execution of the stock component leg. 

However, the Exchange also recognizes that some 

range outside the NBBO may also be appropriate for 

determining whether an automatic execution 

should occur as the QCT Exemption does not 

require the stock component leg of a qualifying 

stock- option order to be executed at the NBBO. The 

proposed parameter therefore provides the 

Exchange with the flexibility to determine to utilize 

the NBBO (which equates to an acceptable tick 

distance of 0) or some range outside the NBBO 

(which equates to the derived net part plus/minus 

an acceptable tick distance of 1, 2, 3 or some other 

number of ticks) for determining whether to 

automatically execute a stock-option order. 

improve the net price and allows for an 

opportunity for an automatic execution 

before a marketable stock-option order 

is cancelled.17 As noted above, after 

being subject to COA, any part of the 

order that may be executed would be 

executed automatically and the part of 

the order that cannot automatically 

execute would be cancelled. 

The following examples illustrate the 

operation of the proposed system 

functionality: 

Example 1: Assume an incoming market 

stock-option order for 75 units is submitted 

to COA, where the strategy involves the sale 

of 75 call contracts and purchase of 7,500 

stock shares. At the conclusion of COA, 

assume the best net price response is $9.13 

for 50 units and the best derived net market 

price is 9.15 for 100 units. The incoming 

market order to purchase 75 units of the 

stock-option strategy will receive a partial 

execution of 50 units at a net price of $9.13. 

Because the remaining 25 units are 

marketable against individual orders and 

quotes in the Book, the 25 units will be 

cancelled.18

Example 2: Assume a stock-option order 

for 75 units is resting in COB, where the 

strategy involves the sale of 75 call contracts 

and purchase of 7,500 stock shares at a net 

debit price of $9.13. By virtue of the fact that 

it is resting [sic] the COB, the stock-option 

order is not marketable—meaning there are 

no orders or quotes within the derived net 

market price or other stock-option orders 

within COB against which the resting stockoption order may trade. Assume there are no 

other stock-option orders representing [sic] in 

the COB for the strategy and also assume the 

best derived net market price for the strategy 

is a net price of $9.15 per unit for 100 units. 

If the price of the component option series 

leg or the stock is thereafter updated such 

that the derived net market price becomes 

$9.13 per unit for 100 units, then the full size 

of the resting stock-option order will become 

marketable but cannot automatically execute. 

As a result, the full size (75 units) of the 

resting stock-option order would be subject 

to COA. At the conclusion of COA, any part 

of the stock-option order that may be 

executed against other stock-option orders or 

auction responses will be automatically 

executed. Any part of the order that is 

marketable and cannot automatically execute 

(because the stock-option order cannot ‘‘leg’’ 

against the derived net market) will be 

cancelled. To the extent any part of the stockoption order is not marketable, it will 

continue resting in COB. 

Price Protection and Re-COA Features 

Finally, the fifth purpose of this 

proposed rule change is to adopt a new 

price check parameter applicable to the 

electronic processing of stock-option 

orders. In addition, the Exchange is 

proposing to extend the application of 

an existing price check parameter to 

include stock-option orders. 

In particular, under the proposed new 

price check parameter, the Exchange is 

proposing to provide that, on a class-byclass basis, the Exchange may determine 

(and announce via Regulatory Circular) 

to not automatically execute a stockoption order that is marketable if, 

following COA, the execution would not 

be within the acceptable derived net 

market for the strategy that existed at 

the start of COA. As indicated above, a 

‘‘derived net market’’ for a strategy will 

be calculated using the Exchange’s best 

bid or offer in the individual option 

series leg(s) and the NBBO in the stock 

leg. The ‘‘acceptable derived net 

market’’ for a strategy will be calculated 

using the Exchange’s best bid or offer in 

the individual option series leg(s) and 

the NBBO in the stock leg plus/minus 

an acceptable tick distance. The 

‘‘acceptable tick distance’’ will be 

determined by the Exchange on a classby-class and premium basis.19 Such a 

stock-option order would be cancelled. 

The Exchange believes that users are 

more concerned about obtaining a net 

price execution of their stock-option 

strategy orders than about achieving an 

execution of the stock leg at the NBBO. 

The price check parameter, however, 

would serve to prevent automatic 

executions at extreme prices beyond the 

NBBO. 

The following example illustrates the 

operation of the proposed system 

functionality: 

Example 3: Assume that at the start of COA 

the Exchange’s best bid and offer for the 

option leg of a stock-option strategy is $1.00– 

$1.20 (100 × 100) and the NBBO for the stock 

leg of the strategy is $10.05–$10.15 (10,000 

× 10,000). Thus, the derived net market for 

the strategy is $8.85–$9.15 (calculated as 

$1.20–$10.05 and ¥$1.00 + $10.15, 

respectively). In addition, assume that the 

acceptable tick distance for the stock leg is 

two ticks ($0.02). Under this parameter, an 

order to sell stock could not execute at a 

price below $10.03 and an order to buy stock 

could not execute at a price above $10.17. 

Thus, the acceptable derived net market for 

the strategy would be calculated as $8.83– 

$9.17 (calculated as $1.20–$10.03 and 

¥$1.00 + $10.17, respectively). Under this 

scenario, following COA, a marketable stockoption order to sell the option series and buy 

the stock that would trade with another 

stock-option order at net debit price of $9.17 

(within the acceptable derived net market for 

the strategy) will be executed. However, a 

marketable stock-option to sell the option 

series and buy the stock that would trade 

with another stock-option order at a net debit 

price of $9.18 ($0.01 outside the acceptable 

derived net market for the strategy) will be 

cancelled. 

In addition to the foregoing, 

additional parameters would apply. In 

classes where these price check 

parameters are available, they will also 

be available for COA stock-option 

responses under Rule 6.13(c), stockoption orders and responses under 

Rules 6.51, Automated Improvement 

Mechanism (‘‘AIM’’), and 6.52, 

Solicitation Auction Mechanism 

(‘‘SAM’’), or AIM customer-to-customer 

immediate cross of stock-option orders 

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20AIM, SAM and CTC are mechanisms that may 

be used to cross two paired orders. COA is a 

mechanism that may be used to expose an unpaired 

complex order for price improvement. Orders 

submitted for COA, AIM or SAM processing are 

exposed for price improvement through an auction 

(and thus other market participants may submit 

responses), whereas orders submitted for CTC 

processing are executed immediately without 

exposure. 

21 In conjunction with this rule change, the 

Exchange is also proposing a change to revise the 

text of Rule 6.13 in various places to use the phrase 

‘‘not be accepted’’ to replace various references 

‘‘rejected.’’ This change is non-substantive and is 

just intended to provide consistency in the wording 

of the text. See proposed changes to Rule 6.13.04(c) 

and (d). 

22The ‘‘acceptable price range’’ is determined by 

the Exchange on a class-by-class basis (and 

announced via Regulatory Circular) on a series by 

series basis for each series comprising a complex 

order. See also SR–C2–2012–003 (wherein the 

Exchange is proposing, among other things, to 

expand the application of this price check 

parameter to include marketable limit orders 

(currently the rule text only addresses market 

complex orders) and to correct a typographical error 

by changing the minimum acceptable price range 

specified in the rule text for orders in option series 

where the bid is less than $2 from $0.37 to $0.375. 

23The Exchange notes that it is proposing to 

amend the text to use the phrase ‘‘not be accepted’’ 

to replace the reference to ‘‘rejected.’’ See note 21, 

supra. 

24See proposed changes to Rule 6.13(d). 

25This feature will apply regardless of whether 

the stock-option order was subject to COA before 

it was booked in COB. See note 17, supra. 

26 Determinations by the Exchange regarding the 

classes where the re-COA feature is activated and 

related tick distance and frequency parameters will 

be announced via Regulatory Circular. 

under Rule 6.51.08 (‘‘CTC’’).20 Under 

these provisions, such paired stockoption orders and responses would not 

be accepted.21 In this regard, if any 

paired stock-option order submitted by 

an order entry firm for AIM, SAM or 

CTC processing exceeds the parameters, 

then both the order that exceeds the 

parameters and the paired contra-side 

order would not be accepted regardless 

of whether the contra-side order exceeds 

the parameters. However, to the extent 

that only the paired contra-side order 

submitted by an order entry firm for 

AIM or SAM processing would exceed 

the price check parameter, the paired 

contra-side order would not be accepted 

while the original Agency Order would 

not be accepted or, at the order entry 

firm’s discretion, would continue 

processing as an unpaired stock-option 

order (e.g., the original Agency Order 

would route to COB or COA for 

processing). The proposal also provides 

that, to the extent a contra-side order or 

response is marketable, its price will be 

capped at the price inside the 

acceptable derived net market. 

Example 4: Assume the acceptable derived 

net market is $1.00–$1.20. Also assume two 

paired stock-option orders are submitted to 

an AIM auction. If the original Agency Order 

to sell the option leg and buy the stock is a 

market order, but the contra-side order to buy 

the option leg and sell the stock has a net 

credit price of $1.25, the AIM auction will 

not initiate because the contra-side order 

does not satisfy the price check parameter. 

Such a contra-side order would not be 

accepted because it is outside the acceptable 

net market price range. The paired original 

Agency Order would either not be accepted 

along with the contra-side order or, at the 

order entry firm’s discretion, would continue 

processing as an unpaired complex order. By 

comparison, if the contra-side order has a net 

credit price of $0.95, the price will be capped 

at $1.01. 

The Exchange is also proposing to 

make two existing price protection 

features that it has available for other 

complex orders available for stockoption orders. In particular, the 

Exchange is proposing to modify its 

existing ‘‘market width’’ parameters 

under Rule 6.13.04(a) to extend the 

application of the individual series leg 

width parameters to stock-option orders. 

Under this price check parameter, 

eligible market complex orders will not 

be automatically executed if the width 

between the Exchange’s best bid and 

best offer in any individual series leg is 

not within an acceptable price range.22

As proposed, the Exchange may also 

determine on a class-by-class basis to 

make this price check parameter 

available for market and marketable 

limit stock-option orders. In addition, 

the Exchange has a price protection 

feature that it refers to as the ‘‘buy-buy 

(sell-sell) strategy’’ price check 

parameter under Rule 6.13.04(d). Under 

this parameter, the system will not 

automatically execute a limit order 

where (i) all the components of the 

strategy are to buy and the order is 

priced at zero, any net credit price, or 

a net debit price that is less than the 

number of individual option series legs 

in the strategy (or applicable ratio) 

multiplied by the applicable minimum 

net price increment for the complex 

order; or (ii) all the components of the 

strategy are to sell and the order is 

priced at zero, any net debit price, or a 

net credit price that is less than the 

number of individual option series legs 

in the strategy (or applicable ratio) 

multiplied by the applicable minimum 

net price increment for the complex 

order. Such complex orders under this 

price check parameter are rejected.23 In 

classes where this price check 

parameter is available, the Exchange is 

also proposing to make it available for 

stock-option orders. In such instances, 

the minimum net price increment 

calculation noted above would only 

apply to the individual option series 

legs.24

The Exchange believes that the 

application of these price protection 

features will assist with the 

maintenance of fair and orderly markets 

by helping to mitigate the potential risks 

associated with stock-option orders 

drilling through multiple price points 

(thereby resulting in executions at 

prices that are extreme and potentially 

erroneous) and with stock-option orders 

entered at net limit prices that are 

inconsistent with the particular ‘‘buybuy’’ or ‘‘sell-sell’’ strategy (thereby 

resulting in execution at prices that are 

extreme and potentially erroneous). 

Rather than automatically executing or 

booking orders at extreme and 

potentially erroneous prices, the 

Exchange would cancel orders that are 

not within the price check parameters 

so that the orders can be further 

evaluated. 

Finally, the Exchange is proposing to 

extend the application of its ‘‘re-COA’’ 

feature to stock-option orders. Under 

this feature, to the extent any nonmarketable order resting at the top of the 

COB is priced within the acceptable tick 

distance of the derived net market, the 

full order would be subject to COA (and 

the processing describe above) (referred 

to herein as a ‘‘re-COA’’).25 The 

Exchange notes that this re-COA feature 

for resting orders would only be 

applicable to resting non-marketable 

stock-option orders that move close to 

the derived net market. This feature is 

not applicable to resting stock-option 

orders that become marketable with 

other stock-option orders. The Exchange 

may also determine on a class-by-class 

and strategy basis to limit the frequency 

of re-COA auctions initiated for stockoption orders resting in COB. For 

example, the Exchange might determine 

to limit the frequency of re-COA 

auctions to once every ‘‘X’’ seconds (the 

‘‘interval timer’’) for a total of ‘‘Y’’ 

intervals. Once this cycle is complete, 

the Exchange may determine to wait for 

a period of time ‘‘Z’’ (the ‘‘sleep timer’’) 

and then reactivate the re-COA 

feature.26 All timers would be reset if a 

new stock-option order improves the 

top of the COB (i.e., improves the best 

net price bid or offer of the stock-option 

orders resting in COB). These 

limitations on the frequency of COA 

auctions due to the re-COA feature are 

intended to address system efficiency 

and effectiveness considerations, such 

as limiting repeated initiations of COA 

auctions (and related messaging) when 

there are flickering quotes. Once the reCOA feature is initiated for a resting 

order, all other aspects of the COA 

process described in Rule 6.13 would 

apply unchanged. The Exchange 

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Federal Register / Vol. 77, No. 34 / Tuesday, February 21, 2012 / Notices 10025 

27 In a prior rule change filing, the Exchange 

provided an example indicating that if the setting 

for the interval timer was once every 15 seconds for 

1 interval, then a total of 2 re-COA auctions would 

occur during the interval—the original re-COA 

auction and a second re-COA auction after the 

expiration of the 15-second interval timer. See 

Securities Exchange Act Release No. 65938 

(December 12, 2011), 76 FR 78706 (December 19, 

2011) (SR–C2–2011–039). However, the Exchange 

notes that only one re-COA auction will occur 

under these settings. Therefore, Example 5 above is 

intended to update the previous example and 

provide a more detailed illustration of the interval 

timer. 

28 15 U.S.C. 78f(b). 

29 15 U.S.C. 78f(b)(5). 

believes this re-COA feature facilitates 

the orderly execution of stock-option 

orders by providing an automated 

opportunity for price improvement to 

(and execution of) resting orders priced 

near the current market, similar to what 

a PH might seek to do if the PH were 

representing a stock-option order in 

open outcry on another exchange (or 

just entering an order initially into 

COB). 

The following example illustrates the 

operation of this proposed system 

functionality: 

Example 5: Assume that the acceptable tick 

distance to re-COA is 2 ticks ($0.02). Also 

assume the frequency for the re-COA feature 

is limited to once every 15 seconds (the 

interval timer) for 1 interval. Under this 

setting, only 1 re-COA auction could be 

triggered—the original re-COA auction.27 No 

further auctions would be triggered until the 

sleep timer expires, and only then if a quote 

update which is received AFTER the sleep 

timer expires would result in the order being 

within 2 ticks of the derived net market. 

Assume the sleep timer is set at 60 minutes. 

Assume the current derived net market is 

$8.85–$9.15. If a stock-option order resting in 

the COB is priced at a net credit price of 

$8.88, the stock-option order is not 

marketable and is priced inside the derived 

net market by 3 ticks. If subsequently the 

individual leg prices are updated such that 

the current derived net market for the 

strategy moves to a net price of $8.86–$9.14, 

the resting order priced at a net credit price 

of $8.88 would trigger the re-COA feature and 

initiate the re-COA auction process (as the 

order is now priced within 2 ticks of the 

derived net market). If there are no responses, 

the order would be placed back in COB. The 

resting order would not initiate the re-COA 

feature again until the 60-minute sleep timer 

has expired, and then only if a quote update 

received AFTER the 60-minute sleep timer 

expires would result in the order being 

within 2 ticks of the derived net market. 

If the number of attempts was set to a value 

greater than 1 (assume 2 for the below 

discussion), then when the 15-second 

interval timer expires, the order would be 

eligible to initiate the re-COA feature again 

if the current market moves after the 

expiration of the timer and the order meets 

the tick distance parameter (the order would 

not automatically initiate the re-COA feature 

after the expiration of the interval timer; 

instead there must be an update to the 

current market after the expiration of the 

interval timer and the order must meet the 

tick distance parameter for the system to reCOA again). For example, if after the end of 

the 15-second interval timer the derived net 

market moves to $8.87–$9.13 (or, for 

example, if the derived market moves back to 

$8.85–$9.15 and then, after the end of the 15- 

second interval timer moves back again to 

$8.86–$9.14), then the resting complex order 

would again initiate the re-COA feature. If 

there are no responses, the order would be 

placed back in COB. The cycle is complete. 

Now that the resting order has been subject 

to COA 2 times since it was booked in COB, 

the 60-minute sleep timer will begin and the 

resting order will not be eligible for the reCOA feature again until the sleep timer 

expires and there is a quote update after that 

timer expires that is within the tick distance 

parameter. All timers would be reset anytime 

there is a price change at the top of the COB. 

For example, if five minutes into the sleep 

interval a second stock-option order is 

entered to rest in COB at a price of $8.87 

($0.01 better than the original resting order 

priced at $8.88), the original resting order 

would no longer be at the top of the COB and 

subject to the re-COA feature. The timers 

would reset and the second complex order 

(which now represents the top of the COB) 

would be subject to the re-COA process. If, 

for example, the second order subsequently 

trades (constituting a price change at the top 

of the COB), the original order would be at 

the top of the COB again and could become 

subject to the re-COA feature again. 

2. Statutory Basis 

The proposed rule change is 

consistent with Section 6(b) of the Act 28

in general and furthers the objectives of 

Section 6(b)(5) of the Act 29 in particular 

in that it should promote just and 

equitable principles of trade, serve to 

remove impediments to and perfect the 

mechanism of a free and open market 

and a national market system, and 

protect investors and the public interest. 

The Exchange believes the proposed 

rule change will assist in the electronic 

processing of stock-option orders by 

providing an efficient mechanism for 

carrying out these strategies in the 

Exchange’s electronic trading 

environment. The Exchange also 

believes the proposed stock-option 

related price check parameters will 

enhance the functionality and assist 

with the maintenance of fair and orderly 

markets by helping to mitigate the 

potential risks associated with an order 

drilling through multiple price points 

(thereby resulting in execution at prices 

that are extreme and potentially 

erroneous) and an order trading at 

prices that are inconsistent with 

particular stock-option strategies 

(thereby resulting in executions at 

prices that are extreme and potentially 

erroneous). 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

The Exchange does not believe that 

the proposed rule change will impose 

any burden on competition not 

necessary or appropriate in furtherance 

of the purposes of the Act. 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants, or Others 

The Exchange neither solicited nor 

received comments on the proposal. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

Within 45 days of the date of 

publication of this notice in the Federal 

Register or within such longer period (i) 

as the Commission may designate up to 

90 days of such date if it finds such 

longer period to be appropriate and 

publishes its reasons for so finding or 

(ii) as to which the self-regulatory 

organization consents, the Commission 

will: 

(A) By order approve or disapprove 

such proposed rule change, or 

(B) Institute proceedings to determine 

whether the proposed rule change 

should be 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 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an email to rulecomments@sec.gov. Please include File 

Number SR–C2–2012–004 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Secretary, 

Securities and Exchange Commission, 

100 F Street NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number SR–C2–2012–004. 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 

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10026 Federal Register / Vol. 77, No. 34 / Tuesday, February 21, 2012 / Notices 

30 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3COA is a process for auctioning eligible complex 

orders, including stock-option orders, for price 

improvement. See Rule 6.53C(d) and .06(d). 

4This provision for a designated broker-dealer is 

similar to a provision in the International Securities 

Exchange Rule 722.02, except that CBOE’s proposed 

provision makes it clear the broker-dealer(s) that are 

designated by the Exchange to perform this function 

are not affiliated with CBOE. 

5 17 CFR 242.611(a). 

the Commission’s Internet Web site 

(http://www.sec.gov/rules/sro.shtml). 

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 Web site viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street NE., 

Washington, DC 20549–1090, on official 

business days between the hours of 10 

a.m. and 3 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; the 

Commission does not edit personal 

identifying information from 

submissions. You should submit only 

information that you wish to make 

available publicly. All submissions 

should refer to File Number SR–C2– 

2012–004, and should be submitted on 

or before March 13, 2012. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.30

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2012–3901 Filed 2–17–12; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–66394; File No. SR–CBOE– 

2012–005] 

Self-Regulatory Organizations; 

Chicago Board Options Exchange, 

Incorporated; Notice of Filing of a 

Proposed Rule Change Related to 

Stock-Option Processing 

February 14, 2012. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 (the 

‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice is hereby given that on February 

7, 2012, the Chicago Board Options 

Exchange, Incorporated (‘‘Exchange’’ or 

‘‘CBOE’’) filed with the Securities and 

Exchange Commission (the 

‘‘Commission’’) the 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. 

I. Self-Regulatory Organization’s 

Statement of the Terms of the Substance 

of the Proposed Rule Change 

The Exchange is proposing to amend 

its complex order processing rules to 

revise the procedures for electronically 

processing stock-option orders. The text 

of the rule proposal is available on the 

Exchange’s Web site (http:// 

www.cboe.org/legal), at the Exchange’s 

Office of the Secretary and at the 

Commission. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and the 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, the 

self-regulatory organization 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 those 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 parts of such 

statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and the 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

The Exchange proposes to revise is 

[sic] procedures for electronically 

processing stock-option orders under 

Rule 6.53C in order to (i) revise the 

procedures for routing the stock leg of 

a stock-option order; (ii) modify the 

procedure for executing for [sic] stockoption orders to no longer permit 

‘‘legging,’’ except in one limited context; 

(iii) modify the default electronic 

allocation algorithm applicable for 

stock-option orders in the complex 

order book (‘‘COB’’) and the complex 

order RFR auction (‘‘COA’’); 3 (iv) 

incorporate an additional price check 

parameter specific to the electronic 

processing of stock-option orders and 

modify an existing price check 

parameter and re-COA features 

(described in more detail below) to 

apply to stock-option orders; and (v) 

make other changes to reorganize and 

simplify the rule text. In addition, the 

Exchange is proposing certain changes 

to simplify the definitions for complex 

orders, including stock-option orders, 

subject to electronic processing under 

Rule 6.53C. 

Designated Broker-Dealer(s) 

The first purpose of this proposed 

rule change is to revise the procedures 

for routing the stock leg of a stockoption order. Interpretation and Policy 

.06 to Rule 6.53C, Complex Orders on 

the Hybrid System, currently describes 

the procedure for processing electronic 

stock-option orders. The procedure 

provides that the stock portion of a 

stock-option order shall be 

electronically executed on the CBOE 

Stock Exchange, LLC (‘‘CBSX,’’ CBOE’s 

stock execution facility) consistent with 

CBSX order execution rules. The 

Exchange proposes to revise the process 

to instead provide that the Exchange 

will electronically transmit orders 

related to a stock leg for execution by a 

broker-dealer designated by the 

Exchange (a ‘‘designated broker-dealer’’) 

on behalf of the parties to the trade. The 

Exchange will transmit the underlying 

stock leg order to a designated brokerdealer for execution once the Exchange 

trading system determines that a stockoption order trade is possible and at 

what net prices. The stock leg 

component will be transmitted to the 

designated broker-dealer as two paired 

orders with a designated limit price, 

subject to one limited exception 

pertaining to the stock leg of an 

unmatched market stock-option order 

(which is described in more detail 

below). The designated broker-dealer 

will act as agent for the stock leg of the 

stock-option orders. The designated 

broker-dealer may determine to match 

the orders on an exchange or ‘‘over-thecounter.’’ 

To participate in this automated 

process for stock-option orders, an 

Exchange Trading Permit Holder 

(‘‘TPH’’) must enter into a customer 

agreement with one or more designated 

broker-dealers that are not affiliated 

with the Exchange.4 In addition, TPHs 

may only submit complex orders with a 

stock component if such orders comply 

with the Qualified Contingent Trade 

Exemption (the ‘‘QCT Exemption’’) from 

Rule 611(a) of Regulation NMS.5 TPHs 

submitting such complex orders 

represent that such orders comply with 

the QCT Exemption. The Exchange 

intends to address fees related to routing 

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