22022 Federal Register / Vol. 77, No. 71 / Thursday, April 12, 2012 / Notices 

13See, e.g., NASDAQ Rule 4611(a)(6), BATS Rule 

11.21 and BYX Rule 11.21. 

14 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3Securities Exchange Act Release No. 66393 

(February 14, 2012), 77 FR 10020 (‘‘Notice’’). 

4C2 proposes to define a complex order as any 

order involving the execution of two or more 

different options series in the same underlying 

security 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. See C2 

Rule 6.13(a)(1). 

5C2 proposes to define a ‘‘stock-option order’’ as 

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 (or such lower 

ratio as may be determined by the Exchange on a 

class-by-class basis). See C2 Rule 6.13(a)(2). 

6See ISE Rule 722(a)(1) and (2). 

7See C2 Rule 6.13(a)(1) and (2). 

8See C2 Rule 6.13, Interpretation and Policy 

.06(d). 

Commission, but rather, is a minor 

change to the Exchange’s existing rules 

that is consistent with the rules of other 

national securities exchanges.13 For the 

foregoing reasons, this rule filing 

qualifies for immediate effectiveness as 

a ‘‘non-controversial’’ rule change under 

paragraph (f)(6) of Rule 19b–4. 

At any time within 60 days of the 

filing of the proposed rule change, the 

Commission summarily may 

temporarily suspend such rule change if 

it appears to the Commission that such 

action is necessary or appropriate in the 

public interest, for the protection of 

investors, or otherwise in furtherance of 

the purposes of the Act. 

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–EDGA–2012–14 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–EDGA–2012–14. 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 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, on official 

business days between the hours of 10 

a.m. and 3 p.m. Copies of the 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–EDGA– 

2012–14 and should be submitted on or 

before May 3, 2012. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.14

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2012–8788 Filed 4–11–12; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–66760; File No. SR–C2– 

2012–004] 

Self-Regulatory Organizations; C2 

Options Exchange, Incorporated; 

Order Approving a Proposed Rule 

Change Relating To Stock-Option 

Orders 

April 6, 2012. 

I. Introduction 

On February 7, 2012, the C2 Options 

Exchange, Incorporated (‘‘Exchange’’ or 

‘‘C2’’) filed with the Securities and 

Exchange Commission (‘‘Commission’’), 

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

Securities Exchange Act of 1934 

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

proposed rule change to amend C2 Rule 

6.13, ‘‘Complex Order Execution,’’ to, 

among other things, revise C2’s 

procedures for electronically executing 

stock-option orders. The proposed rule 

change was published for comment in 

the Federal Register on February 21, 

2012.3 The Commission received no 

comment letters regarding the proposed 

rule change. This order approves the 

proposed rule change. 

II. Description of the Proposal 

C2 proposes to amend C2 Rule 6.13 to 

adopt definitions of complex order and 

stock-option order, and to provide 

procedures for electronically executing 

stock-option orders. 

A. Definitions of Complex Order and 

Stock-Option Order 

C2 proposes to amend C2 Rule 6.13(a) 

to include definitions of complex order 4

and stock-option order.5 C2 notes that 

its new definitions of complex order 

and stock-option order are consistent 

with those of another options 

exchange,6 and with the definitions 

used in C2 Chapter VI, Section E, 

‘‘Intermarket Linkage,’’ which 

incorporates by reference Chicago Board 

Options Exchange, Inc. (‘‘CBOE’’) CBOE 

Rule 6.80(4). 

C2 Rule 6.13(b)(2) currently permits 

only complex orders with no more than 

four legs to be placed in the Complex 

Order Book (‘‘COB’’). C2 proposes to 

remove this limitation and to provide 

that only complex orders and stockoption orders with no more than the 

applicable number of legs, as 

determined by C2 on a class-by-class 

basis, will be eligible for processing.7

B. Execution of Stock-Option Orders 

1. Legging 

C2 proposes to add Interpretation and 

Policy .06 to Rule 6.13 to provide that 

stock-option orders will execute against 

other stock-option orders through COB 

and the Complex Order RFR Auction 

(‘‘COA’’). Stock-option orders will not 

be legged against the individual 

component legs, except in one limited 

circumstance, as described below.8 C2 

believes that the proposal will provide 

for more efficient execution and 

processing of stock-option orders and 

will help to mitigate the potential risks 

associated with legging stock-option 

orders, including the risk of an 

mstockstill on DSK4VPTVN1PROD with NOTICES

Federal Register / Vol. 77, No. 71 / Thursday, April 12, 2012 / Notices 22023 

9See Notice, 77 FR at 10021–22. 

10See C2 Rule 6.13, Interpretation and Policy 

.06(d). For purposes of the legging functionality, an 

eligible market order is a stock-option order that is 

within the designated size and order type 

parameters, as determined by C2 on a class-by-class 

basis, and for which the national best bid or offer 

(‘‘NBBO’’) is within designated size and price 

parameters, as determined by C2 for the individual 

leg. See C2 Rule 6.13, Interpretation and Policy 

.06(d). 

11See C2 Rule 6.13, Interpretation and Policy 

.06(d). 

12See id. 

13See id. 

14See id. 

15See Notice, 77 FR at 10022. 

16See C2 Rule 6.13, Interpretation and Policy 

.06(a). 

17See Notice, 77 FR at 10021. 

18See C2 Rule 6.13, Interpretation and Policy 

.06(a). 

19See Notice, 77 FR at 10020. 

20See id. at 10020–21. 

21See id. at 10021. 

22See id. at 10021 and C2 Rule 6.13, 

Interpretation and Policy .06. 

23See 17 CFR 242.611(a). See also Securities 

Exchange Act Release No. 57620 (April 4, 2008), 73 

FR 19271 (April 9, 2008) (order modifying the QCT 

Exemption) and Securities Exchange Act Release 

No. 53489 (August 31, 2006), 71 FR 52829 

(September 7, 2006) (order establishing the QCT 

Exemption). 

24See C2 Rule 6.13, Interpretation and Policy 

.06(a). 

25See Notice, 77 FR at 10021. 

26See id. at 10021. 

27See C2 Rule 6.13, Interpretation and Policy 

.06(c). 

28See id. C2 notes that the allocation algorithms 

for the individual series legs include price-time, 

pro-rata, and price-time with primary public 

customer and secondary trade participation right 

priority and an optional priority overlay pertaining 

to market turner priority. See Notice, 77 FR at 

footnote 15. See also C2 Rule 6.12. 

29See C2 Rule 6.13, Interpretation and Policy 

.06(c). C2 Rule 6.13, Interpretation and Policy .05 

allows C2 to determine, on a class-by-class basis, 

which electronic matching algorithm from Rule 

6.12 will apply to executions in COB in lieu of the 

algorithm specified in C2 Rule 6.13(b)(1)(B). 

30See C2 Rule 6.13, Interpretation and Policy 

.06(d). Under Interpretation and Policy .06(d), a 

stock-option order that was subject to a COA would 

execute against other stock-option orders first at the 

same net price(s) and, at the same price, in the 

following sequence: (i) Against public customer 

stock-option orders resting in COB before, or that 

are received during, the COA Response Time 

Interval, and public customer RFR responses, with 

multiple orders ranked by time priority; (ii) against 

non-public customer stock-option orders resting in 

the COB before the COA Response Time Interval, 

with multiple orders subject to the rules of trading 

priority otherwise applicable to incoming orders in 

the individual component legs; and (iii) against 

non-public customer stock-option orders resting in 

the COB that are received during the COA Response 

Time Interval and non-public customer responses, 

with multiple orders subject to the rules of trading 

priority otherwise applicable to incoming orders in 

the individual component legs. 

unhedged position if one leg of the 

order cannot be executed.9

C2 proposes to permit legging for an 

eligible market stock-option order that 

cannot be executed in full, or in a 

permissible ratio, at the conclusion of a 

COA.10 At the conclusion of a COA, any 

remaining balance of the option leg(s) of 

an eligible market stock-option order 

will route to C2’s system for processing 

as a simple market order(s), and C2 will 

electronically transmit any remaining 

balance of the stock leg to a designated 

broker-dealer (as described below) for 

processing as a market order.11 The 

designated broker-dealer will represent 

the stock leg on behalf of the party that 

submitted the stock-option order. 

For purposes of this legging 

functionality, an eligible market order is 

a stock-option order that is within 

certain parameters determined by C2 

and for which the NBBO is within 

designated size and price parameters, as 

determined by C2 for the individual 

leg.12 The designated NBBO price 

parameters will be determined based on 

a minimum bid price for sell orders.13

The Exchange may also determine on a 

class-by-class basis to limit the trading 

times within regular trading hours that 

the legging functionality will be 

available.14

C2 believes that the order eligibility 

parameters for eligible market stockoption orders will help to mitigate the 

potential risks associated with legging 

stock-option orders, including the risk 

of an order drilling through multiple 

price points on another exchange 

(thereby resulting in executions at 

prices that are far from the NBBO and 

potentially erroneous), and the risk that 

one leg of the stock-option order will go 

unexecuted (resulting in an incomplete 

execution and a partial position that is 

unhedged).15

2. Communication of Stock Leg to a 

Designated Broker-Dealer(s) 

Under the proposal, C2 will 

electronically communicate the stock 

leg of a stock-option order to a 

designated broker-dealer(s) for 

execution on behalf of a Permit 

Holder.16 C2 believes that this 

procedure will provide a more efficient 

means for processing stock-option 

orders.17 To participate in stock-option 

order automated processing, a Permit 

Holder must enter into a brokerage 

agreement with one or more designated 

broker-dealers that are not affiliated 

with C2.18

C2 will transmit the stock component 

of a stock-option order to a designated 

broker-dealer as two paired orders with 

a designated limit price (except in the 

limited circumstance described above 

for eligible market stock-option orders) 

after the Exchange’s trading system 

determines that a stock-option order 

trade is possible and at what net 

prices.19 The designated broker-dealer 

will act as agent for the stock leg of a 

stock-option order and will be 

responsible for the proper execution, 

trade reporting, and submission to 

clearing of the stock trade.20 After C2 

communicates the stock orders to the 

designated broker-dealer for execution, 

the designated broker-dealer will be 

responsible for determining whether the 

orders may be executed in accordance 

with all of the rules applicable to 

execution of equity orders, including 

compliance with applicable short sale, 

trade-through, and trade reporting 

rules.21 If the designated broker-dealer 

cannot execute the stock leg at the 

designated price, the stock-option order 

will not be executed on the Exchange.22

A Permit Holder may submit a stockoption order only if the order complies 

with the qualified contingent trade 

exemption (‘‘QCT Exemption’’) from 

Rule 611(a) of Regulation NMS,23 and a 

Permit Holder submitting a stock-option 

order represents that the order complies 

with the QCT Exemption.24 In addition, 

as described more fully in the Notice, 

C2’s system will validate compliance 

with the QCT Exemption with respect to 

each matched order communicated to 

the designated broker-dealer.25

C2 intends to file a separate proposal 

to establish fees related to the routing of 

the stock portion of a stock-option 

order.26

C. Allocation Algorithms and Priority 

1. COB and COA Allocation Algorithms 

Stock-option orders in COB and COA 

will execute according to an electronic 

allocation algorithm. Specifically, stockoption orders in COB that are 

marketable against each other will 

execute automatically.27 Multiple stockoption orders at the same price will be 

allocated pursuant to the rules of 

trading priority otherwise applicable to 

incoming electronic orders in the 

individual component legs,28 or 

pursuant to another allocation algorithm 

designated by C2 under C2 Rule 6.13, 

Interpretation and Policy .05.29

Stock-option orders executed against 

other stock-option orders through a 

COA will trade first at the best net 

price(s) and, at the same price, in the 

sequence set forth in C2 Rule 

6.13(c)(5)(B)–(D).30

2. Priority 

For a stock-option order to execute 

against another stock-option order in 

COB or COA, the execution must occur 

at a price where the option leg(s) of the 

stock-option order have priority over the 

mstockstill on DSK4VPTVN1PROD with NOTICES

22024 Federal Register / Vol. 77, No. 71 / Thursday, April 12, 2012 / Notices 

31See Notice, 77 FR at 10022. 

32See C2 Rule 6.13, Interpretation and Policy 

.06(b). See also Notice, 77 FR at 10022. 

33See C2 Rule 6.13, Interpretation and Policy 

.06(b). 

34See C2 Rule 6.13, Interpretation and Policy 

.06(b)(1). 

35See C2 Rule 6.13, Interpretation and Policy 

.06(b)(2). The order would not execute 

automatically against the derived net market 

because stock-option orders will not execute against 

the individual legs of the order, except in the 

limited circumstance described above. 

36See id. 

37See C2 Rule 6.13, Interpretation and Policy 

.06(b)(1). For examples of this proposed 

functionality, see the Notice, 77 FR at 10023. 

38See Notice, 77 FR at 10022–23. 

39See id. at 10022. 

40See C2 Rule 6.13, Interpretation and Policy 

.04(f). 

41See id. 

42See C2 Rule 6.13, Interpretation and Policy 

.04(f)(2). 

43See C2 Rule 6.13, Interpretation and Policy 

.04(f)(1). 

44See id. For an example of how this price check 

parameter would operate, see the Notice, 77 FR at 

10023. 

45See Notice, 77 FR at footnote 19. 

46See id. 

47See supra note 23. 

48See Notice, 77 FR at footnote 19. 

49See id. 

50See C2 Rule 6.13, Interpretation and Policy 

.04(f). 

51See id. 

52See id. For an example of how this price check 

parameter would operate, see the Notice, 77 FR at 

10024. 

53See C2 Rule 6.13, Interpretation and Policy 

.04(a)(5) and Notice, 77 FR at 10024. 

54See C2 Rule 6.13, Interpretation and Policy 

.04(a). 

55See C2 Rule 6.13, Interpretation and Policy 

.04(d) and Notice, 77 FR at 10024. 

individual orders and quotes in C2’s 

Book.31 To satisfy this condition, the 

individual option leg(s) of the stockoption order: (i) Must not trade at a 

price that is inferior to C2’s best bid 

(offer) in the individual component 

series; and (ii) must not trade at C2’s 

best bid (offer) in the individual 

component series if one or more public 

customer orders are resting at the best 

bid (offer) price in each of the 

component option series and the stockoption order could otherwise be 

executed in full or in a permissible 

ratio.32 The option leg(s) of a stockoption order may be executed in a onecent increment regardless of the 

minimum quoting increment applicable 

to that series.33

D. Provisions Applicable to Marketable 

Stock-Option Orders 

Several provisions in the proposal 

address the handling of a stock-option 

order that is or becomes marketable. 

First, to the extent that a marketable 

stock-option order cannot be executed 

in full, or in a permissible ratio, when 

it is routed to COB or following a COA, 

any part of the order that can execute 

will execute and the part that cannot 

automatically execute will be 

cancelled.34

Second, to the extent that a stockoption order resting in COB becomes 

marketable against the derived net 

market, the full order will be subject to 

a COA.35 The derived net market for a 

strategy will be calculated using C2’s 

best bid or offer in the individual option 

series leg(s) and the NBBO in the stock 

leg.36 After being subject to a COA, any 

part of the order that may be executed 

will be executed automatically and the 

part that cannot execute automatically 

will be canceled.37 C2 believes that 

automatically initiating a COA after a 

resting stock-option order becomes 

marketable against the derived net 

market will provide an opportunity for 

market participants to match or improve 

the net price and provide an 

opportunity for automatic execution of 

the order.38 C2 notes that this system 

feature will not be applicable to a 

resting stock-option order that becomes 

marketable against another stock-option 

order(s).39

E. Price Check Parameters 

C2 proposes to adopt a new price 

check parameter applicable to the 

electronic processing of stock-option 

orders.40 This new price check 

parameter will allow C2 to determine, 

on a class-by-class basis, and announce 

via Regulatory Circular, not to 

automatically execute a stock-option 

order if, following a COA, the execution 

would not be within the acceptable 

derived net market for the strategy that 

existed at the start of the COA.41 A 

stock-option order that is not within the 

acceptable derived net market will be 

cancelled.42

The ‘‘acceptable derived net market’’ 

for a strategy will be calculated using 

C2’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.43 C2 will determine the 

‘‘acceptable tick distance’’ on a class-byclass basis.44 C2 believes it is reasonable 

and appropriate to use the Exchange’s 

best bid and offer for the individual 

series to calculate the acceptable 

derived net market for the option series 

leg(s) because the option component 

leg(s) of a stock-option order are not 

permitted to trade at a price that is 

inferior to the Exchange’s best bid and 

offer.45 C2 believes it is reasonable and 

appropriate to use the NBBO plus/ 

minus an acceptable tick distance to 

calculate the acceptable derived net 

market for the stock component because 

C2 believes 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.46 C2 believes, further, 

that it also may be appropriate to 

consider some range outside the NBBO 

in determining the acceptable tick 

distance because the stock leg of a stockoption order that qualifies for the QCT 

Exemption 47 may be executed outside 

the NBBO for the stock.48 Accordingly, 

in establishing the acceptable tick 

distance for the stock leg of the order, 

C2 would have the flexibility to use the 

NBBO (which would equate to an 

acceptable tick distance of 0) or a range 

outside the NBBO.49

In classes where this price check 

parameter is available, it will also be 

available for COA responses under C2 

Rule 6.13(c); Automated Improvement 

Mechanism (‘‘AIM’’) and Solicitation 

Auction Mechanism stock-option orders 

and responses under C2 Rules 6.51 and 

6.52; and AIM customer-to-customer 

immediate cross stock-option orders 

under C2 Rule 6.51, Interpretation and 

Policy .08.50 Under these provisions, 

paired stock-option orders and 

responses will not be accepted, except 

that, to the extent only a paired contraside order subject to an auction under 

C2 Rule 6.51 or C2 Rule 6.52 exceeds 

the price check parameter, the contraside order will not be accepted and the 

paired original Agency Order will not be 

accepted or, at the order entry firm’s 

discretion, continue processing as an 

unpaired stock-option order (e.g., the 

Agency Order would route to COB or 

COA for processing).51 To the extent 

that a contra-side order or response is 

marketable, its price will be capped at 

the price inside the acceptable derived 

net market.52

C2 also proposes to apply the existing 

individual series leg width price check 

parameter in C2 Rule 6.13, 

Interpretation and Policy .04(a) to 

market and marketable limit stockoption orders.53 Under this price check 

parameter, a market or marketable limit 

stock-option order in a class where the 

price check parameter is available will 

not be executed automatically if the 

width between C2’s best bid and best 

offer in any individual series leg is not 

within an acceptable price range.54

In addition, C2 proposes to apply the 

existing buy-buy (sell-sell) strategy price 

check parameter in C2 Rule 6.13, 

Interpretation and Policy .04(d) to stockoption orders.55 Under this price check 

parameter, C2’s system will not 

automatically execute a limit order 

where (1) all the components of the 

mstockstill on DSK4VPTVN1PROD with NOTICES

Federal Register / Vol. 77, No. 71 / Thursday, April 12, 2012 / Notices 22025 

56See C2 Rule 6.13, Interpretation and Policy 

.04(d). The minimum net price increment 

calculation would only apply to the individual 

option series legs. 

57See id. 

58See Notice, 77 FR at 10024. 

59See C2 Rule 6.13, Interpretation and Policy 

.02(b). 

60See Notice, 77 FR at 10024. For an example of 

how the re-COA feature would operate, see id. at 

10025. 

61See id. at 10024–25. 

62 In approving this proposed rule change, the 

Commission has considered the proposed rule’s 

impact on efficiency, competition, and capital 

formation. See 15 U.S.C. 78c(f). 

63 15 U.S.C. 78f(b)(5). 

64See ISE Rule 722(a)(1) and (2). 

65See C2 Chapter VI, Section E, ‘‘Intermarket 

Linkage’’ (incorporating the rules in CBOE Chapter 

VI, Section E). CBOE Rule 6.80(4) defines a 

Complex Trade for purposes of CBOE Chapter VI, 

Section E, ‘‘Order Protection; Locked and Crossed 

Markets.’’ CBOE Rule 6.81(b)(7) provides an 

exception from the prohibition on Trade-Throughs 

for any transaction that was effected as a portion of 

a Complex Trade. 

66See Phlx Rule 1080, Commentary .08(a)(i) 

(stating that stock-option orders may only be 

executed against other stock-option orders and 

cannot be executed by the system against orders for 

the individual components). 

67See Notice, 77 FR at 10022. Under C2 Rule 

6.13, Interpretation and Policy .06(d), an eligible 

market order means a stock-option order that is 

within the designated size and order type 

parameters, determined by the Exchange on a classby-class basis, and for which the 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. The Exchange may also determine on a 

class-by-class basis to limit the trading times within 

regular trading hours that the legging functionality 

will be available. 

68See C2 Rule 6.13, Interpretation and Policy 

.06(a). 

69See id. 

70See Notice, 77 FR at 10020–21. 

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 an individual option series 

leg in the strategy (or applicable ratio) 

multiplied by the applicable minimum 

net price increment for the complex 

order; or (2) 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.56 Instead, such a stock-option 

order will not be accepted.57

C2 believes that the price protection 

parameters will help to mitigate the 

potential risks associated with stockoption orders drilling through multiple 

price points and with stock-option 

orders being entered at net limit prices 

that are inconsistent with the particular 

‘‘buy-buy’’ or ‘‘sell-sell’’ strategy, 

thereby resulting in executions that are 

extreme and potentially erroneous.58

F. Extension of the re-COA Feature to 

Stock-Option Orders 

C2 Rule 6.13, Interpretation and 

Policy .02(b) provides that, for classes in 

which COA is activated, a nonmarketable order resting at the top of the 

COB may be automatically subject to a 

COA if the order is within a number of 

ticks away from the current derived net 

market. C2 proposes to extend this ‘‘reCOA’’ feature to include stock-option 

orders resting at the top of the COB, and 

to provide that the derived net market 

for a stock-option order will be 

calculated using C2’s best bid or offer in 

the individual option series leg(s) and 

the NBBO in the stock leg.59 C2 notes 

that this feature would apply only to a 

resting non-marketable stock-option 

order that moves close to the derived 

net market, but would not apply to a 

resting stock-option order that becomes 

marketable against another stock-option 

order(s).60 C2 believes that this re-COA 

feature will facilitate the execution of 

stock-option orders by providing an 

automated opportunity for the execution 

of, and price improvement to, a resting 

stock-option order that is priced near 

the current market, similar to what a 

Permit Holder might do if the Permit 

Holder were representing a stock-option 

order in open outcry on another 

exchange or entering the order into the 

COB.61

III. Discussion and Commission’s 

Findings 

After careful review, the Commission 

finds that the proposed rule change is 

consistent with the requirements of the 

Act and the rules and regulations 

thereunder applicable to a national 

securities exchange.62 In particular, the 

Commission finds that the proposed 

rule change is consistent with Section 

6(b)(5) of the Act,63 which requires, 

among other things, that the rules of a 

national securities exchange be 

designed to prevent fraudulent and 

manipulative acts and practices, to 

promote just and equitable principles of 

trade, to remove impediments to and 

perfect the mechanism of a free and 

open market and a national market 

system, and, in general, to protect 

investors and the public interest. 

A. Definitions of Complex Order and 

Stock-Option Order 

The Commission finds that the 

proposed definitions of complex order 

and stock-option order are consistent 

with the Act. The Commission notes 

that the proposed definitions of 

complex order and stock-option order 

are consistent with definitions included 

in the rules of another options 

exchange,64 and in CBOE Rule 6.80(4), 

which is incorporated by reference in 

C2’s rules.65 In addition, the 

Commission believes that the proposed 

rule change removing the limit on the 

number of legs that may be included in 

a complex order could provide greater 

flexibility and permit the electronic 

trading on C2 of additional complex 

orders. 

B. Execution of Stock-Option Orders 

1. Legging of Stock-Option Orders 

The Commission believes that the 

proposal to add Interpretation and 

Policy .06 to Rule 6.13 to provide that 

stock-option orders will execute against 

other stock-option orders through COB 

and COA is consistent with the Act 

because it could facilitate the execution 

of stock-option orders. The Commission 

notes that another options exchange 

similarly permits stock-option orders 

traded on its electronic trading platform 

to execute only against other stockoption orders.66

The Commission also believes that it 

is consistent with the Act for C2 to 

permit the legging of eligible market 

stock-option orders that cannot be 

executed in full or in a permissible ratio 

at the conclusion of COA because the 

legging functionality could provide an 

additional opportunity for these orders 

to be executed. The Commission notes 

that C2 believes that the eligibility 

parameters for eligible stock-option 

orders could help to mitigate the risks 

that may be associated with legging 

stock-option orders.67

2. Communication of Stock Leg to a 

Designated Broker-Dealer(s) 

As described more fully above, C2 

proposes to allow the Exchange to 

electronically communicate the stock 

leg of a stock-option order to a 

designated broker-dealer(s) for 

execution on behalf of a Permit 

Holder.68 To participate in stock-option 

order automated processing, a Permit 

Holder must enter into a brokerage 

agreement with one or more designated 

broker-dealers that are not affiliated 

with C2.69

The designated broker-dealer will act 

as agent for the stock leg of a stockoption order and will be responsible for 

the proper execution, trade reporting, 

and submission to clearing of the stock 

trade.70 In addition, after C2 

communicates the paired stock orders to 

the designated broker-dealer for 

execution, the designated broker-dealer 

will be responsible for determining 

mstockstill on DSK4VPTVN1PROD with NOTICES

22026 Federal Register / Vol. 77, No. 71 / Thursday, April 12, 2012 / Notices 

71See id. at 10021. 

72See C2 Rule 6.13, Interpretation and Policy 

.06(a). 

73See Notice, 77 FR at 10021. 

74See ISE Rule 722, Supplementary Material .02. 

See also Phlx Rule 1080, Commentary .08. 

75See id. 

76C2 Rule 6.13(b)(1)(B) states that the allocation 

of complex orders in COB will be pursuant to the 

rules to trading priority otherwise applicable to 

incoming electronic orders in the individual 

component legs. 

77See C2 Rule 6.13, Interpretation and Policy 

.06(d). Under Interpretation and Policy .06(d), a 

stock-option order that was subject to a COA would 

execute against other stock-option orders first at the 

same net price(s) and, at the same price, in the 

following sequence: (i) Against public customer 

stock-option orders resting in the COB before, or 

that are received during, the COA Response Time 

Interval and public customer RFR responses, with 

multiple orders ranked by time priority; (ii) against 

non-public customer stock-option orders resting in 

the COB before the COA Response Time Interval, 

with multiple orders subject to the rules of trading 

priority otherwise applicable to incoming orders in 

the individual component legs; and (iii) against 

non-public customer stock-option orders resting in 

the COB that are received during the COA Response 

Time Interval and non-public customer responses, 

with multiple orders subject to the rules of trading 

priority otherwise applicable to incoming orders in 

the individual component legs. 

78Because C2 will not permit the legging of stockoption orders, except with respect to eligible market 

stock-option orders at the conclusion of a COA, the 

allocation algorithm for stock-option orders will not 

apply C2 Rule 6.13(c)(5)(A), which provides for the 

execution of a complex order against individual 

orders and quotes in the Book. See C2 Rule 6.13, 

Interpretation and Policy .06(d). 

79See Notice, 77 FR at 10022. 

80See C2 Rule 6.13, Interpretation and Policy 

.06(b). See also Notice, 77 FR at 10022. 

81See, e.g., ISE Rule 722(b)(2) and NYSE Amex 

Rule 980NY, Commentary .03(d). 

82See C2 Rule 6.13, Interpretation and Policy 

.06(b)(1). 

83See C2 Rule 6.13, Interpretation and Policy 

.06(b)(2). This system feature will not be applicable 

to a resting stock-option order that becomes 

marketable against another stock-option order(s). 

84See C2 Rule 6.13, Interpretation and Policy 

.06(a). 

whether the orders may be executed in 

accordance with all of the rules 

applicable to the execution of equity 

orders, including compliance with 

applicable short sale, trade-through, and 

trade reporting rules.71 A Permit Holder 

may submit a stock-option order only if 

the order complies with the QCT 

Exemption from Rule 611(a) of 

Regulation NMS, and a Permit Holder 

submitting a stock-option order 

represents that the order complies with 

the QCT Exemption.72 As described 

more fully in the Notice, C2’s system 

will validate compliance with the QCT 

Exemption with respect to each 

matched order communicated to the 

designated broker-dealer.73

C2’s proposal to electronically 

communicate the stock leg of a stockoption order to a designated brokerdealer for execution is similar to rules 

adopted by other options exchanges.74

Accordingly, the Commission finds that 

the proposal to allow C2 to 

electronically communicate the stock 

leg of a stock-option order to a 

designated broker-dealer that is not 

affiliated with C2 for execution on 

behalf of a Permit Holder is consistent 

with the Act. 

C. Allocation Algorithms and Priority 

1. COB and COA Allocation Algorithms 

Stock-option orders in COB that are 

marketable against each other will 

execute automatically, and multiple 

stock-option orders at the same price 

will be allocated pursuant to the rules 

of trading priority otherwise applicable 

to incoming electronic orders in the 

individual component legs.75 The 

Commission notes that this allocation 

provision for stock-option orders in 

COB is consistent with the existing 

complex order allocation provision in 

C2 Rule 6.13(b)(1)(B).76 Accordingly, 

the Commission believes that the 

allocation provision for marketable 

stock-option orders in COB is consistent 

with the Act. 

Under the proposal, stock-option 

orders executed against other stockoption orders through a COA will trade 

first at the best net price(s) and, at the 

same price, in the sequence set forth in 

C2 Rule 6.13(c)(5)(B)–(D).77 The 

allocation sequence in C2 Rule 

6.13(c)(5)(A)–(D) currently applies to 

complex orders.78 The Commission 

believes that it is consistent with the 

Act for C2 to apply this allocation 

sequence, as modified to reflect that 

stock-option orders will not execute 

against individual orders and quotes in 

the Book, to stock-option orders as well 

as complex orders. 

2. Priority 

For a stock-option order to execute 

against another stock-option order in 

COB or COA, the execution must occur 

at a price where the option leg(s) of the 

stock-option order have priority over the 

individual orders and quotes in C2’s 

Book.79 To satisfy this condition, the 

individual option leg(s) of the stockoption order: (i) Must not trade at a 

price that is inferior to C2’s best bid 

(offer) in the individual component 

series; and (ii) must not trade at C2’s 

best bid (offer) in the individual 

component series if one or more public 

customer orders are resting at the best 

bid (offer) price in each of the 

component option series and the stockoption order could otherwise be 

executed in full or in a permissible 

ratio.80 These provisions are consistent 

with the rules of other options 

exchanges.81 Accordingly, the 

Commission believes that the priority 

requirements for stock-option orders in 

Rule 6.13, Interpretation and Policy 

.06(b) are consistent with the Act. 

D. Provisions Applicable to Marketable 

Stock-Option Orders 

To the extent that a marketable stockoption order cannot be executed in full 

or in a permissible ratio when it is 

routed to COB or following a COA, any 

part of the order that can execute will 

execute and the part that cannot 

automatically execute will be 

cancelled.82 The Commission believes 

this provision is consistent with the Act 

because it describes the handling of the 

remaining balance of a marketable 

stock-option order that cannot be 

executed in full or in a permissible 

ratio. 

In addition, to the extent that a stockoption order resting in COB becomes 

marketable against the derived net 

market, the full order will be subject to 

a COA.83 The Commission believes that 

this provision is consistent with the Act. 

E. Price Check Parameters 

The stock-option derived net market 

price check parameter in C2 Rule 6.13, 

Interpretation and Policy .04(f) will 

prevent the automatic execution of a 

stock-option order following a COA if 

the execution would not be within the 

acceptable derived net market that 

existed at the start of the COA. The 

Commission believes that this price 

check parameter is consistent with the 

Act because it could help to prevent the 

automatic execution of stock-option 

orders at extreme or potentially 

erroneous prices. The Commission 

believes that it is reasonable to use C2’s 

best bid and offer for the individual 

series legs to calculate the acceptable 

derived net market for the option leg(s) 

of a stock-option order because the 

option leg(s) would not be permitted to 

trade at a price that is inferior to CBOE’s 

best bid or offer. The Commission 

believes that using the NBBO for the 

stock, plus or minus an acceptable tick 

distance, to determine the acceptable 

derived net market for the stock leg of 

a stock-option order will provide C2 

with flexibility in setting this parameter. 

The Commission notes that a stockoption order submitted to C2’s system 

must comply with the QCT 

Exemption.84 The stock leg of a stockoption order that complies with the 

QCT Exemption would be permitted to 

trade at a price that is outside the NBBO 

for the stock. 

mstockstill on DSK4VPTVN1PROD with NOTICES

Federal Register / Vol. 77, No. 71 / Thursday, April 12, 2012 / Notices 22027 

85See C2 Rule 6.13, Interpretation and Policy 

.04(a)(5) and Notice, 77 FR at 10024. 

86See C2 Rule 6.13, Interpretation and Policy 

.04(d) and Notice, 77 FR at 10024. 

87See C2 Rule 6.13, Interpretation and Policy 

.02(b). 

88 15 U.S.C. 78s(b)(2). 

89 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 66394 

(February 14, 2012), 77 FR 10026 (‘‘Notice’’). 

4CBOE proposes to define a complex order as any 

order for the same account involving the execution 

of two or more different options series in the same 

underlying security occurring at or near the same 

time in a ratio that is equal to or greater than oneto-three (.333) and less than 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. See CBOE Rule 6.53C(a)(1). 

5CBOE proposes to define a stock-option order as 

any order for the same account 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 (or such lower ratio as may be 

determined by the Exchange on a class-by-class 

basis). See CBOE Rule 6.53C(a)(2). 

6See Notice, 77 FR at 10032. 

7See id. 

8See ISE Rule 722(a)(1) and (2). 

9See CBOE Rule 6.53C(a)(1) and (2). 

10See, e.g., CBOE Rule 6.53C, Interpretation and 

Policy .06(c) and (d). 

C2 also proposes to extend the 

existing individual series leg width 

price check parameter in C2 Rule 6.13, 

Interpretation and Policy .04(a) to the 

individual series legs of market and 

marketable limit stock-option orders.85

This price check parameter prevents the 

automatic execution of a marketable 

complex order when the width between 

C2’s best bid and offer in any individual 

series leg is not within an acceptable 

price range. C2 further proposes to 

extend the existing buy-buy (sell-sell) 

strategy price check parameter in C2 

Rule 6.13, Interpretation and Policy 

.04(d) to stock-option orders.86 As 

described more fully above, this price 

check parameter prevents the automatic 

execution of complex order at a net 

limit price that is inconsistent with the 

order’s strategy (e.g., an order where all 

of the components of a strategy are to 

buy, but the order is priced at 0 or at 

a net credit). The Commission believes 

it is consistent with the Act for C2 to 

have the ability to apply these price 

check parameters to stock-option orders, 

in addition to complex orders. 

F. Extension of the re-COA Feature to 

Stock-Option Orders 

C2 proposes to amend C2 Rule 6.13, 

Interpretation and Policy .02(b) to apply 

its ‘‘re-COA’’ feature to stock-option 

orders resting at the top of the COB. For 

classes in which COA is activated, a 

non-marketable stock-option order 

resting at the top of the COB may be 

automatically subject to a COA if the 

order is within a number of ticks away 

from the current derived net market.87

The Commission believes applying the 

‘‘re-COA’’ feature to stock-option orders 

could facilitate the execution of stockoption orders by providing an 

opportunity for a stock-option order 

resting at the top of the COB to be 

executed automatically. Accordingly, 

the Commission finds that the provision 

is consistent with the Act. 

IV. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,88 that the 

proposed rule change (SR–C2–2012– 

004) is approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.89

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2012–8784 Filed 4–11–12; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–66759; File No. SR–CBOE– 

2012–005] 

Self-Regulatory Organizations; 

Chicago Board Options Exchange, 

Incorporated; Order Approving a 

Proposed Rule Change Relating to 

Stock-Option Orders 

April 6, 2012. 

I. Introduction 

On February 7, 2012, the Chicago 

Board Options Exchange, Incorporated 

(‘‘CBOE’’ or ‘‘Exchange’’), filed with the 

Securities and Exchange Commission 

(‘‘Commission’’), pursuant to Section 

19(b)(1) of the Securities Exchange Act 

of 1934 (‘‘Act’’) 1 and Rule 19b–4 

thereunder,2 a proposed rule change to 

amend CBOE Rule 6.53C, ‘‘Complex 

Orders on the Hybrid System,’’ to, 

among other things, revise CBOE’s 

procedures for electronically executing 

stock-option orders. The proposed rule 

change was published for comment in 

the Federal Register on February 21, 

2012.3 The Commission received no 

comment letters regarding the proposed 

rule change. This order approves the 

proposed rule change. 

II. Description 

CBOE proposes to amend CBOE Rule 

6.53C to adopt new definitions of 

complex order and stock-option order, 

and to make several changes to its 

procedures for electronically executing 

stock-option orders. 

A. Definitions of Complex Order and 

Stock-Option Order 

CBOE Rule 6.53C(a) currently defines 

complex orders, including stock-option 

orders, in terms of enumerated 

strategies. The proposal replaces these 

enumerated strategies with general 

definitions of complex order 4 and 

stock-option order.5 According to CBOE, 

the investing industry creates new and 

legitimate investment strategies that do 

not necessarily fit within the current 

narrow definitions of complex order 

types, and, as a result, bona fide 

transactions to limit risk are not 

afforded the facility of execution 

provided to more common complex 

orders.6 CBOE believes that more 

general definitions will provide greater 

flexibility in the design and use of 

complex strategies.7 CBOE notes that its 

new definitions of complex order and 

stock-option order are consistent with 

those of another options exchange 8 and 

with CBOE Rule 6.80(4). 

CBOE Rule 6.53C(c)(iii) currently 

permits only complex orders with no 

more than four legs to be placed in the 

Complex Order Book (‘‘COB’’). CBOE 

proposes to remove this limitation and 

to provide that only complex orders and 

stock-option orders with no more than 

the applicable number of legs, as 

determined by CBOE on a class-by-class 

basis, will be eligible for electronic 

processing.9

B. Execution of Stock-Option Orders 

1. Legging of Stock-Option Orders 

Currently, complex orders, including 

stock-option orders, may trade with 

other complex orders or by ‘‘legging’’ 

with the individual orders and quotes in 

CBOE’s and CBSX’s electronic books 

(‘‘EBooks’’) for the individual 

component legs, provided that the 

complex order can be executed in full, 

or in a permissible ratio, by the orders 

and quotes in the EBooks for the 

individual component legs.10 In the case 

of a stock-option order that is legged, 

the stock component of the order would 

trade with CBSX’s EBook and the option 

mstockstill on DSK4VPTVN1PROD with NOTICES