Document ID: SEC-2017-0717-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: C2 Options Exchange, Inc.
Posted Date: 2017-05-04T04:00Z

[Federal Register Volume 82, Number 85 (Thursday, May 4, 2017)]
[Notices]
[Pages 20951-20956]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-08981]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80554; File No. SR-C2-2017-016]

Self-Regulatory Organizations; C2 Options Exchange, Incorporated; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
Related to Rule 6.13

April 28, 2017.
    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 April 25, 2017, 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 Exchange filed the proposal pursuant to Section 
19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(6) thereunder.\4\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange seeks to amend Rule 6.13. The text of the proposed 
rule change is provided below.
    (additions are italicized; deletions are [bracketed])
* * * * *

C2 Options Exchange, Incorporated Rules

* * * * *

Rule 6.13. Complex Order Execution

    (a)-(b) No change.
    (c) Process for Complex Order RFR Auction. Prior to routing to the 
COB, eligible complex orders may be subject to an automated request for 
responses (``RFR'') auction process.
    (1) For purposes of paragraph (c):
    (A) ``COA'' is the automated complex order RFR auction process.
    (B) A ``COA-eligible order'' means a complex order that, as 
determined by the Exchange on a class-by-class basis, is eligible for a 
COA considering the order's [marketability (defined as a number of 
ticks away from the current market),] size, complex order type and 
complex order origin types (i.e. non-broker-dealer public customer, 
broker-dealers that are not Market-Makers or specialists on an options 
exchange, and/or Market-makers or specialists on an options exchange). 
Complex orders processed through a COA may be executed without 
consideration to prices of the same complex orders that might be 
available on other exchanges.
    (2) Initiation of a COA:
    (A) The System will send an RFR message to all Participants who 
have elected to receive RFR messages on receipt of (i) a COA-eligible 
order with two or more legs that is better than the same side of the 
Exchange spread market or (ii) a complex order with three or more legs 
that meets the class, size, and complex order type parameters of 
subparagraph (c)(1)(B) and is marketable against the Exchange spread 
market. Complex orders as described in subparagraph (c)(2)(A)(ii) will 
initiate a COA regardless of the order's routing parameters or handling 
instructions. Immediate or cancel orders that are not marketable 
against the derived net market in accordance with subparagraph 
(c)(2)(B) will be cancelled. The RFR message will identify the 
component series, the size and side of the market of the COA-eligible 
order and any contingencies, if applicable.
    (B) [Notwithstanding the foregoing, Participants may request on an 
order-by-order basis that incoming COA-eligible orders not COA (a ``do-
not-COA'' request).] Notwithstanding subparagraph (c)(2)(A)(i), Trading 
Permit Holders may request on an order-by-order basis that an incoming 
COA-eligible order with two legs not COA (a ``do-not-COA'' request). 
Notwithstanding subparagraph (c)(2)(A)(ii), the System will reject back 
to a Trading Permit Holder any complex order described in that 
subparagraph that includes a do-not-COA request. An order initially 
submitted to the Exchange with a do-not-COA request may still COA after 
it has rested on the COB pursuant to Interpretation and Policy .02.
    (3)-(9) No change.
    . . . Interpretations and Policies:
    .01-.07 No change.
* * * * *
    The text of the proposed rule change is also available on the 
Exchange's Web site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange 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 these 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 aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Exchange seeks to amend Rule 6.13(c) in order to hardcode the 
marketability

[[Page 20952]]

parameter (i.e., the price at which a complex order may initiate a 
COA); amend Rule 6.13(c)(2) related to when a complex order will 
initiate a COA to account for risks to Market-Makers associated with 
the use of the Exchange's Quote Risk Monitoring (``QRM'') Mechanism; 
and amend Rule 6.13(c)(2) to make conforming changes to the ``do-not-
COA'' functionality. The Exchange notes that other than the fact the 
proposed rule text does not reference manual order handling or the 
Public Automated Routing (``PAR'') workstation (because C2 is entirely 
electronic) all of the proposed rule changes are based on and identical 
to CBOE Rule 6.53C(d)(i)-(ii).
Marketability
    Currently, the marketability parameter in Rule 6.13(c)(1)(B) 
defined as a number of ticks away from the current market, sets the 
price at which a complex order will initiate a COA. The Exchange 
proposes to remove the marketability parameter from the definition of 
``COA-eligible order,'' which will remove the Exchange's flexibility to 
set the price at which a complex order will initiate a COA. The 
Exchange does not foresee any issues with removing the flexibility to 
determine the price at which a COA will be initiated because the 
Exchange does not foresee a future need to modify the price at which 
auctions are initiated. If unforeseen circumstances arise where the 
Exchange believes it is necessary to modify the price at which auctions 
are initiated then the Exchange will submit a subsequent rule filing. 
Additionally, removing such flexibility may provide increased certainty 
to market participants about the price at which a complex order will 
initiate a COA, helping to remove impediments to and perfect the 
mechanism of a free and open market.
    The Exchange proposes to hardcode the price at which a complex 
order may initiate a COA in Proposed Rule 6.13(c)(2)(A). For example, 
assuming all of the non-price specific requirements are met, a complex 
order with two or more legs under proposed subparagraph (c)(2)(A)(i) 
will initiate a COA if the Exchange spread market \5\ is 1-1.20 and the 
complex order is to buy at $1.01 or higher or to sell at 1.19 or 
lower.\6\ Additionally, assuming the non-price specific requirements 
are met, a complex order with three legs under subparagraph 
(c)(2)(A)(ii) will initiate a COA if the Exchange Spread Market is 1-
1.20 and the complex order is to buy at $1.20 or higher or to sell at 
$1.00 or lower. Initiating a COA in these situations will relieve the 
risk to Market-Makers noted below, which helps promote just and 
equitable principles of trade by relieving risk to Market-Makers 
allowing them to more efficiently and effectively provide important 
liquidity.
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    \5\ The term ``Exchange spread market'' means the derived net 
market based on the BBOs in the individual series legs comprising a 
complex order and, if a stock-option order, the NBBO of the stock 
leg. See Rule 1.1.
    \6\ The Exchange notes that the prices at which a complex order 
will initiate a COA under subparagraph (c)(2)(A)(i) is consistent 
with the current settings for the marketability parameter. This 
portion of the proposal simply hardcodes existing settings.
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QRM
    Under Rule 8.12, C2 offers Market-Makers that are obligated to 
provide and maintain continuous electronic quotes in an option class 
the QRM Mechanism, which is functionality to help Market-Makers manage 
their quotes and related risk. Market-Makers with appointments on the 
System \7\ must, among other things, provide and maintain continuous 
electronic quotes in a specified percentage of series in each class for 
a specified percentage of time.\8\ To comply with this requirement, 
each Market-Maker may use its own proprietary quotation and risk 
management system to determine the prices and sizes at which it quotes. 
In addition, each Market-Maker may use QRM.\9\
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    \7\ The term ``System'' means the automated trading system used 
by the Exchange for the trading of options contracts. See Rule 1.1.
    \8\ See e.g., Rules 8.5, 8.13, and 8.17.
    \9\ Although Market-Makers or Participant organizations must 
establish parameters for an acronym or firm, as applicable, for each 
QRM function set forth in Rule 8.12, a Market-Maker or Participant 
organization could set the value for the total number of contracts 
executed in a class at a level exceeding the total number of 
contracts it actually quotes in the class, which allows Market-
Makers or Participant organization who prefer to use their own risk-
management systems to enter values that assure the Exchange 
parameters will not be triggered.
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    A Market-Maker's risk in a class is not limited to the risk in a 
single series of that class. Rather, a Market-Maker is generally 
actively quoting in multiple classes, and each class may comprise 
hundreds or thousands of individual series. The System automatically 
executes orders against a Market-Maker's quotes in accordance with the 
Exchange's priority and allocation rules.\10\ As a result, a Market-
Maker has exposure and risk in all series in which it is quoting in 
each of its appointed classes. QRM is an optional functionality that 
helps Market-Makers, and Participant organizations with which a Market-
Maker is associated, limit this overall exposure and risk.
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    \10\ See Rules 6.12 and 6.13.
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    Specifically, if a Market-Maker elects to use QRM, the System will 
cancel a Market-Maker's quotes in all series in an appointed class if 
certain parameters the Market-Maker establishes are triggered. Market-
Makers may set the following QRM parameters (Market-Makers may set 
none, some or all of these parameters):
     A maximum number of contracts for that class (the 
``contract limit'') and a specified rolling time period in seconds 
within which such contract limit is to be measured (the ``measurement 
interval'');
     a maximum cumulative percentage (which is the sum of the 
percentages of the original quoted size of each side of each series 
that trade) (the ``cumulative percentage limit'') that the Market-Maker 
is willing to trade within a specified measurement interval; or
     a maximum number of series for which either side of the 
quote is fully traded (the ``number of series fully traded'') within a 
specified measurement interval.
    If the Exchange determines the Market-Maker has traded more than 
the contract limit or cumulative percentage limit, or has traded at 
least the number of series fully traded, of a class during the 
specified measurement interval, the System will cancel all of the 
Market-Maker's electronic quotes in that class (and any other cases 
with the same underlying security) until the Market-Maker refreshes 
those quotes (a ``QRM Incident''). A Market-Maker, or Participant 
organization with which the Market-Maker is associated, may also 
specify a maximum number of QRM Incidents that may occur on an 
Exchange-wide basis during a specified measurement interval. If the 
Exchange determines that a Market-Maker or Participant Organization, as 
applicable, has reached its QRM Incident limit during the specified 
measurement interval, the System will cancel all of the Market-Maker's 
or Participant Organization's quotes, as applicable, and the Market-
Maker's orders resting in the book in all classes and prevent the 
Market-Maker and Participant organization from sending additional 
quotes or orders to the Exchange until the earlier to occur of (1) the 
Market-Maker or Participant organization reactivates this ability or 
(2) the next trading day.
    The purpose of the QRM functionality is to allow Market-Makers to 
provide liquidity across most series in their appointed classes without 
being at risk of executing the full cumulative size of all their quotes 
before being given

[[Page 20953]]

adequate opportunity to adjust their quotes. For example, if a Market-
Maker can enter quotes with a size of 25 contracts in 100 series of 
class ABC, its potential exposure is 2,500 contracts in ABC. To 
mitigate the risk of having all 2,500 contracts in ABC execute without 
the opportunity to evaluate its positions, the Market-Maker may elect 
to use QRM. If the Market-Maker elects to use the contract limit 
functionality and sets the contract limit at 100 and the measurement 
interval at five seconds for ABC, the System will automatically cancel 
the Market-Maker's quotes in all series of ABC if 100 or more contracts 
in series of ABC execute during any five-second period.
    To assure that all quotations are firm for their full size, the 
System performs the parameter calculations after an execution against a 
Market-Maker's quote occurs. For example, using the same parameters in 
class ABC as above, if a Market-Maker has executed a total of 95 
contracts in ABC within the previous three seconds, a quote in a series 
of ABC with a size of 25 contracts continues to be firm for all 25 
contracts. An incoming order in that series could execute all 25 
contracts of that quote, and, following the execution, the total size 
parameter would add 25 contracts to the previous total of 95 for a 
total of 120 contracts executed in ABC. Because the total size executed 
within the previous five seconds now exceeds the 100 contract limit for 
ABC, the System would, following the execution, immediately cancel all 
of the Market-Maker's quotes in series of ABC. The Market-Maker would 
then enter new quotes for series in ABC. Thus, QRM limits the amount by 
which a Market-Maker's executions in a class may exceed its contract 
limit to the largest size of its quote in a single series of the class 
(or 25 in this example).
    The Exchange proposes to amend Rule 6.13 regarding complex orders 
to limit a potential source of unintended Market-Maker risk related to 
how the System calculates risk parameters under Rule 8.12 when complex 
orders leg into the market.\11\ As discussed above, by checking the 
risk parameters following each execution in a series, the risk 
parameters allow a Market-Maker to provide liquidity across multiple 
series of a class without being at risk of executing the full 
cumulative size of all its quotes. This is not the case, however, when 
a complex order legs into the regular market (i.e., the market for 
individual, or simple, orders). Because the execution of each leg of a 
complex order is contingent on the execution of the other legs, the 
execution of all the legs in the regular market is processed as a 
single transaction, not as a series of individual transactions.
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    \11\ Rule 6.13(b)(1)(A) provides that complex orders in the 
complex order book (``COB'') may execute against individual orders 
or quotes in the book provided the complex order can be executed in 
full (or a permissible ratio) by the orders and quotes in the book. 
Rule 6.13(c)(5)(A) provides that orders that are eligible for the 
complex order auction (``COA'') may trade with individual orders and 
quotes in the book provided the COA-eligible order can be executed 
in full (or a permissible ratio) by the orders and quotes in the 
book. COA is an automated request for responses (``RFR'') auction 
process. Upon initiation of a COA, the Exchange sends an RFR message 
to all Trading Permit Holders who have elected to receive RFR 
messages, which RFR message identifies the series, size and side of 
the market of the COA-eligible order and any contingencies. Eligible 
market participants may submit responses during a response time 
interval. At the conclusion of the response time interval, COA-
eligible orders are allocated in accordance with Rule 6.13(c)(5), 
including against individual orders and quotes in the book.
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    For example, if market participants enter into the System 
individual orders to buy 25 contracts for the Jan 30 call, Jan 35 call, 
Jan 40 call and Jan 45 call in class ABC, the System processes each 
order as it is received and calculates the Market-Makers parameters in 
class ABC following the execution of each 25-contract call. However, if 
a market participant enters into the System a complex order to buy all 
four of these strikes in class ABC 25 times, which complex order 
executes against bids and offers for the individual series (i.e., legs 
into the market), the System will calculate the Market-Maker's 
parameters in class ABC following the execution of all 100 contracts. 
If the Market-Maker had set the same parameters in class ABC as 
discussed above (100-contract limit with five-second measurement 
interval) and had executed 95 contracts in class ABC within the 
previous three seconds, the amount by which the next transaction might 
exceed 100 is limited to the largest size of its quote in a single 
series of the class. In that example, since the largest size of the 
Market-Maker's quotes in any series was 25 contracts, the Market-Maker 
could not have exceeded the 100-contract limit by more than 20 
contracts (95 + 25 = 120). However, with respect to the complex order 
with four legs 25 times, the next transaction against the Market-
Maker's quotes potentially could be as large as 100 contracts 
(depending upon whether there are other market participants at the same 
price), creating the potential in this example for the Market-Maker to 
exceed the 100-contract limit by 95 contracts (95 + 100 = 195) instead 
of 20 contracts.
    As this example demonstrates, legging of complex orders into the 
regular market presents higher risk to Market-Makers than executing 
their quotes against individual orders entered in multiple series of a 
class in the regular market, because it may result in Market-Makers 
exceeding their risk parameters by a greater number of contracts. This 
risk is directly proportional to the number of legs associated with a 
complex order. Market-Makers have expressed concerns to the Exchange 
regarding this risk.
    As noted above, it is the legging of complex orders into the 
regular market that presents the potential risk to Market-Makers. 
Generally, a complex order has the potential to leg into the market 
when the complex order is marketable against leg quotes. For example, 
if the Exchange spread market of a complex order strategy is 1.00-1.20 
and a complex order to buy or sell at $1.10 is entered, the complex 
order would not execute against the legs of the regular market because 
the leg markets (which make-up the Exchange spread market) cannot 
satisfy the order. A complex order to buy at $1.20 or higher or to sell 
at $1.00 or lower (i.e., an order that is marketable against the 
Exchange spread market) would potentially be executable against the leg 
quotes.
    To address this Market-Maker risk, the Exchange proposes to add 
subparagraph (2)(A)(ii) to Rule 6.13(c) to require certain orders with 
three or more legs to COA prior to entering the COB. But first, for 
clarity sake, the Exchange proposes to add subparagraph (2)(A)(i) to 
Rule 6.13(c) to provide that the System will initiate a COA upon 
receipt of a COA-eligible order (i.e., an order that meets the class, 
size, complex order type and complex order origin types parameters) 
\12\ with two or more legs that is better than the same side of the 
Exchange spread market. The Exchange notes that subparagraph (2)(A)(i) 
is not a substantive change. Subparagraph (2)(A)(i) simply reorganizes 
the currently effective rule. Whereas today Rule 6.13(c)(2) states that 
the System will initiate a COA on receipt of a COA-eligible order, 
which currently means an order with two or more legs that meets the 
class, marketability, size, order type, and origin type parameters, 
proposed subparagraph (2)(A)(i) states that the System will initiate a 
COA on receipt of a COA-eligible order (which as proposed in 
subparagraph (c)(1)(B) will continue to include the class, size, order 
type, and origin type parameters but will no longer include the 
marketability parameter as it will be hardcoded into subparagraph 
(c)(A)(i)) with two or more

[[Page 20954]]

legs \13\ that is better than the same side of the Exchange spread 
market (which is the current setting for marketability). As noted, the 
purpose of subparagraph (2)(A)(i) is to provide clarity as it relates 
to additional subparagraph (2)(A)(ii), and the Exchange believes 
reorganizing current functionality into paragraph (2)(A)(i) will help 
bring clarity to subparagraph (2)(A)(ii).
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    \12\ See Rule 6.13(c)(1)(B).
    \13\ Including ``two or more legs'' in proposed subparagraph 
(A)(i) is actually superfluous language because the term ``COA-
eligible order'' by definition must be a ``complex order,'' and a 
``complex order'' by definition must have two or more legs. See Rule 
6.13(c)(1)(B). A ``complex order'' is by definition two or more 
legs. See Rule 6.13(a)(1).
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    Now, with regards to subparagraph (2)(A)(ii), the Exchange proposes 
to provide that the System will initiate a COA upon receipt of a 
complex order with three or more legs that meets the class, size, and 
complex order type parameters of subparagraph (c)(1)(B) and is 
marketable against the Exchange spread market. The purpose of proposed 
subparagraph (2)(A)(ii) of Rule 6.13(c) is simply to allow certain 
orders with three legs that will not COA under subparagraph 
(c)(2)(A)(i) to COA pursuant to subparagraph (c)(2)(A)(ii). In short, 
if an order with three or more legs does not COA pursuant to Rule 
6.13(c)(2)(A)(i)--because it is not COA-eligible--it may still COA 
pursuant to Rule 6.13(c)(2)(A)(ii), as long as the order meets the 
class, size, complex order type parameters of subparagraph (c)(1)(B) 
and is marketable against the Exchange Spread market.
    For example, complex orders identified as IOC are not currently 
COA-eligible under the current rule (and the Exchange has no plans at 
this time to make them COA-eligible pursuant to proposed subparagraph 
(2)(A)(i)). However, IOC orders that have a large number of legs that 
execute immediately against prices in the leg markets are an example of 
orders that cause the risk to Market-Makers described above. Also, such 
orders do not appear to have investment strategies similar to 
traditional complex orders but instead are specifically designed to 
circumvent QRM settings. Thus, proposed subparagraph (2)(A)(ii) will 
allow the Exchange to initiate a COA upon receipt of orders with three 
or more legs that meet the class, size, order type parameter (including 
IOCs) that are marketable against the Exchange spread market.
    The proposed rule change will only impact a small percentage of 
complex orders that enter into the System, as a large percentage of 
complex orders entered into the System are only two legs. The Exchange 
also notes that complex orders with three or more legs will still have 
opportunities for execution through COA or on the COB if they do not 
execute at the end of the COA (including execution with the leg 
markets). Thus, the Exchange believes that requiring complex orders 
with three or more legs to COA prior to entering COB and legging into 
the regular market does not create any unusual circumstances for the 
System. The Exchange believes that the potential risk to Market-Makers 
in the regular market of allowing orders with three or more legs to 
directly enter COB and leg into the market far outweighs the potential 
benefit of continuing to allow COA to be voluntary for a limited number 
of orders.
    The Exchange believes that requiring certain complex orders with 
three or more legs to COA prior to entering COB and legging into the 
market will discourage market participants from continuing to enter the 
complex orders that expose Market-Makers to the risk described above. 
The proposed rule change eliminates the possibility of immediate 
executions of those particular complex orders. Market participants may 
still enter those complex orders. However, if they do, those complex 
orders will COA, which COA will allow Market-Makers to become aware of 
those complex orders and have adequate opportunity to react 
accordingly, including to adjust their quotes to avoid circumvention of 
their QRM settings. If a Market-Maker receives an RFR for a COA for one 
of those complex orders in one of its appointed classes, and the 
Market-Maker believes the order may execute against its quotes and 
cause executions that significantly exceed its contract limit in that 
class, the Market-Maker may adjust its quotes as it deems necessary to 
reduce its risk exposure prior to the complex order legging into the 
market and being presented to the Market-Maker for execution. The 
Exchange believes the proposed rule change will allow Market-Makers to 
better manage their risk in their appointments, as it will reduce the 
risk of those complex orders causing executions that significantly 
exceed Market-Makers' risk parameters. The Exchange believes this 
reduced risk will encourage Market-Makers to quote larger size, which 
will increase liquidity and enhance competition in those classes.
    The Exchange notes that the proposed rule change does not impact 
the allocation of complex orders or relieve Market-Makers of their 
obligations to provide continuous electronic quotes under the Exchange 
Rules or to provide ``firm'' quotes pursuant to Rule 8.6 or Rule 602 of 
Regulation NMS.
Do Not COA
    SR-C2-2015-025 provided, among other things, that rather than have 
Participants affirmatively request that their orders COA, incoming COA-
eligible orders would COA by default.\14\ Rule 6.13(c)(2) currently 
provides that Participants may request on an order-by-order basis that 
a COA-eligible order not COA (referred to as a ``do-not-COA'' request). 
The Exchange proposes to make conforming changes to the do-not-COA 
request to account for the amendment to Rule 6.13(c)(2)(A)(i) and (ii). 
The Exchange proposes to add Rule 6.13(c)(2)(B) to provide that 
notwithstanding subparagraph (c)(2)(A)(i), Trading Permit Holders may 
request on an order-by-order basis that an incoming COA-eligible order 
with two legs not COA. Proposed Rule 6.13(c)(2)(B) also provides that 
notwithstanding subparagraph (c)(2)(A)(ii), the System will reject back 
to a Trading Permit Holder any complex order described in that 
subparagraph that includes a do-not-COA request. This will allow 
Participants the ability to request their orders not COA but also 
ensure that three-legged orders--which may cause the risk to Market-
Makers described above--to be rejected. In either case, order entry 
firms are sophisticated market participants capable of managing their 
orders as they see fit.
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    \14\ See Securities Exchange Act Release No. 76621 (December 11, 
2015), 80 FR 78793 (December 17, 2015).
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    The Exchange will announce the implementation date of the proposed 
rule change in a Regulatory Circular to be published no later than 90 
days following the effective date. The implementation date will be no 
later than 180 days following the effective date.
2. Statutory Basis
    Exchange believes the proposed rule change is consistent with the 
Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\15\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \16\ requirements that the rules of an exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged

[[Page 20955]]

in regulating, clearing, settling, processing information with respect 
to, and facilitating transactions in securities, 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. Additionally, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \17\ requirement that the rules 
of an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
    \17\ Id.
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    In particular, the Exchange believes the proposed rule change 
alleviates a potential risk to Market-Makers that arises through the 
use of QRM. Complex orders with three or more legs that meet the class, 
size, and order type (including IOCs) parameters of subparagraph 
(c)(1)(B) and that are marketable against the derived net market (which 
the Exchange has identified as potentially causing risk to Market-
Makers) will initiate a COA, which helps promote just and equitable 
principles of trade by relieving risk to Market-Makers allowing them to 
more efficiently and effectively provide important liquidity. Orders 
that are designated as IOC and meet the class and size parameters of 
subparagraph (c)(1)(B), but that are not marketable against the derived 
net market, will be cancelled, which allows order entry firms to use 
their own sophisticated technology to manage their orders helping to 
remove impediments to and perfects the mechanism of a free and open 
market.
    The Exchange also believes the proposed rule change to initiate a 
COA upon receipt of complex orders with three or more legs that meet 
the class, size, and order type (including IOCs) parameters of 
subparagraph (c)(1)(B) and that are marketable against the derived net 
market is consistent with the requirement that Market-Makers' quotes be 
firm under Rule 602 of Regulation NMS.\18\ The proposed rule change 
does not relieve Market-Makers of their obligation to provide ``firm'' 
quotes. If a complex order with three or more legs goes through COA and 
then legs into the market for execution upon completion of the COA, at 
which point the complex order would execute against a Market-Maker's 
quotes based on priority rules, the Market-Maker must execute its 
quotes against the order at its then-published bid or offer up to its 
published quote size, even if such execution would cause the Market-
Maker to significantly exceed its risk parameters. However, prior to 
the end of COA (and thus prior to a complex order legging into the 
market), a Market-Maker may adjust its published quotes to manage its 
risk in a class as it deems necessary, including to prevent executions 
that would exceed its risk parameters. In this case, the firm quote 
rule does not obligate the Market-Maker to execute its quotes against 
the complex order at the quote price and size that was published when 
the order entered the System and initiated the COA. Rather, the Market-
Maker's firm quote obligation applies only to its disseminated quote at 
the time an order is presented to the Market-Maker for execution, which 
presentation does not occur until the System processes the order 
against the leg markets after completion of the COA.\19\ Thus, the 
proposed rule change is consistent with the firm quote rule.
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    \18\ Rule 602(b)(2) obligates a Market-Maker to execute any 
order to buy or sell a subject security presented to it by another 
broker or dealer or any other person belonging to a category of 
persons with whom the Market-Maker customarily deals, at a price at 
least as favorable to the buyer or sell as the Market-Maker's 
published bid or offer in any amount up to its published quotation 
size. Rule 602(b)(3) provides that no Market-Maker is obligated to 
execute a transaction for any subject security to purchase or sell 
that subject security in an amount greater than its revised 
quotation size if, prior to the presentation of an order for the 
purchase or sale of a subject security, the Market-Maker 
communicated to the Exchange a revised quotation size. Similarly, no 
Market-Maker is obligated to execute a transaction for any subject 
security if, before the order sought to be executed is presented, 
the Market-Maker has communicated to the Exchange a revised bid or 
offer. C2 Rule 8.6 imposes a similar obligation (Market-Maker bids 
and offers are firm for all orders under Rule 8.6 and SEC Rule 602 
for the number of contracts specified in the bid or offer).
    \19\ See Staff Legal Bulletin No. 16, Transaction in Listed 
Options Under Exchange Act Rule 11Ac1-1, U.S. Securities and 
Exchange Commission, Division of Market Regulation, January 20, 2004 
(``Scenario 3: When an Order is ``Presented'' . . . If an individual 
market maker generates its own quotations . . . and exchange systems 
route incoming orders to the responsible broker-dealer with 
priority, when is an order presented to a responsible broker-dealer? 
Response: . . . . When each market maker is the responsible broker-
dealer with respect to its own quote, an order is presented to it 
when received by the market maker from the exchange system.''). When 
a complex order is processing through COA, the order is still in the 
System and has not yet been presented to a broker or dealer 
(including a Market-Maker) for execution. Only after completion of 
the COA, when the System allocates the complex order for execution 
in accordance with priority rules, will that order be ``presented'' 
to the Market-Maker for firm quote purposes.
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    Additionally, the Exchange is removing flexibility with regards to 
the marketability parameter. Although the Exchange prefers flexibility, 
the Exchange does not foresee the need to retain flexibility with 
regards to the marketability parameter and hardcoding the parameter may 
help avoid confusion with regards to the price at which a complex order 
will initiate a COA, which also helps to remove impediments to and 
perfect the mechanism of a free and open market.
    Finally, the proposed rule change will allow Participants to use 
their knowledge and experience to evaluate then-current market 
conditions and determine if they do not want to COA orders based on 
those conditions, which also removes impediments to and perfects the 
mechanism of a free and open market. This allows Participants to, for 
example, have two-legged orders routed to the COB for potential 
immediate execution or three-legged orders to be rejected if they do 
not want to have three-legged orders delayed by COA.
    The Exchange notes that other than the fact the proposed rule text 
does not reference manual order handling or the Public Automated 
Routing (``PAR'') workstation (because C2 is entirely electronic) all 
of the proposed rule changes are based on and identical to CBOE Rule 
6.53C(d)(i)-(ii).

B. Self-Regulatory Organization's Statement on Burden on Competition

    C2 does not believe that the proposed rule change will impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange does not believe 
the proposed rule change will impose any burden on intramarket 
competition because the proposed rule change is intended to reduce risk 
to Market-Makers that are quoting in the regular market. C2 believes 
that the proposed rule change will promote competition by encouraging 
Market-Makers to increase the size of and to more aggressively price 
their quotes, which will increase liquidity on the Exchange. To the 
extent that the rule change makes C2 a more attractive marketplace, 
market participants are free to become Trading Permit Holders on C2 and 
other exchanges are free to amend their rules in a similar manner. 
Furthermore, the Exchange also does not believe that the hardcoding of 
the price at which a complex order may initiate a COA instead of the 
Exchange having the flexibility to modify the price parameter will 
impose a burden on competition as the hardcoded parameter will apply 
equally to all participants. Finally, the Exchange does not believe 
allowing Participants to determine not to have their orders COA will 
impose a burden on competition as it will also apply equally to all 
participants and allow Participants to use their knowledge and 
experience executing orders to determine whether they want an order to 
COA. The Exchange notes

[[Page 20956]]

that other than the fact the proposed rule text does not reference 
manual order handling or the Public Automated Routing (``PAR'') 
workstation (because C2 is entirely electronic) all of the proposed 
rule changes are based on and identical to CBOE Rule 6.53C(d)(i)-(ii).

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 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \20\ and Rule 19b-
4(f)(6) thereunder.\21\
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    \20\ 15 U.S.C. 78s(b)(3)(A).
    \21\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and the text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission.
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    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: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule change should be approved or 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 rule-comments@sec.gov. Please include 
File Number SR-C2-2017-016 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-C2-2017-016. 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 
10:00 a.m. and 3:00 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-C2-2017-016 and should be 
submitted on or before May 25, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-08981 Filed 5-3-17; 8:45 am]
BILLING CODE 8011-01-P