Document ID: SEC-2016-1186-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: C2 Options Exchange, Inc.
Posted Date: 2016-07-12T04:00Z

[Federal Register Volume 81, Number 133 (Tuesday, July 12, 2016)]
[Notices]
[Pages 45196-45200]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-16379]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78235; File No. SR-C2-2016-010]

Self-Regulatory Organizations; C2 Options Exchange, Incorporated; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
To Amend Rules Related to Execution and Priority

July 6, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that, on June 29, 2016, C2 Options Exchange, Incorporated (``C2'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III, below, which Items have been prepared by the Exchange. The 
Exchange filed the proposal as a ``non-controversial'' proposed rule 
change pursuant to Section 19(b)(3)(A)(iii) 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its rules related to execution and 
priority. The text of the proposed rule change is 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
    The proposed rule change amends C2's execution and priority rules 
to more accurately reflect current System functionality and make other 
technical and nonsubstantive changes. First, the proposed rule change 
amends Rule 6.12(a) to provide the price-time and pro rata priority 
algorithms apply to orders and quotes. The current rule text states 
these trading priority allocations apply only to orders; however, the 
System applies these rules of trading priority to resting orders and 
quotes, which is consistent with the Exchange's intention and, the 
Exchange believes, Participants' expectations.\5\ Resting quotes may 
trade with incoming orders in the same manner as resting orders, and 
the proposed rule change merely updates the rule text to explicitly 
state this. The proposed rule change also makes nonsubstantive changes 
to Rule 6.12(a), including correcting punctuation and using consistent 
language in both subparagraphs (1) and (2).\6\
---------------------------------------------------------------------------

    \5\ Previous rule filings state these rules of trading priority 
apply to the allocation of both resting orders and quotes. See, 
e.g., SR-C2-2010-005. Additionally, Rule 6.12(a)(2) states an 
additional contract (if contracts cannot be distributed equally 
among Participants) will be distributed to the Participant whose 
quote or order has time priority, supporting the rule's 
applicability to orders and quotes.
    \6\ The proposed rule change similarly amends Rules 6.12(b)(1), 
6.12(h), 6.16, 6.18(d), 6.34(d), and 6.51(b)(2)(B) to include 
references to quotes in rule provisions that currently only 
reference orders but also apply in the same manner to quotes.
---------------------------------------------------------------------------

    Second, the proposed rule change amends Rule 6.12(a)(2) to add 
detail regarding how the System distributes contracts pursuant to the 
pro-rata algorithm and rounds fractions of contracts. Current Rule 
6.12(a)(2) states resting orders are prioritized according to price, 
and if there are two or more orders at the best price, then trades are 
allocated proportionally according to size (in a pro rata fashion). 
Executable quantity is allocated to the nearest whole number, with 
fractions \1/2\ or greater rounded up and fractions less than \1/2\ 
rounded down. If there are two market participants that both are 
entitled to an additional \1/2\ contract and there is only one contract 
remaining to be distributed, the additional contract will be 
distributed to the participant whose quote or order has time priority. 
This is consistent with System functionality; however, it represents 
only one example (a situation in which there are two market 
participants and only one remaining contract) rather than a general 
rule regarding allocations of contracts that cannot be allocated 
proportionally in whole numbers. For example, three market participants 
may be entitled to an additional fraction of a contract.
    The proposed rule change amends this provision to state if there 
are two or more resting orders or quotes at the best price, then the 
System allocates contracts from an incoming order or quote to resting 
orders and quotes sequentially in the order in which the System 
received them (i.e., according to time) proportionally according to 
size (i.e., on a pro rata basis). The System allocates contracts to the 
first resting order or quote proportionally according to size (based on 
the number of contracts to be allocated and the size of the resting 
orders and quotes). Then, the System recalculates the number of 
contracts to which each remaining resting order and quote is afforded 
proportionally according to size (based on the number of remaining 
contracts to be allocated and the size of the remaining resting quotes 
and orders) and allocates contracts to the next resting order or quote. 
The System repeats this process until it allocates all contracts from 
the incoming order or quote. The System rounds fractions \1/2\ or 
greater up and fractions less than \1/2\ down prior to each allocation. 
This proposed provision is consistent with the current rule that states 
contracts are distributed to quotes and orders in time priority. It 
adds detail regarding the sequential nature of the allocation process 
and applies the provision to situations in which any number of orders 
or quotes may be entitled to non-whole numbers of contracts. The 
Exchange believes this is a fair, objective process and simple 
systematic process to allocate ``extra'' contracts when more than one 
market participant may be entitled to those extra contracts

[[Page 45197]]

after rounding. The following examples demonstrate this process:
     Example 1: Suppose there are three resting orders at the 
same price with sizes of 30 (Order A), 20 (Order B) and 10 (Order C) 
(received by the System in that order), and an incoming order with size 
of 15 is marketable against those three orders. The System first 
allocates 8 contracts to Order A (1/2 of 15 is 7.5, which rounds to 8). 
After this allocation, the System allocates 5 of the 7 remaining 
contracts to Order B (2/3 of 7 is 4.7, which rounds to 5), and then 
allocates the remaining 2 contracts to Order C.
     Example 2: Suppose there are three resting orders at the 
same price with sizes of 10 (Order A), 20 (Order B) and 30 (Order C) 
(received by the System in that order), and an incoming order with size 
of 15 is marketable against those three orders. The System first 
allocates 3 contracts to Order A (1/6 of 15 is 2.5, which rounds to 3). 
After this allocation, the System allocates 5 of the 12 remaining 
contracts to Order B (2/5 of 12 is 4.8, which rounds to 5), and then 
allocates the remaining 7 contracts to Order C.
     Example 3: Suppose there are three resting orders A, B and 
C (received by the System in that order) at the same price, each with a 
size of 50, and an incoming order with size of 100 is marketable 
against those three orders. The System first allocates 33 contracts to 
Order A (1/3 of 100 is 33.3, which rounds to 33). After this 
allocation, the System allocates 34 of the 67 remaining contracts to 
Order B (1/2 of 67 is 33.5, which rounds to 34), and then allocates the 
remaining 33 contracts to Order C.
    Third, the proposed rule change amends Rule 6.12(a)(3)(B) to delete 
subparagraphs (i) through (iv) (as well as the introductory sentence to 
those subparagraphs, as it is no longer necessary with the deletion of 
the listed items). Currently, subparagraph (B) states when allocating 
the participation right of a Preferred Market-Maker (``PMM'') or 
Designated Primary Market-Maker (``DPM'') pursuant to Rule 8.13 or 
8.19, respectively, the following apply:
     To be entitled to their participation right, a PMM's or 
DPM's order and/or quote must be at the best price on the Exchange 
(i.e., the Exchange's best bid or offer (``BBO'')).
     a PMM or DPM may not be allocated a total quantity greater 
than the quantity that it is quoting (including orders not part of 
quotes) at that price.
     in establishing the counterparties to a particular trade, 
the PMM's or DPM's participation right must first be counted against 
the PMM's or DPM's, as applicable, highest priority bids or offers.
     the participation right shall only apply to any remaining 
balance of an order once all higher priorities are satisfied.
    Each of these four conditions must be satisfied in order for a PMM 
or DPM to receive a participation right, and that will continue to be 
the case. However, the first, second and fourth condition are all 
included in Rules 8.13 and 8.19 regarding PMM and DPM participation 
rights, respectively.\7\ Therefore, the Exchange proposes to delete 
these provisions from Rule 6.12, as they are duplicative, and instead 
state a PMM or DPM is entitled to a participation right if it satisfies 
the conditions in Rule 8.13 or 8.19, respectively. The Exchange notes 
the rule text being deleted states a PMM's or DPM's participation right 
is based on its order and/or quote; however, Rules 8.13 and 8.19 
provide its participation right is based on its quote. Rules 8.13 and 
8.19 are consistent with how the System determines a PMM's or DPM's 
entitlement to a participation right, which is consistent with the 
Exchange's intention and, the Exchange believes, Participant's 
expectations. As PMMs and DPMs having heightened quoting obligations 
under Rules 8.13 and 8.17, which make them eligible for the 
entitlement, the Exchange believes it is appropriate for the 
entitlement to be based on their quotes and not any resting orders they 
may also have at the same price. The Exchange believes deleting the 
provisions referenced above in Rule 6.12(a)(3)(B) will eliminate any 
potential confusion regarding how the System determines a PMM's or 
DPM's participation right.
---------------------------------------------------------------------------

    \7\ See Rules 8.13(b)(ii), (c)(i), and (c)(ii), respectively, 
and 8.19(b)(1)(A), (b)(1)(B) and (b)(1)(C), respectively. Note the 
proposed rule change amends Rules 8.13(c)(ii) and 8.19(b)(1)(C) to 
provide the participation entitlement is based on the number of 
contracts remaining after all higher priority orders have been 
satisfied rather than public customer orders. This is consistent 
with current Rule 6.12(a)(3)(B)(iv) and System functionality. If the 
Exchange has applied public customer priority to a class, those 
orders would be filled prior to a PMM or DPM participation 
entitlement. However, if the Exchange has applied another priority 
to a class at a higher priority than the participation entitlement, 
such as market turn priority, those orders at the higher priority 
would also be filled prior to a PMM or DPM participation entitlement 
consistent with their higher priority status.
---------------------------------------------------------------------------

    Additionally, subparagraph (iii) states in establishing the 
counterparties to a particular trade, the participation entitlement 
must first be counted against the PMM's or DPM's, as applicable, 
highest priority bids or offers. For a PMM or DPM to receive an 
entitlement, it must have a quote at the BBO. A Market-Maker firm may 
have multiple individual Market-Makers submitting quotes within a 
class. An entitlement will apply to a PMM's or DPM's quotes with 
highest priority (i.e., the best price if the price is the BBO) and 
will not apply to quotes of the same PMM or DPM firm at a lower price. 
The general allocation and priority rules provide contracts are 
allocated to quotes with the highest priority, a PMM or DPM must be 
quoting at the BBO, and the PMM or DPM may not be allocated a quantity 
greater than the quantity of its quote at that price. The Exchange 
believes this provision is therefore redundant and proposes to delete 
it.
    Fourth, the proposed rule change amends Rules 8.13(c) and 
8.19(b)(2) related to the participation rights of PMMs and DPMs. 
Currently, Rule 8.13(c) and 8.19(b)(2) each provide that a PMM or DPM 
participation entitlement, respectively, is 50% if there is one other 
Market-Maker also quoting at the BBO and 40% if there are two or more 
Market-Makers also quoting at the BBO. The proposed rule change 
provides that each of the PMM and DPM participation entitlement is 
based on both the number of Market-Maker quotes and non-public customer 
orders (including orders of professionals and voluntary professionals) 
\8\ at the BBO.\9\ This is consistent with current System 
functionality. Additionally, the current rule considers whether other 
Market-Makers are quoting at the best price, because Market-Makers 
provide liquidity to C2's market and are encouraged to do so if they 
have the opportunity to participate in a larger portion of a trade in 
which a PMM or DPM has a participation right. Other Participants 
besides Market-Makers provide liquidity to C2's market through orders, 
and the Exchange believes those

[[Page 45198]]

Participants, like Market-Makers, should have the same opportunity with 
respect to non-pubic customer orders.
---------------------------------------------------------------------------

    \8\ Pursuant to Rule 1.1, professionals and voluntary 
professionals will be treated as broker-dealers for purposes of Rule 
8.13 (as well as other rules related to allocation and priority). 
The proposed rule change amends the definitions of professional and 
voluntary professional in Rule 1.1 to provide that professionals and 
voluntary professionals will be treated as broker-dealers for 
purposes of Rule 8.19 as well. It was the intent of those 
definitions for professionals and voluntary professionals to be 
treated as broker-dealers under all rules related to allocation and 
priority; the Exchange is adding Rule 8.19 to the list of rules in 
those definitions, as it was inadvertently omitted from the list.
    \9\ The proposed rule change makes a corresponding change to 
Rule 8.13, Interpretation and Policy .01(b) related to the PMM 
participation entitlement with respect to complex orders. The 
proposed rule change also amends Rules 8.13(c) and Interpretation 
and Policy .01(b) and 8.19(b) to use terms already defined in Rule 
1.1 (BBO and Public Customer), as well as to make other 
nonsubstantive changes.
---------------------------------------------------------------------------

    The proposed rule change also provides that the participation 
entitlement will be the greater of the amount the PMM or DPM, as 
applicable, would otherwise receive pursuant to the algorithm 
applicable to the class and 40% when there are two or more other 
Market-Maker quotes or non-Public Customer orders at the BBO or 50% 
when there is only one other Market-maker quote or non-Public Customer 
order at the BBO, but no fewer than one contract.\10\ This change is 
consistent with current System functionality as well as the intent of 
the participation entitlement, which is to provide PMMs and DPMs with a 
benefit for their heightened quoting obligations.\11\ The proposed 
change providing the participation entitlement may be the amount the 
PMM or DPM, as applicable, would otherwise receive pursuant to the 
applicable algorithm is appropriate, because the participation 
entitlement could harm rather than benefit the PMM or DPM if its quote 
was large enough it would, for example, receive 60% of the contract 
based on the pro rata algorithm. This encourages PMMs and DPMs to quote 
larger sizes, which increases liquidity and ultimately benefits 
investors. This proposed change is also consistent with the rules of 
other exchanges.\12\
---------------------------------------------------------------------------

    \10\ The proposed rule change also amends Rule 8.19(b)(2) to 
state the DPM participation entitlement will be 30% when there are 
three or more other Market-Maker quotes or non-Public Customer 
orders at the BBO (and thus amends the previous clause to state the 
DPM participation entitlement will be 40% when there are two other 
Market-Maker quotes or non-Public Customer orders at the BBO, rather 
than two or more). This third level of the participation entitlement 
encourages other market participants to quote and is consistent with 
the rules of another exchange. See, e.g., Chicago Board Options 
Exchange, Incorporated (``CBOE'') Rule 8.87(b)(2).
    \11\ See Rules 8.13 and 8.17, respectively.
    \12\ See CBOE Rules 6.45A(a)(i)(C) and 6.45B(a)(ii)(C); and 
Miami International Securities Exchange, LLC (``MIAX'') Rule 
514(g)(1) and (h)(1).
---------------------------------------------------------------------------

    With respect to the proposed change stating a PMM or DPM, as 
applicable, may receive no fewer than one contract pursuant to the 
participation entitlement, because fractions of contracts of less than 
\1/2\ are rounded down, as discussed above, a transaction involving a 
small number of contracts may result in zero contracts being allocated 
to a PMM or DPM who should otherwise have priority. For example, if 
there is one contract left after an order trades with a public customer 
order, and there is a DPM and two other Market-Makers quoting at the 
BBO, 40% of one would give the DPM zero contracts, as 0.4 would round 
down to zero.\13\ Thus, this proposed rule change is intended to ensure 
that a PMM or DPM would receive a contract in this situation to 
continue to encourage PMMs or DPMs to provide liquidity on the 
Exchange.
---------------------------------------------------------------------------

    \13\ The contract would ultimately go to the Market-Maker who 
entered its quote first, as discussed above, which may not be the 
PMM or DPM.
---------------------------------------------------------------------------

    Fifth, the Exchange proposes to update Rule 6.12(c) regarding the 
priority of contingency orders. Currently, Rule 6.12(c) states, 
regardless of the allocation method in place, contingency orders 
(except elected stop-limit orders and the displayed portion of a 
reserve order) are placed last in priority order, regardless of when 
they were entered into the System. A contingency order that was entered 
before a limit order for the same security at the same price will be 
treated as if it were entered after the limit order. If public customer 
priority is afforded to a particular security, public customer 
contingency orders will have priority over non-public customer 
contingency orders but behind all other orders.
    The Exchange proposes to replace that provision to add more detail 
regarding the prioritization of contingency orders. Proposed Rule 
6.12(c) states once a certain event or trading condition satisfies an 
order's contingency, an order is no longer a contingency order and is 
treated as a market or limit order (as applicable), prioritized in the 
same manner as any other market or limit order based on the time it 
enters the book following satisfaction of the contingency (i.e., last 
in time priority with respect to other orders and quotes resting in the 
book at that time).\14\ If contingencies of multiple orders are 
satisfied at the same time, the System sends them to the book in the 
order in which the System initially received them.
---------------------------------------------------------------------------

    \14\ The System generally bases priority of a non-contingency 
order on the time the System receives it.
---------------------------------------------------------------------------

    Notwithstanding the foregoing, under any algorithm in Rule 6.12 
\15\:

    \15\ As provided in current Rule 6.12(a), all displayed orders 
at a given price have priority over the non-displayed portion of a 
reserve order at the same price. This is also consistent with the 
definition of reserve orders in current Rule 6.10(c)(8). The 
proposed rule change moves this provision to proposed subparagraph 
(c)(1) so all provisions of this rule regarding priority of 
contingency orders are included in the same paragraph. The proposed 
rule change also adds all-or-none orders to this provision, as those 
are also not displayed until their contingencies are triggered, 
similar to the non-displayed portions of reserve orders.
---------------------------------------------------------------------------

    (1) Upon receipt of a reserve order, the System displays in the 
book any initially display-eligible portion of the reserve order, 
which is prioritized in the same manner as any other order (i.e., 
based on the time the System receives it). Once any non-displayed 
portion of a reserve order becomes eligible for display, the System 
displays in the book that portion of the order and prioritizes it 
based on the time it becomes displayed in the book (i.e., last in 
time priority with respect to other orders and quotes resting in the 
book at that time).
    (2) Immediate-or-cancel and fill-or-kill orders are not placed 
in the book and thus are not prioritized with respect to other 
resting orders and quotes in the book (by definition, those types of 
orders are cancelled if they do not execute as soon as they are 
represented on the Exchange so have no opportunity to rest in the 
book). These orders execute against resting orders and quotes in the 
book based on the time the System receives them (i.e., the System 
processes these orders in the time sequence in which it receives 
them).
    (3) all-or-none orders are always last in priority (including 
after the undisplayed portions of reserve orders). If the Exchange 
applies public customer priority to a class, orders trade in the 
following order: (A) Public customer orders other than all-or-none, 
(B) non-public customer orders other than all-or-none and quotes, 
(C) public customer all-or-none orders (in time sequence), and (D) 
non-public customer all-or-none orders (in time sequence). If the 
Exchange applies pro-rata with no public customer priority or price-
time to a class, orders trade in the following order: (A) orders 
other than all-or-none and quotes, and (B) all-or-none orders (in 
time sequence).\16\
---------------------------------------------------------------------------

    \16\ Note other priorities may be applied to the class as well 
and would function as set forth in the rules.

    The Exchange believes this provision is consistent with the 
definitions of these order types, pursuant to which most contingency 
orders become market or limit orders once the contingency is satisfied. 
All-or-none orders must always be last in priority to ensure that there 
is sufficient size to satisfy the condition of such an order to trade 
in its entirety after all other orders at the same price have executed. 
Additionally, the Exchange believes it is reasonable for orders that 
are not displayed in the book to not receive priority over orders that 
are displayed, as they are not yet eligible for execution until they 
become displayed. These provisions are consistent with current System 
functionality and are merely adding more detail to the rules to provide 
additional transparency regarding allocation and priority principles 
for investors. These provisions are also consistent with the non-
inclusion of all-or-none orders and non-displayed portions of reserve 
orders in the NBBO.
    Sixth, the proposed rule change amends Rule 6.12(e) regarding how 
modification of an order or quote may change its priority position. The

[[Page 45199]]

proposed rule change amends Rule 6.12(e)(1) to clarify the provision 
applies to changing the price of a quote or order. This is consistent 
with the intention of the rule, including the final part of the 
provision that indicates priority is determined as if the order/quote 
was just received. However, reference in the rule to ``changed side'' 
(which applies to a quote) but not an order may create confusion for a 
market participant, who may mistakenly believe this provision only 
applies to quotes. Additionally, the proposed rule change amends Rule 
6.12(e)(2) to clarify if the price or quantity of one side of a quote 
is changed, the unchanged side retains its priority position. This is 
consistent with the provision in subparagraph (1), which provides 
changing the price of a quote only changes the priority position of the 
changed side of the quote; the proposed rule change explicitly states 
that the unchanged side retains its position. The Exchange believes 
these changes will eliminate any potential confusion.
    Finally, the proposed rule change amend Rule 6.12(f) to clarify the 
meaning of the provision. Current paragraph (f) states unless expressly 
stated otherwise, any potential price improvement resulting from an 
execution in the System shall accrue to the party that is removing 
liquidity previously posted in the System. Proposed paragraph (f) 
states, unless expressly stated otherwise, any potential price 
improvement resulting from an execution in the System accrues to the 
incoming order or quote that removes liquidity previously posted in the 
System. For example, suppose the market for a series is 1.00 to 1.20. A 
limit order in that series to buy for 1.25 enters the System. The 
System will provide price improvement to that incoming order and 
execute the order against the resting offer of 1.20. This is merely a 
clarification of the rule text and does not change any System 
functionality.
    The proposed rule change makes nonsubstantive changes to Rules 
6.12(b)(1), (e) and (h), 6.18(d) and 8.13(c) and Interpretation and 
Policy .01, including to fix punctuation and use defined terms, plain 
English, and language consistent with that used in similar rule 
provisions. In addition, the proposed rule change amends Rule 
6.12(b)(1) to provide the Market Turner priority percentage may be 
reduced on a class-by-class basis rather than series-by-series basis, 
as the Exchange generally makes this determination for an entire class 
rather than for specific series.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder applicable to the 
Exchange and, in particular, the requirements of Section 6(b) of the 
Act.\17\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \18\ 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 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) \19\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(5).
    \19\ Id.
---------------------------------------------------------------------------

    In particular, the proposed rule change amends execution and 
priority rules to more accurately reflect System functionality, which 
transparency protects investors and perfects the mechanism of a free 
and open market. The proposed rule change to provide quotes, in 
addition to orders, are subject to price-time and pro rata priority 
promotes just and equitable principles of trade, as resting quotes 
trade with incoming orders in the same manner as resting orders. The 
proposed change regarding how the System rounds the number of contracts 
when they cannot be allocated proportionally in whole numbers pursuant 
to the pro-rata algorithm adds detail to the rules (which previously 
only addressed the situation if there one additional contract for two 
market participants) regarding the allocation process and provides a 
fair, objective manner for rounding and distribution in all situations 
in which the number of contracts many not be allocated proportionally 
in whole numbers. Distributing contracts to resting orders and quotes 
in time priority when they cannot be allocated proportionally in whole 
numbers is also consistent with C2's current rules as well as the rules 
of another options exchange.\20\ The Exchange believes adding these 
details to the rules, as well as the technical and nonsubstantive 
changes to the rules, will better enable investors to understand how 
the System allocates trades and affords priority. The proposed rule 
change does not change how the System allocates and prioritizes orders 
and quotes; thus, orders and quotes will be subject to the same 
priority principles as they are today.
---------------------------------------------------------------------------

    \20\ See NASDAQ OMX BX, Inc. (``BX'') Chapter VI, Section 
10(1)(B).
---------------------------------------------------------------------------

    The proposed rule change to delete from Rule 6.12 the conditions a 
PMM or DPM must satisfy to be entitled to a participation right 
eliminates duplication and confusion, a these conditions are also 
contained in Rules 8.13 and 8.19, which protects investors. The 
proposed rule change providing a PMM's or DPM's participation right is 
determined in part by how many Market-Maker quotes and non-public 
customer orders are at the BBO is not only consistent with current 
System functionality but also encourages all Market-Makers, not just 
Trading Permit Holders, to continue to provide liquidity to the market 
because it may provide them with the opportunity to participate in a 
larger portion of a trade in which a PMM or DPM has a participation 
right (60% v. 50%). PMMs, and DPMs will still be entitled to a 
significant participation right of 40% or 50%, as applicable, which 
continues to provide an appropriate balance with their heightened 
quoting obligations. The proposed rule change to provide a DPM's 
participation right will be 30% if there are three or more Market-Maker 
quotes or non-Public Customer orders at the BBO will further promote 
other market participants to participate in a larger portion of a trade 
and thus further encourage liquidity from these other market 
participants, and is also consistent with the rules of another 
exchange.\21\ This additional liquidity will ultimately benefit 
investors. The proposed rule change that a PMM or DPM may receive the 
amount it would otherwise receive pursuant to the applicable algorithm 
if greater than the percentage specified in the rule will ensure PMMs 
and DPMs are not harmed by the participation entitlements, which are 
intended to be a benefit. This will encourage PMMs and DPMs to quote 
larges sizes, which will benefit investors, and is consistent with the 
rules of other exchanges.\22\ Similarly, the proposed rule change that 
the PMM or DPM participation entitlement may not be fewer than one 
contract when there are other Market-Maker quotes or non-Public 
Customer orders ensures PMMs and DPMs will receive a benefit

[[Page 45200]]

in exchange for their heightened quoting obligations when executions 
involve small number of contracts.
---------------------------------------------------------------------------

    \21\ See CBOE Rule 8.87(b)(2).
    \22\ See CBOE Rules 6.45A(a)(i)(C) and 6.45B(a)(ii)(C); and MIAX 
Rule 514(g)(1) and (h)(1).
---------------------------------------------------------------------------

    The proposed rule changes regarding the priority of contingency 
orders, modified orders and quotes, and price improvement to incoming 
orders and quotes eliminate potential confusion, promote just and 
equitable principles of trade, and thus protect investors and the 
public interest.

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 proposed rule change is 
consistent with how the System currently executes and prioritizes 
orders and quotes and primarily adds detail to the rules regarding 
current System functionality. Thus, the System will allocate orders and 
quotes under the proposed rule change in the same manner as it does 
today. The proposed rule change applies in the same manner to the 
orders and quotes of all Trading Permit Holders, and the additional 
transparency in the rules benefits all investors. The proposed rule 
change applies only to the allocation of orders and quotes in C2's 
System.

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:
    A. Significantly affect the protection of investors or the public 
interest;
    B. impose any significant burden on competition; and
    C. 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 \23\ 
and Rule 19b-4(f)(6) \24\ thereunder. 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. If the Commission takes such action, the 
Commission will institute proceedings to determine whether the proposed 
rule change should be approved or disapproved.
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78s(b)(3)(A).
    \24\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

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-C2-2016-010 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-C2-2016-010. 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-C2-2016-010 and should be 
submitted on or before August 2, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
---------------------------------------------------------------------------

    \25\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Brent J. Fields,
Secretary.
[FR Doc. 2016-16379 Filed 7-11-16; 8:45 am]
 BILLING CODE 8011-01-P