Document ID: SEC-2016-2244-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: C2 Options Exchange, Inc.
Posted Date: 2016-12-20T05:00Z

[Federal Register Volume 81, Number 244 (Tuesday, December 20, 2016)]
[Notices]
[Pages 92928-92932]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-30560]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79555; File No. SR-C2-2016-020]

Self-Regulatory Organizations; C2 Options Exchange, Incorporated; 
Order Approving a Proposed Rule Change Relating to Price Protection 
Mechanisms and Risk Controls

December 14, 2016.

I. Introduction

    On October 25, 2016, C2 Options Exchange, Incorporated (``C2'' 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 current and adopt new price protection 
mechanisms and risk controls for orders and quotes. The Commission 
published the proposed rule change for comment in the Federal Register 
on November 3, 2016.\3\ The Commission received no comments on the 
proposal. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 79189 (October 28, 
2016), 81 FR 76671 (November 3, 2016) (``Notice'').
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II. Description of the Proposed Rule Change \4\
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    \4\ A more detailed description of the proposed rule change 
appears in the Notice. See id.
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    The Exchange currently has in place various price check mechanisms 
and risk controls that are designed to prevent incoming orders and 
quotes from automatically executing at potentially erroneous prices or 
to assist Trading Permit Holders (``TPHs'') with managing their 
risk.\5\ The Exchange proposed to amend C2 Rules 6.17 and 8.12 to add 
new, as well as amend current, price protection mechanisms and risk 
controls to further assist brokers in their efforts to prevent errors 
and avoid trading activity that could potentially be unwanted or even 
disruptive to the market.\6\
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    \5\ See, e.g., C2 Rules 6.13, Interpretation and Policy .04 
(price check parameters for complex orders), 6.17(a) (market-width 
and drill through price check parameters), Rule 6.17(b) (simple 
limit order price parameters), 6.17(d) and (e) (price protections), 
and 8.12 (Quote Risk Monitor Mechanism (``QRM'')).
    \6\ The proposed rule change also made conforming changes to C2 
Rules 6.11, 6.14, and 6.18. A full discussion of those changes may 
be found in the Notice. See supra note 3.
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A. Limit Order Price Parameter for Simple Orders

    The Exchange proposed to amend the limit order price parameter for 
simple orders in C2 Rule 6.17(b). Currently, the Exchange will not 
accept for execution an eligible limit order if a limit order to buy 
(sell) is more than an acceptable tick distance (``ATD'') \7\ above 
(below): (i) The Exchange's previous day's closing price prior to the 
opening of a series, or (ii) the disseminated Exchange offer (bid) once 
a series has opened.\8\
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    \7\ Currently, the Exchange determines the ATD, which may be no 
less than 5 minimum increment ticks, on a series-by-series and 
premium basis. Under the proposed rule change, the ATD, which may be 
no less than two minimum increment ticks, will be determined on a 
class-by-class and premium basis. In addition, different ATDs may be 
applied to orders entered during the pre-opening, a trading 
rotation, or a trading halt. See proposed C2 Rule 6.17(b) and 
Notice, supra note 3, at 76673.
    \8\ See C2 Rule 6.17(b).
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    The Exchange has now proposed to amend C2 Rule 6.17(b) to reject a 
limit order to buy (sell) generally when it is more than an ATD above 
(below) the last disseminated national best offer (``NBO'') (national 
best bid (``NBB'')).\9\ According to the Exchange, using the NBBO or 
NBO (NBB), if available, will more accurately reflect the then current 
market, rather than the previous day's closing price or Exchange 
BBO.\10\ The Exchange, however, will continue to use the previous day's 
closing price or Exchange BBO in certain instances, such as when the 
NBBO is locked or crossed, or when there is no NBO (NBB) and the 
closing price does not cross the disseminated NBB (NBO).\11\
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    \9\ Specifically, C2 will reject the order if it is more than 
the ATD above (below): (i) Prior to the opening of a series, (A) the 
last disseminated NBO (NBB), if a series is open on another 
exchange, or (B) the Exchange's previous day's closing price, if a 
series is not yet open on any other exchange; if the NBBO is locked, 
crossed, or unavailable; or if there is no NBO (NBB) and the 
previous day's closing price is greater (less) than or equal to the 
NBB (NBO); (ii) intraday, the last disseminated NBO (NBB), or the 
Exchange's best offer (bid) if the NBBO is locked, crossed or 
unavailable; or (iii) during a trading halt, the last disseminated 
NBO (NBB).
    \10\ See Notice, supra note 3 at 76672.
    \11\ See id.

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[[Page 92929]]

    C2 also proposed to apply the limit order price parameter to 
immediate-or-cancel orders. According to the Exchange, such orders also 
are at risk of execution at extreme and potentially erroneous prices 
and thus will benefit from applicability of these checks.\12\ However, 
the limit order price parameter will not apply to orders with a stop 
contingency.\13\ According to the Exchange, buy orders with a stop 
contingency are generally submitted at a triggering price that is above 
the NBO, and sell orders with a stop contingency are generally 
submitted at a triggering price that is below the NBB.\14\ As a result, 
the Exchange believes these orders are expected to be priced outside 
the NBBO.\15\
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    \12\ See id. at 76673.
    \13\ See proposed C2 Rule 6.17(b). A stop contingency is 
triggered for a buy order if there is a last sale or bid at or above 
the stop price and for a sell order if there is a last sale or offer 
at or below the stop price.
    \14\ See Notice, supra note 3 at 76673.
    \15\ See id.
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B. Drill Through Price Check Parameter

    The Exchange proposed to amend the drill through price check 
parameter in C2 Rule 6.17(a)(2). Currently, the Exchange's trading 
system (``System'') will not automatically execute a market or 
marketable limit order \16\ if the execution would follow an initial 
partial execution on the Exchange at a price not within an ATD \17\ 
from the initial execution. Instead, the System cancels the remaining 
unexecuted portion.\18\
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    \16\ Currently, the Exchange applies the market-width check to 
market orders and the drill through check to market and marketable 
limit orders. The Exchange proposed to codify this current practice 
into the rules. See Notice, supra note 3, at 76673 n.12.
    \17\ Currently, the ATD is determined by the Exchange on a 
series-by-series and premium basis for market orders and/or 
marketable limit orders and may be no less than two minimum 
increment ticks. Under the proposed rule change, the Exchange will 
determine the ATD on a class and premium basis (which may be no less 
than two minimum increment ticks), which the Exchange will announce 
via Regulatory Circular. See proposed C2 Rule 6.17(a)(2)(A).
    \18\ See C2 Rule 6.17(c).
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    The Exchange now has proposed to amend C2 Rule 6.17(a)(2) to add 
detail to the rule describing how the System will handle orders in the 
event that the Exchange activates HAL or SAL.\19\ In particular, orders 
not previously exposed would be exposed via HAL and orders previously 
exposed via HAL or SAL would rest in the book for a period of time and 
thereafter be cancelled if they do not execute.\20\
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    \19\ Currently, the Exchange has not activated HAL or SAL in any 
class. See Notice, supra note 3, at 76673 nn.13 and 15.
    \20\ Specifically, if a buy (sell) order not yet exposed via HAL 
partially executes, and the System determines the unexecuted portion 
would execute at a price higher (lower) than the price that is an 
ATD above (below) the NBO (NBB) (``drill through price''), the 
System will not automatically execute the remaining portion but will 
instead expose it via HAL at the better of the NBBO and the drill 
through price (if eligible for HAL). If a buy (sell) order exposed 
via HAL (other than pursuant to the previous sentence) or the 
Solicitation Auction Mechanism (``SAL'') would, following the 
exposure period, execute at a price higher (lower) than the drill 
through price, the System will not automatically execute the order 
(or unexecuted portion). These orders (or unexecuted portions) will 
rest in the book (based on the time at which they enter the book for 
priority purposes) for a time period in milliseconds with a price 
equal to the drill through price. The Exchange will determine the 
time period (not to exceed three seconds) and announce it via 
Regulatory Circular in the event the Exchange activates HAL or SAL. 
See Notice, supra note 3, at 76674. If the order (or any unexecuted 
portion) does not execute during that time period, the System 
cancels it. In classes in which the Exchange activated SAL, an order 
eligible for SAL would be exposed immediately and would not 
partially execute prior to being exposed via SAL. For this reason, 
SAL is not included in proposed C2 Rule 6.17(a)(2)(A). See Notice, 
supra note 3, at 76673 n. 15. Any order (or unexecuted portion) that 
by its terms cancels if it does not execute immediately (including 
immediate-or-cancel, fill-or-kill, intermarket sweep, and market-
maker trade prevention orders) will be cancelled rather than rest in 
the book for this time period in accordance with the definition of 
those order types. See proposed C2 Rule 6.17(a)(2)(C).
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    Buy (sell) orders (or any unexecuted portion) that are not eligible 
for HAL or SAL and do not otherwise cancel by their terms will continue 
to be cancelled pursuant to proposed C2 Rule 6.17(a)(2)(D). In 
addition, the drill through price check parameter at the open will be 
handled pursuant to the separate process set forth in Rule 6.11(g)(2) 
and Interpretation and Policy .04.\21\
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    \21\ The proposed rule change also amended the market width 
price check parameter in C2 Rule 6.17(a)(1) to be determined on a 
class-by-class basis rather than series-by-series, as well as made 
additional non-substantive changes to Rule 6.17(a)(1), such as 
moving provisions regarding the market-width price check parameter 
from current paragraph (c) to proposed subparagraph (a)(1).
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C. TPH-Designated Risk Settings

    The Exchange proposed to amend C2 Rule 6.17 to authorize it to 
share TPH-designated risk settings with a TPH's Clearing TPH. The risk 
settings that the Exchange may share with Clearing TPHs include, but 
are not limited to, settings under Rule 8.12 (related to QRM) and 
proposed C2 Rule 6.17(g) (related to order entry and execution rate 
checks) and (h) (related to maximum contract size). The Exchange 
represented that other options exchanges have similar rules permitting 
them to share member-designated risk settings with other members that 
clear transactions on the member's behalf.\22\
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    \22\ See Notice, supra note 3 at 76675. See also, e.g., Miami 
International Securities Exchange, LLC (``MIAX'') Rule 500; NASDAQ 
OMX BX, Inc. (``BX'') Chapter VI, Section 20; NYSE Arca, Inc. 
(``Arca'') Rule 6.2A(a); NYSE MKT LLC (``MKT'') Rule 902.1NY(a); and 
NASDAQ OMX PHLX LLC (``PHLX'') Rule 1016.
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D. Put Strike Price/Call Underlying Value Checks

    The Exchange proposed to amend the put strike price and call 
underlying value checks in C2 Rule 6.17(d). Currently, the System 
rejects back to the TPH a quote or buy limit order for (i) a put if the 
price of the quote bid or order is greater than or equal to the strike 
price of the option, or (ii) a call if the price of the quote bid or 
order is greater than or equal to the consolidated last sale price of 
the underlying security, with respect to equity and exchange-traded 
fund options, or the last disseminated value of the underlying index, 
with respect to index options. The Exchange proposed to extend this 
check to apply to market orders (and any remaining size after a partial 
execution).\23\
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    \23\ The Exchange will not apply these checks to market orders 
that execute during the opening process, however, in order to avoid 
impacting the determination of the opening price. According to the 
Exchange, separate price protections apply during the opening 
process, including the drill through protection in C2 Rule 6.11. See 
Notice, supra note 3, at 76675.
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E. Quote Inverting NBBO Check

    The Exchange proposed to amend C2 Rule 6.17(e) regarding the quote 
inverting NBBO check. Currently, if the Exchange is at the NBO (NBB), 
the System rejects a quote back to a Market-Maker if the quote bid 
(offer) crosses the NBO (NBB) by more than a number of ticks specified 
by the Exchange. If C2 is not at the NBO (NBB), the System rejects a 
quote back to a Market-Maker if the quote bid (offer) locks or crosses 
the NBO (NBB). If the NBBO is unavailable, locked, or crossed, then 
this check compares the quote to the BBO (if available). The rule is 
currently silent on what happens if the BBO is unavailable.
    The Exchange has now proposed to amend Rule 6.17(e) to not apply 
this check to incoming quotes when the BBO is unavailable. The Exchange 
also proposed to amend the rule to state that it will not apply the 
check to incoming quotes prior to the opening of a series if the series 
is not open on another exchange, as well as during a trading halt.\24\
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    \24\ See proposed C2 Rule 6.17(e)(2) and (3).
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F. Execution of Quotes that Lock or Cross NBBO

    The Exchange further proposed to amend the provision concerning the 
execution of quotes that lock or cross

[[Page 92930]]

the NBBO.\25\ The rule currently states that if the System accepts a 
quote that locks or crosses the NBBO, it executes the quote and either 
(i) cancels any remainder or (ii) books any remainder if the price of 
the quote does not lock or cross the price of an away exchange.
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    \25\ The Exchange proposed to move this provision from current 
C2 Rule 6.17(e)(iii) to proposed C2 Rule 6.17(f).
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    The Exchange has now proposed to amend the rule to not apply the 
check when the NBBO is locked, crossed, or unavailable.\26\ In 
addition, the Exchange proposed to authorize a senior official at the 
Exchange's Help Desk to determine not to apply this check in the 
interest of maintaining a fair and orderly market. For example, the 
Exchange believes it is appropriate to disable this check in response 
to a market event or market volatility to avoid inadvertently 
cancelling quotes not erroneously priced but rather priced to reflect 
potentially rapidly changing prices.\27\
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    \26\ See Notice, supra note 3, at 76676.
    \27\ See id. The Exchange represented that, pursuant to Exchange 
procedures, any decision to not apply the check and the reason for 
such decision will be documented, retained, and periodically 
reviewed. See id.
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G. Order Entry, Execution, and Price Parameter Checks

    The Exchange proposed to adopt the following four mandatory 
activity-based risk protections under proposed C2 Rule 6.17(g): \28\
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    \28\ Other exchanges maintain similar activity-based risk 
protections. See, e.g., International Securities Exchange, LLC 
(``ISE'') Rule 714(d) and MIAX Rule 519A.
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    (i) the total number of orders (of all order types) and auction 
responses entered and accepted by the System (``orders entered'');
    (ii) the total number of contracts (from orders and auction 
responses) executed on the System, which does not count stock contracts 
executed as part of stock-option orders (``contracts executed'');
    (iii) the total number of orders the System books or cancels \29\ 
pursuant to the drill through price check parameter (as amended by this 
proposed rule change) in proposed Rule 6.17(a)(2) (``drill through 
events''); and
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    \29\ As discussed above, orders (or unexecuted portions) that by 
their terms cancel if they do not execute immediately will be 
cancelled rather than rest in the book for a period of time (as 
proposed in this filing) pursuant to the drill through price check 
parameter if triggered. According to the Exchange, because these 
orders will not book or be cancelled pursuant to the drill through 
price check parameter (but rather because of their terms), these 
orders will not be included in the count for the drill through event 
check. See Notice, supra note 3, at 76676 n.32.
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    (iv) the total number of orders the System cancels pursuant to the 
limit order price parameters in Rules 6.13, Interpretation and Policy 
.04(f) and (g), and 6.17(b) (``price reasonability events'').
    When a TPH exceeds a parameter within one of the time intervals set 
by C2, the System will (i) reject all subsequent incoming orders and 
quotes, (ii) cancel all resting quotes, and (iii) for the orders 
entered and contracts executed checks, if the TPH requests, cancel 
resting orders in the manner specified by the TPH (either all orders, 
orders with time-in-force of day, or orders entered on that trading 
day).\30\
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    \30\ The Exchange expects the initial time intervals for all 
these checks to be set at one and five minutes. The time intervals 
set by the Exchange will apply to all TPHs, who will not be able to 
change these time intervals. See Notice, supra note 3, at 76676 
n.33.
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    The System will not accept new orders or quotes from a restricted 
acronym or login until the Exchange receives the TPH's manual 
notification to reactivate its ability to send orders and quotes. While 
an acronym or login is restricted, a TPH may continue to interact with 
any resting orders (i.e., orders not cancelled pursuant to this 
protection) entered prior to its acronym or login becoming restricted, 
including receiving trade execution reports and canceling resting 
orders.

H. Maximum Contract Size

    The Exchange proposed to adopt a maximum contact size risk control 
pursuant to which the System will reject a TPH's incoming order or 
quote (including both sides of a two-sided quote) if its size exceeds 
the TPH's designated maximum contract size parameter.\31\ Each TPH must 
provide a maximum contract size for each of simple orders, complex 
orders, and quotes applicable to an acronym or, if the TPH requests, a 
login.\32\
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    \31\ See proposed C2 Rule 6.17(h). The Exchange represented that 
other options exchanges have adopted similar functionality. See 
Notice, supra note 3, at 76678 n.40; MIAX Rule 519(b).
    \32\ For purposes of determining the contract size of an 
incoming order or quote, the proposed rule states the contract size 
of a complex order will equal the contract size of the largest 
option leg of the order (i.e., if the order is a stock-option order, 
this check will not apply to the stock leg of the order). See 
proposed C2 Rule 6.17(h). If a TPH enters an order or quote to 
replace a resting order or update a resting quote, and the System 
rejects the incoming order or quote because it exceeds the 
applicable maximum contract size, the System also will cancel the 
resting order or any resting quote in the same series. In addition, 
the Exchange proposed to apply this check to paired orders submitted 
to AIM or SAM. Further, the Exchange proposed that for an A:AIR 
order, if the System rejects the agency order, then the System 
rejects the contra-side order; however, if the System rejects the 
contra-side order, the System still accepts the agency order. See 
proposed C2 Rule 6.17(h)(2).
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I. Kill Switch

    The Exchange further proposed to adopt a kill switch, which will be 
on optional tool allowing a TPH to send a message to the System to, or 
contact the Exchange Help Desk to request that, the Exchange cancel all 
its resting quotes, resting orders (either all orders, orders with 
time-in-force of day, or orders entered on that trading day), or both, 
and thereafter reject all subsequent incoming quotes and/or orders.\33\ 
The System will send a TPH an automated message when it has processed a 
kill switch request and thereafter will not accept new orders or quotes 
from a restricted acronym or login until the Exchange receives the 
TPH's manual notification to reactivate its ability to send orders and 
quotes.
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    \33\ See proposed C2 Rule 6.17(i). The Exchange represented that 
other options exchanges have adopted similar kill switches. See 
Notice, supra note 3, at 76678; BOX Options Exchange LLC (``BOX'') 
Rule 7280 and PHLX Rule 1019(b).
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    According to the Exchange, the kill switch message will be accepted 
by the System in the order of receipt in the queue and will be 
processed in that order so that interest already in the System will be 
processed prior to the kill switch message.\34\ Moreover, a Market-
Maker's utilization of the kill switch, and subsequent removal of its 
quotes, will not diminish or relieve the Market-Maker of its obligation 
to provide continuous two-sided quotes. Market-Makers will continue to 
be required to provide continuous two-sided quotes on a daily basis, 
and a Market-Maker's utilization of the kill switch will not prohibit 
the Exchange from taking disciplinary action against the Market-Maker 
for failing to meet the continuing quoting obligation each trading 
day.\35\
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    \34\ See Notice, supra note 3 at 76681.
    \35\ See id.
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J. Quote Risk Monitor Mechanism

    Lastly, the Exchange proposed to amend the QRM Mechanism in C2 Rule 
8.12. Pursuant to the QRM mechanism, a Market-Maker may establish a (i) 
maximum number of contracts, (ii) a maximum cumulative percentage of 
the original quoted size of each side of each series, and (iii) the 
maximum number of series for which either side of its quote is fully 
traded, that may trade within a rolling time period in milliseconds 
also established by the Market-Maker. When these parameters are 
exceeded within the time interval, the System cancels the Market-
Maker's quotes in the class and other classes with the same underlying. 
In addition, C2 Rule 8.12 allows Market-Makers or TPH organizations to 
specify

[[Page 92931]]

a maximum number of QRM incidents across all classes on an Exchange-
wide basis. When the Exchange determines that a Market-Maker or TPH 
organization has reached its QRM incident limit during the rolling time 
interval, the System will cancel all of the Market-Maker's electronic 
quotes and Market-Maker orders resting in the book in all option 
classes on the Exchange and prevent the Market-Maker or TPH 
organization from sending additional quotes or orders to the Exchange 
until the Market-Maker reactivates its ability to send quotes or 
orders.
    Currently, use of the QRM is optional. The Exchange proposed to 
amend C2 Rule 8.12 to make it mandatory for Market-Makers to enter 
values for each parameter for all classes in which they quote.\36\
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    \36\ The Exchange represented that other options exchanges have 
made similar functionality mandatory for all Market-Makers. See 
Notice, supra note 3, at 76679; ISE Rule 804(g).
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 6 of the Act \37\ 
and the rules and regulations thereunder applicable to the 
Exchange.\38\ Specifically, the Commission finds that the proposed rule 
change is consistent with the Section 6(b)(5) \39\ 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. The Commission believes that 
the proposed rule change is designed to mitigate the likelihood of 
orders trading at potentially erroneous prices, clarify when certain 
price/risk controls will apply, and assist TPHs in managing their risk 
exposure to avoid potentially harmful and disruptive trading. Moreover, 
the Commission notes that it recently approved proposed rule changes to 
CBOE rules that are substantially similar to the C2 proposed rule 
changes that are the subject of this Order.\40\
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    \37\ 15 U.S.C. 78f(b).
    \38\ In approving these proposed rule changes, the Commission 
has considered the proposed rules' impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \39\ 15 U.S.C. 78f(b)(5).
    \40\ See Securities Exchange Act Release No. 79244 (November 4, 
2016), 81 FR 79063 (November 10, 2016) (approving CBOE proposed rule 
changes relating to price protection mechanisms and risk controls).
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    As discussed above, C2 is proposing to amend its limit order price 
parameter for simple orders to use the NBBO when available in lieu of 
the Exchange's previous day's closing price or BBO. To the extent that 
the use of the NBBO, when available, rather than the Exchange's 
previous day's closing price or BBO, may better reflect the then 
current market, it should provide a suitable measure for purposes of 
determining the reasonability of the prices of orders. Moreover, the 
Commission believes that it is reasonable for C2 to exclude orders with 
a stop contingency from the limit order price check parameter, as 
application of the limit order price check parameter to such orders may 
interfere with the application of the stop contingency.
    Further, the Commission believes that the proposed rule change to 
expand the applicability of the put strike price and call underlying 
value checks to market orders \41\ may help TPHs mitigate risks 
associated with orders trading at prices that exceed a corresponding 
benchmark, which may indicate an execution at a price that is 
potentially erroneous.
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    \41\ The checks will not apply to market orders during an 
opening rotation since separate price protections will apply during 
the opening process. See Notice, supra note 3, at 76680.
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    The proposed changes to the drill through price checks provide 
additional detail to the rule regarding how the System will handle 
certain orders in the event that the Exchange activates HAL or SAL, 
such as orders that were not exposed prior to trading up to the drill 
through price and orders that traded up to the drill through price 
following exposure. In addition, allowing the remainder of orders to 
rest in the book for a brief time period at the drill through price may 
benefit investors by providing an additional opportunity for execution 
of their orders. Furthermore, clarifying that an order exposed via HAL 
pursuant to the drill through price check will not be exposed at a 
price worse than the NBBO is consistent with the current treatment of 
other orders exposed via HAL at the NBBO.\42\
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    \42\ See current and proposed C2 Rule 6.18(b).
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    The Commission also believes that the proposed amendments to the 
quote inverting NBBO check will provide market participants with 
greater clarity that C2 will not apply the check in the absence of an 
NBBO or BBO. In addition, the proposed rule change eliminates the 
Exchange's flexibility to apply the check prior to the opening of a 
series as well as during a trading halt. Removing this flexibility and 
clearly stating when C2 will not apply the check considerably enhances 
the transparency of the functionality.
    With respect to C2's proposed changes regarding the execution of 
quotes that lock or cross the NBBO (Proposed Rule 6.17(f)), the 
Commission believes that the proposed rule change to not apply the 
check when the NBBO is locked, crossed or unavailable, and to allow the 
Exchange to disable this check in the interest of maintaining a fair 
and orderly market, will prevent the System from cancelling quotes when 
there is no reliable benchmark or when prices on quotes may not be 
erroneous but rather reflect a rapidly changing market. Moreover, to 
the extent the Exchange determines to temporarily deactivate the check 
in the interest of maintaining a fair and orderly market, C2 has 
represented that all such decisions by C2 will be adequately justified, 
documented, retained, and periodically reviewed.\43\
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    \43\ See supra note 27 and accompanying text.
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    Further, the Commission believes that the Exchange's proposed risk 
protection parameters and mechanisms for orders and quotes are 
reasonably designed to provide TPHs with additional tools to assist 
them in managing their risk exposure. Specifically, the order entry, 
execution, and price parameter rate checks, maximum contract size risk 
control, and mandatory use of the QRM may help TPHs to mitigate the 
potential risks associated with entering too many orders or quotes, 
executing too many contracts, having too many orders cancelled because 
of price protection parameters, and entering orders or quotes with size 
that may be potentially erroneous that may result from, for example, 
technology issues with the broker's electronic trading system. To this 
extent, these TPH-customizable settings may help act as a backstop to 
the TPH's own controls and provide an additional layer of protection 
customized to the TPH's self-selected parameters. In addition to the 
CBOE filing mentioned above, the Commission notes that other exchanges 
have established similar risk protection mechanisms.\44\ The Commission 
notes that the proposed functionality, including the cancellation of 
any resting interest, must be processed in sequence with other interest 
in the System and

[[Page 92932]]

comply with the firm quote obligations in Rule 602 of Regulation NMS.
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    \44\ See ISE Rules 714(d) & 804(g); MIAX Rules 519(b) & 519A.
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    C2 will require TPHs and Market-Makers to utilize these risk 
protection parameters and mechanisms. However, TPHs and Market-Makers 
will have discretion to customize the parameters in accordance with 
their respective risk management needs. In light of this flexibility, 
the Commission reminds TPHs to be mindful of their obligations, to 
among others, seek best execution of orders they handle on an agency 
basis and consider their best execution obligations when establishing 
parameters for the order entry, execution, price parameter rate checks, 
maximum contract size risk control, and QRM.\45\ For example, an 
abnormally low order entry parameter should be carefully scrutinized, 
particularly if a TPH's order flow to the Exchange contains agency 
orders. To the extent that a TPH chooses sensitive parameters and those 
parameters apply to connections over which it transmits customer orders 
to the Exchange, a TPH should consider the effect of its chosen 
settings on its ability to receive a timely execution on marketable 
agency orders that it sends to the Exchange in various market 
conditions. The Commission cautions brokers considering their best 
execution obligations to be aware that an agency order they represent 
may be rejected as a result of these risk protections.
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    \45\ See, e.g., Securities Exchange Act Release Nos. 37619A 
(September 6, 1996), 61 FR 48290 (September 12, 1996) (Order 
Handling Rules adopting release); 51808 (June 9, 2005), 70 FR 37496, 
37537-8 (June 29, 2005) (Regulation NMS adopting release).
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    In addition, in light of the Exchange's decision not to set maximum 
or minimum values, or default values, the Commission expects C2 to 
periodically assess whether these risk protection measures are 
operating in a manner that is consistent with the promotion of fair and 
orderly markets, including whether not utilizing maximum and minimum 
parameters or default values continues to be appropriate and in 
accordance with the Act and the rules thereunder.
    Further, the Commission believes that Proposed Rule 6.17(i), which 
creates an optional kill switch mechanism, is consistent with the Act 
as it may further enhance risk management capabilities of TPHs by 
providing them with the ability to manage their risk exposure if they 
experience a significant system failure. To the extent that the kill 
switch mechanism provides TPHs with an appropriate backstop in this 
manner, it may encourage firms to provide liquidity on C2 and thus 
contribute to fair and orderly markets in a manner that protects 
investors and the public interest. The Commission notes that the 
Exchange represented in its proposal that the kill switch will operate 
consistently with a broker-dealer's firm quote obligations pursuant to 
Rule 602 of Regulation NMS,\46\ and that the kill switch does not 
diminish or relieve a Market-Maker of its obligation to provide 
continuous two-sided quotes.\47\ The Exchange also represented that the 
kill switch message will be accepted by the System in the order of 
receipt in the queue and will be processed in such order. As such, the 
System will process interest already in the System prior to receipt of 
the kill switch message prior to processing the kill switch 
message.\48\ Based on these representations, the Commission believes 
that the kill switch is reasonably designed to promote just and 
equitable principles of trade and perfect the mechanism of a free and 
open market. Lastly, the Commission notes that in addition to the CBOE 
filing mentioned above, other exchanges have established kill switches 
that operate in a manner similar to that proposed by C2.\49\
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    \46\ See Notice, supra note 3, at 76681.
    \47\ See id.
    \48\ See id.
    \49\ See, e.g., BOX Rule 7280(b) and PHLX Rule 1019(b).
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    Finally, the Commission believes that the proposal to authorize C2 
to share with Clearing TPHs the risk mitigation settings selected by a 
TPH for whom the Clearing TPH clears may assist Clearing TPHs manage 
their clearing risk exposure. In addition to the CBOE filing mentioned 
above, the Commission notes that other exchanges have adopted similar 
rules authorizing the sharing of similar risk settings with clearing 
members.\50\
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    \50\ See, e.g., MIAX Rule 500; BX Chapter VI, Section 20; NYSE 
Arca Rule 6.2A(a); NYSE MKT Rule 902.1NY(a); and PHLX Rule 1016.
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IV. Conclusion

    It Is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\51\ that the proposed rule change (SR-C2-2016-020), be, and hereby 
is, approved.
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    \51\ See id.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\52\
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    \52\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-30560 Filed 12-19-16; 8:45 am]
BILLING CODE 8011-01-P