Document ID: SEC-2016-1138-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: C2 Options Exchange, Inc.
Posted Date: 2016-07-05T04:00Z

[Federal Register Volume 81, Number 128 (Tuesday, July 5, 2016)]
[Notices]
[Pages 43681-43687]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-15760]

[[Page 43681]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78187; File No. SR-C2-2016-009]

Self-Regulatory Organizations; C2 Options Exchange, Incorporated; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
Relating to Professionals Order Counting

June 28, 2016.
    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 June 23, 2016, 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 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.
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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)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend its definition of ``Professional'' 
in Rule 1.1 to include guidance on how orders should be counted for 
Professional order counting purposes. The text of the proposed rule 
change is provided below (additions are italicized; deletions are 
[bracketed]).
* * * * *

C2 Options Exchange, Incorporated

Rules

* * * * *

CHAPTER 1

Definitions

Rule 1.1. Definitions

* * * * *

Professional

    The term ``Professional'' means any person or entity that (i) is 
not a broker or dealer in securities, and (ii) places more than 390 
orders in listed options per day on average during a calendar month for 
its own beneficial account(s). A Professional will be treated in the 
same manner as a broker or dealer in securities for purposes of Rules 
6.11, 6.12, 6.13(b)(1), 6.13(c)(5), 6.14, 6.15, 6.51, 6.52 and 8.13. 
All Professional orders shall be marked with the appropriate origin 
code as determined by the Exchange.
    . . . Interpretations and Policies:
    .01 Except as noted below, each order of any order type counts as 
one order for Professional order counting purposes.
    (a) Complex Orders:
    (1) A complex order comprised of eight (8) legs or fewer counts as 
a single order.
    (2) A complex order comprised of nine (9) legs or more counts as 
multiple orders with each option leg counting as its own separate 
order.
    (b) ``Parent''/``Child'' Orders:
    (1) Same Side and Same Series: A ``parent'' order that is placed 
for the beneficial account(s) of a person or entity that is not a 
broker or dealer in securities that is broken into multiple ``child'' 
orders on the same side (buy/sell) and series as the ``parent'' order 
by a broker or dealer, or by an algorithm housed at a broker or dealer 
or by an algorithm licensed from a broker or dealer, but which is 
housed with the customer, counts as one order even if the ``child'' 
orders are routed across multiple exchanges.
    (2) Both Sides and/or Multiple Series: A ``parent'' order 
(including a strategy order) that is broken into multiple ``child'' 
orders on both sides (buy/sell) of a series and/or multiple series 
counts as multiple orders, with each ``child'' order counting as a new 
and separate order.
    (c) Cancel/Replace:
    (1) Except as provided in paragraph (c)(2) below, any order that 
cancels and replaces an existing order counts as a separate order (or 
multiple new orders in the case of a complex order comprised of nine 
(9) legs or more).
    (2) Same Side and Same Series: An order that cancels and replaces 
any ``child'' order resulting from a ``parent'' order that is placed 
for the beneficial account(s) of a person or entity that is not a 
broker, or dealer in securities that is broken into multiple ``child'' 
orders on the same side (buy/sell) and series as the ``parent'' order 
by a broker or dealer, by an algorithm housed at a broker or dealer, or 
by an algorithm licensed from a broker or dealer, but which is housed 
with the customer, does not count as a new order.
    (3) Both Sides and/or Multiple Series: An order that cancels and 
replaces any ``child'' order resulting from a ``parent'' order 
(including a strategy order) that generates ``child'' orders on both 
sides (buy/sell) of a series and/or in multiple series counts as a new 
order.
    (4) Pegged Orders: Notwithstanding the provisions of paragraph 
(c)(2) above, an order that cancels and replaces any ``child'' order 
resulting from a ``parent'' order being ``pegged'' to the BBO or NBBO 
or that cancels and replaces any ``child'' order pursuant to an 
algorithm that uses BBO or NBBO in the calculation of ``child'' orders 
and attempts to move with or follow the BBO or NBBO of a series counts 
as a new order each time the order cancels and replaces in order to 
attempt to move with or follow the BBO or NBBO.
* * * * *
    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
    The Exchange proposes to amend its definition of ``Professional'' 
in Rule 1.1 to include guidance on how orders should be counted for 
Professional order counting purposes. Specifically, the Exchange 
proposes to adopt Interpretation and Policy .01 to the definition of 
``Professional'' within Rule 1.1 (Definitions), setting forth standards 
for calculating average daily order submissions for Professional order 
counting purposes. The Exchange also proposes to add a provision to 
Rule 1.1's definition of Professional, which would provide that all 
Professional orders shall be marked with the appropriate origin code as 
determined by the Exchange. The Exchange believes that the proposed 
rule change would provide additional clarity in the Rules and serve to 
promote the purposes for which the

[[Page 43682]]

Exchange's Professional rule was originally adopted. The Exchange notes 
that this filing is materially based upon and substantially similar to 
rule changes recently adopted by several of the U.S. options exchanges, 
including, but not limited to Chicago Board Options Exchange, 
Incorporated (``CBOE'') filing SR-CBOE-2016-005.\5\
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    \5\ See Securities Exchange Act Release No. 77450 (March 25, 
2016), 81 FR 18668 (March 31, 2016) (Notice of Filing of Amendment 
No. 1 and Order Granting Accelerated Approval of a Proposed Rule 
Change, as Modified by Amendment No. 1, To Amend Interpretation and 
Policy .01 to Rule 1.1(ggg) Relating to the Professional Customer 
Definition) (SR-CBOE-2016-005); Securities Exchange Act Release No. 
77449 (March 25, 2016), 81 FR 18665 (March 31, 2016) (Notice of 
Filing of Amendment No. 1 and Order Granting Accelerated Approval of 
a Proposed Rule Change, as Modified by Amendment No. 1, Relating to 
the Professional Customer Definition) (SR-Phlx-2016-10); Securities 
Exchange Act Release No. 77580 (April 11, 2016), 81 FR 22328 (April 
15, 2016) (Notice of Filing of Proposal to Amend Rule 100 
(Definitions) Relating to Professionals) (SR-BOX-2016-13); see also 
Securities Exchange Act Release No. 73628 (November 18, 2014), 79 FR 
69958 (November 24, 2014) (Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change Relating to Professional 
Orders) (SR-CBOE-2014-085).
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Background
    In general, ``public customers'' are granted certain marketplace 
advantages over other market participants, including Market-Makers, 
brokers and dealers of securities, and industry ``Professionals'' on 
most U.S. options exchanges. The U.S. options exchanges, including C2, 
have adopted materially similar definitions of the term 
``Professional,'' \6\ which commonly refers to persons or entities that 
are not a brokers or dealers in securities and who or which place more 
than 390 orders in listed options per day on average during a calendar 
month for their own beneficial account(s).\7\ Various exchanges adopted 
similar Professional rules for many of the same reasons, including, but 
not limited to the desire to create more competitive marketplaces and 
attract retail order flow.\8\ In addition, as several of the exchanges 
noted in their original Professional rule filings, their beliefs that 
disparate Professional rules and a lack of uniformity in the 
application of such rules across the options markets would not promote 
the best regulation and may, in fact, encourage regulatory 
arbitrage.\9\
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    \6\ Some U.S. options exchanges refer to ``Professionals'' as 
``Professional Customers'' or non-``Priority Customers.'' Compare 
BATS Exchange, Inc. (``BZX'') Rule 16.1(a)(45) (Professional); BOX 
Options Exchange LLC (``BOX'') Rule 100(a)(50) (Professional); CBOE 
Rule 1.1(ggg) (Professional); C2 Rule 1.1; BX Chapter I, Sec. 1(49) 
(Professional); NASDAQ OMX PHLX LLC (``PHLX'') Rule 1000(b)(14) 
(Professional); Nasdaq Options Market (``NOM'') Chapter I, Sec. 
1(a)(48) (Professional); with ISE Rule 100(a)(37A) (Priority 
Customer); Gemini Rule 100(a)(37A) (Priority Customer); Miami 
International Securities Exchange LLC (``MIAX'') Rule 100 (Priority 
Customer); NYSE MKT LLC (``NYSE MKT'') Rule 900.2NY(18A) 
(Professional Customer); NYSE Arca, Inc. (``Arca'') Rule 6.1A(4A) 
(Professional Customer).
    \7\ See, e.g., BZX Rule 16.1(a)(45); BOX Rule 100(a)(50); CBOE 
Rule 1.1(ggg); C2 Rule 1.1; BX Chapter I, Sec. 1(49); PHLX Rule 
1000(b)(14); NOM Chapter I, Sec. 1(a)(48); see also ISE Rule 
100(a)(37A) (Priority Customer); Gemini Rule 100(a)(37A) (Priority 
Customer); MIAX Rule 100 (Priority Customer); NYSE MKT Rule 
900.2NY(18A) (Professional Customer); Arca Rule 6.1A(4A) 
(Professional Customer).
    \8\ See, e.g., Securities Exchange Act Release No. 60931 
(November 4, 2009), 74 FR 58355, 58356 (November 12, 2009) (Notice 
of Filing of Proposed Rule Change, as Modified by Amendment No. 1, 
Related to Professional Orders) (SR-CBOE 2009-078); Securities 
Exchange Act Release No. 59287 (January 23, 2009), 74 FR 5694, 5694 
(January 30, 2009) (Notice of Filing of Amendment No. 2 and Order 
Granting Accelerated Approval of the Proposed Rule Change, as 
Modified by Amendment Nos. 1 and 2 Thereto, Relating to Professional 
Account Holders) (SR-ISE-2006-026); Securities Exchange Act Release 
No. 61802 (March 30, 2010), 75 FR 17193, 17194 (April 5, 2010) 
(Notice of Filing of Amendment No. 2 and Order Granting Accelerated 
Approval of the Proposed Rule Change, as Modified by Amendment No. 2 
Thereto, Relating to Professional Orders) (SR-PHLX-2010-005); 
Securities Exchange Act Release No. 61629 (March 2, 2010), 75 FR 
10851, 10851 (March 9, 2010) (Notice of Filing of Proposed Rule 
Change Relating to the Designation of a ``Professional Customer'') 
(SR-NYSEMKT-2010-018).
    \9\ See, e.g., Securities and Exchange Act Release No. 62724 
(August 16, 2010), 75 FR 51509 (August 20, 2010) (Notice of Filing 
of a Proposed Rule Change by the NASDAQ Stock Market LLC To Adopt a 
Definition of Professional and Require That All Professional Orders 
Be Appropriately Marked) (SR-NASDAQ-2010-099); Securities and 
Exchange Act Release No. 65500 (October 6, 2011), 76 FR 63686 
(October 13, 2011) (Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change To Adopt a Definition of Professional and 
Require That All Professional Orders Be Appropriately Marked) (SR-
BATS-2011-041); Securities Exchange Act Release No. 65036 (August 4, 
2011), 76 FR 49517, 49518 (August 10, 2011) (Notice of Filing and 
Immediate Effectiveness of Proposed Rule Change To Adopt a 
Definition of ``Professional'' and Require That Professional Orders 
Be Appropriately Marked by BOX Options Participants) (SR-BX-2011-
049); Securities Exchange Act Release No. 60931 (November 4, 2009), 
74 FR 58355, 58357 (November 12, 2009) (Notice of Filing of Proposed 
Rule Change, as Modified by Amendment No. 1, Related to Professional 
Orders) (SR-CBOE 2009-078); see also Securities Exchange Act Release 
73628 (November 18, 2014), 79 FR 69958, 69960 (November 24, 2014) 
(Notice of Filing and Immediate Effectiveness of a Proposed Rule 
Change Relating to Professional Orders) (SR-CBOE-2014-085).
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    Similar to other U.S. options exchanges, the Exchange grants 
``public customers'' certain marketplace advantages over other market 
participants pursuant to the Exchange's Fees Schedule \10\ and the 
Rules.\11\ In general, public customers may receive allocation and 
execution priority above equally priced competing interests of Market-
Makers, broker-dealers, and other market participants. In addition, 
customer orders may be exempt or pay lower transaction fees and/or be 
exempt from certain Exchange surcharges. Similar to other U.S. options 
exchanges, the Exchange affords these marketplace advantages to public 
customers based on various business- and regulatory-related objectives, 
including, for example, to attract retail order flow to the Exchange 
and to provide competitive pricing.
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    \10\ See, e.g., Fees Schedule (Transaction Fees).
    \11\ See, e.g., Rules 6.12(c) (Order Execution and Priority--
Contingency Orders); 6.13(c)(5)(B) (Complex Order Execution--
Execution of COA-Eligible Orders); 6.51(b)(3) (Automated Improvement 
Mechanism (``AIM'')--Order Allocation).
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    Currently, Rule 1.1 defines a Professional as a person or entity 
that is not a securities broker or dealer that places more than 390 
listed options orders per day on average during a calendar month for 
its own beneficial account(s). In large part, the Exchange's 
Professional order rules were adopted to distinguish non-broker dealer 
individuals and entities that have access to information and technology 
that enable them to professionally trade listed options in a manner 
similar to brokers or dealers in securities from retail investors for 
order priority and/or transaction fees purposes. In general, 
Professionals are treated as brokers or dealers in securities under the 
Exchange's rules, including, but not limited to with respect to order 
priority and fees.\12\ Rule 1.1 is substantially similar to the 
Professional order rules of other exchanges and was materially based 
upon the preexistent Professional order rules of other exchanges.\13\
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    \12\ See Rule 1.1; Fees Schedule (Transaction Fees).
    \13\ See Securities Exchange Act Release No. 60931 (November 4, 
2009), 74 FR 58355, 58356 (November 12, 2009) (Notice of Filing of 
Proposed Rule Change, as Modified by Amendment No. 1, Related to 
Professional Orders) (SR-CBOE 2009-078); see, e.g., ISE Rule 
100(a)(31A).
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    Over time, the Exchange has received various questions as to what 
constitutes an ``order'' for Professional order counting purposes, 
including, but not limited to questions about how to count certain 
types of strategy orders and how to count ``child'' orders generated as 
part of specific ``parent'' execution strategies. The advent of new 
multi-leg spread products and the proliferation of the use of complex 
orders and algorithmic execution strategies by both institutional and 
retail market participants have continued to spur questions as to what 
constitutes an ``order'' for Professional order counting purposes. For 
example, do multi-leg spread orders or strategy orders such as 
volatility orders constitute a single order or multiple orders for 
Professional order counting purposes? The Exchange's

[[Page 43683]]

Professional rule does not fully address these issues and, to date, 
there has not been a common interpretation across the U.S. options 
markets. The Exchange believes that additional clarity is needed 
regarding the application of Rule 1.1 with respect to Professionals. 
Accordingly, the Exchange is proposing to amend Rule 1.1 to add 
Interpretation and Policy .01 to the definition of Professional to 
address how various new execution and order strategies should be 
treated under the Exchange's Professional rule. The Exchange believes 
that the adoption of proposed Interpretation and Policy .01 to Rule 
1.1's definition of Professional is warranted to ensure that public 
customers are afforded the marketplace advantages that they are 
intended to be afforded over other types of market participants on the 
Exchange.
    The Exchange notes that despite the adoption of materially similar 
Professional rules across the markets, exchanges' interpretations of 
their respective Professional rules vary. Although Professionals are 
similarly defined by exchanges as non-broker-dealer persons or entities 
that place more than 390 orders in listed options for their own 
beneficial account(s) per day on average during a calendar month, there 
is no consistent definition across the markets as to what constitutes 
an ``order'' for Professional order counting purposes. While several 
options exchanges have attempted to clarify their interpretations of 
their Professional rules through regulatory and information notices and 
circulars,\14\ those interpretations have not necessarily been 
consistent.\15\ As a result, the Exchange believes that the rather than 
helping to promote the best regulation and discourage regulatory 
arbitrage, the Professional rules have become a basis of intermarket 
competition. The Exchange believes that the proposed set of standards 
would allow the Exchange to better compete for order flow and help 
ensure deeper levels of liquidity on the Exchange. The Exchange also 
believes that the proposed rule change would help to remove impediments 
to and help perfect the mechanism of a free and open market and a 
national market system by increasing competition in the marketplace. 
Accordingly, the Exchange proposes to amend the Rules by adopting 
Interpretation and Policy .01 to Rule 1.1's definition of Professional.
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    \14\ See Regulatory Circular RG09-148 (Professional Orders); ISE 
Regulatory Information Circular 2014-007/Gemini Regulatory 
Information Circular 2014-011 (Priority Customer Orders and 
Professional Orders (FAQ)); MIAX Regulatory Circular 2014-69 
(Priority Customer and Professional Interest Order Summary); NYSE 
Joint Regulatory Bulletin, NYSE Acra RBO-15-03, NYSE Amex RBO-15-06) 
(Professional Customer Orders); BOX Regulatory Circular RC-2015-21 
(Professional Orders).
    \15\ Compare NYSE Joint Regulatory Bulletin, NYSE Acra RBO-15-
03, NYSE Amex RBO-15-06) (Professional Customer Orders); 
Interpretation and Policy .01 to Rule 1.1(ggg) with ISE Regulatory 
Information Circular 2014-007/Gemini Regulatory Information Circular 
2014-011 (Priority Customer Orders and Professional Orders (FAQ)); 
and ISE Regulatory Information Circular 2009-179 (Priority Customer 
Orders and Professional Orders (FAQ)).
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Proposal
    The Exchange proposes to adopt Interpretation and Policy to Rule 
1.1's definition of Professional setting forth a detailed counting 
regime for calculating average daily orders for Professional order 
counting purposes. Specifically, the Exchange's proposed Interpretation 
and Policy would make clear how to count complex orders, ``parent/
child'' orders that are broken into multiple orders, and ``cancel/
replace'' orders for Professional order counting purposes.
    Under the Exchange's proposed Interpretation and Policy .01 to Rule 
1.1's definition of Professional, all orders would count as one single 
order for Professional counting purposes, unless otherwise specified 
under the Rules. Proposed Interpretation and Policy .01 to Rule 1.1's 
definition of Professional would provide that except as noted below, 
each order of any order type counts as one order for Professional order 
counting purposes. Paragraph (a) of proposed Interpretation and Policy 
.01 to Rule 1.1's definition of Professional would discuss complex 
orders. Under paragraph (a)(1) of proposed Interpretation and Policy 
.01 to Rule 1.1's definition of Professional, a complex order comprised 
of eight (8) legs or fewer would count as a single order. Conversely, 
paragraph (a)(2) of proposed Interpretation and Policy .01 to Rule 
1.1's definition of Professional would provide that a complex order 
comprised of nine (9) legs or more counts as multiple orders with each 
option leg counting as its own separate order. The Exchange believes 
the distinction between complex orders with up to eight legs from those 
with nine or more legs is appropriate in light of the purposes for 
which the Exchange's Professional rule was adopted. In particular, the 
Exchange notes that multi-leg complex order strategies with nine or 
more legs are more complex in nature and thus, more likely to be used 
by professional traders than traditional two, three, and four leg 
complex order strategies such as the strangle, straddle, butterfly, 
collar, condor strategies, and combinations thereof with eight legs or 
fewer, which are generally not algorithmically generated and are 
frequently used by retail investors. Thus, the types of complex orders 
traditionally placed by retail investors would continue to count as 
only one order while the more complex strategy orders that are 
typically used by professional traders would count as multiple orders 
for Professional order counting purposes.
    Paragraph (b) of proposed Interpretation and Policy .01 to Rule 
1.1's definition of Professional would provide details relating to the 
counting of ``parent/child'' orders. Under paragraph (b)(1) of proposed 
Interpretation and Policy .01 to Rule 1.1's definition of Professional, 
a ``parent'' order that is placed for the beneficial account(s) of a 
person or entity that is not a broker or dealer in securities that is 
broken into multiple ``child'' orders on the same side (buy/sell) and 
series as the ``parent'' order by a broker or dealer, or by an 
algorithm housed at a broker or dealer or by an algorithm licensed from 
a broker or dealer, but which is housed with the customer, counts as 
one order even if the ``child'' orders are routed across multiple 
exchanges. Essentially, this paragraph would describe how orders placed 
for public customers, which are ``worked'' by a broker in order to 
receive best execution should be counted for Professional order 
counting purposes. Paragraph (b)(1) of proposed Interpretation and 
Policy .01 to Rule 1.1's definition of Professional would permit larger 
``parent'' orders (which may be simple orders or complex orders 
consisting of up to eight legs), to be broken into multiple smaller 
orders on the same side (buy/sell) and in the same series (or complex 
orders consisting of up to eight legs) in order to attempt to achieve 
best execution for the overall order.
    For example, if a customer were to enter an order to buy 1,000 XYZ 
$5 January calls at a limit price of $1, which the customer's broker 
then broke into four separate orders to buy 250 XYZ $5 January calls at 
a limit price of $1 in order to achieve a better execution, the four 
``child'' orders would still only count as one order for Professional 
order counting purposes (whether or not the four separate orders were 
sent to the same or different exchanges for execution).\16\ Similarly, 
in

[[Page 43684]]

the case of a complex order, if a customer were to enter an order to 
buy 1,000 XYZ $5 January(sell)/March(buy) calendar spreads (with a 1:1 
ratio on the legs), at a net debit limit price of $0.20, which the 
customer's broker then broke into four separate orders to buy 250 XYZ 
$5 January/March calendar spreads (each with a 1:1 ratio on the legs), 
each at a net debit limit price of $0.20, the four ``child'' orders 
would still only count as one order for Professional order counting 
purposes (whether or not the four separate orders were sent to the same 
or different exchanges for execution).
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    \16\ Notably, however, if the customer herself were to enter the 
same four identical orders to buy 250 XYZ $5 January calls at a 
limit price of $1 prior to sending the orders, those orders would 
count as four separate orders for Professional order counting 
purposes because the orders would not have been broken into multiple 
``child'' orders on the same side (buy/sell) and series as the 
``parent'' order by a broker or dealer, or by an algorithm housed at 
a broker or dealer or by an algorithm licensed from a broker or 
dealer, but which is housed with the customer.
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    Conversely, under paragraph (b)(2) of proposed Interpretation and 
Policy .01 to Rule 1.1's definition of Professional, a ``parent'' order 
(including a strategy order) \17\ that is broken into multiple 
``child'' orders on both sides (buy/sell) of a series and/or multiple 
series counts as multiple orders, with each ``child'' order counting as 
a new and separate order. Accordingly, under this provision, strategy 
orders, which are most often used by sophisticated traders best 
characterized as ``Professionals,'' would count as multiple orders for 
each child order entered as part of the overall strategy. For example, 
if a customer were to enter a volatility order \18\ or ``vega'' order 
\19\ with her broker by which multiple ``child'' orders were then sent 
to the Exchange across multiple series in a particular option class, 
each order entered would count as a separate order for Professional 
order counting purposes. Likewise, if the customer instructed her 
broker to buy a variety of calls across various option classes as part 
of a basket trade, each order entered by the broker in order to obtain 
the positions making up the basket would count as a separate order for 
Professional counting purposes.\20\
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    \17\ For purposes of this proposed Interpretation and Policy, 
the term ``strategy order'' is intended to mean an execution 
strategy, trading instruction, or algorithm whereby multiple 
``child'' orders on both sides of a series and/or multiple series 
are generated prior to being sent to any or multiple U.S. options 
exchange(s).
    \18\ A ``volatility'' or ``volatility-type'' order may be 
characterized as an order instruction or combination to buy/sell 
contracts at a specific implied volatility rather than at a specific 
price or premium. Because implied volatility is a key determinant of 
the premium on an option, some traders may wish to take positions in 
specific contract months in an effort to take advantage of perceived 
changes in implied volatility arising before, during, or after 
earnings or in a certain company when specific or broad market 
volatility is predicted to change. In certain cases, depending on 
where a customer's account is housed or the trading capabilities of 
the participant involved, an options trader may trade and position 
for movements in the price of the option based on implied volatility 
using a ``volatility'' or ``volatility-type'' order or trading 
instruction by setting a limit for the volatility level they are 
willing to pay or receive. In such cases, premiums may be calculated 
in percentage terms rather than premiums.
    \19\ An option's vega is a measure of the impact of changes in 
the underlying volatility on the option price. Specifically, the 
vega of an option expresses the change in the price of the option 
for every 1% change in underlying volatility.
    \20\ Notably, with respect to the types of ``parent'' orders 
(including strategy orders) described in paragraph (b)(2) to 
proposed Interpretation and Policy .01 to Rule 1.1's definition of 
Professional, such orders would be received only as multiple 
``child'' orders the U.S. options exchange receiving such orders. 
The ``parent'' order would be broken apart before being sent by the 
participant to the exchange(s) as multiple ``child'' orders. See 
supra at note 17.
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    The Exchange believes that the distinctions between ``parent'' and 
``child'' orders in paragraph (b) to proposed Interpretation and Policy 
.01 to Rule 1.1's definition of Professional are appropriate. The 
Exchange notes that paragraph (b) to proposed Interpretation and Policy 
.01 to Rule 1.1's definition of Professional is not aimed at capturing 
orders that are being ``worked'' or broken into multiple orders to 
avoid showing large orders to the market in an effort to elude front-
running and to achieve best execution as is typically done by brokers 
on behalf of retail clients. Rather, paragraph (b) to proposed 
Interpretation and Policy .01 to Rule 1.1's definition of Professional 
is aimed at identifying ``child'' orders of ``parent'' orders generated 
by algorithms that are typically used by sophisticated traders to 
continuously update their orders in concert with market updates in 
order to keep their overall trading strategies in balance. The Exchange 
believes that these types of ``parent/child'' orders typically used by 
sophisticated traders should count as multiple orders.
    Paragraph (c) of proposed Interpretation and Policy .01 to Rule 
1.1's definition of Professional, would discuss the counting of orders 
that are cancelled and replaced. Similar to the distinctions drawn in 
paragraph (b) of proposed Interpretation and Policy .01 to Rule 1.1's 
definition of Professional, paragraph (c) of proposed Interpretation 
and Policy .01 to Rule 1.1's definition of Professional would 
essentially separate orders that are cancelled and replaced as part of 
an overall strategy from those that are cancelled and replaced by a 
broker that is ``working'' the order to achieve best execution or 
attempting to time the market. Specifically, paragraph (c)(1) of 
proposed Interpretation and Policy .01 to Rule 1.1's definition of 
Professional would provide that except as otherwise provided in the 
rule (and specifically as provided under paragraph (c)(2) to proposed 
Interpretation and Policy .01 to Rule 1.1's definition of 
Professional), any order that cancels and replaces an existing order 
counts as a separate order (or multiple new orders in the case of a 
complex order comprised of nine (9) legs or more). For example, if a 
trader were to enter a non-marketable limit order to buy an option 
contract at a certain net debit price, cancel the order in response to 
market movements, and then reenter the same order once it became 
marketable, those orders would count as two separate orders for 
Professional order counting purposes even though the terms of both 
orders were the same.
    Paragraph (c)(2) of proposed Interpretation and Policy .01 to Rule 
1.1's definition of Professional would specify the exception to 
paragraph (c)(1) of proposed Interpretation and Policy .01 to Rule 
1.1's definition of Professional and would provide that an order that 
cancels and replaces any ``child'' order resulting from a ``parent'' 
order that is placed for the beneficial account(s) of a person or 
entity that is not a broker, or dealer in securities that is broken 
into multiple ``child'' orders on the same side (buy/sell) and series 
as the ``parent'' order by a broker or dealer, by an algorithm housed 
at a broker or dealer, or by an algorithm licensed from a broker or 
dealer, but which is housed with the customer, would not count as a new 
order. For example, if a customer were to enter an order with her 
broker to buy 10,000 XYZ $5 January calls at a limit price of $1, which 
the customer's broker then entered, but could not fill and then 
cancelled to avoid having to rest the order in the book as part of a 
strategy to obtain a better execution for the customer and then 
resubmitted the remainder of the order, which would be considered a 
``child'' of the ``parent'' order, once it became marketable, such 
orders would only count as one order for Professional order counting 
purposes. Again, similar to paragraph (b) of proposed Interpretation 
and Policy .01 to Rule 1.1's definition of Professional, the Exchange 
notes that paragraph (c) to proposed Interpretation and Policy .01 to 
Rule 1.1's definition of Professional is not aimed at capturing orders 
that are being ``worked'' or being cancelled and replaced to avoid 
showing large orders to the market in an effort to elude front-running 
and to achieve best execution as is typically done by brokers on behalf 
of retail clients. Rather, paragraph (c) to proposed Interpretation and 
Policy .01 to Rule 1.1's definition of Professional is

[[Page 43685]]

aimed at identifying ``child'' orders of ``parent'' orders generated by 
algorithms that are typically used by sophisticated traders to 
continuously update their orders in concert with market updates in 
order to keep their overall trading strategies in balance. The Exchange 
believes that paragraph (c)(2) to proposed Interpretation and Policy 
.01 to Rule 1.1's definition of Professional is consistent with these 
goals.
    Accordingly, consistent with paragraph (c)(1) of proposed 
Interpretation and Policy .01 to Rule 1.1's definition of Professional, 
under paragraph (c)(3) of proposed Interpretation and Policy .01 to 
Rule 1.1's definition of Professional, an order that cancels and 
replaces any ``child'' order resulting from a ``parent'' order 
(including a strategy order) that generates ``child'' orders on both 
sides (buy/sell) of a series and/or in multiple series would count as a 
new order. For example, if an investor were to seek to make a trade (or 
series of trades) to take a long vega position at a certain percentage 
limit on a basket of options, the investor may need to cancel and 
replace several of the ``child'' orders entered to achieve the overall 
execution strategy several times to account for updates in the prices 
of the underlyings. In such a case, each ``child'' order placed to keep 
the overall execution strategy in place would count as a new and 
separate order even if the particular ``child'' order were being used 
to replace a slightly different ``child'' order that was previously 
being used to keep the same overall execution strategy in place. The 
Exchange believes that the distinctions between cancel/replace orders 
in paragraph (c) to proposed Rule 1.1's definition of Professional are 
appropriate as such orders are typically generated by algorithms used 
by sophisticated traders to keep strategy orders continuously in line 
with updates in the markets. As such, the Exchange believes that in 
most cases, cancel/replace orders should count as multiple orders.
    Paragraph (c)(4) of proposed Interpretation and Policy .01 to Rule 
1.1's definition of Professional would provide that notwithstanding the 
provisions of paragraph (c)(2) above, an order that cancels and 
replaces any ``child'' order resulting from a ``parent'' order being 
``pegged'' to the Exchange's best bid or offer (``BBO'') or national 
best bid or offer (``NBBO'') or that cancels and replaces any ``child'' 
order pursuant to an algorithm that uses BBO or NBBO in the calculation 
of ``child'' orders and attempts to move with or follow the BBO or NBBO 
of a series would count as a new order each time the order cancels and 
replaces in order to attempt to move with or follow the BBO or NBBO. 
The Exchange believes that paragraph (c)(4) is appropriate to make 
clear that ``pegged'' strategy orders that are typically used by 
sophisticated traders should be counted as multiple orders even though 
such orders may cancel/replace orders in on the same side (buy/sell) of 
the market in a single series in order to achieve an overall order 
strategy.
    Finally, the Exchange also proposes to amend Rule 1.1 to provide 
that all Professional orders shall be marked with the appropriate 
origin code as determined by the Exchange in order to bring the 
Exchange's rules in-line with the Professional order rules of other 
exchanges.\21\ The Exchange notes that Permit Holders are already 
required to mark orders with appropriate origin codes.\22\ The Exchange 
is simply proposing to codify this requirement in the Rules under the 
definition of Professional in current Rule 1.1; Permit Holders would 
continue to be required to indicate whether public customer orders are 
``Professional'' orders as they are currently. To comply with this 
requirement, Permit Holders would be required to review their 
customers' activity on at least a quarterly basis to determine whether 
orders that are not for the account of a broker or dealer should be 
represented as customer orders or Professional orders and make any 
appropriate changes to the way in which they are representing orders 
within five days after the end of each calendar quarter. Orders for any 
customer that had an average of more than 390 orders per day during any 
month of a calendar quarter must be represented as Professional orders 
for the next calendar quarter. If, however, during a quarter the 
Exchange identifies a customer for which orders are being represented 
as public customer orders but that has averaged more than 390 orders 
per day during a month, the Exchange will notify the Permit Holder and 
the Permit Holder will be required to change the manner in which it is 
representing the customer's orders within five days.
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    \21\ See see [sic] also Securities Exchange Act Release No. 
73628 (November 18, 2014), 79 FR 69958 (November 24, 2014) (Notice 
of Filing and Immediate Effectiveness of a Proposed Rule Change 
Relating to Professional Orders) (SR-CBOE-2014-085); see also ISE 
Regulatory Information Circular 2014-007 (Priority Customer Orders 
and Professional Orders (FAQ)).
    \22\ See Regulator Circular C2 RG13-015 (Order Origin 
Requirement).
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    Because the rule only requires that Permit Holders conduct a look-
back to determine whether their customers are averaging more than 390 
orders per day at the end of each calendar quarter, the Exchange 
proposes an effective date of July 1, 2016 for proposed Interpretation 
and Policy .01 to the definition of Professional in Rule 1.1 to ensure 
that all orders during the next quarterly review will be counted in the 
same manner and that proposed Interpretation and Policy .01 to Rule 
1.1(ggg) [sic] will not be applied retroactively.
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.\23\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \24\ 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)\25\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \23\ 15 U.S.C. 78f(b).
    \24\ 15 U.S.C. 78f(b)(5).
    \25\ Id.
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    In particular, the Exchange believes that proposed Interpretation 
and Policy .01 to Rule 1.1's definition of Professional provides a more 
conservative order counting regime for Professional order counting 
purposes that would identify more traders as Professionals to which the 
Exchange's definition of Professional was designed to apply and create 
a better competitive balance for all participants on the Exchange, 
consistent with the Act. As the options markets have evolved to become 
more electronic and more competitive, the Exchange believes that the 
distinction between registered broker-dealers and professional traders 
who are currently treated as public customers has become increasingly 
blurred. More and more, the category of public customer today includes 
sophisticated algorithmic traders including former market makers and

[[Page 43686]]

hedge funds that trade with a frequency resembling that of broker-
dealers. The Exchange believes that it is reasonable under the Act to 
treat those customers who meet the high level of trading activity 
established in the proposal differently than customers who do not meet 
that threshold and are more typical retail investors to ensure that 
professional traders do not take advantage of priority and fee benefits 
intended for public customers.
    The Exchange notes that it is not unfair to differentiate between 
different types of investors in order to achieve certain marketplace 
balances. The Rules currently differentiate between public customers, 
broker-dealers, Market-Makers, and the like. These differentiations 
have been recognized to be consistent with the Act. The Exchange does 
not believe that the current rules of C2 or other exchanges that accord 
priority to all public customers over broker-dealers are unfairly 
discriminatory. Nor does the Exchange believe that it is unfairly 
discriminatory to accord priority to only those customers who on 
average do not place more than one order per minute (390 per day) under 
the counting regime that the Exchange proposes. The Exchange believes 
that such differentiations drive competition in the marketplace and are 
within the business judgment of the Exchange. Accordingly, the Exchange 
also believes that its proposal is consistent with the requirement of 
Section 6(b)(8) of the Act that the rules of an exchange not impose an 
unnecessary or inappropriate burden upon competition in that it treats 
persons who should be deemed Professionals (but who may not be under 
the current Rules), in a manner so that they do not receive special 
priority benefits.
    Furthermore, the Exchange believes that the proposed rule change 
will protect investors and the public interest by helping to assure 
that retail customers continue to receive the appropriate marketplace 
advantages in the C2 marketplace as intended, while furthering 
competition among marketplace professionals by treating them in the 
same manner as other similarly situated market participants. The 
Exchange believes that it is consistent with Section 6(b)(5) of the Act 
not to afford market participants with similar access to information 
and technology as that of brokers and dealers of securities with 
marketplace advantages over such marketplace competitors. The Exchange 
also believes that the proposed Interpretation and Policy would help to 
remove burdens on competition and promote a more competitive 
marketplace by affording certain marketplace advantages only to those 
for whom they are intended. The Exchange believes that the proposed 
rule change sets forth a more detailed and clear regulatory regime with 
respect to calculating average daily order entry for Professional order 
counting purposes. The Exchange believes that this additional clarity 
and detail will eliminate confusion among market participants, which is 
in the interests of all investors and the general public. The Exchange 
also believes that codifying the requirement that all Professional 
orders shall be marked with the appropriate origin code as determined 
by the Exchange will add additional transparency and clarity to the 
Rules, which is also in the interests of all investors and the general 
public.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. As discussed above, the 
Exchange does not believe that the current rules of C2 and other 
exchanges that accord priority to all public customers over broker-
dealers are unfairly discriminatory. Nor does the Exchange believe that 
it is unfairly discriminatory to accord priority to only those 
customers who on average do not place more than one order per minute 
(390 per day) under the counting regime that the Exchange proposes. The 
Exchange believes that its proposal does not impose an undue burden on 
competition. The Exchange notes that one of the purposes of the 
Professional rules is to help ensure fairness in the marketplace and 
promote competition among all market participants. The Exchange 
believes that proposed Interpretation and Policy .01 to Rule 1.1's 
definition of Professional would help establish more competition among 
market participants and promote the purposes for which the Exchange's 
Professional rule was originally adopted. The Exchange does not believe 
that the Act requires it to provide the same incentives and discounts 
to all market participants equally, so as long as the exchange does not 
unfairly discriminate among participants with regard to access to 
exchange systems. The Exchange believes that here, that is clearly the 
case.
    Rather than burden competition, the Exchange believes that the 
proposed rule change promotes competition by ensuring that retail 
investors continue to receive the appropriate marketplace advantages in 
the C2 marketplace as intended, while furthering competition among 
marketplace professionals by treating them in the same manner under the 
Rules as other similarly situated market participants by ensuring that 
market participants with similar access to information and technology 
(i.e. Professionals and broker-dealers), receive similar treatment 
under the Rules while retail investors receive the benefits of order 
priority and fee waivers that are intended to apply to public 
customers.

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 written 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)(iii) of the Act \26\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\27\ A proposed rule 
change filed under Rule 19b-4(f)(6) normally does not become operative 
prior to 30 days after the date of filing.\28\ Rule 19b-4(f)(6)(iii), 
however, permits the Commission to designate a shorter time if such 
action is consistent with the protection of investors and the public 
interest.\29\
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    \26\ 15 U.S.C. 78s(b)(3)(a)(iii).
    \27\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file 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. 
The Exchange has satisfied this requirement.
    \28\ 17 CFR 240.19b-4(f)(6)(iii).
    \29\ Id.
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    The Exchange has requested that the Commission waive the 30-day 
operative delay. The Commission notes that it has considered 
substantially similar proposed rule changes filed by CBOE and PHLX 
which it approved after a notice and comment period.\30\ This proposed 
rule change does not raise any new or novel issues from those 
considered in the CBOE or PHLX

[[Page 43687]]

proposals. Based on the foregoing, the Commission believes that it is 
consistent with the protection of investors and the public interest to 
waive the 30-day operative date so that the proposal may take effect 
upon filing.\31\
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    \30\ See Securities Exchange Act Release Nos. 77450 (March 25, 
2016) (Order Approving SR-CBOE-2016-005); 77449 (March 25, 2016), 81 
FR 18665, (March 31, 2016) (Order Approving SR-Phlx-2016-10).
    \31\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of such 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 shall institute proceedings under 
Section 19(b)(2)(B) of the Act \32\ to determine whether the proposed 
rule change should be approved or disapproved.
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    \32\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

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 No. SR-C2-2016-009 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 No. SR-C2-2016-009. 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 such filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File No. SR-C2-2016-009, and should be 
submitted on or before July 26, 2016.
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    \33\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\33\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-15760 Filed 7-1-16; 8:45 am]
 BILLING CODE 8011-01-P