Document ID: SEC-2011-1436-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: C2 Options Exchange, Inc.
Posted Date: 2011-09-26T04:00Z

[Federal Register Volume 76, Number 186 (Monday, September 26, 2011)]
[Notices]
[Pages 59470-59472]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-24594]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65360; File No. SR-C2-2011-022]

Self-Regulatory Organizations; C2 Options Exchange, Incorporated; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Related to the Exchange's Complex Order Execution Mechanisms

September 20, 2011.
    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 September 16, 2011, the C2 Options Exchange, Incorporated 
(``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 has designated 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 C2 Rules [sic] 6.13, Complex Order 
Execution. The text of the proposed rule change is available on the 
Exchange's Web site (http://www.c2exchange.com/Legal/RuleFilings.aspx), 
at the Exchange's Office of the Secretary and at the Commission.

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 those 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 parts of such 
statements.

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

1. Purpose
    C2 Rule 6.13 governs the operation of the Exchange's electronic 
complex order book and electronic complex order auction (referred to as 
``COB'' and ``COA,'' respectively). The purpose of this proposed rule 
change is to incorporate a provision that would provide the Exchange 
with the ability to determine which electronic allocation algorithm 
shall apply for COB and/or COA executions on a class-by-class basis, 
subject to certain conditions. Currently, as described in more detail 
below, the allocation algorithms for COB and COA default to the 
allocation algorithms in effect for a given options class. As proposed, 
the rule change would provide the Exchange with the flexibility to 
permit the allocation algorithm in effect for COB/COA to be different 
from the default allocation algorithm in effect for the options class. 
The applicable algorithm for COB/COA would be selected from among the 
allocation algorithms set forth in Rule 6.12, Order Execution and 
Priority.\5\
---------------------------------------------------------------------------

    \5\ The allocation algorithms include price-time priority, pro-
rata priority, and price-time with primary public customer and 
secondary trade participation right priority. Each of these base 
allocation methodologies can be supplemented with an optional market 
turner priority overlay. See Rule 6.12(a) through (b).
---------------------------------------------------------------------------

    Specifically, the Exchange is proposing as follows:
     COB: Currently, Rule 6.13(b)(1)(A) through (B) provides 
that, at the same net price, individual series component legs have 
priority over complex orders resting in the COB when executing against 
a complex order. If there are multiple complex orders resting in COB at 
the same price, the allocation of a complex order within COB is 
pursuant to the rules of trading priority otherwise applicable to 
incoming electronic orders in the individual component legs. The 
Exchange is proposing to amend Rule 6.13(b)(1)(B) to have the 
flexibility to determine to apply a different allocation algorithm for 
complex orders resting in COB. Such algorithm would be selected from 
among the algorithms set forth in Rule 6.12. (At the same price, the 
individual series legs will continue to have priority over complex 
orders resting in COB regardless of the allocation algorithm that is 
chosen for complex orders resting in COB.)
     COA: Currently, Rule 6.13(c)(5)(A) through (D) provides 
that, at the same place [sic], individual series component legs have 
priority over complex orders resting in COB and COA responses when 
executing against an incoming COA-eligible order. To the extent there 
are multiple complex orders and responses at the same price, Rule 
6.13(c)(5)(B) through (D) specifies that, at the same price, the 
allocation is based on public customer complex orders and responses 
having priority (with multiple public customer complex orders and 
responses being allocated based on time priority), then non-public 
customer complex orders resting in COB before the COA auction response 
time interval (with multiple non-public customer complex orders being 
allocated based on the allocation algorithm in effect for the 
individual component legs), then non-public customer complex orders 
resting in COB and responses received during the COA auction response 
time interval (with such multiple non-public customer complex orders 
and responses being allocated based on the allocation algorithm in 
effect for the individual component legs). The Exchange is proposing to 
amend the rule to have the flexibility to determine to apply a 
different allocation algorithm from the one set out in Rule 
6.13(c)(5)(B) through (D) for complex orders and responses that trade 
against a COA-eligible order. Such algorithm would be selected from 
among the algorithms set forth in Rule 6.12, which may or may not 
include public customer priority. (At the same price, the individual 
series legs will continue to have priority over complex orders in COB 
and COA responses regardless of the allocation algorithm that is chosen 
for complex orders in COB and COA responses.) All pronouncements 
regarding allocation algorithm determinations by the Exchange will be 
announced to C2 Trading Permit Holders via Regulatory Circular.
    As noted above, the allocation algorithm applied to COB/COA for 
each options class will be selected from among those set forth in Rule 
6.12. Thus, the Exchange is not creating any new algorithms for the 
mechanisms, but is amending Rules [sic] 6.13 to provide the flexibility 
to choose an algorithm from among the existing algorithms to be applied 
to the COB/COA mechanisms rather than simply defaulting to the 
algorithm in effect for intra-day trading in an options class (e.g., 
the algorithm for intra-day trading

[[Page 59471]]

may be established as pro-rata priority without public customer 
priority, while the algorithm for complex orders in COB and COA may be 
established as price-time priority (with or without public customer 
priority)). Regardless of the algorithm selected for complex order in 
COB or COA responses, the individual series legs retain priority over 
complex orders. All other aspects of COB/COA pursuant to Rules [sic] 
6.13 shall apply unchanged. The Exchange believes that having this 
additional flexibility will allow the Exchange to select an allocation 
algorithm (from among the existing algorithms set forth in Rule 6.12) 
that the Exchange believes is appropriate considering the particular 
options class and mechanism. With respect to COA, the Exchange believes 
that having the ability to select an alternate algorithm will provide 
us with additional flexibility to incent market participants to respond 
to COA auctions.
    The second purpose of the proposed rule change is to make a 
correction to the text of Rule 6.13 pertaining to complex orders. In 
particular, the Exchange is proposing to change the maximum permissible 
ratio for complex orders in COB, which is currently incorrectly 
identified as a ratio of one-to-two or lower, to a ratio of one-to-
three or lower. As revised, this Rule 6.13 provision will conform the 
rule text with the definition of a ratio order in subparagraph (d)(5) 
of C2 Rule 6.10, Order Types Defined.\6\ We also note that the change 
to a maximum ratio of one-to-three is consistent with the electronic 
complex order book rules of other options exchanges.\7\
---------------------------------------------------------------------------

    \6\ Rule 6.10(d)(5) currently provides that a permissible ratio 
for a ratio order is any ratio that is equal to greater than one-to-
three (.333) and less than or equal to three-to-one (3.00). The 
Exchange notes that Rule 6.10(d)(5) was amended as part of the C2 
Form-1 application to become a national securities exchange in order 
to reflect this maximum one-to-three ratio. See Amendment 1 to C2 
Form-1 Application, December 4, 2009. We are now seeking to conform 
the text of Rule 6.13.
    \7\ See, e.g., Chicago Board Options Exchange, Incorporated 
(``CBOE'') Rule 6.53C(c)(iii).
---------------------------------------------------------------------------

2. Statutory Basis
    The basis under the Securities Exchange Act of 1934 (the ``Act'') 
for this proposed rule change is the requirement under Section 6(b)(5) 
\8\ that an exchange have rules that are designed to promote just and 
equitable principles of trade, and to remove impediments to and perfect 
the mechanism for a free and open market and a national market system, 
and, in general, to protect investors and the public interest. In 
particular, the Exchange believes the proposed change is designed to 
promote just and equitable principles of trade, and to remove 
impediments to and perfect the mechanism for a free and open market and 
national market system because the rule change would provide more 
flexibility for the Exchange to designate the allocation algorithm for 
COB and/or COA in a manner that is consistent with existing C2 rules. 
The Exchange also believes that correcting the text of Rule 6.13 to 
reflect the maximum ratio for complex orders in COB of one-to-three 
will provide additional clarity, avoid confusion and conform the rule 
text to be consistent with C2 Rule 6.10(d)(5) and the electronic 
complex order book rules of other options exchanges.\9\
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78f(b)(5).
    \9\ See note 3, [sic] supra, and surrounding discussion.
---------------------------------------------------------------------------

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.

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 
proposal.

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

    Because the foregoing rule 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 if consistent with the protection of investors 
and the public interest, provided that the self-regulatory organization 
has given 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 proposed rule change has become effective 
pursuant to Section 19(b)(3)(A) of the Act \10\ and Rule 19b-4(f)(6) 
thereunder.\11\ 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.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6). C2 has requested that the 
Commission waive the five-day pre-filing notice requirement in Rule 
19b-4(f)(6)(iii). The Commission waives the five-day pre-filing 
notice requirement.
---------------------------------------------------------------------------

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 e-mail to rule-comments@sec.gov. Please include 
File Number SR-C2-2011-022 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-C2-2011-022. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for Web site 
viewing and printing in the Commission's Public Reference Room, 100 F 
Street, NE., Washington, DC 20549, on official business days between 
the hours of 10 a.m. and 3 p.m. Copies of 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 Number SR-C2-

[[Page 59472]]

2011-022 and should be submitted on or before October 17, 2011.
---------------------------------------------------------------------------

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

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-24594 Filed 9-23-11; 8:45 am]
BILLING CODE 8011-01-P