Document ID: SEC-2010-0662-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: C2 Options Exchange, Inc.
Posted Date: 2010-05-05T04:00Z

[Federal Register: May 5, 2010 (Volume 75, Number 86)]
[Notices]               
[Page 24771-24772]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05my10-148]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61987; File No. SR-C2-2010-001]

 
Self-Regulatory Organizations; C2 Options Exchange, Incorporated; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Adopt Certain Order Routing and Market-Maker Rules

April 27, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on April 23, 2010, 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, II, 
and III below, which Items have been prepared by the Exchange. The 
Exchange filed the proposal as a ``non-controversial'' proposed rule 
change pursuant to Section 19(b)(3)(A)(iii) of the Act\3\ and Rule 19b-
4(f)(6) thereunder.\4\ The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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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 Substance 
of the Proposed Rule Change

    The Exchange proposes to adopt a rule relating to order routing to 
other exchanges and to adopt preferred market-maker rules. The text of 
the proposed rule change is available on the Exchange's Web site 
(http://www.cboe.org/Legal), 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, C2 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    C2 was recently registered as a national securities exchange under 
Section 6 of the Exchange Act.\5\ When operational, C2 will operate an 
all-electronic marketplace for the trading of listed options. It will 
not maintain a physical trading floor. C2 is filing this proposed rule 
change in order to add a linkage order routing rule. The rule is 
identical to a rule adopted by the Chicago Board Options Exchange, 
Incorporated (``CBOE'') as part of the transition to the new 
intermarket linkage plan (the Options Order Protection and Locked/
Crossed Market Plan). Under the new linkage, exchanges ensure order 
protection by routing orders to other markets through broker-dealers. 
The proposed rule adopts certain guidelines that would be applicable to 
any routing services provided by C2 through a broker-dealer. Routing 
services would be available to C2 permit holders only and are optional. 
Permit holders that do not want orders routed can use the Immediate or 
Cancel designation to avoid routing.
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    \5\ See Exchange Act Release No. 61152 (Dec. 10, 2009), 74 FR 
66699 (Dec. 16, 2009).
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    As proposed, routing services will only be provided by routing 
brokers that are not affiliated with the Exchange. Further, the 
Exchange may not use a routing broker for which the Exchange or any 
affiliate of the Exchange is the designated examining authority. For 
each routing broker used by the Exchange, an agreement will be in place 
between the Exchange and the routing broker that will, among other 
things, restrict the use of any confidential and proprietary 
information that the routing broker receives to legitimate business 
purposes necessary for routing orders at the direction of the Exchange.
    The rule further requires the Exchange to provide routing services 
in compliance with the Securities Exchange Act of 1934 and the rules 
thereunder, including, but not limited to, the requirements in Section 
6(b)(4) and (5) of the Act that the rules of a national securities 
exchange provide for the equitable allocation of reasonable dues, fees, 
and other charges among its members and issuers and other persons using 
its facilities, and not be designed to permit unfair discrimination 
between customers, issuers, brokers, or dealers. The rule also requires 
the Exchange to establish and maintain procedures and internal controls 
reasonably designed to adequately restrict the flow of confidential and 
proprietary information between the Exchange and the routing broker, 
and any other entity, including any affiliate of the routing broker, 
and, if the routing broker or any of its affiliates engages in any 
other business activities other than providing routing services to the 
Exchange, between the segment of the routing broker or affiliate that 
provides the other business activities and the segment of the routing 
broker that provides the routing services.
    Under the proposed rule, the Exchange will determine the logic that 
provides when, how, and where orders are routed away to other 
exchanges. Further, the routing broker cannot change the terms of an 
order or the routing instructions, nor does the routing broker have any 
discretion about where to route an order. Lastly, the rule provides 
that any bid or offer entered on the Exchange routed to another 
exchange via a routing broker that results in an execution shall be 
binding on the member that entered such bid/offer.
    The filing also proposes to adopt a Preferred Market-Maker rule and 
a participation entitlement for Preferred Market-Makers (PMMs). The 
proposed additions are virtually identical to rules governing the PMM 
program on CBOE. A PMM program allows order senders to designate a 
preferred Market-Maker for orders sent to the Exchange. If the PMM 
meets certain requirements at the time the order is received, the PMM 
is entitled to an enhanced participation on the trade (a participation 
entitlement). Adopting a PMM program will provide C2 with greater 
flexibility in attracting dedicated liquidity providers.
    Proposed Rule 8.13 provides that the Exchange may allow, on a 
class-by-class basis, for the receipt orders that carry a designation 
specifying a Market-Maker in that class as the ``Preferred Market-
Maker'' for that order. The PMM will receive a participation 
entitlement for such order if the following provisions are met: (i) The 
PMM is registered in the relevant option class; and (ii) the PMM is 
quoting at the best bid/offer on the Exchange. The participation 
entitlement shall be 40% when there are two or more Market-Makers also 
quoting at the

[[Page 24772]]

NBBO on the Exchange, and 50% when there is only one other Market-Maker 
quoting at the NBBO on the Exchange. In addition: (i) A PMM may not be 
allocated a total quantity greater than the quantity that the PMM is 
quoting at the best bid/offer on the Exchange; (ii) the participation 
entitlement rate is based on the number of contracts remaining after 
all public customer orders in the book at the best bid/offer on the 
Exchange have been satisfied; and (iii) if a Preferred Market-Maker 
receives a PMM participation entitlement, then no other participation 
entitlements shall apply to such order.
    PMMs will be subject to heightened quoting requirements. More 
specifically, PMMs must comply with the quoting obligations applicable 
under Exchange rules and must provide continuous electronic quotes in 
at least 90% of the series of each class for which it receives 
Preferred Market-Maker orders.\6\
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    \6\ Under Rule 8.5(a)(1), C2 Market-Makers must maintain a 
continuous (99% of the time) two-sided market in 60% of the series 
of each registered class that have time to expiration of less than 
nine months.
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    Proposed Rule 8.13 also allows the Exchange to implement a PMM 
program for complex orders. The program is substantially similar to the 
program for straight orders and is identical to the program in place 
for CBOE.
    Corresponding changes to Rule 6.12 are also proposed to ensure that 
the order execution and priority rule contemplates a participation 
entitlement for PMMs.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Exchange Act in general and furthers the objectives 
of Section 6(b)(5) in particular in that, by making the linkage process 
more efficient and ensuring certain safeguards are in place when 
routing firms are used, it should promote just and equitable principles 
of trade, serve to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and protect 
investors and the public interest. Moreover, the Exchange believes that 
adopting these rules will facilitate the trading of options in a 
national market system by establishing more transparent routing 
guidelines, and will facilitate the ability of preferred Market-Makers 
to provide deeper liquidity.

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

    C2 does not believe that the proposed rule change will impose any 
burden on competition 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 \7\ and Rule 19b-4(f)(6) 
thereunder.\8\ At any time within 60 days of the filing of such 
proposed rule change, the Commission may summarily abrogate 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.
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    \7\ 15 U.S.C. 78s(b)(3)(A).
    \8\ 17 CFR 240.19b-4(f)(6).
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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-C2-2010-001 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-C2-2010-001. 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,\9\ 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 the filing also will be available for 
inspection and copying at the principal office of C2. 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-C2-2010-001 and should be 
submitted on or before May 26, 2010.
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    \9\ The text of the proposed rule change is available on the 
Commission's Web site at http://www.sec.gov/rules/sro.shtml.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-10459 Filed 5-4-10; 8:45 am]
BILLING CODE 8010-01-P