[Federal Register Volume 76, Number 179 (Thursday, September 15, 2011)]
[Notices]
[Pages 57094-57097]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-23603]
[[Page 57094]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-65311; File No. SR-C2-2011-018]
Self-Regulatory Organizations; C2 Options Exchange, Incorporated;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change
Related to Opening and Complex Order Price Check Parameter Features
September 9, 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 August 26, 2011, 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.
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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 is proposing to expand the operation of an existing
price check parameter feature to its opening rotation process and to
include an additional price check parameter feature for its complex
order process. 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'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 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
The Exchange has in place various price check parameter features
that are designed to prevent incoming orders from automatically
executing at potentially erroneous prices. These price check parameter
features are designed to help maintain a fair and orderly market. The
Exchange is proposing to expand the operation of an existing price
check parameter feature to its opening rotation process and to include
an additional price check parameter feature for its complex order
process. The Exchange believes the below-described protection features
will enhance the existing functionality and assist with the maintenance
of fair and orderly markets by providing an automated process that
helps to mitigate the potential risks associated with orders drilling
through multiple price points on the opening (thereby resulting in
executions at prices that are extreme and potentially erroneous) and
complex orders trading at prices that are inconsistent with particular
complex order strategies (thereby resulting in executions at prices
that are extreme and potentially erroneous).
With respect to opening rotations, the Exchange is proposing to
amend Rule 6.11, Openings (and sometimes Closings), to extend the
application of an existing price check parameter feature to apply to
the opening order exposure process. By way of background, currently the
Exchange has in place a price check parameter under Rule 6.17, Price
Check Parameters, which provides in relevant part that the Exchange
will not automatically execute eligible orders that are marketable if
the execution would follow an initial partial execution on the Exchange
and would be at a subsequent price that is not within an acceptable
tick distance from the initial execution (which is equivalent to the
national best bid or offer (``NBBO'')). For purposes of this provision,
the acceptable tick distance is determined by the Exchange on a series-
by-series and premium basis for market orders and/or marketable limit
orders (provided it is not less than 2 minimum increment ticks) and
announced via Regulatory Circular. Also by way of background, currently
as part of the opening rotation process, additional steps are
automatically taken through an order exposure process to address
certain opening quote, acceptable price range, market order imbalance,
and NBBO conditions. At the conclusion of the order exposure process,
the remaining balance of any orders are automatically executed if
marketable or booked if not marketable, except that any remaining
balance of opening contingency orders not executed after an exposure on
the opening are automatically cancelled. Orders that are subject to
this opening order exposure process are not currently subject to the
price check parameter described above.
The purpose of the proposed rule change is to extend the
application of the existing price check protection feature to apply to
orders that are subject to the opening order exposure process, with
certain modifications described below. In particular, the Exchange is
proposing to amend Rule 6.11 to instead provide that, following the
exposure process, the Exchange will not automatically execute or book
the remaining balance of any orders not executed after an exposure on
the opening that are priced or would execute at a price that is not
within an acceptable tick distance from the initial exposure price. Any
remaining balance of such orders will be cancelled.\5\ The ``acceptable
tick distance'' will be determined by the Exchange on a series-by-
series and premium basis and will be the same as the acceptable tick
distance established under Rule 6.17. In accordance with Rule 6.11.02,
all pronouncements regarding the acceptable tick distances determined
by the Exchange will be announced via Regulatory Circular. The Exchange
notes that the only distinctions in the application of the existing
price check parameter to the opening order exposure process are that:
(i) The price from which the acceptable tick distance is measured will
be the initial exposure price,\6\ not the NBBO; and (ii) all orders
that are part of the opening order exposure process will be subject to
the price check parameter, not just market orders and/or marketable
limit orders.
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\5\ The Exchange notes that opening contingency orders are
currently subject to the order exposure process and, under the price
check parameter, would also be subject to execution at prices within
the acceptable tick distance. Any remaining balance of any opening
contingency order that is not executed within the acceptable tick
distance will be cancelled.
\6\ The initial exposure price varies depending on the
particular conditions that exist. For certain conditions, the
initial exposure price is the NBBO. For other conditions, the
initial exposure price is the widest point within the acceptable
opening range or the NBBO, whichever is better. See Rule 6.11(e)-
(f).
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For example, the Exchange may determine that an acceptable tick
[[Page 57095]]
distance for a series trading in penny increments with premiums ranging
from $1.00-$2.99 is five ticks (i.e., $0.05). Thus, if the initial
exposure price for a series is $1.20, any remaining balance of an order
not executed via the exposure process will be cancelled to the extent
the order is priced or would execute at a price that is more than $0.05
away from the initial exposure price of $1.20 (e.g., a market order to
buy that would execute above $1.25 or a limit order to buy that is
priced above $1.25).
The Exchange believes that extending the existing price protection
feature to include the opening exposure process will assist with the
maintenance of fair and orderly markets by helping to mitigate the
potential risks associated with orders drilling through multiple price
points when the Exchange first opens for trading (thereby resulting in
executions at prices that are extreme and potentially erroneous).
Rather than automatically executing or booking orders at extreme and
potentially erroneous prices, the Exchange will cancel orders that
exceed the price check parameter back to order entry firms so that the
orders can be further evaluated.
With respect to the complex order process, the Exchange is
proposing to amend Rule 6.13, Complex Order Execution, to include a new
price check parameter feature. Specifically, the Exchange is proposing
to introduce a new price check parameter feature (the ``buy-buy/sell-
sell strategy parameter'') that the Exchange may determine to make
available on a class-by-class basis (and announce via Regulatory
Circular in accordance with Rule 6.13.01). In classes where the buy-
buy/sell-sell strategy parameter feature is activated, the complex
order book (``COB'') will not automatically execute an eligible complex
order that is a limit order where (i) All the components of the
strategy are to buy and the order is priced at zero, any net credit
price, or a net debit price that is less than the number of individual
option series legs in the strategy (or applicable ratio) multiplied by
the applicable minimum net price increment for the complex order; or
(ii) all the components of the strategy are to sell and the order is
priced at zero, any net debit price, or a net credit price that is less
than the number of individual option series legs in the strategy (or
applicable ratio) multiplied by the applicable minimum net price
increment for the complex order. Such a complex order under this
feature will be rejected (and, thus, could not route to COB or the
complex order RFR auction (``COA'') for processing). As proposed, in
classes where the buy-buy/sell-sell strategy parameter feature is
available, it will also be available for COA responses under Rule
6.13(c), complex orders and responses under Rule 6.51, Automated
Improvement Mechanism (``AIM''), and 6.52, Solicitation Auction
Mechanism (``SAM''), and AIM customer-to-customer immediate crosses
under Rule 6.51.08 (``CTC'').\7\ Such paired complex orders and
responses under these provisions will be rejected. In this regard, if
any paired order submitted by an order entry firm for AIM, SAM or CTC
processing exceeds the parameters, then both the order that exceeds the
parameters and the paired contra-side order will be rejected regardless
of whether the contra-side order exceeds the parameters. However, to
the extent that only the paired contra-side order submitted by an order
entry firm for AIM or SAM processing would exceed the price check
parameter, the paired contra-side order will be rejected while the
original Agency Order may be rejected or, at the order entry firm's
discretion, continue processing as an unpaired complex order (e.g., the
original Agency Order would route to COB or COA for processing).
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\7\ AIM, SAM and CTC are mechanisms that may be used to cross
two paired orders. COA is a mechanism that may be used to expose an
unpaired complex order for price improvement. Orders submitted for
COA, AIM or SAM or COA processing are exposed for price improvement
through an auction (and thus other market participants may submit
responses), whereas orders submitted for CTC processing are executed
immediately without exposure.
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For example, under the new buy-buy/sell-sell strategy parameter
feature, a limit order to sell 1 Mar 45 call where the individual
option series trades in a minimum increment of $0.05 and the minimum
net price increment for the complex order is $0.01 would be rejected if
it has a net price of $0.00, any net debit price, or a net credit price
that is less than $0.01 ($0.01 x (1 option leg)).\8\ Such an order
would appear to be erroneously priced because normally a person selling
one series would expect to receive a net credit price of at least $0.01
(a price of at least $0.01--the minimum net price trading increment for
the complex order--for the series being sold).
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\8\ If, for example, the individual option series trades in a
minimum increment of $0.05 and the minimum net price increment for
the complex order is $0.05, then the minimum net credit price
calculation for the scenario above would be $0.05 ($0.05 x (1
options leg)).
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As another example, a limit order to sell 1 Mar 45 call and sell 1
Mar 50 call where the individual option series trade in a minimum
increment of $0.05 and the minimum net price increment for the complex
order is $0.01 would be rejected if it has a net price of $0.00, any
net debit price, or a net credit price that is less than $0.02 ($0.01 x
(2 options legs)).\9\ Such an order would appear to be erroneously
priced because normally a person selling two series would expect to
receive a net credit price of at least $0.02 (a price of at least
$0.01--the minimum net price increment for the complex order--for each
series being sold).
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\9\ If, for example, the individual option series trades in a
minimum increment of $0.05 and the minimum net price increment for
the complex order is $0.05, then the minimum net credit price
calculation for the scenario above would be $0.10 ($0.05 x (2
options legs)).
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As another example, assume two paired complex orders are submitted
to an AIM auction and the minimum net price increment for the complex
orders is $0.01. If the original Agency Order is a market order to sell
1 Mar 45 call and sell 1 Mar 50 call (which satisfies the price check
parameter because the parameter is only triggered by limit prices), but
the contra-side order to buy 1 Mar 45 call and buy 1 Mar 50 call has a
net price of $0.00, the AIM auction will not initiate because the
contra-side order does not satisfy the price check parameter. Such a
contra-side order would appear to be erroneously priced because
normally a person buying two series would expect to pay a net debit
price of at least $0.02 (a price of at least $0.01--the minimum net
price increment for the complex order--for each series being
purchased). The contra-side order would be rejected. The paired
original Agency Order would either be rejected along with the contra-
side order or, at the order entry firm's discretion, continue
processing as an unpaired complex order.
The Exchange believes that this new price protection feature will
assist with the maintenance of fair and orderly markets by helping to
mitigate the potential risks associated with complex orders that are
entered at net limit prices that are inconsistent with the particular
``buy-buy'' or ``sell-sell'' strategy (thereby resulting in execution
at prices that are extreme and potentially erroneous). Rather than
automatically execute, book or auction orders at prices inconsistent
with the strategy, the Exchange will reject the orders back to the
order entry firms.\10\
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\10\ The Exchange notes that the proposed buy-buy/sell-sell
strategy parameter feature for limit orders is very similar to the
logic behind an existing debit-to-credit/credit-to-debit strategy
parameter feature and an existing vertical/butterfly strategy
parameter feature under Rule 6.13.04(b) and (c), respectively. These
existing price protection parameters also prevent complex orders
from being automatically executed or booked at prices that would be
inconsistent with the particular complex order strategies.
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[[Page 57096]]
2. Statutory Basis
The proposed rule change is consistent with Section 6(b) of the Act
\11\ in general and furthers the objectives of Section 6(b)(5) of the
Act \12\ in particular in that 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. The Exchange believes the
proposed rule change will assist in the automatic execution and
processing of orders that are subject to the Exchange's opening and
complex order processing. The Exchange also believes the proposed rule
change will enhance the existing price check parameter functionality
and assist with the maintenance of fair and orderly markets by
providing an automated process that helps to mitigate the potential
risks associated with orders drilling through multiple price points on
the opening (thereby resulting in executions at prices that are extreme
and potentially erroneous) and complex orders trading at prices that
are inconsistent with particular complex order strategies (thereby
resulting in executions at prices that are extreme and potentially
erroneous).
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\11\ 15 U.S.C. 78f(b).
\12\ 15 U.S.C. 78f(b)(5).
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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 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 after the date of the filing, or such
shorter time as the Commission may designate, it has become effective
pursuant to Section 19(b)(3)(A) of the Act \13\ and Rule 19b-4(f)(6)
thereunder.\14\
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\13\ 15 U.S.C. 78s(b)(3)(A).
\14\ 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.
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A proposed rule change filed under Rule 19b-4(f)(6) \15\ normally
does not become operative prior to 30 days after the date of the
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\16\ the Commission
may designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay so that the proposal
may become operative immediately upon filing. The Exchange notes that
waiving the 30-day operative delay will enable the Exchange to
implement these protection promptly, which will allow market
participants to benefit from these protections without delay. In
addition, the Exchange notes that the proposed opening price check
parameter feature is an extension of the Exchange's existing price
check parameter feature with certain modifications (as discussed above)
and is intended to address problematic executions that have previously
occurred on the open. The Exchange further notes that the proposed new
complex order price check parameter feature is similar to existing
price check parameter features for complex orders (as discussed above)
and is designed to address problematic executions that have previously
occurred with complex orders. The Exchange has informed the Commission
that it is proposing these changes in response to requests the Exchange
received from market participants. For these reasons, the Commission
believes that waiving the 30-day operative delay is consistent with the
protection of investors and the public interest, and designates the
proposed rule change to be operative upon filing with the
Commission.\17\
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\15\ 17 CFR 240.19b-4(f)(6).
\16\ 17 CFR 240.19b-4(f)(6)(iii).
\17\ For purposes only of waiving the operative delay for this
proposal, the Commission has considered the proposed rule's impact
on efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.
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 [email protected]. Please include
File Number SR-C2-2011-018 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-C2-2011-018. 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-C2-2011-018 and should be
submitted on or before October 6, 2011.
[[Page 57097]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-23603 Filed 9-14-11; 8:45 am]
BILLING CODE 8011-01-P