[Federal Register Volume 76, Number 228 (Monday, November 28, 2011)]
[Notices]
[Pages 72991-72992]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-30447]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-65800; File No. SR-C2-2011-035]
Self-Regulatory Organizations; C2 Options Exchange,
Incorporated; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change Related to a Temporary Quote Risk Monitor
Mechanism Rule
November 21, 2011.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on November 18, 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 the
Substance of the Proposed Rule Change
The Exchange proposes to adopt Rule 8.12A Pilot Quote Risk Monitor
Mechanism. 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 self-regulatory organization
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
On November 7, 2011, the Exchange filed to adopt a Quote Risk
Monitor (QRM) rule.\5\ That rule change was immediately effective upon
filing, but will not be operative until December 7, 2011. C2 submitted
the filing to codify C2's QRM functionality which has been available
and in use on C2 since C2 commenced trading listed options.\6\ On
November 17, 2011 C2 announced that it would be deactivating the QRM
functionality until December 7, 2011 when the new rule becomes
operational.\7\ The anticipated deactivation has caused considerable
concern among C2 Market-Makers, and some have taken steps to cease
acting as C2 Market-Makers. Out of concern that a decrease in quoters
and a decrease in quote quality will have an adverse effect on the C2
market, this filing proposes to adopt a temporary C2 QRM rule that
would be immediately effective and operative until December 7, 2011
when the above-referenced QRM rule will become operative.
---------------------------------------------------------------------------
\5\ See Securities Exchange Act Release No. 65744 (November 14,
2011) (SR-C2-2011-034).
\6\ The Exchange inadvertently did not include a QRM rule in its
initial rulebook and did not realize the omission until very
recently.
\7\ See C2 Regulatory Circular RG11-035.
---------------------------------------------------------------------------
C2 Rules require Market-Makers to maintain continuous electronic
quotes.\8\ To comply with this requirement, each Market-Maker can
employ its own proprietary quotation and risk management systems to
determine the prices and sizes at which it quotes.
---------------------------------------------------------------------------
\8\ See C2 Rule 8.5(a)(1).
---------------------------------------------------------------------------
A Market-Maker's risk in an options class is not limited to the
risk in a single series of that class. Rather, a Market-Maker typically
is active in quoting in multiple option classes, and each such option
class can comprise dozens of individual option series. On C2, trades
are automatically effected against a Market-Maker's then current quote.
As a result, a Market-Maker faces exposure in all series of a class,
requiring that the Market-Maker off-set or otherwise hedge its overall
position in a class. The QRM functionality helps Market-Makers limit
this overall exposure and risk. Specifically, the functionality permits
a Market-Maker to establish parameters in the system to cancel its
electronic quotes in all series of an option class until the Market-
Maker refreshes those electronic quotes.
Under proposed Rule 8.12A, each Market-Maker that elects to use the
functionality would be required to specify two parameters that the QRM
Mechanism would use to determine when that Market-Maker's quotes should
be cancelled. In particular, each Market-Maker is required to specify a
maximum number of contracts for each option class (the ``Contract
Limit'') and a rolling time period in seconds during which such
Contract Limit is to be measured (the ``Measurement Interval'').
When the QRM Mechanism determines that the Market-Maker has traded
more than the Contract Limit for any option class during any rolling
Measurement Interval, the QRM Mechanism automatically cancels all of
the Market-Maker's quotes in any series of that option class. By
limiting its exposure across series, a Market-Maker is better able to
quote aggressively in an option, knowing that the QRM
[[Page 72992]]
Mechanism will automatically cancel all its quotations in a class when
its exposure limit is hit.
The Exchange notes that the proposed rule would not relieve a
Market-Maker of its obligations to provide continuous electronic quotes
under the Exchange rules \9\ nor to provide ``firm'' quotes pursuant to
the requirements of Exchange Rule 8.6. The Exchange also notes that the
proposed rule is based on Chicago Board Options Exchange, Incorporated
(``CBOE'') Rule 8.18 (Quote Risk Monitor Mechanism).
---------------------------------------------------------------------------
\9\ See C2 Rule 8.5(a)(1).
---------------------------------------------------------------------------
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)
\10\ 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 a
mechanism that would allow C2 Market-Makers to more effectively and
efficiently manage their quotations. Knowing that a helpful quote
management tool is in place would, in turn, allow those Market-Makers
to quote more aggressively which removes impediments to a free and open
market and benefits all C2 users.
---------------------------------------------------------------------------
\10\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
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 proposed rule change: (i) Does not significantly affect
the protection of investors or the public interest; (ii) does not
impose any significant burden on competition; and (iii) does not become
operative for 30 days after the date of the filing, or such shorter
time as the Commission may designate if consistent with the protection
of investors and the public interest, the proposed rule change has
become effective pursuant to Section 19(b)(3)(A) of the Act \11\ and
Rule 19b-4(f)(6) thereunder.\12\
---------------------------------------------------------------------------
\11\ 15 U.S.C. 78s(b)(3)(A).
\12\ 17 CFR 240.19b-4(f)(6). Pursuant to Rule 19b-4(f)(6)(iii)
under the Act, the Exchange is required to give the Commission
written notice of its intent to file the proposed rule change, along
with a brief description and text of 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.
C2 has requested that the Commission waive the five-day pre-filing
notice requirement in Rule 19b-4(f)(6)(iii). The Commission has
determined to waive the five day pre-filing notice requirement.
---------------------------------------------------------------------------
A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the
Act \13\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6)(iii) \14\ permits the
Commission to designate a shorter time if such action is consistent
with the protection of investors and the public interest. The Exchange
has requested that the Commission waive the 30-day operative delay.
---------------------------------------------------------------------------
\13\ 17 CFR 240.19b-4(f)(6).
\14\ 17 CFR 240.19b-4(f)(6)(iii).
---------------------------------------------------------------------------
The Commission believes that waiving the 30-day operative delay is
consistent with the protection of investors and the public interest.
Waiver of the operative delay will allow market makers to continue to
use the QRM to manage risk associated with providing continuous quotes
across a multitude of series and classes and thereby avoid a
potentially adverse effect on the C2 market. For these reasons, the
Commission designates that the proposed rule change become operative
immediately upon filing.\15\
---------------------------------------------------------------------------
\15\ 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. 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.
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 [email protected]. Please include
File No. SR-C2-2011-035 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 No. SR-C2-2011-035. 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
a.m. and 3 p.m. Copies of such filing also will be available for
inspection and copying at the principal office of the 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 No. SR-C2-2011-035 and should be
submitted on or before December 19, 2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\16\
---------------------------------------------------------------------------
\16\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-30447 Filed 11-25-11; 8:45 am]
BILLING CODE 8011-01-P