[Federal Register Volume 77, Number 17 (Thursday, January 26, 2012)]
[Notices]
[Pages 4070-4073]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-1628]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-66210; File No. SR-C2-2012-003]
Self-Regulatory Organizations; C2 Options Exchange, Incorporated;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change
Related to Complex Order Price Check Parameter Features
January 20, 2012.
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 January 9, 2012, the C2 Options Exchange, Incorporated (``Exchange''
or ``C2'') filed with the Securities and Exchange Commission
(``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) 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).
\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 amend its complex order processing
rules to update existing price check protection features and include
some additional ones. 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
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 amend its complex order processing rules under
Rule 6.13, Complex Order Execution, to update existing price check
protection features to provide additional clarity on the operation of
the functionality and to include some additional features. The Exchange
believes the below-described price check parameter revisions will
enhance the existing functionality and assist with the maintenance of
fair and orderly markets by helping to mitigate the potential risks
associated with an order drilling through multiple price points
(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).
First, the Exchange is proposing to include descriptive headings in
the rule text for each of the existing price check parameters. The
Exchange is also proposing to break the description of the existing
same expiration strategy price check parameters into two separate
paragraphs instead of a single paragraph. We believe these changes will
make it easier for users to read and understand the operation of these
price protection features. These changes are simply non-substantive
formatting changes and do not impact the operation of the various
features.
Second, the market width parameter under Rule 6.13.04(a) currently
provides that the complex order book (``COB'') will not automatically
execute eligible complex orders that are market orders if the width
between the Exchange's best bid and best offer (``BBO'') are not within
an acceptable price range. In addition, the rule text currently
provides that such market complex orders will be cancelled.
The Exchange is proposing to revise this provision to provide that
the Exchange may determine to apply these price check parameters to
market orders and/or marketable limit orders. However, whereas market
orders that are subject to this price protection feature are cancelled,
marketable limit orders would be held in the system. Any such orders
held in the system would not be eligible to automatically execute until
after the market width parameter condition is resolved. In addition,
while being held in the system, such orders would be displayed in the
COB as applicable. This functionality for marketable limit order is
currently in use but not expressly covered in the rules. The Exchange
believes that extending the same price check logic to not automatically
execute such marketable limit orders but to continue to hold such
orders in the system is reasonable and appropriate because, as with
market orders, this feature should help to prevent executions of such
limit orders at extreme and potentially erroneous prices. In contrast
to market orders, marketable limit orders are able to be held in the
system because they have a price associated with them. The Exchange
also notes that applying market width price check logic to market
orders and/or marketable limit orders is consistent with other existing
price check parameters that apply to both market orders and marketable
limit complex orders.\5\ In addition, the
[[Page 4071]]
Exchange is proposing to correct a typographical error by changing the
minimum acceptable price range specified in the rule text for orders in
option series where the bid is less than $2 from $0.37 to $0.375.\6\
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\5\ See, e.g., Rule 6.17, Price Check Parameters (which
provides, among other things, that the Exchange will not
automatically execute eligible orders that are marketable if the
width between the national best bid and offer is not within an
acceptable price range (as determined by the Exchange on a series by
series basis for market orders and/or marketable limit orders and
announced to Trading Permit Holders via Regulatory Circular).
\6\ The $0.375 amount is same as the acceptable price range
parameters set forth in Rule 6.17.
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Third, the debit-to-credit (credit-to-debit) parameters under Rule
6.13.04(b) currently provide that (i) a market order that would be
executed at a net credit price after receiving a partial execution at a
net debit price would not be automatically executed (the ``debit-to-
credit'' parameter), and (ii) a market order that would be executed at
a net debit price after receiving a partial execution at a net credit
price would not be automatically executed (the ``credit-to-debit''
parameter). The Exchange is proposing to eliminate the debit-to-credit
parameter because it not possible for such a scenario to occur and
therefore the parameter is unnecessary. (Because orders are executed at
the best available price and then the next best price, a market order
would never execute at a net debit price then at a net credit price.)
Fourth, the Exchange is proposing to change the existing same
expiration strategy price check parameters to distinguish between its
application to limit orders and to market orders. The Exchange is also
proposing to eliminate a provision that would make this price check
parameter feature available to ratio orders should the Exchange
determine to do so. As the term implies, the ``same expiration
strategy'' price protection parameters apply to certain complex order
strategies where all the option series have the same expiration.\7\ The
functionality is designed to detect scenarios where (i) a limit order
is entered at a net credit price when it clearly should have been
entered at a net debit price (or vice versa) and (ii) a market order
would be executed at a net debit price when it clearly should be
executed at a net credit price (but not vice versa).\8\
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\7\ See Rule 6.13.04(c).
\8\ A same expiration strategy market order that would result in
an execution at a net credit price (i.e., the net sale proceeds from
the series being sold are more than the net purchase cost from the
series being bought) but that would normally execute at a net debit
price (i.e., the net sale proceeds from the series being sold are
less than the net purchase cost from the series being bought) would
be a favorable execution for the market order and would not trigger
this price check parameter. In making the changes to the rule text,
the Exchange is correcting a typographical error, which correction
clarifies that the same expiration strategy parameter does not apply
to market orders that would execute at a net credit.
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Currently the rule text provides that, if the conditions for this
price check parameter exist when a complex order is routed to the COB,
then the order will be rejected. The rule text also currently provides
that, to the extent the parameters are triggered once an order is
resting in COB or after an incoming order receives a partial execution,
such a complex order will be cancelled. The provision does not
distinguish between limit orders and market orders. The Exchange is
proposing to amend the text to separately describe how the two
categories of orders are processed.
With respect to limit orders, proposed changes to the text provide
that incoming limit orders will be rejected under this parameter only
if the conditions exist when the order is first routed to COB. The
provisions about resting orders and partial executions are not
applicable to limit orders because incoming limit orders that are
priced at a net price that meets the conditions are rejected outright
upon routing to COB and never get to the point where they are resting
or partially executed. With respect to market orders, proposed changes
to the text provide that, to the extent the parameters are triggered
when an incoming market order is routed to COB or after an incoming
market order is subject to a complex order RFR auction (``COA''), any
part of the market order that may be executed within an acceptable
price range will be executed automatically and the part of the order
that would execute at a net debit price will be cancelled. (A market
order would never rest in COB, so that provision will be removed from
the rule text.) The following examples illustrate this price check
parameter:
Example 1: Assume a complex order to buy 50 Jan 45 XYZ calls and
sell 50 Jan 50 XYZ calls is entered with a limit that is a net
credit price (i.e., the net sale proceeds from the Jan 50 calls are
larger than the net purchase cost from the Jan 45 calls). Such an
order would appear to be erroneously priced as a net credit--it
should instead be a net debit--because normally a person would
expect that the Jan 50 calls would not cost more than the Jan 45
calls. As a result, upon routing to COB, such a limit order would be
rejected.
Example 2: Assume a butterfly spread to buy 50 Jan 45 XYZ calls,
sell 100 Jan 50 XYZ calls and buy 50 Jan 55 XYZ calls is entered at
a net credit price (i.e., the net sale proceeds from the Jan 50
calls are more than the net purchase cost from the Jan 45 and 55
calls). Such an order would appear to be erroneously priced as a net
credit--it should instead be a net debit--because normally a person
would expect that selling the middle 50 strike would result in less
than the cost of buying the upper 55 and lower 45 strikes. As a
result, upon routing to COB, such a limit order would be rejected.
Example 3: Assume a market order to buy 50 Jan 45 XYZ calls and
sell 50 Jan 40 XYZ calls is entered. Also assume that the Jan 45 XYZ
calls are quoted $4.00-$4.10 for 10 contracts and the next available
offer is $4.30 for 100 contracts, and that the Jan 40 XYZ calls are
quoted $4.50-$4.60 for 10 contracts and the next available bid is
$4.20 for 100 contracts. Under this scenario, the incoming market
order would receive an execution for 10 spreads at a net credit
price of $0.40 each (i.e., the net sale proceeds from the Jan 40
Series are larger than the net purchase cost from the Jan 45
Series). When the series decrement, the net execution price would
become a net debit price of $0.10 each (i.e., the net sale proceeds
from the Jan 40 Series are less than the net purchase cost from the
Jan 45 Series). Such an execution would appear to be erroneous
because normally a person in this scenario would expect to execute
the vertical spread at a net credit price. As a result, upon routing
to COB, 10 contracts would execute at a net credit price of $0.40
each and the remaining 40 contracts would be cancelled.
Example 4: Assume a market order to buy 50 Jan 45 XYZ calls and
sell 50 Jan 40 XYZ calls is routed to COA. Also assume that at the
end of the COA the Jan 45 XYZ calls are quoted $4.00-$4.10 for 10
contracts and the next available offer is $4.30 for 100 contracts,
and that the Jan 40 XYZ calls are quoted $4.50-$4.60 for 10
contracts and the next available bid is $4.20 for 100 contracts. To
the extent the market order can execute at prices within the price
check parameter, then that part of the order would execute (i.e., 10
vertical spreads will execute at a net credit price of $0.40). To
the extent that the price check parameters are triggered at the
conclusion of COA, then that part of the market order would be
cancelled (i.e., 40 vertical spreads will cancel).
As noted above, the Exchange is also proposing to delete a
provision in the rule that provides that the Exchange may determine to
make the same expiration strategy price check parameters available to
applicable ratio orders (as such applicable ratios are determined by
the Exchange on a class-by-class basis). The Exchange has not activated
this feature for ratio orders and has no intention to do so at this
time. Therefore, the Exchange is proposing to delete this provision
from the rule at this time.\9\
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\9\ In the future, should the Exchange would determine to apply
this price check parameter feature to ratio orders, the Exchange
would address it through a separate rule change filing.
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Finally, fifth, the Exchange is proposing to codify a price check
parameter for orders processed via COA, which is currently in use but
not
[[Page 4072]]
expressly covered in the rules. Specifically, the Exchange may
determine on a class-by-class basis (and announce via Regulatory
Circular) that COA will not automatically execute a COA-eligible order
that is marketable if the execution would be at a price that is not
within an acceptable percentage distance from the derived net price of
the individual series legs at the start of COA. For purposes of this
provision, the ``acceptable percentage distance'' will be a percentage
determined by the Exchange on a class-by-class basis and it shall be
not less than 3 percent. The Exchange believes a 3 percent level is
reasonable and appropriate because a marketable order that would
deviate from the derived net market by that percentage or more may be
indicative of an extreme or potentially erroneous price, and a broker
would generally want to evaluate the order further before receiving an
automatic execution. The Exchange also believes that a 3 percent
minimum is reasonable and appropriate in comparison to other price
check parameters it currently has available.\10\ To the extent the
parameters under this provision are triggered, such a complex order
will be cancelled.
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\10\ The ``acceptable percentage distance'' price check
parameter for complex orders is adapted from the ``acceptable tick
distance'' parameter set forth in Rule 6.17, which provides that the
acceptable tick distance shall not be less than 2 minimum increment
ticks.
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For example, the Exchange could determine that the acceptable
percentage distance is 5%. Assume at the start of COA the individual
leg market in Series A is $1.00-$1.20 and in series B is $2.00-$2.20
and the derived leg market is $0.80 (net debit)-$1.20 (net credit). The
acceptable percentage distance would be $0.04 (5% x $0.80) for orders
to buy Series A and sell series B and $0.06 (5% x $1.20) for orders to
sell Series A and buy series B. As a result, COA would execute a COA-
eligible order at prices ranging from $0.84 (net debit)--$1.26 (net
credit), but not an order priced at a net debit of $0.85 or more or a
net credit of $1.27 or more.
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
complex order price check parameters assist in the automatic execution
and processing of orders that are subject to the Exchange's complex
order processing. The Exchange also believes these price check
parameters assist with the maintenance of fair and orderly markets by
helping to mitigate the potential risks associated with complex orders
drilling through multiple price points (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). In this regard, for example, the
Exchange notes that the acceptable percentage distance parameter is
designed to mitigate the potential risks of executions at prices that
are not within an acceptable percentage distance from the derived net
market price of the individual series legs. The Exchange also notes
that the extension of the BBO market width logic to include marketable
limit orders is designed to help prevent executions of such limit
orders at extreme and potentially erroneous prices in a manner
consistent with the existing logic utilized for market orders. The
Exchange also believes that the proposed changes to the rule text will
make it easier for users to read and understand the operation of the
price check parameters, and will better and more fully describe the
operation of the parameters.
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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 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 \13\ and Rule 19b-4(f)(6)
thereunder.\14\ 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.
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\13\ 15 U.S.C. 78s(b)(3)(A).
\14\ 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 email to [email protected]. Please include
File Number SR-C2-2012-003 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-C2-2012-003. 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
[[Page 4073]]
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-C2-2012-003 and should be
submitted on or before February 16, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-1628 Filed 1-25-12; 8:45 am]
BILLING CODE 8011-01-P