[Federal Register Volume 77, Number 218 (Friday, November 9, 2012)]
[Notices]
[Pages 67424-67427]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-27360]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68154; File No. SR-C2-2012-036]
Self-Regulatory Organizations; C2 Options Exchange, Incorporated;
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change
Relating to System Access, Connectivity, and Testing
November 5, 2012.
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 October 23, 2012, C2 Options Exchange, Incorporated (the
``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 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.
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange proposes to amend its rules regarding System \3\
access, connectivity, and testing by Participants. The text of the
proposed rule change is available on the Exchange's Web site (http://www.c2exchange.com/Legal/), at the Exchange's Office of the Secretary,
and at the Commission.
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\3\ The System means the automated trading system used by the
Exchange for the trading of options products.
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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 these 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 aspects 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 proposes to amend its rules regarding System access,
connectivity, and testing by Participants. The Exchange makes available
to Participants various application programming interfaces
(``APIs''),\4\ such as CBOE Market Interface (``CMi'') and Financial
Information eXchange (``FIX'') Protocol, for authorized Participants to
use to access the System.\5\ Participants may select which of these
APIs they would like to use to connect to the System when registering
with the Exchange for System access. The Exchange believes it is
important to provide Participants with this flexibility so that they
can determine the API that will be most compatible with their systems
and maximize the efficiency of their systems' connection to the System.
Connection to the System allows authorized Participants to enter and
execute orders, as well as submit certain order and trade data to the
Exchange, which data the Exchange uses to conduct surveillances of its
markets and Participants.
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\4\ APIs are computer programs that allow Participants to
interface with the Exchange.
\5\ Only Participants may access the System. The Commission
adopted Rule 15c3-5 under the Act, which, among other things,
requires broker-dealers providing others with access to an exchange
or alternative trading system to establish, document, and maintain a
system of risk management controls and supervisory procedures
reasonably designed to manage the financial, regulatory, and other
risks of providing such access. See Securities Exchange Act Release
No. 63241 (November 3, 2010), 75 FR 69792 (November 15, 2010). Rule
15c3-5 effectively eliminated ``naked access'' (i.e. ``Sponsored
Users'') to the Exchange by non-Participants and effectively
requires Participants to filter all non-Participant orders prior to
being sent to the Exchange. The Exchange expects to eliminate the
concept of sponsored use under its Rules in connection with the
adoption of Rule 15c3-5 in a separate rule filing.
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After a Participant registers with the Exchange to use a specific
API, the Exchange may require the Participant to use a specific
connectivity protocol that, among other things, may require the input
of certain information (e.g. trading acronym, category of Participant)
during the connectivity process in accordance with technical
specifications established by the Exchange. The Exchange may prescribe
a specific connectivity protocol for all Participants, or for certain
categories of similarly situated Participants (e.g. Market-Makers,
Designated Primary Market-Makers (``DPMs'')).
It is imperative for the Exchange to receive during the
connectivity process information regarding a Participant's
identification so that the Exchange can ensure that the connecting
party is a Participant authorized to access the System and that the
Exchange is aware of what type of Participant the connecting party is.
Requiring a specific connectivity protocol allows the Exchange to
receive this information in a uniform manner for all Participants, or
categories of similarly situated Participants, as the Exchange deems
necessary. This information allows the Exchange to, among other things,
perform the necessary surveillances applicable to the Participant and
determine whether the Participant is complying with all relevant
Exchange Rules. Many of the Exchange's surveillances are conducted by
type of Participants, as different types have
[[Page 67425]]
different responsibilities they must meet under the Exchange rules.\6\
The Exchange believes that receiving trade data in an organized and
uniform format from all Participants, or types of Participants, allows
it to efficiently identify Participants and monitor and conduct
surveillances of its markets and Participant, and thus effectively
fulfill its regulatory responsibilities. Additionally, the Exchange
believes that prescribing connectivity protocols on either all
Participants or categories of similarly situated Participants ensures
that the Exchange makes these prescriptions in an objective manner.
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\6\ For example, a DPM must satisfy quoting obligations that are
different than those that a Market-Maker must satisfy, and the
Exchange reviews their quoting activity to determine whether they
have satisfied their respective obligations. See Rule 8.17
(obligations of DPMs) and Rule 8.5 (obligations of Market-Makers).
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The Exchange also periodically requires Participants that have been
authorized to access the System to conduct or participate in the
testing of their computer systems to ascertain the compatibility of
these systems with the System. The Exchange believes that it is
critical that Participants work closely with the Exchange in testing
new software releases and other System changes. System testing allows
the Exchange to ensure that Participants' systems are continuously
compatible with the System in the event of System changes and that the
Exchange continues to receive all necessary data from Participants in a
timely manner and efficient format. Additionally, System testing allows
Participants to make any necessary adjustments to their systems in the
event of System changes to ensure that their connections to the System
are functioning properly and that they are able to submit order and
trade information in compliance with all applicable Exchange Rules.
The Exchange proposes to codify these current Exchange practices
and requirements related to System access and connectivity. Proposed
Rule 6.34(c) clarifies in the Rules that only Participants (and their
associated persons) may be authorized to access the System to enter and
execute orders. This proposed provision also provides that the Exchange
will require a Participant to enter into a software user or license
agreement with the Exchange in a form or forms prescribed by the
Exchange in order to obtain authorized access to the System if the
Participant elects to use an API for which the Exchange has determined
that this type of an agreement is necessary. In other words, whether
the Exchange requires a Participant to enter into a user or license
agreement will depend solely on the objective criteria of what type of
API the Participant opts to use.\7\ The proposed rule change also
amends Rule 6.34(a) to clarify that the term API means application
programming interface.
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\7\ For example, the Exchange developed CMi and currently
requires all Participants that opt to connect to the System using
CMi to enter into a software license agreement with the Exchange to
use CMi. The Exchange has determined that Participants that opt to
connect to the System using FIX do not currently have to enter into
any type of software user or license agreement, which is a
universally available application for which the developer does not
require a user agreement.
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Proposed Rule 6.34(d) provides that the Exchange may prescribe
technical specifications pursuant to which all Participants, or
categories of similarly situated Participants (e.g., DPMs, Market-
Makers), may establish an electronic connection to the System (and any
facilities). The Exchange will announce to Participants via Regulatory
Circular any connectivity protocol prescription.
Proposed Rule 6.34(e)(i) provides that each Participant that the
Exchange designates as required to participate in a system test must
conduct or participate in the testing of its computer systems to
ascertain the compatibility of such systems with the System in the
manner and frequency prescribed by the Exchange. The Exchange will
designate Participants as required to participate in a system test
based on: (1) The category of the Participant (e.g. DPM, Market-Maker);
(2) the computer system(s) the Participant uses; and (3) the manner in
which the Participant connects to the System. The Exchange will give
Participants reasonable notice of any mandatory systems test, which
notice will specify the nature of the test and Participants'
obligations in participation in the test.
In connection with this mandatory system testing, proposed Rule
6.34(e)(ii) provides that every Participant required by the Exchange to
conduct or participate in testing of computer systems must provide to
the Exchange any reports relating to the testing as the Exchange may
prescribe. Participants must maintain adequate documentation of tests
required by this Rule and results of this testing for examination by
the Exchange.
Proposed Rule 6.34(e)(iii) states that a Participant that fails to
conduct or participate in mandatory systems tests, fails to file the
required reports, or fails to maintain the required documentation, as
required by proposed Rule 6.34(e)(i) and (ii), may be subject to
summary suspension or other action taken pursuant to Chapter 16
(Summary Suspension) and/or disciplinary action pursuant to Chapter 17
(Discipline) of the Exchange Rules. Disciplinary action may include
fines pursuant to proposed Rule 17.50(g)(19), which provides that
Participants that violate proposed Rule 6.34(e) may be subject to fines
under the Exchange's minor rule violation plan.\8\ As with all other
violations in the Exchange's minor rule violation plan, the Exchange
retains the ability to refer a violation of the system testing
requirements to its Business Conduct Committee should the circumstances
warrant such a referral. The Exchange believes that violations of the
proposed mandatory system testing provision are suitable for its minor
rule violation plan because they are generally technical in nature.
Further, including these violations into the minor rule violation plan
will allow the Exchange to carry out its regulatory responsibilities
more quickly and efficiently.
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\8\ These fines are as follows: $250 for the first offense, $500
for the second offense, $1,000 for the third offense, $2,000 for the
fourth offense, and referral to the Business Conduct Committee for
any subsequent offenses. The fines are based on the number of
offenses in one calendar year.
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Codification of these requirements gives the Exchange the ability
to discipline any Participants that fail to comply with these
requirements. While Participants generally comply with these
requirements, their inclusion in the Rules (and the resulting potential
for discipline for noncompliance) may enhance Participants' overall
compliance with them.
Codification of these requirements is also consistent with the
Rules of other exchanges. Proposed Rule 6.34(c) is substantially
similar to: BATS Exchange, Inc. (``BATS'') Rule 11.3(a); BOX Options
Exchange LLC (``BOX'') Rule 7000(a); EDGA Exchange, Inc. (``EDGA'')
Chapter XI, Rule 11.3(a); EDGX Exchange, Inc. (``EDGX'') Chapter XI,
Rule 11.3(a); International Securities Exchange, LLC (``ISE'') Rule
706(a); NASDAQ Option Market (``NOM'') Chapter V, Section 1(a); NYSE
Arca, Inc. (``NYSE Arca'') Rule 6.2A(a); and NYSE MKT LLC (``NYSE
MKT'') Rule 902.1NY(a). Proposed Rule 6.34(e) is substantially similar
to: BATS Rule 18.13; BOX Rule 3180; ISE Rule 419; and NOM Chapter III,
Section 13. BOX Rule 12140(d)(7) and ISE Rule 1614(d)(8) also allow
those exchanges to fine their members for violations of their
respective mandatory system provisions pursuant to their respective
minor rule violation plans.\9\
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\9\ The proposed fine amounts in proposed Rule 17.50(g)(19) are
the same as the fine amounts in the corresponding BOX and ISE rules.
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[[Page 67426]]
Additionally, proposed Rule 6.34(c) is consistent with Rule 15c3-1
[sic] under the Act.\10\
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\10\ See supra note 5.
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Act and the rules and regulations thereunder applicable to the
Exchange and, in particular, the requirements of Section 6(b) of the
Act.\11\ Specifically, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) requirements that the rules of
an exchange be designed to promote just and equitable principles of
trade, to prevent fraudulent and manipulative acts, to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, to remove impediments to and
to perfect the mechanism for a free and open market and a national
market system, and, in general, to protect investors and the public
interest.\12\ Additionally, the Exchange believes the proposed rule
change is consistent with the Section 6(b)(5) requirement that the
rules of a national securities exchange be designed to not permit
unfair discrimination between customer, issuers, brokers or
dealers.\13\ The Exchange also believes the proposed rule change is
consistent with the Section 6(b)(6) \14\ requirement that the rules of
an exchange provide that its members and persons associated with its
members be appropriately disciplined for violation of the provisions of
the Act, the rules and regulations thereunder, or the rules of the
exchange, by expulsion, suspension, limitation of activities,
functions, and operations, fine, censure, being suspended or barred
from being associated with a member, or any other fitting sanction.
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\11\ 15 U.S.C. 78f(b).
\12\ 15 U.S.C. 78f(b)(5).
\13\ Id.
\14\ 15 U.S.C. 78f(b)(6).
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The proposed rule change codifies current Exchange requirements
that enhance C2's market surveillances and System functionality.
Proposed Rule 6.34(c) is consistent with Rule 15c3-5 under the Act, and
the Exchange believes the proposed rule change promotes compliance by
Participants with the market access requirements under that rule. The
Exchange believes that proposed Rule 6.34(d) allows the Exchange to
receive from Participants, or categories of similarly situated
Participants, information in a uniform format, which aids the
Exchange's efforts to monitor and regulate C2's markets and
Participants and helps prevent fraudulent and manipulative practices.
This also helps coordinate the ability of Participants to
electronically trade on the Exchange with the Exchange's ability to
receive the necessary information to regulate those transactions.
Proposed Rule 6.34(e) allows the Exchange to ensure that Participants'
connections to the System function correctly, which promotes efficiency
and enhances compliance by Participants with Exchange Rules.
In addition, codification of these requirements is consistent with
the Act because it gives the Exchange the ability to discipline
Participants that fail to comply with these requirements, which may
enhance overall Participants compliance with these requirements. This
proposed rule change will also promote consistency in the minor rule
violation programs of other exchanges and allow the Exchange to carry
out its regulatory responsibilities more quickly and efficiently by
including violations of the mandatory system testing provision in the
Exchange's minor rule violation plan.
The Exchange believes that the proposed rule change is designed to
not permit unfair discrimination among Participants, as the proposed
rule change provides for the Exchange to impose requirements on
Participants in an objective manner. For example, under proposed Rule
6.34(d), the Exchange may impose connectivity protocol requirements on
all Participants, or similarly situated Participants. Additionally,
under proposed Rule 6.34(c), whether the Exchange requires a
Participant to enter into a software user or license agreement depends
solely on what type of API the Participant opts to use to connect to
the System.
Finally, the proposed rule change will help remove impediments to
and promote a free and open market and a national market system because
it is consistent with rules in place at other exchanges and imposes
substantially similar requirements on Participants as those rules do on
those exchanges' members.
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 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
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not:
A. Significantly affect the protection of investors or the public
interest;
B. impose any significant burden on competition; and
C. become operative for 30 days from the date on which it was
filed, or such shorter time as the Commission may designate, it has
become effective pursuant to Section 19(b)(3)(A) \15\ of the Act and
Rule 19b-4(f)(6) \16\ thereunder.
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\15\ 15 U.S.C. 78s(b)(3)(A).
\16\ 17 CFR 240.19b-4(f)(6).
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At any time within 60 days of the filing of this 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 Number SR-C2-2012-036 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-C2-2012-036. 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/
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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 on
official business days between the hours of 10:00 a.m. and 3:00 p.m.
Copies of such filing also will be available for inspection and copying
at the principal offices 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-C2-2012-036, and should be submitted on
or before November 30, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-27360 Filed 11-8-12; 8:45 am]
BILLING CODE 8011-01-P