[Federal Register Volume 78, Number 6 (Wednesday, January 9, 2013)]
[Notices]
[Pages 1889-1892]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-00200]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68573; File No. SR-C2-2012-043]
Self-Regulatory Organizations; C2 Options Exchange, Incorporated;
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change,
as Modified by Amendment No. 1 Thereto, To Adopt a HAL System
January 3, 2013.
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 December 21, 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. On January 2, 2013, the Exchange submitted Amendment No. 1 to
the
[[Page 1890]]
proposed rule change.\3\ 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\ In Amendment No. 1, the Exchange modified the description of
the proposed rule change to reflect the proposed rule text that
provides that HAL will be open to all Trading Permit Holders.
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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 adopt a HAL system. The text of the
proposed rule change is provided in Exhibit 5. The text of the proposed
rule change is also available on the Exchange's Web site (http://www.c2exchange.com/Legal/ 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, 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 adopt a rule that governs the operation of
its new HAL system (``HAL''). HAL is a feature within the C2 System
that provides automated order handling in designated classes for
qualifying electronic orders that are not automatically executed by the
System. Regarding HAL eligibility, the Exchange shall designate
eligible order size, eligible order type, eligible order origin code
(i.e., public customer orders, non-Market Maker broker-dealer orders,
and Market Maker broker-dealer orders), and classes in which HAL shall
be activated. HAL shall automatically process upon receipt: (i) An
eligible order that is marketable against the Exchange's disseminated
quotation while that quotation is not the national best bid or offer
(``NBBO''), unless the Exchange's quotation contains resting orders and
does not contain sufficient Market-Maker quotation interest to satisfy
the entire order; (ii) an eligible order that would improve the
Exchange's disseminated quotation and that is marketable against
quotations disseminated by other exchanges that are participants in the
Options Order Protection and Locked/Crossed Market Plan (the ``Linkage
Plan''); or (iii) an order submitted to HAL as a result of the price
check parameters of Rule 6.17.
For order handling and responses regarding HAL, orders that are
received by HAL pursuant to the paragraph above shall immediately upon
receipt be electronically exposed at the NBBO price. The exposure shall
be for a period of time determined by the Exchange on a class-by-class
basis, which period of time shall not exceed one second. All Trading
Permit Holders (``TPHs'') may submit responses to the exposure message
during the exposure period. Responses (i) must be priced equal to or
better than the Exchange's best bid/offer; (ii) must be limited to the
size of the order being exposed; and (iii) may be cancelled and/or
replaced any time during the exposure period.
Regarding the allocation of exposed orders, any responses priced at
the prevailing NBBO or better shall immediately trade against the order
(on a first come, first served basis). At the conclusion of the
exposure period, the Exchange will evaluate all remaining responses as
well as the disseminated best bid/offer on other exchanges and execute
any remaining portion of the exposed order to the fullest extent
possible at the best price(s) by first executing against responses
(pursuant to the matching algorithm in effect for the class except that
the participation entitlement and market turner status shall not apply
to responses), and, second, routing Immediate-or-Cancel (``IOC'')
Intermarket Sweep Orders (``ISOs'') to other exchanges. Any portion of
a routed IOC ISO that returns unfilled shall trade against the
Exchange's best bid/offer unless another exchange is quoting at a
better price in which case new IOC ISOs shall be generated and routed
to trade against such better prices. Any executions at the Exchange's
best bid/offer will first trade against interest that was resting at
the price at the time the exposed order was received, and any remaining
balance will trade against all new interest at that price (in both
cases pursuant to the matching algorithm for that class). All
executions on the Exchange pursuant to this paragraph shall comply with
Rule 6.81. Executions will be subject to price check parameters set
forth in Rule 6.17 when such price check functionality is enabled.
Regarding the early termination of the exposure period, in addition
to the receipt of a response to trade the entire exposed order at the
NBBO or better, the exposure period will also terminate early under the
following circumstances: (i) If during the exposure period the Exchange
receives an unrelated order (or quote) on the opposite side of the
market from the exposed order that could trade against the exposed
order at the prevailing NBBO price or better, then the orders will
trade at the prevailing NBBO price unless the unrelated order is a
customer order in which case the orders will trade at the midpoint of
the unrelated order's limit price and the prevailing NBBO. The exposure
period shall not terminate if a quantity remains on the exposed order
after such trade; (ii) If during the exposure period the Exchange
receives an unrelated order on the same side of the market as the
exposed order that is priced equal to or better than the exposed order,
then the exposure period shall terminate and the exposed order shall be
processed in accordance with paragraph (c) (which regards allocation of
exposed orders); (iii) If during the exposure of an order that is
marketable against the Exchange's best bid/offer at the time the order
was exposed (``Exchange Initial BBO''), Market-Maker interest at the
Exchange Initial BBO decrements to a contract size equal to the size of
the exposed order, then the exposure period shall terminate and the
exposed order shall be processed in accordance with paragraph (c)
(which regards allocation of exposed orders).
The purpose of the proposed change is to provide C2 TPHs with the
opportunity to improve their prices and ``step up'' to meet the NBBO in
order to interact with orders sent to the Exchange. This will allow the
market participant sending an order to C2 to increase its chances of
receiving an execution at C2 (the market participant's chosen venue)
instead of having the order be routed to another exchange. This ``step
up'' process allows market participants to take into account factors
beyond just disseminated prices, such as execution costs, system
reliability, and quality of service, when determining the exchange to
which to route an order. A market participant that prefers C2 due to
some combination of these other factors will know that, even if C2 is
not displaying a price that is the NBBO, the market participant may
still receive an execution at C2 because a C2 TPH may ``step up'' to
match the NBBO.
Further, HAL and the ``step up'' process enable C2 TPHs to add
liquidity that is available to interact with orders sent to the
Exchange. Indeed, when a C2 TPH ``steps up'' to match the NBBO that is
displayed on another exchange, more
[[Page 1891]]
contracts may be executed at this NBBO price here on C2 than are
available at that same price on the other exchange.
C2's proposed HAL and the ``step up'' process are not novel
concepts. C2's proposed HAL is nearly identical to the Hybrid Agency
Liaison (``CBOE HAL'') offered on the Chicago Board Options Exchange,
Incorporated (``CBOE''), which provides the same manner of ``step up''
process. There are a couple of differences between CBOE HAL and the
proposed C2 HAL. First, CBOE HAL operates on CBOE's Hybrid Trading
System, which combines both open outcry and electronic trading, whereas
the proposed C2 HAL would be entirely electronic (as C2 is an all-
electronic exchange). The proposed C2 HAL rule does not incorporate the
minimal CBOE HAL language regarding Hybrid.\4\
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\4\ See CBOE Rule 6.14A.
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Second, on CBOE HAL, only Market-Makers with an appointment in the
relevant option class and TPHs acting as agent for orders resting at
the top of CBOE's book in the relevant option series opposite the order
submitted to CBOE HAL may submit responses to the exposure message
during the exposure period (unless CBOE determines, on a class-by-class
basis, to allow all TPHs to submit responses to the exposure message).
C2 has determined that, on its proposed C2 HAL, all TPHs may submit
responses to the exposure message during the exposure period. As such,
Interpretation and Policy .01 to CBOE Rule 6.14A (the CBOE rule
regarding HAL), which prohibits the redistribution of exposure messages
to market participants not eligible to respond to such messages (except
in classes in which CBOE allows all TPHs to respond to such messages)
does not apply to the proposed C2 HAL, as all C2 TPHs are permitted to
respond to all exposure messages. Despite these differences, the
proposed C2 HAL would otherwise operate in an identical manner to the
CBOE HAL, which has been approved by the Securities and Exchange
Commission (the ``Commission'').\5\
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\5\ See Securities Exchange Act Release No. 60551 (August 20,
2009), 74 FR 43196 (August 26, 2009) (SR-CBOE-2009-040).
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The Exchange believes that the Commission has always been clear
that honoring better prices on other markets can be accomplished by
matching those better prices.\6\ The proposed HAL and a ``step up''
process would allow C2 TPHs to do just that. And if a C2 market
participant wants to ensure that an order does not go through the
proposed HAL process, that market participant can submit an Immediate-
or-Cancel order (which is not exposed to HAL).
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\6\ For example, in adopting the Order Protection Rule (Rule
611) under Regulation NMS in 2005, the Commission stated: ``The
Order Protection Rule generally requires that trading centers match
the best quoted prices, cancel orders without an execution, or route
orders to the trading centers quoting the best prices.'' See
Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR
37496 (June 29, 2005), at 37525 (S7-10-04).
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The Exchange also proposes to adopt Interpretation and Policy .01
to new Rule 6.18, which will state that the Exchange may determine, on
a class-by-class basis, to not route ISOs to other exchanges on behalf
of non-public customer orders that are exposed pursuant to this Rule.
In such cases, any unexecuted balance of such non-public customer
orders shall be cancelled at the conclusion of the exposure period.
Under the Linkage Plan, the Exchange is not obligated to route orders
to another exchange; the Linkage Plan only requires that C2 not trade
through a better price at another exchange. In certain circumstances,
particularly with orders of non-public customer market participants,
the Exchange may elect not to route an order to another exchange in
order to not incur the costs associated with routing such order.
The Exchange also proposes to adopt Interpretation and Policy .02
to new Rule 6.18, which will state that all pronouncements regarding
determinations by the Exchange pursuant to Rule 6.18 and the
Interpretations and Policies thereunder will be announced to Trading
Permit Holders via Regulatory Circular. This method of notification
will allow the Exchange to promptly inform TPHs of any new or
modification to any determinations made by the Exchange.
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.\7\ Specifically, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5) \8\ requirements that the rules of
an exchange be designed to promote just and equitable principles of
trade, to prevent fraudulent and manipulative acts, 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.
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\7\ 15 U.S.C. 78f(b).
\8\ 15 U.S.C. 78f(b)(5).
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Adopting HAL, a ``step up'' program, on C2 will provide TPHs with
the opportunity to improve their prices to match the NBBO in order to
interact with orders sent to the Exchange. This will allow the market
participant sending an order to C2 to increase its chances of receiving
an execution at C2 (the market participant's chosen venue) instead of
having the order be routed to another exchange. This ``step up''
process allows market participants to take into account factors beyond
just disseminated prices, such as execution costs, system reliability,
and quality of service, when determining the exchange to which to route
an order. A market participant that prefers C2 due to some combination
of these other factors will know that, even if C2 is not displaying a
price that is the NBBO, the market participant may still receive an
execution at C2 because a C2 TPH may ``step up'' to match the NBBO.
Therefore, the fact that HAL allows a market participant who elects to
send an order to C2 to have a greater likelihood of achieving execution
at this chosen venue without the risk of paying a lower price removes
an impediment to and perfects the mechanism for a free and open
national market system.
Further, HAL and the ``step up'' process enable C2 TPHs to add
liquidity that is available to interact with orders sent to the
Exchange. Indeed, when a C2 TPH ``steps up'' to match the NBBO that is
displayed on another exchange, more contracts may be executed at this
NBBO price here on C2 than are available at that same price on the
other exchange. This increased liquidity benefits all market
participants on C2, thereby perfecting the mechanism for a free and
open national market system and protecting investors and the public
interest.
C2's proposed HAL is nearly identical to CBOE HAL, which provides
the same manner of ``step up'' process. The only differences between
CBOE HAL and the proposed C2 HAL are that (1) CBOE HAL operates on
CBOE's Hybrid Trading System, which combines both open outcry and
electronic trading, whereas the proposed C2 HAL would be entirely
electronic (as C2 is an all-electronic exchange), and (2) the proposed
C2 HAL will be open to all C2 TPHs.\9\ Despite these differences, the
proposed C2 HAL would otherwise operate in an identical manner to the
CBOE HAL, which has been approved
[[Page 1892]]
by the Commission.\10\ As such, C2 merely desires to adopt a mechanism
that is nearly identical to one that already exists on CBOE. Permitting
C2 to operate on an even playing field relative to other exchanges
removes impediments to and to perfects the mechanism for a free and
open market and a national market system.
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\9\ On CBOE HAL, only Market-Makers with an appointment in the
relevant option class and Trading Permit Holders acting as agent for
orders resting at the top of CBOE's book in the relevant option
series opposite the order submitted to CBOE HAL may submit responses
to the exposure message during the exposure period (unless CBOE
determines, on a class-by-class basis, to allow all TPHs to submit
responses to the exposure message).
\10\ See Securities Exchange Act Release No. 60551 (August 20,
2009), 74 FR 43196 (August 26, 2009) (SR-CBOE-2009-040).
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The Commission has always been clear that honoring better prices on
other markets can be accomplished by matching those better prices.\11\
The proposed HAL and a ``step up'' process would allow C2 TPHs to do
just that.
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\11\ For example, in adopting the Order Protection Rule (Rule
611) under Regulation NMS in 2005, the Commission stated: ``The
Order Protection Rule generally requires that trading centers match
the best quoted prices, cancel orders without an execution, or route
orders to the trading centers quoting the best prices.'' See
Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR
37496 (June 29, 2005), at 37525 (S7-10-04).
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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. The proposed C2 HAL is open to
all market participants. The ``step-up'' feature of the proposed C2 HAL
allows for price improvement. When such price improvement is achieved
via this ``stepping up'' to meet (or beat) the best quoted price at
another exchange, market participants are able to receive the best
quoted price while still achieving execution on C2, the exchange to
which they elected to send their orders.
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) of the Act \12\ and
Rule 19b-4(f)(6) \13\ thereunder. 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.
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\12\ 15 U.S.C. 78s(b)(3)(A).
\13\ 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-C2-2012-043 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-C2-2012-043. 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 NW.,
Washington, DC 20549, 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 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-C2-2012-043, and should be
submitted on or before January 30, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-00200 Filed 1-8-13; 8:45 am]
BILLING CODE 8011-01-P