[Federal Register Volume 78, Number 39 (Wednesday, February 27, 2013)]
[Notices]
[Pages 13389-13393]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-04544]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68964; File No. SR-C2-2013-008]
Self-Regulatory Organizations; C2 Options Exchange, Incorporated;
Notice of Filing of a Proposed Rule Change, as Modified by Amendment
No. 1 Thereto, Relating to Market-Maker Continuous Quoting Obligations
February 21, 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 February 8, 2013, 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 February 20, 2013, the Exchange submitted Amendment No. 1
to the proposed rule change. 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 Substance
of the Proposed Rule Change
The Exchange proposes to amend its Rules relating to Market-Maker
continuous quoting obligations. 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.
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 purpose of the proposed rule change is to add language to
Exchange Rules 8.5 and 8.17 to exclude intra-day add-on series
(``Intra-day Adds'') on the day during which such series are added for
trading from Market-Makers' \3\ quoting obligations. Additionally, the
proposed rule change clarifies in Rule 8.19 that Designated Primary
Market-Makers (``DPMs), respectively (Market-Makers and DPMs are
collectively referred to in this filing as ``Market-Makers'' unless the
context provides otherwise) may still receive participation
entitlements pursuant to those Rules in all Intra-day Adds on the day
during which such series are added for trading in which they are
quoting provided that Market-Maker meets all other entitlement
requirements as set forth in the applicable rule.
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\3\ See Exchange Rule 8.1 which defined Market-Makers as
participants that ``have certain rights and bear certain
responsibilities beyond those of other Participants.''
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Intra-Adds are series that are be added to the Exchange system
after the opening of the Exchange. These series
[[Page 13390]]
may be added throughout the trading day which differs from other newly
added series which are only added prior to the beginning of trading. In
the event a series is added after the open of trading on the Exchange,
the Exchange, in real time, disseminates a message to the Exchange
application program interfaces, which any Exchange Trading Permit
Holder (``TPH'') can receive, that a new series has been listed. In
addition, there is a corresponding product state change message
disseminated when the new series moves from pre-opening rotation to an
open state. Any Market-Maker with an appointment in the class in which
the series was added is permitted to quote in the new series.
Currently, Exchange Rules 8.5 and 8.17 impose certain obligations
on Market-Makers and DPMs, respectively, including obligations to
provide continuous quotes as follows \4\:
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\4\ For purposes of Rules 8.5(a)(1), and 8.17(a)(1),
``continuous'' means 90% of the time. If a technical failure of
limitation of the System prevents a Market-Maker from maintaining
timely and accurate quotes in a series, the duration of such failure
will not be included in the 90% determination.
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Rule 8.5 requires that Market-Makers provide a continuous
two-sided market in 60% of the non-adjusted option series of the
Market-Maker's appointed class that have a time to expiration of less
than nine months;
Rule 8.17(a)(1) requires DPMs to provide continuous quotes
in at least the lesser of 99% or 100% minus one call-put pair \5\ of
the non-adjusted option series of each class allocated to it.
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\5\ See Rule 8.17(a)(1) which defines a ``call-up pair'' as
``one call and one put that cover the same underlying instrument and
have the same expiration date and exercise price.''
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Exchange Rule 8.19 provides that DPMs generally will receive the
participation entitlements in their assigned classes when quoting at
the best price if they satisfy their obligations and other conditions
set forth in the rules. Specifically, Rule 8.19 provides that the DPM
participation entitlement will be 50% when there is one Market-Maker
also quoting at the best price on the Exchange and 40% when there are
two Market-Makers also quoting at the best price on the Exchange.\6\
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\6\ The participation entitlements of DPMs are based on the
number of contracts remaining after all public customer orders in
the book at the best price on the Exchange have been satisfied.
Additionally, a DPM may not be allocated a total quantity greater
than the quantity for which the DPM is quoting at the best price.
See Rules 8.19(b)(1)(B) and (C).
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In order to comply with their continuous quoting obligations,
Exchange Market-Makers have automated systems in place that use complex
calculations based on a variety of market factors to compute quotes in
their appointed classes and transmit these quotes to the Exchange's
System (the ``System'').\7\ Their system computations also factor in
their market risk models. Several Market-Makers have communicated to
the Exchange that their trading systems do not automatically produce
continuous quotes in Intra-day Adds on the trading day during which
those series are added. They further indicated that the only way they
could quote in these series on the trading day during which they were
added would be to completely shut down and restart their systems. As a
result, it is the Exchange's understanding that several Market-Makers
do not currently quote Intra-day Adds during the trading day on which
such series are added (although the Market-Makers generally do quote
these series upon the opening of the next trading day, assuming those
series are still listed on the Exchange). The required work on Market-
Makers' systems to quote Intra-day Adds, as further communicated to the
Exchange, would be significant and costly.
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\7\ See Rule 1.1 which defines ``System'' as the ``automated
trading system used by the Exchange for the trading of options
contracts.''
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Intra-day Adds make it extremely difficult for Market-Makers to
comply with their obligation to quote in a substantial percentage of
series in their appointed classes during a trading day on which Intra-
day Adds are added in those classes. For example, if there are 1,000
series listed in a DPM's appointed class and the DPM is quoting in 990
of these series, the DPM is in compliance with the current minimum
requirement to quote in 99% of series in its appointed class (assuming
the DPM quotes in this number of series 90% of the trading day).
However, if an Intra-day Add is added in the DPM's appointed class
during the trading day, and the DPM's system does not automatically
quote in this series, then the DPM would not comply, as it would be
quoting in 990 of 1,001 series. This noncompliance would be compounded
if more than one Intra-day Add is listed in a class during the same
trading day. Further, if these Market-Makers turned their systems off
to quote in Intra-day Adds on the trading day during which those series
are added, then the Market-Makers could satisfy the standard to quote
in a minimum percentage of series in their appointed classes but would
then risk violating their obligation to quote for minimum percentage of
the trading day as, theoretically, these Market-Makers might need to
repeatedly turn their systems off to accommodate the Intra-day Adds.
The Exchange believes that it would be impracticable, particularly
given that a number of Market-Makers use their systems to quote on
multiple markets and not solely on the Exchange, for Market-Makers to
turn off their entire systems to accommodate quoting in Intra-day Adds
on the day during which those series are added on the Exchange. In
addition, the Exchange believes this would interfere with the
continuity of its market and reduce liquidity, which would ultimately
harm investors and contradicts the purpose of the Market-Maker
continuous quoting obligation.
This proposed rule change excludes Intra-day Adds from these
continuous quoting obligations to address this conflict. Specifically,
the Exchange is proposing to add text to Rules 8.5 and 8.17 to exclude
Intra-day Adds on the day during which such series are added for
trading from Market-Makers' quoting obligations. Based on
communications from Market-Makers, the Exchange is concerned that
Market-Makers may withdraw from the DPM program and that other market
participants may be discouraged from requesting Market-Maker
appointments or applying to the DPM program if they are required to
quote Intra-day Adds on the trading day during which those series are
added. The Exchange believes that withdrawals from, and reduced
applications for, Market-Maker appointments would negatively impact
liquidity and volume on the Exchange in those classes. The Exchange
believes that providing Market-Makers with relief from their quoting
obligations with respect to Intra-day Adds on the trading day during
which they are added for trading will prevent these withdrawals and
encourage market participants to apply for or continue their Market-
Maker class appointments.
The Exchange does not believe this relief will result in any
material decrease in liquidity. As mentioned above, it is the
Exchange's understanding that several Market-Makers currently do not
quote Intra-day Adds on the trading day during which they are added, so
the Exchange believes this proposed relief would result in a minimal
reduction, if any, in liquidity in these series. These Market-Makers'
systems would add these series the next trading day, so if there is any
slight reduction in liquidity in these few series, it would only last
for a short period of time (until the following trading day).
Additionally, this potential small reduction in liquidity would be far
outweighed by the reduction in liquidity that the Exchange believes
[[Page 13391]]
would result from the withdrawals from and reductions in applications
for Market-Maker appointments if the Exchange did not provide this
relief.
The current quoting obligation in Intra-day Adds is a minor part of
a Market-Maker's overall obligations. Specifically, Intra-day Adds
represent only approximately 0.10% of the number of series listed on
the Exchange, so Market-Makers will still be obligated to provide
continuous two-sided markets in a substantial number of series in their
appointed classes.\8\ Intra-day Adds are rarely added on the Exchange,
so Market-Makers will still be obligated to provide continuous two-
sided markets in a substantial number of series in their appointed
classes. Further, Market-Makers would still be obligated to quote the
Intra-day Adds the following day, and, thus, their quoting relief is
very short-lived and could, potentially, only last a few hours or until
the opening of trading the following day. The Exchange believes that
the burden of continuous quoting in this extremely small number of
series is counter to the Exchange's efforts to continuously increase
liquidity in its listed option classes.
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\8\ From January 1, 2013 through February 19, 2013, there have
been 37 Intra-day Adds listed on the Exchange, and, in that time
period, there have been a total of 35,502 series added on the
Exchange. Thus, the Intra-day Adds represent 0.10%.
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The Exchange believes the proposed rule change will continue to
ensure that Market-Makers create a fair and orderly market in the
option classes to which they are assigned, as it does not absolve
Market-Makers from providing continuous quotes in a significant
percentage of series of each class for a substantial portion of the
trading day. Market-Makers must engage in activities that constitute a
course of dealings reasonably calculated to contribute to the
maintenance of a fair and orderly market, including (1) competing with
other Market-Makers to improve markets in all series of options classes
comprising their appointments, (2) making markets that, absent changed
market conditions, will be honored in accordance with firm quote rules,
and (3) updating market quotations in response to changed market
condition in their appointed options classes and to assure that any
market quote it causes to be disseminated is accurate.\9\
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\9\ See Rule 8.5(a).
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The relief proposed in this filing is mitigated by a Market-Maker's
other obligations. For example, the proposed rule change would not
excuse a Market-Maker from its obligation to submit a single quote or
maintain continuous quotes in one or more series of a class to which
the Maker-Maker is appointed when called upon by an Exchange official
if, in the judgment of such official, it is necessary to do so in the
interest of maintaining a fair and orderly market.\10\
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\10\ See Rule 8.5(d).
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The proposed rule change also clarifies in the Exchange Rules that
while Market-Makers are not required to provide continuous quotes in
Intra-day Adds on the day during which such series are added for
trading, a Market-Maker may still receive a participation entitlement
in such series if it elects to quote in that series and otherwise
satisfies the other entitlement requirements set forth in accordance
with the Rules. Specifically, the Exchange is proposing to add language
to Rule 8.19 clearly stating that DPMs may still receive participation
entitlements pursuant to those Rules in all Intra-day Adds on the day
during which such series are added for trading in which they are
quoting provided that Market-Maker meets all other entitlement
requirements as set forth in Rule 8.19(b).
Market-Makers already receive participation entitlements in series
they are not required to quote. For example, a DPM is currently
required to provide continuous quotes in at least 99% of the non-
adjusted option series or 100% of the non-adjusted series minus one
call-put pair of each option class allocated to it for 90% of the
trading day.\11\ If the DPM elects to quote in 100% of the non-adjusted
series in an option class allocated to it, it will receive a
participation entitlement in all of those series when quoting at the
best price, including the 1% of the series in which it is not required
to quote in. Thus, under the proposed rule change, the market would
continue to function as it does now. The Exchange believes this benefit
is appropriate, as it incentivizes Market-Makers to quote in as many
series as possible in their appointed classes, even those series in
which the Rules do not require them to continuously quote.
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\11\ See Rule 8.17(a).
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The Exchange does not believe that the proposed rule change would
adversely affect the quality of the Exchange's markets or lead to a
material decrease in liquidity. Rather, the Exchange believes that its
current market structure, with its high rate of participation by
Market-Makers, permits the proposed rule change without fear of losing
liquidity. The Exchange also believes that market-making activity and
liquidity could materially decrease without the proposed rule change to
exclude Intra-day Adds from Market-Maker continuous quoting obligations
on the trading day during which they are added for trading. The
Exchange believes that this proposed relief will encourage Market-
Makers to continue appointments and other TPHs to request Market-Maker
appointments, and, as a result, expand liquidity in options classes
listed on the Exchange to the benefit of the Exchange and its TPHs and
public customers. The Exchange believes that its Market-Makers would be
disadvantaged without this proposed relief, and other TPHs and public
customers would also be disadvantaged if Market-Makers withdrew from
appointments in options classes, resulting in reduced liquidity and
volume in these classes. Additionally, the Exchange believes that the
proposed rule change to clarify that Market-Makers may receive
participation entitlements in Intraday Adds on the day during which
such series are added for trading if it satisfies the other entitlement
requirements as set forth in Exchange Rules, even if the Rules do not
require the Market-Makers to continuously quote in those series, will
incent Market-Makers to quote in series in which they are not required
to quote, which may increase liquidity in their appointed classes.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\12\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \13\ requirements that the rules of an exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitation
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest. Additionally,
the Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \14\ requirement that the rules of an exchange not be
designed
[[Page 13392]]
to permit unfair discrimination between customers, issuers, brokers, or
dealers.
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\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
\14\ Id.
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In particular, the Exchange believes the proposed rule change to
exclude Intra-day Adds during the day which such series are added for
trading from Market-Makers' quoting obligations promotes just and
equitable principles of trade because it promotes liquidity and
continuity in the marketplace and would prevent interruptions in
quoting or reduced liquidity that may otherwise result. The Exchange
also believes that the proposed rule change supports the quality of the
Exchange's markets because it does not significantly change the current
quoting obligations of Market-Makers. Market-Makers must still provide
continuous quotes for a significant part of the trading day in a
substantial number of series of each appointed class. Even if a Market-
Maker does not quote Intra-day Adds on the trading day during which
they are added, this would be offset by the Market-Maker's continued
other obligations. The proposed relief is further offset by a Market-
Maker's obligation to quote in these series beginning the next trading
day. Accordingly, the proposed rule change supports the quality of the
Exchange's trading markets by helping to ensure that Market-Makers will
continue to be obligated to quote in Intra-day Adds if, and when, the
need arises and on an ongoing basis following the trading day during
which the series are added. The Exchange believes this proposed change
is reasonable and is offset by Market-Makers' continued
responsibilities to provide significant liquidity to the market to the
benefit of market participants.
The Exchange believes this proposed rule change, on balance, is a
minor change and should not impact the quality of the Exchange's
trading markets. Among other things, Intra-day Adds represent an
insignificant percentage of series listed on the Exchange each day. The
Exchange further believes that the potential small reduction in
liquidity in Intra-day Adds that may result from the proposed relief
would be far outweighed by the significant reduction in liquidity in
appointed classes that the Exchange believes could occur from
withdrawals from and reductions in applications for Market-Maker
appointments without the proposed relief. The proposed rule change also
removes impediments to and allows for a free and open market, while
protecting investors, by promoting additional transparency regarding
Market-Makers' obligations and benefits in the Exchange Rules. In
addition, the Exchange believes that the proposed rule change is
designed to not permit unfair discrimination among Market-Makers, as
the proposed rule change provides the proposed relief for all Market-
Makers.
The proposed rule change to clarify that Market-Makers may receive
participation entitlements in Intra-day Adds in their appointed classes
in which they are quoting, even though they are not required to quote,
if the other requirements set forth in the Rules are satisfied, further
supports the quality of the Exchange's trading markets because it
encourages Market-Makers to quote in as many series as possible, which
ultimately benefits all investors. This benefit is offset by the
Market-Makers' continued quoting obligations and the fact that their
quotes in these ``non-required'' series must still satisfy all of the
Market-Makers' other obligations under the Rules. The Exchange also
believes that this proposed change is consistent with its current
practice, pursuant to which Market-Makers receive participation
entitlements in additional series in which they elect to quote above
the minimum percentage of series in which they are required to
continuously quote under the Rules.
For the foregoing reasons, the Exchange believes that the proposed
rule change is appropriate and consistent with the Act.
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 Exchange does not believe
the proposed rule change to exclude Intra-day Adds during the day which
such series are added for trading from Market-Makers' quoting
obligations will cause any unnecessary burden on intramarket
competition because it provides the same relief to a group of similarly
situated market participants--Market-Makers. The Exchange does not
believe the proposed change will cause any unnecessary burden on
intermarket competition because Intra-day Adds are a very small portion
of series on the Exchange. Exchange further believes that the potential
small reduction in liquidity in Intra-day Adds that may result from the
proposed relief would be far outweighed by the significant reduction in
liquidity in appointed classes that the Exchange believes could occur
from withdrawals from and reductions in applications for Market-Maker
appointments without the proposed relief. In addition, the Exchange
believes that the proposed rule change will in fact relieve any burden
on, or otherwise promote, competition. The Exchange believes that
excluding Intra-day Adds on the day during which they are added for
trading from Market-Maker obligations will promote trading activity on
the Exchange to the benefit of the Exchange, its TPHs, and market
participants.
The Exchange does not believe the proposed rule change to clarify
that Market-Makers may receive participation entitlements in Intra-day
Adds in their appointed classes in which they are quoting, even though
they are not required to quote, if the other requirements set forth in
the Rules are satisfied, will cause any unnecessary burden on
intramarket competition because it too provides the same relief to a
group of similarly situated market participants--Market-Makers. The
Exchange does not believe the proposed change will cause any
unnecessary burden on intermarket competition because Market-Makers are
currently entitled to receive participation entitlements on series they
are not obligated to quote in under the Rules. In addition, the
Exchange believes that the proposed rule change will in fact relieve
any burden on, or otherwise promote, competition. The Exchange believes
allowing Market-Makers to receive a participation entitlements in
Intra-day Adds will promote trading activity on the Exchange because it
will incentivize Market-Makers to quote in such series though not
obligated to do so to the benefit of the Exchange, its TPHs, and market
participants.
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
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
A. By order approve or disapprove such proposed rule change, or
B. Institute proceedings to determine whether the proposed rule
change should be disapproved.
[[Page 13393]]
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-C2-2013-008 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-C2-2013-008. 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
10:00 a.m. and 3:00 p.m. Copies of the 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-C2-2013-008, and should be
submitted on or before March 20, 2013.
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. 2013-04544 Filed 2-26-13; 8:45 am]
BILLING CODE 8011-01-P