[Federal Register Volume 78, Number 72 (Monday, April 15, 2013)]
[Notices]
[Pages 22360-22361]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-08725]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69350; File No. SR-C2-2013-008]
Self-Regulatory Organizations; C2 Options Exchange, Incorporated;
Order Approving a Proposed Rule Change, as Modified by Amendment No. 1
Thereto, Relating to Market-Maker Continuous Quoting Obligations
April 9, 2013.
I. Introduction
On February 8, 2013, C2 Options Exchange, Incorporated (``C2'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to amend C2's rules relating to Market-Maker \3\
continuous quoting obligations. The proposed rule change, as modified
by Amendment No. 1, was published for comment in the Federal Register
on February 27, 2013.\4\ The Commission did not receive any comment
letters regarding the proposal. This order approves the proposed rule
change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ C2 Rule 1.1 defines ``Market-Maker'' as ``a Participant
registered with the Exchange for the purpose of making markets in
options contracts traded on the Exchange and that is vested with the
rights and responsibilities specified in Chapter 8 of [the C2]
Rules.''
\4\ See Securities Exchange Act Release No. 68964 (February 21,
2013), 78 FR 13389 (``Notice'').
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II. Description of the Proposal
The Exchange proposes to amend its rules to exclude intra-day add-
on series (``Intra-day Adds'') from Market-Makers' continuous quoting
obligations on the day during which such series are added for
trading.\5\ In addition, the Exchange proposes to permit Designated
Primary Market-Makers (``DPMs'') \6\ to receive participation
entitlements in all Intra-day Adds on the day during which such series
are added for trading provided that the DPM elects to quote in such
series and otherwise satisfies the requirements set forth in Rule
8.19(b).\7\
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\5\ See id. at 13389. According to the Exchange, Intra-day Adds
are series that are added to the Exchange system after the opening
of the Exchange, rather than prior to the beginning of trading. See
id. at 13389-90.
\6\ C2 Rule 1.1 defines ``DPM'' as ``a Participant organization
that is approved by the Exchange to function in allocated securities
as a Market-Maker (as defined in Rule 1.1) and is subject to the
obligations under Rule 8.17 or as otherwise provided under the
Rules.''
\7\ See Notice, supra note 4, 78 FR at 13389.
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III. Discussion and Commission's Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities exchange.\8\
In particular, the Commission finds that the proposed rule change is
consistent with Section 6(b)(5) of the Act,\9\ which requires, among
other things, that the rules of a national securities exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, 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.
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\8\ In approving this proposal, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\9\ 15 U.S.C. 78f(b)(5).
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According to C2, 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 and that the only way they could quote in these
series in the trading day during which they were added would be to shut
down and restart their systems.\10\ Further, the Exchange states that
Market-Makers have indicated that the work that would be required to
modify their systems to permit quoting in Intra-day Adds would be
significant and costly.\11\ In addition, the Exchange indicates that
Intra-day Adds represent only approximately 0.10% of the average number
of series listed on the Exchange each trading day, and that Market-
Makers will still be obligated to provide continuous two-sided markets
in a substantial number of series in their appointed classes.\12\
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\10\ See Notice, supra note 4, 78 FR at 13390.
\11\ See id.
\12\ See id. at 13391.
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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.\13\
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\13\ See id. at 13390.
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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.\14\
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\14\ See id. at 13391.
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The Exchange believes that this proposed relief will encourage
Market-Makers to continue appointments and other Trading Permit Holders
(``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 that 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.\15\
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\15\ See id.
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In addition, the Exchange believes that the proposed rule change to
clarify that Market-Makers may receive participation entitlements in
Intra-day Adds on the day during which such series are added for
trading if they satisfy 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 incentivize Market-Makers
to quote in series in
[[Page 22361]]
which they are not required to quote, which may increase liquidity in
their appointed classes.\16\
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\16\ See id.
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The Exchange's proposal to exclude Intra-day Adds from Market-
Makers' continuous electronic quoting obligations on the day during
which such series are added for trading would not affect Market-Makers'
other obligations. For example, Market-Makers will still be required to
engage in activities that constitute a course of dealings reasonably
calculated to contribute to the maintenance of a fair and orderly
market, including (1) to compete with other Market-Makers to improve
markets in all series of options classes comprising their appointments;
(2) to make markets that, absent changed market conditions, will be
honored in accordance with firm quote rules; and (3) to update market
quotations in response to changed market conditions in their appointed
options classes and to assure that any market quote they cause to be
disseminated is accurate.\17\ In addition, the proposed rule change
would not excuse a Market-Maker from its obligation to submit a single
quote or to maintain continuous quotes in one or more series of a class
to which the Market-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.\18\
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\17\ See C2 Rule 8.5(a).
\18\ See C2 Rule 8.5(d).
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The Commission notes that the Exchange indicates that Market-Makers
would be required to shut down and restart their systems, or make
costly systems changes, in order to quote in Intra-day Adds. A
requirement for Market-Makers to maintain continuous electronic quotes
in Intra-day Adds, which represents a minor part of Market-Makers'
overall obligations, may not justify the system resources, or the
disruption to trading, the Exchange states would be necessary to
accommodate quoting in Intra-day Adds. Accordingly, the Commission
believes that the Exchange's proposal concerning Intra-day Adds would
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.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\19\ that the proposed rule change (SR-C2-2013-008), as modified by
Amendment No. 1, is approved.
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\19\ 15 U.S.C. 78s(b)(2).
\20\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-08725 Filed 4-12-13; 8:45 am]
BILLING CODE 8011-01-P