[Federal Register Volume 78, Number 222 (Monday, November 18, 2013)]
[Notices]
[Pages 69162-69164]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-27472]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70846; File No. SR-C2-2013-038]
Self-Regulatory Organizations; C2 Options Exchange, Incorporated;
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change
Relating to Obvious Error
November 12, 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 October 28, 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. 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 Rule 6.15 (Obvious Error and
Catastrophic Errors). 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's Public
Reference Room.
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
Exchange Rule 6.15 (Obvious Error and Catastrophic Errors) governs
the nullification and adjustment of options transactions. The Exchange
is proposing to amend Rule 6.15(b)(2) to modify how the Exchange will
nullify or adjust an obvious error. The Exchange believes this proposal
will also harmonize its rules to more closely align with other options
exchanges.\3\
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\3\ See, e.g., International Securities Exchange, LLC (``ISE'')
Rule 720(b)(2).
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Under the current rule 6.15(b)(2)(A), the Exchange will adjust the
price of an erroneous transaction to the Theoretical Price when the
transaction is between two market-makers unless such parties agree to
adjust the transaction to a different price or bust the trade within
ten minutes of being notified by the Help Desk of the error. Pursuant
to current Exchange Rule 6.15(b)(2)(B), transactions involving at least
one non-C2 market-maker will be nullified unless both parties agree to
adjust the transaction within thirty minutes of being notified by the
Help Desk of the error.
The Exchange is now proposing to amend Rule 6.15(b)(2) to modify
the Exchange obvious error procedures by nullifying trades for
transactions involving at least one non-broker-dealer customer and
adjusting all other trades between groups that do not fall into this
category including for example, a market maker or a broker-dealer.\4\
The Exchange believes that the proposal will protect investors by
eliminating some uncertainty in the current rule.
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\4\ The Exchange is also proposing to add text to Exchange Rule
1.1(fff) [sic] (Voluntary Professional) and Rule 1.1(ggg) [sic]
(Professional) to include a reference to Rule 6.15. These
designations are done on the Exchange on an order by order basis.
Thus, through reference, professional orders will be treated as
broker-dealer orders. In addition certain non-broker-dealer
customers may have their orders treated as broker-dealer orders
rather than as public customer orders for purposes of Rule 6.15.
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More specifically, the Exchange is first proposing to include all
transactions in which neither party is a non-broker-dealer customer in
the current Rule 6.15(b)(2)(A) instead of only including transactions
between C2 market-makers. Next, the Exchange is proposing to add a
provision to nullify all erroneous transactions between non-broker-
dealer customers unless both parties agree to an adjusted price within
thirty minutes.
The Exchange believes that the proposal will limit obvious error
trade nullification only to transactions involving non-broker-dealer
customers. The Exchange believes that this approach will limit the
number of nullifications while assuring that non-broker-dealer
customers will not have their erroneous trades adjusted through their
limit price forcing such customer to spend (receive) more (less) money
on erroneous transactions. In addition, the proposed changes to the
rule will allow any non-professional customer orders to be subject to
professional standards if that customer decides to designate an order
as such.\5\
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\5\ See note 4 supra.
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Non-broker-dealer customers are typically far less familiar with
the day-to-day trading of the markets and are also less likely to be
watching trading activity in a particular option throughout the day.
Therefore, given the potential for drastic market swings, the Exchange
believes that it is fair and reasonable and consistent with statutory
standards to change the procedure for obvious errors involving at least
one non-broker-dealer customer, and not for other market participants
so as not to expose these customers to any additional risk. In
addition, as stated above, these customers have the option of
indicating they would like the treatment of their orders as if they
originated from a professional.\6\
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\6\ Id.
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The proposed rule change is a fair way to address the issue of a
trade executing through a non-broker-dealer customer's limit order
price while balancing the competing interest of certainty that trades
stand versus dealing with the true errors. The proposed rule change
would continue to entail specific and objective procedures.
Furthermore, the proposed rule change more fairly balances the
potential windfall to one market participant against the potential
reconsidering of a trading decision under the guise of an error. The
Exchange also believes it is fair and reasonable to treat all
professional market participants equally, e.g. market-makers, broker-
dealers, etc.
As stated above, the Exchange believes that non-broker-dealer
customers are far less familiar with the day-to-day trading of the
markets and are also less likely to be watching trading activity in a
particular option throughout the day. Therefore, the Exchange believes
that it is fair and reasonable and consistent with statutory standards
to change the procedure for obvious errors involving non-broker-
[[Page 69163]]
dealer customers, and not for other market participants so as not to
expose these customers to any additional risk. In addition, as stated
above, these customers have the option of indicating they would like
the treatment of their orders as if they were from professionals.\7\
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\7\ Id.
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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.\8\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \9\ 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 facilitating
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) \10\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\8\ 15 U.S.C. 78f(b).
\9\ 15 U.S.C. 78f(b)(5).
\10\ Id.
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In particular, the proposal to nullify all erroneous transactions
in which at least one non-broker-dealer customer is a party to the
transaction and adjusting all other trades will help market
participants to better hedge risk associated with these potentially
erroneous transactions. By nullifying erroneous transactions which
involve a non-broker-dealer customer, the Exchange is assuring that
these non-professional customers will not receive a trade at a higher
(lower) price than a limit price placed upon the transaction. In
addition, the proposal is requiring trades in most circumstances to be
honored. The proposal also allows for all parties to nullify any
erroneous transaction as long as the two parties come to an agreement.
The Exchange believes that adjusting all transactions that do not
involve a non-broker-dealer customer is just and equitable because
professional customers are more sophisticated and familiar with the day
to day trading swings. Though, as proposed, a professional that is not
a market-maker may be adjusted through its limit price, the Exchange
believes these professionals have adequate resources in place to manage
this adjustment and would prefer the certainty of the proposed changes
and to adjust these transactions (rather than nullify) to continue to
hedge their risk. In addition, the Exchange believes that market-makers
and other professionals are similarly situated, and, thus, it is
consistent to treat these groups in the same manner. Moreover, the
market benefits from the least amount of nullifications because parties
have more certainty about their executions. The Exchange also believes
that assessing an adjustment penalty will encourage professionals to
adjust and nullify a lesser amount of transactions which will benefit
the market as a whole. Thus, the Exchange believes that the treatment
of all professional orders in the same manner is consistent with the
Act as it will allow the market to suffer fewer disruptions, in the
form of adjustments or nullifications of trades after the fact, and
treats similarly situated groups, namely market-makers and other
professionals, in the same manner. The Exchange also notes that
aligning the Exchange with other options exchanges will ensure less
disruption to market participants as they will be treated consistently
across the markets.\11\
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\11\ See note 3 supra.
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Though the proposal will treat different groups of market
participants differently, the Exchange believes that the proposal is
not unfairly discriminating because it treats similarly situated groups
in the same manner. More specifically, all professionals will be
treated in a similar manner while non-professional customers will also
be left with the choice to designate an order as professional, under
Exchange Rule 1.1 and thus have the ability to be treated in the same
manner as a professional. With this choice, all groups may be treated
in the same manner. In addition, the proposal creates a safeguard for a
non-professional customer that may not be as familiar with the
specifics of every day trading (and does not choose to be treated as a
professional) by nullifying all erroneous transactions in which they
are a party.
The Exchange acknowledges that the proposal may allow for some
uncertainty to regarding whether a trade will be adjusted or nullified
depending upon the nature of the parties to the transaction. More
specifically, the contra party will not know the category of the other
party. Nonetheless, the Exchange believes the proposal continues to
promote just and equitable principles of trade and protect investors
and the public interest because it eliminates a more serious
uncertainty of price uncertainty which is inherent in the current
Exchange rule because the current rule takes the non-broker-dealer
customer's limit price into consideration while this proposal does not
as it will be nullified unless agreed upon by the two parties. The
Exchange also notes that this rule is substantially similar to another
option exchange.\12\ Thus, market participants will receive similar
treatment in the [sic] across the markets which eliminates confusion
and promotes just and equitable principles of trade.
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\12\ See note 3 supra.
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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. Specifically, the proposal is
meant to eliminate market participant confusion along with help market
participants to better hedge the risk associated with erroneous options
trades. C2 believes that the proposed rule change will relieve any
burden on, or otherwise promote, competition because it creates less
uncertainty about the treatment of erroneous trades which may encourage
market participants to trade on the Exchange.
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 \13\ and
Rule 19b-4(f)(6) \14\ thereunder. At any time within 60 days
[[Page 69164]]
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. If the Commission takes such action, the
Commission will institute proceedings to determine whether the proposed
rule change should be approved or disapproved.
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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-C2-2013-038 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-C2-2013-038. 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-C2-2013-038 and should be
submitted on or before December 9, 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. 2013-27472 Filed 11-15-13; 8:45 am]
BILLING CODE 8011-01-P