[Federal Register Volume 79, Number 129 (Monday, July 7, 2014)]
[Notices]
[Pages 38345-38349]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-15720]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72499; File No. SR-C2-2014-012]
Self-Regulatory Organizations; C2 Options Exchange, Incorporated;
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change
Relating to the Exchange's Quote Risk Monitor Mechanism
June 30, 2014.
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 June 20, 2014, 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 and II 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 its Quote Risk Monitor Mechanism
rule. The text of the proposed rule change is provided below.
(additions are italicized; deletions are [bracketed])
* * * * *
[[Page 38346]]
C2 Options Exchange, Incorporated
Rules
* * * * *
Rule 8.12. Quote Risk Monitor Mechanism
Each Market-Maker who is obligated to provide and maintain
continuous electronic quotes pursuant to Rule 8.5, or the
Participant organization with which the Market-Maker is associated,
may establish parameters by which the Exchange will activate the
Quote Risk Monitor (``QRM'') Mechanism. The functionality of the QRM
Mechanism that is available to Market-Makers [that use the QRM
Mechanism shall specify] includes, for each such option class in
which the Market-Maker is engaged in trading[,]: (i) A maximum
number of contracts for such option class (the ``Contract Limit'')
and a rolling time period in milliseconds within which such Contract
Limit is to be measured (the ``Measurement Interval'')[.]; (ii) a
maximum cumulative percentage that the Market-Maker is willing to
trade (the ``Cumulative Percentage Limit''), where the cumulative
percentage is the sum of the percentages of the original quoted size
of each size of each series that traded, and a Measurement Interval;
and (iii) the maximum number of series for which either side of the
quote is fully traded (the ``Number of Series Fully Traded'') and a
Measurement Interval. This functionality is optional and Market-
Makers are not required to set parameters for the aforementioned QRM
Mechanism functions.
When the Exchange determines that the Market-Maker has traded
[more than] at least the Contract Limit or Cumulative Percentage
Limit for such option class during any rolling Measurement Interval,
or has traded at least the Number of Series Fully Traded on an
option class during any rolling Measurement Interval, the QRM
Mechanism shall cancel all electronic quotes [that are] being
disseminated with respect to that Market-Maker in that option class
and any other classes with the same underlying security until the
Market-Maker refreshes those electronic quotes. Such action by the
Exchange is referred to herein as a QRM Incident. Once the QRM
Mechanism is triggered, all counters that determine whether the QRM
Mechanism is triggered and a QRM Incident occurs will be reset for
all classes for which quotes were canceled for all parties for whom
such quotes were canceled.
A Market-Maker or a Participant organization may also specify a
maximum number of QRM Incidents on an Exchange-wide basis. When the
Exchange determines that such Market-Maker or Participant
organization has reached its QRM Incident limit during any rolling
Measurement Interval, the QRM Mechanism shall cancel all of the
Market-Maker's or Participant organization's electronic quotes and
Market-Maker orders resting in the Book in all option classes on the
Exchange and prevent the Market-Maker or Participant organization
from sending additional quotes or orders to the Exchange until the
Market-Maker or Participant organization reactivates its ability to
send quotes or orders in a manner prescribed by the Exchange. Once
the QRM Mechanism is triggered and quotes and orders are cancelled,
all counters that determine whether the QRM Mechanism is triggered
and a QRM Incident occurs will be reset for all parties for whom the
QRM Mechanism was triggered and for all classes for which quotes and
orders were canceled. If the Exchange cancels all of the Market-
Maker's or Participant organization's electronic quotes and Market-
Maker orders resting in the Book, and the Market-Maker or
Participant organization does not reactivate its ability to send
quotes or orders, the block will be in effect only for the
organization does not reactivate its ability to send quotes or
orders, the block will be in effect only for the trading day that
the Market-Maker or Participant organization reached its QRM
Incident limit. Market-Makers and Participant organizations are not
required to set parameters for the Exchange-wide QRM.
* * * * *
The text of the proposed rule change is also available on the
Exchange's Web site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), 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
The operation of the Exchange's Quote Risk Monitor (``QRM'')
Mechanism is codified in Rule 8.12. The purpose of this proposed rule
change is to add three new functions to the QRM Mechanism to help
Market-Makers and Participant organizations control the risk of
multiple, nearly simultaneous executions across related option series.
The use of the new functions is voluntary. The proposed rule change
also makes clear that the Participant organization with which a Market-
Maker is associated (as well as the individual Market-Maker) may
establish parameters by which the Exchange will activate the QRM
Mechanism for the Market-Maker (the current rule text only explicitly
permits Market-Makers to establish such parameters). The Exchange also
proposes to make some changes to the Rule 8.12 text to make such rule
more readable in conjunction with the other changes proposed herein.\3\
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\3\ Specifically, the Exchange proposes to amend the beginning
of the second sentence of Rule 8.12, which reads ``Market-Makers
that use the QRM Mechanism shall specify, for each such option class
in which the Market-Maker is engaged in trading, a maximum number of
contracts for such option class (the ``Contract Limit'') and a
rolling time period in seconds within which such Contract Limit is
to be measured (the ``Measurement Interval'')'' to read: ``The
functionality of the QRM Mechanism that is available to Market-
Makers includes, for each such option class in which the Market-
Maker is engaged in trading: (i) A maximum number of contracts for
such option class (the ``Contract Limit'') and a rolling time period
in milliseconds within which such Contract Limit is to be measured
(the ``Measurement Interval'').'' The Exchange's systems will allow
Market-Makers to set the Measurement Interval in milliseconds (as
opposed to seconds), so the Exchange proposes to provide this more
precise option to Market-Makers.
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The first new function available to Market-Makers allows each
Market-Maker the ability to specify a maximum cumulative percentage
that the Market-Maker is willing to trade (the ``Cumulative Percentage
Limit''). Under the proposal, the cumulative percentage is the sum of
the percentages of the original quoted size of each side of each series
within a class that traded, and a rolling time period in milliseconds
within which such Cumulative Percentage Limit is to be measured (the
``Measurement Interval''). When the QRM Mechanism determines that the
Market-Maker has traded at least the Cumulative Percentage Limit for
any option class during any rolling Measurement Interval, the QRM
Mechanism will automatically cancel all of the electronic quotes being
disseminated with respect to that Market-Maker in that option class and
any other classes with the same underlying security until the Market-
Maker refreshes those electronic quotes.\4\
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\4\ The Exchange also proposes to delete the words ``more than''
from the specification that ``When the Exchange determines that the
Market-Maker has traded more than the Contract Limit or Cumulative
Percentage Limit for such option class during any rolling
Measurement Interval, or has traded at least the Number of Series
Fully Traded during any rolling Measurement Interval, the QRM
Mechanism shall cancel all electronic quotes that are being
disseminated with respect to that Market-Maker in that option class
and any other classes with the same underlying security until the
Market-Maker refreshes those electronic quotes'' and replace ``more
than'' with the words ``at least.'' This is because the QRM
Mechanism is triggered (and quotes are canceled) at the moment when
the Market-Maker trades the Contract Limit or Cumulative Percentage
Limit (as opposed to when the Market-Maker has traded more than
Contract Limit or Cumulative Percentage Limit). The Exchange also
proposes to delete the words ``that are'' from the above statement
for reasons of grammatical simplicity.
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[[Page 38347]]
By way of example, assume a Market-Maker is quoting the following
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series in a class:
Series A Quote: 1.00 - 1.20 50 x 50
Series B Quote: 2.00 - 2.20 75 x 75
Series C Quote: 3.00 - 3.20 100 x 100
If the Cumulative Percentage Limit is set at 150% for the Market-
Maker and an order to buy 40 contracts of Series A is received, the
series percentage would be 80% (i.e., 40/50). The cumulative percentage
would also be 80%. If a second order to sell 25 contracts of Series B
is received, the series percentage would be 33% (i.e., 25/75). The
cumulative percentage would now be 113% (i.e., 80 + 33 = 113). If a
third order to buy 70 contracts of Series C is received, the series
percentage would be 70% (i.e., 70/100). The cumulative percentage would
now be 183% (i.e., 113 + 70 = 183). Since 183% exceeds the Cumulative
Percentage Limit of 150%, the Market-Maker's quotes in the class, and
any class with the same underlying security, would be cancelled. This
cancellation, however, would not occur until after execution of the
third order. Due to firm quote obligations rules, the QRM Mechanism
will not cancel quotes (and in the case of an Exchange-wide QRM
Incident, orders) until after the execution of the order that caused
the triggering of the QRM Mechanism. Note that percentages are added to
one another, regardless of the denominator.
Percentages are also calculated based on the original quote size,
not the remaining quote size. Using the quotes set forth above as an
example, if an order to buy 40 contracts of Series A is received, the
series percentage would be 80% (i.e., 40/50). The cumulative percentage
would also be 80%. If a second order to sell 25 contracts of Series B
is received, the series percentage would be 33% (i.e., 25/75). The
cumulative percentage would then be 113% (i.e., 80 + 33 = 113). If a
third order to buy 10 contracts of Series A is received, the series
percentage would be 20% (i.e., 10/50). The cumulative percentage would
then be 133% (i.e., 113 + 20 = 133). If a fourth order to buy 70
contracts of Series C is received, the series percentage would be 70%
(i.e., 70/100). The cumulative percentage would then be 203% (i.e., 133
+ 70 = 203).
The proposed rule change adds a second new function to the QRM
Mechanism that would allow each Market-Maker to specify the maximum
number of series for which either side of the quote is fully traded
(the ``Number of Series Fully Traded'') and a Measurement Interval.
When the QRM Mechanism determines that the Market-Maker has traded at
least the Number of Series Fully Traded for any option class during any
rolling Measurement Interval, the QRM Mechanism will automatically
cancel all of the Market-Maker's electronic quotes being disseminated
in that option class and any other classes with the same underlying
security until the Market-Maker refreshes those electronic quotes.
To illustrate this functionality, assume that a Market-Maker is
quoting the following series in a class:
Series A Quote: 1.00 - 1.20 50 x 50
Series B Quote: 2.00 - 2.20 75 x 75
Series C Quote: 3.00 - 3.20 100 x 100
If the Number of Series Fully Traded is set at two, and an order to buy
50 contracts of Series A is received, the number of series traded in
full will be one. If a second order to sell 25 contracts of Series B is
received, the number of series traded in full will still be one because
Series B did not trade in full. If a third order to buy 100 contracts
of Series C is received, the number of series traded in full will then
be two. Since two meets the parameter set for Number of Series Fully
Traded, the Market-Maker's quotes in that class (and any other classes
with the same underlying security) would be cancelled.
Whenever one of the QRM functions (i.e., Contract Limit, Cumulative
Percentage Limit or Number of Series Fully Traded) has been triggered
and the QRM Mechanism automatically cancels all of the Market-Maker's
electronic quotes in all series of that option class (and any other
classes with the same underlying security), such action by the Exchange
shall be termed a ``QRM Incident''. Both of the new functionalities
described above (along with the already-existing Contract Limit QRM
functionality) are optional and Market-Makers are not required to set
parameters for the aforementioned QRM Mechanism functions.
The Exchange has above proposed that, when the QRM Mechanism
automatically cancels all of a Market-Maker's electronic quotes in an
option class, the Exchange will also cancel all of the Market-Maker's
electronic quotes in any other classes with the same underlying
security. The purpose of this is because the risk involved in trading
beyond a Market-Maker's risk profile extends to classes that have the
same underlying security (since often the only difference between such
classes is the multiplier of number of units of the underlying
security).
Finally, the proposed amendment adds a third function that allows
the Exchange to cancel all quotes and orders of a Market-Maker or
Participant Organization once a specified number of QRM Incidents has
been reached. Under this proposed functionality, a Market-Maker or a
Participant organization may specify a maximum number of QRM Incidents
with respect to all QRM Functions (i.e., Contract Limit, Cumulative
Percentage Limit and Number of Series Fully Traded) and a Measurement
Interval on an Exchange-wide basis. When the Exchange determines that
such Market-Maker or Participant organization has reached its QRM
Incident limit during any rolling Measurement Interval, the QRM
Mechanism shall cancel all of the Market-Maker's or Participant
organization's electronic quotes and Market-Maker orders resting in the
Book in all option classes on the Exchange and prevent a Market-Maker
or Participant organization from sending additional quotes or orders to
the Exchange until the Market-Maker or Participant organization
reactivates its ability to send quotes or orders in a manner prescribed
by the Exchange.\5\
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\5\ The Exchange will announce such manner to Trading Permit
Holders via Regulatory Circular. The current plan for such
reactivation is for the Market-Maker or TPH Organization to contact
the Exchange's Help Desk to request reactivation, though the
Exchange is examining the possibility of creating a systematized
manner for Market-Makers or TPH organizations to reactivate.
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Once the QRM Mechanism is triggered and quotes (and in the case of
an Exchange-wide cancellation, orders) are cancelled, all counters that
determine whether the QRM Mechanism is triggered and a QRM Incident
occurs will be reset for all classes for which quotes (and in the case
of an Exchange-wide cancellation, orders) were canceled for all parties
for whom such quotes (and in the case of an Exchange-wide cancellation,
orders) were canceled. This means that, if the QRM Mechanism is
triggered due to a party's reaching the Contract Limit, Cumulative
Percentage Limit, or Number of Series Fully Traded for a class, and
quotes (and in the case of an Exchange-wide cancellation, orders) are
canceled, the number of contracts traded in all classes for which
quotes and orders were canceled would be reset to zero, the cumulative
percentage for all classes for which quotes and orders were canceled
would be reset to zero, and the number of series that are fully traded
for all classes for which quotes and orders were canceled would be
reset to zero. If the Exchange cancels all of the Market-Maker's or
Participant
[[Page 38348]]
organization's electronic quotes and Market-Maker orders resting in the
Book, and the Market-Maker or Participant organization does not
reactivate its ability to send quotes or orders, the block will be in
effect only for the trading day that the Market-Maker or Participant
organization reached its QRM Incident limit.
As with the Contract Limit, Cumulative Percentage Limit or Number
of Series Fully Traded QRM functions, Market-Makers and Participant
organizations are not required to set parameters for the Exchange-wide
QRM. All QRM Mechanism functionalities are currently optional.
The Exchange represents that it has the systems capacity to permit
the operation of these enhanced QRM Mechanism functions. The Exchange
does note that, in a situation in which the QRM Mechanism is triggered,
and quotes (and in the case of an Exchange-wide cancellation, orders)
must be canceled for multiple classes related to the same underlying
security or across multiple business clusters,\6\ it may take a brief
period for such cancellation to occur (during which period orders may
execute against such quotes and orders; this functionality will not
violate the Exchange's firm quote rules). The Exchange will use best
efforts to cancel such quotes and orders as rapidly as possible.
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\6\ The Exchange's systems group various classes into different
business clusters for systems purposes.
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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.\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 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) \9\ requirement that the rules of
an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\7\ 15 U.S.C. 78f(b).
\8\ 15 U.S.C. 78f(b)(5).
\9\ Id.
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In particular, the Exchange believes that investors and market
participants will benefit from the proposed new functionality of the
QRM Mechanism. Market-Makers are vulnerable to the risk that, through
an error in pricing or due to market events, they will receive
multiple, automatic executions at disadvantageous or erroneous prices
before they can adjust their quotes. Without adequate risk management
tools such as the QRM, Market-Makers could widen their quotes, quote
less aggressively or limit their quote size. Such actions may undermine
the quality of the markets available to customers and other market
participants.
Accordingly, with the enhancements proposed by the Exchange to QRM,
the use of the QRM Mechanism will encourage more aggressive and
narrower quoting, thereby removing impediments to and perfecting the
mechanism of a free and open market and a national market system, and,
in general, more effectively protecting investors and the public
interest. In addition, providing Market-Makers with more tools for
managing risk will facilitate transactions in securities because, as
noted above, the quotes of market makers will be more reliable and
could help prevent erroneous orders and transactions. As a result, the
new functionality for the QRM Mechanism has the potential to promote
just and equitable principles of trade. Also, the proposed changes do
not change to whom any aspects of the QRM Mechanism applies, as the
proposed changes apply to all market participants to whom the QRM
Mechanism previously applied.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange 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. Rather, the Exchange
believes that the functions of the QRM Mechanism promote fair and
orderly markets.
C2 does not believe that the proposed rule change will impose any
burden on intramarket competition that is not necessary or appropriate
in furtherance of the purposes of the Act because the use of the QRM
Mechanism including the new enhancements is voluntary. Further, the
proposed changes do not change to whom any aspects of the QRM Mechanism
applies, as the proposed changes apply to all market participants to
whom the QRM Mechanism previously applied. Similarly, the Exchange does
not believe that the proposed rule change will impose any burden on
intermarket competition that is not necessary or appropriate in
furtherance of the purposes of the Act because, again, the use of the
QRM Mechanism including the new enhancements is voluntary. Moreover,
the proposed enhancements to the QRM Mechanism apply only to trading on
C2. To the extent that the proposed changes may make C2 a more
attractive trading venue for market participants on other exchanges,
such market participants may elect to become C2 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
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days after the date of the filing, or such
shorter time as the Commission may designate, it has become effective
pursuant to 19(b)(3)(A) of the Act \10\ and Rule 19b-4(f)(6) \11\
thereunder.
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\10\ 15 U.S.C. 78s(b)(3)(A).
\11\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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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. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or disapproved.
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:
[[Page 38349]]
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-C2-2014-012 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-C2-2014-012. 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-C2-2014-012 and should be
submitted on or before July 28, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2014-15720 Filed 7-3-14; 8:45 am]
BILLING CODE 8011-01-P