
[Federal Register Volume 76, Number 187 (Tuesday, September 27, 2011)]
[Notices]
[Pages 59754-59756]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-24674]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65371; File No. SR-C2-2011-021]


Self-Regulatory Organizations; C2 Options Exchange, Incorporated; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Related to the Exchange's Automated Improvement Mechanism

September 21, 2011.
    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 September 16, 2011, the C2 Options Exchange, Incorporated 
(``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 Exchange has designated the proposal as a ``non-
controversial'' proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6) thereunder.\4\ 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\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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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 C2 Rule 6.51, Automated Improvement 
Mechanism (``AIM''). The text of the proposed rule change is available 
on the Exchange's Web site (http://www.c2exchange.com/Legal/RuleFilings.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 those 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 parts of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    C2 Rule 6.51 governs the operation of an Exchange feature that 
allows agency orders to electronically execute against principal or 
solicited interest pursuant to a crossing entitlement after being 
exposed in an auction (referred to as ``AIM''). The purpose of this 
proposed rule change is to incorporate a provision into the rule that 
would provide the Exchange with the ability to determine to apply a 
price-time priority allocation algorithm for the SPXPM option class,\5\ 
subject to certain conditions.
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    \5\ SPXPM is the ticker symbol for the P.M.-settled S&P 500 
Index options to be listed and traded on C2. See Securities Exchange 
Act Release No. 65256 (September 2, 2011) (SR-C2-2011-008).
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    Currently, Rule 6.51(b)(3) specifies that agency orders may be 
allocated via AIM at the best price(s) pursuant to the allocation 
algorithm in effect for the class, subject to various conditions set 
forth in subparagraphs (b)(3)(A) through (I), including a requirement 
that public customer orders in the book shall have priority over the 
crossing entitlement. As proposed, the rule change would provide the 
Exchange with the flexibility to permit the allocation algorithm in 
effect for AIM in the SPXPM option class to be the price-time priority 
allocation algorithm (as provided in Rule 6.12, Order Execution and 
Priority) even if the allocation algorithm in effect for intra-day 
trading in the class is some other allocation algorithm.\6\ If a 
determination is made to use price-time priority for AIM in the SPXPM 
option class, allocations would still be subject to the various 
conditions set forth in subparagraphs (b)(3)(A) through (I) of Rule 
6.51, including the requirements that public customer orders in the 
book have priority over the crossing entitlement and that the crossing 
entitlement generally be limited to 40% (as specified in more detail in 
Rule 6.51). All pronouncements regarding allocation algorithm 
determinations by the Exchange for AIM in SPXPM will be announced to C2 
Trading Permit Holders via Regulatory Circular.
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    \6\ The allocation algorithms include price-time priority, pro-
rata priority, and price-time with primary public customer and 
secondary trade participation right priority. Each of these base 
allocation methodologies can be supplemented with an optional market 
turner priority overlay. See Rule 6.12(a) through (b).
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    As noted above, the price-time priority allocation algorithm that 
would be applied to AIM for the SPXPM option class is one of the 
algorithms specified in Rule 6.12. Thus, the Exchange is not creating 
any new algorithm for the AIM mechanism with respect to SPXPM, but is 
amending Rule 6.51 to provide the flexibility to choose the price-time 
priority allocation algorithm for AIM in the SPXPM option class rather 
than simply defaulting to the algorithm that will be in effect for 
intra-day trading in the SPXPM options class (e.g., the algorithm for 
intra-day trading in SPXPM may be established as pro-rata priority 
(without public customer priority)), while the algorithm for AIM may be 
established as price-time priority (subject to certain conditions set 
out in the AIM rule, including the requirement that public customers 
have priority over the crossing entitlement). All other aspects of AIM, 
pursuant to Rule 6.51, shall apply unchanged.\7\
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    \7\ In connection with this change, the Exchange is also 
proposing a non-substantive amendment to Rule 6.51. Specifically, 
the Exchange is proposing to replace the term ``matching algorithm'' 
with ``allocation algorithm'' so there is consistency in the use of 
terms within the rules. See proposed changes to Rule 6.51(b)(3).
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    Having this additional flexibility will allow the Exchange to 
select the price-time priority allocation algorithm for AIM in the 
SPXPM option class (which algorithm is included among the existing 
algorithms set forth in Rule 6.12) even when a different allocation 
algorithm may be in effect for intra-day trading in the SPXPM option 
class. The Exchange notes that public customer orders are not impacted 
by this proposed rule change because, as discussed above, public 
customer priority is one of the conditions of the AIM auction that does 
not change regardless of on the base allocation algorithm that is 
applicable for the class. Thus, regardless of the base allocation 
algorithm in effect for intra-day trading and AIM in the class (e.g., 
price-time priority or pro-rata priority), public customer orders in 
the book have priority to execute before any crossing entitlement is 
applied or any remaining balance after the application of the 
entitlement is allocated pursuant to the base algorithm.\8\ For 
example:
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    \8\ To the extent that public customers may strategically rest 
orders based on the allocation algorithm employed for intra-day and 
auction trading on a given exchange, public customers can (and 
already would today under the existing rules) adjust their 
``quoting'' behavior accordingly, similar to how they and other 
market participants already would do today. Several market 
characteristics factor into a market participant's quoting behavior 
including, but certainly not limited to, the applicable fee 
structure, average incoming order size, and the average touch rate 
(i.e., average allocation a market participant actually receives on 
incoming electronic orders). The allocation for any market 
participant (including public customers) changes constantly from 
order-to-order, second-to-second for various reasons. The ultimate 
allocation depends upon, among other things, the size of an incoming 
order and whatever trading interest happens to be represented at the 
time the order is received. The Exchange believes (and as is further 
illustrated above) that the instant proposed rule change presents 
nothing novel or unique in this respect.

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[[Page 59755]]

     Under the current rules, the Exchange may determine to 
apply a pro-rata allocation algorithm (without public customer 
priority) for intra-day trading in SPXPM, in which case the AIM 
allocation algorithm for SPXPM would be public customer priority, then 
the crossing entitlement, then any remaining balance allocated based on 
pro-rata priority.
     Under the proposed rule change, the Exchange may determine 
to apply a pro-rata allocation algorithm (without public customer 
priority) for intra-day trading in SPXPM and a price-time allocation 
for AIM in SPXPM, in which case the AIM allocation algorithm would be 
public customer priority, then the crossing entitlement, then any 
remaining balance allocated based on pro-rata priority.
    Public customer orders have the same experience under both 
allocation scenarios noted above. To further illustrate this point, 
consider the following examples:
     Under the current rules, the intra-day allocation 
algorithm in effect for SPXPM is pro-rata. If there are three public 
customer orders to sell resting in the book (each for 10 contracts at 
$1.20) and an agency order for 100 contracts is presented for crossing 
via AIM and the execution price at the conclusion of the auction is 
$1.20 (assume there are no responses and no other interest represented 
on the book at $1.20), the priority would be 10 contracts to each 
resting public customer order, then the remaining balance of 70 
contracts is allocated to the crossing contra-order.
     Under the proposed rule change, if the intra-day 
allocation algorithm in effect for SPXPM is pro-rata and for AIM in 
SPXPM is price-time, the outcomes would be exactly the same. 
Specifically, if there are three public customer orders to sell resting 
in the book (each for 10 contracts at $1.20) and an agency order for 
100 contracts is presented for crossing via AIM and the execution price 
at the conclusion of the auction is $1.20 (assume there are no 
responses and no other interest represented on the book at $1.20), the 
priority would be 10 contracts to each resting public customer order, 
then the remaining balance of 70 contracts is allocated to the crossing 
contra-order.
    The Exchange also believes that having the ability to select price-
time priority as an alternate algorithm for SPXPM will provide us with 
additional flexibility to incent market participants to respond to AIM 
auctions. The Exchange believes that the proposed rule change would 
encourage quote competition because it is designed to reward aggressive 
pricing by offering incentives for Market-Makers and other market 
participants to support and participate in AIM and for market 
participants to establish the best price. When a price-time base 
algorithm is utilized for AIM, all market participants (including 
public customers) are incented to compete by establishing the best 
price.
    The Exchange also notes that the outcomes that would result from 
the selection of the price-time priority algorithm for AIM are not 
novel or unique. Each outcome is an allocation that is currently 
permitted under C2's existing allocation rule, Rule 6.12. (Under the 
current rules, the Exchange could select price-time for the intra-day 
algorithm in SPXPM and, thus, the allocation algorithm for AIM would be 
public customer priority, then the crossing entitlement, then the 
remainder allocated based on price-time priority.) The Exchange further 
notes the fact that an order may be subject to one allocation under the 
intraday automatic execution procedures and another allocation under 
AIM is not novel or unique. The allocation algorithms for various 
mechanisms and trading scenarios on C2 (and on other exchanges) already 
have allocation algorithms ``hardcoded'' into the rules that differ 
from the intra-day allocation algorithms.\9\ In each instance, a 
resting order is subject to varying allocations depending on several 
factors. In fact, as discussed and illustrated above, AIM currently has 
an allocation algorithm hardcoded into the C2 rules that differs from 
the intra-day allocation algorithm. As illustrated above, it is already 
possible today for a simple resting public customer order to receive a 
pro-rata share if executed intra-day, and a public customer priority 
share if executed via AIM.
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    \9\ See, e.g., C2 Rules 6.51 and 6.52 and Chicago Board Options 
Exchange, Incorporated Rules 6.74A and 6.74B.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \10\ and the rules thereunder, and in 
particular with: Section 6(b)(5) of the Act, which requires that the 
rules of a national securities exchange, among other things, be 
designed to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism for a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest; and not be designed to permit unfair discrimination 
between customers, issuers, brokers, or dealers; \11\ and Section 
6(b)(8) of the Act, which requires the rules of an exchange not to 
impose any burden on competition not necessary or in furtherance of the 
Act.\12\ The Exchange believes the proposed rule change is consistent 
with the Act in so much as use of a price-time priority allocation 
algorithm for AIM in SPXPM is consistent with, and already permitted 
under, C2 rules. The Exchange further notes that the proposed rule 
change ensures that incoming electronic orders processed through AIM 
are allocated in an equitable and fair manner and that market 
participants (including public customers) have a fair and reasonable 
opportunity for allocations based on established criteria and 
procedures. In this regard, the Exchange notes that public customer 
orders are not impacted by this proposed rule change because, as 
discussed above, public customer priority is one of the conditions of 
the AIM auction that does not change regardless of on the base 
allocation algorithm that is applicable for the class. The Exchange 
also believes that the change will allow the Exchange another method to 
reward aggressive pricing in AIM for the SPXPM options class. The 
Exchange believes that use of a price-time priority allocation 
algorithm in AIM (which is already an approved allocation algorithm 
utilized by the Exchange) would encourage quote competition because is 
designed to reward aggressive pricing by offering incentives both for 
Market-Makers and other market participants to support and participate 
in the C2 marketplace and for market participants to establish the best 
price. When a price-time algorithm is utilized in AIM, market 
participants (including public customers) are incented to compete by 
establishing the best price.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
    \12\ 15 U.S.C. 78f(b)(8).

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[[Page 59756]]

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.

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 
proposal.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing rule 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 from the date on which it was filed, or such shorter time as the 
Commission may designate if consistent with the protection of investors 
and the public interest, provided that the self-regulatory organization 
has given 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 proposed rule change has become effective 
pursuant to Section 19(b)(3)(A) of the Act \13\ and Rule 19b-4(f)(6) 
thereunder.\14\ At any time within 60 days of the filing of such 
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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    \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 e-mail to rule-comments@sec.gov. Please include 
File Number SR-C2-2011-021 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-C2-2011-021. This file 
number should be included on the subject line if e-mail 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 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of C2. 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 publicly available. All 
submissions should refer to File Number SR-C2-2011-021 and should be 
submitted on or before October 18, 2011.

    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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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-24674 Filed 9-26-11; 8:45 am]
BILLING CODE 8011-01-P


