
[Federal Register Volume 76, Number 228 (Monday, November 28, 2011)]
[Notices]
[Pages 72991-72992]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-30447]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65800; File No. SR-C2-2011-035]


 Self-Regulatory Organizations; C2 Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Related to a Temporary Quote Risk Monitor 
Mechanism Rule

November 21, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on November 18, 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 the 
Substance of the Proposed Rule Change

    The Exchange proposes to adopt Rule 8.12A Pilot Quote Risk Monitor 
Mechanism. 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.

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 self-regulatory organization 
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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    On November 7, 2011, the Exchange filed to adopt a Quote Risk 
Monitor (QRM) rule.\5\ That rule change was immediately effective upon 
filing, but will not be operative until December 7, 2011. C2 submitted 
the filing to codify C2's QRM functionality which has been available 
and in use on C2 since C2 commenced trading listed options.\6\ On 
November 17, 2011 C2 announced that it would be deactivating the QRM 
functionality until December 7, 2011 when the new rule becomes 
operational.\7\ The anticipated deactivation has caused considerable 
concern among C2 Market-Makers, and some have taken steps to cease 
acting as C2 Market-Makers. Out of concern that a decrease in quoters 
and a decrease in quote quality will have an adverse effect on the C2 
market, this filing proposes to adopt a temporary C2 QRM rule that 
would be immediately effective and operative until December 7, 2011 
when the above-referenced QRM rule will become operative.
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    \5\ See Securities Exchange Act Release No. 65744 (November 14, 
2011) (SR-C2-2011-034).
    \6\ The Exchange inadvertently did not include a QRM rule in its 
initial rulebook and did not realize the omission until very 
recently.
    \7\ See C2 Regulatory Circular RG11-035.
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    C2 Rules require Market-Makers to maintain continuous electronic 
quotes.\8\ To comply with this requirement, each Market-Maker can 
employ its own proprietary quotation and risk management systems to 
determine the prices and sizes at which it quotes.
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    \8\ See C2 Rule 8.5(a)(1).
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    A Market-Maker's risk in an options class is not limited to the 
risk in a single series of that class. Rather, a Market-Maker typically 
is active in quoting in multiple option classes, and each such option 
class can comprise dozens of individual option series. On C2, trades 
are automatically effected against a Market-Maker's then current quote. 
As a result, a Market-Maker faces exposure in all series of a class, 
requiring that the Market-Maker off-set or otherwise hedge its overall 
position in a class. The QRM functionality helps Market-Makers limit 
this overall exposure and risk. Specifically, the functionality permits 
a Market-Maker to establish parameters in the system to cancel its 
electronic quotes in all series of an option class until the Market-
Maker refreshes those electronic quotes.
    Under proposed Rule 8.12A, each Market-Maker that elects to use the 
functionality would be required to specify two parameters that the QRM 
Mechanism would use to determine when that Market-Maker's quotes should 
be cancelled. In particular, each Market-Maker is required to specify a 
maximum number of contracts for each option class (the ``Contract 
Limit'') and a rolling time period in seconds during which such 
Contract Limit is to be measured (the ``Measurement Interval'').
    When the QRM Mechanism determines that the Market-Maker has traded 
more than the Contract Limit for any option class during any rolling 
Measurement Interval, the QRM Mechanism automatically cancels all of 
the Market-Maker's quotes in any series of that option class. By 
limiting its exposure across series, a Market-Maker is better able to 
quote aggressively in an option, knowing that the QRM

[[Page 72992]]

Mechanism will automatically cancel all its quotations in a class when 
its exposure limit is hit.
    The Exchange notes that the proposed rule would not relieve a 
Market-Maker of its obligations to provide continuous electronic quotes 
under the Exchange rules \9\ nor to provide ``firm'' quotes pursuant to 
the requirements of Exchange Rule 8.6. The Exchange also notes that the 
proposed rule is based on Chicago Board Options Exchange, Incorporated 
(``CBOE'') Rule 8.18 (Quote Risk Monitor Mechanism).
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    \9\ See C2 Rule 8.5(a)(1).
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2. Statutory Basis
    The basis under the Securities Exchange Act of 1934 (the ``Act'') 
for this proposed rule change is the requirement under Section 6(b)(5) 
\10\ that an exchange have rules that are designed to promote just and 
equitable principles of trade, and 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. In 
particular, the Exchange believes the proposed change is designed to 
promote just and equitable principles of trade, and to remove 
impediments to and perfect the mechanism for a free and open market and 
national market system because the rule change would provide a 
mechanism that would allow C2 Market-Makers to more effectively and 
efficiently manage their quotations. Knowing that a helpful quote 
management tool is in place would, in turn, allow those Market-Makers 
to quote more aggressively which removes impediments to a free and open 
market and benefits all C2 users.
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    \10\ 15 U.S.C. 78f(b)(5).
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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 proposed rule change: (i) Does not significantly affect 
the protection of investors or the public interest; (ii) does not 
impose any significant burden on competition; and (iii) does not become 
operative for 30 days after the date of the filing, or such shorter 
time as the Commission may designate if consistent with the protection 
of investors and the public interest, the proposed rule change has 
become effective pursuant to Section 19(b)(3)(A) of the Act \11\ and 
Rule 19b-4(f)(6) thereunder.\12\
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6). Pursuant to Rule 19b-4(f)(6)(iii) 
under the Act, the Exchange is required to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of 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. 
C2 has requested that the Commission waive the five-day pre-filing 
notice requirement in Rule 19b-4(f)(6)(iii). The Commission has 
determined to waive the five day pre-filing notice requirement.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \13\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \14\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has requested that the Commission waive the 30-day operative delay.
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    \13\ 17 CFR 240.19b-4(f)(6).
    \14\ 17 CFR 240.19b-4(f)(6)(iii).
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    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest. 
Waiver of the operative delay will allow market makers to continue to 
use the QRM to manage risk associated with providing continuous quotes 
across a multitude of series and classes and thereby avoid a 
potentially adverse effect on the C2 market. For these reasons, the 
Commission designates that the proposed rule change become operative 
immediately upon filing.\15\
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    \15\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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    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.

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 rule-comments@sec.gov. Please include 
File No. SR-C2-2011-035 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 No. SR-C2-2011-035. 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 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of the 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 available publicly. All 
submissions should refer to File No. SR-C2-2011-035 and should be 
submitted on or before December 19, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-30447 Filed 11-25-11; 8:45 am]
BILLING CODE 8011-01-P


