
[Federal Register Volume 76, Number 232 (Friday, December 2, 2011)]
[Notices]
[Pages 75582-75584]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-30995]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65834; File No. SR-C2-2011-033]


Self-Regulatory Organizations; C2 Options Exchange, Incorporated; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to Market-Makers' Continuous Quoting Obligations and Adjusted 
Option Series

November 28, 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 (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 Exchange filed 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 Rules 8.5 and 8.13 to indicate that 
Market-Makers will not be obligated to maintain continuous quotes in 
adjusted option series and to define the term adjusted option 
series.\5\ 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.
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    \5\ In addition, to ensure that Market-Makers will continue to 
be obligated to quote in adjusted option series if and when the need 
arises, the proposed rule change adds Rule 8.5(d) to provide that a 
Market-Maker may be called upon by an Exchange official designated 
by the Board of Directors to submit a single quote or maintain 
continuous quotes in one or more series of a class to which the 
Market-Maker is appointed whenever, in the judgment of such 
official, it is necessary to do so in the interest of maintaining a 
fair and orderly market.
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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
    The purpose of the proposed rule change is to amend Rules 8.5, 
``Obligations of Market-Makers,'' and 8.13, ``Preferred Market-Maker 
Program,'' to indicate that Market-Makers will not be obligated to 
maintain continuous quotes in adjusted option series and to define the 
term adjusted option series. The proposal is based on recent rule 
changes of NYSE Amex LLC (``NYSE Amex''), NYSE Arca, Inc. (``NYSE 
Arca'') and NASDAQ OMX PHLX, Inc. (``PHLX'').\6\
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    \6\ See Securities Exchange Act Release Nos. 65572 (October 14, 
2011), 76 FR 65310 (October 20, 2011) (SR-NYSEAmex-2011-61) (order 
granting approval of proposed rule change concerning market maker 
continuous quoting obligations and adjusted option series); 65573 
(October 14, 2011), 76 FR 65305 (October 20, 2011) (SR-NYSEArca-
2011-59) (order granting approval of proposed rule change concerning 
market maker continuous quoting obligations and adjusted option 
series); and 61095 (December 2, 2009), 74 FR 64786 (December 8, 2009 
(SR-PHLX-2009-99).
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    Rule 8.5(a)(1) currently provides that during trading hours, a 
Market-Maker must maintain a continuous two-sided market in 60% of the 
series of each registered class that have a time to expiration of less 
than nine months. For purposes of that obligation, ``continuous'' means 
99% of the time.\7\ Rule 8.13(d) currently provides that a Preferred 
Market-Maker \8\ (Market-

[[Page 75583]]

Makers and Preferred Market-Makers collectively referred to as 
``Market-Makers'' in this filing) must comply with the quoting 
obligations applicable under Exchange rules and must provide continuous 
quotes in at least 90% of the series of each class for which it 
receives Preferred Market-Maker orders.
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    \7\ The rule also provides that if a technical failure or 
limitation of the Exchange's system prevents a Market-Maker from 
maintaining, or from communicating to the Exchange, timely and 
accurate quotes in a series, the duration of such failure will not 
be considered in determining whether that Market-Maker has satisfied 
the 99% quoting standard with respect to that series. The Exchange 
may consider other exceptions to this obligation based on 
demonstrated legal or regulatory requirements or other mitigating 
circumstances.
    \8\ Rule 8.13(a) provides that the Exchange may allow, on a 
class-by-class basis, for the receipt of marketable orders, through 
the Exchange's system when the Exchange's disseminated quote is the 
national best bid or offer, that carry a designation from the member 
transmitting the order that specifies a Market-Maker in that class 
as the ``Preferred Market-Maker'' for that order.
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    The Exchange proposes to relieve Market-Makers of the obligation to 
maintain continuous quotes in adjusted option series. The proposal 
amends the rules discussed above that impose continuous quoting 
obligations on Market-Makers to provide that such quoting obligations 
only apply to non-adjusted option series. The proposal defines 
``adjusted option series'' as an option series for which, as a result 
of a corporate action by the issuer of the security underlying such 
option series, one option contract in the series represents the 
delivery of other than 100 shares of underlying stock or Units.\9\
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    \9\ ``Units'' are securities other than shares that are traded 
on a national securities exchange and are defined as an ``NMS 
stock'' under Rule 600 of Regulation NMS and that meet the other 
requirements set forth in Rule 5.3, Interpretation and Policy .06.
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    After a corporate action and a subsequent adjustment to the 
existing options, the series in question are identified by the Options 
Price Reporting Authority and at the Options Clearing Corporation with 
a separate symbol consisting of the underlying symbol and a numerical 
appendage. As a standard procedure, exchanges listing options on an 
underlying security that undergoes a corporate action resulting in 
adjusted series will list new standard option series across all 
appropriate expiration months the day after the existing series are 
adjusted. The adjusted series are generally actively traded for a short 
period of time following adjustment, but orders to open options 
positions in the underlying security are almost exclusively placed in 
the new standard option series contracts. Although the adjusted series 
may not expire for a long period of time, in a short time the adjusted 
series are no longer actively traded. Thus, the burden of quoting these 
series generally outweighs the benefit of being appointed in the class 
because of the lack of interest in the series by various market 
participants.
    The Exchange notes that other options exchanges have indicated that 
market-makers have recently withdrawn from assignments in classes that 
include adjusted series, resulting in a reduction in liquidity in these 
classes. These market-makers informed the exchanges that the 
withdrawals were based in part on their obligation to continuously 
quote adjusted option series, and the quoting obligations on these 
often less frequently traded option series impacted the risk parameters 
acceptable to the market-makers. These options exchanges also noted 
that market-makers also expressed concern that the adjusted nature of 
these series complicates the calculation of an appropriate quote. As a 
result of withdrawals from such assignments by market-makers, these 
options exchanges stated that liquidity, as well as volume, had been 
negatively impacted in the affected options classes listed on the 
exchanges.\10\ The Exchange believes that this proposal will prevent 
any similar withdrawals by C2 Market-Makers from assignments in classes 
that include adjusted option series on the Exchange, and thus any 
potential reduction in liquidity and volume related to the withdrawals, 
and encourage Market-Makers to continue their appointments in these 
option classes.
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    \10\ See supra note 6.
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    In support of this proposal, the Exchange notes that this proposed 
rule change is similar to recent rule changes of NYSE Amex, NYSE Arca 
and PHLX.\11\ The Exchange is merely proposing to exclude adjusted 
option series from Market-Makers' continuous quoting obligations, but 
not from other obligations imposed on Market-Makers pursuant to Rules 
8.5 and 8.13. In addition, to ensure that Market-Makers will continue 
to be obligated to quote in adjusted option series if and when the need 
arises, the proposed rule change adds Rule 8.5(d) to provide that a 
Market-Maker may be called upon by an Exchange official designated by 
the Board of Directors to submit a single quote or maintain continuous 
quotes in one or more series of a class to which the Market-Maker is 
appointed whenever, in the judgment of such official, it is necessary 
to do so in the interest of maintaining a fair and orderly market.\12\ 
For example, in the event of a large market order imbalance in a 
particular series, and the Market-Makers currently quoting in that 
series are not able to provide sufficient liquidity to fulfill the full 
size of the orders, an Exchange official may call upon a Market-Maker 
to maintain continuous quotes in such series until the imbalance is 
resolved.
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    \11\ Id.
    \12\ The duration for which a Market-Maker must maintain 
continuous quotes if called upon by an Exchange official pursuant to 
new Rule 8.5(d) would depend on the facts and circumstances that 
prompted the Exchange official to make such a request, and therefore 
could last anywhere from a few minutes to the remainder of the 
trading day. This new Rule 8.5(d) is based on a similar provision in 
CBOE Rule 8.7(d)(iv).
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    The current quoting obligation in these illiquid adjusted option 
series is a minor part of a Market-Maker's overall obligation, and the 
proposed relief is mitigated by a Market-Maker's obligation to respond 
to a request for quote by a Trading Permit Holder. Because of the lack 
of interest in these adjusted option series, there is little 
demonstrable benefit to being a Market-Maker in them other than the 
ability to maintain Market-Maker margins for what little activity may 
occur. In addition, the burden of continuous quoting in these series is 
counter to the Exchange's efforts to mitigate the number of quotes 
collected and disseminated.
    The Exchange believes that the proposed rule change should incent 
Market-Makers to continue appointments, and as a result expand 
liquidity, in options classes listed on the Exchange to the benefit of 
the Exchange and its Trading Permit Holders and public customers. The 
Exchange believes that its Market-Makers would be disadvantaged if they 
are required to continuously quote in these illiquid adjusted option 
series, and the Exchange's Trading Permit Holders and public customers 
would also be disadvantaged if Market-Makers withdrew from appointments 
in options classes that include adjusted option series, resulting in 
reduced liquidity and volume in these classes.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6 of the Act \13\ and the rules and regulations thereunder and, 
in particular, the requirements of Section 6(b) of the Act.\14\ 
Specifically, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \15\ requirements that the rules of 
an exchange be designed to promote just and equitable principles of 
trade, to prevent fraudulent and manipulative acts, to remove 
impediments to and to perfect the mechanism for a free and open market 
and a national market system, and, in general, to protect investors and 
the public interest.
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    \13\ 15 U.S.C. 78f.
    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
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    In particular, the Exchange believes this proposed rule change is 
consistent with the Act because, on balance, the elimination of the 
continuous quoting obligations in adjusted option series is

[[Page 75584]]

a minor change and should not impact the quality of C2's trading 
market. Among other things, adjusted option series are not common, and 
trading interest is often very low after the corporate event has 
passed. Consequently, continuous quotes in these series increase quote 
traffic and burdens systems without a corresponding benefit. By not 
requiring Market-Makers to provide continuous quotes in these series, 
the Exchange's proposal would further its goal of measured quote 
mitigation. Further, while they will not be tasked with providing 
continuous quotes in these series, Market-Makers must still quote these 
series when requested by an Exchange official. Accordingly, the 
proposal supports the quality of C2's trading market by helping to 
ensure that Market-Makers will continue to be obligated to quote in 
adjusted option series if and when the need arises.
    These changes are consistent with the rules of competing options 
exchanges, and they serve to remove impediments to and to perfect the 
mechanism for a free and open market and a national market system.

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 not necessary or appropriate in furtherance of 
the purposes of the Act. In this regard, and as indicated above, the 
Exchange notes that the rule change is being proposed as a competitive 
response to recent rule changes of NYSE Amex, NYSE Arca and PHLX.\16\ 
C2 believes this proposed rule change is necessary to permit fair 
competition among the options exchanges with respect to Market-Makers' 
continuous quoting obligations.
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    \16\ See supra note 6.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    Because the 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 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 \17\ and Rule 19b-4(f)(6) 
\18\ thereunder.
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    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 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 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 Number SR-C2-2011-033 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-C2-2011-033. 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 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-C2-2011-033 and should be 
submitted on or before December 23, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-30995 Filed 12-1-11; 8:45 am]
BILLING CODE 8011-01-P


