
[Federal Register Volume 76, Number 243 (Monday, December 19, 2011)]
[Notices]
[Pages 78706-78708]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-32343]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65938; File No. SR-C2-2011-039]


Self-Regulatory Organizations; C2 Options Exchange, Incorporated; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Related to a Complex Order Auction Feature

December 12, 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 December 6, 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) 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).
    \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 is proposing to amend its electronic complex order 
rules. The text of the proposed rule change is available on the 
Exchange's Web site

[[Page 78707]]

(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 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    On a class-by-class basis, the Exchange may determine to activate 
the electronic complex order RFR auction (``COA''), which is a process 
by which eligible complex orders \5\ are given an opportunity for price 
improvement before being booked in the electronic complex order book 
(``COB''). Paragraph (c) of Rule 6.13 describes the COA process. 
Interpretation and Policy .02 of the Rule also provides that, with 
respect to the initiation of a COA, Participants routing complex orders 
directly to COB may request that the complex orders be processed by COA 
on a class-by-class basis.
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    \5\ An eligible complex order, referred to in Rule 6.13 as a 
``COA-eligible order,'' means a complex order that, as determined by 
the Exchange on a class-by-class basis, is eligible for a COA 
considering the order's marketability (defined as a number of ticks 
away from the current market), size, complex order type and complex 
order origin type (i.e., non-broker-dealer public customer, broker-
dealers that are not Market-Makers or specialists on an options 
exchange, and/or Market-Makers or specialists on an options 
exchange). All determinations by the Exchange on COA-eligible orders 
parameters are announced to via Regulatory Circular. See Rule 
6.13(c)(1)(B) and Interpretation and Policy .01 to Rule 6.13.
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    The Exchange is proposing to amend the rule to describe a COA 
feature for complex orders resting in COB (referred to herein as the 
``re-COA'' feature), which is currently in use but not expressly 
covered in the rules. In particular, the Exchange is proposing to 
provide that, for each class where COA is activated, the Exchange may 
also determine to activate the re-COA feature for complex orders 
resting in COB. For such classes, any order resting in COB (regardless 
of whether it was subject to COA before it was booked in COB) \6\ will 
be automatically subject to the re-COA feature if the order is within a 
number of ticks away from the current market (calculated based on the 
derived net price of the individual series legs). The Exchange notes 
that this re-COA feature for resting orders is only applicable to 
resting non-marketable orders that move close to the current market 
price calculated based on the individual series legs. This feature is 
not applicable to resting orders that become marketable. The Exchange 
may also determine on a class-by-class and strategy basis to limit the 
frequency of re-COA auctions initiated for complex orders resting in 
COB. For example, the Exchange might determine to limit the frequency 
of re-COA auctions to once every ``X'' seconds (the ``interval timer'') 
for a total of ``Y'' intervals. Once this cycle is complete, the 
Exchange may determine to wait for a period of time ``Z'' (the ``sleep 
timer'') and then reactivate the re-COA feature.\7\ All timers will be 
reset if a new complex order improves the top of the COB (i.e., 
improves the best net price bid or offer of the complex orders resting 
in COB). These limitations on the frequency of COA auctions due to the 
re-COA feature are intended to address system efficiency and 
effectiveness considerations, such as limiting repeated initiations of 
COA auctions (and related messaging) when there are flickering quotes. 
Once the re-COA feature is initiated for a resting order, all other 
aspects of the COA process described in Rule 6.13 will apply unchanged. 
The Exchange believes this re-COA feature facilitates the orderly 
execution of complex orders by providing an automated opportunity for 
price improvement to (and execution of) resting orders priced near the 
current market, similar to what a broker-dealer might seek to do if the 
broker-dealer were representing a complex order in open outcry on an 
exchange floor (or just entering an order initially into COB).
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    \6\ In this regard, the Exchange notes that, currently, all of 
its Trading Permit Holders have elected to have their COA-eligible 
orders processed by COA. In addition, the Exchange notes that other 
markets have programs in place that provide for the automatic 
auctioning of complex orders. See, e.g., NASDAQ OMX PHLX LLC 
(``Phlx'') Rule 1080(e)(i)(A) which, among other things, provides 
that a complex order live auction (``COLA'') will initiate if the 
Phlx system receives a complex order that improves the Phlx complex 
order best debit or credit price respecting the specific complex 
order strategy that is the subject of the complex order. During a 
COLA, Phlx market participants may bid and offer against the COLA-
eligible order pursuant to the Phlx Rule.
    \7\ Determinations by the Exchange regarding the classes where 
the re-COA feature is activated and related tick distance and 
frequency parameters will be announced to Trading Permit Holders via 
Regulatory Circular.
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    The following example illustrates the operation of this re-COA 
feature: Assume the feature is activated for complex orders resting in 
COB that are within 2 ticks of the current market ($0.02 in a class 
where complex orders trade in $0.01 net price increments). Assume the 
frequency is limited to once every 15 seconds (the interval timer) for 
1 interval. Under this setting, a total of 2 re-COA auctions could be 
triggered--the original re-COA auction and a second re-COA auction 
after the expiration of the 15-second interval timer. Assume the sleep 
timer is set at 60 minutes. Assume the current market calculated based 
on the derived net price of the individual series legs in the C2 
electronic book for a given strategy is at a net price of $0.80-$1.01. 
If a complex order resting in the COB to buy the strategy is priced at 
a net debit price of $0.98, the complex order is not marketable (as the 
order is away from the current market by $0.03 (or 3 ticks)). If 
subsequently the individual series legs prices are updated such that 
the current market for the strategy moves to a net price of $0.80-
$1.00, the resting complex order to buy at $0.98 would trigger the re-
COA feature and initiate the re-COA auction process (as the order is 
within $0.02 (or 2 ticks) of the current market). If there are no 
responses, the order would be placed back in COB. The resting order 
would not initiate the re-COA feature again until the 15-second 
interval timer has expired. When the 15-second interval timer expires, 
the order would be eligible to initiate the re-COA feature again if the 
current market moves after the expiration of the timer and the order 
meets the tick distance parameter (the order would not automatically 
initiate the re-COA feature at the end of the interval timer; instead, 
there must be an update to the current market after the expiration of 
the interval timer and the order must meet the tick distance parameter 
for the system to re-COA again). For example, if after the end of the 
15-second interval timer the current market moves to $0.80-$0.99 (or, 
for example, if the current market moves back to $0.80-$1.01 and then, 
after the end of the 15-second interval timer, moves back again to 
$0.80-$1.00), then the resting complex order would again initiate the 
re-COA feature. If there are no responses, the order would be placed 
back in COB. The cycle is complete. Now that the resting order has been 
subject to COA 2 times since it was booked in COB, the 60 minute sleep

[[Page 78708]]

timer will begin and the resting order will not be eligible for the re-
COA feature again until the sleep timer expires and there is a quote 
update after that timer expires that is within the tick distance 
parameter. All timers would be reset anytime there is a price change at 
the top of the COB. For example, if five minutes into the sleep 
interval a second complex order is entered to rest in COB at a price of 
$0.99 ($0.01 better than the original resting order priced at $0.98), 
the original resting order would no longer be at the top of the COB and 
subject to the re-COA feature. The timers would reset and the second 
complex order (which now represents the top of the COB) would be 
subject to the re-COA process. If, for example, the second order 
subsequently trades (constituting a price change at the top of the 
COB), the original order would be at the top of the COB again and could 
become subject to the re-COA feature again.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the Act 
\8\ in general and furthers the objectives of Section 6(b)(5) of the 
Act \9\ in particular in that it should promote just and equitable 
principles of trade, serve to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and 
protect investors and the public interest. The Exchange believes that 
the proposed rule change facilitates the orderly execution of complex 
orders by providing an automated opportunity for price improvement to 
(and execution of) resting orders priced near the current market.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 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 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 \10\ and Rule 19b-4(f)(6) 
thereunder.\11\ 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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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 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 rule-comments@sec.gov. Please include 
File Number SR-C2-2011-039 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-C2-2011-039. 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-C2-2011-039 and 
should be submitted on or before January 9, 2012.

    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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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-32343 Filed 12-16-11; 8:45 am]
BILLING CODE 8011-01-P


