
[Federal Register Volume 77, Number 11 (Wednesday, January 18, 2012)]
[Notices]
[Pages 2595-2597]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-771]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66131; File No. SR-C2-2011-043]


Self-Regulatory Organizations; C2 Options Exchange, Incorporated; 
Notice of Filing of a Proposed Rule Change Relating to Changes to Rule 
6.51

January 11, 2012.
    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 30, 2011, 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 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 the 
Substance of the Proposed Rule Change

    The filing proposes to make changes to C2's Automated Improvement 
Mechanism (``AIM'') rule. The text of the proposed rule change is 
available on the Exchange's Web site (http://www.c2exchange.com), 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 the 
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 these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to amend C2 Rule 6.51 to 
(i) allow TPHs to enter Agency Orders for fewer than 50 contracts into 
AIM at the NBBO; and (ii) allow Initiating TPHs to designate a limit 
price if it elects to auto-match.
    This proposed rule change would make AIM more similar to current 
rules of the Boston Options Exchange Group, LLC (``BOX'') \3\ and the 
International Securities Exchange, LLC (``ISE'') \4\ relating to the 
Price Improvement Period (``PIP'') and Price Improvement Mechanism 
(``PIM''), respectively, which are automated price improvement 
mechanisms.\5\
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    \3\ See BOX Rules Chapter V, Section 18.
    \4\ See ISE Rule 723.
    \5\ AIM, PIP and PIM have certain characteristics in common with 
each other. All three mechanisms (a) provide for the opportunity for 
customer price improvement, (b) have certain periods where the 
initial orders are exposed for potential price improvement, (c) have 
certain guidelines regarding the types of orders that may be 
eligible for price improvement, and (d) have certain defined rules 
related to the allocation of trades within price improvement 
auctions.
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    AIM allows a TPH to submit an Agency Order along with a contra-side 
second order (a principal order or a solicited order for the same size 
as the Agency Order) into an Auction where other participants could 
compete with the Initiating TPH's second order to execute against the 
Agency Order, which guarantees that the Agency Order will receive an 
execution. Once an Auction commences, the Initiating TPH cannot cancel 
it.\6\
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    \6\ See C2 Rule 6.51(b)(1)(A).
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    Under this proposal, Agency Orders of all sizes submitted to AIM 
will be guaranteed execution at a price at least as good as the NBBO 
while providing the opportunity for execution at a price better than 
the NBBO. The proposal will incent more TPHs to initiate and 
participate in Auctions and will allow even broader participation in 
Auctions by all types of market participants. As a result, C2 expects 
the proposal will increase the number of and participation in Auctions, 
which would enhance competition in the Auctions. The Exchange believes 
that this proposal will ultimately provide additional opportunities for 
price improvement over the NBBO for its customers.
Elimination of Entry Price Restriction on Agency Orders for Fewer Than 
50 Contracts
    C2 Rule 6.51(a)(2) and (3) currently provides that if an Initiating 
TPH submits an Agency Order to AIM for 50 contracts or more, the 
Initiating TPH must enter its contra-side second order (or stop the 
Agency Order) at the better of the NBBO or the Agency Order's limit 
price (if the order is a limit order); however, if an Initiating TPH 
submits an Agency Order to AIM for fewer than 50 contracts, the 
Initiating TPH must stop the entire Agency Order at the better of the 
NBBO price improved by one minimum price improvement increment or the 
Agency Order's limit price (if the order is a limit order). The 
Exchange is proposing to eliminate this distinction and allow 
Initiating TPHs to submit to AIM Agency Orders of any size at the NBBO.
    The Exchange believes this proposal will increase the likelihood 
that TPHs will initiate Auctions for Agency Orders for fewer than 50 
contracts because the TPH will only be required to guarantee an 
execution at the NBBO, which will provide additional customer orders 
with an opportunity for price improvement over the NBBO. The Exchange 
believes the proposal will also encourage increased participation in 
AIM by TPHs willing to trade with an Agency Order for fewer than 50 
contracts at the NBBO but not better than the NBBO.
    In support of this proposal, the Exchange notes that both BOX \7\ 
and

[[Page 2596]]

ISE \8\ allow entry of orders into PIP and PIM, respectively, at the 
NBBO without distinguishing between orders of more than or fewer than 
50 contracts. Because BOX and ISE are currently able to offer their 
customers price improvement for orders of fewer than 50 contracts at 
the NBBO in PIP and PIM, respectively, the Exchange has determined that 
it is important for competitive purposes that it be able to offer the 
same opportunities to its customers for price improvement on C2 through 
AIM.
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    \7\ See supra note 3; see also Securities Exchange Act Release 
No. 34-59654 (March 30, 2009), 74 FR 15551 (April 6, 2009) (SR-BX-
2009-08) (order approving proposed rule change allowing entry of 
orders into PIP at the NBBO when BOX's best bid or offer is inferior 
to the NBBO with no order size distinction).
    \8\ See supra note 4; see also Securities Exchange Act Release 
No. 34-57847 (May 21, 2008), 73 FR 30987 (May 29, 2008) (SR-ISE-
2008-29) (order approving proposed rule change allowing entry of 
orders into PIM at the NBBO when ISE's best bid or offer is inferior 
to the NBBO with no order size distinction).
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    The Exchange notes that certain allocation differences exist 
between AIM and PIM as well as AIM and PIP. As proposed, our AIM change 
would make the handling of AIM trades over 50 contracts consistent with 
AIM trades under 50 contracts.\9\ However, unlike PIM, which requires 
auctions to commence at prices better than the ISE best bid or offer 
and thus precludes an auction initiator from establishing priority 
ahead of any resting ISE interest, an AIM Auction can begin and 
conclude at the C2 best bid or offer. This means that, like for orders 
of 50 or more contracts on C2, the Initiating TPH can trade at a price 
in which resting interest existed and can establish priority over 
resting broker-dealer interest. Although PIP allows auctions to occur 
at the BOX best bid or offer, PIP uses an order allocation structure 
based on price-time priority sequence with priority for public customer 
orders (like C2) and secondary priority for non-BOX Participant broker-
dealers. On C2, when an Auction concludes at the C2 best bid or offer, 
first priority is for public customers, second priority is for the 
Initiating TPH (for 40%), third priority is for nonpublic customer 
resting orders or quotes that are unchanged from when the Auction 
began, and last priority is for RFR responses. The Exchange references 
these differences for informational purposes but does not believe that 
the differences are material to the Exchange's goals of handling AIM 
orders of all sizes the same and allowing Auctions of orders smaller 
than 50 contracts at the NBBO (like PIP and PIM).
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    \9\ PIP and PIM also do not distinguish between orders over 50 
contracts and orders under 50 contracts.
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    The Exchange further notes that certain components of AIM were 
approved on a pilot basis, including that there is no minimum size 
requirement for orders to be eligible for the Auction. In connection 
with the pilot programs, the Exchange will submit to the Commission 
reports providing detailed AIM Auction and order execution data, 
including monthly data regarding executions through AIM of Agency 
Orders for more or fewer than 50 contracts, as supporting evidence 
that, among other things, there is meaningful competition for all size 
orders.
Addition of Option To Designate Auto-Match Limit Price
    C2 Rule 6.51(b)(1)(A) currently allows an Initiating TPH to enter 
its contra-side second order in one of two formats: (1) A specified 
single price; or (2) a non-price specific commitment to auto-match all 
Auction responses achieved during the Auction. In this case, the 
Initiating TPH would have no control over the match price. The Exchange 
is proposing to provide Initiating TPHs with the additional option to 
auto-match competing prices from other market participants up to a 
designated limit price. The Initiating TPH will still not be able to 
cancel the auto-match instruction after an Auction commences and will 
have no control over the prices at which it receives an allocation of 
the Auction other than the outside boundary established by the 
designated limit price.
    The Exchange notes that when the Initiating TPH selects the auto-
match feature prior to the start of an Auction (with or without a 
designated limit price), the available liquidity at improved prices is 
increased and competitive final pricing is out of the Initiating TPH's 
control. The Exchange believes the proposal will encourage increased 
participation in AIM because it allows TPHs willing to trade with an 
Agency Order at a price better than the NBBO, but only up to a certain 
price, to initiate an Auction.
    In support of this proposal, the Exchange also notes that both PIP 
\10\ and PIM \11\ permit initiating participants to elect to auto-match 
up to a designated limit price. The Exchange believes that AIM, and in 
turn the customers that benefit from AIM, would be disadvantaged if 
TPHs are not provided with the option to auto-match up to a designated 
limit price because this lack of flexibility reduces the number of 
Auctions and, as a result, opportunities for price improvement. Because 
BOX and ISE currently allow initiating participants or members, 
respectively, the option to auto-match up to the NBBO achieved during 
an auction or up to a designated limit price, the Exchange believes it 
is important for competitive purposes that it be able to offer the same 
opportunities for price improvement on C2 through AIM.
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    \10\ See supra note 3; see also Securities Exchange Act Release 
No. 34-61805 (March 31, 2010), 75 FR 17454 (April 6, 2010) (SR-BX-
2010-22) (order approving implementation of auto-match feature with 
the option to auto-match up to a designated limit price).
    \11\ See supra note 4; see also Securities Exchange Act Release 
No. 34-62644 (August 4, 2010), 75 FR 48395 (August 10, 2010) (SR-
ISE-2010-61) (order approving implementation of auto-match feature 
with the option to auto-match up to a designated limit price).
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    The Exchange will provide the Commission with the following data: 
(1) The percentage of trades effected through AIM in which the 
Initiating TPH submitted an Agency Order with an auto-match instruction 
that included a designated limit price and the percentage that did not 
include a designated limit price; and (2) the average amount of price 
improvement provided to AIM Agency Orders when the Initiating TPH 
submitted an auto-match instruction that included a designated limit 
price and the average amount that did not include a designated limit 
price, versus the average amount of price improvement provided to AIM 
Agency Orders when the Initiating TPH submitted a single price (no 
auto-match instruction).
    After effectiveness of the proposal, and at least one week prior to 
implementation, C2 will issue a notice to TPHs informing them of the 
implementation of the additional auto-match feature. This will give 
TPHs an opportunity to make any necessary modifications to coincide 
with the implementation date.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange and, in particular, the 
requirements of Section 6(b) of the Act.\12\ Specifically, the Exchange 
believes the proposed rule change is consistent with the Section 
6(b)(5) \13\ 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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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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    In particular, the Exchange believes this proposed rule change is a 
reasonable modification designed to

[[Page 2597]]

provide additional flexibility for TPHs to obtain executions on behalf 
of their customers while continuing to provide meaningful, competitive 
Auctions. The Exchange also believes that that proposed rule change 
will ultimately enhance competition in the AIM Auctions and provide 
customers with additional opportunities for price improvement. These 
changes are consistent with changes made by other 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.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be 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:

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-C2-2011-043 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-C2-2011-043. 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 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 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-C2-2011-043, and should be submitted on or before 
February 8, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-771 Filed 1-17-12; 8:45 am]
BILLING CODE 8011-01-P


