
[Federal Register Volume 77, Number 17 (Thursday, January 26, 2012)]
[Notices]
[Pages 4070-4073]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-1628]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66210; File No. SR-C2-2012-003]


Self-Regulatory Organizations; C2 Options Exchange, Incorporated; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Related to Complex Order Price Check Parameter Features

January 20, 2012.
    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 January 9, 2012, the C2 Options Exchange, Incorporated (``Exchange'' 
or ``C2'') filed with the Securities and Exchange Commission 
(``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 complex order processing 
rules to update existing price check protection features and include 
some additional ones. 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 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
    The Exchange has in place various price check parameter features 
that are designed to prevent incoming orders from automatically 
executing at potentially erroneous prices. These price check parameter 
features are designed to help maintain a fair and orderly market. The 
Exchange is proposing to amend its complex order processing rules under 
Rule 6.13, Complex Order Execution, to update existing price check 
protection features to provide additional clarity on the operation of 
the functionality and to include some additional features. The Exchange 
believes the below-described price check parameter revisions will 
enhance the existing functionality and assist with the maintenance of 
fair and orderly markets by helping to mitigate the potential risks 
associated with an order drilling through multiple price points 
(thereby resulting in executions at prices that are extreme and 
potentially erroneous) and complex orders trading at prices that are 
inconsistent with particular complex order strategies (thereby 
resulting in executions at prices that are extreme and potentially 
erroneous).
    First, the Exchange is proposing to include descriptive headings in 
the rule text for each of the existing price check parameters. The 
Exchange is also proposing to break the description of the existing 
same expiration strategy price check parameters into two separate 
paragraphs instead of a single paragraph. We believe these changes will 
make it easier for users to read and understand the operation of these 
price protection features. These changes are simply non-substantive 
formatting changes and do not impact the operation of the various 
features.
    Second, the market width parameter under Rule 6.13.04(a) currently 
provides that the complex order book (``COB'') will not automatically 
execute eligible complex orders that are market orders if the width 
between the Exchange's best bid and best offer (``BBO'') are not within 
an acceptable price range. In addition, the rule text currently 
provides that such market complex orders will be cancelled.
    The Exchange is proposing to revise this provision to provide that 
the Exchange may determine to apply these price check parameters to 
market orders and/or marketable limit orders. However, whereas market 
orders that are subject to this price protection feature are cancelled, 
marketable limit orders would be held in the system. Any such orders 
held in the system would not be eligible to automatically execute until 
after the market width parameter condition is resolved. In addition, 
while being held in the system, such orders would be displayed in the 
COB as applicable. This functionality for marketable limit order is 
currently in use but not expressly covered in the rules. The Exchange 
believes that extending the same price check logic to not automatically 
execute such marketable limit orders but to continue to hold such 
orders in the system is reasonable and appropriate because, as with 
market orders, this feature should help to prevent executions of such 
limit orders at extreme and potentially erroneous prices. In contrast 
to market orders, marketable limit orders are able to be held in the 
system because they have a price associated with them. The Exchange 
also notes that applying market width price check logic to market 
orders and/or marketable limit orders is consistent with other existing 
price check parameters that apply to both market orders and marketable 
limit complex orders.\5\ In addition, the

[[Page 4071]]

Exchange is proposing to correct a typographical error by changing the 
minimum acceptable price range specified in the rule text for orders in 
option series where the bid is less than $2 from $0.37 to $0.375.\6\
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    \5\ See, e.g., Rule 6.17, Price Check Parameters (which 
provides, among other things, that the Exchange will not 
automatically execute eligible orders that are marketable if the 
width between the national best bid and offer is not within an 
acceptable price range (as determined by the Exchange on a series by 
series basis for market orders and/or marketable limit orders and 
announced to Trading Permit Holders via Regulatory Circular).
    \6\ The $0.375 amount is same as the acceptable price range 
parameters set forth in Rule 6.17.
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    Third, the debit-to-credit (credit-to-debit) parameters under Rule 
6.13.04(b) currently provide that (i) a market order that would be 
executed at a net credit price after receiving a partial execution at a 
net debit price would not be automatically executed (the ``debit-to-
credit'' parameter), and (ii) a market order that would be executed at 
a net debit price after receiving a partial execution at a net credit 
price would not be automatically executed (the ``credit-to-debit'' 
parameter). The Exchange is proposing to eliminate the debit-to-credit 
parameter because it not possible for such a scenario to occur and 
therefore the parameter is unnecessary. (Because orders are executed at 
the best available price and then the next best price, a market order 
would never execute at a net debit price then at a net credit price.)
    Fourth, the Exchange is proposing to change the existing same 
expiration strategy price check parameters to distinguish between its 
application to limit orders and to market orders. The Exchange is also 
proposing to eliminate a provision that would make this price check 
parameter feature available to ratio orders should the Exchange 
determine to do so. As the term implies, the ``same expiration 
strategy'' price protection parameters apply to certain complex order 
strategies where all the option series have the same expiration.\7\ The 
functionality is designed to detect scenarios where (i) a limit order 
is entered at a net credit price when it clearly should have been 
entered at a net debit price (or vice versa) and (ii) a market order 
would be executed at a net debit price when it clearly should be 
executed at a net credit price (but not vice versa).\8\
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    \7\ See Rule 6.13.04(c).
    \8\ A same expiration strategy market order that would result in 
an execution at a net credit price (i.e., the net sale proceeds from 
the series being sold are more than the net purchase cost from the 
series being bought) but that would normally execute at a net debit 
price (i.e., the net sale proceeds from the series being sold are 
less than the net purchase cost from the series being bought) would 
be a favorable execution for the market order and would not trigger 
this price check parameter. In making the changes to the rule text, 
the Exchange is correcting a typographical error, which correction 
clarifies that the same expiration strategy parameter does not apply 
to market orders that would execute at a net credit.
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    Currently the rule text provides that, if the conditions for this 
price check parameter exist when a complex order is routed to the COB, 
then the order will be rejected. The rule text also currently provides 
that, to the extent the parameters are triggered once an order is 
resting in COB or after an incoming order receives a partial execution, 
such a complex order will be cancelled. The provision does not 
distinguish between limit orders and market orders. The Exchange is 
proposing to amend the text to separately describe how the two 
categories of orders are processed.
    With respect to limit orders, proposed changes to the text provide 
that incoming limit orders will be rejected under this parameter only 
if the conditions exist when the order is first routed to COB. The 
provisions about resting orders and partial executions are not 
applicable to limit orders because incoming limit orders that are 
priced at a net price that meets the conditions are rejected outright 
upon routing to COB and never get to the point where they are resting 
or partially executed. With respect to market orders, proposed changes 
to the text provide that, to the extent the parameters are triggered 
when an incoming market order is routed to COB or after an incoming 
market order is subject to a complex order RFR auction (``COA''), any 
part of the market order that may be executed within an acceptable 
price range will be executed automatically and the part of the order 
that would execute at a net debit price will be cancelled. (A market 
order would never rest in COB, so that provision will be removed from 
the rule text.) The following examples illustrate this price check 
parameter:

    Example 1: Assume a complex order to buy 50 Jan 45 XYZ calls and 
sell 50 Jan 50 XYZ calls is entered with a limit that is a net 
credit price (i.e., the net sale proceeds from the Jan 50 calls are 
larger than the net purchase cost from the Jan 45 calls). Such an 
order would appear to be erroneously priced as a net credit--it 
should instead be a net debit--because normally a person would 
expect that the Jan 50 calls would not cost more than the Jan 45 
calls. As a result, upon routing to COB, such a limit order would be 
rejected.
    Example 2: Assume a butterfly spread to buy 50 Jan 45 XYZ calls, 
sell 100 Jan 50 XYZ calls and buy 50 Jan 55 XYZ calls is entered at 
a net credit price (i.e., the net sale proceeds from the Jan 50 
calls are more than the net purchase cost from the Jan 45 and 55 
calls). Such an order would appear to be erroneously priced as a net 
credit--it should instead be a net debit--because normally a person 
would expect that selling the middle 50 strike would result in less 
than the cost of buying the upper 55 and lower 45 strikes. As a 
result, upon routing to COB, such a limit order would be rejected.
    Example 3: Assume a market order to buy 50 Jan 45 XYZ calls and 
sell 50 Jan 40 XYZ calls is entered. Also assume that the Jan 45 XYZ 
calls are quoted $4.00-$4.10 for 10 contracts and the next available 
offer is $4.30 for 100 contracts, and that the Jan 40 XYZ calls are 
quoted $4.50-$4.60 for 10 contracts and the next available bid is 
$4.20 for 100 contracts. Under this scenario, the incoming market 
order would receive an execution for 10 spreads at a net credit 
price of $0.40 each (i.e., the net sale proceeds from the Jan 40 
Series are larger than the net purchase cost from the Jan 45 
Series). When the series decrement, the net execution price would 
become a net debit price of $0.10 each (i.e., the net sale proceeds 
from the Jan 40 Series are less than the net purchase cost from the 
Jan 45 Series). Such an execution would appear to be erroneous 
because normally a person in this scenario would expect to execute 
the vertical spread at a net credit price. As a result, upon routing 
to COB, 10 contracts would execute at a net credit price of $0.40 
each and the remaining 40 contracts would be cancelled.
    Example 4: Assume a market order to buy 50 Jan 45 XYZ calls and 
sell 50 Jan 40 XYZ calls is routed to COA. Also assume that at the 
end of the COA the Jan 45 XYZ calls are quoted $4.00-$4.10 for 10 
contracts and the next available offer is $4.30 for 100 contracts, 
and that the Jan 40 XYZ calls are quoted $4.50-$4.60 for 10 
contracts and the next available bid is $4.20 for 100 contracts. To 
the extent the market order can execute at prices within the price 
check parameter, then that part of the order would execute (i.e., 10 
vertical spreads will execute at a net credit price of $0.40). To 
the extent that the price check parameters are triggered at the 
conclusion of COA, then that part of the market order would be 
cancelled (i.e., 40 vertical spreads will cancel).

    As noted above, the Exchange is also proposing to delete a 
provision in the rule that provides that the Exchange may determine to 
make the same expiration strategy price check parameters available to 
applicable ratio orders (as such applicable ratios are determined by 
the Exchange on a class-by-class basis). The Exchange has not activated 
this feature for ratio orders and has no intention to do so at this 
time. Therefore, the Exchange is proposing to delete this provision 
from the rule at this time.\9\
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    \9\ In the future, should the Exchange would determine to apply 
this price check parameter feature to ratio orders, the Exchange 
would address it through a separate rule change filing.
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    Finally, fifth, the Exchange is proposing to codify a price check 
parameter for orders processed via COA, which is currently in use but 
not

[[Page 4072]]

expressly covered in the rules. Specifically, the Exchange may 
determine on a class-by-class basis (and announce via Regulatory 
Circular) that COA will not automatically execute a COA-eligible order 
that is marketable if the execution would be at a price that is not 
within an acceptable percentage distance from the derived net price of 
the individual series legs at the start of COA. For purposes of this 
provision, the ``acceptable percentage distance'' will be a percentage 
determined by the Exchange on a class-by-class basis and it shall be 
not less than 3 percent. The Exchange believes a 3 percent level is 
reasonable and appropriate because a marketable order that would 
deviate from the derived net market by that percentage or more may be 
indicative of an extreme or potentially erroneous price, and a broker 
would generally want to evaluate the order further before receiving an 
automatic execution. The Exchange also believes that a 3 percent 
minimum is reasonable and appropriate in comparison to other price 
check parameters it currently has available.\10\ To the extent the 
parameters under this provision are triggered, such a complex order 
will be cancelled.
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    \10\ The ``acceptable percentage distance'' price check 
parameter for complex orders is adapted from the ``acceptable tick 
distance'' parameter set forth in Rule 6.17, which provides that the 
acceptable tick distance shall not be less than 2 minimum increment 
ticks.
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    For example, the Exchange could determine that the acceptable 
percentage distance is 5%. Assume at the start of COA the individual 
leg market in Series A is $1.00-$1.20 and in series B is $2.00-$2.20 
and the derived leg market is $0.80 (net debit)-$1.20 (net credit). The 
acceptable percentage distance would be $0.04 (5% x $0.80) for orders 
to buy Series A and sell series B and $0.06 (5% x $1.20) for orders to 
sell Series A and buy series B. As a result, COA would execute a COA-
eligible order at prices ranging from $0.84 (net debit)--$1.26 (net 
credit), but not an order priced at a net debit of $0.85 or more or a 
net credit of $1.27 or more.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the Act 
\11\ in general and furthers the objectives of Section 6(b)(5) of the 
Act \12\ 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 the 
complex order price check parameters assist in the automatic execution 
and processing of orders that are subject to the Exchange's complex 
order processing. The Exchange also believes these price check 
parameters assist with the maintenance of fair and orderly markets by 
helping to mitigate the potential risks associated with complex orders 
drilling through multiple price points (thereby resulting in executions 
at prices that are extreme and potentially erroneous) and complex 
orders trading at prices that are inconsistent with particular complex 
order strategies (thereby resulting in executions at prices that are 
extreme and potentially erroneous). In this regard, for example, the 
Exchange notes that the acceptable percentage distance parameter is 
designed to mitigate the potential risks of executions at prices that 
are not within an acceptable percentage distance from the derived net 
market price of the individual series legs. The Exchange also notes 
that the extension of the BBO market width logic to include marketable 
limit orders is designed to help prevent executions of such limit 
orders at extreme and potentially erroneous prices in a manner 
consistent with the existing logic utilized for market orders. The 
Exchange also believes that the proposed changes to the rule text will 
make it easier for users to read and understand the operation of the 
price check parameters, and will better and more fully describe the 
operation of the parameters.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 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 \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 email to rule-comments@sec.gov. Please include 
File Number SR-C2-2012-003 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-C2-2012-003. 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

[[Page 4073]]

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 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-C2-2012-003 and should be 
submitted on or before February 16, 2012.

    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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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-1628 Filed 1-25-12; 8:45 am]
BILLING CODE 8011-01-P


