
[Federal Register Volume 77, Number 51 (Thursday, March 15, 2012)]
[Notices]
[Pages 15438-15440]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-6230]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66552; File No. SR-C2-2011-043]


Self-Regulatory Organizations; C2 Options Exchange, Incorporated; 
Order Approving Proposed Rule Change, as Modified by Amendment No. 1 
Thereto, Relating to Changes to the Automated Improvement Mechanism

March 9, 2012.

I. Introduction

    On December 30, 2011, C2 Options Exchange, Incorporated 
(``Exchange'' or ``C2'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change relating to its Automated 
Improvement Mechanism (``AIM''). The proposed rule change was published 
for comment in the Federal Register on January 18, 2012.\3\ On March 2, 
2012, the Exchange filed Amendment No. 1 to the proposed rule 
change.\4\ The Commission received no comments on the proposal. This 
order approves the proposed rule change, as modified by Amendment No. 1 
thereto.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 66131 (January 11, 
2012), 77 FR 2595 (January 18, 2012) (``Notice'').
    \4\ In Amendment No. 1, the Exchange represented that it will 
provide to the Commission the same data that the Chicago Board of 
Options Exchange, Incorporated provides to the Commission in 
connection with that exchange's AIM. See Securities Exchange Act 
Release No. 53222 (February 3, 2006), 71 FR 7089 (February 10, 
2006). Amendment No. 1 is technical in nature, and therefore the 
Commission is not publishing Amendment No. 1 for public comment.
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II. Description of the Proposal

    C2's AIM allows a Participant \5\ to cross an agency order it 
presents as agent (``Agency Order'') against principal interest or a 
solicited order, provided that it first exposes the Agency Order to a 
one-second auction. If the Agency Order is 50 contracts or greater, the 
Participant (``Initiating Participant'') must stop the Agency Order at 
the national best bid or offer (``NBBO'') (or the order's limit price 
if better), and if it is less than 50 contracts, the Participant must 
stop the Agency Order at the NBBO improved by one minimum increment (or 
the order's limit price if better).\6\ When initiating an auction, an

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Initiating Participant submitting an Agency Order to the AIM either 
must indicate a single price at which it seeks to cross the Agency 
Order (``single-price submission'') or must indicate that it will match 
as principal the price and size of all AIM responses (``auto-
match'').\7\ Once the Initiating Participant has submitted an Agency 
Order for processing, such submission may not be modified or 
cancelled.\8\ A Request for Responses (``RFR'') will then be sent to 
any Participant that has elected to receive such requests, and the 
exposure period will last for one second.\9\ If the auction attracts 
responses (which may be submitted by Participants), the Agency Order 
will be allocated at the best price(s), subject to the allocation 
algorithm in effect for the option class, and public customer orders in 
the book will have priority.\10\ If the best price equals the 
initiating Participant's single-price submission, then the Initiating 
Participant will be allocated the greater of one contract or a 
specified percentage of the order, which percentage will be determined 
by the Exchange and may not be greater than 40% (or 50% in the case of 
a single-price submission where only one other market maker matches the 
price).\11\
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    \5\ The term ``Participant'' is defined in C2 Rule 1.1.
    \6\ See Rule 6.51(a)(2)-(3). See also Rule 6.51, Interpretations 
and Policies .03, noting that for at least a Pilot Period expiring 
on July 18, 2012, there will be no minimum size requirement for 
orders to be eligible for the auction.
    \7\ See Rule 6.51(b)(1)(A).
    \8\ See id.
    \9\ See Rule 6.51(b)(1)(B)-(C).
    \10\ See Rule 6.51(b)(3)(A).
    \11\ See Rule 6.51(b)(3)(F).
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    The Exchange proposes to amend Rule 6.51 to allow an Initiating 
Participant to enter an Agency Order for fewer than 50 contracts into 
the AIM at the NBBO. The proposal eliminates the distinction between 
orders for fewer than 50 contracts and orders for 50 contracts or 
greater and thereby will allow an Initiating Participant to submit to 
AIM an Agency Order of any size at the NBBO.
    The Exchange also proposes to allow an Initiating Participant to 
elect to auto-match competing prices from other market participants up 
to a designated limit price. The Initiating Participant will not be 
able to cancel the auto-match instruction after an AIM Auction 
commences and will have no control over the prices at which it receives 
an allocation in the auction other than the outside boundary 
established by the designated limit price.
    The Exchange notes that, during the existing pilot for certain 
components of AIM, there is no minimum size requirement for orders that 
are eligible for AIM. In connection with the pilot program, the 
Exchange represents that it will continue to submit to the Commission 
reports providing AIM Auction and order execution data, including 
monthly data regarding executions through AIM of agency orders for 50 
contracts or greater or for fewer than 50 contracts, as supporting 
evidence that, among other things, there is meaningful competition for 
all size orders.\12\
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    \12\ See Rule 6.51, Interpretation and Policies .03. See also 
Amendment No. 1, supra note 4.
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    The Exchange represents that, in connection with the proposed auto-
match feature, it will provide the Commission with the following 
additional data: (1) The percentage of trades effected through AIM in 
which the Initiating Participant 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 Participant 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 
Participant submitted a single price (no auto-match instruction).
    At least one week prior to implementation of the proposed rule 
change, the Exchange will issue a notice to Participants informing them 
of the implementation of the additional auto-match feature. 
Participants will have an opportunity to make any necessary 
modifications to coincide with the implementation date.

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment No. 1, is consistent with the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\13\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b) of the Act,\14\ in 
general, and Section 6(b)(5) of the Act,\15\ in particular, which 
requires that the rules of an exchange be designed, among other things, 
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\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposal to permit Initiating 
Participants to stop an Agency Order for fewer than 50 contracts at the 
better of the NBBO or the order's limit price will continue to provide 
customers with an opportunity for price improvement over the NBBO. The 
Commission also believes that the proposal will continue to provide 
Participants with incentives to compete in AIM Auctions. The Commission 
notes that once an Agency Order is submitted into the AIM Auction, the 
submission may not be modified or cancelled. Therefore, the Agency 
Order submitted to the AIM Auction will be guaranteed an execution 
price of at least the NBBO and, moreover, will be given an opportunity 
for execution at a price better than the NBBO.
    The Commission notes that the Initiating Participant's maximum 
allocation in the auction will be only 40% (or 50% in the case of a 
single price submission where only one other market maker matches the 
price). Further, C2's current rules provide for broad participation in 
the AIM Auction,\16\ which should allow for a meaningful, competitive 
auction. Moreover, the Commission believes that the proposal may 
encourage increased participation in the AIM by Participants willing to 
trade with an Agency Order of less than 50 contracts at the NBBO but 
not better than the NBBO. The Commission also notes that the proposal 
makes the handling of AIM Agency Orders of under 50 contracts 
consistent with larger AIM Agency Orders. Finally, the Commission notes 
that it will continue to receive data from the Exchange pursuant to the 
AIM pilot program, and that it will have the opportunity to evaluate 
the data to assess the impact of the proposal.\17\
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    \16\ See Rule 6.51(b)(1)(D).
    \17\ See Amendment No. 1, supra note 4.
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    The Commission believes that the proposal to add an option for 
Initiating Participants to auto-match competing prices from other 
market participants up to a designated limit price is also consistent 
with the Act. The Commission believes that the change may encourage 
increased participation in AIM because it will allow Initiating 
Participants to trade with an Agency Order at a price better than the 
NBBO, but only up to a certain price.\18\ In

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addition, the Exchange will provide the Commission with data showing 
the average amount of price improvement provided to AIM Agency Orders 
when the Initiating Participant submitted an auto-match instruction 
versus the average amount of price improvement provided when there is 
no auto-match instruction. This additional data will allow the 
Commission to evaluate this change.
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    \18\ The Commission also notes that the Exchange's auto-match 
proposal is similar to the current rules of the Boston Options 
Exchange Group, LLC (``BOX'') and the International Securities 
Exchange, LLC (``ISE'') relating to the Price Improvement Period 
(``PIP'') and Price Improvement Mechanism (``PIM''), respectively. 
See Securities Exchange Act Release Nos. 62644 (August 4, 2010), 75 
FR 48395 (August 10, 2010) (SR-ISE-2010-61) (notice of filing and 
immediate effectiveness of rule change to add auto-match 
functionality in the PIM) and 61805 (March 31, 2010), 75 FR 17454 
(April 6, 2010) (SR-BX-2010-022) (notice of filing and immediate 
effectiveness of rule change to add auto-match functionality in the 
PIP).
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    Thus, for the reasons set forth above, the Commission believes that 
the proposal is consistent with the requirements of the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-C2-2011-043), as modified by 
Amendment No. 1 thereto, be, and it hereby is, approved.
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    \19\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-6230 Filed 3-14-12; 8:45 am]
BILLING CODE 8011-01-P


