
[Federal Register Volume 77, Number 163 (Wednesday, August 22, 2012)]
[Notices]
[Pages 50755-50756]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-20574]



[[Page 50755]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67671; File No. SR-C2-2012-026]


Self-Regulatory Organizations; C2 Options Exchange, Incorporated; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
Relating to Its Automatic Order Handling Process

August 15, 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 August 2, 2012, 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 and II 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 Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its rules regarding its automatic 
order handling process. The text of the proposed rule change is 
available on the Exchange's Web site at http://www.c2exchange.com/Legal/, at the principal office of the Exchange, and at the 
Commission's Public Reference Room.

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 these 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 aspects 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 proposes to amend its rules regarding its automatic 
order handling process. The proposed rule change adds paragraph (h) to 
Rule 6.12 to codify how the System \3\ handles market orders to sell in 
option series for which the national best bid in the series is zero 
(``no-bid series'').\4\ If the System receives during the trading day 
or has resting in the electronic book (the ``Book'') after the opening 
of trading a market order to sell in a no-bid series, it handles the 
order as follows:
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    \3\ The System is the automated trading system used by the 
Exchange for the trading of options contracts.
    \4\ The Exchange notes that, for singly listed series, the 
national best bid is equivalent to the Exchange's best bid and the 
national best offer is equivalent to the Exchange's best offer.
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     If the Exchange best offer in that series is less than or 
equal to $0.30, then the System will consider, for the remainder of the 
trading day, the market order as a limit order to sell with a limit 
price equal to the minimum trading increment applicable to the series 
and enter the order into the Book behind limit orders to sell at the 
minimum increment that are already resting in the Book.
     If the Exchange best offer in that series is greater than 
$0.30, then the market order will be cancelled.
    The Exchange's Rules are currently silent on how the System handles 
market orders to sell in no-bid series. The Exchange believes that 
proposed Rule 6.12(h) will clarify for investors how the System handles 
these orders.\5\ The Exchange believes that the automatic handling of 
market orders to sell in no-bid series if the Exchange best offer is 
less than or equal to $0.30 facilitates the System's automatic handling 
process. Additionally, the $0.30 threshold serves as a protection 
feature for investors in certain situations, such as when a series is 
no-bid because the last bid traded just prior to the entry of the 
market order to sell. The purpose of this threshold is to limit the 
automatic handling of market orders to sell in no-bid series to only 
those for true zero-bid options, as options in no-bid series with an 
offer of more than $0.30 are likely not worthless.
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    \5\ The Exchange notes for informational purposes that other 
options exchanges have rules that address how their systems handle 
market orders to sell no-bid series. See, e.g., NASDAQ OMX PHLX 
(``Phlx'') Rule 1080(i) (which provides that the Phlx system will 
convert market orders to sell a no-bid series to limit orders to 
sell with a limit price of the minimum trading increment applicable 
to that series that are received when Phlx's disseminated quotation 
in the series has a bid/ask differential less than or equal to 
$0.25, and will place the limit orders on the book).
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    For example, if the System receives a market order to sell in a no-
bid series with a minimum increment of $0.01 and the Exchange best 
offer is $0.20, the System will consider, for the remainder of the 
trading day, the order as a limit order with a price of $0.01 and 
submit it to the Book behind other limit orders to sell at the minimum 
increment that are already resting in the Book. At that point, even if 
the series is no-bid because, for example, the last bid just traded and 
the limit order trades at $0.01, the next bid entered after the trade 
would not be higher than $0.20.\6\ However, if the System receives a 
market order to sell in a no-bid series with a minimum increment of 
$0.01 and the Exchange best offer is $1.20 (because, for example, the 
last bid of $1.00 just traded), the System will instead cancel the 
order. It would be unfair to the entering firm to let its market order 
trade as a limit order for $0.01 because, for example, the firm 
submitted the order during the brief time when there were no 
disseminated bids in a series trading significantly higher than the 
minimum increment.
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    \6\ If the order does not execute during the trading day as a 
limit order and remains outstanding after the close of trading 
(i.e., a GTC order), the System at that time will no longer consider 
the order as a limit order and will again handle the order as a 
market order to sell after the close of trading. The market order 
will stay on the Book until the opening of the next trading day (or 
until cancelled), at which point it may execute during the open or, 
if it remains unexecuted after the opening of trading, it will 
either execute with the best bid at the time or, if the series is 
still no-bid, again be handled pursuant to proposed Rule 6.12(h).
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    The $0.30 threshold has been in place for a number of years, and 
the Exchange believes the threshold is reasonable. The Exchange notes 
that this threshold is less than the acceptable price range (``APR'') 
in the price check parameter provision in Rule 6.17. Pursuant to that 
Rule, the System will not automatically execute a marketable order if 
the width between the national best bid and national best offer is not 
within the APR, which for an option contract with a bid of less than $2 
may not be less than $0.375.\7\ Instead, the System will cancel the 
order. Notwithstanding this provision, proposed Rule 6.12(h) allows for 
the potential execution of market orders to sell in no-bid series with 
offers

[[Page 50756]]

less than [sic] \8\ $0.30 as limit orders at the price of a minimum 
increment. If the threshold in proposed Rule 6.12(h) were higher, the 
risk of having a market order trade at a minimum increment in a series 
that is not truly no-bid would increase. This risk of execution is not 
present in the price check parameter provision of Rule 6.17, and 
therefore the Exchange believes a wider APR is appropriate for that 
provision.
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    \7\ Rule 6.17 also provides that the System will not 
automatically execute eligible orders that are marketable if the 
execution would follow an initial partial execution on the Exchange 
and would be at a subsequent price that is not within an acceptable 
tick distance from the initial execution. The APR for purposes of 
Rule 6.17 is determined by the Exchange on a class-by-class basis 
and may not be less than $0.375 between the bid and offer for each 
option contract for which the bid is less than $2, $0.60 where the 
bid is at least $2 but does not exceed $5, $0.75 where the bid is 
more than $5 but does not exceed $10, $1.20 where the bid is more 
than $10 but does not exceed $20, and $1.50 where the bid is more 
than $20. An ``acceptable tick distance'' [sic] less than two 
minimum increments.
    \8\ The Commission notes that C2's proposed rule text actually 
specifies that the Exchange would convert market orders in no-bid 
series to limit orders where the Exchange's best offer is less than 
or equal to $.30 (emphasis added).
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder applicable to the 
Exchange and, in particular, the requirements of Section 6(b) of the 
Act.\9\ Specifically, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \10\ 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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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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    In particular, the proposed rule change protects investors and the 
public interest by providing investors with more clarity regarding the 
System's automatic order handling process--specifically how it 
processes market orders to sell in no-bid series. The Exchange believes 
that the automated handling of market orders to sell in no-bid series 
if the Exchange best offer is $0.30 or less assists with the 
maintenance of fair and orderly markets and protects investors and the 
public interest because it provides for automated handling of these 
orders, ultimately resulting in more efficient executions of these 
orders. The Exchange believes that the $0.30 threshold also protects 
investors and assists with the maintenance of fair and orderly markets 
by preventing executions of market orders to sell in no-bid series with 
higher offers at potentially extreme prices in series that are not 
truly no-bid. The Exchange believes this threshold appropriately 
reflects the interests of investors, as options in no-bid series with 
offers higher than $0.30 are likely not worthless. The Exchange 
believes an investor would not want automatic handling of these orders 
in this situation, as such handling could result in a sale at a 
significantly lower price than the investor could otherwise obtain if 
the System cancelled the order, and the investor later resubmitted the 
order when the series was no longer no-bid.

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 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 
proposed rule change.

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \11\ and Rule 19b-4(f)(6) thereunder.\12\ 
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 prior to 
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, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.\13\
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    \11\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \12\ 17 CFR 240.19b-4(f)(6).
    \13\ 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-
4(f)(6)(iii) requires a self-regulatory organization to provide the 
Commission with written notice of its intent to file the proposed 
rule change, along with a brief description and text of 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 fulfilled 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-C2-2012-026 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-C2-2012-026. 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 
10:00 a.m. and 3:00 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-C2-2012-026 and should be 
submitted on or before September 12, 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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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-20574 Filed 8-21-12; 8:45 am]
BILLING CODE 8011-01-P


