
[Federal Register Volume 78, Number 6 (Wednesday, January 9, 2013)]
[Notices]
[Pages 1889-1892]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-00200]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68573; File No. SR-C2-2012-043]


Self-Regulatory Organizations; C2 Options Exchange, Incorporated; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change, 
as Modified by Amendment No. 1 Thereto, To Adopt a HAL System

January 3, 2013.
    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 21, 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, II, and III below, which Items have been prepared by the 
Exchange. On January 2, 2013, the Exchange submitted Amendment No. 1 to 
the

[[Page 1890]]

proposed rule change.\3\ The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange modified the description of 
the proposed rule change to reflect the proposed rule text that 
provides that HAL will be open to all Trading Permit Holders.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to adopt a HAL system. The text of the 
proposed rule change is provided in Exhibit 5. The text of the proposed 
rule change is also available on the Exchange's Web site (http://www.c2exchange.com/Legal/ Legal/), 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 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 adopt a rule that governs the operation of 
its new HAL system (``HAL''). HAL is a feature within the C2 System 
that provides automated order handling in designated classes for 
qualifying electronic orders that are not automatically executed by the 
System. Regarding HAL eligibility, the Exchange shall designate 
eligible order size, eligible order type, eligible order origin code 
(i.e., public customer orders, non-Market Maker broker-dealer orders, 
and Market Maker broker-dealer orders), and classes in which HAL shall 
be activated. HAL shall automatically process upon receipt: (i) An 
eligible order that is marketable against the Exchange's disseminated 
quotation while that quotation is not the national best bid or offer 
(``NBBO''), unless the Exchange's quotation contains resting orders and 
does not contain sufficient Market-Maker quotation interest to satisfy 
the entire order; (ii) an eligible order that would improve the 
Exchange's disseminated quotation and that is marketable against 
quotations disseminated by other exchanges that are participants in the 
Options Order Protection and Locked/Crossed Market Plan (the ``Linkage 
Plan''); or (iii) an order submitted to HAL as a result of the price 
check parameters of Rule 6.17.
    For order handling and responses regarding HAL, orders that are 
received by HAL pursuant to the paragraph above shall immediately upon 
receipt be electronically exposed at the NBBO price. The exposure shall 
be for a period of time determined by the Exchange on a class-by-class 
basis, which period of time shall not exceed one second. All Trading 
Permit Holders (``TPHs'') may submit responses to the exposure message 
during the exposure period. Responses (i) must be priced equal to or 
better than the Exchange's best bid/offer; (ii) must be limited to the 
size of the order being exposed; and (iii) may be cancelled and/or 
replaced any time during the exposure period.
    Regarding the allocation of exposed orders, any responses priced at 
the prevailing NBBO or better shall immediately trade against the order 
(on a first come, first served basis). At the conclusion of the 
exposure period, the Exchange will evaluate all remaining responses as 
well as the disseminated best bid/offer on other exchanges and execute 
any remaining portion of the exposed order to the fullest extent 
possible at the best price(s) by first executing against responses 
(pursuant to the matching algorithm in effect for the class except that 
the participation entitlement and market turner status shall not apply 
to responses), and, second, routing Immediate-or-Cancel (``IOC'') 
Intermarket Sweep Orders (``ISOs'') to other exchanges. Any portion of 
a routed IOC ISO that returns unfilled shall trade against the 
Exchange's best bid/offer unless another exchange is quoting at a 
better price in which case new IOC ISOs shall be generated and routed 
to trade against such better prices. Any executions at the Exchange's 
best bid/offer will first trade against interest that was resting at 
the price at the time the exposed order was received, and any remaining 
balance will trade against all new interest at that price (in both 
cases pursuant to the matching algorithm for that class). All 
executions on the Exchange pursuant to this paragraph shall comply with 
Rule 6.81. Executions will be subject to price check parameters set 
forth in Rule 6.17 when such price check functionality is enabled.
    Regarding the early termination of the exposure period, in addition 
to the receipt of a response to trade the entire exposed order at the 
NBBO or better, the exposure period will also terminate early under the 
following circumstances: (i) If during the exposure period the Exchange 
receives an unrelated order (or quote) on the opposite side of the 
market from the exposed order that could trade against the exposed 
order at the prevailing NBBO price or better, then the orders will 
trade at the prevailing NBBO price unless the unrelated order is a 
customer order in which case the orders will trade at the midpoint of 
the unrelated order's limit price and the prevailing NBBO. The exposure 
period shall not terminate if a quantity remains on the exposed order 
after such trade; (ii) If during the exposure period the Exchange 
receives an unrelated order on the same side of the market as the 
exposed order that is priced equal to or better than the exposed order, 
then the exposure period shall terminate and the exposed order shall be 
processed in accordance with paragraph (c) (which regards allocation of 
exposed orders); (iii) If during the exposure of an order that is 
marketable against the Exchange's best bid/offer at the time the order 
was exposed (``Exchange Initial BBO''), Market-Maker interest at the 
Exchange Initial BBO decrements to a contract size equal to the size of 
the exposed order, then the exposure period shall terminate and the 
exposed order shall be processed in accordance with paragraph (c) 
(which regards allocation of exposed orders).
    The purpose of the proposed change is to provide C2 TPHs with the 
opportunity to improve their prices and ``step up'' to meet the NBBO in 
order to interact with orders sent to the Exchange. This will allow the 
market participant sending an order to C2 to increase its chances of 
receiving an execution at C2 (the market participant's chosen venue) 
instead of having the order be routed to another exchange. This ``step 
up'' process allows market participants to take into account factors 
beyond just disseminated prices, such as execution costs, system 
reliability, and quality of service, when determining the exchange to 
which to route an order. A market participant that prefers C2 due to 
some combination of these other factors will know that, even if C2 is 
not displaying a price that is the NBBO, the market participant may 
still receive an execution at C2 because a C2 TPH may ``step up'' to 
match the NBBO.
    Further, HAL and the ``step up'' process enable C2 TPHs to add 
liquidity that is available to interact with orders sent to the 
Exchange. Indeed, when a C2 TPH ``steps up'' to match the NBBO that is 
displayed on another exchange, more

[[Page 1891]]

contracts may be executed at this NBBO price here on C2 than are 
available at that same price on the other exchange.
    C2's proposed HAL and the ``step up'' process are not novel 
concepts. C2's proposed HAL is nearly identical to the Hybrid Agency 
Liaison (``CBOE HAL'') offered on the Chicago Board Options Exchange, 
Incorporated (``CBOE''), which provides the same manner of ``step up'' 
process. There are a couple of differences between CBOE HAL and the 
proposed C2 HAL. First, CBOE HAL operates on CBOE's Hybrid Trading 
System, which combines both open outcry and electronic trading, whereas 
the proposed C2 HAL would be entirely electronic (as C2 is an all-
electronic exchange). The proposed C2 HAL rule does not incorporate the 
minimal CBOE HAL language regarding Hybrid.\4\
---------------------------------------------------------------------------

    \4\ See CBOE Rule 6.14A.
---------------------------------------------------------------------------

    Second, on CBOE HAL, only Market-Makers with an appointment in the 
relevant option class and TPHs acting as agent for orders resting at 
the top of CBOE's book in the relevant option series opposite the order 
submitted to CBOE HAL may submit responses to the exposure message 
during the exposure period (unless CBOE determines, on a class-by-class 
basis, to allow all TPHs to submit responses to the exposure message). 
C2 has determined that, on its proposed C2 HAL, all TPHs may submit 
responses to the exposure message during the exposure period. As such, 
Interpretation and Policy .01 to CBOE Rule 6.14A (the CBOE rule 
regarding HAL), which prohibits the redistribution of exposure messages 
to market participants not eligible to respond to such messages (except 
in classes in which CBOE allows all TPHs to respond to such messages) 
does not apply to the proposed C2 HAL, as all C2 TPHs are permitted to 
respond to all exposure messages. Despite these differences, the 
proposed C2 HAL would otherwise operate in an identical manner to the 
CBOE HAL, which has been approved by the Securities and Exchange 
Commission (the ``Commission'').\5\
---------------------------------------------------------------------------

    \5\ See Securities Exchange Act Release No. 60551 (August 20, 
2009), 74 FR 43196 (August 26, 2009) (SR-CBOE-2009-040).
---------------------------------------------------------------------------

    The Exchange believes that the Commission has always been clear 
that honoring better prices on other markets can be accomplished by 
matching those better prices.\6\ The proposed HAL and a ``step up'' 
process would allow C2 TPHs to do just that. And if a C2 market 
participant wants to ensure that an order does not go through the 
proposed HAL process, that market participant can submit an Immediate-
or-Cancel order (which is not exposed to HAL).
---------------------------------------------------------------------------

    \6\ For example, in adopting the Order Protection Rule (Rule 
611) under Regulation NMS in 2005, the Commission stated: ``The 
Order Protection Rule generally requires that trading centers match 
the best quoted prices, cancel orders without an execution, or route 
orders to the trading centers quoting the best prices.'' See 
Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 
37496 (June 29, 2005), at 37525 (S7-10-04).
---------------------------------------------------------------------------

    The Exchange also proposes to adopt Interpretation and Policy .01 
to new Rule 6.18, which will state that the Exchange may determine, on 
a class-by-class basis, to not route ISOs to other exchanges on behalf 
of non-public customer orders that are exposed pursuant to this Rule. 
In such cases, any unexecuted balance of such non-public customer 
orders shall be cancelled at the conclusion of the exposure period. 
Under the Linkage Plan, the Exchange is not obligated to route orders 
to another exchange; the Linkage Plan only requires that C2 not trade 
through a better price at another exchange. In certain circumstances, 
particularly with orders of non-public customer market participants, 
the Exchange may elect not to route an order to another exchange in 
order to not incur the costs associated with routing such order.
    The Exchange also proposes to adopt Interpretation and Policy .02 
to new Rule 6.18, which will state that all pronouncements regarding 
determinations by the Exchange pursuant to Rule 6.18 and the 
Interpretations and Policies thereunder will be announced to Trading 
Permit Holders via Regulatory Circular. This method of notification 
will allow the Exchange to promptly inform TPHs of any new or 
modification to any determinations made by the Exchange.
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.\7\ Specifically, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \8\ 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.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Adopting HAL, a ``step up'' program, on C2 will provide TPHs with 
the opportunity to improve their prices to match the NBBO in order to 
interact with orders sent to the Exchange. This will allow the market 
participant sending an order to C2 to increase its chances of receiving 
an execution at C2 (the market participant's chosen venue) instead of 
having the order be routed to another exchange. This ``step up'' 
process allows market participants to take into account factors beyond 
just disseminated prices, such as execution costs, system reliability, 
and quality of service, when determining the exchange to which to route 
an order. A market participant that prefers C2 due to some combination 
of these other factors will know that, even if C2 is not displaying a 
price that is the NBBO, the market participant may still receive an 
execution at C2 because a C2 TPH may ``step up'' to match the NBBO. 
Therefore, the fact that HAL allows a market participant who elects to 
send an order to C2 to have a greater likelihood of achieving execution 
at this chosen venue without the risk of paying a lower price removes 
an impediment to and perfects the mechanism for a free and open 
national market system.
    Further, HAL and the ``step up'' process enable C2 TPHs to add 
liquidity that is available to interact with orders sent to the 
Exchange. Indeed, when a C2 TPH ``steps up'' to match the NBBO that is 
displayed on another exchange, more contracts may be executed at this 
NBBO price here on C2 than are available at that same price on the 
other exchange. This increased liquidity benefits all market 
participants on C2, thereby perfecting the mechanism for a free and 
open national market system and protecting investors and the public 
interest.
    C2's proposed HAL is nearly identical to CBOE HAL, which provides 
the same manner of ``step up'' process. The only differences between 
CBOE HAL and the proposed C2 HAL are that (1) CBOE HAL operates on 
CBOE's Hybrid Trading System, which combines both open outcry and 
electronic trading, whereas the proposed C2 HAL would be entirely 
electronic (as C2 is an all-electronic exchange), and (2) the proposed 
C2 HAL will be open to all C2 TPHs.\9\ Despite these differences, the 
proposed C2 HAL would otherwise operate in an identical manner to the 
CBOE HAL, which has been approved

[[Page 1892]]

by the Commission.\10\ As such, C2 merely desires to adopt a mechanism 
that is nearly identical to one that already exists on CBOE. Permitting 
C2 to operate on an even playing field relative to other exchanges 
removes impediments to and to perfects the mechanism for a free and 
open market and a national market system.
---------------------------------------------------------------------------

    \9\ On CBOE HAL, only Market-Makers with an appointment in the 
relevant option class and Trading Permit Holders acting as agent for 
orders resting at the top of CBOE's book in the relevant option 
series opposite the order submitted to CBOE HAL may submit responses 
to the exposure message during the exposure period (unless CBOE 
determines, on a class-by-class basis, to allow all TPHs to submit 
responses to the exposure message).
    \10\ See Securities Exchange Act Release No. 60551 (August 20, 
2009), 74 FR 43196 (August 26, 2009) (SR-CBOE-2009-040).
---------------------------------------------------------------------------

    The Commission has always been clear that honoring better prices on 
other markets can be accomplished by matching those better prices.\11\ 
The proposed HAL and a ``step up'' process would allow C2 TPHs to do 
just that.
---------------------------------------------------------------------------

    \11\ For example, in adopting the Order Protection Rule (Rule 
611) under Regulation NMS in 2005, the Commission stated: ``The 
Order Protection Rule generally requires that trading centers match 
the best quoted prices, cancel orders without an execution, or route 
orders to the trading centers quoting the best prices.'' See 
Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 
37496 (June 29, 2005), at 37525 (S7-10-04).
---------------------------------------------------------------------------

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. The proposed C2 HAL is open to 
all market participants. The ``step-up'' feature of the proposed C2 HAL 
allows for price improvement. When such price improvement is achieved 
via this ``stepping up'' to meet (or beat) the best quoted price at 
another exchange, market participants are able to receive the best 
quoted price while still achieving execution on C2, the exchange to 
which they elected to send their orders.

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

    Because the foregoing proposed rule change does not:
    A. significantly affect the protection of investors or the public 
interest;
    B. impose any significant burden on competition; and
    C. become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to Section 19(b)(3)(A) of the Act \12\ and 
Rule 19b-4(f)(6) \13\ thereunder. At any time within 60 days of the 
filing of the 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.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

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-C2-2012-043 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-C2-2012-043. 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, 100 F Street NW., 
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-C2-2012-043, and should be 
submitted on or before January 30, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-00200 Filed 1-8-13; 8:45 am]
BILLING CODE 8011-01-P


