
[Federal Register Volume 78, Number 39 (Wednesday, February 27, 2013)]
[Notices]
[Pages 13389-13393]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-04544]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68964; File No. SR-C2-2013-008]


Self-Regulatory Organizations; C2 Options Exchange, Incorporated; 
Notice of Filing of a Proposed Rule Change, as Modified by Amendment 
No. 1 Thereto, Relating to Market-Maker Continuous Quoting Obligations

February 21, 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 February 8, 2013, 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 February 20, 2013, the Exchange submitted Amendment No. 1 
to the proposed rule change. 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 relating to Market-Maker 
continuous quoting obligations. The text of the proposed rule change is 
available on the Exchange's Web site (http://www.c2exchange.com/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 purpose of the proposed rule change is to add language to 
Exchange Rules 8.5 and 8.17 to exclude intra-day add-on series 
(``Intra-day Adds'') on the day during which such series are added for 
trading from Market-Makers' \3\ quoting obligations. Additionally, the 
proposed rule change clarifies in Rule 8.19 that Designated Primary 
Market-Makers (``DPMs), respectively (Market-Makers and DPMs are 
collectively referred to in this filing as ``Market-Makers'' unless the 
context provides otherwise) may still receive participation 
entitlements pursuant to those Rules in all Intra-day Adds on the day 
during which such series are added for trading in which they are 
quoting provided that Market-Maker meets all other entitlement 
requirements as set forth in the applicable rule.
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    \3\ See Exchange Rule 8.1 which defined Market-Makers as 
participants that ``have certain rights and bear certain 
responsibilities beyond those of other Participants.''
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    Intra-Adds are series that are be added to the Exchange system 
after the opening of the Exchange. These series

[[Page 13390]]

may be added throughout the trading day which differs from other newly 
added series which are only added prior to the beginning of trading. In 
the event a series is added after the open of trading on the Exchange, 
the Exchange, in real time, disseminates a message to the Exchange 
application program interfaces, which any Exchange Trading Permit 
Holder (``TPH'') can receive, that a new series has been listed. In 
addition, there is a corresponding product state change message 
disseminated when the new series moves from pre-opening rotation to an 
open state. Any Market-Maker with an appointment in the class in which 
the series was added is permitted to quote in the new series.
    Currently, Exchange Rules 8.5 and 8.17 impose certain obligations 
on Market-Makers and DPMs, respectively, including obligations to 
provide continuous quotes as follows \4\:
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    \4\ For purposes of Rules 8.5(a)(1), and 8.17(a)(1), 
``continuous'' means 90% of the time. If a technical failure of 
limitation of the System prevents a Market-Maker from maintaining 
timely and accurate quotes in a series, the duration of such failure 
will not be included in the 90% determination.
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     Rule 8.5 requires that Market-Makers provide a continuous 
two-sided market in 60% of the non-adjusted option series of the 
Market-Maker's appointed class that have a time to expiration of less 
than nine months;
     Rule 8.17(a)(1) requires DPMs to provide continuous quotes 
in at least the lesser of 99% or 100% minus one call-put pair \5\ of 
the non-adjusted option series of each class allocated to it.
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    \5\ See Rule 8.17(a)(1) which defines a ``call-up pair'' as 
``one call and one put that cover the same underlying instrument and 
have the same expiration date and exercise price.''
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    Exchange Rule 8.19 provides that DPMs generally will receive the 
participation entitlements in their assigned classes when quoting at 
the best price if they satisfy their obligations and other conditions 
set forth in the rules. Specifically, Rule 8.19 provides that the DPM 
participation entitlement will be 50% when there is one Market-Maker 
also quoting at the best price on the Exchange and 40% when there are 
two Market-Makers also quoting at the best price on the Exchange.\6\
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    \6\ The participation entitlements of DPMs are based on the 
number of contracts remaining after all public customer orders in 
the book at the best price on the Exchange have been satisfied. 
Additionally, a DPM may not be allocated a total quantity greater 
than the quantity for which the DPM is quoting at the best price. 
See Rules 8.19(b)(1)(B) and (C).
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    In order to comply with their continuous quoting obligations, 
Exchange Market-Makers have automated systems in place that use complex 
calculations based on a variety of market factors to compute quotes in 
their appointed classes and transmit these quotes to the Exchange's 
System (the ``System'').\7\ Their system computations also factor in 
their market risk models. Several Market-Makers have communicated to 
the Exchange that their trading systems do not automatically produce 
continuous quotes in Intra-day Adds on the trading day during which 
those series are added. They further indicated that the only way they 
could quote in these series on the trading day during which they were 
added would be to completely shut down and restart their systems. As a 
result, it is the Exchange's understanding that several Market-Makers 
do not currently quote Intra-day Adds during the trading day on which 
such series are added (although the Market-Makers generally do quote 
these series upon the opening of the next trading day, assuming those 
series are still listed on the Exchange). The required work on Market-
Makers' systems to quote Intra-day Adds, as further communicated to the 
Exchange, would be significant and costly.
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    \7\ See Rule 1.1 which defines ``System'' as the ``automated 
trading system used by the Exchange for the trading of options 
contracts.''
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    Intra-day Adds make it extremely difficult for Market-Makers to 
comply with their obligation to quote in a substantial percentage of 
series in their appointed classes during a trading day on which Intra-
day Adds are added in those classes. For example, if there are 1,000 
series listed in a DPM's appointed class and the DPM is quoting in 990 
of these series, the DPM is in compliance with the current minimum 
requirement to quote in 99% of series in its appointed class (assuming 
the DPM quotes in this number of series 90% of the trading day). 
However, if an Intra-day Add is added in the DPM's appointed class 
during the trading day, and the DPM's system does not automatically 
quote in this series, then the DPM would not comply, as it would be 
quoting in 990 of 1,001 series. This noncompliance would be compounded 
if more than one Intra-day Add is listed in a class during the same 
trading day. Further, if these Market-Makers turned their systems off 
to quote in Intra-day Adds on the trading day during which those series 
are added, then the Market-Makers could satisfy the standard to quote 
in a minimum percentage of series in their appointed classes but would 
then risk violating their obligation to quote for minimum percentage of 
the trading day as, theoretically, these Market-Makers might need to 
repeatedly turn their systems off to accommodate the Intra-day Adds.
    The Exchange believes that it would be impracticable, particularly 
given that a number of Market-Makers use their systems to quote on 
multiple markets and not solely on the Exchange, for Market-Makers to 
turn off their entire systems to accommodate quoting in Intra-day Adds 
on the day during which those series are added on the Exchange. In 
addition, the Exchange believes this would interfere with the 
continuity of its market and reduce liquidity, which would ultimately 
harm investors and contradicts the purpose of the Market-Maker 
continuous quoting obligation.
    This proposed rule change excludes Intra-day Adds from these 
continuous quoting obligations to address this conflict. Specifically, 
the Exchange is proposing to add text to Rules 8.5 and 8.17 to exclude 
Intra-day Adds on the day during which such series are added for 
trading from Market-Makers' quoting obligations. Based on 
communications from Market-Makers, the Exchange is concerned that 
Market-Makers may withdraw from the DPM program and that other market 
participants may be discouraged from requesting Market-Maker 
appointments or applying to the DPM program if they are required to 
quote Intra-day Adds on the trading day during which those series are 
added. The Exchange believes that withdrawals from, and reduced 
applications for, Market-Maker appointments would negatively impact 
liquidity and volume on the Exchange in those classes. The Exchange 
believes that providing Market-Makers with relief from their quoting 
obligations with respect to Intra-day Adds on the trading day during 
which they are added for trading will prevent these withdrawals and 
encourage market participants to apply for or continue their Market-
Maker class appointments.
    The Exchange does not believe this relief will result in any 
material decrease in liquidity. As mentioned above, it is the 
Exchange's understanding that several Market-Makers currently do not 
quote Intra-day Adds on the trading day during which they are added, so 
the Exchange believes this proposed relief would result in a minimal 
reduction, if any, in liquidity in these series. These Market-Makers' 
systems would add these series the next trading day, so if there is any 
slight reduction in liquidity in these few series, it would only last 
for a short period of time (until the following trading day). 
Additionally, this potential small reduction in liquidity would be far 
outweighed by the reduction in liquidity that the Exchange believes

[[Page 13391]]

would result from the withdrawals from and reductions in applications 
for Market-Maker appointments if the Exchange did not provide this 
relief.
    The current quoting obligation in Intra-day Adds is a minor part of 
a Market-Maker's overall obligations. Specifically, Intra-day Adds 
represent only approximately 0.10% of the number of series listed on 
the Exchange, so Market-Makers will still be obligated to provide 
continuous two-sided markets in a substantial number of series in their 
appointed classes.\8\ Intra-day Adds are rarely added on the Exchange, 
so Market-Makers will still be obligated to provide continuous two-
sided markets in a substantial number of series in their appointed 
classes. Further, Market-Makers would still be obligated to quote the 
Intra-day Adds the following day, and, thus, their quoting relief is 
very short-lived and could, potentially, only last a few hours or until 
the opening of trading the following day. The Exchange believes that 
the burden of continuous quoting in this extremely small number of 
series is counter to the Exchange's efforts to continuously increase 
liquidity in its listed option classes.
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    \8\ From January 1, 2013 through February 19, 2013, there have 
been 37 Intra-day Adds listed on the Exchange, and, in that time 
period, there have been a total of 35,502 series added on the 
Exchange. Thus, the Intra-day Adds represent 0.10%.
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    The Exchange believes the proposed rule change will continue to 
ensure that Market-Makers create a fair and orderly market in the 
option classes to which they are assigned, as it does not absolve 
Market-Makers from providing continuous quotes in a significant 
percentage of series of each class for a substantial portion of the 
trading day. Market-Makers must engage in activities that constitute a 
course of dealings reasonably calculated to contribute to the 
maintenance of a fair and orderly market, including (1) competing with 
other Market-Makers to improve markets in all series of options classes 
comprising their appointments, (2) making markets that, absent changed 
market conditions, will be honored in accordance with firm quote rules, 
and (3) updating market quotations in response to changed market 
condition in their appointed options classes and to assure that any 
market quote it causes to be disseminated is accurate.\9\
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    \9\ See Rule 8.5(a).
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    The relief proposed in this filing is mitigated by a Market-Maker's 
other obligations. For example, the proposed rule change would not 
excuse a Market-Maker from its obligation to submit a single quote or 
maintain continuous quotes in one or more series of a class to which 
the Maker-Maker is appointed when called upon by an Exchange official 
if, in the judgment of such official, it is necessary to do so in the 
interest of maintaining a fair and orderly market.\10\
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    \10\ See Rule 8.5(d).
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    The proposed rule change also clarifies in the Exchange Rules that 
while Market-Makers are not required to provide continuous quotes in 
Intra-day Adds on the day during which such series are added for 
trading, a Market-Maker may still receive a participation entitlement 
in such series if it elects to quote in that series and otherwise 
satisfies the other entitlement requirements set forth in accordance 
with the Rules. Specifically, the Exchange is proposing to add language 
to Rule 8.19 clearly stating that DPMs may still receive participation 
entitlements pursuant to those Rules in all Intra-day Adds on the day 
during which such series are added for trading in which they are 
quoting provided that Market-Maker meets all other entitlement 
requirements as set forth in Rule 8.19(b).
    Market-Makers already receive participation entitlements in series 
they are not required to quote. For example, a DPM is currently 
required to provide continuous quotes in at least 99% of the non-
adjusted option series or 100% of the non-adjusted series minus one 
call-put pair of each option class allocated to it for 90% of the 
trading day.\11\ If the DPM elects to quote in 100% of the non-adjusted 
series in an option class allocated to it, it will receive a 
participation entitlement in all of those series when quoting at the 
best price, including the 1% of the series in which it is not required 
to quote in. Thus, under the proposed rule change, the market would 
continue to function as it does now. The Exchange believes this benefit 
is appropriate, as it incentivizes Market-Makers to quote in as many 
series as possible in their appointed classes, even those series in 
which the Rules do not require them to continuously quote.
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    \11\ See Rule 8.17(a).
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    The Exchange does not believe that the proposed rule change would 
adversely affect the quality of the Exchange's markets or lead to a 
material decrease in liquidity. Rather, the Exchange believes that its 
current market structure, with its high rate of participation by 
Market-Makers, permits the proposed rule change without fear of losing 
liquidity. The Exchange also believes that market-making activity and 
liquidity could materially decrease without the proposed rule change to 
exclude Intra-day Adds from Market-Maker continuous quoting obligations 
on the trading day during which they are added for trading. The 
Exchange believes that this proposed relief will encourage Market-
Makers to continue appointments and other TPHs to request Market-Maker 
appointments, and, as a result, expand liquidity in options classes 
listed on the Exchange to the benefit of the Exchange and its TPHs and 
public customers. The Exchange believes that its Market-Makers would be 
disadvantaged without this proposed relief, and other TPHs and public 
customers would also be disadvantaged if Market-Makers withdrew from 
appointments in options classes, resulting in reduced liquidity and 
volume in these classes. Additionally, the Exchange believes that the 
proposed rule change to clarify that Market-Makers may receive 
participation entitlements in Intraday Adds on the day during which 
such series are added for trading if it satisfies the other entitlement 
requirements as set forth in Exchange Rules, even if the Rules do not 
require the Market-Makers to continuously quote in those series, will 
incent Market-Makers to quote in series in which they are not required 
to quote, which may increase liquidity in their appointed classes.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the 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 prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitation 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest. Additionally, 
the Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \14\ requirement that the rules of an exchange not be 
designed

[[Page 13392]]

to permit unfair discrimination between customers, issuers, brokers, or 
dealers.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
    \14\ Id.
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    In particular, the Exchange believes the proposed rule change to 
exclude Intra-day Adds during the day which such series are added for 
trading from Market-Makers' quoting obligations promotes just and 
equitable principles of trade because it promotes liquidity and 
continuity in the marketplace and would prevent interruptions in 
quoting or reduced liquidity that may otherwise result. The Exchange 
also believes that the proposed rule change supports the quality of the 
Exchange's markets because it does not significantly change the current 
quoting obligations of Market-Makers. Market-Makers must still provide 
continuous quotes for a significant part of the trading day in a 
substantial number of series of each appointed class. Even if a Market-
Maker does not quote Intra-day Adds on the trading day during which 
they are added, this would be offset by the Market-Maker's continued 
other obligations. The proposed relief is further offset by a Market-
Maker's obligation to quote in these series beginning the next trading 
day. Accordingly, the proposed rule change supports the quality of the 
Exchange's trading markets by helping to ensure that Market-Makers will 
continue to be obligated to quote in Intra-day Adds if, and when, the 
need arises and on an ongoing basis following the trading day during 
which the series are added. The Exchange believes this proposed change 
is reasonable and is offset by Market-Makers' continued 
responsibilities to provide significant liquidity to the market to the 
benefit of market participants.
    The Exchange believes this proposed rule change, on balance, is a 
minor change and should not impact the quality of the Exchange's 
trading markets. Among other things, Intra-day Adds represent an 
insignificant percentage of series listed on the Exchange each day. The 
Exchange further believes that the potential small reduction in 
liquidity in Intra-day Adds that may result from the proposed relief 
would be far outweighed by the significant reduction in liquidity in 
appointed classes that the Exchange believes could occur from 
withdrawals from and reductions in applications for Market-Maker 
appointments without the proposed relief. The proposed rule change also 
removes impediments to and allows for a free and open market, while 
protecting investors, by promoting additional transparency regarding 
Market-Makers' obligations and benefits in the Exchange Rules. In 
addition, the Exchange believes that the proposed rule change is 
designed to not permit unfair discrimination among Market-Makers, as 
the proposed rule change provides the proposed relief for all Market-
Makers.
    The proposed rule change to clarify that Market-Makers may receive 
participation entitlements in Intra-day Adds in their appointed classes 
in which they are quoting, even though they are not required to quote, 
if the other requirements set forth in the Rules are satisfied, further 
supports the quality of the Exchange's trading markets because it 
encourages Market-Makers to quote in as many series as possible, which 
ultimately benefits all investors. This benefit is offset by the 
Market-Makers' continued quoting obligations and the fact that their 
quotes in these ``non-required'' series must still satisfy all of the 
Market-Makers' other obligations under the Rules. The Exchange also 
believes that this proposed change is consistent with its current 
practice, pursuant to which Market-Makers receive participation 
entitlements in additional series in which they elect to quote above 
the minimum percentage of series in which they are required to 
continuously quote under the Rules.
    For the foregoing reasons, the Exchange believes that the proposed 
rule change is appropriate and consistent with the Act.

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 Exchange does not believe 
the proposed rule change to exclude Intra-day Adds during the day which 
such series are added for trading from Market-Makers' quoting 
obligations will cause any unnecessary burden on intramarket 
competition because it provides the same relief to a group of similarly 
situated market participants--Market-Makers. The Exchange does not 
believe the proposed change will cause any unnecessary burden on 
intermarket competition because Intra-day Adds are a very small portion 
of series on the Exchange. Exchange further believes that the potential 
small reduction in liquidity in Intra-day Adds that may result from the 
proposed relief would be far outweighed by the significant reduction in 
liquidity in appointed classes that the Exchange believes could occur 
from withdrawals from and reductions in applications for Market-Maker 
appointments without the proposed relief. In addition, the Exchange 
believes that the proposed rule change will in fact relieve any burden 
on, or otherwise promote, competition. The Exchange believes that 
excluding Intra-day Adds on the day during which they are added for 
trading from Market-Maker obligations will promote trading activity on 
the Exchange to the benefit of the Exchange, its TPHs, and market 
participants.
    The Exchange does not believe the proposed rule change to clarify 
that Market-Makers may receive participation entitlements in Intra-day 
Adds in their appointed classes in which they are quoting, even though 
they are not required to quote, if the other requirements set forth in 
the Rules are satisfied, will cause any unnecessary burden on 
intramarket competition because it too provides the same relief to a 
group of similarly situated market participants--Market-Makers. The 
Exchange does not believe the proposed change will cause any 
unnecessary burden on intermarket competition because Market-Makers are 
currently entitled to receive participation entitlements on series they 
are not obligated to quote in under the Rules. In addition, the 
Exchange believes that the proposed rule change will in fact relieve 
any burden on, or otherwise promote, competition. The Exchange believes 
allowing Market-Makers to receive a participation entitlements in 
Intra-day Adds will promote trading activity on the Exchange because it 
will incentivize Market-Makers to quote in such series though not 
obligated to do so to the benefit of the Exchange, its TPHs, and market 
participants.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange 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.

[[Page 13393]]

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-C2-2013-008 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-C2-2013-008. 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 the 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-C2-2013-008, and should be 
submitted on or before March 20, 2013.

    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. 2013-04544 Filed 2-26-13; 8:45 am]
BILLING CODE 8011-01-P


