
[Federal Register Volume 78, Number 72 (Monday, April 15, 2013)]
[Notices]
[Pages 22360-22361]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-08725]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69350; File No. SR-C2-2013-008]


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

April 9, 2013.

I. Introduction

    On February 8, 2013, C2 Options Exchange, Incorporated (``C2'' or 
``Exchange'') 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 to amend C2's rules relating to Market-Maker \3\ 
continuous quoting obligations. The proposed rule change, as modified 
by Amendment No. 1, was published for comment in the Federal Register 
on February 27, 2013.\4\ The Commission did not receive any comment 
letters regarding the proposal. This order approves the proposed rule 
change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ C2 Rule 1.1 defines ``Market-Maker'' as ``a Participant 
registered with the Exchange for the purpose of making markets in 
options contracts traded on the Exchange and that is vested with the 
rights and responsibilities specified in Chapter 8 of [the C2] 
Rules.''
    \4\ See Securities Exchange Act Release No. 68964 (February 21, 
2013), 78 FR 13389 (``Notice'').
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II. Description of the Proposal

    The Exchange proposes to amend its rules to exclude intra-day add-
on series (``Intra-day Adds'') from Market-Makers' continuous quoting 
obligations on the day during which such series are added for 
trading.\5\ In addition, the Exchange proposes to permit Designated 
Primary Market-Makers (``DPMs'') \6\ to receive participation 
entitlements in all Intra-day Adds on the day during which such series 
are added for trading provided that the DPM elects to quote in such 
series and otherwise satisfies the requirements set forth in Rule 
8.19(b).\7\
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    \5\ See id. at 13389. According to the Exchange, Intra-day Adds 
are series that are added to the Exchange system after the opening 
of the Exchange, rather than prior to the beginning of trading. See 
id. at 13389-90.
    \6\ C2 Rule 1.1 defines ``DPM'' as ``a Participant organization 
that is approved by the Exchange to function in allocated securities 
as a Market-Maker (as defined in Rule 1.1) and is subject to the 
obligations under Rule 8.17 or as otherwise provided under the 
Rules.''
    \7\ See Notice, supra note 4, 78 FR at 13389.
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III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange.\8\ 
In particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\9\ which requires, among 
other things, that the rules of a national securities exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, 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.
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    \8\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \9\ 15 U.S.C. 78f(b)(5).
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    According to C2, 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 and that the only way they could quote in these 
series in the trading day during which they were added would be to shut 
down and restart their systems.\10\ Further, the Exchange states that 
Market-Makers have indicated that the work that would be required to 
modify their systems to permit quoting in Intra-day Adds would be 
significant and costly.\11\ In addition, the Exchange indicates that 
Intra-day Adds represent only approximately 0.10% of the average number 
of series listed on the Exchange each trading day, and that Market-
Makers will still be obligated to provide continuous two-sided markets 
in a substantial number of series in their appointed classes.\12\
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    \10\ See Notice, supra note 4, 78 FR at 13390.
    \11\ See id.
    \12\ See id. at 13391.
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    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.\13\
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    \13\ See id. at 13390.
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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.\14\
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    \14\ See id. at 13391.
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    The Exchange believes that this proposed relief will encourage 
Market-Makers to continue appointments and other Trading Permit Holders 
(``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 that 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.\15\
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    \15\ See id.
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    In addition, the Exchange believes that the proposed rule change to 
clarify that Market-Makers may receive participation entitlements in 
Intra-day Adds on the day during which such series are added for 
trading if they satisfy 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 incentivize Market-Makers 
to quote in series in

[[Page 22361]]

which they are not required to quote, which may increase liquidity in 
their appointed classes.\16\
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    \16\ See id.
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    The Exchange's proposal to exclude Intra-day Adds from Market-
Makers' continuous electronic quoting obligations on the day during 
which such series are added for trading would not affect Market-Makers' 
other obligations. For example, Market-Makers will still be required to 
engage in activities that constitute a course of dealings reasonably 
calculated to contribute to the maintenance of a fair and orderly 
market, including (1) to compete with other Market-Makers to improve 
markets in all series of options classes comprising their appointments; 
(2) to make markets that, absent changed market conditions, will be 
honored in accordance with firm quote rules; and (3) to update market 
quotations in response to changed market conditions in their appointed 
options classes and to assure that any market quote they cause to be 
disseminated is accurate.\17\ In addition, the proposed rule change 
would not excuse a Market-Maker from its obligation to submit a single 
quote or to maintain continuous quotes in one or more series of a class 
to which the Market-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.\18\
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    \17\ See C2 Rule 8.5(a).
    \18\ See C2 Rule 8.5(d).
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    The Commission notes that the Exchange indicates that Market-Makers 
would be required to shut down and restart their systems, or make 
costly systems changes, in order to quote in Intra-day Adds. A 
requirement for Market-Makers to maintain continuous electronic quotes 
in Intra-day Adds, which represents a minor part of Market-Makers' 
overall obligations, may not justify the system resources, or the 
disruption to trading, the Exchange states would be necessary to 
accommodate quoting in Intra-day Adds. Accordingly, the Commission 
believes that the Exchange's proposal concerning Intra-day Adds would 
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.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-C2-2013-008), as modified by 
Amendment No. 1, is approved.
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    \19\ 15 U.S.C. 78s(b)(2).
    \20\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-08725 Filed 4-12-13; 8:45 am]
BILLING CODE 8011-01-P


