
[Federal Register Volume 78, Number 153 (Thursday, August 8, 2013)]
[Notices]
[Pages 48510-48513]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-19149]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70102; File No. SR-C2-2013-028]


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

August 2, 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 July 25, 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 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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

    The Exchange proposes to modify its rules to address certain option 
order handling procedures on the Exchange in connection with the 
implementation of the market wide equity Plan to Address Extraordinary 
Market Volatility (the ``Plan''). The text of the proposed rule change 
is available at the Exchange's Office of the Secretary, on the 
Exchange's Web site at http://www.c2exchange.com/Legal/, at the 
Commission's Public Reference Room, and on the Commission's Web site at 
http://www.sec.gov.

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.

[[Page 48511]]

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    In an attempt to address extraordinary market volatility in NMS 
Stock, and, in particular, events like the severe volatility on May 6, 
2010, the Exchange, in conjunction with the other national securities 
exchanges and the Financial Industry Regulatory Authority, Inc. 
(collectively, ``Participants'') drafted the Plan pursuant to Rule 608 
of Regulation NMS and under the Securities Exchange Act of 1934 (the 
``Act'').\3\ The Plan is primarily designed to, among other things, 
address extraordinary market volatility in NMS stocks, protect 
investors, and promote fair and orderly markets. The Plan provides for 
market-wide limit up-limit down requirements that prevent trades in 
individual NMS Stocks from occurring outside of specified price bands, 
as defined in Section I(N) of the Plan. These requirements are coupled 
with trading pauses, as defined in Section I(Y) of the Plan, to 
accommodate more fundamental price moves (as opposed to erroneous 
trades or monetary gaps of liquidity).
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release No. 64547 (May 25, 
2011), 76 FR 31647 (June 1, 2011) (File No. 4-631).
---------------------------------------------------------------------------

    The Plan was filed on April 5, 2011 by the Participants for 
publication and comment.\4\ The Participants requested the Commission 
approve the Plan as a one-year pilot. On May 24, 2012, the Participants 
filed an amendment to the Plan which clarified, among other things, the 
calculation of the reference price, as defined in Section I(T) of the 
Plan, potential for order type exemption, and the creation of an 
Advisory Committee.\5\ On May 31, 2012, the Commission approved the 
Plan, as amended, on a one-year pilot basis.\6\ The Plan was 
implemented on April 8, 2013.
---------------------------------------------------------------------------

    \4\ Id.
    \5\ See Securities and Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631).
    \6\ See Securities and Exchange Act Release No. 67091 (May 31, 
2012) 77 FR 33498 (June 6, 2012).
---------------------------------------------------------------------------

    Though the Plan was primarily designed for equity markets, the 
Exchange believed it would impact the options markets as well. Thus, 
the Exchange filed rule changes to amend the Exchange rules to ensure 
the option markets are not compromised as a result of the Plan's 
implementation.\7\ The Exchange is proposing to amend these rules to 
clarify how the openings will operate on the Exchange in the event of a 
limit up-limit down state.
---------------------------------------------------------------------------

    \7\ See Securities and Exchange Act Release No. 34-69345 (April 
8, 2013), 78 FR 21985 (April 11, 2013) (SR-C2-2013-013).
---------------------------------------------------------------------------

    The current rule 6.11, as recently amended, states that is an 
underlying security for an option class enters into a limit up-limit 
down state when the class moves to opening rotation, ``all market 
orders in the system will be cancelled.''\8\ The Exchange is proposing 
to: (1) Correct the reference to Exchange Rule 6.3A, (2) add an 
exception to this general rule, and (3) provide greater clarity on the 
effect of a limit up-limit down state on an underlying security after 
the Rotation Period has begun.
---------------------------------------------------------------------------

    \8\ See Exchange Rule 6.11.03.
---------------------------------------------------------------------------

    First, the Exchange is proposing to clarify an incorrect reference 
in Rule 6.11.03 to Rule 6.3A. The correct reference should be made to 
Rule 6.39 which was a recently added rule to address the Plan. The 
Exchange believes that by updating the reference, Permit Holders will 
have greater clarity of which rule is applicable.
    Next the Exchange is proposing to make an exception to the general 
rule that all market orders will be cancelled during the Rotation 
Period if the underlying security is in a limit up-limit down state. 
The Exchange is proposing to add language stating that the type of 
order described in Exchange Rule 6.12(h), ``No-Bid Series'' orders, 
from a previous day will not cancelled. The Exchange is proposing to 
allow such market orders to remain in the Exchange Book because these 
essentially act as limit orders at the minimum increment. Cancelling 
such orders could potentially cause such orders to lose their priority 
with respect to other market orders in the Exchange Book. The Exchange 
believes that though these orders are essentially treated as limit 
orders, because they may have a ``market'' distinction, alerting Permit 
Holders of the behavior of such orders when the underlying security 
enters a limit up-limit down state will provide more clarity. In 
addition, this behavior is consistent with how limit orders are treated 
in the same situation.
    Finally, the Exchange is proposing to add further clarity to the 
recently amended rule to clarify that if a limit up-limit down state 
commences after the Rotation Period has begun for a class of options, 
the Rotation Period will continue normally. More specifically, the 
Exchange is proposing to add language to state that market and limit 
orders will continue through the Rotation Period as they would if there 
was not a limit up-limit down state. Once the Rotation Period has begun 
for a class of options, due to how the Exchange System operates, the 
process will not be interrupted to modify the order handling mid-
process.
    Market orders will continue to process even though they are 
normally returned during a limit up-limit down state,\9\ limit orders 
will process normally,\10\ and the Exchange will open normally if there 
is a presence of Opening Conditions.\11\ Market orders, though normally 
returned during a limit up-limit down state to avoid executions at 
unfavorable or unreliable prices, do not face the same risks when they 
are part of the opening process. This is because preopening orders are 
matched with each other and with other interest during the Rotation 
Period. Thus, market orders will trade at the calculated opening price. 
Preopening limit orders will also be filled at the opening price and 
cannot be filled through their limit prices.
---------------------------------------------------------------------------

    \9\ See Exchange Rule 6.10(a) which describes how market orders 
process.
    \10\ See Exchange Rule 6.10(b) which describes how limit orders 
process.
    \11\ See Exchange Rule 6.11(f) which describes how the Exchange 
will open in the presence of Opening Conditions. If a limit up-limit 
down state commences after the Rotation Period has begun for a class 
of options, options to buy and sell will be paired to the extent 
possible. If another market is displaying a more favorable price, 
then the Exchange will open as described in 6.11(f). Consistent with 
Rule 6.11(f), the Exchange will link any unmatched portion of the 
market order to an away trading venue. Any portion of a market order 
that is unfilled and returned to the Exchange will be cancelled. 
Thus, markets orders will not be filled at an unreliable price 
because they will either be paired with other resting orders at the 
open or linked to an away trading venue displaying a more favorable 
price. The Exchange believes this is consistent with the treatment 
of market orders and ensures they will not be given an unreliable 
price despite the limit up-limit down state. Additionally, because 
limit orders have a limit price, these orders will also not fill at 
an unreliable price.
---------------------------------------------------------------------------

    The Exchange believes this clarity is necessary to ensure Permit 
Holders are fully aware of special order handling during limit up-limit 
down states. Though the rule currently specifies what happens to orders 
on the Exchange if the limit up-limit down state commences prior to the 
Rotation Period beginning for a class of options, the Exchange believes 
it is necessary to additionally state what would happen if the Rotation 
Period had already begun and the limit up-limit down state triggers 
during the time of that process. The Exchange believes that including 
pre-opening market order interest in the Rotation Period will enhance 
the liquidity available during the rotation, and that the nature of the 
opening match process will protect market orders against anomalous 
opening prices that could otherwise be caused by market conditions 
associated with a limit-up limit-down state. This will also

[[Page 48512]]

help to ensure the options markets remain just and equitable with the 
implementation of the Plan.
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 facilitating 
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 to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
    \14\ Id.
---------------------------------------------------------------------------

    In particular, the Exchange believes the proposed changes will be 
in accordance with the Act as they are merely intended to ensure the 
options markets will continue to remain just and equitable with the 
implementation of the Plan which is intended to reduce the negative 
impacts of a sudden, unanticipated price movement in NMS stocks. The 
proposed rule changes would promote this intention in the options 
markets while protecting investors participating there. More 
specifically, the currently proposed changes will correct and clarify 
current Exchange rules promoting the interest of investors. Finally, 
creating a more orderly market will promote just and equitable 
principles of trade by allowing investors to feel more secure in their 
participation in the national market system after the implementation of 
the Plan. In addition, the Exchange is proposing to provide a more 
robust rule text by clarifying what occurs if a limit up-limit down 
states initiates after the beginning of the Exchange's opening 
rotation. The Exchange believes that not cancelling the pre-opening 
interest will ensure investors can execute more interest despite the 
change in the market conditions after the opening process has begun. 
This will also help to ensure the options markets remain just and 
equitable with the implementation of the Plan.

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. Specifically, the Exchange 
believes the proposed changes will not impose any burden on intramarket 
competition because it applies to all Permit Holders equally. The 
Exchange does not believe the proposed changes will impose any burden 
on intermarket competition as the changes are merely being made to 
protect investors with the implementation of the Plan. In addition, the 
proposed changes will provide certainty of treatment and execution of 
options orders during periods of extraordinary market volatility.

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 \15\ and Rule 19b-4(f)(6) thereunder.\16\ 
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.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \16\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

    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. If the Commission 
takes such action, the Commission shall institute proceedings under 
Section 19(b)(2)(B) \17\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

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-C2-2013-028 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-C2-2013-028. 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 Section, 100 F Street 
NE., Washington, DC 20549-1090 on official business days between the 
hours of 10:00 a.m. and 3:00 p.m. Copies of the filing will also 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

[[Page 48513]]

should refer to File Number SR-C2-2013-028 and should be submitted on 
or before August 29, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
---------------------------------------------------------------------------

    \18\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-19149 Filed 8-7-13; 8:45 am]
BILLING CODE 8011-01-P


