
[Federal Register Volume 79, Number 129 (Monday, July 7, 2014)]
[Notices]
[Pages 38345-38349]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-15720]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72499; File No. SR-C2-2014-012]


Self-Regulatory Organizations; C2 Options Exchange, Incorporated; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
Relating to the Exchange's Quote Risk Monitor Mechanism

June 30, 2014.
    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 June 20, 2014, 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 Quote Risk Monitor Mechanism 
rule. The text of the proposed rule change is provided below.

(additions are italicized; deletions are [bracketed])
* * * * *

[[Page 38346]]

C2 Options Exchange, Incorporated

Rules

* * * * *

Rule 8.12. Quote Risk Monitor Mechanism

    Each Market-Maker who is obligated to provide and maintain 
continuous electronic quotes pursuant to Rule 8.5, or the 
Participant organization with which the Market-Maker is associated, 
may establish parameters by which the Exchange will activate the 
Quote Risk Monitor (``QRM'') Mechanism. The functionality of the QRM 
Mechanism that is available to Market-Makers [that use the QRM 
Mechanism shall specify] includes, for each such option class in 
which the Market-Maker is engaged in trading[,]: (i) A maximum 
number of contracts for such option class (the ``Contract Limit'') 
and a rolling time period in milliseconds within which such Contract 
Limit is to be measured (the ``Measurement Interval'')[.]; (ii) a 
maximum cumulative percentage that the Market-Maker is willing to 
trade (the ``Cumulative Percentage Limit''), where the cumulative 
percentage is the sum of the percentages of the original quoted size 
of each size of each series that traded, and a Measurement Interval; 
and (iii) the maximum number of series for which either side of the 
quote is fully traded (the ``Number of Series Fully Traded'') and a 
Measurement Interval. This functionality is optional and Market-
Makers are not required to set parameters for the aforementioned QRM 
Mechanism functions.
    When the Exchange determines that the Market-Maker has traded 
[more than] at least the Contract Limit or Cumulative Percentage 
Limit for such option class during any rolling Measurement Interval, 
or has traded at least the Number of Series Fully Traded on an 
option class during any rolling Measurement Interval, the QRM 
Mechanism shall cancel all electronic quotes [that are] being 
disseminated with respect to that Market-Maker in that option class 
and any other classes with the same underlying security until the 
Market-Maker refreshes those electronic quotes. Such action by the 
Exchange is referred to herein as a QRM Incident. Once the QRM 
Mechanism is triggered, all counters that determine whether the QRM 
Mechanism is triggered and a QRM Incident occurs will be reset for 
all classes for which quotes were canceled for all parties for whom 
such quotes were canceled.
    A Market-Maker or a Participant organization may also specify a 
maximum number of QRM Incidents on an Exchange-wide basis. When the 
Exchange determines that such Market-Maker or Participant 
organization has reached its QRM Incident limit during any rolling 
Measurement Interval, the QRM Mechanism shall cancel all of the 
Market-Maker's or Participant organization's electronic quotes and 
Market-Maker orders resting in the Book in all option classes on the 
Exchange and prevent the Market-Maker or Participant organization 
from sending additional quotes or orders to the Exchange until the 
Market-Maker or Participant organization reactivates its ability to 
send quotes or orders in a manner prescribed by the Exchange. Once 
the QRM Mechanism is triggered and quotes and orders are cancelled, 
all counters that determine whether the QRM Mechanism is triggered 
and a QRM Incident occurs will be reset for all parties for whom the 
QRM Mechanism was triggered and for all classes for which quotes and 
orders were canceled. If the Exchange cancels all of the Market-
Maker's or Participant organization's electronic quotes and Market-
Maker orders resting in the Book, and the Market-Maker or 
Participant organization does not reactivate its ability to send 
quotes or orders, the block will be in effect only for the 
organization does not reactivate its ability to send quotes or 
orders, the block will be in effect only for the trading day that 
the Market-Maker or Participant organization reached its QRM 
Incident limit. Market-Makers and Participant organizations are not 
required to set parameters for the Exchange-wide QRM.
* * * * *

    The text of the proposed rule change is also available on the 
Exchange's Web site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, 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 operation of the Exchange's Quote Risk Monitor (``QRM'') 
Mechanism is codified in Rule 8.12. The purpose of this proposed rule 
change is to add three new functions to the QRM Mechanism to help 
Market-Makers and Participant organizations control the risk of 
multiple, nearly simultaneous executions across related option series. 
The use of the new functions is voluntary. The proposed rule change 
also makes clear that the Participant organization with which a Market-
Maker is associated (as well as the individual Market-Maker) may 
establish parameters by which the Exchange will activate the QRM 
Mechanism for the Market-Maker (the current rule text only explicitly 
permits Market-Makers to establish such parameters). The Exchange also 
proposes to make some changes to the Rule 8.12 text to make such rule 
more readable in conjunction with the other changes proposed herein.\3\
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    \3\ Specifically, the Exchange proposes to amend the beginning 
of the second sentence of Rule 8.12, which reads ``Market-Makers 
that use the QRM Mechanism shall specify, for each such option class 
in which the Market-Maker is engaged in trading, a maximum number of 
contracts for such option class (the ``Contract Limit'') and a 
rolling time period in seconds within which such Contract Limit is 
to be measured (the ``Measurement Interval'')'' to read: ``The 
functionality of the QRM Mechanism that is available to Market-
Makers includes, for each such option class in which the Market-
Maker is engaged in trading: (i) A maximum number of contracts for 
such option class (the ``Contract Limit'') and a rolling time period 
in milliseconds within which such Contract Limit is to be measured 
(the ``Measurement Interval'').'' The Exchange's systems will allow 
Market-Makers to set the Measurement Interval in milliseconds (as 
opposed to seconds), so the Exchange proposes to provide this more 
precise option to Market-Makers.
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    The first new function available to Market-Makers allows each 
Market-Maker the ability to specify a maximum cumulative percentage 
that the Market-Maker is willing to trade (the ``Cumulative Percentage 
Limit''). Under the proposal, the cumulative percentage is the sum of 
the percentages of the original quoted size of each side of each series 
within a class that traded, and a rolling time period in milliseconds 
within which such Cumulative Percentage Limit is to be measured (the 
``Measurement Interval''). When the QRM Mechanism determines that the 
Market-Maker has traded at least the Cumulative Percentage Limit for 
any option class during any rolling Measurement Interval, the QRM 
Mechanism will automatically cancel all of the electronic quotes being 
disseminated with respect to that Market-Maker in that option class and 
any other classes with the same underlying security until the Market-
Maker refreshes those electronic quotes.\4\
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    \4\ The Exchange also proposes to delete the words ``more than'' 
from the specification that ``When the Exchange determines that the 
Market-Maker has traded more than the Contract Limit or Cumulative 
Percentage Limit for such option class during any rolling 
Measurement Interval, or has traded at least the Number of Series 
Fully Traded during any rolling Measurement Interval, the QRM 
Mechanism shall cancel all electronic quotes that are being 
disseminated with respect to that Market-Maker in that option class 
and any other classes with the same underlying security until the 
Market-Maker refreshes those electronic quotes'' and replace ``more 
than'' with the words ``at least.'' This is because the QRM 
Mechanism is triggered (and quotes are canceled) at the moment when 
the Market-Maker trades the Contract Limit or Cumulative Percentage 
Limit (as opposed to when the Market-Maker has traded more than 
Contract Limit or Cumulative Percentage Limit). The Exchange also 
proposes to delete the words ``that are'' from the above statement 
for reasons of grammatical simplicity.

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[[Page 38347]]

    By way of example, assume a Market-Maker is quoting the following 
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series in a class:

 Series A Quote: 1.00 - 1.20 50 x 50
 Series B Quote: 2.00 - 2.20 75 x 75
 Series C Quote: 3.00 - 3.20 100 x 100

    If the Cumulative Percentage Limit is set at 150% for the Market-
Maker and an order to buy 40 contracts of Series A is received, the 
series percentage would be 80% (i.e., 40/50). The cumulative percentage 
would also be 80%. If a second order to sell 25 contracts of Series B 
is received, the series percentage would be 33% (i.e., 25/75). The 
cumulative percentage would now be 113% (i.e., 80 + 33 = 113). If a 
third order to buy 70 contracts of Series C is received, the series 
percentage would be 70% (i.e., 70/100). The cumulative percentage would 
now be 183% (i.e., 113 + 70 = 183). Since 183% exceeds the Cumulative 
Percentage Limit of 150%, the Market-Maker's quotes in the class, and 
any class with the same underlying security, would be cancelled. This 
cancellation, however, would not occur until after execution of the 
third order. Due to firm quote obligations rules, the QRM Mechanism 
will not cancel quotes (and in the case of an Exchange-wide QRM 
Incident, orders) until after the execution of the order that caused 
the triggering of the QRM Mechanism. Note that percentages are added to 
one another, regardless of the denominator.
    Percentages are also calculated based on the original quote size, 
not the remaining quote size. Using the quotes set forth above as an 
example, if an order to buy 40 contracts of Series A is received, the 
series percentage would be 80% (i.e., 40/50). The cumulative percentage 
would also be 80%. If a second order to sell 25 contracts of Series B 
is received, the series percentage would be 33% (i.e., 25/75). The 
cumulative percentage would then be 113% (i.e., 80 + 33 = 113). If a 
third order to buy 10 contracts of Series A is received, the series 
percentage would be 20% (i.e., 10/50). The cumulative percentage would 
then be 133% (i.e., 113 + 20 = 133). If a fourth order to buy 70 
contracts of Series C is received, the series percentage would be 70% 
(i.e., 70/100). The cumulative percentage would then be 203% (i.e., 133 
+ 70 = 203).
    The proposed rule change adds a second new function to the QRM 
Mechanism that would allow each Market-Maker to specify the maximum 
number of series for which either side of the quote is fully traded 
(the ``Number of Series Fully Traded'') and a Measurement Interval. 
When the QRM Mechanism determines that the Market-Maker has traded at 
least the Number of Series Fully Traded for any option class during any 
rolling Measurement Interval, the QRM Mechanism will automatically 
cancel all of the Market-Maker's electronic quotes being disseminated 
in that option class and any other classes with the same underlying 
security until the Market-Maker refreshes those electronic quotes.
    To illustrate this functionality, assume that a Market-Maker is 
quoting the following series in a class:

 Series A Quote: 1.00 - 1.20 50 x 50
 Series B Quote: 2.00 - 2.20 75 x 75
 Series C Quote: 3.00 - 3.20 100 x 100

If the Number of Series Fully Traded is set at two, and an order to buy 
50 contracts of Series A is received, the number of series traded in 
full will be one. If a second order to sell 25 contracts of Series B is 
received, the number of series traded in full will still be one because 
Series B did not trade in full. If a third order to buy 100 contracts 
of Series C is received, the number of series traded in full will then 
be two. Since two meets the parameter set for Number of Series Fully 
Traded, the Market-Maker's quotes in that class (and any other classes 
with the same underlying security) would be cancelled.
    Whenever one of the QRM functions (i.e., Contract Limit, Cumulative 
Percentage Limit or Number of Series Fully Traded) has been triggered 
and the QRM Mechanism automatically cancels all of the Market-Maker's 
electronic quotes in all series of that option class (and any other 
classes with the same underlying security), such action by the Exchange 
shall be termed a ``QRM Incident''. Both of the new functionalities 
described above (along with the already-existing Contract Limit QRM 
functionality) are optional and Market-Makers are not required to set 
parameters for the aforementioned QRM Mechanism functions.
    The Exchange has above proposed that, when the QRM Mechanism 
automatically cancels all of a Market-Maker's electronic quotes in an 
option class, the Exchange will also cancel all of the Market-Maker's 
electronic quotes in any other classes with the same underlying 
security. The purpose of this is because the risk involved in trading 
beyond a Market-Maker's risk profile extends to classes that have the 
same underlying security (since often the only difference between such 
classes is the multiplier of number of units of the underlying 
security).
    Finally, the proposed amendment adds a third function that allows 
the Exchange to cancel all quotes and orders of a Market-Maker or 
Participant Organization once a specified number of QRM Incidents has 
been reached. Under this proposed functionality, a Market-Maker or a 
Participant organization may specify a maximum number of QRM Incidents 
with respect to all QRM Functions (i.e., Contract Limit, Cumulative 
Percentage Limit and Number of Series Fully Traded) and a Measurement 
Interval on an Exchange-wide basis. When the Exchange determines that 
such Market-Maker or Participant organization has reached its QRM 
Incident limit during any rolling Measurement Interval, the QRM 
Mechanism shall cancel all of the Market-Maker's or Participant 
organization's electronic quotes and Market-Maker orders resting in the 
Book in all option classes on the Exchange and prevent a Market-Maker 
or Participant organization from sending additional quotes or orders to 
the Exchange until the Market-Maker or Participant organization 
reactivates its ability to send quotes or orders in a manner prescribed 
by the Exchange.\5\
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    \5\ The Exchange will announce such manner to Trading Permit 
Holders via Regulatory Circular. The current plan for such 
reactivation is for the Market-Maker or TPH Organization to contact 
the Exchange's Help Desk to request reactivation, though the 
Exchange is examining the possibility of creating a systematized 
manner for Market-Makers or TPH organizations to reactivate.
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    Once the QRM Mechanism is triggered and quotes (and in the case of 
an Exchange-wide cancellation, orders) are cancelled, all counters that 
determine whether the QRM Mechanism is triggered and a QRM Incident 
occurs will be reset for all classes for which quotes (and in the case 
of an Exchange-wide cancellation, orders) were canceled for all parties 
for whom such quotes (and in the case of an Exchange-wide cancellation, 
orders) were canceled. This means that, if the QRM Mechanism is 
triggered due to a party's reaching the Contract Limit, Cumulative 
Percentage Limit, or Number of Series Fully Traded for a class, and 
quotes (and in the case of an Exchange-wide cancellation, orders) are 
canceled, the number of contracts traded in all classes for which 
quotes and orders were canceled would be reset to zero, the cumulative 
percentage for all classes for which quotes and orders were canceled 
would be reset to zero, and the number of series that are fully traded 
for all classes for which quotes and orders were canceled would be 
reset to zero. If the Exchange cancels all of the Market-Maker's or 
Participant

[[Page 38348]]

organization's electronic quotes and Market-Maker orders resting in the 
Book, and the Market-Maker or Participant organization does not 
reactivate its ability to send quotes or orders, the block will be in 
effect only for the trading day that the Market-Maker or Participant 
organization reached its QRM Incident limit.
    As with the Contract Limit, Cumulative Percentage Limit or Number 
of Series Fully Traded QRM functions, Market-Makers and Participant 
organizations are not required to set parameters for the Exchange-wide 
QRM. All QRM Mechanism functionalities are currently optional.
    The Exchange represents that it has the systems capacity to permit 
the operation of these enhanced QRM Mechanism functions. The Exchange 
does note that, in a situation in which the QRM Mechanism is triggered, 
and quotes (and in the case of an Exchange-wide cancellation, orders) 
must be canceled for multiple classes related to the same underlying 
security or across multiple business clusters,\6\ it may take a brief 
period for such cancellation to occur (during which period orders may 
execute against such quotes and orders; this functionality will not 
violate the Exchange's firm quote rules). The Exchange will use best 
efforts to cancel such quotes and orders as rapidly as possible.
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    \6\ The Exchange's systems group various classes into different 
business clusters for systems purposes.
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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.\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 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) \9\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
    \9\ Id.
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    In particular, the Exchange believes that investors and market 
participants will benefit from the proposed new functionality of the 
QRM Mechanism. Market-Makers are vulnerable to the risk that, through 
an error in pricing or due to market events, they will receive 
multiple, automatic executions at disadvantageous or erroneous prices 
before they can adjust their quotes. Without adequate risk management 
tools such as the QRM, Market-Makers could widen their quotes, quote 
less aggressively or limit their quote size. Such actions may undermine 
the quality of the markets available to customers and other market 
participants.
    Accordingly, with the enhancements proposed by the Exchange to QRM, 
the use of the QRM Mechanism will encourage more aggressive and 
narrower quoting, thereby removing impediments to and perfecting the 
mechanism of a free and open market and a national market system, and, 
in general, more effectively protecting investors and the public 
interest. In addition, providing Market-Makers with more tools for 
managing risk will facilitate transactions in securities because, as 
noted above, the quotes of market makers will be more reliable and 
could help prevent erroneous orders and transactions. As a result, the 
new functionality for the QRM Mechanism has the potential to promote 
just and equitable principles of trade. Also, the proposed changes do 
not change to whom any aspects of the QRM Mechanism applies, as the 
proposed changes apply to all market participants to whom the QRM 
Mechanism previously applied.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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. Rather, the Exchange 
believes that the functions of the QRM Mechanism promote fair and 
orderly markets.
    C2 does not believe that the proposed rule change will impose any 
burden on intramarket competition that is not necessary or appropriate 
in furtherance of the purposes of the Act because the use of the QRM 
Mechanism including the new enhancements is voluntary. Further, the 
proposed changes do not change to whom any aspects of the QRM Mechanism 
applies, as the proposed changes apply to all market participants to 
whom the QRM Mechanism previously applied. Similarly, the Exchange does 
not believe that the proposed rule change will impose any burden on 
intermarket competition that is not necessary or appropriate in 
furtherance of the purposes of the Act because, again, the use of the 
QRM Mechanism including the new enhancements is voluntary. Moreover, 
the proposed enhancements to the QRM Mechanism apply only to trading on 
C2. To the extent that the proposed changes may make C2 a more 
attractive trading venue for market participants on other exchanges, 
such market participants may elect to become C2 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

    Because the foregoing 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 for 30 days after the date of the filing, or such 
shorter time as the Commission may designate, it has become effective 
pursuant to 19(b)(3)(A) of the Act \10\ and Rule 19b-4(f)(6) \11\ 
thereunder.
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file 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 satisfied this requirement.
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    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. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.

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:

[[Page 38349]]

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-C2-2014-012 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-C2-2014-012. 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-C2-2014-012 and should be 
submitted on or before July 28, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2014-15720 Filed 7-3-14; 8:45 am]
BILLING CODE 8011-01-P


