
[Federal Register Volume 79, Number 152 (Thursday, August 7, 2014)]
[Notices]
[Pages 46286-46288]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-18649]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72741; File No. SR-C2-2014-015]


Self-Regulatory Organizations; C2 Options Exchange, Incorporated; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
Relating To Amend Market-Maker Quoting Obligations

August 1, 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 July 22, 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 rules regarding Market-Maker 
continuous quoting obligations.
    The text of the proposed rule change is 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 purpose of the proposed rule change is to amend Rules 8.5, 8.13 
and 8.17: (i) To provide that compliance with continuous quoting 
obligations apply to Market-Makers' appointed classes collectively and 
(ii) to provide that the Exchange will determine Market-Makers' 
compliance with continuous quoting obligations on a monthly basis. 
These changes do not substantially change Market-Makers' quoting 
obligations and make C2's Market-Maker obligations more consistent with 
market-maker obligations at other options exchanges. The proposed rule 
change only changes how and when the Exchange determines a Market-
Maker's compliance with continuous quoting obligations.
Collective Application
    Rules 8.5, 8.13, 8.17 impose the following continuous electronic 
quoting obligations on Market-Makers, Preferred Market-Makers 
(``PMMs''), and Designated Primary Market-Makers (``DPMs''), 
respectively (collectively, ``Market-Makers'' unless the context 
otherwise requires):
     Rule 8.7(a)(1) requires Market-Makers to maintain a 
continuous two-sided market in 60% of the non-adjusted option series of 
each registered class that have a time to expiration of less than nine 
months, with continuous meaning 90% of the time; \3\
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    \3\ Rule 8.7(a)(1) also provides that if a technical failure or 
limitation of the System prevents a Market-Maker from maintaining, 
or communicating to the Exchange, timely and accurate quotes in a 
series, the duration of such failure will not be considered in 
determining whether the Market-Maker has satisfied the 90% quoting 
standard with respect to that series. The Exchange may consider 
other exceptions to this continuous electronic quote obligation 
based on demonstrated legal or regulatory requirements or other 
mitigating circumstances. It further provides that this quoting 
obligation does not apply to intra-day add-on series on the day 
during which such series are added for trading.
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     Rule 8.13(d) requires PMMs to provide continuous 
electronic quotes in at least 90% of the non-adjusted option series of 
each class for which it receives Preferred Market-Maker orders, with 
continuous meaning 99% of the time; \4\ and
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    \4\ Rule 8.13(d) also provides that if a technical failure or 
limitation of the System prevents a Market-Maker from maintaining, 
or communicating to the Exchange, timely and accurate quotes in a 
series, the duration of such failure will not be considered in 
determining whether the Market-Maker has satisfied the 90% quoting 
standard with respect to that series. The Exchange may consider 
other exceptions to this continuous electronic quote obligation 
based on demonstrated legal or regulatory requirements or other 
mitigating circumstances.
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     Rule 8.17(a)(1) requires DPMs to provide continuous quotes 
in at least the lesser of 99% of the non-adjusted option series or 100% 
of the non-adjusted option series minus one call-put pair \5\ in each 
of their allocated classes, with continuous meaning 90% of the time.\6\
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    \5\ A ``call-put'' pair refers to one call and one put that 
cover the same underlying instrument and have the same expiration 
date and exercise price.
    \6\ Rule 8.17(a)(1) also provides that if a technical failure or 
limitation of the System prevents a Market-Maker from maintaining, 
or communicating to the Exchange, timely and accurate quotes in a 
series, the duration of such failure will not be considered in 
determining whether the Market-Maker has satisfied the 90% quoting 
standard with respect to that series. It further provides that this 
quoting obligation does not apply to intra-day add-on series on the 
day during which such series are added for trading. The proposed 
rule change adds that the Exchange may consider other exceptions to 
this continuous electronic quote obligation based on demonstrated 
legal or regulatory requirements or other mitigating circumstances, 
consistent with the Exchange's ability to do so for Market-Makers 
and PMMs. This language was previously and inadvertently omitted 
form [sic] the rules. The Exchange believes it is reasonable and 
fair to DPMs to have this authority for all Market-Makers.
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    C2 proposes to amend Rules 8.7(a)(1), 8.13(d), and 8.17(a)(1) to 
provide that the continuous quoting obligation for Market-Makers will 
be applied collectively across all classes in which the Market-Maker 
has appointments \7\, rather than on a class-by-class basis.\8\ The 
Exchange believes that applying the continuous quoting requirements for 
Market-Makers collectively across all classes is a fair and efficient 
way for the Exchange and market participants to evaluate compliance 
with the continuous quoting obligation.

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Applying the continuous electronic quoting requirements collectively 
across all classes rather than on a class-by-class basis is beneficial 
to Market-Makers by providing some flexibility to choose which series 
in their appointed classes they will continuously quote--increasing the 
continuous quoting in the series of one class while allowing for a 
decrease in the continuous quoting in the series of another class. This 
flexibility, however, does not diminish the Market-Maker's obligation 
to continuously quote in a significant percentage of series for a 
significant part of the trading day. This flexibility is especially 
important for classes that have relatively few series and may prevent a 
Market-Maker from reaching the continuous quoting obligation when 
failing to quote 90% or 99% of the trading day, as applicable, in more 
than one series in an appointed class. The Exchange believes that the 
proposed rule change will not diminish, and may in fact increase, 
market-making activity on the Exchange, by applying continuous quoting 
obligations in a reasonable manner, which is already in place on other 
options exchanges.\9\
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    \7\ As this rule filing demonstrates, the Exchange has several 
types of Market-Makers, each of which has separate quoting 
obligations. The Exchange notes that proposed rule change to apply 
the quoting obligation collectively applies with respect to each 
Market-Maker type as the Market-Maker is approved to act. Thus, the 
collective application of the continuous quoting obligation applies 
to classes for each Market-Maker type (i.e. classes for which the 
Market-Maker has the same quoting obligation). For example, if a 
Market-Maker is a Permit Holder organization with appointments in 
ten classes, with 100 series in each, for a total of 1,000 series 
(with an obligation to quote in 60% of the series in those classes 
90% of the time it is quoting in those classes) and acts as a DPM in 
three classes, with 100 series in each, for a total of 300 series 
(with an obligation to quote 99% (or 100% minus one call-put pair) 
of the series in those classes 90% of the time), for purposes of 
compliance with the continuous quoting obligation, the Permit Holder 
must quote in 600 series (or 60% of the series) in the ten Market-
Maker classes collectively for 90% of the time it is quoting in 
those classes and 297 series (or 99% of the series) in the three DPM 
classes collectively for 90% of the trading day. The Exchange 
believes this is consistent with the application of those exchanges' 
rules, as it would not be possible to apply the collective standard 
across classes for which a Market-Maker has different quoting 
obligations.
    \8\ The proposed rule change makes corresponding changes to Rule 
8.13(d) to delete rule text that a PMM must quote the specified 
percentage of series in each class it receives PMM orders and to 
Rule 8.17(a)(1) to delete rule text that a DPM must quote the 
specified percentage of series in each class allocated to it. This 
language is no longer applicable given the proposed collectively 
application of the continuous quoting obligation.
    \9\ See, e.g., Box Options Exchange, LLC (``BOX'') Rule 8050(e); 
International Securities Exchange, LLC (``ISE'') Rule 804, 
Supplementary Material .01; Miami International Securities Exchange, 
LLC (``MIAX'') Rule 604(e); NYSE Arca, Inc. (``NYSE Arca'') Options 
Rules 6.37B(b) and (c) and 6.88(iv); and NYSE MKT LLC (``NYSE MKT'') 
Options Rules 925.1NY(b) and (c) and 964.1NY(iv).
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Monthly Compliance
    The continuous quoting obligations described above apply on a daily 
basis. C2 proposes to amend Rules 8.7(a)(1), 8.13(d), and 8.17(a)(1) to 
provide that the Exchange will determine compliance by Market-Makers 
with continuous quoting obligations on a monthly basis.\10\ Determining 
compliance with these quoting obligations does not relieve Market-
Makers from meeting these quoting obligations on a daily basis, nor 
does it prohibit the Exchange from taking disciplinary action against 
Market-Makers for failing to meet any of these requirements each 
trading day.
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    \10\ The Exchange will continue to provide to Market-Makers 
daily reports to enable them to monitor their compliance with their 
quoting obligations. On the basis of these daily reports, the 
Exchange will continue to monitor Market-Maker compliance on a daily 
basis and inform Market-Makers if they are failing to satisfy their 
quoting obligations. Additionally, on the basis of this daily 
monitoring activity, the Exchange can determine whether Market-
Makers violated any other Exchange rules, such as Chicago Board 
Options Exchange, Incorporated (CBOE) Rule 4.1 (which is 
incorporated into C2 Rules pursuant to Chapter 4) regarding just and 
equitable principles of trade. This daily monitoring will allow the 
Exchange to investigate unusual activity and to take appropriate 
regulatory action.
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    Similar to the proposed rule change to apply continuous quoting 
obligations to all classes collectively, the Exchange believes that 
reviewing compliance on a monthly basis is a fair and more efficient 
way for the Exchange and market participants to evaluate compliance 
with these quoting obligations. Reviewing compliance on a monthly basis 
allows the Exchange to review a Market-Maker's daily compliance in the 
aggregate and determine the appropriate disciplinary action for single 
or multiple compliance failures during a one-month period. C2 believes 
that the proposed rule change will not diminish, and in fact may 
increase, market-making on the Exchange by establishing quoting 
compliance standards that are reasonable and already in place on other 
options exchanges.\11\ C2 also believes that determining compliance by 
Market-Makers with quoting obligations on a monthly basis will 
facilitate C2's determination of appropriate penalties or other 
remedial measures for violation(s) of these obligations.
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    \11\ See, e.g., BOX Rule 8050(e); ISE Rule 804(e), Supplementary 
Material .01; and MIAX Rule 604(e).
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    The Exchange will announce the implementation date of the proposed 
rule change in a Regulatory Circular to be published no later than 90 
days following the effective date. The implementation date will be no 
later than 180 days following the effective date. Because the proposed 
change provides for a monthly compliance standard, the Exchange 
believes it is appropriate for implementation of the proposed rule 
change to occur on the first trading day of a month. Additionally, the 
implementation date will provide sufficient time for the Exchange to 
make any necessary changes to its surveillances with respect to 
continuous quoting obligations and for Market-Makers to make any system 
changes in connection with the proposed collective standard.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
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.
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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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    The proposed rule change removes impediments to and perfects the 
mechanisms of a free and open market and a national market system 
because it is consistent with standards currently in place on other 
options exchanges. With respect to the application of continuous 
electronic quoting obligations collectively, the Exchange believes that 
providing Market-Makers with flexibility to satisfy their continuous 
quoting obligations collectively across their appointed classes will 
not diminish Market-Makers' obligations to provide continuous quotes in 
a significant percentage of series for a significant part of the 
trading day. With respect to the monthly compliance standard, the 
Exchange believes that the proposed rule change will enhance compliance 
efforts by Market-Makers and the Exchange. The Exchange believes that 
determining compliance with continuous quoting obligations on a monthly 
basis will prevent fraudulent and manipulative acts and practices and 
to promote just and equitable principles of trade, because it will 
increase regulatory efficiency to the benefit of both the Exchange and 
market participants. The Exchange believes that the proposed rule 
change will not diminish, and in fact may increase, market-making 
activity and liquidity on the Exchange by establishing a quoting 
compliance standard that is reasonable and is already in place on other 
options exchanges.
    C2 continues to believe that the balance between the obligations 
imposed on and benefits provided to Market-Makers under the rules is 
appropriate. The proposed rule change does not diminish any of the 
obligations imposed on Market-Makers. Rather, it merely changes how the 
continuous quoting obligation is applied and when the Exchange 
determines compliance with continuous quoting obligations. The Exchange 
notes that Market-Makers

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are subject to many obligations under the rules, including the 
obligation to contribute to the maintenance of a fair and orderly 
market in their appointed classes, which the Exchange believes will 
ensure continued liquidity on the Exchange. C2 believes that its 
proposed rule change is consistent with the Act in that providing 
flexibility does not detract from the overall market-making obligations 
of Market-Makers. The proposed rule change better supports a Market-
Maker's continuous obligation to engage in dealings for its own 
account. Accordingly, any benefits of the proposed rule change to 
provide flexibility to Market-Makers are offset by the continued 
responsibilities to provide significant liquidity to the market to the 
benefit of all market participants.

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 rule change 
applies to all Market-Makers. All Market-Makers may benefit from the 
flexibility provided by the proposed rule change, which benefit is 
offset by the continued responsibilities to provide significant 
liquidity to the market to the benefit of all market participants. The 
proposed rule change to the compliance standard does not change the 
obligations imposed on Market-Makers; it merely changes the time at 
which the Exchange will determine compliance with these obligations. 
The proposed rule change is substantially similar to rules in place at 
other options exchanges, which the Exchange believes may enhance, 
rather than burden, competition among the options exchanges. C2 is 
better able to compete for liquidity providers when its Market-Maker 
obligations are consistent with those of other options exchanges, which 
may increase competition and liquidity on C2. Market participants on 
other exchanges are welcome to trade at C2 if they determine that this 
proposed rule change has made C2 more attractive or favorable to them.

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 
paragraph (A) of section 19(b)(3) of the Exchange 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 for 30 days after the date of the filing, 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 
\17\ and Rule 19b-4(f)(6)(iii) thereunder.\18\
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires the Exchange to give the Commission written notice of the 
Exchange's intent to file the proposed rule change along with a 
brief description and the text of 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 pre-filing requirement.
    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(f)(6)(iii).
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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 will institute proceedings to 
determine whether the proposed rule change 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:

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-C2-2014-015 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-C2-2014-015. 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-C2-2014-015 and should be 
submitted on or before August 28, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2014-18649 Filed 8-6-14; 8:45 am]
BILLING CODE 8011-01-P


