
[Federal Register Volume 80, Number 228 (Friday, November 27, 2015)]
[Notices]
[Pages 74186-74188]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-30074]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76488; File No. SR-C2-2015-032]


Self-Regulatory Organizations; C2 Options Exchange, Incorporated; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
Relating to the Technical Disconnect Mechanism

November 20, 2015.
    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 November 9, 2015, 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. 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 Rule 6.48 related to the Exchange's 
Technical Disconnect Mechanism. The text of the proposed rule change is 
provided below. (additions are italicized; deletions are [bracketed])

C2 Options Exchange, Incorporated

Rules

* * * * *
Rule 6.48. Technical Disconnect
    (a) When a CBOE Application Server (``CAS'') loses communication 
with a Client Application such that a CAS does not receive an 
appropriate response to a Heartbeat Request within ``x'' period of 
time, the Technical Disconnect Mechanism will automatically logoff the 
Permit Holder's affected Client Application and [, if applicable, will] 
automatically cancel all the Permit Holder's Market-Maker quotes, if 
applicable, and open orders with a time-in-force of ``day'' (``day 
orders''), if the Permit Holder enables that optional service, posted 
through the affected Client Application. The following describes how 
the Technical Disconnect Mechanism works for each of the Exchange's 
application programming interfaces (``APIs''):
    (i) CBOE Market Interface 2.0 (``CMi 2'') API. A CAS shall generate 
a Heartbeat Request to a Client Application (i) after the CAS does not 
receive any messages from a particular Client Application for ``n'' 
period of time or (ii) after every ``n'' period of time. A Permit 
Holder shall determine the value of ``n.'' In no event shall ``n'' be 
less than three (3) seconds or exceed twenty (20) seconds. If a CAS 
generates a Heartbeat Request only after it does not receive any 
messages from a particular Client Application for ``n'' period of time, 
the value of ``x'' shall be set at a half (.5) second. If a CAS 
generates a Heartbeat Request every ``n'' period of time, the value of 
``x'' shall be equal to the value of ``n.''
    (ii) Financial Information eXchange (``FIX'') Protocol API. A CAS 
shall generate a Heartbeat Message to a Client Application after the 
CAS does not receive any messages from a particular Client Application 
for ``n'' period of time. If the CAS does not receive a response to the 
Heartbeat Message from the Client Application for ``n'' period of time, 
the CAS shall generate a Heartbeat Request to the Client Application. A 
Permit Holder shall determine the value of ``n'' at logon. In no event 
shall ``n'' be less than five (5) seconds. The value of ``x'' shall be 
equal to the value of ``n.''
    (b) The Technical Disconnect Mechanism is enabled for all Permit 
Holders and may not be disabled by Permit Holders, except the automatic 
cancellation of a Permit Holder's day orders is an optional service 
that the Permit Holder may enable or disable through the API.
    (c) The trigger of the Technical Disconnect Mechanism is event- and 
Client Application- specific. The automatic cancellation of a Market-
Maker's quotes (if applicable) or a Permit Holder's day orders (if 
enabled by the Permit Holder) entered into a CAS via a particular 
Client Application will neither impact nor determine the treatment of 
the quotes of the same or other Market-Makers or orders of the same 
Permit Holder entered into the CAS via a separate and distinct Client 
Application. Except for day orders the Technical Disconnect Mechanism 
automatically cancels if a Permit Holder enables that optional service, 
[T]the Technical Disconnect Mechanism will not impact or determine the 
treatment of orders a Permit Holder previously entered into the CAS.
    . . . Interpretations and Policies:
    .01 No change.
* * * * *
    The text of the proposed rule change is also available on the 
Exchange's Web site (http://www.c2exchange.com/Legal/), 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 Exchange proposes to amend Rule 6.48 related to the Exchange's 
Technical Disconnect Mechanism. Rule 6.48(a) provides that when a CBOE

[[Page 74187]]

Application Server (``CAS'') \3\ loses communication with a Client 
Application \4\ such that a CAS does not receive an appropriate 
response to a Heartbeat Request \5\ within ``x'' period of time, the 
Technical Disconnect Mechanism will automatically logoff the Permit 
Holder's affected Client Application. If that occurs, the current rule 
provides that the Technical Disconnect Mechanism, if applicable, will 
automatically cancel all the Permit Holder's Market-Maker quotes posted 
through the affected Client Application.\6\ The Technical Disconnect 
Mechanism is intended to help mitigate the potential risks associated 
with a loss of communication with a Client Application, such as 
erroneous or unintended executions for stale quotes that are resting in 
the C2 book. This mechanism serves to assist a Permit Holder when a 
technical or system issue occurs, as well as assist the Exchange in 
maintaining a fair and orderly market.
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    \3\ C2 currently has numerous CASs serving Permit Holders.
    \4\ For relevant purposes, a ``Client Application'' is the 
system component, such as a C2-supported workstation or a Permit 
Holder's custom trading application, through which a Permit Holder 
communicates its quotes and/or orders to a CAS. Messages are passed 
between a Client Application and a CAS. A Market-Maker may send 
quotes to the Exchange from one or more Client Applications, and a 
Permit Holder may send orders to the Exchange from one or more 
Client Applications.
    \5\ A ``Heartbeat Request'' refers to a message from a CAS to a 
Client Application to check connectivity and which requires a 
response from the Client Application in order to avoid logoff. The 
Heartbeat Request acts as a virtual pulse between a CAS and a Client 
Application and allows a CAS to continually monitor its connection 
with a Client Application. Failure to receive a response to a 
Heartbeat Request within the Heartbeat Response Time is indicative 
of a technical or system issue.
    \6\ See Rule 6.48 and Securities Exchange Act Release No. 34-
70112 (August 5, 2013), 78 FR 48738 (August 9, 2013) (SR-C2-2013-
029) for further information regarding the Technical Disconnect 
Mechanism.
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    The proposed rule change provides Permit Holders with an optional 
service that, if enabled by a Permit Holder, will cause the Technical 
Disconnect Mechanism to also automatically cancel all the Permit 
Holder's open orders with a time-in-force of ``day'' (``day orders'') 
posted through the affected Client Application if the CAS loses 
communication with the Client Application. The proposed rule change 
amends Rule 6.48(b) to provide that the Permit Holder may enable or 
disable this optional service through its application programming 
interface (``API'') (all other aspects of the Technical Disconnect 
Mechanism continue to otherwise be enabled for all Permit Holders and 
may not be disabled by Permit Holders).\7\ The proposed rule change 
makes corresponding changes to Rule 6.48(c) that indicate the Technical 
Disconnect Mechanism will automatically cancel a Permit Holder's day 
orders (in addition to a Market-Maker's quotes), if the Permit Holder 
enables the proposed optional service.\8\ As is the case in the event 
the Technical Disconnect Mechanism automatically logs a Permit Holder 
off and cancels its Market-Maker quotes (if applicable), if a Permit 
Holder enables this proposed optional service, and the Technical 
Disconnect Mechanism automatically logs a Permit Holder off and cancels 
the Permit Holder's day orders due to lost communication with Permit 
Holder's Client Application, the Permit Holder may send messages to the 
CAS to enter new orders once it reestablishes connectivity to the 
Client Application. In addition, any nonconnectivity will continue to 
be event- and Client Application-specific. In other words, any 
cancellation of day orders entered into a CAS via a particular Client 
Application will neither impact nor determine the treatment of the 
quotes of the same Permit Holder entered into a CAS via a separate and 
distinct Client Application. The Technical Disconnect Mechanism will 
not impact or determine the treatment of orders previously entered into 
a CAS if the Permit Holder does not enable this optional service, nor 
will it impact or determine the treatment of non-day orders previously 
entered into a CAS by the Permit Holder. The Exchange notes use of this 
service will be voluntary and within the sole discretion of each Permit 
Holder.
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    \7\ C2 currently makes available two APIs: CBOE Market Interface 
2.0 (``CMi 2'') and Financial Information eXchange Protocol 
(``FIX'').
    \8\ In addition, the proposed rule change makes nonsubstantive 
changes to Rule 6.48 including moving the phrase ``if applicable'' 
to ensure that phrase clearly applies to the cancellation of a 
Market-Maker's quotes (as that functionality only applies to Permit 
Holders that are Market-Makers).
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    The proposed optional service is an additional preventative risk 
control measure that C2 is making available to Permit Holders. It is 
intended to help further mitigate the potential risks associated with a 
loss of communication with a Client Application. While orders may be 
static in nature and rest in the book, Permit Holders often enter day 
orders more frequently in response to then-current market conditions. 
Therefore, if a Permit Holder's Client Application is disconnected for 
any period of time, it is possible that market conditions upon which it 
based its day orders may change during that time and make those orders 
stale. Consequently, any resulting executions of those orders may be 
erroneous or unintended. The Exchange believes it is appropriate to 
limit this optional service to day orders and exclude good-til-
cancelled orders,\9\ as those orders are intended to rest in the book 
for a period of time and thus have lower risk of erroneous or 
unintended executions during and after the Technical Disconnect 
Mechanism logs off a Permit Holder.
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    \9\ Currently, the Exchange offers two time-in-force order 
types: day and good-til-cancelled. The proposed optional service 
will apply to orders that include the ``day'' marking.
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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.\10\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \11\ 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) \12\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
    \12\ Id.
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    In particular, the proposed rule change helps maintain a fair and 
orderly market and protects investors and the public interest. The 
Technical Disconnect Mechanism is a valuable tool that is designed to 
help maintain a fair and orderly market. The Exchange believes that 
providing Permit Holders with the option to have the Technical 
Disconnect Mechanism cancel its day orders, in addition to Market-Maker 
quotes (if applicable), further mitigates the potential risks 
associated with a loss in communication with a Client Application. The 
Exchange believes it is reasonable to offer to cancel only day orders. 
Unlike non-day orders, day orders are more likely to be reflective of 
then-current market conditions and are intended to rest in the book for 
a limited period of time. As a result, in the event

[[Page 74188]]

that a CAS loses connectivity with a Client Application, execution of 
day orders during that time are more likely to result in erroneous or 
unintended executions, while risk of such executions is lower for non-
day orders. The proposed optional service protects Permit Holders from 
these potential erroneous or unintended executions, as well as protects 
investors and the efficiency and fairness of the markets in general. 
The Exchange believes this functionality enhances the overall market 
quality for options traded on C2. The Exchange notes that other 
exchanges offer their members similar services that cancels a member's 
orders if it disconnects from the exchange.\13\
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    \13\ See, e.g., BZX Exchange US Equities FIX Specification, 
Version 1.33.5 (October 8, 2014), available at http://www.batstrading.com/resources/membership/BATS_FIX_Specification.pdf 
(see Section 5.1 for description of automatic cancel on 
disconnection or malfunction); MIAX Options Market Protections 
Handout (March 2015), available at https://www.miaxoptions.com/sites/default/files/MIAX_Market_Protections_March_2015.pdf (see page 
5 for description of auto cancel on disconnect order protection); 
and NYSE UTPDirect (CGC Binary) API Specification, V1.4 (February 
26, 2015), available at https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSEUTPDirect_Specification.pdf (see Section 3.8 for 
description of cancel on disconnect service).
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    The Exchange also believes that the proposed rule change is 
designed to not permit unfair discrimination among market participants. 
Use of the optional service will be voluntary and within the sole 
discretion of each Permit Holder. The proposed optional service is 
available to all Permit Holders and will apply to the same order types 
of all Permit Holders.

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 does 
not believe the proposed rule change will cause any burden on 
intramarket competition because the optional service will be available 
to all Permit Holders. Use of this optional service will be within the 
sole discretion of each Permit Holder. The proposed rule change will 
have no impact on Permit Holders that do not enable the proposed 
optional service. For Permit Holders that elect to enable the proposed 
optional service, the only impact on those Permit Holders will be 
cancellation of day orders (in addition to Market-Maker quotes) upon 
loss of connectivity. The Technical Disconnect Mechanism will otherwise 
continue to function in the same manner as it does today. Further, the 
Exchange does not believe that such change will impose any burden on 
intermarket competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. The proposed rule change 
modifies a mechanism available on C2's system and applies only to 
orders entered on C2. The Exchange notes that, should the proposed 
change make C2 a more attractive place for trading, market participants 
trading on other exchanges are welcome to become Permit Holders and 
trade at C2 if they determine that this proposed change has made C2 
more attractive or favorable. Additionally, as discussed above, other 
options exchanges offer their members similar functionality.\14\
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    \14\ Id.
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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 foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \15\ and paragraph (f) of Rule 19b-4\16\ 
thereunder. 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.
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f).
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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-C2-2015-032 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-C2-2015-032. 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-C2-2015-032 and should be 
submitted on or before December 18, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-30074 Filed 11-25-15; 8:45 am]
 BILLING CODE 8011-01-P


